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PACIFIC SELECT CHOICE PROSPECTUS MAY 1, 1999
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Pacific Select Choice is a flexible premium variable life insurance policy
issued by Pacific Life Insurance Company.
This prospectus provides information that you should know before buying a
Policy. It's accompanied by a current prospectus for the Pacific Select Fund, a
This Policy is not available in Fund that provides the underlying Portfolios for the Variable Investment
all states. This prospectus is Options offered under the Policy. Please read these prospectuses carefully and
not an offer in any state or keep them for future reference.
jurisdiction where we're not
legally permitted to offer the Here's a list of all the Investment Options available under your Policy:
Policy.
VARIABLE INVESTMENT OPTIONS
The Policy is described in detail Money Market Large-Cap Value
in this prospectus. The Pacific High Yield Bond Mid-Cap Value
Select Fund is described in its Managed Bond Equity
prospectus and in its Statement Government Securities Bond and Income
of Additional Information (SAI). Growth Equity Index
No one has the right to describe Aggressive Equity Small-Cap Index
the Policy or the Pacific Select Growth LT REIT
Fund any differently than they Equity Income International
have been described in these Multi-Strategy Emerging Markets
documents.
FIXED OPTION
You should be aware that the Fixed Account
Securities and Exchange
Commission (SEC) has not reviewed
the Policy for its investment
merit, and does not guarantee
that the information in this
prospectus is accurate or
complete. It's a criminal offense
to say otherwise.
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YOUR GUIDE TO THIS PROSPECTUS
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Terms Used in This Prospectus 3 Performance Information 34
- ---------------------------------------------------------- ----------------------------------------------------------
An Overview of Pacific Select Choice 4 The Fixed Account 35
- ---------------------------------------------------------- General Description 35
Information about Pacific Life, the Separate Account, Death Benefit 36
and the Fund 12 Policy Charges 36
Pacific Life Insurance Company 12 Transfers, Surrenders, Withdrawals, and Policy Loans 36
Pacific Select Exec Separate Account 12 ----------------------------------------------------------
The Pacific Select Fund 13 More about the Policy 37
The Investment Adviser and Portfolio Managers 14 Ownership 37
- ---------------------------------------------------------- Beneficiary 37
The Policy 15 The Contract 37
Application for a Policy 15 Payments 37
Premiums 15 Assignment 37
Allocation of Net Premiums 16 Errors on the Application 38
Portfolio Rebalancing 17 Incontestability 38
Dollar Cost Averaging Option 17 Payment in Case of Suicide 38
Transfer of Accumulated Value 18 Participating 38
Death Benefit 18 Policy Illustrations 38
Changes in Guideline Premium Test 20 Payment Plan 38
Change in Death Benefit by Us 20 Optional Insurance Benefits and Other Policies 38
Decrease in Face Amount 21 Retirement Income Strategy Using Life Insurance 39
Policy Values 21 Risks Regarding Retirement Income Strategy Using
Determination of Accumulated Value 21 Life Insurance 39
Policy Loans 22 Distribution of the Policy 40
Benefits at Maturity 23 ----------------------------------------------------------
Surrender 23 More about Pacific Life 41
Partial Withdrawal Benefit 23 Management 41
Right to Examine a Policy - Free-Look Right 24 State Regulation 43
Lapse 25 Telephone Transfer and Loan Privileges 43
Reinstatement 25 Legal Proceedings 43
- ---------------------------------------------------------- Legal Matters 43
Charges and Deductions 26 Registration Statement 43
Premium Load 26 Preparation for the Year 2000 44
Sales Load Refund 26 Independent Auditors 44
Deductions from Accumulated Value 27 Financial Statements 44
Underwriting Surrender Charge 28 ----------------------------------------------------------
Withdrawal Fee 28 Illustrations 90
Corporate and Other Purchasers 28 ----------------------------------------------------------
Other Charges 29 Appendix A 100
Guarantee of Certain Charges 29 ----------------------------------------------------------
Usage 29 Appendix B 101
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Other Information 29 Where to Go for More Information Back Cover
Federal Income Tax Considerations 29
Charge for Our Income Taxes 32
Voting of Fund Shares 32
Disregard of Voting Instructions 33
Confirmation Statements and Reports to Owners 33
Replacement of Life Insurance or Annuities 33
Substitution of Investments 34
Changes to Comply with Law 34
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TERMS USED IN THIS PROSPECTUS
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Some of the terms we've used in this prospectus may be Monthly Payment Date - The day each month on which the
new to you. We've identified them in this prospectus by monthly deduction is due against the Accumulated Value. The
capitalizing the first letter of each word. You'll find first Monthly Payment Date is the Policy Date.
an explanation of what they mean below.
Net Cash Surrender Value - The Cash Surrender Value less
In this prospectus, Owner, you and your mean the Policy Debt.
Policyholder or Policy Owner. Pacific Life, we, us and
our refer to Pacific Life Insurance Company. The Fund Planned Periodic Premium - The premium determined by you as
refers to Pacific Select Fund. Policy means a Pacific a level amount planned to be paid at fixed intervals over a
Select Choice variable life insurance policy, unless we specified period of time.
state otherwise.
Policy Date - The date used to determine the Monthly Payment
If you have any questions, please ask your registered Date, Policy Years, and Policy Monthly, Quarterly,
representative or call us at 1-800-800-7681. Semi-Annual, and Annual Anniversaries. It is usually the
date the application is accepted by us. The term "Issue
Accumulated Value - The total value of the amounts in the Date" is substituted for Policy Date with respect to
Investment Options for the Policy as well as any amount Policies issued to residents of the Commonwealth of
set aside in the Loan Account, including any accrued earned Massachusetts.
interest, as of any Valuation Date.
Policy Debt - The unpaid Policy loan balance including
Accumulation Period - The period between the Policy Date accrued loan interest.
and the Maturity Date of your Policy.
Policyholder, Policy Owner, Owner, You, or Your - The person
Age - The Insured's age as of his or her nearest birthday who owns the Policy. The Policy Owner will be the Insured
as of the Policy Date, increased by the number of complete unless otherwise stated in the application. If your Policy
Policy Years elapsed. has been absolutely assigned, the assignee becomes the
Owner. A collateral assignee is not the Owner.
Beneficiary - The person or persons you name in the
application or by proper later designation to receive the Separate Account - The Pacific Select Exec Separate Account,
death benefit proceeds upon the death of the Insured. a separate account of ours registered as a unit investment
trust under the Investment Company Act of 1940.
Cash Surrender Value - The Accumulated Value, less the
underwriting surrender charge. Target Premium - A hypothetical premium that is used in the
measurement of sales load under the Policy. The Target
Face Amount - The minimum death benefit for so long as the Premium varies with the death benefit election, the Age of
Policy remains in force. The Face Amount may be decreased the Insured at issue, and the sex of the Insured (unless
under certain circumstances. unisex rates are required by law). The Target Premium will
be equal to or less than the Guideline Annual Premium. The
Fixed Account - An account that is part of our General Target Premium is shown in the Policy.
Account. All or a portion of premium payments may be
allocated to the Fixed Account for accumulation at a fixed Valuation Date - Each date on which the Separate Account is
rate of interest (which may not be less than 4.0%) declared valued, which currently includes each day that the New York
periodically by us. Stock Exchange is open for trading and on which our client
services offices are open. The New York Stock Exchange is
General Account - All of our assets other than those closed on weekends and on: New Year's Day, Martin Luther
allocated to the Separate Account or to any of our other King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
segregated separate accounts. July Fourth, Labor Day, Thanksgiving Day, and Christmas Day.
Our client services offices are normally closed on the
Guideline Annual Premium - A hypothetical premium that is following: the Monday before New Year's Day, July Fourth,
used in the measurement of any sales load refund upon or Christmas Day if any of those holidays falls on a
surrender or lapse of the Policy during the first two years Tuesday; the Tuesday before Christmas Day if that holiday
after issuance. The Guideline Annual Premium is equal to falls on a Wednesday; the Friday after New Year's Day, July
the premium that would be payable under a Policy for one Fourth or Christmas Day if any of these holidays falls on a
year if the Policy Owner were to pay level annual premiums Thursday; the Friday after Thanksgiving. If any transaction
for the life of the Policy, taking into account fees and or event called for under a Policy is scheduled to occur on
charges under the Policy (including charges, if any, for a day that is not a Valuation Date, such transaction or
substandard risks and optional insurance benefits) and event will be deemed to occur on the next following
assuming net investment earnings at an annual rate of 5% Valuation Date unless otherwise specified.
or, if greater, the rate or rates guaranteed in the Policy
at issuance. Valuation Period - The period that starts at the close of a
Valuation Date and ends at the close of the next succeeding
Home Office - The Client Services Department at our main Valuation Date.
office. The address is shown on the back cover.
Variable Account - A separate account of ours or a
Insured - The person whose death is the contingency upon subaccount of such a separate account, which is used only
which the death benefit proceeds are payable. to support the variable death benefits and policy values of
variable life insurance policies, and the assets of which
Investment Option - The Fixed Account or one of the are segregated from our General Account and our other
Variable Accounts. separate accounts. The Pacific Select Exec Separate Account
serves as the funding vehicle for the Policies. The Money
Loan Account - An account that holds Accumulated Value set Market Variable Account, High-Yield Bond Variable Account,
aside to secure Policy loans. Managed Bond Variable Account, Government Securities
Variable Account, Growth Variable Account, Aggressive
Maturity Date - The Policy Anniversary on which the Insured Equity Variable Account, Growth LT Variable Account, Equity
is Age 100. The Maturity Date may be extended beyond Age 100 Income Variable Account, Multi-Strategy Variable Account,
at your written request, when the Insured reaches Age 100, Large-Cap Value Variable Account, Mid-Cap Value Variable
in which case reserves, cost of insurance rates, and any Account, Equity Variable Account, Bond and Income Variable
other calculations depending on the Insured's Age will Account, Equity Index Variable Account, Small-Cap Index
continue to be based on Age 99. Variable Account, REIT Variable Account, International
Variable Account, and Emerging Markets Variable Account are
all subaccounts of the Separate Account.
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AN OVERVIEW OF PACIFIC SELECT CHOICE
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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 Choice Basics Pacific Select Choice is a flexible premium variable life insurance policy.
This Policy may be appropriate if you . Flexible premium means you can vary the amount and frequency of your premium
want to provide a death benefit for payments.
family members or others or to help
meet other long-term financial . Variable means the Policy's value depends on the performance of the
objectives. Investment Options you choose.
This may not be the right kind of . Life insurance means the Policy provides a death benefit to the Beneficiary
Policy if you plan to withdraw money you choose.
for short-term needs.
In addition to providing a death benefit that is generally free of federal
Please discuss your insurance needs income tax, any growth in your Policy's Accumulated Value is tax-deferred. You
and financial objectives with your can choose from 18 Variable Investment Options, each of which invests in a
registered representative. corresponding Portfolio of the Pacific Select Fund, and a Fixed Option that
provides a guaranteed minimum rate of interest.
You'll find more about the basics of
Pacific Select Choice starting on When the person insured by this Policy reaches Age 100, the Policy will mature.
page 15. We'll pay you the Policy's Net Cash Surrender Value on the Maturity Date if the
person insured by the Policy is still living. You can ask us in writing to
extend the Maturity Date beyond Age 100.
Pacific Select Choice 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 Examine a Policy - Free-Look Right
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 The death benefit provided by your Policy depends on the amount of premiums you
want to pay.
Your Policy provides a death benefit for
your Beneficiary after the person insured First you choose one of two death benefit qualification tests--the cash value
by the Policy has died, as long as your accumulation test, which allows you to pay more premiums into your Policy, or
Policy is in force. the guideline premium test. Once you make this choice, you cannot change it.
Your Policy will be in force until one of If you choose the cash value accumulation test, the amount of the death benefit
the following happens: will depend on your Policy's Accumulated Value and Face Amount.
. the person insured by the Policy dies If you choose the guideline premium test, you can choose one of two death
benefit options, depending on what is more important to you: a larger death
. your Policy matures benefit or building the Accumulated Value of your Policy. You can change your
death benefit option and reduce your Policy's Face Amount (with certain
. the Grace Period expires and your Policy restrictions) while your Policy is in force.
lapses, or
We'll pay death benefit proceeds to your Beneficiary when we receive proof of
. you surrender your Policy. death, along with payment instructions.
You'll find more about the death benefit Optional Riders
starting on page 18. There are seven 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 and a state and local tax charge.
starting on page 15.
Limits on the Premium Payments You Can Make
Your Policy's Accumulated Value 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
Accumulated Value is used as the basis for make, or remove all or part of a premium from your Policy and return it to you
determining Policy benefits and charges. under certain circumstances.
If there is not enough Accumulated Value to --------------------------------------------------------------------------------
cover Policy charges, your Policy could
lapse.
You'll find more about Accumulated Value Accumulated Value is the value of your Policy on any Valuation Date. It is not
starting on page 21. 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
You'll find more about the monthly charge on borrowed or withdrawn from the Policy.
page 27.
Monthly Deductions
You'll find more about lapsing and We deduct a monthly charge from your Policy's Accumulated Value on each Monthly
reinstatement starting on page 25. Payment Date. The charge is made up of cost of insurance, an administrative
charge, and a mortality and expense risk charge. If you add any riders, we'll
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, you have five years from the end of the Grace Period to
apply for a reinstatement. You cannot reinstate your Policy after its Maturity
Date. If your policy lapses during the first two Policy Years, we'll pay you
any Net Cash Surrender Value and any sales load refund due after deducting
outstanding monthly charges.
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AN OVERVIEW OF PACIFIC SELECT CHOICE
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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
and may affect the death benefit. other portfolio managers to manage the other Portfolios. The value of each
Portfolio will fluctuate with the value of the investments it holds, and
Please review the Investment Options returns are not guaranteed.
carefully and ask your registered
representative to help you choose the You can also choose a Fixed Option, called the Fixed Account, that provides a
right ones for your goals and risk guaranteed minimum annual interest rate of 4%. We may offer a higher rate of
tolerance. interest. If we do, we'll guarantee that rate for one year.
You'll find more about the Variable We allocate your premium payments and Accumulated Value to the Investment
Investment Options on page 14 and the Options you choose. The Accumulated Value will fluctuate depending on the
Fixed Account on page 35. Investment Options you've chosen. You bear the investment risk of any Variable
Investment Options you choose.
In some states we'll hold your premium payments in the Money Market Investment
Option until the Free-Look Transfer Date. Please turn to Right to Cancel --
Free-Look Right for more details.
You'll find more information about Transferring Among Investment Options
transfers on page 18. You can transfer among the Investment Options during the Accumulation Period
without paying any current tax. There is currently no charge for transfers.
You can make as many transfers as you like between Variable Investment Options.
You can also make automatic transfers from one Variable Investment Option to
another using our dollar cost averaging or portfolio rebalancing programs.
These programs are not available for the Fixed Account.
You can only make one transfer from the Fixed Account to the Variable
Investment Options in any 12-month period, and each transfer may be no more
than $5,000 or 25% of the Accumulated Value in the Fixed Account, whichever is
greater. You can only transfer to the Fixed Account in the Policy Month right
before each Policy Anniversary.
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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 take out a loan from us using your Policy as security. You can also use your
or surrendering your Policy can change Policy's loan and withdrawal features to supplement your income, for example,
your Policy's tax status, generate during retirement.
taxable income, or make your Policy
more susceptible to lapsing. Be sure Making Withdrawals
to plan carefully before using these You can withdraw part of your Policy's Net Cash Surrender Value starting on
Policy benefits. your first Policy Anniversary. This reduces your Policy's Accumulated Value and
could reduce the Face Amount and death benefit, depending on the death benefit
You'll find more about making withdrawals option and qualification test you've chosen. You can also make systematic
on page 23. withdrawals, where you receive a specified withdrawal amount at regular
intervals.
You'll find more about taking out loans
on page 22. 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 4.75%
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%.
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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.
You'll find out more about surrendering Surrendering Your Policy
your Policy on page 23. You can surrender or cash in your Policy for its Net Cash Surrender Value while
the person insured by the Policy is still living. If you surrender your Policy
during the first two Policy Years, we may refund you a portion of the sales
load that you've paid.
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Variable Life Insurance and Your Your Beneficiary generally will not have to pay federal income tax on death
Taxes benefit proceeds. You'll also generally not be taxed on any or all of your
Policy's Accumulated Value unless you receive a cash distribution by making a
There are tax issues to consider when you withdrawal or surrendering your Policy.
own a life insurance policy. These are
described in detail starting on page 29. 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 you've chosen.
our strength as a company, starting on
page 12. Amounts allocated to the Fixed Account are held in our General Account. Our
General Account includes all of our assets, except for those held in our
separate accounts. Our ability to meet our obligations under the Policy is
backed by our strength as an insurance company.
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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Processing Payments, Forms and Effective Date
Requests The effective date of payments, forms and requests you send us is usually
determined by the day and time we receive the item in proper form at the
To request payment of death benefit mailing address that appears on the back cover of this prospectus.
proceeds, send us proof of death and
payment instructions. Planned Periodic Premium payments, loan requests, transfer requests, loan
payments or withdrawal requests that we receive in proper form before 4:00 p.m.
Eastern time on a Valuation Date will normally be effective as of the end of
that day, unless the transaction is scheduled to occur of the end of the next
Valuation Date or on another Valuation Date. If we receive your payment or
request on or after 4:00 p.m. Eastern time on a Valuation Date, your payment or
request will be effective as of the end of the next Valuation Date. If a
transaction is scheduled to occur on a day that is not a Valuation Date, we'll
process it as of the end of the next Valuation Date.
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 unless it appears that your
signature has changed, if it appears the signature is not 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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AN OVERVIEW OF PACIFIC SELECT CHOICE
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This section of the overview explains the fees and expenses associated with
your Pacific Select Choice Policy.
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Understanding Policy Expenses
and Cash Flow Your Premium
You make a
The chart to the right illustrates how premium payment
cash normally flows through a Pacific
Select Choice Policy.
We deduct a
The dark shaded boxes show the fees premium load
and expenses you pay directly or
indirectly under your Policy. These are
explained in the pages that follow. Net Premium
We allocate the
In some states we'll hold your net net premium to
premium payments in the Money Market the Investment
Investment Option until the Free-Look Options you
Transfer Date. Please turn to Your Right choose
to Examine a Policy - Free-Look Right
for details.
Fixed Option Variable Pacific Select The Fund deducts
We hold amounts Investment Fund advisory fees
you allocate to Options The Variable and other Fund
this Option in We hold amounts Investment expenses from
our general you allocate to Options invest the Portfolios
account these Options in the Fund's
in our Separate Portfolios
Account
We deduct:
. cost of
insurance
We make . administrative
monthly deductions charge
. mortality and
expense risk
charge
. Rider charges
We deduct a
withdrawal charge.
If you choose to
Loan Account Accumulated make systematic
Accumulated Value If you make a withdrawals, we
value set The total value withdrawal currently only
aside to of your Policy. deduct a
secure a withdrawal charge
Policy Loan for the first
systematic
withdrawal.
If you surrender We deduct an
your Policy during underwriting
the first 10 Policy surrender charge
Years
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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 two charges:
The premium load is explained in more
detail on page 26. Sales Load - based on Target Premiums and varies with the death benefit option
and qualification test you choose. The Target Premium is shown in your Policy.
Here are the maximum loads we'll deduct from your premium payments:
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Sales Load Under
Death Benefit Sales Load
Target Option A and Cash Under Death
Premiums Value Accumulation Test Benefit Option B
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1 through 3 25% 30%
4 through 10 4% 4%
11 and higher 2% 2%
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If you surrender your Policy or it lapses during the first two Policy Years, we
may refund you a portion of the sales load you've paid.
State and Local Tax Charge - 2.35% 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 27. Cost of Insurance Charge - We calculate this charge by multiplying the current
cost of insurance rate by a discounted net amount at risk at the beginning of
An example each Policy Month.
For a Policy with Accumulated Value of
$150,000 after deducting cost of Administrative Charge - We deduct a charge of $25 a month during the first
insurance, and any Policy Debt and rider Policy Year. After the first Policy Year, we deduct a charge of $8 a month for
charges. Policies with initial Face Amounts of less than $100,000 and $5 a month for
initial Face Amounts of at least $100,000, but less than $500,000. If your
The monthly mortality and expense risk initial Face Amount is $500,000 or more, we will not deduct an administrative
charge is: charge after the first Policy Year.
. $93.75 if the deduction is made in Mortality and Expense Risk Charge - We deduct a charge every month during the
Policy Years 1-10 first ten Policy Years at an annual rate of 0.75% (0.0625 % monthly) of your
($150,000 X .0625%) Policy's Accumulated Value in the Investment Options after we've deducted the
cost of insurance and any rider charges. During Policy Years 11 through 20, we
. $31.25 if the deduction is made in reduce the annual rate to 0.25% (0.0208333% monthly) of the Accumulated Value.
Policy Year 11 or later Starting in Policy Year 21, the mortality and expense risk charge is reduced to
($150,000 X .020833%). zero.
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 CHOICE
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Withdrawal and Surrender You can withdraw part of your Policy's Net Cash Surrender Value at any time
Charges starting on your Policy's first anniversary. There is a $25 charge for each
withdrawal you make. We deduct this charge proportionately from all of your
Withdrawal charges are explained in Investment Options. If you choose to receive systematic withdrawals, we'll
more detail on page 28. currently only charge you $25 on the first systematic withdrawal.
The underwriting surrender charge is If you surrender, or cash in, your Policy during the first 10 Policy Years,
explained in more detail on page 28. we'll deduct an underwriting surrender charge. It's based on your Policy's
initial Face Amount and the Age of the person insured by the Policy on the
An example Policy Date. Here's how we calculate it:
For a Policy:
. that insures the life of a male Age 45 --------------------------------------------------------
when the Policy was issued Age of Person Insured Charge per $1,000
by Policy on Policy Date of Initial Face Amount
. with an initial Face Amount of --------------------------------------------------------
$200,000. 0-30 $2.50
31-40 3.50
The underwriting surrender charge is: 41-50 4.50
. $900 at the end of the fifth Policy 51-60 5.50
Year 61-80 6.50
(($200,000 / 1,000) X $4.50) --------------------------------------------------------
. $540 at the end of the seventh Policy
Year The amount of the charge does not change during the first five Policy Years.
($900 - ($900 X 1.666% X 24 Starting on the fifth Policy Anniversary, we reduce the charge by 1.666% a
months)) 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 13, and in the indirectly because they reduce Portfolio returns.
Fund's prospectus, which accompanies
this prospectus. Advisory Fee
Pacific Life is the Investment Adviser to the Fund. The Fund pays an advisory
fee to us for these services. The table below shows the advisory fee as an
annual percentage of each Portfolio's average daily net assets.
Other Expenses
The table also shows expenses the Fund paid in 1998 as an annual percentage of
each Portfolio's average daily net assets. To help limit Fund expenses, we've
agreed to waive all or part of our investment advisory fees or otherwise
reimburse each Portfolio for expenses (not including advisory fees, additional
costs associated with foreign investing and extraordinary expenses) that exceed
0.25% of its average daily net assets. We do this voluntarily but do not
guarantee 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
-----------------------------------------------------------------------------
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%
-----------------------------------------------------------------------------
/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.
11
</TABLE>
<PAGE>
INFORMATION ABOUT PACIFIC LIFE, THE SEPARATE ACCOUNT, AND THE FUND
Pacific Life Insurance Company
We are a life insurance company that is 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. As of the end of 1998, we had
$89.6 billion of individual life insurance in force and total admitted assets
of approximately $37.6 billion. We have been ranked according to admitted
assets as the 18th largest life insurance carrier in the nation based on
December 31, 1998 assets. The Pacific Life family of companies has total assets
and funds under management of $290 billion as of December 31, 1998. We are
authorized to conduct life insurance and annuity business in the District of
Columbia and all states except New York. Our principal office is located at 700
Newport Center Drive, Newport Beach, California 92660.
We were originally organized on January 2, 1868, under the name "Pacific
Mutual Life Insurance Company of California" and reincorporated as "Pacific
Mutual Life Insurance Company" on July 22, 1936. On September 1, 1997, we
converted from a mutual life insurance company to a stock life insurance
company ultimately controlled by a mutual holding company and were authorized
by California regulatory authorities to change our name to Pacific Life
Insurance Company.
We are a subsidiary of Pacific LifeCorp, a holding company which, in turn, is
a subsidiary of Pacific Mutual Holding Company, a mutual holding company. Under
their respective charters, Pacific Mutual Holding Company must always hold at
least 51% of the outstanding voting stock of Pacific LifeCorp, and Pacific
LifeCorp must always own 100% of the voting stock of Pacific Life. Owners of
Pacific Life's annuity contracts and life insurance policies have certain
membership interests in Pacific Mutual Holding Company, consisting principally
of the right to vote on the election of the Board of Directors of the mutual
holding company and on other matters, and certain rights upon liquidation or
dissolutions of the mutual holding company.
The principal underwriter for the Policies is Pacific Mutual Distributors,
Inc. ("PMD"), one of our subsidiaries. PMD is registered as a broker-dealer
with the Securities and Exchange Commission ("SEC").
Pacific Select Exec Separate Account
The Separate Account is a separate investment account of ours used only to
support the variable death benefits and policy values of variable life
insurance policies. The Separate Account supports the Policies as well as other
variable life insurance policies issued by us. The assets in the Separate
Account are kept separate from our General Account assets and our other
separate accounts.
We own the assets in the Separate Account and are required to maintain
sufficient assets in the Separate Account to meet anticipated obligations of
the insurance policies funded by the Account. The Separate Account is divided
into subaccounts called Variable Accounts. The income, gains, or losses,
realized or unrealized, of each Variable Account are credited to or charged
against the assets held in the Variable Account without regard to our other
income, gains, or losses. Assets in the Separate Account attributable to the
reserves and other liabilities under the variable life insurance policies
funded by the Separate Account are not chargeable with liabilities arising from
any other business that we conduct. However, we may transfer to our General
Account any assets which exceed anticipated obligations of the Separate
Account. All obligations arising under the Policy are our general corporate
obligations. We may accumulate in the Separate Account proceeds from various
Policy charges and investment results applicable to those assets.
The Separate Account was established on May 12, 1988 under California law
under the authority of our Board of Directors. The Separate Account is
registered as a unit investment trust with the SEC. Such registration does not
involve any supervision by the SEC of the administration or investment
practices or policies of the Account.
Each Variable Account invests exclusively in shares of a designated Portfolio
of the Fund. We may in the future establish additional Variable Accounts within
the Separate Account, which may invest in other Portfolios of the Fund or in
other securities.
12
<PAGE>
The Pacific Select Fund
The Fund is a diversified, open-end management investment company of the
series type. The Fund is registered with the SEC under the Investment Company
Act of 1940. Such registration does not involve supervision by the SEC of the
investments or investment policies of the Fund. The Fund currently offers
eighteen separate Portfolios that fund the Variable Investment Options
available to you. Each Portfolio pursues different investment objectives and
policies. We purchase shares of each Portfolio for the corresponding Variable
Account at net asset value, i.e., without sales load. All dividends and capital
gains distributions received from a Portfolio are automatically reinvested in
such Portfolio at net asset value, unless we, on behalf of the Separate
Account, elect otherwise. Fund shares will be redeemed by us at their net asset
value to the extent necessary to make payments under the Policies.
Shares of the Fund currently are offered only to separate accounts of ours
and our affiliates and/or subsidiaries to serve as an investment medium for
variable life insurance policies and for variable annuity contracts issued or
administered by us. Shares of the Fund may also be sold in the future to
separate accounts of other insurance companies, either affiliated or not
affiliated with us. Investment in the Fund by other separate accounts in
connection with variable annuity and variable life insurance contracts may
potentially create conflicts. See "Information for investors" in the
accompanying prospectus of the Fund.
The following chart summarizes some basic data about each Portfolio of the
Fund offered to the Separate Account. There can be no assurance that any
Portfolio will achieve its objective. This chart is only a summary. You should
read the more detailed information which is contained in the accompanying
prospectus of the Fund, including information on the risks associated with the
investments and investment techniques of each of the Portfolios.
13
<PAGE>
THE FUND'S PROSPECTUS ACCOMPANIES THIS PROSPECTUS AND SHOULD BE READ
CAREFULLY BEFORE INVESTING.
<TABLE>
<CAPTION>
Primary Investments
Portfolio Objective (under normal circumstances) Portfolio Manager
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Current income consistent Highest quality money Pacific Life
with preservation of market instruments
capital. believed to have limited
credit risk.
- ----------------------------------------------------------------------------------------------
High Yield High level of current Fixed income securities Pacific Life
Bond income. with lower and medium-
quality credit ratings and
intermediate to long terms
to maturity.
- ----------------------------------------------------------------------------------------------
Managed Bond Maximize total return Medium and high-quality Pacific Investment
consistent with prudent fixed income securities Management Company
investment management. with varying terms to
maturity.
- ----------------------------------------------------------------------------------------------
Government Maximize total return Fixed income securities Pacific Investment
Securities consistent with prudent that are issued or Management Company
investment management. guaranteed by the U.S.
government, its agencies
or government-sponsored
enterprises.
- ----------------------------------------------------------------------------------------------
Growth Growth of capital. Equity securities of Capital Guardian
smaller and medium-sized Trust Company
companies.
- ----------------------------------------------------------------------------------------------
Aggressive Eq- Capital appreciation. Equity securities of small Alliance Capital
uity emerging-growth companies Management L.P.
and medium-sized
companies.
- ----------------------------------------------------------------------------------------------
Growth LT Long-term growth of Equity securities of a Janus Capital
capital consistent with large number of companies Corporation
the preservation of of any size.
capital.
- ----------------------------------------------------------------------------------------------
Equity Income Long-term growth of Equity securities of large J.P. Morgan
capital and income. and medium-sized dividend- Investment Management
paying 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 Long-term growth of Equity securities of large Salomon Brothers
Value capital. Current income is U.S. companies. Asset Management Inc
of secondary importance.
- ----------------------------------------------------------------------------------------------
Mid-Cap Value Capital appreciation. Equity securities of Lazard Asset
medium-sized U.S. Management
companies believed to be
undervalued.
- ----------------------------------------------------------------------------------------------
Equity Capital appreciation. Equity securities of large Goldman Sachs
Current income is of U.S. growth-oriented Asset Management
secondary importance. companies.
- ----------------------------------------------------------------------------------------------
Bond and In- Total return and income A wide range of fixed Goldman Sachs
come consistent with prudent income securities with Asset Management
investment management. varying terms to maturity,
with an emphasis on long-
term bonds.
- ----------------------------------------------------------------------------------------------
Equity Index Investment results that Equity securities of Bankers Trust
correspond to the total companies that are Company
return of common stocks included in the Standard &
publicly traded in the Poor's 500 Composite Stock
U.S. Price Index.
- ----------------------------------------------------------------------------------------------
Small-Cap In- Investment results that Equity securities of Bankers Trust
dex correspond to the total companies that are Company
return of an index of included in the Russell
small capitalization 2000 Small Stock Index.
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 Morgan Stanley Asset
appreciation. companies of any size Management
located in developed
countries outside of the
U.S.
- ----------------------------------------------------------------------------------------------
Emerging Mar- Long-term growth of Equity securities of Blairlogie Capital
kets capital. companies that are located Management
in countries generally
regarded as "emerging
market" countries.
- ----------------------------------------------------------------------------------------------
</TABLE>
The Investment Adviser and Portfolio Managers
We serve as Investment Adviser to each Portfolio of the Fund. We are
registered with the SEC as an Investment Adviser. For sixteen of the
Portfolios, we and the Fund have engaged other firms to serve as Portfolio
Managers which are shown in the chart above.
14
<PAGE>
THE POLICY
The variable life insurance benefits provided by the Policies are funded
through the Policy Owner's Accumulated Value in the Separate Account and the
Fixed Account. The information included below describes the benefits, features,
charges, and other major provisions of the Policies.
Application for a Policy
The Policy is designed to meet the needs of individuals and of corporations
that wish to provide coverage and benefits for key employees. Anyone wishing to
purchase the Policy may submit an application to us. A Policy can be issued on
the life of an Insured for Ages up to and including Age 80 with evidence of
insurability satisfactory to us. The Insured's Age is calculated as of the
Insured's birthday nearest the Policy Date. Acceptance is subject to our
underwriting rules, and we reserve the right to request additional information
and to reject an application.
Each Policy is issued with a Policy Date. The Policy Date is usually the date
the application is accepted by us, although the Policy Date will never be the
29th, 30th, or 31st of any month. We first become obligated under the Policy on
the date the total initial premium is received or on the date the application
is accepted, whichever is later. Any monthly deductions due will be taken on
the Monthly Payment Date on or next following the date we become obligated. The
initial premium must be received within 20 days after the Policy is issued,
although we may waive the 20 day requirement at our discretion. If the initial
premium is not received or the application is rejected by us, the Policy will
be cancelled and any partial premium received will be refunded.
Subject to our approval, a Policy may be backdated, but the Policy Date may
not be more than six months prior to the date of the application. Backdating
can be advantageous if the Insured's lower issue Age results in lower cost of
insurance rates. If the Policy is backdated, the minimum initial premium
required will include sufficient premium to cover the backdating period and
will be applied as of the later of the Policy Date or the date the initial
premium is received at our Home Office. Monthly deductions will be made for the
period the Policy Date is backdated.
Insureds are assigned to underwriting (insurance risk) classes which are used
in calculating the cost of insurance charges. In assigning Insureds to
underwriting classes, we will normally use the medical or paramedical
underwriting method, which may require a medical examination of a proposed
Insured, although other forms of underwriting may be used when deemed
appropriate by us.
Premiums
The Policy is a flexible-premium policy, and it provides considerable
flexibility, subject to the limitations described below, to pay premiums at
your discretion. We usually require you to pay a minimum initial premium equal
to at least 25% of the sum of the Policy's monthly deductions plus premium load
for the first year, which will be based upon your Policy's Face Amount and the
Age, smoking status, gender (unless unisex cost of insurance rates apply, (see
"Charges and Deductions: Cost of Insurance")), and underwriting class of the
Insured. Thereafter, subject to the limitations described below, you may choose
the amount and frequency of premium payments. The Policy, therefore, provides
you with the flexibility to vary premium payments to reflect varying financial
conditions.
When applying for a Policy, you will determine a Planned Periodic Premium
that provides for the payment of level premiums over a specified period of
time. You will receive a premium reminder notice, or a listbill for multiple
policies, on an annual, semiannual, or quarterly basis, or, if a listbill, a
monthly basis, at your option; however, you are not required to pay Planned
Periodic Premiums. Premiums may be paid monthly under the Uni-check plan
electronic funds transfer where you authorize us to withdraw premiums from your
checking account each month. The minimum initial premium required must be paid
before the Uni-check plan will be accepted by us. You may elect the day each
month on which premiums are paid under the Uni-check plan, provided the day
elected is between the 4th and the 28th day of the month. If you do not elect a
payment day, the day on which premiums are paid will be the Monthly
Anniversary.
15
<PAGE>
Payment of the Planned Periodic Premium will not guarantee that your Policy
will remain in force. Instead, the continuation of your Policy depends upon
your Policy's Accumulated Value. Even if Planned Periodic Premiums are paid,
your Policy will lapse any time Accumulated Value less Policy Debt is
insufficient to pay the current monthly deduction and a Grace Period expires
without sufficient payment. See "Lapse".
Any premium payment must be for at least $50. We also may reject or limit any
premium payment that would result in an immediate increase in the net amount at
risk under the Policy, although such a premium may be accepted with
satisfactory evidence of insurability. See "Charges and Deductions: Cost of
Insurance". If satisfactory evidence of insurability is not received, the
payment, or a portion thereof, may be returned. All or a portion of a premium
payment will be rejected and returned to you if it would exceed the maximum
premium limitations prescribed by federal tax law for Policy Owners electing
the guideline premium test.
The amount, frequency and period of time over which you pay premiums may
affect whether the Policy will be classified as a modified endowment contract,
which is a type of life insurance contract subject to different tax treatment
for certain pre-death distributions than conventional life insurance contracts.
Accordingly, variations from the Planned Periodic Premiums on a Policy that is
not otherwise a modified endowment contract may result in the Policy becoming a
modified endowment contract for tax purposes.
In order for your Policy to avoid being treated as a modified endowment
contract, the sum of the premiums paid less a portion of any Partial
Withdrawals may not exceed the "seven pay premium" limit as defined in the
Internal Revenue Code ("IRC"). (See "Federal Income Tax Considerations"). If we
receive any premium payment that we believe, if applied to your Policy in that
Policy year, would cause your Policy to become a modified endowment contract,
the portion of the payment that we believe would cause your Policy to become a
modified endowment contract will not be applied to your Policy but will be
returned to you, unless you had previously notified us that payments that cause
your Policy to become a modified endowment contract may be accepted by us and
applied to your Policy. However, for premium payments received by us at our
Home Office within 20 days before the upcoming Annual Anniversary of your
Policy, we may apply the portion of the premium payment that we believe would
cause your Policy to become a modified endowment contract to your Policy on the
upcoming Annual Anniversary.
Certain charges will be deducted from each premium payment. See "Charges and
Deductions". The remainder of the premium, known as the net premium, will be
allocated as described below under "Allocation of Net Premiums." Except in
Texas, additional payments will first be treated as repayments of Policy Debt
unless you request otherwise. Any portion of a payment that exceeds the amount
of Policy Debt will be applied as an additional premium payment.
Allocation of Net Premiums
In your application for the Policy, you select the Investment Options to
which net premium payments will be allocated. When your application is approved
and your Policy is issued, your Accumulated Value will be automatically
allocated according to your instructions contained in your application, or more
recent written instructions, if any (except for amounts allocated to the Loan
Account to secure any Policy loan). However, if your Policy is delivered before
all of our requirements necessary for the Policy to be considered in force have
been met, the net premium will be allocated to the Money Market Account until
the requirements are received by our Home Office.
For residents of states that require a refund of premium to an Owner who
returns the Policy during the Free-Look Period, net premiums received prior to
the Free-Look Transfer Date will be allocated to the Money Market Variable
Account (except for amounts allocated to the Loan Account to secure any Policy
loan). The Free-Look Transfer Date is 15 days after the Policy is issued or 45
days after the application is signed, or, if longer, when all requirements are
received by the Home Office for the Policy to be considered in force. Net
premiums received on and after the Free-Look Transfer Date will be allocated
upon receipt among the Investment Options according to your most recent
instructions.
You may change the allocation of net premiums by submitting a proper written
request to our Home Office. Changes in net premium allocation instructions may
be made by telephone if a properly completed Authorization for Telephone
Requests has been filed at our Home Office. We reserve the right to discontinue
telephone net premium allocation instructions.
16
<PAGE>
Portfolio Rebalancing
You may direct us to automatically re-set the percentage of your Accumulated
Value allocated to each Variable Account at a predetermined level. This process
is called portfolio rebalancing. (The Fixed Account is not available for
portfolio rebalancing.) Over time, the variations in each Variable Account's
investment results will shift the percentage allocations of your Accumulated
Value. The portfolio rebalancing feature will automatically transfer your
Accumulated Value among the Variable Accounts back to the preset percentages.
Rebalancing can be made quarterly, semi-annually or annually, measured from
your Policy Date ("frequency period"). Rebalancing may result in transferring
amounts from a Variable Account with relatively higher investment performance
to a Variable Account with relatively lower investment performance.
You may initiate portfolio rebalancing by sending our Home Office a signed,
written request in good form or a properly completed Automatic Portfolio
Rebalancing form. You must specify the frequency for rebalancing and a
beginning date. The first rebalancing will usually occur on your Monthly
Payment Date that starts the frequency period you elected and that occurs on or
follows the beginning date you elected. If you stop portfolio rebalancing, you
must wait 30 days to begin again. Portfolio rebalancing cannot be used with the
Dollar Cost Averaging Option.
We do not currently charge for the Portfolio Rebalancing program or for
transfers made under this program.
We may modify, terminate or suspend the portfolio rebalancing feature at any
time.
Dollar Cost Averaging Option
We currently offer an option under which you may dollar cost average your
allocations in the Variable Accounts under your Policy by authorizing us to
make periodic allocations of Accumulated Value from any one Variable Account to
one or more of the other Variable Accounts. Dollar cost averaging is a
systematic method of investing in which securities are purchased at regular
intervals in fixed dollar amounts so that the cost of the securities gets
averaged over time and possibly over various market values. The option will
result in the allocation of Accumulated Value to one or more Variable Accounts,
and these amounts will be credited at the Accumulation Unit values as of the
end of the Valuation Dates on which the transfers are processed. Since the
value of Accumulation Units will vary, the amounts allocated to a Variable
Account will result in the crediting of a greater number of units when the
Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Similarly, the amounts transferred from a
Variable Account will result in a debiting of a greater number of units when
the Accumulation Unit value is low and a lesser number of units when the
Accumulation Unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that you will not have losses.
A Dollar Cost Averaging Request form is available upon request. To elect the
Dollar Cost Averaging option, your Accumulated Value in the Variable Account
from which the Dollar Cost averaging transfers will be made must be at least
$5,000. After we have received a Dollar Cost Averaging Request in proper form
at our Home Office, we will transfer Accumulated Value in amounts you designate
from the Variable Account from which transfers are to be made to the Variable
Account or Accounts you choose. The minimum amount that may be transferred to
any one Variable Account is $50. After your initial net premium is allocated
according to your instructions, the first transfer will be effected on your
Policy's Monthly, Quarterly, Semi-Annual, or Annual Anniversary, whichever
period you select, coincident with or next following receipt at our Home Office
of a Dollar Cost Averaging Request in proper form. Subsequent transfers will be
effected on the following Monthly, Quarterly, Semi-Annual, or Annual
Anniversary for so long as you designate, until the total amount elected has
been transferred, until Accumulated Value in the Variable Account from which
transfers are made has been depleted, or until your Policy enters the Grace
Period. Amounts periodically transferred under this option will not be subject
to any transfer charges that may be imposed by us in the future, except as may
be required by applicable law.
We do not currently charge you for the Dollar Cost Averaging Option, and will
not charge you for transfers made under this Option, even if we decide to
charge you in the future for transfers outside the Option, except if we have to
by law.
You may instruct us at any time to terminate this option by written request
to our Home Office. We may discontinue, modify, or suspend the Dollar Cost
Averaging Option at any time.
17
<PAGE>
Transfer of Accumulated Value
After your initial net premium is allocated to the Investment Options you
choose and upon proper written request to our Home Office, you may transfer
Accumulated Value among the Variable Accounts. Transfers (other than transfers
in connection with the Dollar Cost Averaging Option) may be made by telephone
if a properly completed Authorization For Telephone Requests form is on file at
our Home Office. Currently, there are no limitations on the number of transfers
between Variable Accounts, no minimum amount required for a transfer, nor any
minimum amount required to be remaining in a given Variable Account after a
transfer (except as required under the Dollar Cost Averaging Option). No
transfer may be made if your Policy is in the Grace Period and a payment
required to avoid lapse is not paid. See "Lapse". No charges are currently
imposed upon such transfers. We reserve the right, however, at a future date to
limit the size of transfers and remaining balances, to assess transfer charges,
to limit the number and frequency of transfers, and to suspend and discontinue
telephone transfers.
Subject to certain restrictions, Accumulated Value may also be transferred
from the Variable Accounts to the Fixed Account after your initial net premium
is allocated to the Investment Options you choose; however, such a transfer
will only be permitted in the Policy Month preceding your Policy Anniversary,
except that if you reside in Connecticut, Georgia, Maryland, North Carolina,
North Dakota, or Pennsylvania, you may make such a transfer at any time during
the first 18 Policy Months. Transfers from the Fixed Account to the Variable
Accounts are restricted as described in "The Fixed Account".
Death Benefit
When your Policy is issued, we will determine the initial amount of insurance
based on the instructions provided in your application. That amount will be
shown on the specifications page of your Policy and is called the "Face
Amount." The minimum Face Amount at issuance of a Policy is $50,000. We may
reduce the minimum Face Amount required at issuance under certain
circumstances, such as for group or sponsored arrangements or if you acquire
multiple Policies on the life of the same Insured.
For so long as your Policy remains in force, we will, upon proof of the death
of an Insured, pay death benefit proceeds to a named Beneficiary. Death benefit
proceeds will consist of the death benefit under the Policy, plus any death
benefit proceeds on the life of the Insured provided by rider, reduced by any
outstanding Policy Debt (and, if in the Grace Period, any overdue charges).
You will have one or two elections in determining the death benefit under a
Policy. First, you will choose the death benefit qualification test, which is
the method for qualifying the Policy as a life insurance contract for purposes
of federal tax law. Two tests are available under the Policy. Once elected, the
death benefit qualification test cannot be changed for the duration of your
Policy. As described below, the available death benefit qualification tests are
the cash value accumulation test and the guideline premium test. Generally, an
applicant designates the death benefit election or option in the application.
If no option is designated, we will assume the guideline premium test Option A
has been selected.
Cash Value Accumulation Test. The death benefit will be determined with
reference to the requirements for the cash value accumulation test for
qualifying a Policy as a life insurance contract under IRC Section 7702. For
Policy Owners choosing the cash value accumulation test, the death benefit will
be equal to the Face Amount or, if greater, Accumulated Value (determined as of
the end of the Valuation Period during which the Insured dies) divided by the
"net single premium" that would purchase $1 of future benefits under the
Policy. Generally, the cash value accumulation test requires that under the
terms of a life insurance policy, the death benefit must be sufficient so that
the cash surrender value, as defined in IRC Section 7702, does not at any time
exceed the net single premium required to fund the future benefits under the
policy. The net single premiums under the Policy vary according to the Age,
sex, and underwriting classification of the Insured, and the resulting death
benefit determined by using the net single premium will be at least equal to
the amount required for the Policy to be deemed life insurance under IRC
Section 7702. The net single premium is calculated using a four percent
interest rate or, if higher, the contractually guaranteed interest rate and
using mortality charges specified in the prevailing commissioners standard
tables as of the time the Policy is issued. The net single premium that would
18
<PAGE>
purchase $1 of future benefits under the Policy for a male Insured, Age 40, is
0.2966. A table showing net single premiums that would purchase $1 of future
benefits under the Policy for Insureds in a standard underwriting
classification is in Appendix A to this Prospectus.
Guideline Premium Test. The death benefit will be determined with reference
to the requirements for the guideline premium test for qualifying a Policy as a
life insurance contract under the Internal Revenue Code. If you choose this
test you will be given another election under the Policy--to select one of two
death benefit options: Option A or Option B. Subject to certain restrictions,
you can change the death benefit option selected. So long as your Policy
remains in force, the death benefit under either option will never be less than
the Face Amount of your Policy.
Option A. Under Option A, the death benefit will be equal to the Face Amount
of your Policy or, if greater, Accumulated Value (determined as of the end of
the Valuation Period during which the Insured dies) multiplied by a death
benefit percentage. The death benefit percentages vary according to the Age of
the Insured and will be at least equal to the cash value corridor in IRC
Section 7702. The death benefit percentage is 250% for an Insured at Age 40 or
under, and it declines for older Insureds. A table showing the death benefit
percentages is in Appendix B to this Prospectus.
Option B. Under Option B, the death benefit will be equal to the Face Amount
of your Policy plus your Accumulated Value (determined as of the end of the
Valuation Period during which the Insured dies) or, if greater, Accumulated
Value multiplied by a death benefit percentage. The specified percentage is the
same as that used in connection with Option A and as stated in Appendix B. The
death benefit under Option B will always vary as Accumulated Value varies.
Comparison of Death Benefit Elections. There are two main differences between
the cash value accumulation test and the guideline premium test. First, the
guideline premium test limits the amount of premium that may be paid into a
Policy. No such limits apply under the cash value accumulation test. (However,
any premium that would increase the net amount at risk is subject to evidence
of insurability satisfactory to us.) Second, the factors that determine the
minimum death benefit relative to the Policy's Accumulated Value are different.
Required increases in the minimum death benefit due to growth in Accumulated
Value will generally be greater under the cash value accumulation test than
under the guideline premium test.
If you desire to pay premiums in excess of the guideline premium test
limitations you should elect the cash value accumulation test. If you do not
desire to pay premiums in excess of the guideline premium test limitations you
should consider the guideline premium test. Favorable investment performance
will be reflected in increasing Accumulated Value to the greatest degree under
the guideline premium test Option A. At times, favorable investment performance
will be reflected in increasing insurance coverage to the greatest degree under
the guideline premium test Option B; at other times, insurance coverage will be
greater under the cash value accumulation test. Applicants for a Policy should
consult a qualified tax adviser in choosing a death benefit election.
The following examples demonstrate the determination of death benefits under
Options A and B of the guideline premium test and under the cash value
accumulation test. The examples show three Policies-- Policies I, II, and III--
with the same Face Amount, but Accumulated Values that vary as shown, and which
assume a male Insured, Age 40, at the time of calculation of the death benefit
and that there is no outstanding Policy Debt.
<TABLE>
<CAPTION>
Policy Policy
Policy I II III
-------- -------- --------
<S> <C> <C> <C>
Face Amount............................. $100,000 $100,000 $100,000
Accumulated Value....................... $ 25,000 $ 50,000 $ 75,000
Death Benefit Percentage................ 250% 250% 250%
Net Single Premium Factor............... 0.2966 0.2966 0.2966
Death Benefit Under Option A............ $100,000 $125,000 $187,500
Death Benefit Under Option B............ $125,000 $150,000 $187,500
Death Benefit Under Cash Value
Accumulation Test...................... $100,000 $168,577 $252,866
</TABLE>
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<PAGE>
Payment of Death Benefit Proceeds. All calculations of death benefit will be
made as of the end of the Valuation Period during which the Insured dies. Death
benefit proceeds may be paid to a Beneficiary in a lump sum or under a payment
plan offered under the Policy. The Policy should be consulted for details.
Changes in Guideline Premium Test Death Benefit Option
If you elect the guideline premium test (and not the cash value accumulation
test), you may request that the death benefit under the Policy be changed from
Option A to Option B, or from Option B to Option A. Changes in the death
benefit option may be made only once per Policy Year after the fifth Policy
Year, and should be made in writing to our Home Office. A change from Option B
to Option A may be made without evidence of insurability; a change from Option
A to Option B will require evidence of insurability satisfactory to us. The
effective date of any such change shall be the next Monthly Payment Date after
the change is accepted.
A change in the death benefit from Option A to Option B will result in a
reduction in the Face Amount of your Policy by the amount of your Policy's
Accumulated Value, with the result that the death benefit payable under
Option B at the time of the change will equal that which would have been
payable under Option A immediately prior to the change. The change in option
will affect the determination of the death benefit from that point on since
Accumulated Value will then be added to the new Face Amount, and the death
benefit will then vary with Accumulated Value. This change will not be
permitted if it would result in a Face Amount of less than $50,000, although we
reserve the right to waive this minimum under certain circumstances, such as
for group or sponsored arrangements. A charge of $100 will be deducted from
your Accumulated Value in the Investment Options on a prorata basis on the
effective date of the change to cover the cost of processing the request.
A change in the death benefit from Option B to Option A will result in an
increase in the Face Amount of your Policy by the amount of your Policy's
Accumulated Value, with the result that the death benefit payable under
Option A at the time of the change will equal that which would have been
payable under Option B immediately prior to the change. However, the change in
option will affect the determination of the death benefit from that point on
since your Accumulated Value will no longer be added to the Face Amount in
determining the death benefit. From that point on, the death benefit will equal
the new Face Amount (or, if greater, the Accumulated Value times the applicable
specified percentage). No charge will be made on a change from Option B to
Option A.
A change in death benefit option may affect the monthly cost of insurance
charge since this charge varies with the net amount at risk, which generally is
the amount by which the death benefit exceeds Accumulated Value. See "Charges
and Deductions: Cost of Insurance". Assuming that the Policy's death benefit
would not be equal to Accumulated Value times a death benefit percentage under
either Option A or B, changing from Option B to Option A will generally result
in a decreasing net amount at risk, and therefore will decrease the cost of
insurance charges relatively. Changing from Option A to Option B will generally
result in a net amount at risk that remains level. Such a change, however, will
result in an increase in the cost of insurance charges over time, since the
cost of insurance rates increase with the Insured's Age.
Change in Death Benefit by Us
We reserve the right to reduce the death benefit under a Policy by requiring
Partial Withdrawals in order to maintain the net amount at risk at an amount
that will not exceed three times the death benefit on the Policy Date. The net
amount at risk is the difference between the death benefit and the Accumulated
Value. Similarly, we reserve the right to require Partial Withdrawals or
otherwise to distribute amounts under a Policy in order to comply with tax-
related requirements. Such withdrawals or other distributions may be taxable to
you in whole or in part. See "Federal Income Tax Considerations". The $25
withdrawal fee will not be assessed on Partial Withdrawals we require.
We reserve the right to increase the death benefit if required for a Policy
to be deemed a life insurance contract under the IRC.
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<PAGE>
Decrease in Face Amount
You may request a decrease in the Face Amount under a Policy subject to our
approval. A decrease in Face Amount may only be made once per Policy Year, and
only after the fifth Policy Year. Decreasing the Face Amount could decrease the
death benefit. The amount of change in the death benefit will depend, among
other things, upon the death benefit election you choose and whether, and the
degree to which, the death benefit under your Policy exceeds the Face Amount
prior to the decrease. Decreasing the Face Amount could affect the subsequent
level of the death benefit while your Policy is in force and the subsequent
level of Policy values. A decrease in Face Amount may decrease the net amount
at risk, which will decrease your cost of insurance charge.
Any request for a decrease in Face Amount must be made by written application
to our Home Office. It will become effective on the Monthly Payment Date on or
next following the date we receive your written request at our Home Office. If
you are not the Insured, we will also require the consent of the Insured before
accepting a request.
A decrease will not be permitted if the Face Amount would fall below $50,000,
although we reserve the right to waive the minimum Face Amount under certain
circumstances, such as for group or sponsored arrangements or if you have
multiple Policies on the life of the same Insured. No charge will be deducted
in connection with a decrease. If a decrease in the Face Amount would result in
total premiums paid exceeding the premium limitations prescribed under tax law
to qualify your Policy as a life insurance contract, we will refund to you the
amount of such excess above the premium limitations. These refunds may be
taxable in whole or in part. See "Federal Income Tax Considerations".
We reserve the right to disallow a requested decrease, and will not permit a
requested decrease, among other reasons, (1) if compliance with the guideline
premium limitations under tax law resulting from the requested decrease would
result in immediate termination of your Policy, or (2) if, to effect the
requested decrease, payments to you would have to be made from Accumulated
Value for compliance with the guideline premium limitations, and the amount of
such payments would exceed the Net Cash Surrender Value under your Policy.
Increases in Face Amount are not available under your Policy unless state law
requires otherwise.
Policy Values
Accumulated Value. Your Accumulated Value is the sum of the amounts under the
Policy held in each Investment Option, as well as the amount set aside in the
Loan Account, including any accrued earned interest, to secure any Policy Debt.
On each Valuation Date, the portion of your Accumulated Value allocated to
any particular Variable Account will be adjusted to reflect the investment
experience of that Variable Account. On each Monthly Payment Date, the portion
of your Accumulated Value allocated to a particular Investment Option also will
be adjusted to reflect the assessment of the monthly deduction. See
"Determination of Accumulated Value". No minimum amount of Accumulated Value is
guaranteed. You bear the risk for the investment experience of Accumulated
Value allocated to the Variable Accounts.
Cash Surrender Value. The Cash Surrender Value of your Policy equals your
Accumulated Value less the underwriting surrender charge. Thus, your
Accumulated Value will exceed your Policy's Cash Surrender Value by the amount
of the underwriting surrender charge. Once the surrender charge has expired,
your Accumulated Value will equal the Cash Surrender Value.
Net Cash Surrender Value. The Net Cash Surrender Value of your Policy equals
your Cash Surrender Value less any outstanding Policy Debt. You can surrender
your Policy at any time while the Insured is living and receive your Net Cash
Surrender Value. See "Surrender".
Determination of Accumulated Value
Although the death benefit under your Policy can never be less than your
Policy's Face Amount, your Accumulated Value will vary to a degree that depends
upon several factors, including investment performance
21
<PAGE>
of the Variable Accounts to which your Accumulated Value has been allocated,
payment of premiums, the amount of any outstanding Policy Debt, Partial
Withdrawals, and the charges assessed in connection with your Policy.
The amounts allocated to the Variable Accounts will be invested in shares of
the corresponding Portfolios of the Fund. The investment performance of each
Variable Account will reflect increases or decreases in the net asset value per
share of the corresponding Portfolio and any dividends or distributions
declared by a Portfolio. Any dividends or distributions from any Portfolio of
the Fund will be automatically reinvested in shares of the same Portfolio,
unless we, on behalf of the Separate Account, elect otherwise.
Assets in the Variable Accounts are divided into accumulation units, which
are a measure of value used for bookkeeping purposes. When you allocate net
premiums to a Variable Account, the Policy is credited with accumulation units.
In addition, other transactions including loans, a surrender, Partial
Withdrawals, transfers, and assessment of charges against your Policy affect
the number of accumulation units credited to your Policy. The number of units
credited or debited in connection with any such transaction is determined by
dividing the dollar amount of such transaction by the unit value of the
affected Variable Account. The unit value of each Variable Account is
determined on each Valuation Date at or about 4:00 p.m. Eastern time. The
number of units credited will not change because of subsequent changes in unit
value.
The accumulation unit value of each Variable Account's unit initially was
$10. The unit value of a Variable Account on any Valuation Date is calculated
by adjusting the unit value from the previous Valuation Date for (1) the
investment performance of the Variable Account, which is based upon the
investment performance of the corresponding Portfolio of the Fund, (2) any
dividends or distributions paid by the corresponding Portfolio, and (3) the
charges, if any, we may assess for income taxes attributable to the operation
of the Variable Account.
Policy Loans
You may borrow money from us using your Policy as the only security for the
loan by submitting a proper written request to our Home Office. We may in our
discretion permit loans to be made by telephone if a properly completed
Authorization For Telephone Requests has been filed at our Home Office. A loan
may be taken any time your Policy is in force. The minimum loan that can be
taken at any time is $500 ($200 in Connecticut, $250 in Oregon). The maximum
amount that can be borrowed at any time is the greater of (1) 90% of your
Policy's Accumulated Value allocated to the Variable Accounts and 100% of
Accumulated Value allocated to the Fixed Account, less any underwriting
surrender charges that would be imposed if your Policy were surrendered on the
date the loan is taken, or (2) 100% of the product of (a X b/c - d) where (a)
equals your Policy's Accumulated Value less any surrender charge that would be
imposed if your Policy were surrendered on the date the loan is taken and less
12 times the current monthly deduction; (b) equals 1 plus the annual loan
interest rate credited; (c) equals 1 plus the annual loan interest rate
currently charged; and (d) equals any existing Policy Debt.
When you take a loan, an amount equal to the loan is transferred out of your
Accumulated Value in the Investment Options into the Loan Account to secure the
loan. Unless you request otherwise, loan amounts will be deducted from the
Investment Options in the proportion that each bears to your Accumulated Value
less Debt.
The Policy loan annual effective interest rate is 4.75% per year for the
first 10 years and 4.25% thereafter. We will credit interest monthly on any
Policy Debt to secure the loan at an annual effective rate of 4.0%.
You may repay all or part of the loan at any time while your Policy is in
force. Interest on a loan is accrued daily and is due for the prior year on
each Policy Anniversary. If interest is not paid when due, it will be added to
the amount of the loan principal and interest will begin accruing thereon from
that date. An amount equal to the loan interest charged will be transferred to
the Loan Account from the Investment Options on a proportional basis.
22
<PAGE>
Unless you request otherwise, any loan repayment will be transferred into the
Investment Options in accordance with your most recent premium allocation
instructions. In addition, on each Policy Anniversary, any interest earned on
the loan balance held in the Loan Account will be transferred to each of the
Investment Options in accordance with your most recent premium allocation
instructions.
While the amount to secure the loan is held in the Loan Account, you forgo
the investment experience of the Variable Accounts and the current interest
rate of the Fixed Account on the loaned amount. Thus a loan, whether or not
repaid, will have a permanent effect on your Policy's values and may have an
effect on the amount and duration of the death benefit. If not repaid, the
Policy Debt will be deducted from the amount of death benefit paid upon the
death of the Insured, the Cash Surrender Value upon surrender or maturity, or
the refund of premium upon exercise of the Free-Look Right.
A loan may affect the length of time your Policy remains in force. Your
Policy will lapse when Accumulated Value minus Policy Debt is insufficient to
cover the monthly deduction against your Policy's Accumulated Value on any
Monthly Payment Date and the minimum payment required is not made during the
Grace Period. Moreover, your Policy may enter the Grace Period more quickly
when a loan is outstanding, because the loaned amount is not available to cover
the monthly deduction. Additional payments or repayment of a portion of Policy
Debt may be required to keep the Policy in force. See "Lapse".
A loan will not be treated as a distribution from your Policy and will not
result in taxable income to you unless your Policy is a modified endowment
contract, or unless the Policy is surrendered or upon maturity or lapse of the
Policy, in which case a loan will be treated as a distribution that may give
rise to taxable income.
For information on the tax treatment of loans, see "Federal Income Tax
Considerations".
Benefits at Maturity
If the Insured is living on the Maturity Date, we will pay you, as an
endowment benefit, your Accumulated Value, reduced by any Policy Debt. Payment
ordinarily will be made within seven days of your Policy Anniversary, although
payments may be postponed in certain circumstances. See "Payments".
Surrender
You may fully surrender your Policy at any time during the life of the
Insured. The amount received in the event of a full surrender is your Policy's
Net Cash Surrender Value, which is equal to your Accumulated Value less any
applicable underwriting surrender charge and less any outstanding Policy Debt.
If your Policy is surrendered during the first two years following its
issuance, a portion of the sales load paid under the Policy may be refunded to
you. See "Sales Load Refund".
You may surrender your Policy by sending a written request together with your
Policy to our Home Office. The proceeds will be determined as of the end of the
Valuation Period during which the request for a surrender is received. You may
elect to have the proceeds paid in cash or applied under a payment plan offered
under the Policy. See "Payment Plan". For information on the tax effects of a
surrender of a Policy, see "Federal Income Tax Considerations".
Partial Withdrawal Benefit
We offer a partial surrender benefit by which you can obtain a portion of
your Net Cash Surrender Value called the Partial Withdrawal Benefit. The
Partial Withdrawal Benefit is available on and after the first Policy Year.
Under this Benefit, you may make "Partial Withdrawals" of your Net Cash
Surrender Value. There is no limit on the number of Partial Withdrawals that
may be taken after the first Policy Anniversary. There is a $25 withdrawal fee
for Partial Withdrawals. The fee will be deducted from your Policy's
Accumulated Value in the Investment Options in the same proportion as the
withdrawal amount. If you have elected to receive systematic withdrawals as
described below, the withdrawal fee is currently waived on each systematic
withdrawal following the first systematic withdrawal.
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<PAGE>
Partial Withdrawals must be for at least $500, and your Policy's Net Cash
Surrender Value after the withdrawal must be at least $500. If there is any
Policy Debt, the maximum Partial Withdrawal is limited to the excess, if any,
of the Cash Surrender Value immediately prior to the withdrawal over the result
of the Policy Debt divided by 90%.
You may make a Partial Withdrawal by submitting a proper written request to
our Home Office. As of the effective date of any withdrawal, your Accumulated
Value, Cash Surrender Value, and Net Cash Surrender Value will be reduced by
the amount of the withdrawal. The amount of the withdrawal will be allocated
proportionately to your Accumulated Value in the Investment Options unless you
request otherwise. If, after a withdrawal is effected, we are notified that the
Insured died after the request for the withdrawal was sent to us and prior to
the withdrawal being effected, the amount of the withdrawal will be deducted
from the death benefit. Under these circumstances, the death benefit will be
determined without taking into account the withdrawal.
When a Partial Withdrawal is made on a Policy on which you have selected the
cash value accumulation test or guideline premium test death benefit Option A,
the Face Amount under the Policy is decreased by the lesser of (1) the amount
of the Partial Withdrawal or (2) if the death benefit prior to the withdrawal
is greater than the Face Amount, the amount, if any, by which the Face Amount
exceeds the difference between the death benefit and the amount of the Partial
Withdrawal. A Partial Withdrawal will not change the Face Amount of a Policy on
which you have selected guideline premium test death benefit Option B. However,
assuming that the death benefit is not equal to Accumulated Value times a death
benefit percentage, the Partial Withdrawal will reduce the death benefit by the
amount of the Partial Withdrawal. To the extent the death benefit is based upon
the Accumulated Value times the death benefit percentage applicable to the
Insured, a Partial Withdrawal may cause the death benefit to decrease by an
amount greater than the amount of the Partial Withdrawal. See "Death Benefit".
Systematic Withdrawals. You may elect to receive systematic Partial
Withdrawals after the first Policy Year while the Policy is in force by sending
a Preauthorized Scheduled Withdrawal Request form to us at our Home Office. You
will be requested to designate the systematic withdrawal amount as a specified
dollar amount, and the desired frequency of the systematic withdrawals, which
may be monthly, quarterly, semi-annually, or annually. The day of the month
that you wish each systematic Partial Withdrawal to be effected may also be
elected provided the scheduled day elected is not later than the 28th of a
month. Systematic Partial Withdrawals may be stopped or modified upon your
proper written request, received by us at least 30 days in advance. A proper
request must include the written consent of any effective assignee or
irrevocable Beneficiary, if applicable.
Each systematic withdrawal must be at least $100. Each systematic withdrawal
will be effected as of the end of the Valuation Period during which the
withdrawal is scheduled. Unless you specify otherwise, the deduction caused by
the systematic Partial Withdrawal will be allocated proportionately from your
Accumulated Value in the Investment Options. If a systematic Partial Withdrawal
would cause the Net Cash Surrender Value to fall below $500, the amount
withdrawn will be reduced to the amount available and systematic Partial
Withdrawals will automatically terminate. We will notify you of the
termination.
We may, at any time, change the minimum amount for any systematic
withdrawals, impose or increase remaining minimum balances, and limit the
number or frequency of requests for modifying systematic Partial Withdrawals.
Tax Treatment. Receipt of proceeds from a Partial Withdrawal may result in
taxable income to you in the year in which the withdrawal is made, and, if the
Policy is classified as a modified endowment contract, may result in a 10%
additional tax for Owners who are under 59 1/2 years old. For more information
on the tax treatment of Partial Withdrawals, see "Federal Income Tax
Considerations".
Right to Examine a Policy--Free-Look Right
You have a Free-Look Right, under which your Policy may be returned within 10
days after you receive it (15 days in Colorado; 20 days in North Dakota; and 30
days if you are a resident of California and age 60 or
24
<PAGE>
older), 10 days after we mail or deliver this notice of right of withdrawal
included in this prospectus, or within 45 days after you sign the application
for insurance, whichever is latest. However, in Pennsylvania, you have a
different Free-Look Right under which your Policy may be returned only within
10 days after you receive it. Certain states require different Free-Look Rights
if you purchase the Policy in exchange for another policy, in which case we
will notify you of your Right. It can be mailed or delivered to us or our
agent. The returned Policy will be treated as if we never issued it and, except
as indicated below, we will refund any charges deducted from premiums received,
any net premium allocated to the Fixed Account, plus the sum of your Policy's
Accumulated Value allocated to the Variable Accounts as of the end of the
Valuation Period in which the Policy is received plus any Policy Charges and
Fees deducted from the Policy's Accumulated Value in the Variable Accounts. If
you have taken a loan during the Free-Look Period, your Policy Debt will be
deducted from the amount refunded.
If you reside in a state that requires us to return premium payments to
Policy Owners who exercise the Free-Look Right, we will refund the full amount
of the premium paid. Any Policy Debt will be deducted from the amount refunded.
Prior to the Free-Look Transfer Date, net premiums will be allocated to the
Money Market Variable Account, which invests in the Money Market Portfolio of
the Fund (except for amounts allocated to the Loan Account to secure a Policy
loan). See "Allocation of Net Premiums".
Lapse
Your Policy will lapse only when your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on a Monthly Payment Date,
and a Grace Period expires without you making a sufficient payment. If your
Accumulated Value less Policy Debt is insufficient to cover the current monthly
deduction on a Monthly Payment Date, you must pay during the Grace Period a
minimum of three times the full monthly deduction due on the Monthly Payment
Date when the insufficiency occurred to avoid termination of your Policy. We
will not accept any payment if it would cause your total premium payments to
exceed the maximum permissible premium for your Policy's Face Amount under the
IRC. This is unlikely to occur unless you have outstanding Policy Debt, in
which case you could repay a sufficient portion of the Policy Debt to avoid
termination. In this instance, you may wish to repay a portion of Policy Debt
to avoid recurrence of the potential lapse. If premium payments have not
exceeded the maximum permissible premiums for the Policy's Face Amount, you may
wish to make larger or more frequent premium payments to avoid recurrence of
the potential lapse.
If your Accumulated Value less Policy Debt is insufficient to cover the
monthly deduction on a Monthly Payment Date, we will deduct the amount that is
available. We will notify you (and any assignee of record) of the payment
required to keep your Policy in force. You will then have a "Grace Period" of
61 days, measured from the date the notice is sent, to make the required
payment. Your Policy will remain in force through the Grace Period. Failure to
make the required payment within the Grace Period will result in termination of
coverage under your Policy, and your Policy will lapse with no value. However,
if your Policy lapses during the first 2 years from issuance, we will pay you
any sales load refund to which you are entitled. If the required payment is
made during the Grace Period, any premium paid will be allocated among the
Investment Options in accordance with your current premium allocation
instructions. Any monthly deduction due will be charged to the Investment
Options on a proportionate basis. If the Insured dies during the Grace Period,
the death benefit proceeds will equal the amount of the death benefit
immediately prior to the commencement of the Grace Period, reduced by any
unpaid monthly deductions, any sales load refund already paid, and any Policy
Debt.
Reinstatement
We will reinstate a lapsed Policy (but not a Policy which has been
surrendered for its Net Cash Surrender Value) at any time within five years
after the end of the Grace Period but before the Maturity Date provided we
receive the following: (1) your written application; (2) evidence of
insurability satisfactory to us; and (3) a premium equal to all monthly
deductions that were due and unpaid during the Grace Period, payment of a
premium at least sufficient to keep the Policy in force for three months after
the date of reinstatement, and payment of any excess sales load refunded to you
at the time the Policy lapsed.
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<PAGE>
When your Policy is reinstated, your Accumulated Value will be equal to your
Accumulated Value on the date of the lapse subject to the following: If the
Policy is reinstated after the first Monthly Payment Date following lapse, the
Accumulated Value will be reduced by the amount of Policy Debt on the date of
lapse and no Policy Debt will exist on the date of the reinstatement. If your
Policy is reinstated on your Monthly Payment Date next following lapse, any
Policy Debt on the date of lapse will also be reinstated. No interest on
amounts held in the Loan Account to secure Policy Debt will be paid or credited
between lapse and reinstatement. Reinstatement will be effective as of the
Monthly Payment Date on or next following the date of our approval, and
Accumulated Value minus, if applicable, Policy Debt will be allocated among the
Investment Options in accordance with your most recent premium allocation
instructions.
CHARGES AND DEDUCTIONS
Premium Load
A premium load is deducted from each premium payment under your Policy prior
to allocation of the net premium to your Accumulated Value. The premium load
consists of the following items:
Sales Load. For purposes of assessing the sales load, premiums are measured
in terms of Target Premiums. The Target Premium is set forth in your Policy.
The sales load is based on Target Premiums and varies with the death benefit
election. The maximum sales load assessed upon Target Premiums received under a
Policy are shown in the chart below.
<TABLE>
<CAPTION>
Sales Load Under Option A
and Cash Value Sales Load Under
Target Premiums Accumulation Test Option B
--------------- ------------------------- ----------------
<S> <C> <C>
1 through 3.............. 25% 30%
4 through 10............. 4% 4%
11 and thereafter........ 2% 2%
</TABLE>
The sales load is deducted to compensate us for the cost of distributing the
Policies. The amount derived by us from the sales load is not expected to be
sufficient to cover the sales and distribution expenses in connection with the
Policies. To the extent that sales and distribution expenses exceed sales
loads, such expenses may be recovered from other charges, including amounts
derived indirectly from the charge for mortality and expense risks and from
mortality gains.
We may reduce or waive the sales load on Policies sold to the directors or
employees of us and our affiliates or to trustees or any employees of the Fund.
State and Local Tax Charge. A charge equal to 2.35% is assessed against each
premium to pay applicable state and local premium taxes. Premium taxes vary
from state to state, and in some instances, among municipalities. The 2.35%
rate approximates the average tax rate expected to be paid on premiums from all
states. We reserve the right to change the premium tax charge to reflect
changes in the law.
Sales Load Refund
If a Policy is surrendered for its Net Cash Surrender Value or your Policy
lapses at any time during the first two years following its issuance, a portion
of the sales load paid under your Policy may be refunded. This refund will be
paid only for premiums paid in the first two years following issuance of the
Policy. We will refund the excess of the sales load charged over the sum of (1)
30% of the premiums paid during the first two years of issuance up to one
Guideline Annual Premium, plus (2) 10% of the premiums paid during the first
two years of issuance that exceed one Guideline Annual Premium by up to one
Guideline Annual Premium, plus (3) 9% of actual premium payments paid during
the first two years from issuance in excess of two times the Guideline Annual
Premium.
The operation of the sales load refund is illustrated by the following
example. Assume the Policy Owner has paid $5,000 in premiums under a Policy
which has a Guideline Annual Premium of $3,000 and a Target
26
<PAGE>
Premium of $2,500, and has elected Death Benefit Option B under the Guideline
Annual Premium Test, and assume that the Policy Owner decides to surrender his
or her Policy during the second year from issuance. Under the formula described
above, the maximum sales load allowable is the sum of $900 (30% of $3,000) and
$200 (10% of $2,000), or $1,100. Since a sales load of $1,500 (30% of $5,000)
was deducted from premiums when received, a refund of $400 ($1,500 - $1,100)
will be payable to the Policy Owner.
Deductions from Accumulated Value
A charge called the monthly deduction is deducted from your Policy's
Accumulated Value in the Investment Options beginning on the Monthly Payment
Date on or next following the date we first become obligated under the Policy
and on each Monthly Payment Date thereafter. Unless you request otherwise, the
monthly deduction will be deducted from the Investment Options on a prorata
basis. The monthly deduction consists of the following items:
Cost of Insurance. This monthly charge compensates us for providing life
insurance coverage for the Insured. The amount of the charge is equal to a
current cost of insurance rate multiplied by the net amount at risk under your
Policy at the beginning of the Policy Month. The net amount at risk for these
purposes is equal to the amount of death benefit payable at the beginning of
the Policy Month divided by 1.004074 (a discount factor to account for return
deemed to be earned during the month) less the Accumulated Value at the
beginning of the Policy Month.
The Policy contains guaranteed cost of insurance rates that may not be
increased. The guaranteed rates are no greater than certain of the 1980
Commissioners Standard Ordinary Mortality Tables (and where unisex cost of
insurance rates apply, the 1980 Commissioners Ordinary Mortality Table B).
These rates are based on the Age and underwriting class of the Insured. They
are also based on the sex of the Insured, except that unisex rates are used
where appropriate under applicable law, including in the state of Montana and
in Policies purchased by employers and employee organizations in connection
with employment-related insurance or benefit programs. As of the date of this
prospectus, we charge "current rates" that are lower (i.e., less expensive)
than the guaranteed rates, and we may also charge current rates in the future.
Like the guaranteed rates, the current rates also vary with the Age, gender,
where permissable, and underwriting class of the Insured. In addition, they
also vary with the Insured's smoking status and the policy duration. The cost
of insurance rate generally increases with the Age of the Insured.
Administrative Charge. A monthly administrative charge is deducted equal to
$25 in each of the first 12 Policy Months and which varies with the size of a
Policy's Face Amount thereafter. For Face Amounts of less than $100,000, the
charge is equal to $8 per month; for Face Amounts of $100,000 and less than
$500,000, the charge is equal to $5 per month. There is no charge for Face
Amounts of $500,000 or more. For purposes of this charge, only the initial Face
Amount is considered. The administrative charge is assessed to reimburse us for
the expenses associated with administration and maintenance of the Policies.
The administrative charge is guaranteed never to exceed $25 during the first 12
Policy Months and $10 per month thereafter. We do not expect to profit from
this charge.
The administrative charge will be waived on the second or subsequent Policies
you acquire on the life of the Insured who is the same Insured as on the
initial Policy and that Policy is in force. However, a one-time charge of $100
will be assessed upon issuance to cover processing costs on the second and
subsequent Policies.
Mortality and Expense Risk Charge. A monthly charge is deducted for mortality
and expense risks that we assume. During the first ten Policy Years, this
charge is equal to .000625 multiplied by a Policy's Accumulated Value in the
Investment Options, which is equivalent to an annual rate of .75% of such
amount. During the 11th through 20th Policy Years, the charge is equal to
.000208333 multiplied by a Policy's Accumulated Value in the Investment
Options, which is equivalent to an annual rate of .25% of such amount. After
the 20th Policy Year the charge reduces to 0%. For purposes of this charge, the
Accumulated Value is based upon its value on the Monthly Payment Date after the
deduction of the charge for the cost of insurance and any optional insurance
benefits added by rider.
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The mortality and expense risk charge is assessed to compensate us for
assuming certain mortality and expense risks under the Policies. The mortality
risk assumed is that Insureds, as a group, may live for a shorter period of
time than estimated and, therefore, the cost of insurance charges specified in
the Policy will be insufficient to meet actual claims. The expense risk assumed
is that other expenses incurred in issuing and administering the Policies and
operating the Separate Account will be greater than the charges assessed for
such expenses. We will realize a gain from this charge to the extent it is not
needed to provide the mortality benefits and expenses under the Policies, and
will realize a loss to the extent the charge is not sufficient.
Optional Insurance Benefits Charges. Charges for any optional insurance
benefits added to the Policy by rider will be included in the monthly deduction
or as otherwise specified in the rider and/or the Policy. See "Optional
Insurance Benefits".
Underwriting Surrender Charge
We will assess an underwriting surrender charge against Accumulated Value
upon surrender of your Policy within ten years after its issuance. The
underwriting surrender charge is equal to a specified amount that varies with
the Age of the Insured for each $1,000 of your Policy's initial Face Amount in
accordance with the following schedule:
<TABLE>
<CAPTION>
Issue Age Charge Per $1,000
--------- -----------------
<S> <C>
0-30 $2.50
31-40 3.50
41-50 4.50
51-60 5.50
61-80 6.50
</TABLE>
The amount of the charge remains level for five Policy Years. After the fifth
Policy Year, the charge decreases by 1.666% per month until it reaches zero at
the end of the 120th Policy Month.
The charge is based upon the Age of the Insured and the Face Amount on the
Policy Date, and it does not increase as the Insured gets older or with changes
in the Face Amount. For example, if an Insured Age 25 purchases a Policy with a
Face Amount of $50,000 and surrenders the Policy in the third Policy Year, the
underwriting surrender charge would be $125.
The underwriting surrender charge is designed to cover the administrative
expenses associated with underwriting and issuing a Policy, including the costs
of processing applications, conducting medical examinations, determining
insurability and the Insured's underwriting class, and establishing policy
records. We do not expect to profit from the underwriting surrender charge.
Withdrawal Fee
A withdrawal fee of $25 will be deducted proportionately from the Accumulated
Value in the Investment Options each time a Partial Withdrawal occurs. If you
have elected to receive systematic withdrawals, the withdrawal fee is currently
waived on each systematic withdrawal following the first systematic withdrawal.
We reserve the right to reinstate this fee.
Corporate and Other Purchasers
The Policy is available for individuals and for corporations and other
institutions. For certain individuals and certain corporate or other group or
sponsored arrangements purchasing one or more Policies, we may reduce the
amount of the sales load, underwriting surrender charge, administrative charge,
or other charges where the expenses associated with the sale of the Policy or
Policies or the underwriting or other administrative costs associated with the
Policy or Policies are reduced. Sales, underwriting or other administrative
expenses may be reduced for reasons such as expected economies resulting from a
corporate purchase or a group or sponsored arrangement, from the purchase of
multiple Policies on the life of the same Insured, from the amount of the
initial premium payment or payments, or the amount of projected premium
payments.
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Other Charges
We may charge the Variable Accounts for federal income taxes we incur that
are attributable to the Separate Account and its Variable Accounts or to our
operations with respect to the Policies. No such charge is currently assessed.
See "Charge for Our Income Taxes".
We will bear the direct operating expenses of the Separate Account. Each
Variable Account available to you purchases shares of the corresponding
Portfolio of the underlying Fund. The Fund and each of its Portfolios incur
certain charges, including the investment advisory fee, and certain operating
expenses. The Fund is governed by its Board of Trustees. The Fund's expenses
are not fixed or specified under the terms of the Policy, and these expenses
may vary from year to year. The advisory fees and other expenses are more fully
described in "AN OVERVIEW OF PACIFIC SELECT CHOICE: Fees and Expenses Paid by
the Pacific Select Fund" and in the prospectus of the Fund.
Guarantee of Certain Charges
We guarantee that certain charges will not increase. This includes the charge
for mortality and expense risks, the administrative charge with respect to the
guaranteed rates described above, the sales load, the guaranteed cost of
insurance rates, the withdrawal fee, and the underwriting surrender charge.
Usage
We may use any profit derived from charges imposed under the Policies for any
lawful purpose, including our sales and distribution expenses not covered by
the sales load.
OTHER INFORMATION
Federal Income Tax Considerations
The following discussion provides a general description of the federal income
tax considerations relating to the Policy. This discussion is based upon our
understanding of the present federal income tax laws as they are currently
interpreted by the Internal Revenue Service ("IRS"). This discussion is not
intended as tax advice. Because of the inherent complexity of such laws and the
fact that tax results will vary according to the particular circumstances of
the individual involved, tax advice may be needed by a person contemplating the
purchase of the Policy. It should, therefore, be understood that these comments
concerning federal income tax consequences are not an exhaustive discussion of
all tax questions that might arise under the Policy and that special rules
which are not discussed herein may apply in certain situations. Moreover, no
representation is made as to the likelihood of continuation of federal income
tax or estate or gift tax laws or of the current interpretations by the IRS or
the courts. Future legislation may adversely affect the tax treatment of life
insurance policies or other tax rules described in this discussion or that
relate directly or indirectly to life insurance policies. Finally, these
comments do not take into account any state or local income tax considerations
which may be involved in the purchase of the Policy.
While we believe that the Policy meets the statutory definition of life
insurance under Section 7702 of the Internal Revenue Code ("IRC") and hence
will receive federal income tax treatment consistent with that of traditional
fixed life insurance, the area of the tax law relating to the definition of
life insurance does not explicitly address all relevant issues (including, for
example, the treatment of substandard risk Policies and Policies with term
insurance on the Insured). We reserve the right to make changes to the Policy
if changes are deemed appropriate by us to attempt to assure qualification of
the Policy as a life insurance contract. If a Policy were determined not to
qualify as life insurance, the Policy would not provide the tax advantages
normally provided by life insurance. The discussion below summarizes the tax
treatment of life insurance contracts.
The death benefit under a Policy should be excludable from the gross income
of the Beneficiary (whether the Beneficiary is a corporation, individual, or
other entity) under IRC Section 101(a)(1) for purposes of the regular federal
income tax and you generally should not be deemed to be in constructive receipt
of the cash values, including increments thereof, under the Policy until a full
surrender thereof, maturity of the Policy, or a
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<PAGE>
Partial Withdrawal. In addition, certain Policy loans and Partial Withdrawals
may be taxable in the case of Policies that are modified endowment contracts.
Prospective Owners that intend to use Policies to fund deferred compensation
arrangements for their employees are urged to consult their tax advisors with
respect to the tax consequences of such arrangements. Prospective corporate
Owners should consult their tax advisers about the treatment of life insurance
in their particular circumstances for purposes of the alternative minimum tax
applicable to corporations and the environmental tax under IRC Section 59A.
Changing the Policy Owner may also have tax consequences. Exchanging a Policy
for another involving the same Insured generally will not result in the
recognition of gain or loss according to IRC Section 1035(a). Changing the
Insured under a Policy will, however, not be treated as a tax-free exchange
under IRC Section 1035, but rather as a taxable exchange.
Diversification Requirements. To comply with regulations under Section 817(h)
of the IRC, each Portfolio of the Fund is required to diversify its
investments. For details on these diversification requirements, see "Taxation"
in the Fund's SAI.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. In those circumstances, income and
gains from the separate account assets would be includable in the variable
policy owner's gross income. The Treasury Department also announced, in
connection with the issuance of regulations concerning diversification, that
those regulations "do not provide guidance concerning the circumstances in
which investor control of the investments of a segregated asset account may
cause the investor [i.e., the Policy Owner], rather than the insurance company,
to be treated as the owner of the assets in the account." This announcement
also stated that guidance would be issued by way of regulations or rulings on
the "extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets." As of
the date of this prospectus, no such guidance has been issued.
The ownership rights under your Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, you have additional flexibility in allocating premium payments and
Policy values. These differences could result in your being treated as the
owner of your Policy's pro rata portion of the assets of the Separate Account.
In addition, we do not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. We therefore reserve the right to modify the Policy, as deemed
appropriate by us, to attempt to prevent you from being considered the owner of
your Policy's pro rata share of the assets of the Separate Account. Moreover,
in the event that regulations are adopted or rulings are issued, there can be
no assurance that the Portfolios will be able to operate as currently described
in the Prospectus, or that the Fund will not have to change any Portfolio's
investment objective or investment policies.
Tax Treatment of Policies. IRC Section 7702A defines a class of life
insurance contracts referred to as "modified endowment contracts". Under this
provision, the Policies are treated for tax purposes in one of two ways.
Policies that are not classified as modified endowment contracts will be taxed
as conventional life insurance contracts, as described below. Taxation of pre-
death distributions from Policies that are classified as modified endowment
contracts and that are entered into on or after June 21, 1988 is somewhat
different, as described below.
A life insurance contract becomes a "modified endowment contract" if, at any
time during the first seven contract years, the sum of actual premiums paid
exceeds the sum of the "seven-pay premium." Generally, the "seven-pay premium"
is the level annual premium, such that if paid for each of the first seven
years, will fully pay for all future death and endowment benefits under a life
insurance policy. For example, if the "seven-pay premiums" were $1,000, the
maximum premiums that could be paid during the first seven years to avoid
"modified endowment" treatment would be $1,000 in the first year; $2,000
through the first two years, and $3,000 through the first three years, etc.
Under this test, a Pacific Select Choice Policy may or may not be a modified
endowment contract, depending on the amount of premiums paid during each of the
Policy's first seven contract years. Changes in the Policy, including changes
in death benefits, may require "retesting" of a Policy to determine if it is to
be classified as a modified endowment contract.
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<PAGE>
Conventional Life Insurance Policies. If a Policy is not a modified endowment
contract, upon full surrender or maturity of a Policy for its Net Cash
Surrender Value, the excess, if any, of the Net Cash Surrender Value plus any
outstanding Policy Debt over the cost basis under a Policy will be treated as
ordinary income for federal income tax purposes. Such a Policy's cost basis
will usually equal the premiums paid less any premiums previously recovered in
Partial Withdrawals. Under IRC Section 7702, if a Partial Withdrawal occurring
within 15 years of the Policy Date is accompanied by a reduction in benefits
under the Policy, special rules apply to determine whether part or all of the
cash received is paid out of the income of the Policy and is taxable. Cash
distributed to a Policy Owner on Partial Withdrawals occurring more than 15
years after the Policy Date will be taxable as ordinary income to the Policy
Owner to the extent that it exceeds the cost basis under a Policy.
We also believe that loans received under Policies that are not modified
endowment contracts will be treated as indebtedness of the Owner for federal
income tax purposes, and that no part of any loan under the Policy will
constitute income to the Owner unless the Policy is surrendered or upon
maturity or lapse. However, if a loan is still outstanding when a Policy is
surrendered or allowed to lapse, the borrowed amount becomes taxable at that
time to the extent the Accumulated Value exceeds the Policy Owner's basis in
the Policy, as if the borrowed amount was actually received at the time of
surrender or lapse and used to pay off the loan.
Consult with your tax advisor on whether interest paid (or accrued by an
accrual basis taxpayer) on a Policy that is not a modified endowment contract
may be deductible. Tax law provisions may limit the deduction of interest
payable on loans and on loan proceeds that are used to purchase or carry
certain life insurance policies. Also, new tax law has been proposed in 1999
which contains a provision that could adversely affect the owners of certain
"corporate-owned life insurance policies". (As of the date of this prospectus,
this proposal has not been introduced as a bill and may or may not ever become
law as currently drafted.) Present law provides that a portion of the interest
deductions on indebtedness is reduced if the taxpayer is a direct or indirect
beneficiary of certain life insurance, endowment, or annuity contracts (even
interest on indebtedness that is completely unrelated to the contract). This
--------------------
rule does not apply under present law if the contract was issued on 20% owners,
officers or employees. The proposal would repeal the exception other than for
20% owners for taxable years beginning after the date of enactment. The effect
of the proposal would be to increase the after-tax cost of such policies in
most cases. If you have questions regarding the proposal, please consult your
tax advisor.
Modified Endowment Contracts. Pre-death distributions from modified endowment
contracts may give rise to taxable income. Upon full surrender or maturity of
the Policy, the Policy Owner would recognize ordinary income for federal income
tax purposes equal to the amount by which the Net Cash Surrender Value plus
Policy Debt exceeds the investment in the Policy (usually the premiums paid
plus pre-death distributions that were taxable less any premiums previously
recovered that were excludable from gross income). Upon Partial Withdrawals and
Policy loans, the Policy Owner would recognize ordinary income to the extent
allocable to income (which includes all previously non-taxed gains) on the
Policy. The amount allocated to income is the amount by which the Accumulated
Value of the Policy exceeds investment in the Policy immediately before the
distribution. Under a tax law provision, if two or more policies which are
classified as modified endowment contracts are purchased from any one insurance
company, including us, during any calendar year, all such policies will be
aggregated for purposes of determining the portion of the pre-death
distributions allocable to income on the policies and the portion allocable to
investment in the policies.
Amounts received under a modified endowment contract that are included in
gross income are subject to an additional tax equal to 10% of the amount
included in gross income, unless an exception applies. The 10% additional tax
does not apply to any amount received: (i) when the taxpayer is at least 59 1/2
years old; (ii) which is attributable to the taxpayer becoming disabled; or
(iii) which is part of a series of substantially equal periodic payments (not
less frequently than annually) made for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the taxpayer and
his or her beneficiaries.
If a Policy was not originally a modified endowment contract but becomes one,
under Treasury Department regulations which are yet to be prescribed, pre-death
distributions received in anticipation of a failure of a Policy to meet the
seven-pay premium test are to be treated as pre-death distributions from a
modified endowment contract (and, therefore, are to be taxable as described
above) even though, at the time of
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the distribution(s) the Policy was not yet a modified endowment contract. For
this purpose, pursuant to the IRC, any distribution made within two years
before the Policy is classified as a modified endowment contract shall be
treated as being made in anticipation of the Policy's failing to meet the
seven-pay premium test.
It is unclear whether interest paid (or accrued by an accrual basis taxpayer)
on Policy Debt with respect to a modified endowment contract constitutes
interest for federal income tax purposes. Consult your tax advisor. Tax law
provisions may limit the deduction of interest payable on loans and on loan
proceeds that are used to purchase or carry certain life insurance policies.
Reasonableness Requirement for Charges. Another provision of the tax law
deals with allowable charges for mortality costs and other expenses that are
used in making calculations to determine whether a contract qualifies as life
insurance for federal income tax purposes. For life insurance policies entered
into on or after October 21, 1988, these calculations must be based upon
reasonable mortality charges and other charges reasonably expected to be
actually paid. The Treasury Department has issued proposed regulations and is
expected to promulgate temporary or final regulations governing reasonableness
standards for mortality charges. While we believe under IRS pronouncements
currently in effect that the mortality costs and other expenses used in making
calculations to determine whether the Policy qualifies as life insurance meet
the current requirements, complete assurance cannot be given that the IRS would
necessarily agree. It is possible that future regulations will contain
standards that would require us to modify our mortality and other charges used
for the purposes of the calculations in order to retain the qualification of
the Policy as life insurance for federal income tax purposes, and we reserve
the right to make any such modifications.
Accelerated Living Benefits Rider. Amounts received under the Rider should be
generally excluded from taxable income under Section 101(g) of the tax code.
Benefits under the Rider will be taxed, however, if they are paid to someone
other than an Insured, and an Insured 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.
Other. Federal estate and gift and state and local estate, inheritance, and
other tax consequences of ownership or receipt of Policy proceeds depend on the
jurisdiction and the circumstances of each Owner or Beneficiary.
For complete information on federal, state, local, and other tax
considerations, a qualified tax adviser should be consulted.
WE DO NOT MAKE ANY GUARANTEE REGARDING THE TAX STATUS OF ANY POLICY.
Charge for Our Income Taxes
For federal income tax purposes, variable life insurance generally is treated
in a manner consistent with traditional fixed life insurance. We will review
the question of a charge to the Separate Account or the Policy for our federal
income taxes periodically. A charge may be made for any federal income taxes
incurred by us that are attributable to the Separate Account or to our
operations with respect to the Policy. Charges might become necessary if our
tax treatment is ultimately determined to be other than what we currently
believe it to be, if there are changes made in the federal income tax treatment
of variable life insurance at the insurance company level, or if there is a
change in our tax status.
Under current laws, we may incur state and local taxes (in addition to
premium taxes) in several states. At present, these taxes are not significant.
If there is a material change in applicable state or local tax laws, we reserve
the right to charge the Account for such taxes, if any, attributable to the
Account.
Voting of Fund Shares
In accordance with our view of present applicable law, we will exercise
voting rights attributable to the shares of each Portfolio of the Fund held in
the Variable Accounts at any regular and special meetings of the shareholders
of the Fund on matters requiring shareholder voting under the Investment
Company Act of 1940 or by the Fund. We will exercise these voting rights based
on instructions received from persons having the voting interest in
corresponding Variable Accounts of the Separate Account. However, if the
Investment
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Company Act of 1940 or any regulations thereunder should be amended, or if the
present interpretation thereof should change, and as a result we determine that
it is permitted to vote the shares of the Fund in its own right, we may elect
to do so.
You are the person having the voting interest under a Policy. Unless
otherwise required by applicable law, the number of votes as to which you will
have the right to instruct will be determined by dividing your Accumulated
Value in a Variable Account by the net asset value per share of the
corresponding Portfolio of the Fund. Fractional votes will be counted. The
number of votes as to which you will have the right to instruct will be
determined as of the date coincident with the date established by the Fund for
determining shareholders eligible to vote at the meeting of the Fund. If
required by the Securities and Exchange Commission, we reserve the right to
determine in a different fashion the voting rights attributable to the shares
of the Fund based upon the instructions received from Policy Owners. Voting
instructions may be cast in person or by proxy.
If there are shares of a Portfolio held by a Variable Account for which we do
not receive timely voting instructions, we will vote those shares in the same
proportion as the voting instructions for all other shares of that Portfolio
held by that Variable Account for which we have received timely voting
instructions. If we hold shares of a Portfolio in our General Account, we will
vote those shares in the same proportion as the total votes cast 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.
Disregard of Voting Instructions
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that voting rights be exercised
so as to cause a change in the subclassification or investment objective of a
Portfolio or to approve or disapprove an investment advisory contract. In
addition, we may disregard voting instructions of changes initiated by Policy
Owners in the investment policy or the investment adviser (or portfolio
manager) of a Portfolio, provided that our disapproval of the change is
reasonable and is based on a good faith determination that the change would be
contrary to state law or otherwise inappropriate, considering the Portfolio's
objectives and purpose, and considering the effect the change would have on us.
In the event we do disregard voting instructions, a summary of that action and
the reasons for such action will be included in the next report to Policy
Owners.
Confirmation Statements and Reports to Owners
A statement will be sent quarterly to you setting forth a summary of the
transactions which occurred during the quarter and indicating the death
benefit, Face Amount, Accumulated Value, Cash Surrender Value, and any Policy
Debt. In addition, the statement will indicate the allocation of Accumulated
Value among the Investment Options and any other information required by law.
Confirmations will be sent out upon premium payments, transfers, loans, loan
repayments, withdrawals, and surrenders. Confirmations of scheduled
transactions under systematic withdrawals, dollar cost averaging, portfolio
rebalancing, and monthly deductions will appear on your quarterly statements.
You will also be sent annual financial statements for the Separate Account
and the Fund, the latter of which will include a list of the portfolio
securities of the Fund, as required by the Investment Company Act of 1940,
and/or such other reports as may be required by federal securities laws.
Replacement of Life Insurance or Annuities
The term "replacement" has a special meaning in the life insurance industry
and is described more fully below. Before you make your purchase decision,
Pacific Life wants you to understand how a replacement may impact your existing
plan of insurance.
A policy "replacement" occurs when a new policy or contract is purchased and,
in connection with the sale, an existing policy or contract is surrendered,
lapsed, forfeited, assigned to the replacing insurer, otherwise terminated, or
used in a financed purchase. A "financed purchase" occurs when the purchase of
a new life insurance policy or annuity contract involves the use of funds
obtained from the values of an existing life insurance policy or annuity
contract through withdrawal, surrender or loan.
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There are circumstances in which replacing your existing life insurance
policy or annuity contract can benefit you. As a general rule, however,
replacement is not in your best interest. Accordingly, you should make a
careful comparison of the costs and benefits of your existing policy or
contract and the proposed policy or contract to determine whether replacement
is in your best interest.
Substitution of Investments
We reserve the right, subject to compliance with the law as then in effect,
to make additions to, deletions from, or substitutions for the securities that
are held by the Separate Account or any Variable Account or that the Separate
Account or any Variable Account may purchase. If shares of any or all of the
Portfolios of the Fund should no longer be available for investment, or if, in
the judgment of our management, further investment in shares of any or all
Portfolios of the Fund should become inappropriate in view of the purposes of
the Policies, we may substitute shares of another Portfolio of the Fund or of a
different fund for shares already purchased, or to be purchased in the future
under the Policies.
Where required, we will not substitute any shares attributable to your
interest in a Variable Account or the Separate Account without notice, your
approval, or prior approval of the Securities and Exchange Commission and
without following the filing or other procedures established by applicable
state insurance regulators.
We also reserve the right to establish additional Variable Accounts, which
may include additional subaccounts of the Separate Account to serve as
investment options under the Policies, which may be managed separate accounts
or may invest in a new Portfolio of the Fund, or in shares of another
investment company, a Portfolio thereof, or suitable investment vehicle, with a
specified investment objective. New Variable Accounts may be established when,
at our sole discretion, marketing needs or investment conditions warrant, and
any new Variable Accounts will be made available to existing Policy Owners on a
basis to be determined by us. We may also eliminate one or more Variable
Accounts if, in our sole discretion, marketing, tax, or investment conditions
so warrant. We may also terminate and liquidate any Variable Account.
In the event of any such substitution or change, we may, by appropriate
endorsement, make such changes in this and other policies as may be necessary
or appropriate to reflect such substitution or change. If deemed by us to be in
the best interests of persons having voting rights under the Policies, the
Separate Account or any Variable Account may be operated as a management
investment company under the Investment Company Act of 1940 or any other form
permitted by law, may be deregistered under that Act in the event such
registration is no longer required, or may be combined with other separate
accounts of ours or an affiliate of ours. Subject to compliance with applicable
law, we also may combine one or more Variable Accounts and may establish a
committee, board, or other group to manage one or more aspects of the operation
of any such entity.
Changes to Comply with Law
We reserve the right to make any change without your consent to the
provisions of the Policy to comply with, or give you the benefit of, any
federal or state statute, rule, or regulation, including but not limited to,
requirements for life insurance contracts and modified endowment contracts
under the IRC, under regulations of the United States Treasury Department or
any state.
PERFORMANCE INFORMATION
Performance information for the Variable Accounts of the Separate Account
may appear in advertisements, sales literature, or reports to Policy Owners or
prospective purchasers. Performance information in advertisements or sales
literature may be expressed in any fashion permitted under applicable law,
which may include presentation of a change in a Policy Owner's Accumulated
Value attributable to the performance of one or more Variable Accounts, or as a
change in a Policy Owner's death benefit. Performance quotations may be
expressed as a change in a Policy Owner's Accumulated Value over time or in
terms of the average annual compounded rate of return on the Policy Owner's
Accumulated Value, based upon a hypothetical Policy in which premiums have been
allocated to a particular Variable Account over certain periods of time that
will include one year or from the commencement of operation of the Variable
Account. If a Portfolio has been in existence for a longer period of time than
its corresponding Variable Account, we may also present hypothetical
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<PAGE>
returns that the Variable Account would have achieved had it invested in its
corresponding Portfolio for periods through the commencement of operation of
the Portfolio. For the period that a particular Variable Account has been in
existence, the performance will be actual performance and not hypothetical in
nature. Any such quotation may reflect the deduction of all applicable charges
to the Policy including premium load, the cost of insurance, the administrative
charge, and the mortality and expense risk charge. The varying death benefit
options will result in different expenses for the cost of insurance, and the
varying expenses will result in different Accumulated Values. Since the
Guideline Minimum Death Benefit is equal to a percentage (e.g., 250% for an
Insured Age 40) times Accumulated Value, it will vary with Accumulated Value.
The cost of insurance charge varies according to the Ages of the Insureds and
therefore the cost of insurance charge reflected in the performance for the
hypothetical Policy is based on the hypothetical Insureds and death benefit
option assumed. The quotation may also reflect the deduction of the surrender
charge, if applicable, by assuming a surrender at the end of the particular
period, although other quotations may simultaneously be given that do not
assume a surrender and do not take into account deduction of the surrender
charge or other charges.
Performance information for a Variable Account may be compared, in
advertisements, sales literature, and reports to Policy Owners, to: (i) other
variable life separate accounts, mutual funds, or investment products tracked
by research firms, ratings services, companies, publications, or persons who
rank separate accounts or investment products on overall performance or other
criteria; and (ii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from the purchase of a Policy. Reports and promotional
literature may also contain our rating or a rating of our claim-paying ability
as determined by firms that analyze and rate insurance companies and by
nationally recognized statistical rating organizations.
Performance information for any Variable Account of the Separate Account
reflects only the performance of a hypothetical Policy whose Accumulated Value
is allocated to the Variable Account during a particular time period on which
the calculations are based. Performance information should be considered in
light of the investment objectives and policies, characteristics and quality of
the Portfolio of the Fund in which the Variable Account invests, and the market
conditions during the given period of time, and should not be considered as a
representation of what may be achieved in the future.
THE FIXED ACCOUNT
You may allocate all or a portion of your net premium payments and transfer
Accumulated Value to our Fixed Account. Amounts allocated to the Fixed Account
become part of our General Account, which supports insurance and annuity
obligations. Because of exemptive and exclusionary provisions, interests in the
Fixed Account have not been registered under the Securities Act of 1933 and the
Fixed Account has not been registered as an investment company under the
Investment Company Act of 1940. Accordingly, neither the Fixed Account nor any
interest therein is generally subject to the provisions of these Acts and, as a
result, the staff of the SEC has not reviewed the disclosure in this prospectus
relating to the Fixed Account. Disclosures regarding the Fixed Account may,
however, be subject to certain generally applicable provisions of the federal
securities laws relating to the accuracy and completeness of statements made in
the prospectus. For more details regarding the Fixed Account, see the Policy
itself.
General Description
Amounts allocated to the Fixed Account become part of our General Account
which consists of all assets owned by us other than those in the Separate
Account and our other separate accounts. Subject to applicable law, we have
sole discretion over the investment of the assets of our General Account.
You may elect to allocate net premium payments to the Fixed Account, the
Separate Account, or both. If you reside in a state that requires us to refund
premiums to Policy Owners who return their Policies, net premiums will not be
applied to the Fixed Account until after the Free-Look Transfer Date. If you
reside in a state that requires refunds of premiums if you exercise your Free-
Look Rights, any net premium received during the Free-Look Period will be
allocated to the Money Market Account until the Free-Look Transfer Date. You
may also transfer Accumulated Value from the Variable Accounts to the Fixed
Account, or from the Fixed Account to the Variable Accounts, subject to the
limitations described below. We guarantee that the
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Accumulated Value in the Fixed Account will be credited with a minimum interest
rate of .32737% per month, compounded monthly, for a minimum effective annual
rate of 4%. Such interest will be paid regardless of the actual investment
experience of the Fixed Account. In addition, we may at our sole discretion
declare current interest in excess of the 4%, which will be guaranteed for one
year. (The portion of your Accumulated Value that has been used to secure
Policy Debt will be credited with an interest rate of .32737% per month,
compounded monthly, for an effective annual rate of 4%.)
We bear the full investment risk for the Accumulated Value allocated to the
Fixed Account.
Death Benefit
The death benefit under the Policy will be determined in the same fashion for
an Owner who has Accumulated Value in the Fixed Account as for an Owner who has
Accumulated Value in the Variable Accounts. See "Death Benefit".
Policy Charges
Policy charges will be the same whether you allocate net premiums or transfer
Accumulated Value to the Fixed Account or allocate net premiums to the Variable
Accounts. These charges consist of the premium load, including the sales load
and state and local premium tax charge; the deductions from Accumulated Value,
including the charges for the cost of insurance, administrative charge,
mortality and expense risk charge, the charge for any optional insurance
benefits added by rider, and the underwriting surrender charge. Any amounts
that we pay for income taxes allocable to the Variable Accounts will not be
charged against the Fixed Account. In addition, the operating expenses of the
Variable Accounts, the investment advisory fee charged by the Fund, will not be
paid directly or indirectly by you to the extent the Accumulated Value is
allocated to the Fixed Account; however, to such extent, you will not
participate in the investment experience of the Variable Accounts.
Transfers, Surrenders, Withdrawals, and Policy Loans
Amounts may be transferred from the Variable Accounts to the Fixed Account
and from the Fixed Account to the Variable Accounts, subject to the following
limitations. If you reside in a state that requires us to refund premiums to
Policy Owners who return their Policies during the Free-Look Period, you may
not make transfers until after the Free-Look Transfer Date. No transfer may be
made if the Policy is in a Grace Period and the required premium has not been
paid. You may not make more than one transfer from the Fixed Account to the
Variable Accounts in any 12-month period. Further, you may not transfer more
than the greater of 25% of your Accumulated Value in the Fixed Account or
$5,000 in any year. Currently there is no charge imposed upon transfers;
however, we reserve the right to assess such a charge in the future and to
impose other limitations on the number of transfers, the amount of transfers,
and the amount remaining in the Fixed Account or Variable Accounts after a
transfer. Transfers from the Variable Accounts to the Fixed Account may be made
in the Policy Month preceding a Policy Anniversary, except that if you reside
in Connecticut, Georgia, Maryland, North Carolina, North Dakota or
Pennsylvania, you may make such a transfer at any time during the first 18
Policy Months.
You may also make full surrenders and Partial Withdrawals from the Fixed
Account to the same extent as an Owner who has invested in the Variable
Accounts. See "Surrender" and "Partial Withdrawal Benefit". You may borrow up
to the greater of (1) 100% of Accumulated Value in the Fixed Account and 90% of
Accumulated Value in the Variable Accounts less any underwriting surrender
charge that would be imposed if the Policy were surrendered at the time of the
loan, or (2) 100% of the product of (a X b/c - d) where (a) equals the Policy's
Accumulated Value less any surrender charge that would be imposed if the Policy
were surrendered on the date the loan is taken and less 12 times the current
monthly deduction; (b) equals 1 plus the annual loan interest rate credited;
(c) equals 1 plus the annual loan interest rate currently charged; and (d)
equals any existing Policy Debt. See "Policy Loans". Transfers, surrenders, and
withdrawals payable from the Fixed Account, and the payment of Policy loans
allocated to the Fixed Account, may be delayed for up to six months.
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MORE ABOUT THE POLICY
Ownership
The Policy Owner is the individual named as such in the application or in any
later change shown in our records. While the Insured is living, the Policy
Owner alone has the right to receive all benefits and exercise all rights that
the Policy grants or we allow.
Joint Owners. If more than one person is named as Policy Owner, they are
joint Owners. Any Policy transaction requires the signature of all persons
named jointly. Unless otherwise provided, if a joint Owner dies, ownership
passes to the surviving joint Owner(s). When the last joint Owner dies,
ownership passes through that person's estate, unless otherwise provided.
Beneficiary
The Beneficiary is the individual named as such in the application or any
later change shown in our records. You may change the Beneficiary at any time
during the life of the Insured by written request on forms provided by us,
which must be received by us at our Home Office. The change will be effective
as of the date this form is signed. Contingent and/or concurrent Beneficiaries
may be designated. You may designate a permanent Beneficiary, whose rights
under the Policy cannot be changed without his or her consent. Unless otherwise
provided, if no designated Beneficiary is living upon the death of the Insured,
you are the Beneficiary, if living; otherwise your estate is the Beneficiary.
We will pay the death benefit proceeds to the Beneficiary. Unless otherwise
provided, in order to receive proceeds at the Insured's death, the Beneficiary
must be living at the time of the Insured's death.
The Contract
This Policy is a contract between you and us. The entire contract consists of
the Policy, a copy of the initial application, all subsequent applications to
change the Policy, any endorsements, any riders, and all additional Policy
information sections (specification pages) added to the Policy.
Payments
We ordinarily will pay death benefit proceeds, Net Cash Surrender Value on
surrender, Partial Withdrawals, and loan proceeds based on allocations made to
the Variable Accounts, and will effect a transfer between Variable Accounts or
from a Variable Account to the Fixed Account within seven days after we receive
all the information needed to process a payment or transfer or, if sooner, any
other period required by law.
However, we can postpone the calculation or payment of such a payment or
transfer of amounts based on investment performance of the Variable Accounts
if:
. The New York Stock Exchange is closed on other than customary weekend and
holiday closing or trading on the New York Stock Exchange is restricted as
determined by the SEC; or
. An emergency exists, as determined by the SEC, as a result of which
disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of a Variable Account's net
assets; or
. The SEC by order permits postponement for the protection of Policy Owners.
Assignment
You may assign a Policy as collateral security for a loan or other
obligation. No assignment will bind us unless the original, or a copy, is
received and recorded by our Home Office. An assignment does not change the
ownership of the Policy. However, after an assignment, the rights of any Owner
or Beneficiary will be subject to the assignment. The entire Policy, including
any attached payment option, Endorsement, or Rider, will be subject to the
assignment. We will not be responsible for the validity of any assignment.
Unless otherwise provided, the assignee may exercise all rights this Policy
grants except (a) the right to change the Policy Owner or Beneficiary; and (b)
the right to elect a payment option. Assignment of a Policy that is a modified
endowment contract may generate taxable income. (See "Federal Income Tax
Considerations".)
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Errors on the Application
If the Age or sex of the Insured has been misstated, the death benefit under
your Policy will be the greater of that which would be purchased by the most
recent cost of insurance charge at the correct Age and sex, or the death
benefit derived by multiplying Accumulated Value by the death benefit
percentage for the correct Age and sex. If the Insured's Age or sex is
misstated in the application, the Accumulated Value will be modified by
recalculating all prior cost of insurance charges and other monthly deductions
based on the correct Age and sex. If unisex cost of insurance rates apply, no
adjustment will be made for a misstatement of sex. See "Cost of Insurance".
Incontestability
We may contest the validity of your Policy if any material misstatements are
made in the application. However, your Policy will be incontestable after the
expiration of the following: the Face Amount cannot be contested after your
Policy has been in force during the Insured's lifetime for two years from the
Policy Date; and if the Insured is changed, your Policy cannot be contested
after it has been in force during the new Insured's lifetime for two years from
the effective date of the exchange.
Payment in Case of Suicide
If the Insured dies by suicide, while sane or insane, within two years from
the Policy Date, we will limit the death benefit proceeds to the premium
payments less any withdrawal amounts, any Policy Debt and any dividends paid in
cash by us. If the Insured has been changed and the new Insured dies by
suicide, while sane or insane, within two years of the exchange date, the death
benefit proceeds will be limited to the Net Cash Surrender Value as of the
exchange date, plus the premiums paid since the exchange date, less the sum of
any increases in Debt, withdrawal amounts, and any dividends paid in cash by us
since the exchange date.
Participating
The Policy is participating and may share in our surplus earnings. However,
the current dividend scale is zero and we do not anticipate that dividends will
be paid. Any dividends that do become payable will be paid in cash.
Policy Illustrations
Upon request, we will send you an illustration of future benefits under your
Policy based on both guaranteed and current cost factor assumptions. However,
we reserve the right to charge a $25 fee for requests for illustrations in
excess of one per Policy Year.
Payment Plan
Maturity, surrender, or withdrawal benefits may be used to purchase a payment
plan providing monthly income for the lifetime of the Insured, and death
benefit proceeds may be used to purchase a payment plan providing monthly
income for the lifetime of the Beneficiary. The monthly payments consisting of
proceeds plus interest will be paid in equal installments for at least ten
years. The purchase rates for the payment plan are guaranteed not to exceed
those shown in the Policy, but current rates that are lower (i.e., providing
greater income) may be established by us from time to time. This benefit is not
available if the income would be less than $25 a month. Maturity, surrender, or
withdrawal benefits or death benefit proceeds may be used to purchase any other
payment plan that we make available at that time.
Optional Insurance Benefits and Other Policies
Subject to certain requirements, you may elect to add one or more of the
following optional insurance benefits to the Policy by a Rider at the time of
application for your Policy (subject to approval of state insurance
authorities). These optional benefits are: additional insurance coverage for
the accidental death of the Insured (Accidental Death Rider); term insurance on
the Insured's children (Children's Term Rider); annual renewal term insurance
on the Insured or any member of his or her immediate family (Annual Renewable
Term Rider); added protection benefit on the Insured (Added Protection Benefit
Rider); the right to purchase additional
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insurance on the Insured's life on certain specified dates without proof of
insurability (Guaranteed Insurability Rider); additional protection in the
event of a disability (Waiver of Charges Rider); or early payment of coverage
if the Insured is diagnosed with a terminal illness (Accelerated Living Benefit
Rider). The cost of any additional insurance benefits will be deducted as part
of the monthly deduction against Accumulated Value or as otherwise specified in
the Rider and/or Policy. See "Charges and Deductions". The amounts of these
benefits are fully guaranteed at issue. Certain restrictions may apply and are
described in the applicable Rider. Under certain circumstances, a Policy can be
combined with an added protection benefit to result in a combined coverage
amount (face amount) equal to the same Face Amount that could be acquired under
a single Policy. Combining a Policy and a benefit will result in certain
charges, including a sales load and underwriting surrender charge and possibly
cost of insurance charges, for the Policy that is lower than for the single
Policy providing the same coverage amount.We offer other variable life
insurance policies that provide insurance protection on the life of a single
insured or on the lives of two insureds, whose loads and charges may vary. A
registered representative authorized to sell the Policy can describe these
extra benefits and other policies further. Samples of the provisions for the
extra optional benefits are available from us upon written request.
Retirement Income Strategy Using Life Insurance
Any Policy Owners or applicants who wish to consider using the Policy as a
funding vehicle for (non-qualified) retirement purposes may obtain additional
information from us. An Owner could pay premiums under a Policy for a number of
years, and upon retirement, could utilize a Policy's loan and partial
withdrawal features to access Accumulated Value as a source of retirement
income for a period of time. This use of a Policy does not alter an Owner's
rights or our obligations under a Policy; the Policy would remain a life
insurance contract that, so long as it remains in force, provides for a death
benefit payable when the Insured dies.
Ledger illustrations are available upon request that portray how the Policy
can be used as a funding mechanism for (non-qualified) supplemental retirement
income for individuals. Ledger illustrations are illustrations that show the
effect on Accumulated Value, Net Cash Surrender Value, and the net death
benefit of premiums paid under a Policy and Partial Withdrawals and loans taken
for retirement income; or reflecting allocation of premiums to specified
Variable Accounts. This information will be portrayed at hypothetical rates of
return that are requested. Charts and graphs presenting the results of the
ledger illustrations or a comparison of retirement strategies will also be
furnished upon request. Any graphic presentations and retirement strategy
charts must be accompanied by a corresponding ledger illustration; ledger
illustrations must always include or be accompanied by comparable information
that is based on guaranteed cost of insurance rates and that presents a
hypothetical gross rate of return of 0%. Retirement illustrations will not be
furnished with a hypothetical gross rate of return in excess of 12%.
The hypothetical rates of return in ledger illustrations are illustrative
only and should not be interpreted as a representation of past or future
investment results. Policy values and benefits shown in the ledger
illustrations would be different if the gross annual investment rates of return
were different from the hypothetical rates portrayed, if premiums were not paid
when due, and loan interest was paid when due. Withdrawals or loans may have an
adverse effect on Policy benefits.
Risks Regarding Retirement Income Strategy Using Life Insurance
Using the Policy as a funding vehicle for retirement income purposes presents
several risks, including the risk that if the Policy is insufficiently funded
in relation to the income stream from the Policy, the Policy can lapse
prematurely and result in significant income tax liability to the Owner in the
year in which the lapse occurs. Other risks associated with borrowing from the
Policy also apply. Loans will be automatically repaid from the gross death
benefit at the death of the Insured, resulting in the estimated payment to the
Beneficiary of the net death benefit, which will be less than the gross death
benefit and may be less than the Face Amount. Upon surrender or maturity, the
loan will be automatically repaid, resulting in the payment to you of the Net
Surrender Value. Similarly, upon lapse, the loan will be automatically repaid.
The automatic repayment of the loan upon maturity, lapse, or surrender will
cause the recognition of taxable income to the extent that Net Surrender Value
plus the amount of the repaid loan exceeds your basis in the Policy. Thus,
under certain circumstances, maturity, surrender, or lapse of the Policy could
result in tax liability to you. In addition, to
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reinstate a lapsed Policy, you would be required to make certain payments as
described under "Reinstatement". Thus, you should be careful to fashion a life
insurance retirement plan so that the Policy will not lapse prematurely under
various market scenarios as a result of withdrawals and loans taken from the
Policy.
Your Policy will lapse if your Accumulated Value less Policy Debt is
insufficient to cover the current monthly deduction on any Monthly Payment
Date, and a Grace Period expires without you making a sufficient payment. To
avoid lapse of your Policy, it is important to fashion a payment stream that
does not leave your Policy with insufficient Accumulated Value. Determinations
as to the amount to withdraw or borrow each year warrant careful consideration.
Careful consideration should also be given to any assumptions respecting the
hypothetical rate of return, to the duration of withdrawals and loans, and to
the amount of Accumulated Value that should remain in your Policy upon its
maturity. Poor investment performance can contribute to the risk that your
Policy may lapse. In addition, the cost of insurance generally increases with
the Age of the Insured, which can further erode existing Accumulated Value and
contribute to the risk of lapse.
Further, interest on a Policy loan is due to us for any Policy Year on the
Policy Anniversary. If this interest is not paid when due, it is added to the
amount of the outstanding Policy Debt, and interest will begin accruing thereon
from that date. This can have a compounding effect, and to the extent that the
outstanding loan balance exceeds your basis in the Policy, the amounts
attributable to interest due on the loans can add to your federal (and possibly
state) income tax liability.
You should consult with your attorney and financial advisers in designing a
life insurance retirement strategy that is suitable. Further, you should
continue to monitor the Accumulated Value net of loans remaining in a Policy to
assure that the Policy is sufficiently funded to continue to support the
desired income stream and so that it will not lapse. In this regard, you should
consult your periodic statements to determine the amount of their remaining
Accumulated Value minus the outstanding loan balance. Illustrations showing the
effect of charges under the Policy upon existing Accumulated Value or the
effect of future withdrawals or loans upon the Policy's Accumulated Value and
death benefit are available from your agent. Consideration should be given
periodically to whether the Policy is sufficiently funded so that it will not
lapse prematurely.
Because of the potential risks associated with borrowing from a Policy, use
of the Policy's Accumulated Value as a source for retirement income may not be
suitable for all Policy Owners. These risks should be carefully considered
before borrowing from the Policy to provide an income stream.
Distribution of the Policy
Pacific Mutual Distributors, Inc. ("PMD") is principal underwriter
(distributor) of the Policies. PMD is registered as a broker-dealer with the
SEC and is a member of the National Association of Securities Dealers ("NASD").
We pay PMD for acting as principal underwriter under a Distribution Agreement.
PMD is a subsidiary of ours. PMD's principal business address is 700 Newport
Center Drive, Newport Beach, California 92660.
We and PMD have sales agreements with various broker-dealers under which the
Policy will be sold by registered representatives of the broker-dealers. The
registered representatives are required to be authorized under applicable state
regulations to sell variable life insurance. The broker-dealers are required to
be registered with the SEC. We pay compensation directly to broker-dealers for
promotions and sales of the Policy. The compensation payable to a broker-dealer
for sales of the Policy may vary with the Sales Agreement, but the most common
schedule of commissions we pay is 55% of the first Target Premium paid, 10% of
the second and third Target Premiums paid, 4% of premiums paid on the fourth
through tenth Target Premiums, and 2% thereafter. There is a 40% bonus on the
third Target Premium paid, first payable at the beginning of the third Policy
Year. In addition, we may also pay override payments, expense allowances,
bonuses, wholesaler fees, and training allowances. Registered representatives
earn commissions from the broker-dealers with whom they are affiliated for
selling our Policies. Compensation arrangements vary among broker-dealers. In
addition, registered representatives who meet specified production levels may
qualify, under sales incentive programs adopted by us, to receive non-cash
compensation such as expense-paid trips, expense-paid educational seminars and
merchandise and may elect to receive compensation on a deferred basis.
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MORE ABOUT PACIFIC LIFE
Management
Our directors and officers are listed below together with information as to
their principal occupations during the past five years and certain other
current affiliations. Unless otherwise indicated, the business address of each
director and officer is c/o Pacific Life Insurance Company, 700 Newport Center
Drive, Newport Beach, California 92660.
<TABLE>
<CAPTION>
Name and Position Principal Occupation During the Last Five Years
----------------- -----------------------------------------------
<S> <C>
Thomas C. Sutton Director, Chairman of the Board and Chief Executive Officer
Director, Chairman of of Pacific Life; Director, Chairman of the Board and Chief
the Board and Executive Officer of Pacific LifeCorp, August 1997 to
Chief Executive Officer present; Director, Chairman of the Board and Chief
Executive Officer of Pacific Mutual Holding Company, August
1997 to present; Trustee and Chairman of 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
Director and President 1995) of Pacific Life; Executive Vice President and Chief
Financial Officer of Pacific Life, April 1991 to January
1995; Director and President of Pacific LifeCorp, August
1997 to present; Director and President of Pacific Mutual
Holding Company, August 1997 to present; President (since
February 1999) and Former Trustee (November 1998 to
February 1999) 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
Director, Senior Vice Chief Financial Officer of Pacific Life, June 1996 to
President and Chief present; Vice President and Treasurer of Pacific Life,
Financial Officer November 1991 to June 1996; Senior Vice President and Chief
Financial Officer of Pacific LifeCorp, August 1997 to
present; Senior Vice President and Chief Financial Officer
of Pacific Mutual Holding Company, August 1997 to present;
Chief Financial Officer and Treasurer to other affiliated
companies of Pacific Life.
David R. Carmichael Director (since August 1997), Senior Vice President and
Director, Senior Vice General Counsel of Pacific Life; Senior Vice President and
President and General General Counsel of Pacific LifeCorp, August 1997 to
Counsel present; Senior Vice President and General Counsel of
Pacific Mutual Holding Company, August 1997 to present;
Director of: 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
Director, Vice President Secretary of Pacific Life; Vice President and Secretary of
and Corporate Secretary Pacific LifeCorp, August 1997 to present; Vice President
and Secretary of Pacific Mutual Holding Company, August
1997 to present; 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,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director and Chairman of
Korn/Ferry International; Director of: Avery Dennison
Corporation; Broco, Inc.; ConAm Management; 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.
</TABLE>
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<TABLE>
<CAPTION>
Name and Position Principal Occupation During the Last Five Years
----------------- -----------------------------------------------
<S> <C>
Donald E. Guinn Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Chairman Emeritus and
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, Jr. Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, Chairman and
Former Editor-In-Chief of La Opinion; Former Director of:
BankAmerica Corporation; Bank of America NT&SA; 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,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, Chairman and
Former Chief Executive Officer of Avery Dennison
Corporation; Former Director of Great Western Financial
Corporation; Advisory Board Member of: Korn/Ferry
International; Mellon Bank; Director of: Nationwide Health
Properties, Inc.; Edison International. Address: 150 North
Orange Grove Boulevard, Pasadena, California 91109.
Donn B. Miller Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Director, President and
Chief Executive Officer of Pearson-Sibert Oil Co. of Texas;
Director of: The Irvine Company; Automobile Club of
Southern California; Former Director of St. John's Hospital
& Health Care Foundation. Address: 136 El Camino, Suite
216, Beverly Hills, California 90212.
Richard M. Rosenberg Director of Pacific Life (since October 1997 and previously
Director from November 1995 to August 1997); Director of Pacific
LifeCorp, August 1997 to present; Director of Pacific
Mutual Holding Company, October 1997 to present; Chairman
and Chief Executive Officer (Retired) of BankAmerica
Corporation; Director of: BankAmerica Corporation; Airborne
Express Corporation; Northrop Grumman Corporation; Potlatch
Corporation; SBC Communications; Chronicle Publishing;
Pollo Rey/Unamas; Age Wave; Former Director of K-2
Incorporated. Address: 555 California Street, 11th Floor,
Unit 3001B, San Francisco, California 94104.
James R. Ukropina Director of Pacific Life; Director of Pacific LifeCorp,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Partner with the law firm
of O'Melveny & Meyers 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,
Director August 1997 to present; Director of Pacific Mutual Holding
Company, August 1997 to present; Vice Chairman and Director
of The Irvine Company; Director of: The Walt Disney
Company; The Mitchell Energy and Development Company; The
Irvine Apartment Communities; 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
Executive Vice President Life, January 1995 to present; Senior Vice President,
Individual Insurance, of Pacific Life, 1989 to 1995;
Executive Vice President of Pacific Life & Annuity Company.
Edward R. Byrd Vice President and Controller of Pacific Life; Vice
Vice President and President and Controller of Pacific LifeCorp, August 1997
Controller to present; Vice President and Controller of Pacific Mutual
Holding Company, August 1997 to present; and similar
positions with other affiliated companies of Pacific Life.
Brian D. Klemens Vice President and Treasurer of Pacific Life, December 1998
Vice President and to present; Assistant Vice President, Accounting and
Treasurer Assistant Controller of Pacific Life, April 1994 to
December 1998.
</TABLE>
No officer or director listed above receives any compensation from the
Separate Account. No separately allocable compensation has been paid by us or
any of our affiliates to any person listed for services rendered to the
Separate Account.
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State Regulation
We are subject to the laws of the state of California governing insurance
companies and to regulation by the Commissioner of Insurance of California. In
addition, we are subject to the insurance laws and regulations of the other
states and jurisdictions in which we are licensed or may become licensed to
operate. An annual statement in a prescribed form must be filed with the
Commissioner of Insurance of California and with regulatory authorities of
other states on or before March 1st in each year. This statement covers our
operation for the preceding year and our financial condition as of December
31st of that year. Our affairs are subject to review and examination at any
time by the Commissioner of Insurance or his agents, and subject to full
examination of our operations at periodic intervals.
Telephone Transfer and Loan Privileges
You may request a transfer of Accumulated Value or a Policy loan by telephone
if a properly completed Authorization for Telephone Requests ("Telephone
Authorization") has been filed at our Home Office. All or part of any telephone
conversation with respect to transfer or loan instructions may be recorded by
us. Telephone instructions received by us by 1:00 P.M. Pacific time on any
Valuation Date will be processed as of the end of that Valuation Date in
accordance with your instructions, (presuming that the Free-Look Transfer Date
has expired). We reserve the right to deny any telephone transfer or loan
request. If all telephone lines are busy (which might occur, for example,
during periods of substantial market fluctuations), you might not be able to
request transfers and loans by telephone and would have to submit written
requests.
We have established procedures to confirm that instructions communicated by
telephone are genuine. Under the procedures, any person requesting a transfer
by telephone must provide certain personal identification as requested by us,
and we will send a written confirmation of all transfers requested by telephone
within 7 days of the transfer. Upon your submission of a Telephone
Authorization, you authorize us to accept and act upon telephone instructions
for transfers or loans involving your Policy, and agree that neither we, any of
our affiliates, Pacific Select Fund, nor any of our or their directors,
trustees, officers, employees or agents, will be liable for any loss, damages,
cost, or expense (including attorney's fees) arising out of any requests
effected in accordance with the Telephone Authorization and believed by us to
be genuine, provided that we have complied with our procedures. As a result of
this policy on telephonic requests, you will bear the risk of loss arising from
the telephone transfer and loan privileges.
Legal Proceedings
There are no legal proceedings pending to which the Separate Account is a
party, or which would materially affect the Separate Account.
Legal Matters
Legal matters in connection with the issue and sale of the Policies described
in this prospectus and our organization, our authority to issue the Policies
under California law, and the validity of the forms of the Policies under
California law have been passed on by our General Counsel.
Legal matters relating to the federal securities and federal income tax laws
have been passed upon by Dechert Price & Rhoads.
Registration Statement
A registration statement under the Securities Act of 1933 has been filed with
the SEC relating to the offering described in this prospectus. This prospectus
does not include all of the information set forth in the registration
statement, as portions have been omitted pursuant to the rules and regulations
of the SEC. The omitted information may be obtained at the SEC's principal
office in Washington, D.C., upon payment of the SEC's prescribed fees.
43
<PAGE>
Preparation 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.
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.
Financial Statements
The audited financial statements of Pacific Select Exec Separate Account as
of December 31, 1998 and for the two years then ended are set forth herein,
starting on page 45. The audited consolidated financial statements of Pacific
Life as of December 31, 1998 and 1997 and for the three years ended December
31, 1998 are set forth herein starting on page 57.
The financial statements of Pacific Life should be distinguished from the
financial statements of the Pacific Select Exec Separate Account and should be
considered only as bearing upon our ability to meet our obligations under the
Policies.
44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pacific Life Insurance Company
<TABLE>
<S> <C>
We have audited the accompanying statement of includes assessing the accounting principles used and
assets and liabilities of Pacific Select Exec significant estimates made by management, as well as
Separate Account (comprised of the Money Market, evaluating the overall financial statement presentation.
High Yield Bond, Managed Bond, Government Securities, We believe that our audits provide a reasonable basis
Growth, Aggressive Equity, Growth LT, Equity Income, for our opinion.
Multi-Strategy, Equity, Bond and Income, Equity Index,
International, Emerging Markets, Variable Account I, In our opinion, such financial statements present
Variable Account II, Variable Account III, and Variable fairly, in all material respects, the financial position
Account IV Variable Accounts) as of December 31, 1998 of each of the respective Variable Accounts constituting
and the related statement of operations for the year then Pacific Select Exec Separate Account as of December 31, 1998
ended and statement of changes in net assets for each of and the results of their operations for the year then ended
the two years in the period then ended (as to the Equity and the changes in their net assets for each of the two years
Variable Account and the Bond and Income Variable Account, in the period then ended (as to the Equity Variable Account
for the year ended December 31, 1998 and for the period and the Bond and Income Variable Account, for the year
from commencement of operations through December 31, 1997). ended December 31, 1998 and for the period from commencement
These financial statements are the responsibility of the of operations through December 31, 1997), in conformity with
Separate Account's management. Our responsibility is to generally accepted accounting principles.
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 DELOITTE & TOUCHE LLP
assurance about whether the financial statements are free of
material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and Costa Mesa, California
disclosures in the financial statements. An audit also February 5, 1999
</TABLE>
45
<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
46
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (Continued)
DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Bond and Equity Inter- Emerging
Equity Income Index national Markets Variable Variable Variable Variable
Variable Variable Variable Variable Variable Account Account Account Account
Account Account Account Account Account I II III IV
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments:
Equity Portfolio (617
shares; cost $16,061).. $18,066
Bond and Income
Portfolio (397 shares;
cost $5,250)........... $5,282
Equity Index Portfolio
(9,370 shares; cost
$212,820).............. $303,187
International Portfolio
(9,944 shares; cost
$153,283).............. $157,140
Emerging Markets
Portfolio (1,471
shares; cost $11,689).. $10,072
Brandes International
Equity Portfolio (1)
(140 shares;
cost $1,454)........... $1,522
Turner Core Growth
Portfolio (165 shares;
cost $2,467)........... $2,948
Frontier Capital
Appreciation Portfolio
(295 shares;
cost $4,191)........... $4,452
Enhanced U.S. Equity
Portfolio (276 shares;
cost $4,437)........... $4,986
Receivables:
Due from Pacific Life
Insurance Company...... 11 13 161 81 11
Fund shares redeemed... 23 9 19 32
-------------------------------------------------------------------------------
Total Assets............ 18,077 5,295 303,348 157,221 10,083 1,545 2,957 4,471 5,018
-------------------------------------------------------------------------------
LIABILITIES
Payables:
Due to Pacific Life
Insurance Company...... 23 9 19 32
Fund shares purchased.. 11 13 161 81 11
-------------------------------------------------------------------------------
Total Liabilities....... 11 13 161 81 11 23 9 19 32
-------------------------------------------------------------------------------
NET ASSETS.............. $18,066 $5,282 $303,187 $157,140 $10,072 $1,522 $2,948 $4,452 $4,986
-------------------------------------------------------------------------------
</TABLE>
(1) Formerly named Edinburgh Overseas Equity Portfolio
See Notes to Financial Statements
47
<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
48
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Bond and Equity Inter- Emerging
Equity Income Index national Markets Variable Variable Variable Variable
Variable Variable Variable Variable Variable Account Account Account Account
Account Account Account Account Account I II III IV
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends.............. $507 $147 $4,853 $11,985 $117 $87 $52 $21 $154
--------------------------------------------------------------------------------
Net Investment Income... 507 147 4,853 11,985 117 87 52 21 154
--------------------------------------------------------------------------------
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain
(loss) from security
transactions........... 369 19 11,629 5,435 (1,951) 8 96 (64) 183
Net unrealized
appreciation
(depreciation) on
investments............ 1,989 13 43,404 (10,085) (935) 72 460 44 366
--------------------------------------------------------------------------------
Net Realized and
Unrealized Gain
(Loss) on Investments... 2,358 32 55,033 (4,650) (2,886) 80 556 (20) 549
--------------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING FROM
OPERATIONS.............. $2,865 $179 $59,886 $7,335 $(2,769) $167 $608 $1 $703
--------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
49
<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
50
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Bond and Equity Inter- Emerging
Equity Income Index national Markets Variable Variable Variable Variable
Variable Variable Variable Variable Variable Account Account Account Account
Account Account Account Account Account I II III IV
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $507 $147 $4,853 $11,985 $117 $87 $52 $21 $154
Net realized gain
(loss) from security
transactions........... 369 19 11,629 5,435 (1,951) 8 96 (64) 183
Net unrealized
appreciation
(depreciation) on
investments............ 1,989 13 43,404 (10,085) (935) 72 460 44 366
-----------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations.............. 2,865 179 59,886 7,335 (2,769) 167 608 1 703
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 2,976 1,056 44,705 28,077 3,183 238 408 1,305 1,358
Transfers--policy
charges and
deductions............. (633) (197) (12,955) (8,359) (663) (62) (93) (245) (156)
Transfers in (from
other variable
accounts).............. 17,627 6,550 108,028 71,891 27,300 749 2,159 1,700 1,697
Transfers out (to other
variable accounts)..... (8,527) (2,820) (73,002) (64,225) (25,040) (97) (880) (1,374) (481)
Transfers--other....... (432) (171) (10,763) (6,520) (355) (12) (37) (44) 111
-----------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 11,011 4,418 56,013 20,864 4,425 816 1,557 1,342 2,529
-----------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 13,876 4,597 115,899 28,199 1,656 983 2,165 1,343 3,232
-----------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 4,190 685 187,288 128,941 8,416 539 783 3,109 1,754
-----------------------------------------------------------------------------------
End of Year............. $18,066 $5,282 $303,187 $157,140 $10,072 $1,522 $2,948 $4,452 $4,986
-----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
51
<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
52
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (Continued)
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Bond and Equity Inter- Emerging
Equity Income Index national Markets Variable Variable Variable Variable
Variable Variable Variable Variable Variable Account Account Account Account
Account (1) Account (1) Account Account Account I II III IV
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS
FROM OPERATIONS
Net investment income.. $30 $11 $7,400 $4,347 $41 $8 $71 $73 $63
Net realized gain from
security transactions.. 13 5 12,511 4,938 187 2 7 42 7
Net unrealized
appreciation
(depreciation) on
investments............ 16 19 21,545 (62) (644) (4) 31 222 201
---------------------------------------------------------------------------------------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations.............. 59 35 41,456 9,223 (416) 6 109 337 271
---------------------------------------------------------------------------------------
INCREASE (DECREASE) IN
NET ASSETS
FROM POLICY TRANSACTIONS
Transfer of net
premiums............... 466 56 28,526 26,039 2,039 80 172 656 372
Transfers--policy
charges and
deductions............. (87) (13) (8,168) (7,142) (479) (25) (28) (149) (54)
Transfers in (from
other variable
accounts).............. 4,237 659 51,709 54,246 10,615 408 537 3,409 976
Transfers out (to other
variable accounts)..... (438) (53) (25,760) (45,867) (6,460) (3) (163) (1,636) (217)
Transfers--other....... (47) 1 (25,672) (4,997) (162) (4) (17) (51) (9)
---------------------------------------------------------------------------------------
Net Increase in Net
Assets Derived
from Policy
Transactions............ 4,131 650 20,635 22,279 5,553 456 501 2,229 1,068
---------------------------------------------------------------------------------------
NET INCREASE IN NET
ASSETS.................. 4,190 685 62,091 31,502 5,137 462 610 2,566 1,339
---------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year....... 125,197 97,439 3,279 77 173 543 415
---------------------------------------------------------------------------------------
End of Year............. $4,190 $685 $187,288 $128,941 $8,416 $539 $783 $3,109 $1,754
---------------------------------------------------------------------------------------
</TABLE>
(1) For the period from January 10, 1997 (commencement of operations) to
December 31, 1997.
See Notes to Financial Statements
53
<PAGE>
PACIFIC SELECT EXEC SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
1. SIGNIFICANT ACCOUNTING POLICIES and liabilities at the date of the financial
statements and the reported amounts of income
The Pacific Select Exec Separate Account and expenses during the reporting period.
(the "Separate Account") isregistered as a Actual results could differ from those
unit investment trust under the Investment estimates.
Company Act of 1940, as amended, and during
1998 was comprised of eighteen subaccounts A. Valuation of Investments
called Variable Accounts: the Money Market
Variable Account, the High Yield Bond Variable Investments in shares of the Funds are
Account, the Managed Bond Variable Account, valued at the reported net asset values of
the Government Securities Variable Account, the respective portfolios. Valuation of
the Growth Variable Account, the Aggressive securities held by the Funds is discussed in
Equity Variable Account, the Growth LT the notes to their financial statements.
Variable Account, the Equity Income Variable
Account, the Multi-Strategy Variable Account, B. Security Transactions
the Equity Variable Account, the Bond and
Income Variable Account, the Equity Index Transactions are recorded on the trade
Variable Account, the International Variable date. Realized gains and losses on sales of
Account, the Emerging Markets Variable investments are determined on the basis of
Account, and the Variable Accounts I through identified cost.
IV. The assets in each of the first fourteen
Variable Accounts are invested in shares of C. Federal Income Taxes
the corresponding portfolios of Pacific Select
Fund and the assets of the last four Variable The operations of the Separate Account will
Accounts are invested in shares of the be reported on the Federal income tax return
corresponding portfolios of M Fund, Inc. of Pacific Life, which is taxed as a life
(collectively, the "Funds"). Each Variable insurance company under the provisions of the
Account pursues different investment Tax Reform Act of 1986. Under current tax
objectives and policies. The financial law, no Federal income taxes are expected to
statements of the Funds, including the be paid by Pacific Life with respect to the
schedules of investments, are either included operations of the Separate Account.
in Section B of this report or provided
separately and should be read in conjunction 2. DIVIDENDS
with the Separate Account's financial
statements. During 1998, the Funds declared dividends
for each portfolio. The amounts accrued by
The Separate Account was established by the Separate Account for its share of the
Pacific Life Insurance Company (formerly named dividends were reinvested in additional full
Pacific Mutual Life Insurance Company--see and fractional shares of the related
Note 1 to Financial Statements of the Fund on portfolio.
B-58) on May 12, 1988 and commenced operations
on November 22, 1988. Under applicable 3. CHARGES AND EXPENSES
insurance law, the assets and liabilities of
the Separate Account are clearly identified With respect to variable life insurance
and distinguished from the other assets and policies funded by the Separate Account,
liabilities of Pacific Life. The assets of the Pacific Life makes certain deductions from
Separate Account will not be charged with any premiums for sales load and state premium
liabilities arising out of any other business taxes before amounts are allocated to the
conducted by Pacific Life, but the obligations Separate Account. Pacific Life also makes
of the Separate Account, including benefits certain deductions from the net assets of
related to variable life insurance, are each Variable Account for the mortality and
obligations of Pacific Life. expense risks Pacific Life assumes,
administrative expenses, cost of insurance,
The Separate Account held by Pacific Life charges for optional benefits and any sales
represents funds from individual flexible and underwriting surrender charges. The
premium variable life policies. The assets of operating expenses of the Separate Account
the Separate Account are carried at market are paid by Pacific Life.
value.
4. RELATED PARTY AGREEMENT
The preparation of the accompanying financial
statements requires management to make Pacific Mutual Distributors, Inc., a
estimates and assumptions that affect the wholly-owned subsidiary of Pacific Life,
reported amounts of assets serves as principal underwriter of variable
life insurance policies funded by interests
in the Separate Account, without remuneration
from the Separate Account.
</TABLE>
54
<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
-----------------------------------------------------------
55
</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.
56
<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
57
<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
58
<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
59
<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
60
<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
61
<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
62
<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."
63
<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.
64
<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.
65
<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.
66
<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.
67
<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
------------------
<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>
68
<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
69
<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.
70
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is based on quoted
market prices. For securities not actively traded, estimated fair values
were provided by independent pricing services specializing in "matrix
pricing" and modeling techniques. The Company also estimates certain fair
values based on interest rates, credit quality and average maturity or from
securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ----------------- Estimated
Cost Gains Losses Fair Value
--------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Securities Available for Sale:
-----------------------------
As of December 31, 1998:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 94.0 $ 24.9 $ 118.9
Obligations of states, political
subdivisions and foreign govern-
ments 726.0 118.0 $ 16.1 827.9
Corporate securities 7,766.0 438.0 122.4 8,081.6
Mortgage-backed and asset-backed
securities 4,391.7 139.6 52.9 4,478.4
Redeemable preferred stock 104.0 11.3 5.1 110.2
--------------------------------------
Total fixed maturity securities $13,081.7 $ 731.8 $ 196.5 $13,617.0
--------------------------------------
Total equity securities $ 364.4 $ 202.6 $ 19.5 $ 547.5
--------------------------------------
Securities Available for Sale:
-----------------------------
As of December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 85.4 $ 17.5 $ 102.9
Obligations of states, political
subdivisions and foreign govern-
ments 730.2 89.4 $ 3.0 816.6
Corporate securities 7,658.6 594.3 72.7 8,180.2
Mortgage-backed and asset-backed
securities 4,597.2 147.1 15.5 4,728.8
Redeemable preferred stock 102.3 10.3 2.6 110.0
--------------------------------------
Total fixed maturity securities $13,173.7 $ 858.6 $ 93.8 $13,938.5
--------------------------------------
Total equity securities $ 226.4 $ 122.5 $ 2.5 $ 346.4
--------------------------------------
</TABLE>
71
<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 securi-
ties 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>
72
<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>
73
<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.
74
<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.
75
<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.
76
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (Continued)
SHORT-TERM DEBT
The carrying amount of short-term debt is a reasonable estimate of its fair
value because the interest rates are variable and based on current market
values.
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to 401(k) plans totaling $1.6
billion as of December 31, 1998, pursuant to the terms of which the 401(k)
plan retains direct ownership and control of the assets related to these
contracts. Pacific Life agrees to provide benefit responsiveness in the
event that plan benefit requests exceed plan cash flows. In return for this
guarantee, Pacific Life receives a fee which varies by contract. Pacific
Life sets the investment guidelines to provide for appropriate credit
quality and cash flow matching.
8. UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
The detail of universal life, annuity and other investment contract deposit
liabilities is as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,218.0 $10,012.0
Annuity 1,429.0 1,817.4
Other investment contract
deposits 6,326.0 4,815.1
-------------------
$17,973.0 $16,644.5
-------------------
</TABLE>
The detail of universal life, annuity and other investment contract
deposits policy fees and interest credited net of reinsurance ceded is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees:
Universal life $ 439.9 $ 377.5 $ 318.4
Annuity 82.1 50.3 26.6
Other investment contract
deposits 3.3 3.4 3.6
--------------------------
Total policy fees $ 525.3 $ 431.2 $ 348.6
--------------------------
Interest credited:
Universal life $ 440.8 $ 368.2 $ 284.3
Annuity 79.8 116.8 138.7
Other investment contract
deposits 360.2 312.8 242.0
--------------------------
Total interest credited $ 880.8 $ 797.8 $ 665.0
--------------------------
</TABLE>
77
<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>
78
<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>
Years Ended December 31,
1998 1997 1996
----------------------------
<S> <C> <C> <C>
(In Millions)
Non deductible reserves $ 28.2 $ (27.6) $ (6.4)
Duration hedging 20.8 (2.6) (14.9)
Partnership income 20.8
Deferred policy acquisition costs (12.6) (18.0) 2.1
Investment valuation (24.5) 3.9 (7.3)
Policyholder reserves (29.5) 20.1 (28.5)
Other (2.6) 9.8 5.2
----------------------------
Deferred taxes from operations 0.6 (14.4) (49.8)
Release of subsidiary deferred taxes (21.2)
----------------------------
Deferred tax provision $ (20.6) $ (14.4) $ (49.8)
----------------------------
</TABLE>
The Company's acquisition of a controlling interest in a subsidiary allowed
such subsidiary to be included in PMHC's consolidated income tax return.
That inclusion resulted in the release of certain deferred taxes.
A reconciliation of the provision for income taxes based on the prevailing
corporate statutory tax rate to the provision reflected in the consolidated
financial statements is as follows:
<TABLE>
Years Ended December 31,
1998 1997 1996
----------------------------
<S> <C> <C> <C>
(In Millions)
Income taxes at the statutory rate $ 124.2 $ 101.3 $ 98.1
Equity tax (5.0) 5.0 16.3
Amortization of intangibles on equity
method investments 4.3 7.6 6.5
Non-taxable investment income (3.6) (2.6) (2.1)
Other (6.4) 2.2 (5.1)
----------------------------
Provision for income taxes $ 113.5 $ 113.5 $ 113.7
----------------------------
</TABLE>
79
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The net deferred tax liability is comprised of the following tax effected
temporary differences:
<TABLE>
December 31,
1998 1997
----------------
<S> <C> <C>
(In Millions)
Policyholder reserves $ 254.3 $ 224.8
Investment valuation 44.7 20.2
Deferred compensation 33.7 25.9
Dividends 7.6 7.7
Non deductible reserves 5.9 34.1
Depreciation (2.4) (2.5)
Duration hedging (8.5) 12.3
Deferred policy acquisition costs (13.3) (25.9)
Partnership income (20.8)
Other (1.4) 3.8
----------------
Deferred taxes from operations 299.8 300.4
Deferred taxes assumed in acquisition of
subsidiary 4.8
Issuance of partnership units by affiliate (74.9) (47.9)
Unrealized gain on securities available for
sale (272.3) (307.8)
----------------
Net deferred tax liability $ (42.6) $ (55.3)
----------------
</TABLE>
80
<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>
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)
---------------------------
</TABLE>
81
<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>
82
<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.
83
<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>
84
<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>
85
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
The following tables set forth the pension plans' reconciliation of benefit
obligation, plan assets and funded status for the years ended:
<TABLE>
December 31,
1998 1997
--------------
(In Millions)
<S> <C> <C>
Change in Benefit Obligation:
-----------------------------
Benefit obligation, beginning of year $157.9 $140.9
Service cost 4.0 3.6
Interest cost 10.9 10.4
Plan expense (0.3) (0.2)
Actuarial loss 11.9 10.1
Benefits paid (6.6) (6.9)
--------------
Benefit obligation, end of year $177.8 $157.9
--------------
Change in Plan Assets:
----------------------
Fair value of plan assets, beginning of year $180.3 $154.2
Actual return on plan assets 21.9 33.2
Plan expense (0.3) (0.2)
Benefits paid (6.6) (6.9)
--------------
Fair value of plan assets, end of year $195.3 $180.3
--------------
Funded Status Reconciliation:
-----------------------------
Funded status $ 17.5 $ 22.4
Unrecognized transition asset (3.6) (4.8)
Unrecognized prior service cost (1.0) (1.2)
Unrecognized actuarial gain (9.7) (14.7)
--------------
Prepaid pension cost $ 3.2 $ 1.7
--------------
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1998 and 1997, the weighted average discount
rate used was 6.5% and 7.0%, respectively, and the rate of increase in
future compensation levels was 5.0% and 5.5%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1998 and 1997.
In connection with the merger of PCL into Pacific Life as discussed in Note
4, Pacific Life assumed sponsorship of PCL's defined benefit pension plan.
This pension plan provides for retirement income benefits at age 65 with
reduced benefits for early retirement. Effective December 31, 1997, PCL's
defined benefit plan merged into Pacific Life's plan. All benefits
associated with PCL's plan remain unchanged subsequent to the merger.
POSTRETIREMENT BENEFITS
Pacific Life sponsors a defined benefit health care plan and a defined
benefit life insurance plan (the "Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Life's policy as an
active employee for a minimum continuous period prior to the date retired,
and have an employment date before January 1, 1990. The Plans contain cost-
sharing features such as deductibles and
86
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (Continued)
coinsurance, and require retirees to make contributions which can be
adjusted annually. Pacific Life's commitment to qualified employees who
retire after April 1, 1994 is limited to specific dollar amounts. Pacific
Life reserves the right to modify or terminate the Plans at any time. As in
the past, the general policy is to fund these benefits on a pay-as-you-go
basis.
The net periodic postretirement benefit cost for the years ended December
31, 1998, 1997 and 1996 is $0.7 million, $0.8 million and $1.4 million,
respectively. As of December 31, 1998 and 1997, the accumulated benefit
obligation is $19.3 million and $20.0 million, respectively. The fair value
of the plan assets as of December 31, 1998 and 1997 is zero. The amount of
accrued benefit cost included in other liabilities on the accompanying
consolidated statements of financial condition is $25.3 million and $26.0
million as of December 31, 1998 and 1997, respectively.
The Plans include both indemnity and HMO coverage. The assumed health care
cost trend rate used in measuring the accumulated benefit obligation for
indemnity coverage was 8% and 9% for 1998 and 1997, respectively, and is
assumed to decrease gradually to 3.5% in 2003 and remain at that level
thereafter. The assumed health care cost trend rate used in measuring the
accumulated benefit obligation for HMO coverage was 7% and 8% for 1998 and
1997, respectively, and is assumed to decrease gradually to 3% in 2003 and
remain at that level thereafter.
The amount reported is materially effected by the health care cost trend
rate assumptions. If the health care cost trend rate assumptions were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1998 would be increased by 8.0%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
increase by 7.5%. If the health care cost trend rate assumptions were
decreased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1998 would be decreased by 6.8%, and the aggregate of the
service and interest cost components of the net periodic benefit cost would
decrease by 6.5%.
The discount rate used in determining the accumulated postretirement benefit
obligation is 6.5% and 7.0% for 1998 and 1997, respectively.
OTHER PLANS
Pacific Life provides a voluntary Retirement Incentive Savings Plan ("RISP")
pursuant to Section 401(k) of the Internal Revenue Code covering all
eligible employees of the Company. Effective October 1, 1997, Pacific Life's
RISP changed the matching percentage of each employee's contributions from
50% to 75%, up to a maximum of 6% of eligible employee compensation and
restricted the matched investment to an Employee Stock Ownership Plan
("ESOP") sponsored by Pacific LifeCorp. The ESOP was formed at the time of
the Conversion and is currently only available to the participants of the
RISP in the form of matching contributions.
Pacific Life also has a deferred compensation plan which permits certain
employees to defer portions of their compensation and earn a guaranteed
interest rate on the deferred amounts. The interest rate is determined
annually and is guaranteed for one year. The compensation which has been
deferred has been accrued and the primary expense, other than compensation,
related to this plan is interest on the deferred amounts.
The Company also has performance based incentive compensation plans for its
employees.
15. TRANSACTIONS WITH AFFILIATES
Pacific Life serves as the investment advisor for the Pacific Select Fund,
the investment vehicle provided to the Company's variable life and variable
annuity contractholders. Pacific Life charges fees based upon the net asset
value of the portfolios of the Pacific Select Fund, which amounted to $42.1
million, $27.5 million and $14.3 million for the years ended December 31,
1998, 1997 and 1996, respectively. In addition, Pacific Life provides
certain support services to the Pacific Select Fund for an administration
fee which is based on an
87
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Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TRANSACTIONS WITH AFFILIATES (Continued)
allocation of actual costs. Such administration fees amounted to $232,000,
$165,000 and $108,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $16.9 million, $11.4 million and $6.2 million for
the years ended December 31, 1998, 1997 and 1996, respectively. Included in
equity securities on the accompanying consolidated statements of financial
condition are investments in mutual funds and other investments managed by
PIMCO Advisors which amounted to $40.3 million and $46.5 million as of
December 31, 1998 and 1997, respectively.
Pacific Life provides certain support services to PIMCO Advisors. Charges
for these services are based on an allocation of actual costs and amounted
to $1.2 million, $1.2 million and $1.4 million for the years ended December
31, 1998, 1997 and 1996, respectively.
16. TERMINATION AND NON-COMPETITION AGREEMENTS
Effective November 15, 1994, in connection with the PIMCO Advisors
transaction (Note 1), termination and non-competition agreements were
entered into with certain former key employees of PAM's subsidiaries. These
agreements provide terms and conditions for the allocation of future
proceeds received from distributions and sales of certain PIMCO Advisors
units and other noncompete payments. When the amount of future obligations
to be made to a key employee is determinable, a liability for such amount is
established.
For the years ended December 31, 1998, 1997 and 1996, approximately $49.4
million, $85.8 million and $35.3 million, respectively, is included in
operating expenses on the accompanying consolidated statements of operations
related to the termination and non-competition agreements. This includes
payments of $43.1 million in 1997 to former key employees who elected to
sell to PAM's subsidiaries their rights to the future proceeds from the
PIMCO Advisors units.
17. COMMITMENTS
The Company has outstanding commitments to make investments primarily in
fixed maturities, mortgage loans, limited partnerships and other investments
as follows (In Millions):
Years Ending December 31:
1999 $172.7
2000-2003 202.1
2004 and thereafter 55.9
------
Total $430.7
------
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.
88
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Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. LITIGATION
The Company was named in civil litigation proceedings similar to other
litigation brought against many life insurers alleging misconduct in the
sale of products, sometimes referred to as market conduct litigation. The
class of plaintiffs included, with some exceptions, all persons who owned,
as of December 31, 1997 (or as of the date of policy termination, if
earlier), individual whole life, universal life or variable life insurance
policies sold by the Company on or after January 1, 1982. The Company has
settled this litigation pursuant to a finalsettlement agreement approved by
the Court in November 1998. The settlement agreement is currently being
implemented. The cost of the settlement has been included in the
accompanying consolidated statements of operations during the three years
ended December 31, 1998.
Further, the Company is a respondent in a number of other legal proceedings,
some of which involve allegations for extra-contractual damages. In the
opinion of management, the outcome of the foregoing proceedings is not
likely to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
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ILLUSTRATIONS
<S> <C>
-------------------------------------------------------------------------------
If you ask us, we'll provide you Illustrations 1 through 8, which appear on the following pages, illustrate how
with different kinds of the death benefit, Accumulated Value and Net Cash Surrender Value of a
illustrations: hypothetical Policy may vary over an extended period of time, based on certain
hypothetical rates of return.
. Illustrations similar to the ones in
this prospectus, but based on These illustrations are based on a hypothetical Policy with the following
information you give us about the characteristics:
Age of the person to be insured by
the Policy, their risk class, the . the annual premium is $10,000
Face Amount, the death benefit and . on the Policy Date, the person insured by the Policy is a 40-year old male
premium payments. non-smoker
. Illustrations that show the The death benefit option, death benefit qualification test and the cost of
allocation of premium payments to insurance rates vary by illustration, as follows:
specified Variable Accounts. These
will reflect the expenses of the --------------------------------------------------------------------------------
Portfolio of the Fund in which the Cost of
Variable Account invests. Face Death insurance
Illustration amount benefit Qualification test rate
. Illustrations that use a --------------------------------------------------------------------------------
hypothetical gross rate of return 1 $559,458 Option A Guideline premium Current
that's greater than 12%. These are 2 $559,458 Option A Guideline premium Guaranteed
available only to certain large 3 $172,202 Option B Guideline premium Current
institutional investors. 4 $172,202 Option B Guideline premium Guaranteed
5 $559,458 Cash value accumulation Current
6 $559,458 Cash value accumulation Guaranteed
7 $559,458 Option A Guideline premium Current
8 $559,458 Option A Guideline premium Guaranteed
Assumptions
Here are the assumptions we're using:
. The hypothetical rates of return are equal to constant gross annual rates of
0%, 6% and 12%.
. All premium payments are made at the beginning of the Policy Year.
. An amount equal to the annual premium, after taxes, is invested to earn
interest at 5% compounded annually for the second column of each table, Total
premiums paid plus interest at 5%, which shows the amount that would
accumulate.
. No Policy loans have been taken out.
. The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values reflect charges deducted from the Variable Accounts. This
means that the net investment return on the Variable Accounts is lower than the
gross investment return on the assets.
. The amounts shown for the death benefits, Accumulated Values and Net Cash
Surrender Values also reflect premium loads, cost of insurance, administrative
charges, mortality and expense risk charges, and surrender charges.
. Illustrations 1 through 6 assume total annual advisory fees and expenses of
The Fund's investment advisory fees .77% of total average daily net assets of the Fund. This reflects average
and expenses are shown in An advisory fees of .69% and average expenses of .08% based upon fees and expenses
Overview of Pacific Select Choice. of Portfolios available as Investment Options under the Policy.
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. Illustrations 7 and 8 assume total annual advisory fees and expenses of .72% of total average
daily net assets of the Fund. This reflects weighted average advisory fees of .65% and weighted
average expenses of .08% based upon fees and expenses of Portfolios available as Investment
Options under the Policy.
. There are no charges against the Variable Accounts for income taxes but we reserve the right to
impose charges in the future.
Things to keep in mind
Here are a few things to keep in mind when reviewing the illustrations:
. The values shown would be different if, although the gross annual investment rates of return
averaged 0%, 6% or 12% over a period of years, they also rose above or fell below those
averages for individual Policy Years.
. After we've deducted the charges and Fund expenses described in the assumptions above,
the illustrated gross annual investment rates of return of 0%, 6% and 12% correspond to
approximate net annual rates of return of -.77%, 5.18%, and 11.14% for illustrations 1 to 6
and -.72%, 5.24%, and 11.19% for illustrations 7 and 8.
. 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%
-----------------------------------------
91
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Illustration 1
Death benefit Option A and guideline premium test at current cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION A
GUIDELINE PREMIUM TEST
FACE AMOUNT:$559,458
MALE NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
------------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums
Illustration of death benefits, End of paid plus End of year DEATH BENEFIT assuming
Accumulated Values and Net Cash Policy interest at hypothetical gross annual investment return of
Surrender values. Year 5% 0% 6% 12%
------------------------------------------------------------------------------------
All premium payments are illustrated as if 1 $10,500 $559,458 $559,458 $559,458
made at the beginning of the Policy Year. 2 $21,525 $559,458 $559,458 $559,458
3 $33,101 $559,458 $559,458 $559,458
This illustration assumes no Policy 4 $45,256 $559,458 $559,458 $559,458
loans or Partial Withdrawals have been 5 $58,019 $559,458 $559,458 $559,458
made. 6 $71,420 $559,458 $559,458 $559,458
7 $85,491 $559,458 $559,458 $559,458
The death benefits, Accumulated Values 8 $100,266 $559,458 $559,458 $559,458
and Net Cash Surrender Values will 9 $115,779 $559,458 $559,458 $559,458
differ if premiums are paid in different 10 $132,068 $559,458 $559,458 $559,458
amounts or frequencies. 15 $226,575 $559,458 $559,458 $559,458
20 $347,193 $559,458 $559,458 $671,882
The hypothetical investment rates shown 25 $501,135 $559,458 $559,458 $1,104,463
above and elsewhere in this prospectus 30 $697,608 $559,458 $583,445 $1,829,407
are illustrative only and should not be 35 $948,363 $559,458 $740,953 $2,885,714
interpreted as a representation of past ------------------------------------------------------------------------------------
or future investment results. Actual rates End of year End of year
of return may be more or less than those ACCUMULATED VALUE NET CASH SURRENDER VALUE
shown 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 Separate Account or 1 $5,278 $5,648 $6,018 $3,320 $3,690 $4,060
the Fund that these hypothetical rates of 2 $10,760 $11,838 $12,962 $10,056 $11,134 $12,257
return can be achieved for any one year or 3 $16,883 $19,071 $21,438 $14,925 $17,113 $19,480
sustained over any period of time. 4 $24,257 $28,050 $32,301 $22,299 $26,092 $30,343
5 $31,521 $37,431 $44,299 $29,563 $35,473 $42,341
This is an illustration only. An illustration 6 $38,628 $47,185 $57,504 $37,062 $45,619 $55,938
is not intended to predict actual performance 7 $45,577 $57,326 $72,041 $44,402 $56,151 $70,866
Interest rates, dividends, and values set 8 $52,382 $67,887 $88,069 $51,599 $67,103 $87,286
forth in the illustration are not guaranteed. 9 $59,069 $78,914 $105,777 $58,676 $78,521 $105,385
10 $65,781 $90,581 $125,507 $65,781 $90,581 $125,507
15 $98,624 $159,786 $265,497 $98,624 $159,786 $265,497
20 $125,726 $245,155 $501,404 $125,726 $245,155 $501,404
25 $147,139 $357,132 $905,298 $147,139 $357,132 $905,298
30 $153,082 $502,970 $1,577,075 $153,082 $502,970 $1,577,075
35 $130,101 $692,479 $2,696,929 $130,101 $692,479 $2,696,929
------------------------------------------------------------------------------------
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92
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--------------------------------------------------------------------------------
Illustration 2
Death benefit Option A and guideline premium test at guaranteed cost of
insurance rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION A
GUIDELINE PREMIUM TEST
FACE AMOUNT:$559,458
MALE NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
-------------------------------------------------------------------------------
Flexible premium 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 $10,500 $559,458 $559,458 $559,458
2 $21,525 $559,458 $559,458 $559,458
This illustration assumes no Policy loans or 3 $33,101 $559,458 $559,458 $559,458
Partial Withdrawals have been made. 4 $45,256 $559,458 $559,458 $559,458
5 $58,019 $559,458 $559,458 $559,458
*Additional payment will be required to 6 $71,420 $559,458 $559,458 $559,458
prevent Policy termination. 7 $85,491 $559,458 $559,458 $559,458
8 $100,266 $559,458 $559,458 $559,458
The death benefits, Accumulated Values 9 $115,779 $559,458 $559,458 $559,458
and Net Cash Surrender Values will differ 10 $132,068 $559,458 $559,458 $559,458
if premiums are paid in different amounts 15 $226,575 $559,458 $559,458 $559,458
or frequencies. 20 $347,193 $559,458 $559,458 $595,097
25 $501,135 $559,458 $559,458 $975,087
The hypothetical investment rates shown 30 $697,608 $559,458 $559,458 $1,604,963
above and elsewhere in this prospectus 35 $948,363 $0* $559,458 $2,517,105
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 $5,205 $5,572 $5,941 $3,247 $3,614 $3,983
Accounts. No representation can be 2 $10,379 $11,441 $12,548 $9,675 $10,737 $11,844
made by us, the Separate Account or the 3 $16,076 $18,211 $20,524 $14,118 $16,253 $18,566
Fund that these hypothetical rates of 4 $22,889 $26,563 $30,688 $20,930 $24,604 $28,730
return can be achieved for any one year 5 $29,456 $35,143 $41,768 $27,498 $33,185 $39,809
or sustained over any period of time. 6 $35,765 $43,948 $53,848 $34,198 $42,382 $52,281
7 $41,817 $52,991 $67,040 $40,641 $51,816 $65,865
This is an illustration only. An illustration 8 $47,604 $62,274 $81,462 $46,820 $61,490 $80,678
is not intended to predict actual 9 $53,157 $71,842 $97,285 $52,765 $71,450 $96,893
performance. Interest rates, dividends, and 10 $58,589 $81,833 $114,801 $58,589 $81,833 $114,801
values set forth in the illustration are not 15 $82,542 $138,692 $237,350 $82,542 $138,692 $237,350
guaranteed. 20 $95,780 $204,009 $444,102 $95,780 $204,009 $444,102
25 $94,527 $283,637 $799,252 $94,527 $283,637 $799,252
30 $65,412 $381,555 $1,383,589 $65,412 $381,555 $1,383,589
35 $0* $516,858 $2,352,434 $0* $516,858 $2,352,434
-------------------------------------------------------------------------------
93
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ILLUSTRATIONS
<S> <C>
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Illustration 3
Death benefit Option B and guideline premium test at current cost of insurance
rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION B
GUIDELINE PREMIUM TEST
FACE AMOUNT:$172,202
MALE NONSMOKER ISSUE AGE 40
PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums End of year DEATH BENEFIT assuming
Illustration of death benefits, Accumulated End of paid plus hypothetical gross annual investment
Values and Net Cash Surrender Values. Policy interest at return of
Year 5% 0% 6% 12%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $178,075 $178,450 $178,825
2 $21,525 $185,465 $186,668 $187,915
This illustration assumes no Policy loans or 3 $33,101 $193,921 $196,496 $199,262
Partial Withdrawals have been made. 4 $45,256 $202,243 $206,749 $211,771
5 $58,019 $210,457 $217,473 $225,591
The death benefits, Accumulated Values and 6 $71,420 $218,697 $228,828 $241,004
Net Cash Surrender Values will differ if 7 $85,491 $226,788 $240,657 $257,980
premiums are paid in different amounts or 8 $100,266 $234,735 $252,984 $276,683
frequencies. 9 $115,779 $242,537 $265,829 $297,288
10 $132,068 $250,201 $279,216 $319,995
The hypothetical investment rates shown 15 $226,575 $288,654 $358,994 $483,568
above and elsewhere in this prospectus are 20 $347,193 $323,354 $458,273 $768,479
illustrative only and should not be 25 $501,135 $355,577 $586,285 $1,251,224
interpreted as a representation of past or 30 $697,608 $380,039 $743,676 $2,061,914
future investment results. Actual rates of 35 $948,363 $391,890 $933,092 $3,243,111
return may be more or less than those shown ------------------------------------------------------------------------------
and will depend on a number of factors, End of year End of year
including the investment allocations made to ACCUMULATED VALUE NET CASH SURRENDER VALUE
Variable Accounts by the Owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the accounts. No representation Policy annual investment return of annual investment return of
can be made by us, the Separate Account or Year 0% 6% 12% 0% 6% 12%
the Fund that these hypothetical rates of ------------------------------------------------------------------------------
return can be achieved for any one year or 1 $5,873 $6,248 $6,623 $5,705 $6,080 $6,454
sustained over any period of time. 2 $13,263 $14,466 $15,713 $13,741 $14,943 $16,191
3 $21,719 $24,293 $27,060 $21,117 $23,691 $26,457
This is an illustration only. An illustration 4 $30,041 $34,547 $39,569 $29,438 $33,944 $38,967
is not intended to predict actual performance. 5 $38,255 $45,271 $53,389 $37,652 $44,668 $52,786
Interest rates, dividends, and values set 6 $46,495 $56,626 $68,802 $46,013 $56,143 $68,320
forth in the illustration are not guaranteed. 7 $54,585 $68,455 $85,778 $54,224 $68,093 $85,416
8 $62,533 $80,782 $104,481 $62,292 $80,541 $104,240
9 $70,335 $93,626 $125,086 $70,215 $93,506 $124,965
10 $77,999 $107,014 $147,793 $77,999 $107,014 $147,793
15 $116,452 $186,792 $308,005 $116,452 $186,792 $308,005
20 $151,151 $286,071 $573,492 $151,151 $286,071 $573,492
25 $183,375 $414,083 $1,025,594 $183,375 $414,083 $1,025,594
30 $207,837 $571,474 $1,777,512 $207,837 $571,474 $1,777,512
35 $219,688 $760,890 $3,030,944 $219,688 $760,890 $3,030,944
------------------------------------------------------------------------------
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94
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<S> <C>
-------------------------------------------------------------------------------
Illustration 4
Death benefit Option B and guideline premium test at guaranteed cost of
insurance rates
Based on average annual advisory fees and expenses of the Portfolios
DEATH BENEFIT OPTION B
GUIDELINE PREMIUM TEST
FACE AMOUNT:$172,202
MALE NONSMOKER ISSUE AGE 40
GUIDELINE SINGLE PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums End of year DEATH BENEFIT assuming
Illustration of death benefits, Accumulated End of paid plus hypothetical gross annual investment
Values and Net Cash Surrender Values. Policy interest at return of
Year 5% 0% 6% 12%
All premium payments are illustrated as if ------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $178,053 $178,426 $178,801
2 $21,525 $185,324 $186,520 $187,762
This illustration assumes no Policy loans or 3 $33,101 $193,624 $196,178 $198,924
Partial Withdrawals have been made. 4 $45,256 $201,745 $206,207 $211,181
5 $58,019 $209,714 $216,646 $224,672
The death benefits, Accumulated Values and 6 $71,420 $217,674 $227,664 $239,680
Net Cash Surrender Values will differ if 7 $85,491 $225,450 $239,101 $256,169
premiums are paid in different amounts or 8 $100,266 $233,041 $250,971 $274,285
frequencies. 9 $115,779 $240,445 $263,290 $294,192
10 $132,068 $247,658 $276,068 $316,067
The hypothetical investment rates shown 15 $226,575 $282,949 $351,203 $469,276
above and elsewhere in this prospectus 20 $347,193 $312,688 $442,390 $734,963
are illustrative only and should not be 25 $501,135 $337,080 $556,366 $1,185,723
interpreted as a representation of past 30 $697,608 $350,931 $692,159 $1,935,515
or future investment results. Actual 35 $948,363 $348,893 $849,647 $3,021,279
rates of return may be more or less than ------------------------------------------------------------------------------
those shown and will depend on a number End of year End of year
of 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 1 $5,851 $6,224 $6,598 $5,683 $6,056 $6,430
can be achieved for any one year or 2 $13,122 $14,318 $15,560 $13,600 $14,796 $16,038
sustained over any period of time. 3 $21,422 $23,976 $26,722 $20,819 $23,374 $26,120
4 $29,543 $34,005 $38,979 $28,941 $33,402 $38,377
This is an illustration only. An 5 $37,512 $44,444 $52,469 $36,910 $43,841 $51,867
illustration is not intended to predict 6 $45,472 $55,462 $67,478 $44,990 $54,979 $66,996
actual performance. Interest rates, 7 $53,248 $66,899 $83,967 $52,886 $66,537 $83,605
dividends, and values set forth in the 8 $60,839 $78,769 $102,083 $60,598 $78,528 $101,842
illustration are not guaranteed. 9 $68,243 $91,088 $121,990 $68,123 $90,967 $121,870
10 $75,456 $103,866 $143,865 $75,456 $103,866 $143,865
15 $110,747 $179,001 $297,074 $110,747 $179,001 $297,074
20 $140,486 $270,188 $548,480 $140,486 $270,188 $548,480
25 $164,878 $384,164 $971,904 $164,878 $384,164 $971,904
30 $178,729 $519,957 $1,668,548 $178,729 $519,957 $1,668,548
35 $176,691 $677,445 $2,823,625 $176,691 $677,445 $2,823,625
------------------------------------------------------------------------------
95
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ILLUSTRATIONS
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---------------------------------------------------------------------------
Illustration 5
Cash value accumulation test at current cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
CASH VALUE ACCUMULATION TEST
FACE AMOUNT:$559,458
MALE NONSMOKER ISSUE AGE 40
PREMIUM:$10,000
---------------------------------------------------------------------------
Flexible premium 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 $10,500 $559,458 $559,458 $559,458
2 $21,525 $559,458 $559,458 $559,458
This illustration assumes no Policy loans 3 $33,101 $559,458 $559,458 $559,458
or Partial Withdrawals have been made. 4 $45,256 $559,458 $559,458 $559,458
5 $58,019 $559,458 $559,458 $559,458
The death benefits, Accumulated Values and 6 $71,420 $559,458 $559,458 $559,458
Net Cash Surrender Values will differ if 7 $85,491 $559,458 $559,458 $559,458
premiums are paid in different amounts or 8 $100,266 $559,458 $559,458 $559,458
frequencies. 9 $115,779 $559,458 $559,458 $559,458
10 $132,068 $559,458 $559,458 $559,458
The hypothetical investment rates shown above 15 $226,575 $559,458 $559,458 $584,536
and elsewhere in this prospectus are 20 $347,193 $559,458 $559,458 $950,050
illustrative only and should not be 25 $501,135 $559,458 $605,396 $1,477,755
interpreted as a representation of past 30 $697,608 $559,458 $744,609 $2,227,435
or future investment results. Actual rates of 35 $948,363 $559,458 $887,097 $3,291,945
return may be more or less than those shown ----------------------------------------------------------------------------
and will depend on a number of factors, End of year End of year
including the investment allocations made to ACCUMULATED VALUE NET CASH SURRENDER VALUE
Variable Accounts by the Owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the Accounts. No representation Policy annual investment return of annual investment return of
can be made by us, the Separate Account or the Year 0% 6% 12% 0% 6% 12%
Fund that these hypothetical rates of return ----------------------------------------------------------------------------
can be achieved for any one year or sustained 1 $5,278 $5,647 $6,018 $3,320 $3,689 $4,060
over any period of time. 2 $10,759 $11,837 $12,961 $10,030 $11,108 $12,231
3 $16,883 $19,071 $21,438 $14,925 $17,112 $19,480
This is an illustration only. An illustration 4 $24,256 $28,049 $32,301 $22,298 $26,091 $30,343
is not intended to predict actual performance. 5 $31,520 $37,430 $44,299 $29,562 $35,472 $42,341
Interest rates, dividends, and values set 6 $38,628 $47,185 $57,504 $37,061 $45,618 $55,937
forth in the illustration are not guaranteed. 7 $45,576 $57,326 $72,041 $44,402 $56,151 $70,866
8 $52,382 $67,887 $88,069 $51,598 $67,103 $87,286
9 $59,068 $78,913 $105,777 $58,676 $78,521 $105,385
10 $65,781 $90,581 $125,507 $65,781 $90,581 $125,507
15 $98,623 $159,785 $265,471 $98,623 $159,785 $265,471
20 $125,724 $245,154 $494,048 $125,724 $245,154 $494,048
25 $147,136 $356,634 $870,534 $147,136 $356,634 $870,534
30 $153,078 $490,182 $1,466,339 $153,078 $490,182 $1,466,339
35 $130,096 $643,711 $2,388,760 $130,096 $643,711 $2,388,760
----------------------------------------------------------------------------
</TABLE>
96
<PAGE>
<TABLE>
<S> <C>
-------------------------------------------------------------------------------
Illustration 6
Cash value accumulation test at guaranteed cost of insurance rates
Based on average annual advisory fees and expenses of the Portfolios
CASH VALUE ACCUMULATION TEST
FACE AMOUNT:$559,458
MALE NONSMOKER ISSUE AGE 40
GUIDELINE SINGLE PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium 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 $10,500 $559,458 $559,458 $559,458
2 $21,525 $559,458 $559,458 $559,458
This illustration assumes no Policy loans or 3 $33,101 $559,458 $559,458 $559,458
Partial Withdrawals have been made. 4 $45,256 $559,458 $559,458 $559,458
5 $58,019 $559,458 $559,458 $559,458
*Additional payment will be required to 6 $71,420 $559,458 $559,458 $559,458
prevent Policy termination. 7 $85,491 $559,458 $559,458 $559,458
8 $100,266 $559,458 $559,458 $559,458
The death benefits, Accumulated Values and 9 $115,779 $559,458 $559,458 $559,458
Net Cash Surrender Values will differ if 10 $132,068 $559,458 $559,458 $559,458
premiums are paid in different amounts or 15 $226,575 $559,458 $559,458 $559,458
frequencies. 20 $347,193 $559,458 $559,458 $836,593
25 $501,135 $559,458 $559,458 $1,267,368
The hypothetical investment rates shown 30 $697,608 $559,458 $579,031 $1,852,712
above and elsewhere in this prospectus 35 $948,363 $0 $680,737 $2,653,196
are 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 those End of assuming hypothetical gross assuming hypothetical gross
shown and will depend on a number of factors, Policy annual investment return of annual investment return of
including the investment allocations made to Year 0% 6% 12% 0% 6% 12%
Variable Accounts by the Owner and the ------------------------------------------------------------------------------
experience of the accounts. No representation 1 $5,205 $5,572 $5,940 $3,247 $3,614 $3,982
can be made by us, the Separate Account or 2 $10,379 $11,440 $12,548 $9,649 $10,711 $11,818
the Fund that these hypothetical rates of 3 $16,076 $18,211 $20,524 $14,118 $16,253 $18,566
return can be achieved for any one year or 4 $22,888 $26,562 $30,688 $20,930 $24,604 $28,729
sustained over any period of time. 5 $29,455 $35,143 $41,767 $27,497 $33,185 $39,809
6 $35,764 $43,948 $53,848 $34,198 $42,382 $52,281
This is an illustration only. An illustration 7 $41,816 $52,991 $67,040 $40,641 $51,816 $65,866
is not intended to predict actual performance. 8 $47,603 $62,273 $81,462 $46,820 $61,490 $80,678
Interest rates, dividends, and values set 9 $53,157 $71,842 $97,285 $52,765 $71,450 $96,894
forth in the illustration are not guaranteed. 10 $58,589 $81,832 $114,801 $58,589 $81,832 $114,801
15 $82,541 $138,691 $237,352 $82,541 $138,691 $237,352
20 $95,779 $204,009 $435,048 $95,779 $204,009 $435,048
25 $94,526 $283,636 $746,597 $94,526 $283,636 $746,597
30 $65,410 $381,180 $1,219,656 $65,410 $381,180 $1,219,656
35 $0 $493,968 $1,925,259 $0 $493,968 $1,925,259
------------------------------------------------------------------------------
97
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
-------------------------------------------------------------------------
Illustration 7
Death benefit Option A and guideline premium test at current cost of
insurance rates
Based on a weighted average of annual advisory fees and expenses of the
Portfolios
DEATH BENEFIT OPTION A
GUIDELINE PREMIUM TEST
FACE AMOUNT:$559,458
MALE NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
-------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums End of year DEATH BENEFIT assuming
Illustration of death benefits, Accumulated End of paid plus hypothetical gross annual investment
Values and Net Cash Surrender Values. Policy interest at return of
Year 5% 0% 6% 12%
All premium payments are illustrated as if -------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $559,458 $559,458 $559,458
2 $21,525 $559,458 $559,458 $559,458
This illustration assumes no Policy loans or 3 $33,101 $559,458 $559,458 $559,458
Partial Withdrawals have been made. 4 $45,256 $559,458 $559,458 $559,458
5 $58,019 $559,458 $559,458 $559,458
The death benefits, Accumulated Values and 6 $71,420 $559,458 $559,458 $559,458
Net Cash Surrender Values will differ if 7 $85,491 $559,458 $559,458 $559,458
premiums are paid in different amounts or 8 $100,266 $559,458 $559,458 $559,458
frequencies. 9 $115,779 $559,458 $559,458 $559,458
10 $132,068 $559,458 $559,458 $559,458
The hypothetical investment rates shown 15 $226,575 $559,458 $559,458 $559,458
above and elsewhere in this prospectus are 20 $347,193 $559,458 $559,458 $676,484
illustrative only and should not be 25 $501,135 $559,458 $559,458 $1,114,215
interpreted as a representation of past or 30 $697,608 $559,458 $589,620 $1,849,480
future investment results. Actual rates of 35 $948,363 $559,458 $749,996 $2,923,912
return may be more or less than those shown -------------------------------------------------------------------------
and will depend on a number of factors, End of year End of year
including the investment allocations made to ACCUMULATED VALUE NET CASH SURRENDER VALUE
Variable Accounts by the Owner and the End of assuming hypothetical gross assuming hypothetical gross
experience of the Accounts. No representation Policy annual investment return of annual investment return of
can be made by us, the Separate Account or Year 0% 6% 12% 0% 6% 12%
the Fund that these hypothetical rates of -------------------------------------------------------------------------
return can be achieved for any one year or 1 $5,281 $5,651 $6,022 $3,323 $3,693 $4,064
sustained over any period of time. 2 $10,769 $11,848 $12,972 $10,064 $11,143 $12,268
3 $16,901 $19,091 $21,461 $14,943 $17,133 $19,503
This is an illustration only. An illustration 4 $24,287 $28,086 $32,344 $22,329 $26,127 $30,386
is not intended to predict actual 5 $31,567 $37,488 $44,369 $29,609 $35,529 $42,411
performance. Interest rates, dividends, and 6 $38,694 $47,269 $57,611 $37,127 $45,702 $56,044
values set forth in the illustration are not 7 $45,665 $57,443 $72,196 $44,490 $56,268 $71,021
guaranteed. 8 $52,496 $68,044 $88,286 $51,712 $67,260 $87,502
9 $59,211 $79,118 $106,071 $58,819 $78,726 $105,678
10 $65,956 $90,842 $125,896 $65,956 $90,842 $125,896
15 $99,012 $160,493 $266,796 $99,012 $160,493 $266,796
20 $126,401 $246,676 $504,839 $126,401 $246,676 $504,839
25 $148,184 $360,083 $913,291 $148,184 $360,083 $913,291
30 $154,591 $508,293 $1,594,380 $154,591 $508,293 $1,594,380
35 $132,209 $700,930 $2,732,628 $132,209 $700,930 $2,732,628
-------------------------------------------------------------------------
</TABLE>
98
<PAGE>
<TABLE>
<S> <C>
-------------------------------------------------------------------------------
Illustration 8
Death benefit Option A and guideline premium test at guaranteed cost of
insurance rates
Based on a weighted average of annual advisory fees and expenses of the
Portfolios
DEATH BENEFIT OPTION A
GUIDELINE PREMIUM TEST
FACE AMOUNT:$559,458
MALE NONSMOKER ISSUE AGE 40
GUIDELINE SINGLE PREMIUM:$10,000
------------------------------------------------------------------------------
Flexible premium 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 $10,500 $559,458 $559,458 $559,458
2 $21,525 $559,458 $559,458 $559,458
This illustration assumes no Policy loans or 3 $33,101 $559,458 $559,458 $559,458
Partial Withdrawals have been made. 4 $45,256 $559,458 $559,458 $559,458
5 $58,019 $559,458 $559,458 $559,458
*Additional payment will be required to 6 $71,420 $559,458 $559,458 $559,458
prevent Policy termination. 7 $85,491 $559,458 $559,458 $559,458
8 $100,266 $559,458 $559,458 $559,458
The death benefits, Accumulated Values and 9 $115,779 $559,458 $559,458 $559,458
Net Cash Surrender Values will differ if 10 $132,068 $559,458 $559,458 $559,458
premiums are paid in different amounts or 15 $226,575 $559,458 $559,458 $559,458
frequencies. 20 $347,193 $559,458 $559,458 $676,484
25 $501,135 $559,458 $559,458 $1,114,215
The hypothetical investment rates shown 30 $697,608 $559,458 $559,458 $1,849,480
above and elsewhere in this prospectus 35 $948,363 $0 $563,696 $2,923,912
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 shown End of assuming hypothetical gross assuming hypothetical gross
and will depend on a number of factors, Policy annual investment return of annual investment return of
including the investment allocations made Year 0% 6% 12% 0% 6% 12%
to Variable Accounts by the Owner and the ------------------------------------------------------------------------------
experience of the Accounts. No 1 $5,208 $5,576 $6,022 $3,250 $3,618 $4,064
representation can be made by us, the 2 $10,388 $11,451 $12,972 $9,684 $10,746 $12,268
Separate Account or the Fund that these 3 $16,094 $18,231 $21,461 $14,135 $16,273 $19,503
hypothetical rates of return can be achieved 4 $22,918 $26,597 $32,344 $20,960 $24,639 $30,386
for any one year or sustained over any 5 $29,500 $35,198 $44,369 $27,542 $33,240 $42,411
period of time. 6 $35,827 $44,028 $57,611 $34,260 $42,462 $56,044
7 $41,900 $53,102 $72,196 $40,725 $51,927 $71,021
This is an illustration only. An illustration 8 $47,711 $62,423 $88,286 $46,927 $61,639 $87,502
is not intended to predict actual performance. 9 $53,291 $72,036 $106,071 $52,899 $71,643 $105,678
Interest rates, dividends, and values set 10 $58,752 $82,078 $125,896 $58,752 $82,078 $125,896
forth in the illustration are not guaranteed. 15 $82,894 $139,345 $266,796 $82,894 $139,345 $266,796
20 $96,378 $205,408 $504,839 $96,378 $205,408 $504,839
25 $95,427 $286,369 $913,291 $95,427 $286,369 $913,291
30 $66,660 $386,708 $1,594,380 $66,660 $386,708 $1,594,380
35 $0 $526,818 $2,732,628 $0 $526,818 $2,732,628
------------------------------------------------------------------------------
99
</TABLE>
<PAGE>
APPENDIX A
TABLE OF NET CASH VALUE ACCUMULATION TEST SINGLE PREMIUMS
(PER $1 OF FUTURE BENEFITS)
<TABLE>
<CAPTION>
Age Female Male Unisex Age Female Male Unisex
- --- ------ ---- ------ --- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
0 0.07165 0.08697 0.08395 50 0.34637 0.40440 0.39273
1 0.07178 0.08655 0.08364 51 0.35693 0.41653 0.40453
2 0.07383 0.08901 0.08601 52 0.36775 0.42888 0.41655
3 0.07602 0.09165 0.08857 53 0.37880 0.44143 0.42877
4 0.07831 0.09441 0.09124 54 0.39008 0.45416 0.44119
5 0.08072 0.09731 0.09405 55 0.40160 0.46704 0.45376
6 0.08324 0.10038 0.09701 56 0.41336 0.48007 0.46650
7 0.08589 0.10361 0.10012 57 0.42540 0.49324 0.47939
8 0.08865 0.10702 0.10340 58 0.43774 0.50655 0.49246
9 0.09155 0.11061 0.10686 59 0.45042 0.52002 0.50571
10 0.09457 0.11436 0.11047 60 0.46347 0.53364 0.51915
11 0.09773 0.11828 0.11423 61 0.47686 0.54739 0.53274
12 0.10100 0.12232 0.11813 62 0.49058 0.56124 0.54648
13 0.10438 0.12645 0.12211 63 0.50455 0.57516 0.56031
14 0.10788 0.13063 0.12615 64 0.51871 0.58909 0.57418
15 0.11146 0.13484 0.13024 65 0.53301 0.60301 0.58806
16 0.11515 0.13906 0.13435 66 0.54743 0.61689 0.60192
17 0.11895 0.14330 0.13850 67 0.56201 0.63072 0.61578
18 0.12285 0.14757 0.14269 68 0.57676 0.64453 0.62963
19 0.12689 0.15193 0.14699 69 0.59177 0.65831 0.64352
20 0.13106 0.15640 0.15140 70 0.60703 0.67206 0.65742
21 0.13538 0.16103 0.15595 71 0.62253 0.68574 0.67131
22 0.13985 0.16584 0.16069 72 0.63818 0.69929 0.68513
23 0.14449 0.17087 0.16564 73 0.65388 0.71262 0.69878
24 0.14930 0.17613 0.17081 74 0.66948 0.72564 0.71216
25 0.15429 0.18165 0.17622 75 0.68489 0.73828 0.72522
26 0.15946 0.18744 0.18188 76 0.70006 0.75052 0.73792
27 0.16482 0.19351 0.18780 77 0.71496 0.76238 0.75028
28 0.17038 0.19985 0.19398 78 0.72961 0.77391 0.76234
29 0.17613 0.20646 0.20042 79 0.74406 0.78517 0.77417
30 0.18209 0.21334 0.20711 80 0.75830 0.79621 0.78581
31 0.18825 0.22049 0.21407 81 0.77229 0.80702 0.79725
32 0.19462 0.22790 0.22127 82 0.78597 0.81756 0.80843
33 0.20122 0.23558 0.22874 83 0.79922 0.82774 0.81926
34 0.20805 0.24352 0.23646 84 0.81195 0.83745 0.82966
35 0.21510 0.25173 0.24443 85 0.82411 0.84665 0.83956
36 0.22239 0.26019 0.25266 86 0.83569 0.85536 0.84899
37 0.22990 0.26892 0.26114 87 0.84673 0.86362 0.85799
38 0.23761 0.27790 0.26987 88 0.85730 0.87153 0.86665
39 0.24554 0.28712 0.27883 89 0.86749 0.87920 0.87507
40 0.25366 0.29659 0.28802 90 0.87741 0.88679 0.88338
41 0.26197 0.30630 0.29745 91 0.88720 0.89444 0.89175
42 0.27047 0.31623 0.30709 92 0.89704 0.90237 0.90034
43 0.27917 0.32641 0.31697 93 0.90712 0.91083 0.90938
44 0.28807 0.33683 0.32707 94 0.91771 0.92013 0.91917
45 0.29719 0.34748 0.33742 95 0.92905 0.93048 0.92990
46 0.30654 0.35837 0.34800 96 0.94128 0.94201 0.94171
47 0.31613 0.36951 0.35881 97 0.95429 0.95459 0.95445
48 0.32597 0.38089 0.36986 98 0.96766 0.96774 0.96772
49 0.33604 0.39252 0.38118 99 0.98064 0.98064 0.98064
</TABLE>
100
<PAGE>
APPENDIX B
GUIDELINE PREMIUM TEST
DEATH BENEFIT PERCENTAGES
<TABLE>
<CAPTION>
Age Percentage Age Percentage Age Percentage Age Percentage
---- ---------- --- ---------- --- ---------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0-40 250% 50 185% 60 130% 70 115%
41 243 51 178 61 128 71 113
42 236 52 171 62 126 72 111
43 229 53 164 63 124 73 109
44 222 54 157 64 122 74 107
45 215 55 150 65 120 75-90 105
46 209 56 146 66 119 91 104
47 203 57 142 67 118 92 103
48 197 58 138 68 117 93 102
49 191 59 134 69 116 94 or older 101
</TABLE>
101
<PAGE>
<TABLE>
<CAPTION>
PACIFIC SELECT CHOICE WHERE TO GO FOR MORE INFORMATION
<S> <C>
The Pacific Select Choice For more information about Pacific Select Choice, 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>
PACIFIC SELECT CHOICE
Flexible Premium Variable Life Insurance Policy
Issued by Pacific Life Insurance Company
Supplement dated May 1, 1999 to
Prospectus dated May 1, 1999
The attached prospectus describes two death benefit qualification tests
available in connection with the Pacific Select Choice Flexible Premium
Variable Life Insurance Policy ("Policy")--the cash value accumulation test and
the guideline premium test. As of the date of this supplement to the
prospectus, the cash value accumulation test is not yet available.
<PAGE>
Supplement to Prospectus Dated May 1, 1999 for
Pacific Select Choice
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, Options offered under this Policy. Each of these Investment Options is set up
us, and our refer to Pacific Life Insurance as 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
capitalized terms mean in the accompanying Variable Account I: Brandes International Equity Fund
variable life insurance prospectus or the Variable Account II: Turner Core Growth Fund
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 Choice prospectus.
Pacific Select Choice is described
in detail in the accompanying variable INFORMATION ABOUT M FUND
life insurance prospectus. Except
as described below, all features and M Fund, Inc.
procedures of the Policy described in its M Fund is a diversified, open-end management investment company registered with
prospectus remain intact. the Securities and Exchange Commission ("SEC") under the Investment Company Act
of 1940. M Fund currently offers four separate Portfolios as Investment Options
under the Policies. Each Portfolio pursues different investment objectives and
policies. The shares of each Portfolio are purchased by us for the
corresponding Variable Account at net asset value, i.e., without sales load.
All dividends and capital gains distributions received from a Portfolio are
automatically reinvested in such Portfolio at net asset value, unless we, on
behalf of the Separate Account, elect otherwise. M Fund shares may be redeemed
by us at their net asset value to the extent necessary to make payments under
the Policies.
Supplement dated May 1, 1999
1
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Your Policy's Accumulated Value will The following chart is a summary of the M Fund Portfolios. You'll find detailed
fluctuate depending on the Investment descriptions of the Portfolios, including the risks associated with investing
Options you've chosen. in the Portfolios, in the 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 M Financial Investment Advisers, Inc. (MFIA) is the investment adviser for each
operation of the M Fund or any of Portfolio of the M Fund, and has retained other firms to manage the Portfolios.
its Portfolios. We also are not MFIA and the M Fund's Board of Directors oversee the management of all of the M
responsible for ensuring that the Fund's Portfolios.
M Fund and its Portfolios comply
with any laws that apply.
</TABLE>
2
<PAGE>
<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
Choice in the accompanying variable life assets of each Portfolio and may vary from year to year. They are not fixed and
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
You'll find more about M Fund fees Portfolio returns.
and expenses in the accompanying M Fund
prospectus. M Fund's expenses are assessed at the Fund level and are not direct charges
against the Variable Accounts or the Policy's Accumulated Value. These expenses
are taken into account in computing each Portfolio's net asset value. We in
turn use each Portfolio's net asset value to compute the corresponding Variable
Account's Accumulation Unit Value.
. Advisory fee
MFIA is the investment adviser to the M Fund. The M Fund pays an advisory fee
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
Portfolio, 3.42% for Turner Core Growth Portfolio, 1.75% for Frontier Capital
Appreciation Portfolio, and 2.34% for Enhanced U.S. Equity Portfolio. 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 accompanying Voting rights
variable life insurance prospectus under We're the legal owner of the shares of the M Fund that are held by the Variable
Disregard of Voting Instructions and Accounts. The voting rights we describe in the Voting of Fund Shares section of
Substitution of Investments also apply to the accompanying variable life insurance prospectus and how we'll exercise them
the M Fund. also apply to the M Fund.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILLUSTRATIONS
<S> <C>
--------------------------------------------------------------------------------
If you ask us, we'll provide you with Illustrations 1 and 2, which appear on the following pages, illustrate how the
different kinds of illustrations: 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
. Illustrations similar to the ones in the rates of return.
prospectus and this supplement, but based
on information you give us about the Age These illustrations are based on a hypothetical Policy with the following
of the person to be insured by the Policy, characteristics:
their risk classes, the Face Amount, the
death benefit and premium payments. . the Face Amount is $559,458
. Illustrations that show the allocation of . the annual premium is $10,000
premium payments to specified Variable
Accounts. These will reflect the expenses . on the Policy Date, the person insured by the Policy is a 40-year old male
of the Portfolio in which the Variable non-smoker
Account invests.
The cost of insurance rates vary by illustration, as follows:
. Illustrations that use a hypothetical ----------------------------------------------------------
gross rate of return that's greater than Cost of insurance rate
12%. These are available only to certain ----------------------------------------------------------
large institutional investors. Illustration 1 Current
Illustration 2 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.
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. 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 total average daily net assets of the Fund. This reflects average advisory
in An Overview of Pacific Select Choice. 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 . There are no charges against the Variable Accounts for income taxes but we
this supplement. 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 person insured by the Policy was female and insurance rates for females
were used.
. For the illustration that assumes current cost of insurance rates, the amounts
shown would be different if the 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
---------------------------------------------------------
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%
---------------------------------------------------------
5
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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:$559,458
MALE NONSMOKER ISSUE AGE 40
ANNUAL PREMIUM:$10,000
--------------------------------------------------------------------------------
Flexible premium Total
variable universal life premiums End of year DEATH BENEFIT assuming
Illustration of death benefits, Accumulated End of paid plus hypothetical gross annual investment
Values and Net Cash Surrender Values. Policy interest at return of
Year 5% 0% 6% 12%
All premium payments are illustrated as if --------------------------------------------------------------------------------
made at the beginning of the Policy Year. 1 $10,500 $559,458 $559,458 $559,458
2 $21,525 $559,458 $559,458 $559,458
This illustration assumes no Policy loans 3 $33,101 $559,458 $559,458 $559,458
or Partial Withdrawals have been made. 4 $45,256 $559,458 $559,458 $559,458
5 $58,019 $559,458 $559,458 $559,458
The death benefits, Accumulated Values and 6 $71,420 $559,458 $559,458 $559,458
Net Cash Surrender Values will differ if 7 $85,491 $559,458 $559,458 $559,458
premiums are paid in different amounts or 8 $100,266 $559,458 $559,458 $559,458
frequencies. 9 $115,779 $559,458 $559,458 $559,458
10 $132,068 $559,458 $559,458 $559,458
The hypothetical investment rates shown 15 $226,575 $559,458 $559,458 $559,458
above and elsewhere in this prospectus 20 $347,193 $559,458 $559,458 $669,144
are illustrative only and should not be 25 $501,135 $559,458 $559,458 $1,098,673
interpreted as a representation of past 30 $697,608 $559,458 $579,756 $1,817,509
or future investment results. Actual rates 35 $948,363 $559,458 $735,565 $2,863,114
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 --------------------------------------------------------------------------------
underlying funds that these hypothetical 1 $5,276 $5,646 $6,016 $3,318 $3,688 $4,058
rates of return can be achieved for 2 $10,755 $11,832 $12,955 $10,050 $11,128 $12,251
any one year or sustained over any period 3 $16,873 $19,059 $21,424 $14,915 $17,101 $19,466
of time. 4 $24,239 $28,028 $32,276 $22,281 $26,070 $30,318
5 $31,493 $37,397 $44,258 $29,535 $35,439 $42,300
This is an illustration only. An 6 $38,589 $47,135 $57,441 $37,023 $45,569 $55,874
illustration is not intended to predict 7 $45,524 $57,256 $71,949 $44,349 $56,081 $70,774
actual performance. Interest rates, 8 $52,314 $67,793 $87,940 $51,530 $67,009 $87,156
dividends, and values set forth in the 9 $58,983 $78,791 $105,602 $58,591 $78,399 $105,209
illustration are not guaranteed. 10 $65,677 $90,425 $125,275 $65,677 $90,425 $125,275
15 $98,392 $159,364 $264,723 $98,392 $159,364 $264,723
20 $125,323 $244,247 $499,361 $125,323 $244,247 $499,361
25 $146,515 $355,373 $900,551 $146,515 $355,373 $900,551
30 $152,183 $499,790 $1,566,818 $152,183 $499,790 $1,566,818
35 $128,848 $687,444 $2,675,808 $128,848 $687,444 $2,675,808
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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:$559,458
MALE NONSMOKER ISSUE AGE 40
GUIDELINE SINGLE PREMIUM:$10,000
--------------------------------------------------------------------------------
Flexible premium 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 $10,500 $559,458 $559,458 $559,458
2 $21,525 $559,458 $559,458 $559,458
This illustration assumes no Policy loans or 3 $33,101 $559,458 $559,458 $559,458
Partial Withdrawals have been made. 4 $45,256 $559,458 $559,458 $559,458
5 $58,019 $559,458 $559,458 $559,458
*Additional payment will be required to 6 $71,420 $559,458 $559,458 $559,458
prevent Policy termination. 7 $85,491 $559,458 $559,458 $559,458
8 $100,266 $559,458 $559,458 $559,458
The death benefits, Accumulated Values 9 $115,779 $559,458 $559,458 $559,458
and Net Cash Surrender Values will differ 10 $132,068 $559,458 $559,458 $559,458
if premiums are paid in different amounts 15 $226,575 $559,458 $559,458 $559,458
or frequencies. 20 $347,193 $559,458 $559,458 $592,497
25 $501,135 $559,458 $559,458 $969,748
The hypothetical investment rates shown 30 $697,608 $559,458 $559,458 $1,594,216
above and elsewhere in this prospectus 35 $948,363 $0* $559,458 $2,496,976
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 shown End of assuming hypothetical gross assuming hypothetical gross
and will depend on a number of factors, Policy annual investment return of annual investment return of
including the investment allocations made to Year 0% 6% 12% 0% 6% 12%
Variable Accounts by the Owner and the --------------------------------------------------------------------------------
experience of the Accounts. No representation 1 $5,203 $5,570 $5,939 $3,245 $3,612 $3,981
can be made by us, the Separate Account or 2 $10,374 $11,435 $12,542 $9,670 $10,731 $11,838
the underlying funds that these hypothetical 3 $16,066 $18,200 $20,511 $14,108 $16,241 $18,552
rates of return can be achieved for any one 4 $22,871 $26,542 $30,663 $20,913 $24,584 $28,705
year or sustained over any period of time. 5 $29,429 $35,110 $41,727 $27,471 $33,152 $39,769
6 $35,727 $43,901 $53,786 $34,161 $42,334 $52,220
This is an illustration only. An illustration 7 $41,767 $52,924 $66,952 $40,591 $51,749 $65,777
is not intended to predict actual performance. 8 $47,539 $62,185 $81,338 $46,756 $61,401 $80,555
Interest rates, dividends, and values set 9 $53,077 $71,727 $97,119 $52,685 $71,334 $96,726
forth in the illustration are not guaranteed. 10 $58,491 $81,686 $114,581 $58,491 $81,686 $114,581
15 $82,331 $138,300 $236,623 $82,331 $138,300 $236,623
20 $95,422 $203,174 $442,162 $95,422 $203,174 $442,162
25 $93,990 $282,009 $794,875 $93,990 $282,009 $794,875
30 $64,669 $378,489 $1,374,324 $64,669 $378,489 $1,374,324
35 $0* $510,942 $2,333,623 $0* $510,942 $2,333,623
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Form No. 15-21533-00
