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PACIFIC SELECT ESTATE PRESERVER PROSPECTUS MAY 1, 1999
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Pacific Select Estate Preserver is a last survivor 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 (not available in all states)
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YOUR GUIDE TO THIS PROSPECTUS
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An overview of Pacific Select Estate Preserver 4
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Pacific Select Estate Preserver basics 12
Owners, people 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
The guideline minimum death benefit 19
When we pay the death benefit 19
Comparing the death benefit options 20
Changing your death benefit option 20
Decreasing the face amount 21
Optional riders 21
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How premiums work 22
Your first premium payment 22
Planned periodic premium payments 22
Deductions from your premiums 23
Allocating your premiums 23
Limits on the premium payments you can make 24
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Your policy's accumulated value 25
Calculating your policy's accumulated value 25
Monthly deductions 25
Lapsing and reinstatement 27
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Your investment options 29
Variable investment options 29
Fixed options 33
Transferring among investment options 33
Transfer programs 34
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Withdrawals, surrenders and loans 36
Making withdrawals 36
Taking out a loan 37
Ways to use your policy's loan and withdrawal features 38
Surrendering your policy 39
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General information about your policy 41
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Variable life insurance and your taxes 43
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About Pacific Life 47
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Illustrations 100
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Appendices 112
Appendix A: Joint equal age 112
Appendix B: Rates per $1,000 of initial face amount 114
Appendix C: Death benefit percentages 115
Appendix D: Death benefit factor table 116
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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 25 Joint owners 13
Accumulation units 31 Lapse 27
Age 13 Loan account 37
Allocation 23 Modified endowment contract 45
In this prospectus, you and your mean the Assignment 42 Monthly payment date 14
policy holder or owner. Pacific Life, we, Beneficiary 14 Net amount at risk 24
us and our refer to Pacific Life Insurance Business day 16 Net cash surrender value 39
Company. The fund refers to Pacific Select Cash surrender value 39 Net premium 22
Fund. Policy means a Pacific Select Estate Contingent beneficiary 14 Outstanding loan amount 37
Preserver variable life insurance policy, Cost of insurance rate 25 Planned periodic premium 22
unless we state otherwise. Death benefit 18 Policy anniversary 14
Death benefit factor 19 Policy date 14
Death benefit percentage 19 Policy year 14
Face amount 18 Portfolio 29
Fixed account 33 Proper form 16
Fixed LT account 33 Reinstatement 28
Fixed options 33 Riders 21
General account 48 Sales surrender target 40
Guideline minimum death benefit 19 Separate account 48
Guideline premium limit 24 Seven-pay limit 45
Illustration 15 Tax code 43
In force 12 Unit value 31
Income benefit 41 Variable account 29
Joint equal age 27 Variable investment option 29
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AN OVERVIEW OF PACIFIC SELECT ESTATE PRESERVER
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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 Estate Preserver Basics Pacific Select Estate Preserver is a last survivor flexible premium variable
life insurance policy.
Last survivor life insurance may be
appropriate for two spouses who want to . Last survivor means the Policy insures the lives of two people and provides a
provide a death benefit for their children. death benefit that's payable after both people have died.
This may not be the right kind of Policy for . Flexible premium means you can vary the amount and frequency of your premium
someone who wants to provide a death benefit payments.
for his or her spouse. In that case, a
policy that insures a single life may be . Variable means the Policy's value depends on the performance of the Investment
more appropriate. Options you choose.
Please discuss your insurance needs and . Life insurance means the policy provides a death benefit to the Beneficiary
financial objectives with your registered you choose.
representative.
In addition to providing a death benefit that is generally free of federal
You'll find more about the basics of Pacific income tax, any growth in your Policy's Accumulated Value is tax-deferred. You
Select Estate Preserver starting on page 12. can choose from 18 Variable Investment Options, each of which invests in a
corresponding Portfolio of the Pacific Select Fund, and from two Fixed Options,
both of which provide a guaranteed minimum rate of interest.
Pacific Select Estate Preserver is designed for long-term financial planning.
Please take some time to read the information in this prospectus before you
decide if this 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 four 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 both of the people
insured by the policy have died, as long You can change your death benefit option and reduce your policy's face amount
as your policy is in force. (with certain restrictions) while your policy is in force.
You'll find more about the death benefit Optional riders
starting on page 18. There are six 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 Your first premium must be equal to at least 25% of the sum of your premium
load and your policy's monthly charges for the first year. Your planned
Your policy gives you the flexibility to periodic premium must be for at least $50.
choose the amount and frequency of your
premium payments, within certain limits. Deductions from your premiums
We deduct a premium load from each premium payment you make. The premium load
You'll find more about how premiums work is made up of a sales load, a state and local tax charge, and a federal tax
starting on page 22. charge.
Limits on the premium payments you can make
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
make, or remove all or part of a premium from your policy and return it to you
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 value charge, and a mortality and expense risk charge. If you add any riders, we'll
starting on page 25. 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 ESTATE PRESERVER
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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
The investment options you choose will adviser for the Pacific Select Fund. We oversee the management of all the
affect your policy's accumulated value, fund's portfolios and manage two of the portfolios directly. We've retained other
and may affect the death benefit. portfolio managers to manage the other portfolios. The value of each portfolio
will fluctuate with the value of the investments it holds, and returns are not
Please review the investment options guaranteed.
carefully and ask your registered
representative to help you choose the You can also choose from two fixed options, the Fixed account and the Fixed LT
right ones for your goals and risk account, both of which provide a guaranteed minimum annual interest rate of 4%.
tolerance. We may offer a higher interest rate. If we do, we'll guarantee that rate for
one year.
The Fixed LT account will be available
June 1, 1999, but may not be available We allocate your premium payments and accumulated value to the investment
in every state. Please contact your options you choose. Your policy's accumulated value will fluctuate depending on
registered representative or us to find the investment options you've chosen. You bear the investment risk of any
out if the Fixed LT account is available variable investment options you choose.
in the state where you signed your
application. 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
You'll find more about the investment for details.
options starting on page 29.
Transferring among investment options
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 program. 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. You can only transfer to the fixed options in
the policy month right before each policy anniversary.
You'll find out more about our automatic You can also make automatic transfers from the Fixed account to other
transfer programs starting on page 36. 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 36.
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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 on the amount you borrow at an annual rate of 4.5%
during the first 10 policy years and 4.25% thereafter. The accumulated value used
to secure your loan is set aside in a loan account, where it earns interest at an
annual rate of 4%.
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
either of the two people insured by the policy is still living. If you
surrender your policy during the first 10 policy years, we'll apply a surrender
charge.
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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 43.
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 47.
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 ESTATE PRESERVER
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This section of the overview explains the fees and expenses associated with
your Pacific Select Estate Preserver Policy.
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Understanding policy expenses and cash flow Your premium
You make a
The chart to the right illustrates how cash premium
normally flows through a Pacific Select payment
Estate Preserver policy.
We deduct
The dark shaded boxes show the fees and a premium load
expenses you pay directly or indirectly
under your policy. These are explained in
the pages that follow. Net premium
We allocate
In some states we'll hold your net premium the net
payments in the Money Market investment premium to
option until the free look transfer date. the investment
Please turn to Your right to cancel for options you
details. choose
Fixed Options Variable Pacific Select The fund
We hold investment Fund deducts
amounts options The variable advisory
you We hold investment fees and
allocate amounts options invest other fund
to these you allocate in the fund's expenses
options in to these portfolios from the
our general options in portfolios
account our separate
account
We deduct:
. cost of
insurance
. administrative
We make monthly charge
deductions . mortality
and expenses
risk charge
. rider charges
Loan Accumulated If you make We deduct a
account value a withdrawal withdrawal
accumulated The total charge
value set value of
aside to your policy
secure a
policy loan
If you surrender your We deduct
policy during the first a surrender
10 policy years charge
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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 23. Sales load - 5% of each premium payment during the first 10 policy years and
reduced to 3% after the 10th policy year.
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 25. Cost of insurance - We calculate this charge by multiplying the current cost of
insurance rate by a discounted net amount at risk at the beginning of each
policy month. When the younger of the two people insured by the policy reaches
An example age 100, the cost of insurance charge is zero -- in other words, you no longer
pay any cost of insurance charge.
For a policy with:
. a joint equal age of 50 Administrative charge - We deduct a charge of $16 a month during the first five
. a face amount of $100,000 policy years, and $6 a month thereafter. When the younger of the two people
. accumulated value of $60,000 after insured by the policy reaches age 100, the administrative charge is zero -- in
deducting any outstanding loan amount. other words, you no longer pay any administrative charge.
The monthly charge for the face amount Mortality and expense risk charge - The mortality and expense risk charge
component of the mortality and expense varies depending on your policy's face amount, joint equal age on the policy
risk charge is $10.20 date and accumulated value. It's made up of two components:
(($100,000 / 1,000) X 0.102).
. The face amount component, which we deduct every month during the first 10
The monthly charge for the accumulated policy years at a rate that is based on the joint equal age and each $1,000
value component is $15 of the initial face amount of your policy.
($60,000 X 0.025%). The charge in policy
year 21 (and thereafter) would be $5 . The accumulated value component, which we deduct every month during the
($60,000 X 0.008333%) if the policy's first 20 policy years at an annual rate of 0.30% (0.025% monthly) of your
accumulated value was $60,000. policy's accumulated value in the investment options. During policy years 21
and thereafter, we reduce the annual rate to 0.10% (0.008333% monthly) of the
Joint equal age is explained in Appendix A. accumulated value.
The rates for the face amount component are
shown in Appendix B. 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 ESTATE PRESERVER
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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 36 and investment options.
40.
If you surrender or cash in your policy, or decrease its face amount, during
An example the first 10 years of owning the policy, we'll deduct a surrender charge. The
surrender charge is made up of two components:
For a policy that is surrendered at the
end of the first policy year, with: . The underwriting surrender charge, which is assessed at a rate that is based
. a joint equal age of 50 on the joint equal age and each $1,000 of the initial face amount of your
. an initial face amount of $100,000. policy. The amount of the charge does not change during the first policy year.
Starting on the first policy anniversary, we reduce the charge by 0.9259% a
The underwriting surrender charge is $520. month until it reaches zero at the end of 10 policy years.
The sales surrender target is $905. The . The sales surrender charge, which, during the first policy year, equals the
maximum sales surrender charge is $226.25. smaller of the following amounts:
The underwriting surrender charge and . 25% of the premium payments you've made, or
sales surrender target rates appear in
Appendix B. . 25% of the sales surrender target, which is based on the joint equal age of
the people insured by the policy for each $1,000 of a policy's initial face
amount.
The sales surrender charge increases until the premiums you pay reach the sales
surrender target. In the 13th month you own your policy, we reduce the sales
surrender charge so that it is 99.0741% of the charge as calculated above.
After that, we reduce it by 0.9259% a month until it reaches zero at the end of
10 policy years.
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Fees and expenses paid by the The Pacific Select Fund pays advisory fees and other expenses. These are
Pacific 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 29, 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 a
annual percentage of each portfolio's average daily net assets.
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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 ESTATE PRESERVER BASICS
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When you buy a Pacific Select Estate Preserver 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 . both people insured by the policy die
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 both people insured by the policy die, we
are not obligated to pay the death benefit proceeds to your beneficiary.
Last survivor life insurance may be
appropriate for two spouses who want to Pacific Select Estate Preserver is a last survivor flexible premium variable
provide a death benefit for their children. life insurance policy that insures the lives of two people and pays death
benefit proceeds after both people have died.
This may not be the right kind of policy
for someone who wants to provide a death Under a flexible premium life insurance policy, you have the flexibility to
benefit for his or her spouse. In that choose the amount and frequency of your premium payments. You must, however,
case, a policy that insures a single life pay enough premiums to cover the ongoing cost of policy benefits.
may be more appropriate.
A premium load is deducted from each premium payment you make. The resulting
Please discuss your insurance needs and net premium is allocated to the investment options you choose, and becomes part
financial objectives with your registered of your policy's accumulated value.
representative.
Charges are deducted from the accumulated value each month to help cover the
In some states we'll hold your net premium cost of the policy's death benefit and other expenses. If there is not enough
payments in the Money Market investment accumulated value to cover the monthly charge on the day we make the deduction,
option until the free look transfer date. your policy may lapse after a grace period - which means you'll no longer have
Please turn to Your right to cancel for any insurance coverage.
details.
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, people insured by the Owners
policy, 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 a yourself or with someone else. Two or more owners are called joint owners. You
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
under the policy. If the last joint owner dies, his or her estate will own the
policy unless you've given us other instructions.
If you would like to change the owner of
your policy, please contact us or your A policy can also be owned by an institution, trust, corporation or group or
registered representative for a change of sponsored arrangement. These owners often buy more than one policy, which may
owner form. We can process the change qualify them for reduced charges or lower premium payments.
only if we receive your instructions in
writing. 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.
People insured by the policy
This policy insures the lives of two people who are between the ages of 20 and
85 at the time you apply for your policy, and who have given us satisfactory
evidence of insurability. Your policy refers to these people as the insureds.
The policy pays death benefit proceeds after both of these people have died.
Risk classes are usually based on age, Each person to be insured by the policy is assigned an underwriting or
gender, health and whether or not the insurance risk class which we use to calculate cost of insurance and other
person to be insured by the policy charges. We normally use the medical or paramedical underwriting method to
smokes. Most insurance companies use assign underwriting or insurance risk classes, which may require a medical
similar risk classification criteria. examination. We may, however, use other forms of underwriting if we think it's
appropriate.
When we refer to age throughout this
prospectus, we're using the word as we've When we use a person's age in policy calculations, we generally use his or her
defined it here, unless we tell you age as of the nearest policy date, and we add one year to this age on each
otherwise. 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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PACIFIC SELECT ESTATE PRESERVER BASICS
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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
proportion to the share of the proceeds they're entitled to receive, unless you
If you would like to change the beneficiary tell us otherwise.
of your policy, please 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 change name. The contingent beneficiary will receive the death benefit proceeds if the
only if we receive your instructions in primary beneficiary dies.
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 either 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, policy Your policy date
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 known annual and annual anniversary dates are based on your policy date.
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.
In Ohio, your policy can be backdated only Backdating your policy
three months. You can have your policy backdated up to six months, as long as we approve it.
Backdating in some cases may lower your cost of insurance rates since these
rates are based on the ages of the people 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
payments and transfers, loans, loan repayments, withdrawals and surrenders.
We can create customized hypothetical Monthly deductions and scheduled transactions made under the dollar cost
illustrations of benefits under your policy averaging and portfolio rebalancing programs are reported on your quarterly
based on different assumptions. You'll find policy statement.
sample illustrations starting on page 100.
. a quarterly policy statement. The statement will tell you the accumulated
We'll send you one policy illustration free value of your policy by investment option, cash surrender value, the amount of
of charge each policy year if you ask for the death benefit, the policy's face amount, and any outstanding loan amount.
one. We reserve the right to charge $25 It will also include a summary of all transactions that have taken place since
for additional illustrations. 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 on the latest of the following:
after 15 days.
. In North Dakota the free look period . 10 days after you receive your policy (20 days for many states if you are
ends after 20 days. replacing another life insurance policy)
. Pennsylvania requires that you exercise . 10 days after we mail or deliver this prospectus which includes a notice of
your right to cancel your policy within your right of withdrawal
10 days after you receive it, regardless . 45 days after you complete and sign your policy application.
of the date you signed your application.
In most states, your refund will be based on the accumulated value of your
Please call us or your registered policy. In these states, we'll allocate your net premiums to the investment
representative if you have questions about options you've chosen. If you exercise your right to cancel, your refund will
your right to cancel your policy. 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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PACIFIC SELECT ESTATE PRESERVER BASICS
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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
. 45 days after you complete and sign your policy application
. the day we receive your minimum initial premium
. 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 Planned periodic premium payments, loan requests, transfer requests, loan
usually 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
Day, President's Day, Good Friday, that is not a business day, we'll process it as of the end of the next business
Memorial Day, July Fourth, Labor Day, day.
Thanksgiving Day and Christmas Day.
Other forms, notices and requests are normally effective as of the next
Our client services offices are also business day after we receive them in proper form, unless the transaction is
usually closed on the following days: scheduled to occur on another business day. Change of owner and beneficiary
. the Monday before New Year's Day, July forms are effective as of the day you sign the change form, once we receive
Fourth, or Christmas Day, if any of these them in proper form.
holidays falls on a Tuesday
. the Tuesday before Christmas Day if that
holiday falls on a Wednesday
. the Friday after New Year's Day, July
Fourth or Christmas Day, if any of these
holidays falls on a Thursday
. the Friday after Thanksgiving.
Proper form
Call us or contact your registered We'll process your requests once we receive all letters, forms or other
representative if you have any questions necessary documents, completed to our satisfaction. Proper form may require,
about the proper form required for a among other things, a signature guarantee or some other proof of authenticity.
request. We do not generally require a signature guarantee, but we may ask for one if it
appears that your signature has changed, if the signature does not appear to be
yours, if we have not received a properly completed application or confirmation
of an application, or for other reasons to protect you and us.
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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 4% 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 4% on death benefit proceeds,
calculated from the day the last surviving 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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THE DEATH BENEFIT
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We'll pay death benefit proceeds to your beneficiary after the last surviving
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 four death benefit options, Options A, B, C and D. The
coverage is its initial face amount. We option you choose will generally depend on which is more important to you: a
determine the face amount based on larger death benefit or building the accumulated value of your policy.
instructions provided in your application.
Here are some things you need to know about the death benefit:
The minimum face amount when a policy is
issued is usually $100,000, but we may . You choose your death benefit option on your policy application.
reduce this in some circumstances.
. If you do not choose a death benefit option, we'll assume you've chosen
You'll find your policy's face amount, which Option A.
includes any increases or decreases, in the
specification pages in your policy. . The death benefit will always be the greater of the death benefit under the
option you choose or the guideline minimum death benefit.
. The death benefit will never be lower than the face amount of your policy if
you've chosen Option A, B or D. 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 deaths of both of the people insured by the policy.
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Choosing your death benefit option You can choose one of the following four options for the death benefit on your
application. The graphs below helps you compare the options using several
hypothetical examples.
Option A - the face amount of your Option B - the face amount of your policy
policy. plus its accumulated value.
[GRAPH APPEARS HERE] [GRAPH 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 Option D - the face amount of your policy
policy plus the total premiums multiplied by a death benefit factor.
you've paid minus any withdrawals
or distributions made.
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
The more premiums you pay and the The death benefit gradually increases over
less you withdraw, the larger the time no matter how your investment options
death benefit will be. perform, as long as there is enough
accumulated value to keep your policy in
force.
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How we calculate the death benefit for Option D
If you choose Option D, we'll calculate the death benefit by multiplying the
face amount by a death benefit factor. The death benefit factor is a number
from 1.0 to 2.0. A factor of 1.0 means the death benefit equals the face
amount. A factor of 2.0 means the death benefit is two times the face amount.
The factor changes on each policy anniversary and is based on the joint equal
age of the people insured by the policy and the number of completed policy
years. Joint equal age is a calculation that blends the ages and insurance
risks of the two people insured by the policy. Generally, the death benefit
factor will reach the maximum of 2.0 when joint equal age plus the number of
completed policy years is between 85 and 90. You'll find more information about
how we calculate joint equal age in Appendix A.
You'll find more information about the death benefit factor in Appendix D and
in your policy.
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The guideline minimum death benefit The guideline minimum death benefit is the minimum death benefit needed for
your policy to qualify as life insurance under Section 7702 of the Internal
If your policy's death benefit is equal to Revenue Code. If the amount of the death benefit under the option you choose is
the guideline minimum death benefit, and less than the guideline minimum death benefit, we'll adjust your death benefit
the net amount at risk is more than three to equal the guideline minimum death benefit.
times the death benefit on the policy date,
we may reduce the death benefit by making We calculate the guideline minimum death benefit by multiplying the accumulated
withdrawals from your policy. value of your policy by a death benefit percentage. This percentage is based on
the age of the younger person insured by the policy, and will increase over
We will not charge you our usual $25 time. You'll find a table of guideline minimum death benefit percentages in
withdrawal fee, but the withdrawals may be Appendix C.
taxable. Please turn to Withdrawals,
surrenders and loans for information about
making withdrawals.
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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 last surviving person insured by the policy dies. If that person dies on a
Your beneficiary can choose to receive the day that is not a business day, we calculate the proceeds as of the next
death benefit proceeds in a lump sum or use business day.
it to buy an income benefit. Please see the
discussion about income benefits in General Your policy's beneficiary must send us proof that both people insured by the
information about your policy. policy died while the policy was in force, along with payment instructions. If
both people insured by the policy die at the same time, or if it's not clear
It is important that we have a current who died first, we'll assume the younger of the two died first.
address for your beneficiary so that we can
pay death benefit proceeds promptly. If we Death benefit proceeds equal the total of the death benefits provided by your
cannot pay the proceeds to your beneficiary policy and any riders you've added, minus any outstanding loan amount, minus
within five years of the death of the last any overdue charges.
surviving person insured by the policy,
we'll be required to pay them to the state. We'll pay interest at an annual rate of at least 4% on the death benefit
proceeds, calculated from the day the last surviving person insured by the
policy dies to the day we pay the proceeds. In some states we may pay a higher
rate of interest if required by law.
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THE DEATH BENEFIT
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Comparing the death benefit options The tables below compare the death benefits provided by the policy's four death
benefit options. The examples are intended only to show differences in death
benefits and net amounts at risk. Accumulated value assumptions may not be
realistic.
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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Example A assumes the following: Example A The death benefit is the larger
of these two amounts
. the people insured by the policy are -------------------------------
male and female non-smokers, each age 45 Death Death benefit Guideline Net amount at risk
at the time the policy was issued benefit How it's under minimum used for cost of
. face amount is $1,000,000 option calculated the option death benefit insurance charge
. accumulated value at year 20 is $600,000 -------------------------------------------------------------------------------------
. total premiums paid into the policy at Option A Face amount $1,000,000 $720,000 $396,736.94
year 20 is $300,000 Option B Face amount plus
. the death benefit percentage for the accumulated value $1,600,000 $720,000 $994,779.11
guideline minimum death benefit is 120% Option C Face amount plus
. the death benefit factor for Option D at premiums less $1,300,000 $720,000 $695,758.03
year 20 is 108.4% distributions
. the guideline minimum death benefit is Option D Face amount times
$720,000 (accumulated value times a death death benefit factor $1,084,000 $720,000 $480,462.85
benefit percentage factor of 120%) -------------------------------------------------------------------------------------
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Example B uses the same assumptions Example B The death benefit is the larger
as Example A, but has an accumulated value of these two amounts
of $1,400,000. Because accumulated value -------------------------------
has increased, the guideline minimum death Death Death benefit Guideline Net amount at risk
benefit is now $1,600,000 ($1,400,000 benefit How it's under minimum used for cost of
times a death benefit factor of 120%). option calculated the option death benefit insurance charge
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Option A Face amount $1,000,000 $1,680,000 $274,518.06
Option B Face amount plus
accumulated value $2,400,000 $1,680,000 $992,168.66
Option C Face amount plus
premiums less $1,300,000 $1,680,000 $274,518.06
distributions
Option D Face amount times
death benefit factor $1,084,000 $1,680,000 $274,518.06
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Changing your death benefit option You can change your death benefit option after your fifth policy year. Here's
how it works:
We will not change your death benefit
option if it means your policy will be . You can change the death benefit once in any policy year.
treated as a modified endowment contract, . You must send us your request in writing.
unless you've told us in writing that . You can only change to Option A or Option B.
this would be acceptable to you. Modified . The change will become effective on the first monthly payment date after we
endowment contracts are discussed in receive your request. If we receive your request on a monthly payment date,
Variable life insurance and your taxes. we'll process it that day.
. The face amount of your policy will change by the amount needed to make the
Net amount at risk is the difference death benefit under the new option equal the death benefit under the old
between the death benefit that would be option just before the change. We will not let you change the death benefit
payable if both people insured by the if doing so means the face amount of your policy will become less than
policy died, and the accumulated value of $100,000. We may waive this minimum amount under certain circumstances.
your policy. . 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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Decreasing the face amount You can decrease your policy's face amount starting on the first policy
anniversary as long as we approve it. Here's how it works:
Decreasing the face amount may affect your
policy's tax status. To ensure your policy . You can decrease the face amount as long as at least one of the people
continues to qualify as life insurance, we insured by the policy is still living.
might be required to return part of your . You can only decrease the face amount once in any policy year.
premium payments to you, or make . You must send us your request in writing while your policy is in force.
distributions from the accumulated value, . The decrease will become effective on the first monthly payment date after we
which may be taxable. receive your request. If we receive your request on a monthly payment date,
we'll process it that day.
We will not decrease the face amount if it . Decreasing the face amount can affect the monthly cost of insurance charge
means your policy will be treated as a since this charge varies with the net amount at risk.
modified endowment contract, unless you've . We can refuse your request to make the face amount less than $100,000. We can
told us in writing that this would be waive this minimum amount in certain situations, such as group or sponsored
acceptable to you. arrangements.
For more information, please see Variable If you decrease your face amount in the first 10 years of the policy, we'll
life insurance and your taxes. deduct a surrender charge from your policy's accumulated value. Please turn to
Withdrawals, surrenders and loans for information about how we calculate
surrender charges.
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Optional riders There are six optional riders that provide extra benefits, some at additional
cost. Not all riders are available in every state, and some riders may only be
We offer other variable life insurance added when you apply for your policy.
policies which provide insurance protection
on the lives of two people or on the life . Guaranteed minimum death benefit rider
of one person. The loads and charges on Guarantees payment of a specified amount of insurance when the last surviving
these policies may be different. Combining person insured by the policy dies, regardless of investment performance, as
a policy and a rider, however, may be more long as there is enough accumulated value to keep your policy in force.
economical than adding another policy. It
may also be more economical to provide an . Last survivor added protection benefit
amount of insurance coverage through a Provides level or varying term insurance on the two people insured by the
policy alone. policy.
Ask your registered representative for more . Individual annual renewable term rider
information about the riders available with Provides level or varying term insurance on either or both people insured by
the policy, or about other kinds of life the policy.
insurance policies offered by Pacific Life.
. Enhanced policy split option rider
There may be tax consequences if you Available only to married couples, it splits the policy into two individual
exercise your rights under the Accelerated policies without evidence of insurability under certain circumstances.
living benefits rider or either of the two
Policy split option riders. Please see . Policy split option rider
Variable life insurance and your taxes for Splits the policy into two individual policies with evidence of insurability.
more information.
. Accelerated living benefits rider
Samples of the provisions for the extra Gives the policy owner access to a portion of the policy's death benefit if
optional benefits are available from us the last surviving person insured by the policy has been diagnosed with a
upon written request. terminal illness resulting in a life expectancy of six months or less (or
longer than six months in some states).
We guarantee the amounts of the extra benefits when we issue your rider. Certain
restrictions may apply and are described in the rider or benefit. We'll add any
rider charges to the monthly charge we deduct from your policy's accumulated
value.
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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.
The amount, frequency, and period of We usually set the amount of your first premium payment. You can schedule the
time over which you make premium amount and frequency of remaining premium payments within certain limits. Each
payments may affect whether your policy premium payment must be at least $50.
will be classified as a modified
endowment contract, or no longer We deduct a premium load from each premium payment, and then allocate your net
qualifies as life insurance for tax purposes. premium to the investment options you've chosen. Depending on the performance
See Variable life insurance and your taxes of your investment options, and on how many withdrawals, loans or other policy
for more information. features you've taken advantage of, you may need to make additional premium
payments to keep your policy in force.
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Your first premium payment We usually require you to make a minimum initial premium payment that's equal
to at least 25% of the sum of your premium load and your policy's monthly
charges for the first year.
The amount of the monthly charge and premium load are calculated based on your
policy's face amount and the age, smoking status, gender (unless unisex cost of
insurance rates apply), and risk classes of the people insured by your policy.
We describe premium load later in this section. You'll find an explanation of
the monthly charge in Your policy's accumulated value.
If we do not receive the minimum initial 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 payments You can schedule the amount and frequency of your premium payments. We refer to
scheduled premium payments as your planned periodic premium. Here's how it
Even if you pay all your premiums when works:
they're scheduled, your policy could lapse
if the accumulated value, less any . On your application, you choose a fixed amount of at least $50 for each
outstanding loan amount, is not enough to premium payment.
pay your monthly charges. Turn to Your
policy's accumulated value for more . You indicate whether you want to make premium payments annually, semi-
information. annually, or quarterly. You can also choose monthly payments using our
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). 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 premium,
not as a loan repayment, unless you tell us 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
During the first 10 years of your policy, we deduct a 5% sales load from each
premium payment you make. The sales load is reduced to 3% after the 10th policy
year.
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. This rate approximates the average rate we pay
for all states. We do not expect to profit from this charge, and do not expect
to change the rate unless the rate we pay increases.
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 for Market investment option until the free look transfer date, and then transfer
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 you Federal tax law puts limits on the amount of premium payments you can make in
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 . If accepting the premium means your policy will no longer qualify as life
a personalized illustration that will show insurance for federal income tax purposes.
you the guideline single premium and
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 both people insured by the guideline minimum death benefit or would be equal to it once we applied your
policy died and the accumulated value of premium payment.
your 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 two
people insured by the policy.
We will not accept premium payments after the youngest 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 accumulated value Your policy's accumulated value is the total amount allocated to the variable
investment options and the fixed options, plus the amount in the loan account.
We determine the value allocated to the variable investment options on any
business day by multiplying the number of accumulation units for each variable
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 could Unless you tell us otherwise, we deduct the monthly charge from the investment
lapse. The performance of the investment options that make up your policy's accumulated value, in proportion to the
options you choose, not making planned accumulated value you have in each option. This charge is made up of three
premium payments, or taking out a loan all charges:
affect the accumulated value of your policy.
Cost of insurance
You'll find a discussion about when your This charge covers the cost of providing you with life insurance protection.
policy might lapse, and what you can do to
reinstate it, later in this section. There are maximum or guaranteed cost of insurance rates associated with your
policy. When the younger of the two people 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.
The guaranteed rates include the insurance risks associated with insuring two
people. They are calculated using 1980 Commissioners Standard Ordinary
Mortality Tables or the 1980 Commissioners Ordinary Mortality Table B, which
are used for unisex cost of insurance rates. The rates are also based on the
ages, gender and risk classes of the people insured by the policy unless unisex
rates are required.
Our current cost of insurance rates are based on the ages, risk classes and
genders (unless unisex rates are required) of the two people insured by the
policy. These rates generally increase as the ages of the two people increase,
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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How we calculate cost of insurance
We calculate cost of insurance by multiplying the current 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 both people insured
by the policy died, and the accumulated value of your policy. We calculate it
in two steps:
. Step 1: we divide the death benefit that would be payable at the beginning of
the policy month by 1.00327374.
. Step 2: we subtract your policy's accumulated value at the beginning of the
policy month from the amount we calculated in step 1.
Administrative charge
We deduct a charge of $16 a month during the first five policy years to help
cover the costs of administering and maintaining our policies. After five
policy years, we reduce this charge to $6 a month. We guarantee that this
charge will not increase. When the younger of the two people insured by the
policy reaches age 100, the administrative charge is zero - in other words, you
no longer pay any administrative charge.
If you buy additional Pacific Select Estate Preserver policies that insure the
same two people, we will not deduct the administrative charge from the
additional policies. Instead, we'll deduct $200 from each policy's first
premium payment to help cover our processing costs.
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 box on the following page.
We guarantee this charge will not increase.
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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An example How we calculate the mortality and expense risk charge
For a policy with: The mortality and expense risk charge has two components: a face amount
. a joint equal age of 50 component and an accumulated value component.
. a face amount of $100,000
. accumulated value of $60,000 after . Face amount component We deduct a face amount component every month during
deducting any outstanding loan amount. the first 10 policy years, at a rate that is based on the joint equal age on
the policy date and each $1,000 of the initial face amount of your policy.
The monthly charge for the face amount The rates for the face amount component are shown in Appendix B. Joint equal
component is $10.20 age is a calculation that combines the ages and insurance risks of the two
(($100,000 / 1,000) X 0.102). people insured by the policy, and is explained in Appendix A.
The monthly charge for the accumulated . Accumulated value component We deduct an accumulated value component every
value component is $15 month during the first 20 policy years at an annual rate of 0.30% (0.025%
($60,000 X 0.025%). The charge in policy monthly) of your policy's accumulated value in the investment options. During
year 21 (and thereafter) would be $5 policy years 21 and thereafter, we reduce the annual rate to 0.10% (0.008333%
($60,000 X .008333%) if the policy's monthly) of the accumulated value. For the purposes of this charge, the
accumulated value was $60,000. amount of accumulated value is calculated on the monthly payment date after
we deduct the cost of insurance and charges for any optional riders.
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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.
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YOUR POLICY'S ACCUMULATED VALUE
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If you make the minimum payment
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.
Remember to tell us if a payment is a If your policy is in danger of lapsing and you have an outstanding loan amount,
premium payment or a loan repayment. 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 if it.
Paying death benefit proceeds during the grace period
If the last surviving 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.
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 two people insured by the policy are
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, assets in our accounts and allocate your premiums, less any charges, to the
if we have your completed telephone investment options you've chosen. Amounts allocated to the fixed options are
authorization form on file, by calling us held in our general account. Amounts allocated to the variable investment
at 1-800-800-7681. Or you can ask your options are held in our separate account.
registered representative to contact us.
You choose your initial investment options on your application. If you choose
You'll find information about when we more than one investment option, you must tell us the dollar amount or
allocate net premiums to your investment percentage you want to allocate to each option. You can change your premium
options in 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 Pacific find detailed descriptions of the portfolios in the Pacific Select Fund
Select Fund. We oversee the management of prospectus that accompanies this prospectus. There's no guarantee that a
all the fund's portfolios, and manage two of portfolio will achieve its investment objective. You should read the fund
the portfolios directly. We've retained prospectus carefully before investing.
other portfolio managers to manage the other
portfolios.
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YOUR INVESTMENT OPTIONS
<TABLE>
<CAPTION>
PORTFOLIO THE PORTFOLIO'S THE PORTFOLIO'S PORTFOLIO
INVESTMENT GOAL MAIN INVESTMENTS MANAGER
<S> <C> <C> <C>
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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An example Calculating unit values
When you choose a variable investment option, we credit your policy with
You ask us to allocate $6,000 to the accumulation units. The number of units we credit equals the amount we've
Government Securities investment option on allocated divided by the unit value of the variable account. Similarly, the
a business day. At the end of that day, the number of accumulation units in your policy will be reduced when you make a
unit value of the variable account is $15. transfer, withdrawal or loan from a variable investment option, and when your
We'll credit your policy with 400 units monthly charges are deducted.
($6,000 divided by $15).
The value of an accumulation unit is the basis for all financial transactions
The value of an accumulation unit is not relating to the variable investment options. We calculate the unit value for
the same as the value of a share in the each variable account once every business day, usually at or about 4:00 p.m.
underlying portfolio. Eastern time.
For information about timing of Generally, for any transaction, we'll use the next unit value calculated after
transactions, see Pacific Select Estate we receive your written request. If we receive your written request before 4:00
Preserver basics. 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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YOUR INVESTMENT OPTIONS
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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 The Pacific Select Fund pays advisory fees and other expenses. These are
Pacific Select Estate Preserver. 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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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. account.
For this reason, the SEC has not reviewed
the disclosure in this prospectus about Here are some things you need to know about the fixed options:
these options. However, other federal
securities laws may apply to the accuracy . Accumulated value allocated to the fixed options earn interest on a daily
and completeness of the disclosure about basis, using a 365-day year. Our minimum annual interest rate is 4%.
these options. For more information . We may offer a higher annual interest rate on the fixed options. If we do,
about the general account, see About we'll guarantee the higher rate for one year.
Pacific Life. . There are no investment risks or direct charges.
. There are limitations on when and how much you can transfer from the fixed
The Fixed LT account will be available options. These limitations are described below in Transferring among
June 1, 1999, but may not be available investment options.
in every state. Please contact your . We may limit the total amount you allocate to the Fixed LT account for all
registered representative or us to find Pacific Life policies you own to $1,000,000 in any 12-month period, and
out if the Fixed LT account is available transfer any amount over $1,000,000 to your other investment options
in the state where you signed your according to your most recent instructions. We may increase the $1,000,000
application. 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 You can transfer among your investment options any time during the life of your
investment options policy without triggering any current income tax. You can make transfers by
writing to us, by making a telephone transfer, or by signing up for one of our
If your state requires us to refund your automatic transfer programs. You'll find more information about making
premiums when you exercise your right telephone transfers in Pacific Select Estate Preserver basics.
to cancel, you can make transfers and use
transfer programs only after the free look Transfers will normally be effective as of the end of the business day we
transfer date. For more information, receive your written or telephone request.
please see Pacific Select Estate Preserver
basics. Here are some things you need to know about making transfers:
If you live in Connecticut, Georgia, . If you're making transfers between variable investment options, there is no
Maryland, North Carolina, North Dakota, minimum amount required and you can make as many transfers as you like.
or Pennsylvania, you can make a transfer . You can make transfers from the variable investment options to the fixed
to the fixed options any time during the options only in the policy month right before each policy anniversary.
first 18 months of your policy. . 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'll find more about the first year . You can only transfer up to the greater of $5,000 or 25% of your policy's
transfer program later in this section. accumulated value in the Fixed account in any 12-month period.
. 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.
. 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 porfolio 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. It does not allow you to make
lower, and fewer units when unit values transfers to or from either of the fixed options. Here's how the program works:
are higher. This allows you to average the
cost of investments over time. Investing . You need to complete a request form to enroll in the program.
this way does not guarantee profits or . You must have at least $5,000 in a variable investment option to start the
prevent losses. 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.
Because the portfolio rebalancing program Portfolio rebalancing program
matches your original percentage As the value of the underlying portfolios changes, the value of the allocations
allocations, we may transfer money from an to the variable investment options will also change. The portfolio rebalancing
investment option with relatively higher program automatically transfers your policy's accumulated value among the
returns to one with relatively lower variable investment options according to your original percentage allocations.
returns.
Here's how the program works:
. 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, modify or suspend the program at any time.
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This program allows you to average the First year transfer program
cost of investments over your first policy Our first year transfer program allows you to make monthly transfers during the
year. Investing this way does not guarantee first policy year from the Fixed account to the variable investment options or
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 net 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 take out a loan from us using your policy as security. You can also use your
income, or make your policy more policy's loan and withdrawal features to supplement your income, for example,
susceptible to lapsing. Be sure to plan during retirement.
carefully before 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 . You must send us a written request that's signed by all joint owners.
benefit. Please see the discussion about . Each withdrawal must be at least $500, and the net cash surrender value of
income benefits in General information your policy after the withdrawal must be at least $500.
about your 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, . If you do not tell us which investment options to take the withdrawal from,
unless you've told us in writing that you we'll deduct the withdrawal and the withdrawal charge from all of your
want your policy to become a modified investment options in proportion to the accumulated value you have in each
endowment contract. 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 last surviving 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 or Option D, a withdrawal may reduce
your face amount. You can make one withdrawal during each of the first 15
policy years of $10,000 or 10% of your policy's cash surrender value, whichever
is less, 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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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 Estate
interest you owe, is referred to throughout Preserver basics.
this prospectus as your outstanding loan
amount. Your policy refers to this amount When you borrow money from us, we use your policy's accumulated value as
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 . To secure the loan, we transfer an amount equal to the amount you're borrowing
your policy's accumulated value, and may from your accumulated value in the investment options to the loan account.
affect the death benefit. We'll transfer this amount from your investment options in proportion to the
accumulated value you have in each option, unless you tell us otherwise.
. Interest owing on the amount you've borrowed accrues daily at an annual rate
of 4.5% during the first 10 years of the loan. Starting in the 11th year of
the loan, interest accrues at an annual rate of 4.25%.
. Interest that has accrued during the policy year is due on your 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 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
amount from your investment options in proportion to the accumulated value
you have in each option, unless you tell us otherwise.
. The amount in the loan account earns interest daily at an annual rate of
4.0%. On your policy anniversary, we transfer the interest that's been
credited to the loan account proportionately to your investment options
according to your most recent allocation instructions.
How much you can borrow
The minimum amount you can borrow is $500, unless there are other restrictions
in your state. You can borrow up to the larger of the following amounts:
An example
. 100% of the accumulated value in the fixed options, plus 90% of the
For a policy in policy year 13 with: accumulated value in the variable investment options, less any surrender
. accumulated value of $100,000 charges that would apply if you surrendered your policy on the day you took
. an outstanding loan amount of $50,000 out the loan.
The maximum amount you can borrow is . the result of a x (b / c) - d, where:
$49,760.19
($100,000 X (1.04 / 1.0425) - $50,000) 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
If you live in Connecticut, the minimum loan, and less 12 times the most recent monthly charge
amount you can borrow is $200. If you live b = 1.04
in Oregon, the minimum amount is $250. c = 1.045 during the first 10 policy years, and 1.0425 during policy year 11
and thereafter
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 transfer any loan payments you make
proportionately to your 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
premium payment unless you tell us in writing that it's a loan repayment.
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WITHDRAWALS, SURRENDERS AND LOANS
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What happens if you do not pay off your loan
If you do not pay off your loan, we'll deduct the amount in the loan account,
Your outstanding loan amount could including any interest you owe, from one of the following:
result in taxable income if you surrender
your policy, if your policy lapses, or if . the death benefit proceeds before we pay them to your beneficiary
your policy is a modified endowment . the cash surrender value if you surrender your policy
contract. You should talk to your tax . the amount we refund if you exercise your right to cancel.
advisor before taking out a loan under
your policy. For more information, please Taking out a loan, whether or not you repay it, will have a permanent effect on
turn to Taking out a loan in Variable life the value of your policy. For example, while your policy's accumulated value is
insurance and your taxes. 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 . the rate of return you expect to earn on your investment options
affect the accumulated value, net cash . how long you would like to receive regular income
surrender value and death benefit of your . the amount of accumulated value you want to maintain in your policy.
policy based on different hypothetical
gross rates of return. We will not use a Understanding the risks
higher rate than 12%, and will always Setting up an income stream may not be suitable for all policy owners. It's
compare it with a rate of 0% based on important to understand the risks that are involved in using your policy's loan
guaranteed insurance costs. You'll find and withdrawal features.
sample illustrations and the assumptions
they're based on starting on page 100. 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 not 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 if: life insurance coverage.
. the gross annual rates of return are There are also charges associated with reinstating a lapsed policy.
different from the hypothetical rates
. premiums were not paid as illustrated You should consult with your financial adviser and carefully consider how much
. loan interest was paid when due. you can withdraw and borrow from your policy each year to set up your income
stream.
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 ages
of the persons insured by the policy, this can also reduce the accumulated
value.
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You can also ask for accompanying charts In addition, you should carefully review the policy statements we send you.
and graphs that compare results from Your statements will allow you to monitor your policy's accumulated value, less
various retirement strategies. your 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 If your policy lapses, or you surrender your policy after you have taken out a
how policy charges may affect existing loan, you could face significant income tax liability in the year of the lapse
accumulated value and how future or surrender. Any outstanding loan amount will automatically be repaid when
withdrawals and loans may affect the your policy lapses or you surrender your policy. You could be taxed to the extent
accumulated value and death benefit. that the net surrender value plus the outstanding loan amount repaid exceeds the
cost basis of your policy.
Interest on a loan is due to us on each policy anniversary. If we do not
Tax issues are described in detail in receive the interest when due, it is added to the outstanding loan amount and
Variable insurance and your taxes. begins accruing interest from the day it was due. This has a compounding effect
and can add to your income tax liability.
If both persons insured by the policy die, 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 either of the two
people insured by the policy is still living. Your policy's cash surrender
You can choose to receive your money in value is its accumulated value less any surrender charge that applies. The net
a lump sum or use it to buy an income cash surrender value equals your policy's cash surrender value after deducting
benefit. Please see the discussion about any outstanding loan amount.
income benefits in General information
about your policy. Here are some things you need to know about surrendering your policy:
. You must send us your policy and a written request.
. We'll send you the policy's net cash surrender value. If you surrender your
policy during the first 10 policy years, we'll deduct a surrender charge that
helps cover our costs for underwriting, issuing and distributing our
policies. The box on the next page describes how we calculate the surrender
charge. There's no surrender charge after 10 policy years.
. We guarantee the surrender charge rates will not increase. We can reduce or
waive the surrender charge on policies sold to our directors or employees, to
any of our affiliates or to any trustees or employees or affiliates of the
Pacific Select Fund.
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Joint equal age is a calculation that How we calculate the surrender charge
combines the ages and insurance risks of
the two people insured by the policy, and The surrender charge is assessed against your policy's accumulated value. It
is explained in Appendix A. has two parts: an underwriting surrender charge and a sales surrender charge.
Both charges are based on the joint equal age on the policy date of the two
The underwriting surrender charge and people insured by the policy, and on the initial face amount of your policy.
sales surrender target rate appear in
Appendix B. The underwriting surrender charge is designed to help cover our administrative
expenses for underwriting and issuing a policy, including the costs of
processing applications, conducting medical examinations, determining the
An example insurability and underwriting classes of the people insured, and establishing
policy records.
For a policy with:
The amount of the charge does not change during the first policy year. Starting
. a joint equal age of 50 on the first policy anniversary, the charge decreases by 0.9259% each month
. an initial face amount of $100,000. until it reaches zero at the end of the 10th policy year.
Here's the surrender charge at the end of The sales surrender charge helps pay for our costs of distributing policies.
the first policy year: During the first policy year, this charge is equal to the smaller of the
following amounts:
. Underwriting surrender charge: $520
(5.20 X $100,000 / 1,000) . 25% of the premium payments you've made, or
. Maximum sales surrender charge: $226.25 . 25% of the sales surrender target, which is based on the joint equal age of
(25% X 9.05 x $100,000 / 1,000). the people insured by the policy for each $1,000 of the policy's initial face
amount.
At the end of the third policy year, the
surrender charge is reduced to: The sales surrender charge increases until the premiums you pay reach the sales
surrender target. In the 13th month you own your policy, we reduce the sales
. Underwriting surrender charge: $404.45 surrender charge so that it is 99.0741% of the charge as calculated above.
($520 - ($520 X 0.9259% X 24 months)) After that, we reduce it by 0.9259% a month until it reaches zero at the end of
. Maximum sales surrender charge: 10 policy years.
$175.97 ($226.25 -
($225.25 X 0.9259% X 24 months)). We will not increase the charge if your policy's face amount increases. If you
decrease the face amount of your policy, we'll charge you a surrender charge
that's calculated based on the amount of the decrease.
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Calculating the surrender charge on a decrease in face amount
Here's how we calculate the surrender charge on a decrease in face amount:
. Step 1: we divide the amount of the decrease by your policy's face amount
immediately before the decrease
. Step 2: we multiply the amount we calculated in step 1 by the total surrender
charge that would apply if you surrendered your policy.
We deduct the amount we calculated in step 2 from your investment options in
proportion to the accumulated value you have in each option.
We calculate any surrender charge after a decrease in face amount by dividing
the new face amount by the old face amount, and multiplying the result by the
surrender charge that would have applied before the decrease.
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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 Estate
Preserver 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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Paying the death benefit in the If either person insured by the policy, whether sane or insane, commits suicide
case of 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, any withdrawals
you've made, and any cash dividends we've paid.
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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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GENERAL INFORMATION ABOUT YOUR POLICY
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Errors on your application If the age or gender of either person insured by your policy is stated
incorrectly on your application, we'll adjust the face amount to reflect the
If unisex cost of insurance rates apply to correct age or gender. Here's how we'll do it:
your policy, we will not adjust the face
amount if we discover that gender has been . Using the monthly cost of insurance rate for the policy year in which we
stated incorrectly on your application. discover the mistake, we'll multiply the face amount by the rate based on the
incorrect age or gender. We'll then divide the result by the monthly cost of
insurance rate that's based on the correct age or gender.
. We'll calculate accumulated value using cost of insurance, rider and benefit
charges based on the correct age and gender, for all policy months following
the month we discover the mistake.
. We will not recalculate accumulated value for the policy months up to and
including the month in which we discover the mistake.
. We will not recalculate mortality and expense risk charges or surrender
charges.
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Contesting the validity We have the right to contest the validity of your policy for two years from the
of your policy policy date. Once your policy has been in force for two years from the policy
date during the lifetime of the people 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 people 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.
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 either 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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Dividends We do not expect to pay any dividends. If we do pay dividends, we'll pay them
annually in cash.
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VARIABLE LIFE INSURANCE AND YOUR TAXES
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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.
This is not a complete discussion of all federal income tax questions that may
arise under the policy. There are special rules that we do not include here
that may apply in certain situations.
The tax consequences of owning a policy or We do not know whether the current treatment of life insurance policies under
receiving proceeds from it may vary by current federal income tax or estate or gift tax laws will continue. We also do
jurisdiction and according to the not know whether the current interpretations of the laws by the IRS or the
circumstances of each owner or beneficiary. courts will remain the same. Future legislation may adversely change the tax
treatment of life insurance policies, other tax consequences described in this
Speak to a qualified tax adviser for discussion or tax consequences that relate directly or indirectly to life
complete information about federal, state insurance policies.
and local taxes that may apply to you.
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
In order to qualify as a life insurance We believe that the policy qualifies as life insurance. That means it will
contract for federal income tax purposes, receive the same tax advantages as a conventional fixed life insurance policy.
the policy must meet the statutory The two main tax advantages are:
definition of life insurance.
. In general, your policy's beneficiary will not be subject to federal income
Death benefits may be excluded from income tax when he or she receives the death benefit proceeds. This is true regardless
under Section 101(a) of the tax code. of whether the beneficiary is an individual, corporation, or other entity.
. 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, policies with term
insurance on the people insured by the policy or certain tax requirements
relating to joint survivorship life insurance policies. 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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VARIABLE LIFE INSURANCE AND YOUR TAXES
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While the Treasury Department has issued proposed regulations about reasonable
standards for mortality charges, the standards that apply to joint survivor
life insurance policies are not entirely clear. 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 attached 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
people, it generally will be treated as a tax-free exchange and, if so, will
not result in the recognition of gain or loss. If any of the people insured by
the policy are 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 has
Section 59A of the tax code deals with the 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, contracts later in this section. If your policy is not a modified endowment
policies that are not classified as modified contract, it will be treated as a conventional life insurance policy and will
endowment contracts are taxed as have the following tax treatment:
conventional life 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 surrendering your policy are all
life insurance policies, the death benefit considered distributions and may be subject to tax on an income-first basis and
proceeds paid to your beneficiary generally 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 annual premiums (or seven-pay premiums) required to pay for the policy's future
policy, like a change in the death benefit, death and endowment benefits.
we may have to retest your policy and
restart the seven-pay premium period to For example, if the seven-pay premiums were $1,000 a year, the maximum premiums
determine whether the change has caused the you could pay during the first seven years to avoid modified endowment
policy to become a modified endowment treatment would be $1,000 in the first year, $2,000 through the first two years
contract. and $3,000 through the first three years, etc. Under this test, a Pacific
Select Estate Preserver 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.
</TABLE>
45
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<TABLE>
<CAPTION>
VARIABLE LIFE INSURANCE AND YOUR TAXES
<S> <C>
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.
--------------------------------------------------------------------------------
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 either person insured by the
you want to exercise your rights under policy:
either of these riders.
. 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.
Split policy option rider
This rider allows a policy to be split into two individual policies. If the
split is not treated as a nontaxable exchange, it could result in the
recognition of taxable income up to any gain or income in the policy at the
time of the split.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
ABOUT PACIFIC LIFE
<S> <C>
Pacific Life Insurance Company is a life insurance company based in California.
Along with our subsidiaries and affiliates, our operations include life
insurance, annuities, 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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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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<PAGE>
<TABLE>
<CAPTION>
ABOUT PACIFIC LIFE
<S> <C>
Commissions are based on sales surrender "target" premiums we determine. The
commission we pay will vary with the agreement, but the most common schedule
For more information about the sales of commissions we pay is:
surrender target, see Withdrawals,
surrenders and loans and Appendix B. . 90% of premiums paid up to the first sales surrender target premium
. 6% of the premiums paid under sales surrender targets 2 and 3
. 4% of premiums paid in excess of sales surrender target 3
. 2% of premiums paid after policy year 10.
We may pay broker-dealers an annual renewal commission of up to 0.20% of a
policy's accumulated value less any outstanding loan amount. We calculate the
renewal amount monthly and it becomes payable on each policy anniversary.
We may also pay override payments, expense and marketing allowances, bonuses,
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.
--------------------------------------------------------------------------------
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 our amount allocated to the fixed options. The rate is reset annually. The fixed
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.
You'll find the audited financial Separate account
statements for the Pacific Select Exec Amounts allocated to the variable investment options are held in our separate
separate account later in this section account. The assets in this account are kept separate from the assets in our
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 The separate account was established on May 12, 1988 under California law under
financial statements for Pacific Life, the authority of our Board of Directors. It's registered with the SEC as a type
which we include to show our strength as of investment company called a unit investment trust. The SEC does not oversee
a company and our ability to meet our the administration or investment practices or policies of the account.
obligations under the policies.
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.
</TABLE>
48
<PAGE>
<TABLE>
<S> <C>
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
The separate account is not the only insurance policies. We must keep enough money in the account to pay anticipated
investor in the Pacific Select Fund. obligations under the insurance policies funded by the account, but we can
Investment in the fund by other separate transfer any amount that's more than these anticipated obligations to our
accounts for variable annuity contracts general account. Some of the money in the separate account may include charges
and variable life insurance contracts could we collect from the account and any investment results on those charges.
cause conflicts. For more information,
please see the Statement of Additional We cannot charge the assets in the separate account attributable to our
Information for the Pacific Select Fund. reserves and other liabilities under the policies funded by the account with
any liabilities from our other business.
Similarly, the income, gains or losses, realized or unrealized, of the assets
of any variable account belong to that variable account and are credited to or
charged against the assets held in that variable account without regard to our
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.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
ABOUT PACIFIC LIFE
<S> <C>
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.
--------------------------------------------------------------------------------
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 our non-insurance
affiliates in the same proportion as the total votes for all separate accounts
of ours and 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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50
<PAGE>
<TABLE>
<S> <C>
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.
--------------------------------------------------------------------------------
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.
51
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<TABLE>
<CAPTION>
ABOUT PACIFIC LIFE
<S> <C>
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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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
Registration statement We've filed a registration statement with the SEC for Pacific Select Estate
Preserver, 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.
--------------------------------------------------------------------------------
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.
</TABLE>
52
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<TABLE>
<CAPTION>
NAME AND POSITION PRINCIPAL OCCUPATION DURING THE LAST FIVE YEARS
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer 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; Melllon 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.
</TABLE>
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<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>
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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>
54
<PAGE>
INDEPENDENT AUDITORS' REPORT
<TABLE>
<S> <C>
The Board of Directors
Pacific Life Insurance Company
We have audited the accompanying statement of assets evidence supporting the amounts and disclosures in the
and liabilities of Pacific Select Exec Separate Account financial statements. An audit also includes assessing the
(comprised of the Money Market, High Yield Bond, accounting principles used and significant estimates made by
Managed Bond, Government Securities, Growth, Aggressive management, as well as evaluating the overall financial
Equity, Growth LT, Equity Income, Multi-Strategy, Equity, statement presentation. We believe that our audits provide a
Bond and Income, Equity Index, International, Emerging reasonable basis for our opinion.
Markets, Variable Account I, Variable Account II, Variable
Account III, and Variable Account IV Variable Accounts) as In our opinion, such financial statements present fairly, in
of December 31, 1998 and the related statement of all material respects, the financial position of each of the
operations for the year then ended and statement of changes respective Variable Accounts constituting Pacific Select Exec
in net assets for each of the two years in the period then Separate Account as of December 31, 1998 and the results of
ended (as to the Equity Variable Account and the Bond and their operations for the year then ended and the changes in
Income Variable Account, for the year ended December 31, their net assets for each of the two years in the period then
1998 and for the period from commencement of operations ended (as to the Equity Variable Account and the Bond and
through December 31, 1997). These financial statements are Income Variable Account, for the year ended December 31, 1998
the responsibility of the Separate Account's management. Our and for the period from commencement of operations through
responsibility is to express an opinion on these financial December 31, 1997), in conformity with generally accepted
statements based on our audits. accounting principles.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we DELOITTE & TOUCHE LLP
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material Costa Mesa, California
misstatement. An audit includes examining, on a test basis, February 5, 1999
55
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<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
56
<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
--------------------------------------------------------------------------------
(1) Formerly named Edinburgh Overseas Equity Portfolio
See Notes to Financial Statements
57
</TABLE>
<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
58
<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
----------------------------------------------------------------------------------
See Notes to Financial Statements
59
</TABLE>
<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
60
<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
------------------------------------------------------------------------------------
See Notes to Financial Statements
61
</TABLE>
<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
62
<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
----------------------------------------------------------------------------------------
(1) For the period from January 10, 1997 (commencement of operations) to December 31, 1997.
See Notes to Financial Statements
63
</TABLE>
<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.
64
<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
----------------------------------------------------------------
65
</TABLE>
<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.
66
<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
67
<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
- ------------------------------------------------------------------------------
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
68
<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
69
<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
70
<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
71
<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
72
<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."
73
<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.
74
<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.
75
<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.
76
<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.
77
<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>
78
<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
79
<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.
80
<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
-------------------------------------
81
</TABLE>
<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>
82
<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>
83
<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.
84
<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.
85
<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.
86
<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
--------------------------
87
</TABLE>
<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>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $ 134.1 $ 127.9 $ 163.5
Deferred (20.6) (14.4) (49.8)
----------------------------
$ 113.5 $ 113.5 $ 113.7
----------------------------
</TABLE>
88
<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>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------------------------
(In Millions)
<S> <C> <C> <C>
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>
89
<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>
<CAPTION>
December 31,
1998 1997
----------------
(In Millions)
<S> <C> <C>
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>
90
<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
---------------------------
(In Millions)
<S> <C> <C> <C>
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)
---------------------------
91
</TABLE>
<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 premiums $ 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>
92
<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.
93
<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>
94
<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>
95
<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>
<CAPTION>
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
96
<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
97
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TRANSACTIONS WITH AFFILIATES (Continued)
$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
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>
<CAPTION>
Years Ending December 31:
-------------------------
<S> <C>
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.
98
<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.
----------------------------------------------------------------------------
99
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
---------------------------------------------------------------------------------
Illustrations 1 through 10, which appear on the following pages, illustrate how
the death benefit, accumulated value and net cash surrender value of a
hypothetical policy may vary over an extended period of time, based on certain
hypothetical rates of return.
These illustrations are based on a hypothetical policy with the following
characteristics:
. the face amount is $1,500,000
If you ask us, we'll provide you with . the annual premium for Illustrations 1, 2, 5, 6, 7, 8, 9 and 10 is $32,132
different kinds of illustrations: . the annual premium for Illustrations 3 and 4 is $120,584
. on the policy date, the people insured by the policy are:
. Illustrations similar to the ones in this - a 55-year old male non-smoker
prospectus, but based on information you - a 55-year old female non-smoker
give us about the ages of the two people
to be insured by the policy, their The death benefit option and the cost of insurance rates vary by illustration,
risk classes, the face amount, the death as follows:
benefit and premium payments.
---------------------------------------------------------------
. Illustrations that show the allocation of Death benefit Cost of insurance rate
premium payments to specified variable ---------------------------------------------------------------
accounts. These will reflect the expenses Illustration 1 Option A Current
of the portfolio of the fund in which the Illustration 2 Option A Guaranteed
variable account invests. Illustration 3 Option B Current
Illustration 4 Option B Guaranteed
. Illustrations that use a hypothetical gross Illustration 5 Option C Current
rate of return that's greater than 12%. Illustration 6 Option C Guaranteed
These are available only to certain large Illustration 7 Option D Current
institutional investors. Illustration 8 Option D Guaranteed
Illustration 9 Option A Current
Illustration 10 Option A Guaranteed
---------------------------------------------------------------
Assumptions
The illustrations are based on the guideline premium test. 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, administrative charges and
The fund's investment advisory fees and mortality and expense risk charges.
expenses are shown in An overview of . Illustrations 1 to 8 assume total annual advisory fees and expenses of .77%
Pacific Select Estate Preserver. of total average daily net assets of the fund. This reflects average advisory
fees of .69% and average expenses of .08% based upon fees and expenses of
portfolios available as investment options under the policy.
. Illustrations 9 and 10 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.
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. 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 -0.77%,
5.18%, and 11.14%, for illustrations 1 to 8 and -0.72%, 5.24% and 11.19% for
illustrations 9 and 10.
. 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%
--------------------------------------------------
101
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ILLUSTRATIONS
<S> <C>
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Illustration 1
Death benefit Option A at current cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
---------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $33,739 $1,500,000 $1,500,000 $1,500,000
2 $69,164 $1,500,000 $1,500,000 $1,500,000
This illustration assumes no policy loans or 3 $106,361 $1,500,000 $1,500,000 $1,500,000
partial withdrawals have been made. 4 $145,418 $1,500,000 $1,500,000 $1,500,000
5 $186,427 $1,500,000 $1,500,000 $1,500,000
The death benefits, accumulated values 6 $229,487 $1,500,000 $1,500,000 $1,500,000
and cash surrender values will differ if 7 $274,700 $1,500,000 $1,500,000 $1,500,000
premiums are paid in different amounts or 8 $322,174 $1,500,000 $1,500,000 $1,500,000
frequencies. 9 $372,021 $1,500,000 $1,500,000 $1,500,000
10 $424,360 $1,500,000 $1,500,000 $1,500,000
The hypothetical investment rates shown 15 $728,031 $1,500,000 $1,500,000 $1,500,000
above and elsewhere in this prospectus 20 $1,115,599 $1,500,000 $1,500,000 $2,012,881
are illustrative only and should not be 25 $1,610,245 $1,500,000 $1,500,000 $3,545,044
interpreted as a representation of past or 30 $2,241,554 $1,500,000 $1,989,949 $6,175,755
future investment results. Actual rates of 35 $3,047,281 $1,500,000 $2,706,105 $10,535,204
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 year 0% 6% 12% 0% 6% 12%
by us, the separate account or the fund ---------------------------------------------------------------------------------
that these hypothetical rates of return can 1 $26,544 $28,205 $29,867 $14,192 $15,852 $17,514
be achieved for any one year or sustained 2 $52,600 $57,571 $62,743 $41,620 $46,591 $51,763
over any period of time. 3 $78,139 $88,124 $98,923 $68,532 $78,517 $89,316
4 $103,135 $119,890 $138,735 $94,900 $111,655 $130,500
This is an illustration only. An illustration 5 $127,557 $152,895 $182,543 $120,695 $146,032 $175,680
is not intended to predict actual performance. 6 $151,486 $187,283 $230,875 $145,996 $181,793 $225,385
Interest rates, dividends, and values set 7 $175,125 $223,325 $284,430 $171,008 $219,208 $280,312
forth in the illustration are not guaranteed. 8 $198,510 $261,137 $343,810 $195,765 $258,392 $341,065
9 $221,642 $300,807 $409,657 $220,270 $299,434 $408,284
10 $244,526 $342,430 $482,678 $244,526 $342,430 $482,678
15 $368,975 $599,475 $1,004,918 $368,975 $599,475 $1,004,918
20 $484,340 $925,181 $1,881,197 $484,340 $925,181 $1,881,197
25 $584,714 $1,349,195 $3,376,232 $584,714 $1,349,195 $3,376,232
30 $640,372 $1,895,189 $5,881,671 $640,372 $1,895,189 $5,881,671
35 $585,891 $2,577,243 $10,033,528 $585,891 $2,577,243 $10,033,528
---------------------------------------------------------------------------------
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102
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--------------------------------------------------------------------------------
Illustration 2
Death benefit Option A at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
---------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash surrender values. policy interest at hypothetical gross annual investment return of
year 5% 0% 6% 12%
All premium payments are illustrated as if ---------------------------------------------------------------------------------
if made at the beginning of the policy year. 1 $33,739 $1,500,000 $1,500,000 $1,500,000
2 $69,164 $1,500,000 $1,500,000 $1,500,000
This illustration assumes no policy loans 3 $106,361 $1,500,000 $1,500,000 $1,500,000
or partial withdrawals have been made. 4 $145,418 $1,500,000 $1,500,000 $1,500,000
5 $186,427 $1,500,000 $1,500,000 $1,500,000
*Additional payment will be required to 6 $229,487 $1,500,000 $1,500,000 $1,500,000
prevent policy termination. 7 $274,700 $1,500,000 $1,500,000 $1,500,000
8 $322,174 $1,500,000 $1,500,000 $1,500,000
The death benefits, accumulated values and 9 $372,021 $1,500,000 $1,500,000 $1,500,000
cash surrender values will differ if 10 $424,360 $1,500,000 $1,500,000 $1,500,000
premiums are paid in different amounts or 15 $728,031 $1,500,000 $1,500,000 $1,500,000
frequencies. 20 $1,115,599 $1,500,000 $1,500,000 $1,920,933
25 $1,610,245 $1,500,000 $1,500,000 $3,368,180
The hypothetical investment rates shown 30 $2,241,554 $0* $1,584,499 $5,794,020
above and elsewhere in this prospectus are 35 $3,047,281 $0* $2,137,393 $9,646,953
illustrative only and should not be ---------------------------------------------------------------------------------
interpreted as a representation of past End of year End of year
or future investment results. Actual rates ACCUMULATED VALUE NET CASH SURRENDER VALUE
of return may be more or less than End of assuming hypothetical gross assuming hypothetical gross
those shown and will depend on a number of policy annual investment return of annual investment return 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 $26,528 $28,188 $29,849 $14,176 $15,836 $17,497
accounts. No representation can be made by 2 $52,532 $57,500 $62,668 $41,552 $46,520 $51,688
us, the separate account or the fund that 3 $77,977 $87,952 $98,741 $68,370 $78,345 $89,133
these hypothetical rates of return can be 4 $102,832 $119,564 $138,384 $94,597 $111,329 $130,149
achieved for any one year or sustained over 5 $127,060 $152,352 $181,952 $120,198 $145,490 $175,089
any period of time. 6 $150,735 $186,452 $229,957 $145,245 $180,962 $224,467
7 $173,672 $221,744 $282,710 $169,555 $217,627 $278,593
This is an illustration only. An 8 $195,790 $258,211 $340,672 $193,045 $255,466 $337,927
illustration is not intended to predict 9 $216,975 $295,809 $404,345 $215,602 $294,436 $402,972
actual performance. Interest rates, 10 $237,100 $334,491 $474,303 $237,100 $334,491 $474,303
dividends, and values set forth in the 15 $331,076 $559,271 $965,526 $331,076 $559,271 $965,526
illustration are not guaranteed. 20 $370,820 $812,046 $1,795,264 $370,820 $812,046 $1,795,264
25 $291,273 $1,106,051 $3,207,790 $291,273 $1,106,051 $3,207,790
30 $0* $1,509,046 $5,518,114 $0* $1,509,046 $5,518,114
35 $0* $2,035,613 $9,187,575 $0* $2,035,613 $9,187,575
---------------------------------------------------------------------------------
103
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ILLUSTRATIONS
<S> <C>
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Illustration 3
Death benefit Option B at current cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:B
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$120,584
--------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $126,613 $1,606,307 $1,612,753 $1,619,201
2 $259,557 $1,711,264 $1,730,774 $1,751,052
This illustration assumes no policy loans 3 $399,148 $1,814,844 $1,854,276 $1,896,877
or partial withdrawals have been made. 4 $545,719 $1,917,017 $1,983,479 $2,058,137
5 $699,618 $2,017,748 $2,118,611 $2,236,447
The death benefits, accumulated values and 6 $861,212 $2,117,109 $2,260,018 $2,433,711
cash surrender values will differ if 7 $1,030,886 $2,215,343 $2,408,241 $2,652,219
premiums are paid in different amounts or 8 $1,209,043 $2,312,495 $2,563,647 $2,894,300
frequencies. 9 $1,396,109 $2,408,575 $2,726,583 $3,162,503
10 $1,592,527 $2,503,595 $2,897,417 $3,459,648
The hypothetical investment rates shown 15 $2,732,131 $2,985,347 $3,910,309 $5,532,318
above and elsewhere in this prospectus are 20 $4,186,586 $3,437,127 $5,189,705 $8,988,544
illustrative only and should not be 25 $6,042,881 $3,862,356 $6,835,779 $14,861,418
interpreted as a representation of past or 30 $8,412,035 $4,195,832 $8,861,756 $24,678,612
future investment results. Actual rates of 35 $11,435,743 $4,327,673 $11,247,376 $41,458,168
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 ACCUMULATED VALUE NET CASH SURRENDER VALUE
to variable accounts by the owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the accounts. No policy annual investment return of annual investment return of
representation can be made by us, the year 0% 6% 12% 0% 6% 12%
separate account or the fund that these --------------------------------------------------------------------------------
hypothetical rates of return can be
achieved for any one year or sustained 1 $106,307 $112,753 $119,200 $93,954 $100,400 $106,848
over any period of time. 2 $211,264 $230,774 $251,052 $200,284 $219,794 $240,072
3 $314,844 $354,276 $396,876 $305,236 $344,668 $387,269
This is an illustration only. An 4 $417,017 $483,479 $558,137 $408,782 $475,244 $549,902
illustration is not intended to predict 5 $517,748 $618,611 $736,447 $510,885 $611,748 $729,585
actual performance. Interest rates, 6 $617,109 $760,018 $933,711 $611,619 $754,528 $928,221
dividends, and values set forth in the 7 $715,343 $908,241 $1,152,218 $711,225 $904,124 $1,148,101
illustration are not guaranteed. 8 $812,495 $1,063,647 $1,394,300 $809,750 $1,060,902 $1,391,555
9 $908,575 $1,226,583 $1,662,503 $907,203 $1,225,211 $1,661,130
10 $1,003,595 $1,397,417 $1,959,648 $1,003,595 $1,397,417 $1,959,648
15 $1,485,347 $2,410,309 $4,032,318 $1,485,347 $2,410,309 $4,032,318
20 $1,937,127 $3,689,705 $7,488,544 $1,937,127 $3,689,705 $7,488,544
25 $2,362,356 $5,335,779 $13,361,418 $2,362,356 $5,335,779 $13,361,418
30 $2,695,832 $7,361,756 $23,178,612 $2,695,832 $7,361,756 $23,178,612
35 $2,827,673 $9,747,376 $39,483,972 $2,827,673 $9,747,376 $39,483,972
--------------------------------------------------------------------------------
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104
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Illustration 4
Death benefit Option B at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:B
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$120,584
-----------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $126,613 $1,606,290 $1,612,736 $1,619,183
2 $259,557 $1,711,193 $1,730,700 $1,750,975
This illustration assumes no policy loans 3 $399,148 $1,814,674 $1,854,095 $1,896,685
or partial withdrawals have been made. 4 $545,719 $1,916,696 $1,983,132 $2,057,762
5 $699,618 $2,017,215 $2,118,025 $2,235,803
The death benefits, accumulated values and 6 $861,212 $2,116,294 $2,259,106 $2,432,691
cash surrender values will differ if 7 $1,030,886 $2,213,734 $2,406,457 $2,650,235
premiums are paid in different amounts or 8 $1,209,043 $2,309,428 $2,560,254 $2,890,535
frequencies. 9 $1,396,109 $2,403,230 $2,720,641 $3,155,876
10 $1,592,527 $2,494,973 $2,887,747 $3,448,765
The hypothetical investment rates shown 15 $2,732,131 $2,938,468 $3,854,290 $5,464,757
above and elsewhere in this prospectus are 20 $4,186,586 $3,290,348 $5,002,491 $8,744,322
illustrative only and should not be 25 $6,042,881 $3,487,092 $6,329,002 $14,148,365
interpreted as a representation of past or 30 $8,412,035 $3,378,076 $7,691,532 $22,894,142
future investment results. Actual rates of 35 $11,435,743 $2,735,687 $8,827,744 $37,228,220
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 ACCUMULATED VALUE NET CASH SURRENDER VALUE
to variable accounts by the owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the accounts. No policy annual investment return of annual investment return of
representation can be made by us, the year 0% 6% 12% 0% 6% 12%
separate account or the fund that these -----------------------------------------------------------------------------------
hypothetical rates of return can be 1 $106,290 $112,736 $119,183 $93,937 $100,383 $106,830
achieved for any one year or sustained over 2 $211,193 $230,700 $250,974 $200,213 $219,720 $239,994
any period of time. 3 $314,674 $354,095 $396,685 $305,066 $344,487 $387,077
4 $416,696 $483,132 $557,762 $408,461 $474,897 $549,527
This is an illustration only. An 5 $517,215 $618,025 $735,803 $510,353 $611,162 $728,940
illustration is not intended to predict 6 $616,294 $759,106 $932,691 $610,804 $753,616 $927,201
actual performance. Interest rates, 7 $713,734 $906,457 $1,150,235 $709,616 $902,339 $1,146,117
dividends, and values set forth in the 8 $809,428 $1,060,254 $1,390,535 $806,683 $1,057,509 $1,387,790
illustration are not guaranteed. 9 $903,230 $1,220,641 $1,655,875 $901,858 $1,219,269 $1,654,503
10 $994,973 $1,387,747 $1,948,764 $994,973 $1,387,747 $1,948,764
15 $1,438,468 $2,354,290 $3,964,757 $1,438,468 $2,354,290 $3,964,757
20 $1,790,348 $3,502,491 $7,244,322 $1,790,348 $3,502,491 $7,244,322
25 $1,987,092 $4,829,002 $12,648,365 $1,987,092 $4,829,002 $12,648,365
30 $1,878,076 $6,191,532 $21,394,142 $1,878,076 $6,191,532 $21,394,142
35 $1,235,687 $7,327,744 $35,455,448 $1,235,687 $7,327,744 $35,455,448
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105
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ILLUSTRATIONS
<S> <C>
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Illustration 5
Death benefit Option C at current cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:C
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
----------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $33,739 $1,532,132 $1,532,132 $1,532,132
2 $69,164 $1,564,263 $1,564,263 $1,564,263
This illustration assumes no policy loans 3 $106,361 $1,596,395 $1,596,395 $1,596,395
or partial withdrawals have been made. 4 $145,418 $1,628,527 $1,628,527 $1,628,527
5 $186,427 $1,660,658 $1,660,658 $1,660,658
The death benefits, accumulated values and 6 $229,487 $1,692,790 $1,692,790 $1,692,790
cash surrender values will differ if 7 $274,700 $1,724,922 $1,724,922 $1,724,922
premiums are paid in different amounts or 8 $322,174 $1,757,054 $1,757,054 $1,757,054
frequencies. 9 $372,021 $1,789,185 $1,789,185 $1,789,185
10 $424,360 $1,821,317 $1,821,317 $1,821,317
The hypothetical investment rates shown 15 $728,031 $1,981,975 $1,981,975 $1,981,975
above and elsewhere in this prospectus 20 $1,115,599 $2,142,634 $2,142,634 $2,142,634
are illustrative only and should not be 25 $1,610,245 $2,303,292 $2,303,292 $3,512,488
interpreted as a representation of past 30 $2,241,554 $2,463,951 $2,463,951 $6,121,027
or future investment results. Actual rate's 35 $3,047,281 $2,624,609 $2,624,609 $10,443,754
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 $26,542 $28,203 $29,864 $14,190 $15,850 $17,512
achieved for any one year or sustained 2 $52,585 $57,556 $62,727 $41,605 $46,576 $51,747
over any period of time. 3 $78,088 $88,070 $98,866 $68,481 $78,463 $89,259
4 $103,010 $119,756 $138,593 $94,775 $111,521 $130,358
This is an illustration only. An 5 $127,302 $152,620 $182,246 $120,440 $145,757 $175,384
illustration is not intended to predict 6 $151,023 $186,777 $230,322 $145,533 $181,287 $224,832
actual performance. Interest rates, 7 $174,412 $222,531 $283,545 $170,294 $218,413 $279,427
dividends, and values set forth in the 8 $197,505 $259,995 $342,512 $194,760 $257,250 $339,767
illustration are not guaranteed. 9 $220,306 $299,256 $407,853 $218,933 $297,883 $406,480
10 $242,815 $340,401 $480,265 $242,815 $340,401 $480,265
15 $364,707 $593,856 $997,384 $364,707 $593,856 $997,384
20 $474,643 $911,618 $1,863,087 $474,643 $911,618 $1,863,087
25 $555,348 $1,308,944 $3,345,227 $555,348 $1,308,944 $3,345,227
30 $538,614 $1,779,821 $5,829,550 $538,614 $1,779,821 $5,829,550
35 $227,872 $2,347,097 $9,946,433 $227,872 $2,347,097 $9,946,433
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<CAPTION>
<S> <C>
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Illustration 6
Death benefit Option C at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:C
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
Flexible premium survivorship ---------------------------------------------------------------------------------
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 $33,739 $1,532,132 $1,532,132 $1,532,132
This illustration assumes no policy loans 2 $69,164 $1,564,263 $1,564,263 $1,564,263
or partial withdrawals have been made. 3 $106,361 $1,596,395 $1,596,395 $1,596,395
4 $145,418 $1,628,527 $1,628,527 $1,628,527
*Additional payment will be required to 5 $186,427 $1,660,658 $1,660,658 $1,660,658
prevent policy termination. 6 $229,487 $1,692,790 $1,692,790 $1,692,790
7 $274,700 $1,724,922 $1,724,922 $1,724,922
The death benefits, accumulated values and 8 $322,174 $1,757,054 $1,757,054 $1,757,054
cash surrender values will differ if 9 $372,021 $1,789,185 $1,789,185 $1,789,185
premiums are paid in different amounts or 10 $424,360 $1,821,317 $1,821,317 $1,821,317
frequencies. 15 $728,031 $1,981,975 $1,981,975 $1,981,975
20 $1,115,599 $2,142,634 $2,142,634 $2,142,634
The hypothetical investment rates shown 25 $1,610,245 $2,303,292 $2,303,292 $3,182,846
above and elsewhere in this prospectus 30 $2,241,554 $0* $2,463,951 $5,486,990
are illustrative only and should not be 35 $3,047,281 $0* $0* $9,146,974
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 $26,526 $28,186 $29,847 $14,173 $15,833 $17,494
separate account or the fund that these 2 $52,514 $57,481 $62,649 $41,534 $46,501 $51,669
hypothetical rates of return can be 3 $77,917 $87,888 $98,674 $68,309 $78,281 $89,066
achieved for any one year or sustained 4 $102,685 $119,407 $138,217 $94,450 $111,172 $129,982
over any period of time. 5 $126,761 $152,029 $181,602 $119,898 $145,166 $174,740
6 $150,190 $185,857 $229,307 $144,700 $180,367 $223,817
This is an illustration only. An 7 $172,757 $220,731 $281,588 $168,639 $216,613 $277,471
illustration is not intended to predict 8 $194,331 $256,576 $338,839 $191,586 $253,831 $336,094
actual performance. Interest rates, 9 $214,738 $293,276 $401,470 $213,366 $291,904 $400,097
dividends, and values set forth in the 10 $233,776 $330,686 $469,931 $233,776 $330,686 $469,931
illustration are not guaranteed. 15 $313,780 $538,436 $940,102 $313,780 $538,436 $940,102
20 $305,276 $729,241 $1,698,783 $305,276 $729,241 $1,698,783
25 $65,462 $806,798 $3,031,282 $65,462 $806,798 $3,031,282
30 $0* $464,239 $5,225,705 $0* $464,239 $5,225,705
35 $0* $0* $8,711,404 $0* $0* $8,711,404
---------------------------------------------------------------------------------
107
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
--------------------------------------------------------------------------------
Illustration 7
Death benefit Option D at current cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:D
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
--------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $33,739 $1,500,000 $1,500,000 $1,500,000
2 $69,164 $1,503,000 $1,503,000 $1,503,000
This illustration assumes no policy loans 3 $106,361 $1,506,000 $1,506,000 $1,506,000
or partial withdrawals have been made. 4 $145,418 $1,510,500 $1,510,500 $1,510,500
5 $186,427 $1,516,500 $1,516,500 $1,516,500
The death benefits, accumulated values and 6 $229,487 $1,522,500 $1,522,500 $1,522,500
cash surrender values will differ if 7 $274,700 $1,530,000 $1,530,000 $1,530,000
premiums are paid in different amounts or 8 $322,174 $1,539,000 $1,539,000 $1,539,000
frequencies. 9 $372,021 $1,549,500 $1,549,500 $1,549,500
10 $424,360 $1,563,000 $1,563,000 $1,563,000
The hypothetical investment rates shown 15 $728,031 $1,675,500 $1,675,500 $1,675,500
above and elsewhere in this prospectus are 20 $1,115,599 $1,903,500 $1,903,500 $2,007,872
illustrative only and should not be 25 $1,610,245 $2,317,500 $2,317,500 $3,536,761
interpreted as a representation of past or 30 $2,241,554 $2,766,000 $2,766,000 $6,161,831
future investment results. Actual rates of 35 $3,047,281 $3,000,000 $3,000,000 $10,511,937
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 ACCUMULATED VALUE NET CASH SURRENDER VALUE
to variable accounts by the owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the accounts. No policy annual investment return of annual investment return of
representation can be made by us, the year 0% 6% 12% 0% 6% 12%
separate account or the fund that these --------------------------------------------------------------------------------
hypothetical rates of return can be 1 $26,544 $28,205 $29,867 $14,192 $15,852 $17,514
achieved for any one year or sustained 2 $52,599 $57,571 $62,742 $41,619 $46,591 $51,762
over any period of time. 3 $78,137 $88,121 $98,920 $68,529 $78,514 $89,312
4 $103,126 $119,881 $138,725 $94,891 $111,646 $130,490
This is an illustration only. An 5 $127,535 $152,871 $182,518 $120,672 $146,008 $175,655
illustration is not intended to predict 6 $151,439 $187,232 $230,821 $145,949 $181,742 $225,331
actual performance. Interest rates, 7 $175,045 $223,237 $284,333 $170,928 $219,120 $280,216
dividends, and values set forth in the 8 $198,385 $260,998 $343,655 $195,640 $258,253 $340,910
illustration are not guaranteed. 9 $221,461 $300,601 $409,422 $220,088 $299,228 $408,050
10 $244,270 $342,135 $482,338 $244,270 $342,135 $482,338
15 $367,947 $598,210 $1,003,340 $367,947 $598,210 $1,003,340
20 $480,352 $920,194 $1,876,515 $480,352 $920,194 $1,876,515
25 $562,970 $1,322,691 $3,368,344 $562,970 $1,322,691 $3,368,344
30 $529,954 $1,780,587 $5,868,411 $529,954 $1,780,587 $5,868,411
35 $130,825 $2,249,181 $10,011,369 $130,825 $2,249,181 $10,011,369
--------------------------------------------------------------------------------
</TABLE>
108
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 8
Death benefit Option D at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:D
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
--------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $33,739 $1,500,000 $1,500,000 $1,500,000
2 $69,164 $1,503,000 $1,503,000 $1,503,000
This illustration assumes no policy loans or 3 $106,361 $1,506,000 $1,506,000 $1,506,000
partial withdrawals have been made. 4 $145,418 $1,510,500 $1,510,500 $1,510,500
5 $186,427 $1,516,500 $1,516,500 $1,516,500
*Additional payment will be required to 6 $229,487 $1,522,500 $1,522,500 $1,522,500
prevent policy termination. 7 $274,700 $1,530,000 $1,530,000 $1,530,000
8 $322,174 $1,539,000 $1,539,000 $1,539,000
The death benefits, accumulated values and 9 $372,021 $1,549,500 $1,549,500 $1,549,500
cash surrender values will differ if 10 $424,360 $1,563,000 $1,563,000 $1,563,000
premiums are paid in different amounts or 15 $728,031 $1,675,500 $1,675,500 $1,675,500
frequencies. 20 $1,115,599 $1,903,500 $1,903,500 $1,903,500
25 $1,610,245 $2,317,500 $2,317,500 $3,308,987
The hypothetical investment rates shown 30 $2,241,554 $0* $2,766,000 $5,695,959
above and elsewhere in this prospectus 35 $3,047,281 $0* $0* $9,487,267
are 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 End of assuming hypothetical gross assuming hypothetical gross
shown and will depend on a number of policy annual investment return of annual investment return 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 $26,528 $28,188 $29,849 $14,176 $15,833 $17,497
accounts. No representation can be made by 2 $52,531 $57,499 $62,668 $41,551 $46,501 $51,688
us, the separate account or the fund that 3 $77,974 $87,949 $98,737 $68,366 $78,281 $89,129
these hypothetical rates of return can be 4 $102,822 $119,553 $138,373 $94,587 $111,172 $130,138
achieved for any one year or sustained 5 $127,034 $152,324 $181,922 $120,172 $145,166 $175,059
over any period of time. 6 $150,680 $186,393 $229,894 $145,190 $180,367 $224,404
7 $173,568 $221,630 $282,586 $169,450 $216,613 $278,469
This is an illustration only. An 8 $195,603 $258,005 $340,445 $192,858 $253,831 $337,700
illustration is not intended to predict 9 $216,654 $295,453 $403,949 $215,281 $291,904 $402,577
actual performance. Interest rates, 10 $236,565 $333,893 $473,633 $236,565 $330,686 $473,633
dividends, and values set forth in the 15 $326,223 $553,663 $958,994 $326,223 $538,436 $958,994
illustration are not guaranteed. 20 $340,232 $775,646 $1,762,208 $340,232 $729,241 $1,762,208
25 $123,017 $899,648 $3,151,416 $123,017 $806,798 $3,151,416
30 $0* $537,209 $5,424,723 $0* $464,239 $5,424,723
35 $0* $0* $9,035,493 $0* $0* $9,035,493
--------------------------------------------------------------------------------
109
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
--------------------------------------------------------------------------------
Illustration 9
Death benefit Option A at current cost of insurance rates
Based on a weighted average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
--------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $33,739 $1,500,000 $1,500,000 $1,500,000
2 $69,164 $1,500,000 $1,500,000 $1,500,000
This illustration assumes no policy loans 3 $106,361 $1,500,000 $1,500,000 $1,500,000
or partial withdrawals have been made. 4 $145,418 $1,500,000 $1,500,000 $1,500,000
5 $186,427 $1,500,000 $1,500,000 $1,500,000
The death benefits, accumulated values 6 $229,487 $1,500,000 $1,500,000 $1,500,000
and cash surrender values will differ if 7 $274,700 $1,500,000 $1,500,000 $1,500,000
premiums are paid in different amounts or 8 $322,174 $1,500,000 $1,500,000 $1,500,000
frequencies. 9 $372,021 $1,500,000 $1,500,000 $1,500,000
10 $424,360 $1,500,000 $1,500,000 $1,500,000
The hypothetical investment rates shown 15 $728,031 $1,500,000 $1,500,000 $1,500,000
above and elsewhere in this prospectus are 20 $1,115,599 $1,500,000 $1,500,000 $2,026,759
illustrative only and should not be 25 $1,610,245 $1,500,000 $1,500,000 $3,576,790
interpreted as a representation of past or 30 $2,241,554 $1,500,000 $2,009,316 $6,244,628
future investment results. Actual rates of 35 $3,047,281 $1,500,000 $2,737,390 $10,676,944
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 ACCUMULATED VALUE NET CASH SURRENDER VALUE
to variable accounts by the owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the accounts. No policy annual investment return of annual investment return of
representation can be made by us, the year 0% 6% 12% 0% 6% 12%
separate account or the fund that these --------------------------------------------------------------------------------
hypothetical rates of return can be 1 $26,558 $28,220 $29,882 $14,206 $15,867 $17,530
achieved for any one year or sustained over 2 $52,641 $57,617 $62,793 $41,661 $46,637 $51,813
any period of time. 3 $78,220 $88,217 $99,029 $68,613 $78,609 $89,421
4 $103,268 $120,048 $138,923 $95,033 $111,813 $130,688
This is an illustration only. An 5 $127,753 $153,139 $182,844 $120,891 $146,276 $175,981
illustration is not intended to predict 6 $151,757 $187,634 $231,326 $146,267 $182,144 $225,836
actual performance. Interest rates, 7 $175,484 $223,808 $285,075 $171,366 $219,690 $280,957
dividends, and values set forth in the 8 $198,966 $261,776 $344,700 $196,221 $259,031 $341,955
illustration are not guaranteed. 9 $222,207 $301,631 $410,852 $220,835 $300,259 $409,479
10 $245,209 $343,469 $484,249 $245,209 $343,469 $484,249
15 $370,423 $602,163 $1,009,926 $370,423 $602,163 $1,009,926
20 $486,823 $930,821 $1,894,167 $486,823 $930,821 $1,894,167
25 $588,543 $1,359,929 $3,406,467 $588,543 $1,359,929 $3,406,467
30 $645,970 $1,913,635 $5,947,265 $645,970 $1,913,635 $5,947,265
35 $594,268 $2,607,039 $10,168,519 $594,268 $2,607,039 $10,168,519
--------------------------------------------------------------------------------
</TABLE>
110
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 10
Death benefit Option A at guaranteed cost of insurance rates
Based on a weighted average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$1,500,000
MALE SELECT NONSMOKER ISSUE AGE 55
FEMALE SELECT NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
-------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $33,739 $1,500,000 $1,500,000 $1,500,000
2 $69,164 $1,500,000 $1,500,000 $1,500,000
This illustration assumes no policy loans or 3 $106,361 $1,500,000 $1,500,000 $1,500,000
partial withdrawals have been made. 4 $145,418 $1,500,000 $1,500,000 $1,500,000
5 $186,427 $1,500,000 $1,500,000 $1,500,000
*Additional payment will be required to 6 $229,487 $1,500,000 $1,500,000 $1,500,000
prevent policy termination. 7 $274,700 $1,500,000 $1,500,000 $1,500,000
8 $322,174 $1,500,000 $1,500,000 $1,500,000
The death benefits, accumulated values 9 $372,021 $1,500,000 $1,500,000 $1,500,000
and cash surrender values will differ if 10 $424,360 $1,500,000 $1,500,000 $1,500,000
premiums are paid in different amounts or 15 $728,031 $1,500,000 $1,500,000 $1,500,000
frequencies. 20 $1,115,599 $1,500,000 $1,500,000 $1,934,924
25 $1,610,245 $1,500,000 $1,500,000 $3,399,495
The hypothetical investment rates shown 30 $2,241,554 $0* $1,610,310 $5,860,439
above and elsewhere in this prospectus 35 $3,047,281 $0* $2,174,607 $9,779,511
are 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 End of assuming hypothetical gross assuming hypothetical gross
shown and will depend on a number of policy annual investment return of annual investment return 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 $26,542 $28,203 $29,865 $14,190 $15,850 $17,512
accounts. No representation can be made 2 $52,572 $57,545 $62,718 $41,592 $46,565 $51,738
by us, the separate account or the fund 3 $78,058 $88,044 $98,846 $68,450 $78,437 $89,239
that these hypothetical rates of return can 4 $102,965 $119,722 $138,572 $94,730 $111,487 $130,337
be achieved for any one year or sustained 5 $127,256 $152,596 $182,252 $120,394 $145,733 $175,390
over any period of time. 6 $151,006 $186,803 $230,408 $145,516 $181,313 $224,918
7 $174,030 $222,226 $283,354 $169,912 $218,108 $279,236
This is an illustration only. An illustration 8 $196,245 $258,848 $341,560 $193,500 $256,103 $338,815
is not intended to predict actual performance. 9 $217,536 $296,630 $405,537 $216,164 $295,258 $404,165
Interest rates, dividends, and values set 10 $237,779 $335,526 $475,870 $237,779 $335,526 $475,870
forth in the illustration are not guaranteed. 15 $332,498 $561,949 $970,566 $332,498 $561,949 $970,566
20 $373,237 $817,797 $1,808,340 $373,237 $817,797 $1,808,340
25 $295,054 $1,118,015 $3,237,614 $295,054 $1,118,015 $3,237,614
30 $0* $1,533,628 $5,581,371 $0* $1,533,628 $5,581,371
35 $0* $2,071,054 $9,313,820 $0* $2,071,054 $9,313,820
--------------------------------------------------------------------------------
111
</TABLE>
<PAGE>
APPENDIX A - JOINT EQUAL AGE
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------------------------------
An example Joint equal age is a calculation that combines the ages and insurance risks of
two people insured by a policy. It changes many possible combinations of ages,
This example assumes a male smoker risk classes, nonstandard ratings and genders for the two people insured by the
who is age 65 and a female nonsmoker policy into a two life status. With joint equal age, we assume that both people
who is age 55 and has a Table D have the same age, gender (both always male), and risk class (both smoker or
nonstandard rating. both nonsmoker).
Here's how we calculate the joint equal How we use joint equal age
age. Using the joint equal age of the two people insured by the policy eliminates
many of the tables needed when age rates are used. We use the joint equal age
Step 1 for calculating the following:
. certain policy charges. We use joint equal age to determine the rates per
Add 6 to the male age of 65 because he $1000 of initial face amount for the sales surrender target, underwriting
is a smoker. For the female, add 0 to age surrender charge and the face amount component of the mortality and expense
55 because she is a nonsmoker. risk charge.
Adjusted ages after Step 1: . cost of insurance rates. Age is used for cost of insurance rates, both current
. Male 71 and guaranteed.
. Female 55
. the death benefit under Option D.
Step 2
How we calculate joint equal age
Subtract 0 from the male age of 65. For Here are the five steps we use to calculate joint equal age. We start with the
the female, subtract 5 from age 55. actual ages of the two people insured by the policy on the policy date.
Adjusted ages after Step 2: Step 1 Adjust ages for smoker status
. Male 71
. Female 50 If one person is a smoker and the other is a nonsmoker, we add a specified
number of years to the age of the smoker. We do not adjust the age of the
Step 3 nonsmoker. The table below shows how we make the adjustment.
The male's age is not adjusted here --------------------------------------------------------
because he does not have a nonstandard Number of smokers Add to actual age (years)
table rating. Add 8 to the female's age of --------------------------------------------------------
50 because her table rating is D. None 0
One female 4
Adjusted ages after Step 3: One male 6
. Male 71 One unisex 5
. Female 58 Two 0
--------------------------------------------------------
Step 4
If both people insured by the policy are smokers, or if both people are
Subtract 58 from 71. The difference is 13. nonsmokers, we do not adjust the age in this step.
The add-on factor for 13 is 6 in the table.
Step 2 Adjust ages for gender
Step 5
We subtract years from the adjusted age we calculated in Step 1, based on
Add 6, the add-on factor to 58, the gender. The table below shows how we make the adjustment.
younger adjusted age.
--------------------------------------------------------
The joint equal age is 64. Gender Subtract from adjusted age (years)
--------------------------------------------------------
Female 5
Male 0
Unisex 1
--------------------------------------------------------
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Step 3 Adjust ages for table ratings
We add years to the adjusted age in Step 2, based on the nonstandard table
rating for each person insured by the policy. The table below shows how we make
the adjustment.
Table ratings represent a multiple of standard mortality rates. Ratings other
than 0 represent nonstandard ratings.
--------------------------------------------------------------------------------
Table rating 0 A B C D E F H J L N P
Add to adjusted 0 2 4 6 8 10 12 14 15 16 18 19
age (years)
--------------------------------------------------------------------------------
We cap the adjusted age for nonstandard at age 100.
For people who are uninsurable, the adjusted age will always be 100, regardless
of their age and gender. We reserve the right to reject an application for a
policy.
After Steps 1 through 3, we have each person's adjusted age.
Step 4 Determine the add-on factor
We subtract the younger adjusted age from the older adjusted age. We find the
difference between the two in the table below and go across the row to
determine the add-on factor.
---------------------------------- ----------------------------------
Difference in Add-on Difference in Add-on
adjusted age factor adjusted age factor
(years) (years) (years) (years)
---------------------------------- ----------------------------------
0 0 40-44 12
1-2 1 45-47 13
3-4 2 48-50 14
5-6 3 51-53 15
7-9 4 54-56 16
10-12 5 57-60 17
13-15 6 61-64 18
16-18 7 65-69 19
19-23 8 70-75 20
24-28 9 76-82 21
29-34 10 83-91 22
35-39 11 92-100 23
---------------------------------- ----------------------------------
Step 5 Calculate joint equal age
We add the add-on factor to the younger adjusted age (from Step 3).
The sum is the joint equal age.
113
</TABLE>
<PAGE>
APPENDIX B - RATES PER $1,000 OF INITIAL FACE AMOUNT
<TABLE>
<CAPTION>
- ---------------------------------------------- ----------------------------------------------
Face amount Face amount
Joint Sales Underwriting component Joint Sales Underwriting component
equal surrender surrender of M & E equal surrender surrender of M&E
age target charge risk charge age target charge risk charge
- ---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
15 2.28 2.0 0.051 58 16.74 7.0 0.208
16 2.35 2.1 0.052 59 18.04 7.3 0.230
17 2.43 2.1 0.053 60 19.35 7.6 0.253
18 2.50 2.2 0.054 61 20.64 7.9 0.275
19 2.57 2.3 0.055 62 21.89 8.2 0.298
20 2.65 2.3 0.056 63 23.08 8.5 0.320
21 2.73 2.4 0.056 64 24.20 8.9 0.341
22 2.81 2.4 0.057 65 25.26 9.3 0.362
23 2.89 2.5 0.058 66 26.25 9.7 0.382
24 2.98 2.6 0.059 67 27.20 10.1 0.401
25 3.07 2.7 0.060 68 28.12 10.5 0.420
26 3.16 2.8 0.061 69 29.00 10.9 0.439
27 3.25 2.9 0.062 70 29.87 11.3 0.457
28 3.35 3.0 0.063 71 30.73 11.7 0.475
29 3.45 3.1 0.064 72 31.59 12.1 0.492
30 3.55 3.2 0.065 73 32.46 12.5 0.510
31 3.66 3.3 0.066 74 33.35 12.9 0.528
32 3.77 3.4 0.067 75 34.26 13.3 0.547
33 3.88 3.5 0.068 76 35.19 13.7 0.566
34 4.04 3.6 0.069 77 36.14 14.1 0.585
35 4.21 3.7 0.070 78 37.09 14.5 0.605
36 4.38 3.8 0.072 79 38.06 14.9 0.626
37 4.56 3.9 0.073 80 39.04 15.3 0.647
38 4.75 4.0 0.074 81 40.02 15.7 0.668
39 4.95 4.1 0.075 82 41.01 16.1 0.689
40 5.15 4.2 0.076 83 42.00 16.5 0.711
41 5.37 4.3 0.078 84 43.00 16.9 0.733
42 5.59 4.4 0.079 85 44.00 17.3 0.756
43 5.82 4.5 0.080 86 45.00 17.7 0.778
44 6.20 4.6 0.082 87 46.00 18.1 0.801
45 6.60 4.7 0.085 88 47.00 18.5 0.824
46 7.03 4.8 0.087 89 48.00 18.9 0.848
47 7.49 4.9 0.090 90 49.00 19.3 0.871
48 7.98 5.0 0.093 91 50.00 19.7 0.895
49 8.50 5.1 0.097 92 51.00 20.1 0.919
50 9.05 5.2 0.102 93 52.00 20.5 0.944
51 9.64 5.3 0.107 94 53.00 20.9 0.968
52 10.27 5.4 0.113 95 54.00 21.3 0.993
53 10.94 5.5 0.120 96 55.00 21.7 1.018
54 11.94 5.8 0.134 97 56.00 22.1 1.044
55 13.03 6.1 0.150 98 57.00 22.5 1.069
56 14.21 6.4 0.168 99 58.00 22.9 1.095
57 15.45 6.7 0.188 100 59.00 23.3 1.121
- ---------------------------------------------- ----------------------------------------------
</TABLE>
114
<PAGE>
APPENDIX C - DEATH BENEFIT PERCENTAGES
<TABLE>
<CAPTION>
- ----------------- ----------------- ----------------- -----------------
Age Percentage Age Percentage Age Percentage Age Percentage
- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250 50 185 60 130 70 115
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 greater
- ----------------- ----------------- ----------------- than 93 101
-----------------
115
</TABLE>
<PAGE>
APPENDIX D - DEATH BENEFIT FACTOR TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Rate per $1.00 of Face Amount
- ------------------------------------------------------------------------------------------------
Joint
equal
age Policy years*
- ------------------------------------------------------------------------------------------------
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75+
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
15 1.000 1.000 1.000 1.001 1.002 1.005 1.010 1.022 1.048 1.102 1.210 1.415 1.702 1.957 2.000
20 1.000 1.000 1.001 1.002 1.004 1.009 1.021 1.046 1.100 1.207 1.411 1.700 1.957 2.000 2.000
25 1.000 1.000 1.001 1.003 1.008 1.019 1.044 1.097 1.204 1.408 1.697 1.956 2.000 2.000 2.000
30 1.000 1.001 1.003 1.007 1.018 1.042 1.094 1.200 1.404 1.694 1.955 2.000 2.000 2.000 2.000
35 1.000 1.002 1.006 1.016 1.039 1.091 1.197 1.400 1.692 1.954 2.000 2.000 2.000 2.000 2.000
40 1.001 1.005 1.014 1.036 1.087 1.192 1.395 1.688 1.953 2.000 2.000 2.000 2.000 2.000 2.000
45 1.002 1.011 1.032 1.081 1.185 1.388 1.682 1.952 2.000 2.000 2.000 2.000 2.000 2.000 2.000
50 1.006 1.025 1.072 1.174 1.376 1.674 1.949 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
55 1.015 1.058 1.157 1.358 1.660 1.945 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
60 1.035 1.128 1.327 1.636 1.936 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
65 1.079 1.274 1.595 1.920 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
70 1.175 1.519 1.891 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
75 1.357 1.822 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
80 1.620 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
85 1.894 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
90 1.969 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
95 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
99 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000 2.000
- ------------------------------------------------------------------------------------------------
</TABLE>
* Factors are portrayed for both joint equal ages and policy anniversaries, at
five year intervals. See your policy for one year increments in death benefit
factors.
116
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<TABLE>
<CAPTION>
PACIFIC SELECT
ESTATE PRESERVER WHERE TO GO FOR MORE INFORMATION
<S> <C>
The Pacific Select Estate Preserver For more information about Pacific Select Estate Preserver, please call or
variable life insurance policy is write to us at the address below. You should also use this address to send us
underwritten by Pacific Life Insurance any notices, forms or requests about your policy.
Company.
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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
</TABLE>
<PAGE>
Supplement to Prospectus Dated May 1, 1999 for
Pacific Select Estate Preserver Last Survivor
Flexible Premium Variable Life Insurance Policies
Issued by Pacific Life Insurance Company
<TABLE>
<S> <C>
In this supplement, you and your mean the This supplement provides information about four additional variable investment
Policyholder or Owner. Pacific Life, we, us, options offered under the policy. Each of these investment options is set up as
and our refer to Pacific Life Insurance a variable account under our separate account and invests in a corresponding
Company. M Fund refers to M Fund, Inc. portfolio of the M Fund.
You'll find an explanation of what
terms used in this supplement mean in the Variable Account I: Brandes International Equity Fund
accompanying variable life insurance Variable Account II: Turner Core Growth Fund
prospectus or the M Fund prospectus. Variable Account III: Frontier Capital Appreciation Fund
Variable Account IV: Enhanced U.S. Equity Fund
The M Fund is described in detail in its
prospectus and in its Statement of You can allocate premium payments and transfer accumulated value to these
Additional Information (SAI). variable investment options, as well as to the other investment options
described in the accompanying Pacific Select Estate Preserver prospectus.
Pacific Select Estate Preserver is described
in detail in the accompanying variable life
insurance prospectus. Except as described
below, all features and procedures of the
Policy described in its prospectus remain
intact.
</TABLE>
Supplement dated May 1, 1999 1
<PAGE>
<TABLE>
<S> <C>
Your policy's accumulated value will About the variable investment options
fluctuate depending on the investment The following chart is a summary of the M Fund portfolios. Each M Fund
options you've chosen. portfolio invests in different securities and has its own investment goals,
strategies and risks. The value of each portfolio will fluctuate with the value
of the investments it holds and returns are not guaranteed. You'll find
detailed descriptions of the portfolios, including the risks associated with
investing in the portfolios, in the accompanying M Fund prospectus. There's no
guarantee that a portfolio will achieve its investment objective. You should
read the M Fund prospectus carefully before investing.
The Portfolio's The Portfolio's Main
Portfolio Investment Goal Investments Portfolio Manager
Brandes Long-term capital Equity securities of foreign Brandes Investment
International appreciation. issuers, including common stocks, Partners, L.P.
Equity preferred stocks and securities
that are convertible into common
stocks. Focuses on stocks with
capitalizations of $1 billion
or more.
Turner Core Long-term capital Common stocks that show strong Turner Investment
Growth Fund appreciation. earnings potential and also have Partners, Inc.
reasonable valuations.
Frontier Capital Maximum capital Common stock of companies of all Frontier Capital
Appreciation appreciation. sizes with emphasis on stocks Management
companies with capitalizations of Company, Inc.
less than $3 billion.
Enhanced U.S. Above-market Common stocks of U.S. companies Franklin Portfolio
Equity total return. which the portfolio manager Associates LLC
believes have the potential for
higher rates of return than the
Standard & Poor's 500 Composite
Stock Price Index while having
risks similar to those of the
index.
We are not responsible for the operation M Financial Investment Advisers, Inc. (MFIA) is the investment adviser for each
of the M Fund or any of its portfolios. portfolio of the M Fund, and has retained other firms to manage the portfolios.
We also are not responsible for ensuring MFIA and the M Fund's Board of Directors oversee the management of all of the M
that the M Fund and its portfolios Fund's portfolios.
comply with any laws that apply.
</TABLE>
2
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<TABLE>
<S> <C>
You'll find more information about Policy Fees and expenses paid by the M Fund
charges in An overview of Pacific Select The M Fund pays advisory fees and other expenses. These are deducted from the
Estate Preserver in the accompanying assets of each Portfolio and may vary from year to year. They are not fixed and
variable life insurance prospectus. 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.
M Fund's expenses are assessed at the Fund level and are not direct charges
against the Variable Accounts or the Policy's Accumulated Value. The unit value
of a variable account will change with the value of its corresponding M Fund
portfolio.
You'll find more about M Fund fees and . Advisory fee
expenses in the accompanying M Fund MFIA is the investment adviser to the M Fund. The M Fund pays an advisory fee
prospectus. to MFIA 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 M Fund paid in 1998 as an annual percentage
of each portfolio's average daily net assets. MFIA has agreed to pay operating
expenses of the M Fund (not including brokerage or other portfolio transaction
expenses, expenses for litigation, indemnification, taxes, or other
extraordinary expenses) that exceed 0.25% of each portfolio's average daily net
assets. MFIA does this voluntarily, but does not guarantee that it will
continue to do so after December 31, 1999.
M Fund Expenses after Expense Limitation/1/
Advisory Other Total
fee expenses expenses
-------- -------- --------
Brandes International Equity 1.05% 0.25% 1.30%
Turner Core Growth 0.45% 0.25% 0.70%
Frontier Capital Appreciation 0.90% 0.25% 1.15%
Enhanced U.S. Equity 0.55% 0.25% 0.80%
/1/ Actual expenses for 1998 were 3.57% for Brandes International Equity,
3.42% for Turner Core Growth, 1.75% for Frontier Capital Appreciation,
and 2.34% for Enhanced U.S. Equity. MFIA paid the difference.
Statements and reports we'll send you
We'll send you financial statements that we receive from M Fund.
The rights we describe in the Voting rights
accompanying variable life insurance We're the legal owner of the shares of the M Fund that are held by the variable
prospectus under Making changes to accounts. The voting rights we describe in the Voting rights section of the
the separate account also apply to the accompanying variable life insurance prospectus and how we'll exercise them
M Fund. also apply to the M Fund.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
Illustrations 1 and 2, which appear on the following pages, illustrate how the
death benefit, accumulated value and net cash surrender value of a hypothetical
policy may vary over an extended period of time, based on certain hypothetical
rates of return.
These illustrations are based on a hypothetical policy with the following
characteristics:
If you ask us, we'll provide you with . the death benefit option is Option A
different kinds of illustrations: . the face amount is $1,500,000
. the annual premium is $32,132
. Illustrations similar to the ones in the . on the policy date, the people insured by the policy are:
prospectus and this supplement, but - a 55-year old male non-smoker
based on information you give us about the - a 55-year old female non-smoker
ages of the two people to be insured by
the policy, their risk classes, the face The cost of insurance rates vary by illustration, as follows:
amount, the death benefit and premium ----------------------------------------------
payments. Cost of insurance rate
----------------------------------------------
. Illustrations that show the allocation of Illustration 1 Current
premium payments to specified variable Illustration 2 Guaranteed
accounts. These will reflect the expenses ----------------------------------------------
of the portfolio in which the variable
account invests. Assumptions
The illustrations are based on the guideline premium test. Here are the
. Illustrations that use a hypothetical assumptions we're using:
gross rate of return that's greater than
12%. These are available only to certain . The hypothetical rates of return are equal to constant gross annual rates of
large institutional investors. 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, administrative charges and
mortality and expense risk charges.
The Pacific Select Fund's investment . The illustrations assume total annual advisory fees and expenses of 80% of
advisory fees and expenses are shown in An total average daily net assets of the portfolios. This reflects average
overview of Pacific Select Estate Preserver. advisory fees of .69% and average expenses of .11% based upon fees and
expenses of portfolios available as investment options under the policy.
The M Fund's investment advisory fees and
expenses are shown on page 3 of this
supplement.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
. 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 -.80%,
5.15%, and 11.10%.
. 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 illustration that assumes 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 portfolio 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
-----------------------------------------------------
<S> <C>
Pacific Select Fund:
Aggressive Equity 0.01%
Growth LT 0.01%
Equity Income 0.01%
Equity Index 0.01%
International 0.23%
Emerging Markets 0.26%
M Fund:
Brandes International Equity 0.18%
-----------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 1
Death benefit Option A at current cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$1,500,000
MALE NONSMOKER ISSUE AGE 55
FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
--------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, accumulated End of paid plus End of year DEATH BENEFIT assuming
values and net cash 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 year. 1 $33,739 $1,500,000 $1,500,000 $1,500,000
2 $69,164 $1,500,000 $1,500,000 $1,500,000
This illustration assumes no policy loans 3 $106,361 $1,500,000 $1,500,000 $1,500,000
or partial withdrawals have been made. 4 $145,418 $1,500,000 $1,500,000 $1,500,000
5 $186,427 $1,500,000 $1,500,000 $1,500,000
The death benefits, accumulated values and 6 $229,487 $1,500,000 $1,500,000 $1,500,000
cash surrender values will differ if 7 $274,700 $1,500,000 $1,500,000 $1,500,000
premiums are paid in different amounts or 8 $322,174 $1,500,000 $1,500,000 $1,500,000
frequencies. 9 $372,021 $1,500,000 $1,500,000 $1,500,000
10 $424,360 $1,500,000 $1,500,000 $1,500,000
The hypothetical investment rates shown 15 $728,031 $1,500,000 $1,500,000 $1,500,000
above and elsewhere in this prospectus are 20 $1,115,599 $1,500,000 $1,500,000 $2,004,601
illustrative only and should not be 25 $1,610,245 $1,500,000 $1,500,000 $3,526,138
interpreted as a representation of past or 30 $2,241,554 $1,500,000 $1,978,416 $6,134,810
future investment results. Actual rates of 35 $3,047,281 $1,500,000 $2,687,510 $10,451,095
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 ACCUMULATED VALUE NET CASH SURRENDER VALUE
to variable accounts by the owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the accounts. No policy annual investment return of annual investment return of
representation can be made by us, the year 0% 6% 12% 0% 6% 12%
separate account or the underlying funds --------------------------------------------------------------------------------
that these hypothetical rates of return 1 $26,536 $28,196 $29,857 $14,184 $15,843 $17,505
can be achieved for any one year or 2 $52,575 $57,544 $62,713 $41,595 $46,564 $51,733
sustained over any period of time. 3 $78,091 $88,069 $98,860 $68,484 $78,461 $89,252
4 $103,056 $119,795 $138,622 $94,821 $111,560 $130,387
This is an illustration only. An 5 $127,439 $152,748 $182,362 $120,577 $145,886 $175,500
illustration is not intended to predict 6 $151,323 $187,072 $230,605 $145,833 $181,582 $225,115
actual performance. Interest rates, 7 $174,911 $223,036 $284,043 $170,793 $218,919 $279,926
dividends, and values set forth in the 8 $198,237 $260,754 $343,277 $195,492 $258,009 $340,532
illustration are not guaranteed. 9 $221,304 $300,313 $408,941 $219,932 $298,941 $407,569
10 $244,117 $341,807 $481,738 $244,117 $341,807 $481,738
15 $368,109 $597,868 $1,001,925 $368,109 $597,868 $1,001,925
20 $482,857 $921,815 $1,873,459 $482,857 $921,815 $1,873,459
25 $582,430 $1,342,800 $3,358,226 $582,430 $1,342,800 $3,358,226
30 $637,039 $1,884,205 $5,842,677 $637,039 $1,884,205 $5,842,677
35 $580,912 $2,559,533 $9,953,424 $580,912 $2,559,533 $9,953,424
--------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------------
Illustration 2
Death Benefit Option A at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the portfolios
DEATH BENEFIT OPTION:A
FACE AMOUNT:$1,500,000
MALE NONSMOKER ISSUE AGE 55
FEMALE NONSMOKER ISSUE AGE 55
GUIDELINE PREMIUM TEST
ANNUAL PREMIUM:$32,132
--------------------------------------------------------------------------------
Flexible premium survivorship Total
variable universal life premiums
Illustration of death benefits, End of paid plus End of year DEATH BENEFIT assuming
accumulated values and net cash surrender Policy interest at hypothetical gross annual investment return of
values. Year 5% 0% 6% 12%
--------------------------------------------------------------------------------
All premium payments are illustrated as if 1 $33,739 $1,500,000 $1,500,000 $1,500,000
made at the beginning of the policy year. 2 $69,164 $1,500,000 $1,500,000 $1,500,000
3 $106,361 $1,500,000 $1,500,000 $1,500,000
This illustration assumes no policy loans 4 $145,418 $1,500,000 $1,500,000 $1,500,000
or partial withdrawals have been made. 5 $186,427 $1,500,000 $1,500,000 $1,500,000
6 $229,487 $1,500,000 $1,500,000 $1,500,000
*Additional payment will be required to 7 $274,700 $1,500,000 $1,500,000 $1,500,000
prevent policy termination. 8 $322,174 $1,500,000 $1,500,000 $1,500,000
9 $372,021 $1,500,000 $1,500,000 $1,500,000
The death benefits, accumulated values and 10 $424,360 $1,500,000 $1,500,000 $1,500,000
cash surrender values will differ if 15 $728,031 $1,500,000 $1,500,000 $1,500,000
premiums are paid in different amounts or 20 $1,115,599 $1,500,000 $1,500,000 $1,912,579
frequencies. 25 $1,610,245 $1,500,000 $1,500,000 $3,349,520
30 $2,241,554 $0* $1,569,155 $5,754,519
The hypothetical investment rates shown 35 $3,047,281 $0* $2,115,323 $9,568,272
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 or ACCUMULATED VALUE NET CASH SURRENDER VALUE
future investment results. Actual rates of End of assuming hypothetical gross assuming hypothetical gross
return may be more or less than those shown Policy annual investment return of annual investment return of
and will depend on a number of factors, Year 0% 6% 12% 0% 6% 12%
including the investment allocations made --------------------------------------------------------------------------------
to variable accounts by the owner and the 1 $26,520 $28,179 $29,840 $14,167 $15,827 $17,487
experience of the accounts. No 2 $52,507 $57,473 $62,639 $41,527 $46,493 $51,659
representation can be made by us, the 3 $77,929 $87,897 $98,677 $68,321 $78,289 $89,070
separate account or the underlying funds 4 $102,753 $119,469 $138,272 $94,518 $111,234 $130,037
that these hypothetical rates of return can 5 $126,943 $152,206 $181,772 $120,080 $145,344 $174,909
be achieved for any one year or sustained 6 $150,572 $186,242 $229,687 $145,082 $180,752 $224,197
over any period of time. 7 $173,458 $221,456 $282,325 $169,341 $217,338 $278,207
8 $195,518 $257,829 $340,140 $192,773 $255,084 $337,395
This is an illustration only. An 9 $216,638 $295,317 $403,631 $215,266 $293,945 $402,259
illustration is not intended to predict 10 $236,694 $333,872 $473,365 $236,694 $333,872 $473,365
actual performance. Interest rates, 15 $330,226 $557,671 $962,514 $330,226 $557,671 $962,514
dividends, and values set forth in the 20 $369,377 $808,615 $1,787,457 $369,377 $808,615 $1,787,457
illustration are not guaranteed. 25 $289,020 $1,098,927 $3,190,019 $289,020 $1,098,927 $3,190,019
30 $0* $1,494,433 $5,480,495 $0* $1,494,433 $5,480,495
35 $0* $2,014,593 $9,112,640 $0* $2,014,593 $9,112,640
--------------------------------------------------------------------------------
7
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<PAGE>
Form No. 15-21535-00
