<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1997
Registration No. 33- 33085
811-06032
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C 20549
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FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. 13 X
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and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 20 X
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PFL ENDEAVOR VA SEPARATE ACCOUNT
-------------------------------------
(Exact Name of Registrant)
PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
-----------------------------------------
(Former Name of Registrant)
PFL LIFE INSURANCE COMPANY
--------------------------
(Name of Depositor)
4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499
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(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code
(319) 297-8121
Frank A. Camp, Esquire
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499
(Name and Address of Agent for Service)
Copy to:
Frederick R. Bellamy, Esquire
Sutherland, Asbill & Brennan L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
1
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DECLARATION PURSUANT TO RULE 24f-2
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant declares that a notice pursuant to Rule 24f-2 for the year ended
December 31, 1996 was filed on February 18, 1997.
--------------
It is proposed that this filing will become effective:
------- immediately upon filing pursuant to paragraph (b) of
Rule 485
X on May 1, 1997 pursuant to paragraph (b) of Rule 485
-------
60 days after filing pursuant to paragraph (a) (i) of
------- Rule 485
------- on __________ pursuant to paragraph (a)(i) of Rule 485
------- 75 days after filing pursuant to paragraph (a)(ii)
------- on __________ pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
2
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CROSS REFERENCE SHEET
Pursuant to Rule 495
Showing Location in Part A (Prospectus) and
Part B (Statement of Additional Information)
of Registration Statement of Information Required by Form N-4
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<TABLE>
<CAPTION>
PART A
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Item of Form N-4 Prospectus Caption
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<S> <C>
1. Cover Page.................... Cover Page
2. Definitions................... Definitions
3. Synopsis...................... Summary; Historical Performance
Data
4. Condensed Financial Information Financial Statements
5. General
(a) Depositor................. PFL Life Insurance Company
(b) Registrant................ The Mutual Fund Account
(c) Portfolio Company......... Underlying Funds
(d) Fund Prospectus........... Underlying Funds
(e) Voting Rights............. Voting Rights
6. Deductions and Expenses
(a) General................... Charges and Deductions
(b) Sales Load %.............. Surrender Charge
(c) Special Purchase Plan..... N/A
(d) Commissions............... Distributor of the Policies
(e) Expenses - Registrant..... N/A
(f) Fund Expenses............. Expenses Including Investment
Advisory Fees
(g) Organizational Expenses... N/A
7. Policies
(a) Persons with Rights....... The Policy; Election of Annuity
Option; Determination of Annuity
Payments; Annuity Commencement
Date; Ownership of the Policy
Voting Rights
(b) (i) Allocation of Premium
Payments............ Allocation of Premiums
(ii) Transfers........... Transfers
(iii) Exchanges........... N/A
(c) Changes................... Addition, Deletion or
Substitution of Investments;
Election of Annuity Option;
Annuity Commencement Date;
Beneficiary; Ownership of the
Policy
</TABLE>
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<TABLE>
<S> <C>
(d) Inquiries................. Summary
8. Annuity Period................ Annuity Options
9. Death Benefit................. Death of Annuitant Prior to
Annuity Commencement Date
10. Purchase and Policy Values
(a) Purchases................. Policy Application and Issuance
of Policies; Premiums
(b) Valuation................. Policy Value; The Mutual Fund
Account Value
(c) Daily Calculation......... The Mutual Fund Account Value
(d) Underwriter............... Distributor of the Policies
11. Redemptions
(a) By Owners................. Surrenders
By Annuitant.............. N/A
(b) Texas ORP................. Restrictions Under the Texas
Optional Retirement Program
(c) Check Delay............... Payment not Honored by Bank
(d) Lapse..................... N/A
(e) Free Look................. Summary
12. Taxes.......................... Certain Federal Income Tax
Consequences
13. Legal Proceedings.............. Legal Proceedings
14. Table of Contents for the
Statement of Statement of Additional
Additional Information Information
<CAPTION>
PART B
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Item of Form N-4 Statement of Additional
- ---------------- Information Caption
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<S> <C>
15. Cover Page..................... Cover Page
16 Table of Contents.............. Table of Contents
17. General Information
and History.................... (Prospectus) PFL Life Insurance
Company
18. Services.......................
(a) Fees and Expenses
of Registrant............. N/A
(b) Management Policies....... N/A
(c) Custodian................. Custody of Assets
Independent
Auditors.................. Independent Auditors
(d) Assets of Registrant...... Custody of Assets
</TABLE>
4
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<TABLE>
<S> <C>
(e) Affiliated Person......... N/A
(f) Principal Underwriter..... Distribution of the Policies
19. Purchase of Securities
Being Offered.................. Distribution of the Policies
Offering Sales Load............ N/A
20. Underwriters................... Distribution of the Policies;
(Prospectus) Distributor of the
Policies
21. Calculation of Performance
Data........................... Calculation of Yields and Total
Returns; Other Performance Data
22. Annuity Payments............... (Prospectus) Election of Annuity Option;
(Prospectus) Determination of Annuity
Payments
23. Financial Statements........... Financial Statements
<CAPTION>
PART C -- OTHER INFORMATION
---------------------------
Item of Form N-4 Part C Caption
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<S> <C>
24. Financial Statements
and Exhibits.................. Financial Statements and Exhibits
(a) Financial Statements..... Financial Statements
(b) Exhibits................. Exhibits
25. Directors and Officers of Directors and Officers of the
the Depositor Depositor
26. Persons Controlled By or Under Persons Controlled By or Under
Common Control with the Common Control with the
Depositor or Registrant....... Depositor or Registrant
27. Number of Policyowners........ Number of Policyowners
28. Indemnification............... Indemnification
29. Principal Underwriters........ Principal Underwriters
30. Location of Accounts..........
and Records................... Location of Accounts and Records
31. Management Services........... Management Services
32. Undertakings.................. Undertakings
Signature Page................ Signatures
</TABLE>
______________________________
5
<PAGE>
PROSPECTUS May 1, 1997
THE ENDEAVOR VARIABLE ANNUITY
Issued Through
PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
by
PFL LIFE INSURANCE COMPANY
The Endeavor Variable Annuity Policy is a Flexible Premium Variable Annuity
that is offered by PFL Life Insurance Company ("PFL"). You can use the Policy
to accumulate funds for retirement or other long-term financial planning
purposes. You are generally not taxed on any earnings on amounts you invest
until you withdraw them or begin to receive annuity payments. The Policy is a
"variable" annuity because the value of your investments can go up or down
based on the performance of mutual fund portfolios that you select. It is a
flexible premium policy because after you purchase it you can generally make
additional investments of any amount of $50 or more, until the Annuity
Commencement Date when PFL begins making annuity payments to you.
You have twelve investment options to choose from. They include these eleven
mutual fund portfolios:
TCW Managed Asset Allocation Dreyfus Small Cap Value Portfolio
Portfolio
TCW Money Market Portfolio Dreyfus U.S. Government
Securities Portfolio
T. Rowe Price International Stock Value Equity Portfolio
Portfolio Opportunity Value Portfolio
T. Rowe Price Equity Income Enhanced Index Portfolio
Portfolio
WRL Growth Portfolio, managed by
T. Rowe Price Growth Stock Janus Capital Corporation
Portfolio
YOU AS THE OWNER OF THE POLICY, BEAR THE ENTIRE INVESTMENT RISK FOR ALL
AMOUNTS THAT YOU ALLOCATE TO ANY OF THE MUTUAL FUNDS. THIS MEANS THAT YOU COULD
LOSE THE AMOUNT THAT YOU INVEST. But if the mutual fund shares increase in
value, then the value of your Policy will also increase.
The twelfth investment option is the Fixed Account. If you invest in one of
the alternatives offered in the Fixed Account, then PFL guarantees to return
your investment with interest at rates that PFL will declare from time to time.
Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).
LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EVAP597
<PAGE>
You should only purchase a Policy as a long-term investment. However, you do
have access to all or some of the current cash value of your investments at
any time before the Annuity Commencement Date. But, if you do withdraw cash
from your Policy, there may be a surrender charge. You may also have to pay
income taxes on some or all of the amount you withdraw, and if you are under
the age 59 1/2 there may also be a tax penalty. Finally, there may be an
interest penalty if you make a premature withdrawal from the Fixed Account
(this is called an "Excess Interest Adjustment," and it could also result in
you earning extra interest). PFL has the right to postpone withdrawals from
the Fixed Account.
Prospectuses for the mutual fund portfolios are attached to the back of this
Prospectus. This prospectus and the mutual fund prospectuses give you vital
information about the Policies and the mutual funds. Please read them
carefully before you invest. Keep them for future reference.
PLEASE NOTE THAT THE POLICIES AND THE MUTUAL FUNDS: ARE NOT BANK DEPOSITS,
ARE NOT FEDERALLY INSURED, ARE NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY
AND ARE NOT GUARANTEED TO ACHIEVE THEIR GOAL.
This Prospectus sets forth the information that a prospective purchaser
should consider before purchasing a Policy. A Statement of Additional
Information about the Policy and the Mutual Fund Account which has the same
date as this Prospectus has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of
Additional Information is available at no cost to any person requesting a copy
by writing PFL at the Administrative and Service Office or by calling 1-800-
525-6205. The table of contents of the Statement of Additional Information is
included at the end of this Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Policies and the Mutual Fund Account, except when the Fixed
Account is specifically mentioned.
Administrative and Service Office:
Financial Markets Division--Variable Annuity Department
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS................................................................ 5
SUMMARY.................................................................... 8
CONDENSED FINANCIAL INFORMATION............................................ 21
FINANCIAL STATEMENTS....................................................... 23
HISTORICAL PERFORMANCE DATA................................................ 23
Standardized Performance Data............................................ 23
TCW Money Market Subaccount.............................................. 23
Other Subaccounts........................................................ 23
WRL Growth Subaccount--Hypothetical Data................................. 25
Opportunity Value and Equity Index Portfolios............................ 26
Non-Standardized Performance Data........................................ 26
PUBLISHED RATINGS.......................................................... 28
PFL LIFE INSURANCE COMPANY................................................. 28
THE ENDEAVOR ACCOUNTS...................................................... 29
The Mutual Fund Account.................................................. 29
The Fixed Account........................................................ 33
Guaranteed Periods..................................................... 33
Dollar Cost Averaging Fixed Account Option............................. 34
Guaranteed Interest Rates.............................................. 35
Transfers................................................................ 35
Reinstatements........................................................... 36
Telephone Transactions................................................... 37
Dollar Cost Averaging.................................................... 37
Asset Rebalancing........................................................ 38
THE POLICY................................................................. 39
Policy Application and Issuance of Policies--
Premium Payments....................................................... 39
Additional Premium Payments............................................ 39
Maximum Total Premium Payments......................................... 40
Allocation of Premium Payments......................................... 40
Payment Not Honored by Bank............................................ 40
Policy Value............................................................. 40
The Mutual Fund Account Value.......................................... 41
Amendments............................................................... 41
Non-participating Policy................................................. 41
DISTRIBUTIONS UNDER THE POLICY............................................. 41
Surrenders............................................................... 41
Nursing Care and Terminal Condition Withdrawal Option.................... 43
Excess Interest Adjustments (EIA)........................................ 43
Systematic Payout Option................................................. 43
Annuity Payments......................................................... 44
Annuity Commencement Date.............................................. 44
Election of Payment Option............................................. 45
Premium Tax............................................................ 45
Supplementary Policy................................................... 46
Annuity Payment Options.................................................. 46
Death Benefit............................................................ 49
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Death of Annuitant Prior to Annuity Commencement Date.................. 49
Adjusted Partial Withdrawal............................................ 50
Death On or After Annuity Commencement Date............................ 51
Beneficiary............................................................ 51
Death of Owner........................................................... 51
Restrictions Under the Texas Optional Retirement Program................. 52
Restrictions Under Section 403(b) Plans.................................. 52
Restrictions Under Qualified Policies.................................... 52
CHARGES AND DEDUCTIONS..................................................... 52
Surrender Charge......................................................... 53
Mortality and Expense Risk Fee........................................... 53
Administrative Charges................................................... 54
Distribution Financing Charge............................................ 55
Premium Taxes............................................................ 55
Federal, State and Local Taxes........................................... 55
Transfer Charge.......................................................... 55
Other Expenses Including Investment Advisory Fees........................ 56
Employee and Agent Purchases............................................. 56
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 56
Tax Status of the Policy................................................. 57
Taxation of Annuities.................................................... 57
DISTRIBUTOR OF THE POLICIES................................................ 63
VOTING RIGHTS.............................................................. 63
LEGAL PROCEEDINGS.......................................................... 64
STATEMENT OF ADDITIONAL INFORMATION........................................ 65
Appendix A............................................................... A-1
Appendix B............................................................... B-1
</TABLE>
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<PAGE>
DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value in the Mutual Fund Account before the Annuity Commencement Date.
Adjusted Policy Value--An amount equal to the Policy Value increased or
decreased by any Excess Interest Adjustment applied at the time of surrender
or on the Annuity Commencement Date.
Administrative and Service Office--Financial Markets Division--Variable
Annuity Department, PFL Life Insurance Company, 4333 Edgewood Road, N.E.,
Cedar Rapids, Iowa 52499-0001.
Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which Annuity Payments are to
commence. This date may not be later than the last day of the policy month
starting after the Annuitant attains age 85, except as expressly allowed by
PFL, but in no event later than the last day of the month following the month
in which the Annuitant attains age 95.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment after the
Annuity Commencement Date.
Beneficiary--The person who has the right to the death benefit set forth in
the Policy.
Business Day--Any day when the New York Stock Exchange is open for business.
Cash Value--The Policy Value increased or decreased by any Excess Interest
Adjustment, less the Surrender Charge, if any.
Code--The Internal Revenue Code of 1986, as amended.
Current Interest Rate--The interest rate or rates currently guaranteed to be
credited on amounts under a Policy allocated to the Fixed Account. This
interest rate will always equal or exceed a minimum of 3%. See Appendix B for
variations in the minimum guaranteed effective annual interest rate applicable
to the Fixed Account.
Due Proof of Death--A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by the attending physician, or any other proof
satisfactory to PFL will constitute Due Proof of Death.
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<PAGE>
Distribution Financing Charge--a daily charge for the first seven Policy
Years equal to an effective annual rate of 0.15% of the Mutual Fund Account's
net assets.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial withdrawal or surrenders, to amounts transferred by the
Owner from the Fixed Account Guaranteed Period Options, or to amounts applied
to Annuity Payment Options. The adjustment reflects changes in the interest
rates declared by PFL since the date any payment was received by or an amount
was transferred to the Guaranteed Period Option. The Excess Interest
Adjustment (EIA) can either decrease or increase the amount to be received by
the Owner upon surrender or commencement of Annuity Payments, depending upon
whether there has been an increase or decrease in interest rates,
respectively.
Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account, that are part of the general assets of PFL that are
not in separate accounts.
Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.
Guaranteed Period Options--The various guaranteed interest rate periods
which may be offered by PFL under the Fixed Account into which premiums may be
paid or amounts transferred.
Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account.
Mutual Fund Account--The PFL Endeavor Variable Annuity Account, which
comprises a portion of the PFL Endeavor VA Separate Account, a separate
account established and registered as a unit investment trust under the
Investment Company Act of 1940 to which Premium Payments under the Policies
may be allocated and which invests in the Growth Portfolio of the WRL Series
Fund, Inc. and the portfolios of the Endeavor Series Trust, and such other
mutual funds as PFL may determine from time-to-time.
Nonqualified Policy--A Policy other than a Qualified Policy.
PFL--PFL Life Insurance Company, the issuer of the Policies.
Policy--One of the variable annuity policies offered by this Prospectus.
Policy Anniversary--Each anniversary of the Policy Date.
Policy Date--The date shown on the Policy data page attached to the Policy
and the date on which the Policy becomes effective.
Policy Owner or Owner--The person who may exercise all rights and privileges
under the Policy. The Policy Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the Policy
Owner or a Successor Owner in the application.
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<PAGE>
Policy Value--On or before the Annuity Commencement Date, this is an amount
equal to (a) the Premium Payments; minus (b) partial withdrawals taken
(including any applicable Excess Interest Adjustments and Surrender Charges on
such partial withdrawals); plus (c) interest credited in the Fixed Account;
plus or minus (d) accumulated gains or losses in the Mutual Fund Account;
minus (e) any applicable service charges, premium taxes, and transfer fees, if
any.
Policy Year--Each 12-month period beginning on the Policy Date shown on the
Policy Data page and each Policy Anniversary thereafter.
Premium Payment--An amount paid to PFL by the Policy Owner or on the Policy
Owner's behalf as consideration for the benefits provided by the Policy.
Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.
Service Charge--An annual charge on each Policy Anniversary (and a charge at
the time of surrender during any Policy Year) for Policy maintenance and
related administrative expenses. This annual charge is the lesser of 2% of the
Policy Value or $35.
Subaccount--A subdivision within the Mutual Fund Account, the assets of
which are invested in a specified Portfolio of the Underlying Funds.
Successor Policy Owner--A person appointed by the Policy Owner to succeed to
ownership of the Policy in the event of the death of the Policy Owner (if the
Policy Owner is not the Annuitant) before the Annuity Commencement Date.
Surrender Charge--A percentage of each Premium Payment in an amount from 7%
to 0% depending upon the length of time from the date of each Premium Payment.
The Surrender Charge is assessed on surrenders of, or partial withdrawals
from, the Policy. A Surrender Charge may also be referred to as a "Contingent
Deferred Sales Charge."
Underlying Funds--The Growth Portfolio of the WRL Series Fund, Inc., and the
portfolios of the Endeavor Series Trust.
Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determination is made on each Business Day.
Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account.
Written Notice or Written Request--Written notice, signed by the Policy
Owner, that gives PFL the information it requires and is received at the
Administrative and Service Office. For some transactions, PFL may accept an
electronic notice such as telephone instructions. Such electronic notice must
meet the requirements PFL establishes for such notices.
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<PAGE>
THE ENDEAVOR VARIABLE ANNUITY
SUMMARY
The following summary is intended to provide a brief overview of the Policy.
More detailed information can be found in the sections of this Prospectus that
follow, all of which should be read in their entirety.
THE POLICY
The Endeavor Variable Annuity is a Flexible Premium Variable Annuity which
can be purchased as a Nonqualified Policy or as a Qualified Policy. The Owner
allocates the Premium Payments among the two Endeavor Accounts of PFL: the PFL
Endeavor Variable Annuity Account, (the "Mutual Fund Account") and the Fixed
Account. Certain features described in this Prospectus may only be available
to Policies purchased after the effective date of the Policy form used. (See
"Variations in Policy Provisions," p. 19 and Appendix B to this Prospectus.)
THE ACCOUNTS
The Mutual Fund Account. The Mutual Fund Account is a separate account of
PFL, which invests exclusively in shares of the ten portfolios of the Endeavor
Series Trust, and the Growth Portfolio of the WRL Series Fund, Inc.
(collectively, the "Underlying Funds"). The Endeavor Series Trust is a mutual
fund managed by Endeavor Investment Advisers, a general partnership between
Endeavor Management Co. and AUSA Financial Markets, Inc. (an affiliate of
PFL), which contracts with several subadvisers (as described in separate
prospectuses that accompany this Prospectus) for investment advisory services.
The WRL Growth Portfolio is a portfolio within the WRL Series Fund, Inc. The
WRL Series Fund, Inc. is a mutual fund whose investment adviser is WRL
Investment Management, Inc., a subsidiary of Western Reserve Life Assurance
Co. of Ohio ("Western Reserve"), (an affiliate of PFL). WRL Investment
Management, Inc. contracts with Janus Capital Corporation as a sub-adviser to
the WRL Growth Portfolio for investment advisory services.
The Underlying Funds currently have eleven Portfolios: the WRL Growth
Portfolio, managed by Janus Capital Corporation; the TCW Managed Asset
Allocation Portfolio; the TCW Money Market Portfolio; the T. Rowe Price
International Stock Portfolio; the Value Equity Portfolio; the Dreyfus Small
Cap Value Portfolio; the Dreyfus U.S. Government Securities Portfolio; the T.
Rowe Price Equity Income Portfolio; the T. Rowe Price Growth Stock Portfolio;
the Opportunity Value Portfolio; and the Enhanced Index Portfolio. Each of the
eleven Subaccounts of the Mutual Fund Account invests solely in a
corresponding Portfolio of the Underlying Funds. Because the Policy Value may
depend on the investment experience of the selected Subaccounts, the Owner
bears the entire investment risk with respect to Premium Payments allocated
to, and amounts transferred to, the Mutual Fund Account. (See "THE ENDEAVOR
ACCOUNTS--The Mutual Fund Account," p. 29.)
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<PAGE>
The Fixed Account. The Fixed Account guarantees an annual effective interest
rate of at least 3% on: Premium Payments and transfers to, less partial
withdrawals and transfers from, the Fixed Account (see Appendix "B" for
variations in the minimum guaranteed effective annual interest rate for prior
versions of Policies and for Policies offered in certain states). PFL may, in
its sole discretion, declare a higher Current Interest Rate. A Current
Interest Rate is guaranteed for at least one year. Upon surrender, PFL
guarantees return of at least the Premium Payments made to, less prior Partial
Withdrawals and transfers from, the Fixed Account. (See "THE ENDEAVOR
ACCOUNTS--The Fixed Account," p. 33.)
PREMIUM PAYMENTS
A Nonqualified Policy may be purchased with an initial Premium Payment of at
least $5,000, and a Qualified Policy generally may be purchased with an
initial Premium Payment of at least $1,000. A Policy purchased and used in
connection with a Tax Deferred 403(b) Annuity may be purchased with an initial
premium payment in any amount chosen by the purchaser, however, PFL must
receive the initial Premium Payment within 90 days following the Policy Date,
otherwise the Policy will be canceled. An Owner may make subsequent additional
Premium Payments of at least $50 each at any time before the Annuity
Commencement Date. The maximum total Premium Payments allowed without prior
approval of PFL is $1,000,000. At the time of each Premium Payment no charges
or fees are deducted, so the entire Premium Payment is invested immediately.
(See "CHARGES AND DEDUCTIONS--Surrender Charge," p. 40 and "CHARGES AND
DEDUCTIONS--Premium Taxes," p. 55.)
The Owner must allocate the initial Premium Payment among the Investment
Options (that is, among the options available under the Fixed Account or the
Subaccounts of the Mutual Fund Account or a combination of those options)
according to allocation percentages in the Policy application or transmittal
form. Any allocation must be in whole percents, and the total allocation must
equal 100%. Allocations specified by the Owner for the Initial Premium Payment
will be used for Subsequent Additional Premium Payments unless the Owner
requests a change in allocation. Allocations of additional Premium Payments
may be changed by sending Written Notice to PFL's Administrative and Service
Office. (See "THE POLICY--Policy Application and Issuance of Policies--Premium
Payments," p. 39.)
RIGHT TO CANCEL PERIOD
The Owner may, until the end of the period of time specified in the Policy
(the Right to Cancel period), examine the Policy and return it for a refund.
The applicable period will depend on the state in which the Policy is issued.
In most states the period is ten (10) days after the Policy is delivered to
the Owner. Several states allow for a longer period to return the Policy. The
amount of the refund will also depend on the state in which the Policy is
issued. Ordinarily the amount of the refund will be the Policy Value.
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<PAGE>
However, some states may require a return of the Premium Payments, or the
greater of the Premium Payments or the Policy Value. PFL will pay the refund
within seven (7) days after it receives written notice of cancellation and the
returned Policy. The Policy will then be deemed void.
TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
An Owner may transfer Policy Values from one Subaccount to another within
the Mutual Fund Account or to the Fixed Account, or may transfer Policy Values
or an amount equal to the interest credited from the Guaranteed Period Options
of the Fixed Account to the Mutual Fund Account. Transfers of amounts equal to
interest credited to a Guaranteed Period Option are referred to as "interest
transfers." Except for interest transfers before the end of the Guaranteed
Period, any Policy Values transferred out of the Fixed Account are subject to
and Excess Interest Adjustment. The minimum amount which may be transferred is
$500, or the entire Subaccount (or Guaranteed Period Option) Policy Value,
whichever is less. However, following a transfer out of a particular
Subaccount or Guaranteed Period Option, at least $500 must remain in that
Subaccount or Guaranteed Period Option, otherwise PFL reserves the right to
include remaining amounts in the transfer. Transfers currently may be made
either by telephone (subject to the provisions described below under
"Telephone Transactions," p. 28) or by sending Written Notice to the
Administrative and Service Office. Due to the manner of crediting interest in
the Fixed Account, however, interest transfers may affect the rate of interest
credited on funds remaining in the Fixed Account. (See "THE ENDEAVOR
ACCOUNTS--Transfers," p. 35.)
An Owner may choose which Guaranteed Period Option to or from transfers may
be made. Transfers of Policy Value from a Guaranteed Period Option prior to
the end of a Guaranteed Period are subject to an Excess Interest Adjustment
which may increase or decrease the amount removed from the Guaranteed Period
Option in order to honor the transfer amount requested. "Interest transfers"
are not subject to an Excess Interest Adjustment. (See "DISTRIBUTIONS UNDER
THE POLICY--Excess Interest Adjustment," p. 43 and "THE ENDEAVOR ACCOUNTS--
Transfers," p. 35.)
Transfers from the Dollar Cost Averaging Fixed Account Option, except
through automatic Dollar Cost Averaging transfers, are not allowed. (see "THE
ENDEAVOR ACCOUNTS--Dollar Cost Averaging Fixed Account Option," p. 34.)
Prior versions of the Policy and Policies issued in certain states may have
additional restrictions on transfers. See Appendix B and the Policy or
endorsement for details.
A $10 charge may be imposed for each transfer in excess of 12 transfers per
Policy Year. Currently PFL does not charge for any transfers. (See "THE
ENDEAVOR ACCOUNTS--Transfers," p. 35.)
- 10 -
<PAGE>
SURRENDERS AND PARTIAL WITHDRAWALS
The Owner may elect to surrender the Policy or make a partial withdrawal
from the Policy ($500 minimum) in exchange for a cash payment from PFL at any
time prior to the earlier of the Annuitant's death or the Annuity Commencement
Date. A surrender or partial withdrawal may be subject to deductions for
Surrender Charges, Excess Interest Adjustments, and Service Charges. (See
"CHARGES AND DEDUCTIONS," p. 52.) A surrender or partial withdrawal request
must be made by Written Request, and a request for a partial withdrawal must
specify the Subaccounts or Guaranteed Period Options from which the withdrawal
is requested. There is currently no limit on the frequency or timing of
partial withdrawals. (See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p.
41). For Qualified Policies the retirement plan or applicable law may restrict
or penalize partial withdrawals. In addition to the applicable charges and
deductions under the Policy, surrenders and partial withdrawals may be subject
to premium taxes, income taxes and a 10% Federal penalty tax.
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If the Owner or Owner's spouse (or Annuitant or Annuitant's spouse if the
Owner is not a natural person): (1) has been confined in a hospital or nursing
facility for 30 consecutive days or (2) has been diagnosed as having a
terminal condition, as defined in the Policy or endorsement (generally, a life
expectancy of not more than 12 months), then partial withdrawals or surrenders
may be taken with no Surrender Charge and no Excess Interest Adjustment. (This
benefit may not be available in all states or for all policy forms. See
Appendix B and the Policy or endorsement for details.) (See DISTRIBUTIONS
UNDER THE POLICY--Nursing Care and Terminal Condition Withdrawal Option," p.
43.)
CHARGES AND DEDUCTIONS
Surrender Charge. In order to permit investment of the entire Premium
Payment, PFL does not deduct sales or other charges at the time the Policy is
purchased. However, a Surrender Charge of up to 7% of the amount withdrawn is
imposed on certain surrenders or partial withdrawals of Premium Payments in
order to cover expenses relating to the sale of the Policies. The applicable
Surrender Charge is based on the period of time elapsed since payment of the
Premium Payment(s) being withdrawn. There is no Surrender Charge imposed seven
or more years after a Premium Payment was paid. For purposes of determining
the applicable Surrender Charge, Premium Payments are considered to be
withdrawn on a "first in--first out" basis. (See "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 53.) Note that for income tax purposes, however, gains
are deemed to be withdrawn first. (See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," p. 56.) After the first Policy Year, up to 10% of the Policy
Value may be withdrawn once per Policy Year without an Excess Interest
Adjustment and without a Surrender Charge if it is the first withdrawal in
that Policy Year.
- 11 -
<PAGE>
Excess Interest Adjustment. Surrenders, partial withdrawals and transfers
(other than "10 Withdrawals" and "interest transfers") out of Fixed Account
Guaranteed Period Options, which occur prior to the end of the Guaranteed
Period, are subject to an Excess Interest Adjustment, which could eliminate
all credited interest in excess of the minimum guaranteed effective annual
interest rate of 3%. The Excess Interest Adjustment, if a positive adjustment,
could also result in the crediting of additional interest. (See "DISTRIBUTIONS
UNDER THE POLICY--Excess Interest Adjustment," p. 43.)
Account Charges. PFL deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account for the mortality and expense risks assumed
by PFL. For Guaranteed Minimum Death Benefit Options "A" (5% Annually
Compounding Death Benefit) and "B" (Annual Step-Up Death Benefit), the
effective annual rate of this charge is 1.25% of the value of the Mutual Fund
Account's net assets. For Guaranteed Minimum Death Benefit Option "C" (Return
of Premium Death Benefit), the effective annual rate of this charge is 1.10%
of the value of the Mutual Fund Account's net assets. (See "CHARGES AND
DEDUCTIONS--Mortality and Expense Risk Fee," p. 53, and "DISTRIBUTIONS UNDER
THE POLICY--Death Benefit," p. 49.)
PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Mutual Fund Account and the Policies. The
effective annual rate of this charge is .15% of the value of the Mutual Fund
Account's net assets. (See "CHARGES AND DEDUCTIONS--Administrative Charges,"
p. 54.)
PFL guarantees that the account charges for mortality and expense risks and
administrative expenses will not exceed a total of 1.40% for the 5% Annually
Compounding Death Benefit or the Annual Step Up Death Benefit, and 1.25% for
the Return of Premium Death Benefit.
Service Charge. Prior to the Annuity Commencement Date, there is an annual
Service Charge on each Policy Anniversary (and a charge at the time of
surrender during any Policy Year) for Policy maintenance and related
administrative expenses. This annual charge is the lesser of 2% of the Policy
Value or $35. The Service Charge is deducted from each Investment Option in
proportion to each Investment Option's percentage of the Policy Value just
prior to such charge. This charge is waived if either the Policy Value or the
sum of all Premium Payments less the sum of all partial withdrawals equals or
exceeds $50,000 on a Policy Anniversary (or date of surrender). PFL guarantees
that this charge will not be increased in the future. (See "CHARGES AND
DEDUCTIONS--Administrative Charges," p. 54.)
Distribution Financing Charges. During the first seven Policy Years, PFL
imposes a daily Distribution Financing Charge equal to an effective annual
rate of .15% of the Mutual Fund Account's net assets. This charge is used by
PFL to defray a portion of the cost of distribution of the Policies. The sum
of the cumulative Distribution Financing Charges and the
- 12 -
<PAGE>
Surrender Charges will never exceed 8.5% of the cumulative Premium Payments.
(See "CHARGES AND DEDUCTIONS--Distribution Financing Charge," p. 55.)
Taxes. PFL may incur premium taxes relating to the Policies. When permitted
by state law, PFL will not deduct any premium taxes related to a particular
Policy from the Policy Value until the time of surrender, payment of the death
benefit, or the Annuity Commencement Date. Premium taxes currently range from
0% to 3.50% of Premium Payments. (See "CHARGES AND DEDUCTIONS--Premium Taxes,"
p. 55.)
No charges are currently made against the Fixed Account or the Mutual Fund
Account for federal, state, or local income taxes. Should PFL determine that
any such taxes may be imposed, PFL may deduct such taxes from amounts held in
the relevant Account. (See "CHARGES AND DEDUCTIONS--Federal, State and Local
Taxes," p. 55.)
Charges Against the Underlying Funds. The value of the net assets of the
Subaccounts of the Mutual Fund Account will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. Those fees and
expenses are detailed in the prospectuses for the Underlying Funds that
accompany this Prospectus.
- 13 -
<PAGE>
Expense Data. The charges and deductions are summarized in the following
tables. This tabular information regarding expenses assumes that the entire
Policy Value is in the Mutual Fund Account.
<TABLE>
<CAPTION>
DREYFUS
TCW T. ROWE U.S.
TCW MANAGED PRICE DREYFUS GOVERNMENT
MONEY ASSET INTERNATIONAL VALUE SMALL CAP SECURITIES
MARKET ALLOCATION STOCK EQUITY VALUE PORTFOLIO
------ ---------- ------------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
POLICY OWNER TRANSACTION
EXPENSES
Sales Load(/1/) On
Purchase Payments..... 0 0 0 0 0 0
Maximum Surrender
Charge (as a % of
Premium Payments
Surrendered)(/2/)..... 7 7 7 7 7 7
Surrender Fees......... 0 0 0 0 0 0
------------------------------------------------------
Annual Service
Charge(/1/)........... $35 Per Policy
------------------------------------------------------
Transfer Fee(/1/)...... First 12 Transfers Per Year: NO FEE
More than 12 in One Year: Currently no fee
MUTUAL FUND ACCOUNT
ANNUAL EXPENSES
(as a percentage of
account value)
Mortality and Expense
Risk Fees(/3/)........ 1.25 1.25 1.25 1.25 1.25 1.25
Administrative Charge.. 0.15 0.15 0.15 0.15 0.15 0.15
Distribution Financing
Charge................ 0.15 0.15 0.15 0.15 0.15 0.15
Total Mutual Fund
Account Annual
Expenses.............. 1.55 1.55 1.55 1.55 1.55 1.55
UNDERLYING FUNDS ANNUAL
EXPENSES(/4/)(5)
(as a percentage of
average net assets and
after expense
reimbursements)
Management Fees........ 0.50 0.75 0.90 0.80 0.80 0.65
Other Expenses......... 0.10 0.10 0.28 0.11 0.12 0.17
Total Underlying Funds
Annual Expense(/5/)... 0.60 0.85 1.18 0.91 0.92 0.82
</TABLE>
<TABLE>
<CAPTION>
T. ROWE T. ROWE
PRICE PRICE
EQUITY GROWTH OPPORTUNITY ENHANCED WRL
INCOME STOCK VALUE INDEX GROWTH
------- ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C>
POLICY OWNER TRANSACTION EXPENSES
Sales Load(/1/) On Purchase
Payments........................ 0 0 0 0 0
Maximum Surrender Charge (as a %
of Premium Payments
Surrendered)(/2/)............... 7 7 7 7 7
Surrender Fees................... 0 0 0 0 0
-------------------------------------------
Annual Service Charge(/1/)....... $35 Per Policy
-------------------------------------------
Transfer Fee(/1/)................ First 12 Transfers Per Year: No Fee
More than 12 in One Year: Currently no fee.
MUTUAL FUND ACCOUNT ANNUAL
EXPENSES
(as a percentage of account
value)
Mortality and Expense Risk
Fees(/3/)....................... 1.25 1.25 1.25 1.25 1.25
Administrative Charge............ 0.15 0.15 0.15 0.15 0.15
Distribution Financing Charge.... 0.15 0.15 0.15 0.15 0.15
Total Mutual Fund Account
Annual Expenses................. 1.55 1.55 1.55 1.55 1.55
UNDERLYING FUNDS ANNUAL
EXPENSES(/4/)(/5/)
(as a percentage of average net
assets and after expense
reimbursements)
Management Fees.................. 0.80 0.80 0.80 0.75 0.80
Other Expenses................... 0.16 0.21 0.50 .55 0.08
Total Underlying Funds
Annual Expense(/5/)............. 0.96 1.01 1.30 1.30 0.88
</TABLE>
- 14 -
<PAGE>
- ----------------------------------
/1The/Surrender Charge and Transfer Fee, if any is imposed, apply to each
Policy, regardless of how the Policy Value is allocated among the Mutual
Fund Account and the Fixed Account. The Service Charge applies to both the
Fixed Account and the Mutual Fund Account, and is assessed on a prorata
basis relative to each Account's Policy Value as a percentage of the
Policy's total Policy Value. The Service Charge is deducted on each Policy
Anniversary and at the time of surrender, if surrender occurs during a
Policy Year. (See "CHARGES AND DEDUCTIONS--Other Expenses Including
Investment Advisory Fees," p. 56.)
/2The/Surrender Charge is decreased based on the number of years since the
premium payment date in which the withdrawal is made, from 7% in the first
year in which the Premium Payment was made to 0% in the eighth year after
the Premium Payment was made.
/3The/Mortality and Expense Risk Fees shown (1.25%) are for the 5% Annually
Compounding Death Benefit and the Annual Step Up Death Benefit. The
corresponding Fee for the Return of Premium Death Benefit is 1.10% for each
Subaccount. (See "DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p. 49.)
/4Endeavor/Investment Advisers has agreed, until terminated by Endeavor
Investment Advisers, to assume expenses of the Portfolios that exceed the
following rates: TCW Money Market--0.99%; TCW Managed Asset Allocation--
1.25%; T. Rowe Price International Stock--1.53%; Value Equity--1.30%;
Dreyfus Small Cap Value--1.30%; Dreyfus U.S. Government Securities--1.00%;
T. Rowe Price Equity Income--1.30%; T. Rowe Price Growth Stock--1.30%;
Opportunity Value--1.30%; Enhanced Index--1.30%. Amounts shown for the
Enhanced Index Portfolios are estimated for 1997. During 1996, Endeavor
Investment Advisers waived fees relative to, or reimbursed, the Opportunity
Value Portfolio. The annualized operating expense ratio before
waiver/reimbursement by Endeavor Investment Advisers for the period ended
December 31, 1996, was 12.69%. The fee table information relating to the
Underlying Funds was provided to PFL by the Underlying Funds, and PFL has
not independently verified such information.
/5Effective/January 1, 1997, the WRL Series Fund, Inc. has adopted a Plan of
Distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "1940 Act") ("Distribution Plan") and pursuant to the Distribution
Plan, has entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), principal underwriter for the WRL Series Fund, Inc. Under the
Distribution Plan, the WRL Series Fund, Inc., on behalf of the WRL Growth
Portfolio, is authorized to pay to various service providers, as direct
payment for expenses incurred in connection with the distribution of the
Portfolio's shares, amounts equal to actual expenses associated with
distributing the Portfolio's shares, up to a maximum rate of 0.15% (fifteen
one-hundredths of one percent) on an annualized basis of the average daily
net assets. This fee is measured and accrued daily and paid monthly. ISI has
determined that it will not seek payment by the WRL Series Fund, Inc. of
distribution expenses with respect to any portfolio (including the WRL
Growth Portfolio) during the fiscal year ending December 31, 1997. Owners
will be notified in advance prior to ISI's seeking such reimbursement.
- 15 -
<PAGE>
EXAMPLES
I. An Owner would pay the following expenses on a $1,000 investment, assuming
a 5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit, a
hypothetical 5% annual return on assets, and assuming the entire Policy Value
is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TCW Money Market Portfolio..................... $92 $114 $145 $248
TCW Managed Asset Allocation Portfolio......... $95 $121 $157 $274
T. Rowe Price International Stock Portfolio.... $98 $131 $174 $306
Value Equity Portfolio......................... $95 $123 $160 $280
Dreyfus Small Cap Value Portfolio.............. $96 $123 $161 $281
Dreyfus U.S. Government Securities Portfolio... $95 $120 $156 $271
T. Rowe Price Equity Income Portfolio.......... $96 $124 $163 $285
T. Rowe Price Growth Stock Portfolio........... $96 $126 $165 $290
Opportunity Value Portfolio.................... $99 $135 $180 $318
Enhanced Index Portfolio....................... $99 $135 $180 $318
WRL Growth Portfolio........................... $95 $122 $159 $277
</TABLE>
2. If the Policy is annuitized at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TCW Money Market Portfolio..................... $22 $69 $118 $248
TCW Managed Asset Allocation Portfolio......... $25 $77 $131 $274
T. Rowe Price International Stock Portfolio.... $28 $86 $147 $306
Value Equity Portfolio......................... $25 $78 $134 $280
Dreyfus Small Cap Value Portfolio.............. $26 $79 $134 $281
Dreyfus U.S. Government Securities Portfolio... $25 $76 $129 $271
T. Rowe Price Equity Income Portfolio.......... $26 $80 $136 $285
T. Rowe Price Growth Stock Portfolio........... $26 $81 $139 $290
Opportunity Value Portfolio.................... $29 $90 $153 $318
Enhanced Index Portfolio....................... $29 $90 $153 $318
WRL Growth Portfolio........................... $25 $77 $132 $277
</TABLE>
3. If the Policy is not surrendered or annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TCW Money Market Portfolio..................... $22 $69 $118 $248
TCW Managed Asset Allocation Portfolio......... $25 $77 $131 $274
T. Rowe Price International Stock Portfolio.... $28 $86 $147 $306
Value Equity Portfolio......................... $25 $78 $134 $280
Dreyfus Small Cap Value Portfolio.............. $26 $79 $134 $281
Dreyfus U.S. Government Securities Portfolio... $25 $76 $129 $271
T. Rowe Price Equity Income Portfolio.......... $26 $80 $136 $285
T. Rowe Price Growth Stock Portfolio........... $26 $81 $139 $290
Opportunity Value Portfolio.................... $29 $90 $153 $318
Enhanced Index Portfolio....................... $29 $90 $153 $318
WRL Growth Portfolio........................... $25 $77 $132 $277
</TABLE>
- 16 -
<PAGE>
II. An Owner would pay the following expenses on a $1,000 investment, assuming
Return of Premium Death Benefit, a hypothetical 5% annual return on assets, and
assuming the entire Policy Value is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TCW Money Market Portfolio..................... $91 $109 $137 $233
TCW Managed Asset Allocation Portfolio......... $93 $117 $150 $259
T. Rowe Price International Stock Portfolio.... $97 $127 $166 $292
Value Equity Portfolio......................... $94 $118 $153 $265
Dreyfus Small Cap Value Portfolio.............. $94 $119 $153 $266
Dreyfus U.S. Government Securities Portfolio... $93 $116 $148 $256
T. Rowe Price Equity Income Portfolio.......... $94 $120 $155 $270
T. Rowe Price Growth Stock Portfolio........... $95 $121 $158 $275
Opportunity Value Portfolio.................... $98 $130 $172 $303
Enhanced Index Portfolio....................... $98 $130 $172 $303
WRL Growth Portfolio........................... $94 $117 $151 $262
</TABLE>
2. If the Policy is annuitized at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TCW Money Market Portfolio..................... $21 $64 $111 $233
TCW Managed Asset Allocation Portfolio......... $23 $72 $123 $259
T. Rowe Price International Stock Portfolio.... $27 $82 $140 $292
Value Equity Portfolio......................... $24 $74 $126 $265
Dreyfus Small Cap Value Portfolio.............. $24 $74 $127 $266
Dreyfus U.S. Government Securities Portfolio... $23 $71 $122 $256
T. Rowe Price Equity Income Portfolio.......... $24 $75 $129 $270
T. Rowe Price Growth Stock Portfolio........... $25 $77 $131 $275
Opportunity Value Portfolio.................... $28 $85 $146 $303
Enhanced Index Portfolio....................... $28 $85 $146 $303
WRL Growth Portfolio........................... $24 $73 $125 $262
</TABLE>
3. If the Policy is not surrendered or annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TCW Money Market Portfolio..................... $21 $64 $111 $233
TCW Managed Asset Allocation Portfolio......... $23 $72 $123 $259
T. Rowe Price International Stock Portfolio.... $27 $82 $140 $292
Value Equity Portfolio......................... $24 $74 $126 $265
Dreyfus Small Cap Value Portfolio.............. $24 $74 $127 $266
Dreyfus U.S. Government Securities Portfolio... $23 $71 $122 $256
T. Rowe Price Equity Income Portfolio.......... $24 $75 $129 $270
T. Rowe Price Growth Stock Portfolio........... $25 $77 $131 $275
Opportunity Value Portfolio.................... $28 $85 $146 $303
Enhanced Index Portfolio....................... $28 $85 $146 $303
WRL Growth Portfolio........................... $24 $73 $125 $262
</TABLE>
- 17 -
<PAGE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the
expenses of the Underlying Funds. (See "CHARGES AND DEDUCTIONS," p. 52, and
the Underlying Funds' prospectuses.) In addition to the expenses listed above,
premium taxes may be applicable.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH COULD BE GREATER OR
LESS THAN THE ASSUMED RATE. The figures and data for the Underlying Fund
annual expenses have been provided by WRL Investment Management, Inc. and
Endeavor Investment Advisers, and while PFL does not dispute these figures,
PFL has not independently verified their accuracy.
In these examples, the $35 Annual Service Charge is reflected as a charge of
.0547% based on average Policy Value of $64,005. Normally, the $35 Service
Charge would be waived if the Premium Payment(s) less partial withdrawals, or
the Policy Value is at least $50,000. However, it was included in these
examples for illustrative purposes.
These examples include the 1.25% Mortality and Expense Risk Fee for the 5%
Annually Compounding and Annual Step-Up Death Benefits; and the 1.10%
Mortality and Expense Risk Fee for the Return of Premium Death Benefit.
DEATH BENEFIT
Upon receipt of proof that the Annuitant, who is the Owner, has died before
the Annuity Commencement Date, the Death Benefit is calculated and is payable
to the Beneficiary when PFL receives due proof of death, an election of the
method of settlement and return of the Policy. The Death Benefit is only paid
if the Owner and Annuitant are the same person, and that person dies prior to
the Annuity Commencement Date. In the event that the Annuitant who is not the
Owner dies prior to the Annuity Commencement Date, the Owner will generally
become the Annuitant unless the Owner specifically requests on the application
or in writing prior to Annuitant's death that the death benefit be paid upon
the Annuitant's death and PFL agrees to such an election.
The amount of the Death Benefit will depend on the state where the Policy is
purchased and will depend on the Death Benefit option elected by the Owner.
However, the Death Benefit will always be at least equal to the greater of the
Policy Value or the Cash Value on the date PFL receives the documentation it
needs to process the Death Benefit.
The Death Benefit is not paid on the death of an Owner if the Owner is not
the Annuitant. If an Owner who is not the Annuitant dies before the Annuity
Commencement Date, the amount payable under the Policy upon surrender will be
the Adjusted Policy Value. (See "DISTRIBUTIONS UNDER
- 18 -
<PAGE>
THE POLICY--Death Benefit," p. 49, Appendix B or the Policy or endorsement for
details.)
The Owner has the "one-time" option of choosing a Guaranteed Minimum Death
Benefit at the time of purchase of the Policy. The Owner may choose among the
"5% Annually Compounding Death Benefit," the "Annual Step-Up Death Benefit,"
or the "Return of Premium Death Benefit." Certain age restrictions may apply,
and prior versions of the Policy or Policies offered in certain states may not
offer all Guaranteed Minimum Death Benefit Options. Appendix B contains
information regarding the Death Benefit in prior versions of the Policy and
for Policies issued in certain states. See the Policy or endorsement for
details. If no Guaranteed Minimum Death Benefit Option election is made by the
Owner, the contract will be issued with the Return of Premium Death Benefit.
The Death Benefit may be paid as either a lump sum cash benefit or as an
annuity as permitted by federal or state law.
VARIATIONS IN POLICY PROVISIONS
Certain provisions in prior versions of the Policies (sold before May 1,
1997), and those offered in certain states may vary from the descriptions in
this Prospectus in order to comply with different state laws. Any such state
variations will be included in the Policy itself or in riders or endorsements
attached to the Policy. A summary of those differences is contained in
Appendix B to this Prospectus. See the Policy or endorsement for details.
New Jersey residents: Annuity payments must begin on or before the Policy
Anniversary that is closest to the Annuitant's 70th birthday or the 10th
Policy Anniversary, whichever occurs last. The Owner may not select a
Guaranteed Period Option that would extend beyond that date. The Owner's
options at the Annuity Commencement Date are to elect a lump sum payment, or
elect to receive annuity payments under one of the Fixed Payment Options. New
Jersey residents cannot elect Variable Payment Options. Consult your agent and
the policy form itself for details regarding these and other terms applicable
to policies sold in New Jersey.
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY
With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (for example, a surrender, partial withdrawal, or Annuity
Payment) or is deemed to occur (for example, a pledge or assignment of a
Policy). Generally, a portion of any distribution or deemed distribution will
be taxable as ordinary income. The taxable portion of certain distributions
will be subject to withholding unless the recipient elects otherwise. In
addition, a penalty tax may apply to certain distributions or deemed
distributions under the Policy. (See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," p. 56.)
* * *
- 19 -
<PAGE>
Note: The foregoing summary is qualified in its entirety by the more detailed
information in the remainder of this Prospectus, in the Statement of
Additional Information, in the prospectuses for the Underlying Funds, and in
the Policy itself. Prospective purchasers should refer to those sources before
purchasing a Policy. This Prospectus generally describes only the Policy and
the Mutual Fund Account. Separate prospectuses describe the Underlying Funds.
(There is no prospectus for the Fixed Account since interests in the Fixed
Account are not securities. See "THE ENDEAVOR ACCOUNTS--The Fixed Account," p.
33.)
INQUIRIES, WRITTEN NOTICES AND WRITTEN REQUESTS
Any questions about procedures or the Policy, or any Written Notice or
Written Request required to be sent to PFL, should be sent to the
Administrative and Service Office, Financial Markets Division--Variable
Annuity Department, 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Telephone requests and inquiries may be made by calling 800-525-6205. All
inquiries, Notices and Requests should include the Policy number, the Owner's
name and the Annuitant's name.
- 20 -
<PAGE>
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units
outstanding for each Subaccount from the date of inception:
<TABLE>
<CAPTION>
TCW MONEY MARKET SUBACCOUNT*
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $ 1.11571 $ 1.15422 26,461,099.190
1995......................... $ 1.07242 $ 1.11571 21,103,926.232
1994......................... $ 1.05150 $ 1.07242 17,836,839.874
1993......................... $ 1.04313 $ 1.05150 12,190,857.625
1992......................... $ 1.02803 $ 1.04313 4,334,947.760
1991(/1/).................... $ 1.00000 $ 1.02803 1,855,372.177
<CAPTION>
TCW MANAGED ASSET ALLOCATION SUBACCOUNT**
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.577873 $1.833135 124,998,927.667
1995......................... $1.301669 $1.577873 122,974,873.030
1994......................... $1.393488 $1.301669 130,909,987.116
1993......................... $1.209859 $1.393488 69,252,242.665
1992......................... $1.125386 $1.209859 11,637,563.615
1991(/1/).................... $1.000000 $1.125386 3,775,618.731
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.171039 $1.330640 91,462,303.686
1995......................... $1.073958 $1.171039 75,065,177.549
1994......................... $1.156482 $1.073958 76,518,044.179
1993......................... $0.989782 $1.156482 45,569,234.403
1992......................... $1.041235 $0.989782 6,368,485.858
1991(/1/).................... $1.000000 $1.041235 3,068,279.081
<CAPTION>
VALUE EQUITY SUBACCOUNT***
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.387903 $1.694854 65,227,195.342
1995......................... $1.045610 $1.387903 46,194,663.692
1994......................... $1.018576 $1.045610 30,512,231.489
1993(/3/).................... $1.000000 $1.018576 10,958,836.984
<CAPTION>
DREYFUS SMALL CAP VALUE SUBACCOUNT****
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.206843 $1.496065 51,124,831.634
1995......................... $1.072941 $1.206843 40,635,696.978
1994......................... $1.107747 $1.072941 32,607,348.474
1993(/4/).................... $1.000000 $1.107747 11,449,956.948
</TABLE>
- 21 -
<PAGE>
<TABLE>
<CAPTION>
DREYFUS U.S. GOVERNMENT SECURITIES SUBACCOUNT*****
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $ 1.124292 $ 1.128769 17,561,825.527
1995......................... $ 0.985803 $ 1.124292 8,456,764.729
1994(/5/).................... $ 0.998670 $ 0.985803 3,102,671.789
<CAPTION>
T. ROWE PRICE EQUITY INCOME SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $ 1.287240 $ 1.521680 42,673,040.677
1995(/6/).................... $ 1.000000 $ 1.287240 14,943,358.393
<CAPTION>
T. ROWE PRICE GROWTH STOCK SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $ 1.353339 $ 1.611613 30,237,847.748
1995(/6/).................... $ 1.000000 $ 1.353339 14,196,707.745
<CAPTION>
OPPORTUNITY VALUE SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996(/7/).................... $ 1.000000 $ 1.004355 314,119.406
<CAPTION>
ENHANCED INDEX SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996(/8/).................... -- -- --
<CAPTION>
WRL GROWTH SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $14.583843 $16.964068 15,174,482.394
1995......................... $10.051117 $14.583843 13,337,196.679
1994......................... $11.114865 $10.051117 12,758,957.591
1993......................... $10.839753 $11.114865 9,252,403.800
1992(/2/).................... $10.000000 $10.839753 1,119,066,376
</TABLE>
- ----------------------------------
(/1/)Period from April 8, 1991 through December 31, 1991.
(/2/)Period from July 1, 1992 through December 31, 1992.
(/3/)Period from May 27, 1993 through December 31, 1993.
(/4/)Period from May 4, 1993 through December 31, 1993.
(/5/)Period from May 9, 1994 through December 31, 1994.
(/6/)Period from January 3, 1995 through December 31, 1995.
(/7/)Period from November 18, 1996, through December 31, 1996.
(/8/)The offering of the Enhanced Index Subaccount is expected to commence on
or about the date of this Prospectus. Accordingly, no comparable data is
available for that Subaccount.
- 22 -
<PAGE>
* Prior to May 1, 1996, known as the Money Market Subaccount.
** Prior to May 1, 1996, known as the Managed Asset Allocation Subaccount.
*** Prior to May 1, 1996, known as the Quest for Value Equity Subaccount.
**** Prior to October 29, 1996, known as the Value Small Cap Subaccount, and
prior to May 1, 1996, known as the Quest for Value Small Cap Subaccount.
***** Prior to May 1, 1996, known as the U.S. Government Securities
Subaccount.
FINANCIAL STATEMENTS
The financial statements of the Mutual Fund Account and PFL and the
independent auditors' reports thereon are in the Statement of Additional
Information which is available free upon request to the Administrative and
Service Office.
HISTORICAL PERFORMANCE DATA
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. In addition, PFL may advertise the
effective yield of the Subaccount investing in the TCW Money Market Portfolio
(the "TCW Money Market Subaccount"). These figures will be calculated
according to standardized methods prescribed by the Securities and Exchange
Commission ("SEC"). They will be based on historical earnings and are not
intended to indicate future performance.
TCW MONEY MARKET SUBACCOUNT
The yield of the TCW Money Market Subaccount for a Policy refers to the
annualized income generated by an investment under a Policy in the Subaccount
over a specified seven-day period. The yield is calculated by assuming that
the income generated for that seven-day period is generated each seven-day
period over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment under a Policy in the Subaccount is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
OTHER SUBACCOUNTS
The yield of a Subaccount of the Mutual Fund Account (other than the TCW
Money Market Subaccount) for a Policy refers to the annualized income
generated by an investment under a Policy in the Subaccount over a specified
thirty-day period. The yield is calculated by assuming that the income
generated by the investment during that thirty-day period is generated each
thirty-day period over a 12-month period and is shown as a percentage of the
investment.
- 23 -
<PAGE>
The total return of a Subaccount of the Mutual Fund Account refers to return
quotations assuming an investment under a Policy has been held in the
Subaccount for various periods of time including, but not limited to, a period
measured from the date the Subaccount commenced operations. When a Subaccount
has been in operation for one, five, and ten years, respectively, the total
return for these periods will be provided. The total return quotations for a
Subaccount will represent the average annual compounded rates of return that
equate an initial investment of $1,000 in the Subaccount to the redemption
value of that investment as of the first day of each of the periods for which
total return quotations are provided.
The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular Policy. The
yield calculations also do not reflect the effect of any Surrender Charge that
may be applicable to a particular Policy. To the extent that any or all of a
premium tax and/or Surrender Charge is applicable to a particular Policy, the
yield and/or total return of that Policy will be reduced. For additional
information regarding yields and total returns calculated using the standard
formats briefly summarized above, please refer to the Statement of Additional
Information, a copy of which may be obtained from the Administrative and
Service Office upon request.
Based on the method of calculation described in the Statement of Additional
Information, the average annual total returns for periods from inception of
the Subaccounts to December 31, 1996, and for the one and five year periods
ended December 31, 1996 were as follows:
AVERAGE ANNUAL TOTAL RETURNS
Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.40%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF THE SUBACCOUNT
PERIOD ENDED ENDED SUBACCOUNT TO INCEPTION
SUBACCOUNT 12/31/96 12/31/96 12/31/96 DATE
- ---------- ------------ ---------- ---------------- -----------------
<S> <C> <C> <C> <C>
TCW Managed Asset
Allocation............. 10.80% 9.95% 10.91% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. 8.24% 4.68% 4.81% April 8, 1991
Value Equity............ 16.77% N/A 15.08% May 27, 1993
Dreyfus Small Cap
Value.................. 18.63% N/A 10.86% May 4, 1993
Dreyfus U.S. Government
Securities............. -5.07% N/A 3.09% May 9, 1994
T. Rowe Price Equity
Income................. 12.84% N/A 21.26% January 3, 1995
T. Rowe Price Growth
Stock.................. 13.72% N/A 24.94% January 3, 1995
Opportunity Value....... N/A N/A -6.56% November 18, 1996
Enhanced Index(/2/)..... N/A N/A N/A --
WRL Growth.............. 10.94% N/A 12.01% July 1, 1992
</TABLE>
- 24 -
<PAGE>
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF
PERIOD ENDED ENDED THE SUBACCOUNT SUBACCOUNT
SUBACCOUNT 12/31/96 12/31/96 TO 12/31/96 INCEPTION DATE
- ---------- ------------ ---------- -------------- -----------------
<S> <C> <C> <C> <C>
TCW Managed Asset
Allocation............. 10.63% 9.79% 10.74% April 8, 1991
T. Rowe Price
International
Stock(/1/)............. 8.07% 4.52% 4.65% April 8, 1991
Value Equity............ 16.59% N/A 14.91% May 27, 1993
Dreyfus Small Cap
Value.................. 18.38% N/A 10.73% May 4, 1993
Dreyfus U.S. Government
Securities............. -5.22% N/A 2.93% May 9, 1994
T. Rowe Price Equity
Income................. 12.71% N/A 21.07% January 3, 1995
T. Rowe Price Growth
Stock.................. 13.54% N/A 24.75% January 3, 1995
Opportunity Value....... N/A N/A -6.56% November 18, 1996
Enhanced Index(/2/)..... N/A N/A N/A --
WRL Growth.............. 10.79% N/A 11.85% July 1, 1992
</TABLE>
- ----------------------------------
(/1/Effective)January 1, 1995, Rowe Price-Fleming International, Inc. became
the new adviser to the Global Growth Portfolio. The Portfolio's name
changed to the T. Rowe Price International Stock Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (that
is, non-U.S. companies).
(/2/The)Enhanced Index Subaccount is expected to begin operations on or about
the date of this Prospectus, therefore comparable information is not
available.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and the T.
Rowe Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception
periods would have been lower.
WRL GROWTH SUBACCOUNT--HYPOTHETICAL DATA
Prior to July 1, 1992, the WRL Growth Subaccount had not yet commenced
operations. However, the following is standardized average annual total return
information based on the hypothetical assumption that the WRL Growth
Subaccount had been available to the PFL Endeavor Variable Annuity Account
since inception of the WRL Growth Portfolio:
Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.40%)
<TABLE>
<CAPTION>
FIVE YEARS 10 YEARS
ENDED ENDED
SUBACCOUNT 12/31/96 * 12/31/96 *
- ---------- ---------- ----------
<S> <C> <C>
WRL Growth................................................ 9.10% 16.19%
</TABLE>
- 25 -
<PAGE>
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
FIVE YEARS 10 YEARS
ENDED ENDED
SUBACCOUNT 12/31/96* 12/31/96*
- ---------- ---------- ---------
<S> <C> <C>
WRL Growth................................................. 8.94% 16.02%
</TABLE>
- ----------------------------------
* The performance data for periods prior to the date the WRL Growth Subaccount
commenced operations (July 1, 1992) is based on the performance of the WRL
Growth Portfolio and the assumption that the WRL Growth Subaccount was in
existence for the same period as the WRL Growth Portfolio, with a level of
charges equal to those currently assessed against the Subaccount or against
Owners' contract values under the Policies. The WRL Growth Portfolio,
commenced operations on October 2, 1986. For purposes of the calculation of
the performance data prior to July 1, 1992, the deductions for the Mortality
and Expense Risk Fee, and Administrative Charge are made on a monthly basis,
rather than a daily basis. The monthly deduction is made at the beginning of
each month and generally approximates the performance which would have
resulted if the Subaccount had actually been in existence since the
inception of the WRL Growth Portfolio. Performance data for periods of less
than seven years reflect deduction of the Surrender Charge.
OPPORTUNITY VALUE AND EQUITY INDEX PORTFOLIOS
The Opportunity Value Portfolio and the Equity Index Portfolio are new and
therefore do not have (in the case of the Opportunity Value Portfolio, no
significant) historical performance data. However, their investment managers
(OpCap Advisors and J.P. Morgan Investment Management Inc. respectively) have
years of experience managing very similar portfolios with substantially the
same investment objectives and policies. Historical performance data showing
the results the investment managers achieved for those other portfolios is in
the prospectus for the Endeavor Series Trust which is included with this
Prospectus. See "Performance Information" in the Endeavor Series Trust's
prospectus. That performance information in the Endeavor Series Trust's
prospectus does not take into account the fees and charges under the Policy;
if those fees and charges were reflected, the investment returns would be
lower.
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Surrender Charge is applicable, and may also make other assumptions such as
the amount invested in a Subaccount, differences in time periods to be shown,
or the effect of partial withdrawals or annuity payments.
The following non-standardized average annual total return figures are based
on the assumption that the Policy is not surrendered, and therefore the
Surrender Charge is not imposed.
- 26 -
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS (ASSUMING NO SURRENDER CHARGE)
Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.40%)
<TABLE>
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF
PERIOD ENDED ENDED THE SUBACCOUNT
SUBACCOUNT 12/31/96 12/31/96 TO 12/31/96 INCEPTION DATE
- ---------- ------------ ---------- -------------- -----------------
<S> <C> <C> <C> <C>
TCW Managed Asset
Allocation............ 16.10% 10.18% 11.08% April 8, 1991
T. Rowe Price
International
Stock(/1/)............ 13.55% 4.97% 5.05% April 8, 1991
Value Equity............ 22.04% N/A 15.72% May 27, 1993
Dreyfus Small Cap
Value................. 23.88% N/A 11.56% May 4, 1993
Dreyfus U.S. Government
Securities............ 0.33% N/A 4.66% May 9, 1994
T. Rowe Price Equity
Income................ 18.14% N/A 23.35% January 3, 1995
T. Rowe Price Growth
Stock................. 19.01% N/A 26.95% January 3, 1995
Opportunity Value....... N/A N/A 0.44% November 18, 1996
Enhanced Index(/2/) N/A N/A N/A --
WRL Growth.............. 16.24% N/A 12.38% July 1, 1992
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.55%)
<CAPTION>
ONE YEAR FIVE YEARS INCEPTION OF
PERIOD ENDED ENDED THE SUBACCOUNT
SUBACCOUNT 12/31/96 12/31/96 TO 12/31/96 INCEPTION DATE
- ---------- ------------ ---------- -------------- -----------------
<S> <C> <C> <C> <C>
TCW Managed Asset
Allocation............ 15.93% 10.02% 10.92% April 18, 1991
T. Rowe Price
International
Stock(/1/)............ 13.39% 4.81% 4.89% April 8, 1991
Value Equity............ 21.86% N/A 15.55% May 27, 1993
Dreyfus Small Cap
Value................. 23.64% N/A 11.43% May 4, 1993
Dreyfus U.S. Government
Securities............ 0.18% N/A 4.51% May 9, 1994
T. Rowe Price Equity
Income................ 18.01% N/A 23.24% January 3, 1995
T. Rowe Price Growth
Stock................. 18.83% N/A 26.76% January 3, 1995
Opportunity Value....... N/A N/A 0.44% November 18, 1996
Enhanced Index(/2/)..... N/A N/A N/A --
WRL Growth.............. 16.09% N/A 12.22% July 1, 1992
</TABLE>
- ----------------------------------
(/1/Effective)January 1, 1995, Rowe Price-Fleming International, Inc. became
the new adviser to the Global Growth Portfolio. The Portfolio's name
changed to the T. Rowe Price International Stock Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (that
is, non-U.S. companies).
(/2/The)Enhanced Index Subaccount is expected to begin operations on or about
the date of this Prospectus, therefore comparable information is not
available.
- 27 -
<PAGE>
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Rice Equity Income Portfolio and the T. Rowe
Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception
periods would have been lower.
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service office upon request.
PUBLISHED RATINGS
PFL may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is to reflect the financial
strength and/or claims-paying ability of PFL and should not be considered as
bearing on the investment performance of assets held in the Mutual Fund
Account or of the safety or riskiness of an investment in the Mutual Fund
Account. Each year the A.M. Best Company reviews the financial status of
thousands of insurers, culminating in the assignment of Best's ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. In addition, the claims-paying ability of
PFL as measured by Standard & Poor's Insurance Ratings Services, Moody's
Investors Service or Duff & Phelps Credit Rating Co. may be referred to in
advertisements or sales literature or in reports to Owners. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. Claims-
paying ability ratings do not refer to an insurer's ability to meet non-policy
obligations (i.e., debt/commercial paper).
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("PFL"), 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499-0001, is a stock life insurance company. It was incorporated under
the name NN Investors Life Insurance Company, Inc. under the laws of the State
of Iowa on April 19, 1961. It is principally engaged in the sale of life
insurance and annuity policies, and is licensed in the District of Columbia,
Guam, and in all states except New York. As of December 31, 1996, PFL had
assets of approximately $7.9 billion. PFL is a wholly-owned indirect
subsidiary of AEGON USA, Inc., which conducts substantially all of its
operations through subsidiary companies engaged in the insurance business or
in providing non-insurance financial services. All of the stock of AEGON USA,
Inc. is indirectly owned by AEGON n.v. of the Netherlands. AEGON n.v., a
holding company, conducts its business through subsidiary companies engaged
primarily in the insurance business.
- 28 -
<PAGE>
THE ENDEAVOR ACCOUNTS
Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Fixed Account, or to a combination of these Accounts.
THE MUTUAL FUND ACCOUNT
The PFL Endeavor Variable Annuity Account comprises a portion of the PFL
Endeavor VA Separate Account of PFL Life Insurance Company (the "Mutual Fund
Account"). The PFL Endeavor VA Separate Account was established as a separate
investment account under the laws of the State of Iowa on January 19, 1990.
The Mutual Fund Account receives and invests the Premium Payments under the
Policies that are allocated to it for investment in shares of the WRL Growth
Portfolio and the Endeavor Series Trust.
The Mutual Fund Account currently is divided into eleven Subaccounts.
Additional Subaccounts may be established in the future at the discretion of
PFL. Each Subaccount invests exclusively in shares of one of the Portfolios of
the Underlying Funds. Under Iowa law, the assets of the Mutual Fund Account
are owned by PFL, but they are held separately from the other assets of PFL.
To the extent that these assets are attributable to the Policy Value of the
Policies, these assets are not chargeable with liabilities incurred in any
other business operation of PFL. Income, gains, and losses incurred on the
assets in the Subaccounts of the Mutual Fund Account, whether or not realized,
are credited to or charged against that Subaccount without regard to other
income, gains or losses of any other Account or Subaccount of PFL. Therefore,
the investment performance of any Subaccount is entirely independent of the
investment performance of PFL's general account assets or any other Account or
Subaccount maintained by PFL.
The Mutual Fund Account is registered with the SEC under the 1940 Act as a
unit investment trust and meets the definition of a separate account under
federal securities laws. However, the SEC does not supervise the management or
the investment practices or policies of the Mutual Fund Account or PFL.
Underlying Funds. The Mutual Fund Account will invest exclusively in shares
of Endeavor Series Trust and the Growth Portfolio of the WRL Series Fund, Inc.
(collectively the "Underlying Funds"). The WRL Series Fund, Inc., and the
Endeavor Series Trust are each a series-type mutual fund registered with the
SEC under the 1940 Act as an open-end, diversified management investment
company. The registration of the Underlying Funds does not, however, involve
supervision of the management or investment practices or policies of the
Underlying Funds by the SEC.
The Underlying Funds currently issue shares of the following eleven
Portfolios: The WRL Growth Portfolio, managed by Janus Capital Corporation,
the TCW Managed Asset Allocation, the TCW Money Market Portfolio, the T. Rowe
Price International Stock Portfolio, the Value Equity Portfolio, the Dreyfus
Small Cap Value Portfolio, the Dreyfus U.S. Government Securities Portfolio,
the T. Rowe Price Equity Income Portfolio, the T. Rowe Price Growth Stock
Portfolio, the Opportunity Value Portfolio;
- 29 -
<PAGE>
and the Enhanced Index Portfolio. The assets of each Portfolio are held
separate from the assets of the other Portfolios, and each Portfolio has its
own distinct investment objectives and policies. Each Portfolio operates as a
separate investment fund, and the income or losses of one Portfolio generally
have no effect on the investment performance of any other Portfolio.
Endeavor Investment Advisers (the "Manager"), an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, is the
Endeavor Series Trust's manager. The Manager selects and contracts with
advisers for investment services for the Portfolios of Endeavor Series Trust,
reviews the advisers' activities, and otherwise performs administerial and
managerial functions for the Endeavor Series Trust. Six advisers each perform
investment advisory services for particular Portfolios of Endeavor Series
Trust: TCW Funds Management, Inc. (a wholly-owned subsidiary of The TCW Group,
Inc.), T. Rowe Price Associates, Inc., Rowe Price-Fleming International, Inc.
(a joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings Limited), OpCap Advisors (formerly known as Quest for Value
Advisors), J.P. Morgan Investment Management Inc. (a wholly owned subsidiary
of J.P. Morgan and Co. Incorporated) and The Dreyfus Corporation (a wholly
owned subsidiary of Mellon Bank, N.A.), as successor to The Boston Company
Asset Management, Inc., (the "Advisers").
TCW Funds Management, Inc. is the Adviser for the TCW Managed Asset
Allocation Portfolio and the TCW Money Market Portfolio. T. Rowe Price
Associates, Inc. is the Adviser for the T. Rowe Price Equity Income Portfolio
and the T. Rowe Price Growth Stock Portfolio. Rowe Price-Fleming
International, Inc. is the Adviser for the T. Rowe Price International Stock
Portfolio. OpCap Advisors is the Adviser for the Value Equity Portfolio and
the Opportunity Value Portfolio. J.P. Morgan Investment Management Inc.
("Morgan") is the Adviser for the Enhanced Index Portfolio. The Dreyfus
Corporation is the Adviser for the Dreyfus U.S. Government Securities
Portfolio, and the Dreyfus Small Cap Value Portfolio. WRL Investment
Management, Inc. a subsidiary of Western Reserve Life Assurance Co. of Ohio,
(an affiliate of PFL), is the Adviser for the WRL Series Fund, Inc. and
contracts with Janus Capital Corporation (also an "Adviser") as a sub-adviser
to the WRL Growth Portfolio.
The Adviser of a Portfolio is responsible for selecting the investments of
the Portfolio consistent with the investment objectives and policies of the
Portfolio, and will conduct securities trading for the Portfolio. All Advisers
are investment advisers registered with the SEC under the Investment Advisers
Act of 1940. The investment objectives of each Portfolio are summarized as
follows:
TCW Money Market Portfolio--seeks current income, preservation of capital
and maintenance of liquidity through investment in short-term money market
securities. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share although no assurances can be given that such constant net
asset value will be maintained.
- 30 -
<PAGE>
TCW Managed Asset Allocation Portfolio--seeks high total return through a
managed asset allocation portfolio of equity, fixed income and money market
securities.
T. Rowe Price International Stock Portfolio--seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
Value Equity Portfolio--seeks long-term capital appreciation through
investment in securities (primarily equity securities) of companies that are
believed by the Portfolio's Adviser to be undervalued in the marketplace in
relation to factors such as the companies' assets or earnings.
Dreyfus Small Cap Value Portfolio--seeks capital appreciation through
investments in a diversified portfolio consisting primarily of equity
securities of companies with a median capitalization of approximately $750
million, provided that under normal market conditions at least 75% of the
Portfolio's investments will be in equity securities of companies with
capitalizations at the time of purchase between $150 million and $1.5 billion.
Dreyfus U.S. Government Securities Portfolio--seeks as high a level of total
return as is consistent with prudent investment strategies by investing under
normal circumstances at least 65% of its assets in debt obligations and
mortgage-backed securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
T. Rowe Price Equity Income Portfolio--seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend paying
stocks of established companies.
T. Rowe Price Growth Stock Portfolio--seeks long-term growth of capital and
to increase dividend income through investment primarily in common stocks of
well established growth companies.
Opportunity Value Portfolio--seeks growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based upon the Portfolio
Adviser's assessment of relative values.
Enhanced Index Portfolio--seeks to earn a total return modestly in excess of
the total return performance of the S&P 500 Composite Stock Index (the "S&P
500 Index") while maintaining a volatility of return similar to the S&P 500
Index.
WRL Growth Portfolio managed by Janus Capital Corporation--seeks growth of
capital. At most times, this Portfolio will be invested primarily in equity
securities which are selected solely for their capital growth potential;
investment income is not a consideration.
THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE.
MORE DETAILED INFORMATION,
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INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES
AND A DESCRIPTION OF RISKS INVOLVED IN INVESTING IN EACH OF THE PORTFOLIOS AND
OF EACH PORTFOLIO'S FEES AND EXPENSES IS CONTAINED IN THE PROSPECTUSES FOR THE
UNDERLYING FUNDS, CURRENT COPIES OF WHICH ARE ATTACHED TO THIS PROSPECTUS.
INFORMATION CONTAINED IN THE UNDERLYING FUNDS' PROSPECTUSES SHOULD BE READ
CAREFULLY BEFORE INVESTING IN A SUBACCOUNT OF THE MUTUAL FUND ACCOUNT.
An investment in the Mutual Fund Account, and in any Subaccount or
Portfolio, including the TCW Money Market Portfolio and the Dreyfus U.S.
Government Securities Portfolio, is not insured or guaranteed by the U.S.
government or any government agency.
Addition, Deletion, or Substitution of Investments. PFL cannot and does not
guarantee that any of the Portfolios will always be available for Premium
Payments, allocations, or transfers. PFL retains the right, subject to any
applicable law, to make certain changes in the Mutual Fund Account and its
investments. PFL reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Underlying Funds, or of another registered open-end management investment
company for the shares of any Portfolio, if the shares of the Portfolio are no
longer available for investment or if, in PFL's judgment, investment in any
Portfolio would be inappropriate in view of the purposes of the Mutual Fund
Account. To the extent required by the 1940 Act, substitutions of shares
attributable to an Owner's interest in a Subaccount will not be made without
prior notice to the Owner and the prior approval of the SEC. Nothing contained
herein shall prevent the Mutual Fund Account from purchasing other securities
for other series or classes of variable annuity policies, or from effecting an
exchange between series or classes of variable annuity policies on the basis
of requests made by Owners.
New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio or
other investment vehicle. PFL may also eliminate one or more Subaccounts if,
in its sole discretion, marketing, tax, investment or other conditions warrant
such change. In the event any Subaccount is eliminated, PFL will notify Owners
and request a reallocation of the amounts invested in the eliminated
Subaccount. If no such reallocation is provided by the Owner, PFL will
reinvest the amounts invested in the eliminated Subaccount in the Subaccount
that invests in the TCW Money Market Portfolio (or in a similar portfolio of
money market instruments) or in another Subaccount, if appropriate.
In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting
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rights under the Policies, the Mutual Fund Account may be (i) operated as a
management company under the 1940 Act or any other form permitted by law, (ii)
deregistered under the 1940 Act in the event such registration is no longer
required or (iii) combined with one or more other separate accounts. To the
extent permitted by applicable law, PFL also may transfer the assets of the
Mutual Fund Account associated with the Policies to another account or
accounts.
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy and the Mutual Fund Account. For more complete details
regarding the Fixed Account, see the Policy itself.
Premium Payments allocated and amounts transferred to the Fixed Account
become part of the general account of PFL, which supports insurance and
annuity obligations. Interests in the general account have not been registered
under the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the 1940 Act. Accordingly, neither
the general account nor any interests therein are generally subject to the
provisions of the 1933 or 1940 Acts and PFL has been advised that the staff of
the SEC has not reviewed the disclosures in this Prospectus which relate to
the Fixed Account.
The Fixed Account is part of the general assets of PFL, other than those in
the Mutual Fund Account or in any other segregated asset account. The Policy
Owner may allocate Premium Payments to the Fixed Account at the time of
Premium Payment or by subsequent transfers from the Mutual Fund Account.
Instead of the Policy Owner bearing the investment risk, as is the case for
Policy Value in the Mutual Fund Account, PFL bears the full investment risk
for all Policy Value in the Fixed Account. PFL has sole discretion to invest
the assets of its general account, including the Fixed Account, subject to
applicable law. While PFL bears the full investment risk for all Policy Value
in the Fixed Account, the Owner bears the risk that PFL would not be able to
satisfy its contractual obligations.
Premium payments applied to and any amounts transferred to the Fixed Account
will reflect a fixed interest rate. The interest rates PFL sets will be
credited for increments of at least one year measured from each premium
payment or transfer date. These rates will never be less than a minimum
effective annual interest rate of 3%. Prior versions of the Policy and
Policies offered in certain states will have the minimum effective annual
interest rates specified in Appendix B.
Upon Surrender of the Policy, the Owner will receive at least the Premium
Payments applied to, less prior Partial Withdrawals and transfers from, the
Fixed Account.
Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options" or "GPOs") into which Premium Payments may be
paid or amounts transferred. For example, PFL may, from time to time, offer
Guaranteed Period Options for periods of 1, 3, 5, or 7
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years. The current interest rate PFL sets for funds placed in each Guaranteed
Period Option will apply to those funds until the end of the Guaranteed
Period. At the end of the Guaranteed Period, the Premium Payment or amount
transferred into the Guaranteed Period Option less any partial withdrawals or
transfers from that Guaranteed Period Option, including the effect of any
Excess Interest Adjustment or Surrender Charge due to partial withdrawals or
transfers prior to the end of the Guaranteed Period, plus accrued interest,
will be rolled into a new Guaranteed Period Option.
The Owner may choose the Guaranteed Period Option into which the funds are
to be placed by giving PFL notice within 30 days before the end of the
expiring Guaranteed Period. In the absence of such election, the new
Guaranteed Period will be the same as the expiring one. If that Guaranteed
Period Option is no longer offered by PFL, the next shorter Guaranteed Period
Option then being offered will be used. PFL reserves the right, for new
Premium Payments, transfers, or rollovers, whether or not to offer any
Guaranteed Period Option. PFL will, however, always offer at least a one-year
Guaranteed Period Option.
Surrenders, partial withdrawals and transfers from a Guaranteed Period
Option prior to the end of the Guaranteed Period may be subject to an Excess
Interest Adjustment. An Excess Interest Adjustment may result in a loss of
interest credited, but the Owner's Fixed Account Policy Values will always be
credited with an effective annual interest rate of at least 3%. Surrender
charges, if any, are applied after the Excess Interest Adjustment. However,
upon full surrender the Owner is guaranteed return of Premium Payments to the
Fixed Account, less Partial Withdrawals and transfers from the Fixed Account.
(See "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 43.)
For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
or transferred out first; the next oldest Premium Payment plus interest is
considered to be transferred out next, and so on (this is a "first-in, first-
out" procedure).
Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).
This option will have a one-year interest rate guarantee and will only be
available under a Dollar Cost Averaging (DCA) program. The current interest
rate PFL credits for the DCA Fixed Account may differ from the rates credited
on other Guaranteed Period Option(s) in the Fixed Account.
Prior to the Annuity Commencement Date, the Owner can instruct PFL to make
automatic transfers from the Dollar Cost Averaging Fixed Account to one or
more subaccounts of the Mutual Fund Account. Transfers must be scheduled for
at least six but not more than 24 months, or for at least four, but not more
than eight quarters. No changes to the automatic amount transferred will be
allowed, but changes can be made to the Subaccounts to
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which these transfers are allocated. Dollar Cost Averaging transfers from the
Dollar Cost Averaging Fixed Account will not be subject to an Excess Interest
Adjustment. (See "Dollar Cost Averaging" p. 37.)
Guaranteed Interest Rates. PFL periodically will establish an applicable
Guaranteed Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Guaranteed Interest Rates may be changed by PFL frequently or infrequently
depending on interest rates on investments available to PFL and other factors
as described below, but once established, the rate will be guaranteed for the
entire duration of the Guaranteed Period. However, except for limited
situations, any amount withdrawn or transferred will be subject to an Excess
Interest Adjustment, except at the end of the Guaranteed Period Option. (See
"Excess Interest Adjustment," p. 43.)
The Guaranteed Interest Rate will not be less than 3% per year regardless of
any application of the Excess Interest Adjustment. PFL has no specific formula
for determining the rate of interest that it will declare as a Guaranteed
Interest Rate, as this rate will be reflective of interest rates available on
the types of debt instruments in which PFL intends to invest amounts allocated
to the Fixed Account. In addition, PFL's management may consider other factors
in determining Guaranteed Interest Rates for a particular Guaranteed Period
including but not limited to: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors. There is no obligation to declare a rate in
excess of 3%; the Policy Owner assumes the risk that declared rates will not
exceed 3%. PFL has complete discretion to declare any rate of at least 3%,
regardless of market interest rates, the amounts earned by PFL on its
investments, or any other factors.
PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE
GUARANTEED INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE GUARANTEED
EFFECTIVE INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.
TRANSFERS
An Owner can transfer Policy Values from one Investment Option to another
within certain limits. In addition, transfers (from the Guaranteed Period
Option(s) of the Fixed Account) of an amount equal to the interest credited
(that is, "interest transfers") are not subject to an Excess Interest
Adjustment, but may affect the interest crediting rates on the remaining funds
in the Guaranteed Period Option.
Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by the
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Owner, to the Administrative and Service Office. The minimum amount which may
be transferred is the lesser of $500 or the entire Subaccount or Guaranteed
Period Option Value. If the Subaccount or Guaranteed Period Option Value
remaining after a transfer is less than $500, PFL reserves the right, at its
discretion, either to deny the transfer request or to include that amount as
part of the transfer.
If the Excess Interest Adjustment (at time of a transfer request) from any
Guaranteed Period Option is a negative adjustment, then the maximum amount of
Policy Value that can be transferred is 25% of the Guaranteed Period Option's
Policy Value, less amounts previously transferred out of that Guaranteed
Period Option during the current Policy Year. No maximum will apply to amounts
transferred from any Guaranteed Period Option if the Excess Interest
Adjustment is a positive adjustment at the time of transfer.
Transfers prior to the Annuity Commencement Date currently may be made
without charge as often as the Owner wishes, subject to the minimum amount
specified above. PFL reserves the right to limit these transfers to no more
than 12 per Policy Year in the future or to charge up to $10 per transfer in
excess of 12 per Policy Year.
The Owner may transfer an amount up to the interest credited in any of the
Guaranteed Period Option(s) to any Subaccount(s) of the Mutual Fund Account
prior to the end of the Guaranteed Period. No Excess Interest Adjustment will
apply to such interest transfers. Interest transfers may affect the interest
crediting rates on the remaining funds in the Guaranteed Period Option. This
is because interest transfers may have the effect of reducing or eliminating
principal amounts in the Guaranteed Period Options since, for purposes of
crediting interest, PFL considers the oldest Premium Payment or transfer into
the Guaranteed Period Option, plus interest allocable to that particular
Premium Payment or transfer, to be withdrawn first. The Owner must notify PFL
within 30 days prior to the end of the Guaranteed Period Option to instruct
PFL regarding any transfers to be performed at that time.
Transfers out of the Dollar Cost Averaging Fixed Account, except through an
automatic Dollar Cost Averaging program, are not allowed.
After the Annuity Commencement Date, transfers out of the Fixed Account are
not permitted, and transfers between Subaccounts or from Subaccounts to the
Fixed Account may be limited to once per Policy Year. (See "DISTRIBUTIONS
UNDER THE POLICY--Annuity Payment Options," p. 46.)
Transfers may be made by telephone, subject to the provisions described
below under "Telephone Transactions."
REINSTATEMENTS
Requests are occasionally received by PFL to reinstate funds which had been
transferred to another insurance company pursuant to a Section 1035 exchange
or trustee-to-trustee transfer under the Code. In this situation PFL
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will require the Owner to replace the same total amount of money in the
applicable Subaccounts or Fixed Accounts as taken from them to effect the
exchange. The total dollar amount of funds reapplied to the Separate Account
will be used to purchase a number of Accumulation Units available for each
Subaccount based on the Accumulation Unit prices at the date of reinstatement
(within two days after the date the funds are received by PFL). The number of
Accumulation Units available on the reinstatement date may be more or less
than the number of Units surrendered for the exchange. Amounts reapplied to
the Fixed Account will receive the effective annual interest rate they would
otherwise have received, had they not been withdrawn. However, an adjustment
will be made to the amount reapplied to compensate PFL for the additional
interest credited during the period of time between the withdrawal and the
reapplication of the funds. Owners should consult a qualified tax adviser
concerning the tax consequences of any Section 1035 exchanges or
reinstatements.
TELEPHONE TRANSACTIONS
An Owner (or the Owner's designated account executive) may make transfers
and/or change the allocation of subsequent Premium Payments by telephone.
Telephone transfers are only allowed if the "Telephone Transfer/Reallocation
Authorization" box in the Policy application has been checked or telephone
transfers have been subsequently authorized in writing on a form provided by
PFL by the Owner. PFL will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. PFL will
employ reasonable procedures, however, to confirm that instructions
communicated by telephone are genuine. If PFL fails to do so, it may be liable
for any losses due to unauthorized or fraudulent instructions. All telephone
requests will be recorded on voice recorder equipment for the protection of
the Owner. The Owner, when making telephone requests, will be required to
provide a social security number or other information for identification
purposes.
Telephone requests must be received at the Administrative and Service Office
no later than 3:00 p.m. Central time in order to assure same day pricing of
the transaction.
At its discretion, PFL may discontinue the telephone transaction privilege
at any time as to some or all Owners, and PFL may require written confirmation
of any transaction request.
DOLLAR COST AVERAGING (DCA)
Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, the Owner can instruct PFL to automatically transfer a specified dollar
amount from the Dollar Cost Averaging Fixed Account Option, the TCW Money
Market Subaccount or the Dreyfus U.S. Government Securities Subaccount to any
other Subaccount or Subaccounts of the Mutual Fund Account. The automatic
transfers can occur monthly or quarterly and will occur on the 28th day of the
month. If the Dollar Cost Averaging request is received prior to the 28th day
of any month, the first
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transfer will occur on the 28th day of that month. If the Dollar Cost
Averaging request is received on or after the 28th day of any month, the first
transfer will occur on the 28th day of the following month. The amount
transferred each time must be at least $500. A minimum of six monthly or four
quarterly transfers are required and a maximum of 24 monthly or eight
quarterly transfers are allowed from the Dollar Cost Averaging Fixed Account.
Dollar Cost Averaging results in the purchase of more units when the Unit
Value is low, and fewer units when the Unit Value is high. However, there is
no guarantee that the Dollar Cost Averaging program will result in higher
Policy Values or will otherwise be successful. Dollar Cost Averaging requires
regular investment regardless of fluctuating prices and does not guarantee
profits nor prevent losses in a declining market. Before electing this option,
individuals should consider their financial ability to continue transfers
through periods of both high and low price levels.
The Owner may request Dollar Cost Averaging when purchasing the Policy or at
a later date. The program will terminate when the amount in the Dollar Cost
Averaging Fixed Account, the TCW Money Market Subaccount or the Dreyfus U.S.
Government Securities Subaccount is insufficient for the next transfer, at
which time the entire remaining balance is transferred.
Except for automatic Dollar Cost Averaging transfers from the Dollar Cost
Averaging Fixed Account Option the Owner may increase or decrease the amount
of the transfers by sending PFL a new Dollar Cost Averaging form. The Owner
may discontinue the program at any time by sending a Written Notice to the
Administrative and Service Office. The minimum number of transfers (6 monthly
or 4 quarterly) requirement must be satisfied each time the Dollar Cost
Averaging program is restarted following termination of the program for any
reason. There is no charge for participation in the Dollar Cost Averaging
program.
ASSET REBALANCING
Prior to the Annuity Commencement Date the Owner may instruct PFL to
automatically transfer amounts among the Subaccounts of the Mutual Fund
Account on a regular basis to maintain a desired allocation of the Policy
Value among the various Subaccounts offered. Rebalancing will occur on a
monthly, quarterly, semi-annual, or annual basis, beginning on a date selected
by the Owner. If no date is selected, the account will be rebalanced on the
day of the month the Policy was effective. The Owner must select the
percentage of the Policy Value desired in each of the various Subaccounts
offered (totaling 100%). Any amounts in the Fixed Account are ignored for
purposes of asset rebalancing. Rebalancing may be started, stopped, or changed
at any time, except that rebalancing will not be available when:
(1) Automatic Dollar Cost Averaging transfers are being made; or
(2) any other transfer is requested.
There is no charge for participation in the asset rebalancing program.
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THE POLICY
The Endeavor Variable Annuity Policy is a Flexible Premium Variable Annuity
Policy. The rights and benefits under the Policy are summarized below;
however, the description of the Policy contained in this Prospectus is
qualified in its entirety by reference to the Policy itself, a copy of which
is available upon request from PFL. The Policy may be purchased on a non-tax
qualified basis ("Nonqualified Policy"). The Policy may also be purchased and
used in connection with retirement plans or individual retirement accounts
that qualify for favorable federal income tax treatment ("Qualified Policy").
POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS
Before it will issue a Policy, PFL must receive a completed Policy
application or transmittal form and a minimum initial Premium Payment of
$5,000 for a Nonqualified Policy, or $1,000 for a Qualified Policy. There is
no minimum initial Premium Payment required for tax deferred 403(b) annuity
purchases, any amount selected by the Owner in such case, up to the maximum
total premium payment allowed by PFL, may be used to start a Policy. The
initial Premium Payment for tax deferred 403(b) purchases must be received
within 90 days following the Policy Date, otherwise the Policy will be
canceled. The initial Premium Payment is the only Premium Payment required to
be paid under a Policy. A Policy ordinarily will be issued only in respect of
Annuitants Age 0 through 80. Acceptance or declination of an application shall
be based on PFL's underwriting standards, and PFL reserves the right to reject
any application or Premium Payment based on those underwriting standards.
If the application or transmittal form can be accepted in the form received,
the initial Premium Payment will be credited to the Policy Value within two
Business Days after the later of receipt of the information needed to issue
the Policy or receipt of the initial Premium Payment. If the initial Premium
Payment cannot be credited because the application or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay and the initial Premium
Payment will be returned at that time unless the applicant consents to PFL's
retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled.
The date on which the initial Premium Payment is credited to the Policy
Value is the Policy Date. The Policy Date is the date used to determine Policy
Years and Policy Anniversaries.
All checks or drafts for Premium Payments should be made payable to PFL Life
Insurance Company and sent to the Administrative and Service Office. The Death
Benefit will not take effect until the Premium Payment is received and any
check or draft for the Premium Payment is honored.
Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, the Owner may make additional Premium Payments at
any time, and in any frequency. The minimum
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additional Premium Payment under both a Nonqualified Policy and a Qualified
Policy is $50. Additional Premium Payments will be credited to the Policy and
added to the Policy Value as of the Business Day when the premium and required
information are received.
Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of PFL is $1,000,000.
Allocation of Premium Payments. An Owner must allocate Premium Payments to
one or more of the Investment Options. The Owner must specify the initial
allocation in the Policy application or transmittal form. This allocation will
be used for Subsequent Additional Premium Payments unless the Owner requests a
change of allocation. All allocations must be made in whole percentages and
must total 100%. If Premium Payments are allocated to the Dollar Cost
Averaging Fixed Account, directions regarding the Subaccount(s) to which
transfers are to be made must be specified on the Application or other proper
Written Request. If the Owner fails to specify how Premium Payments are to be
allocated, the Premium Payment(s) cannot be accepted.
The Owner may change the allocation instructions for future subsequent
additional Premium Payments by sending Written Notice, signed by the Owner, to
PFL's Administrative and Service Office, or by telephone (subject to the
provisions described under "Telephone Transactions," p. 37.) The allocation
change will apply to Premium Payments received after the date the Written
Notice or telephone request is received.
Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.
POLICY VALUE
On the Policy Date, the Policy Value equals the initial Premium Payment.
Thereafter, the Policy Value equals the sum of the values in the Mutual Fund
Account and the Fixed Account. The Policy Value will increase by: (1) any
Subsequent Additional Premium Payments received by PFL; (2) any increases in
the Policy Value due to investment results of the selected Subaccount(s); (3)
any positive Excess Interest Adjustments on transfers, and (4) interest
credited in the Fixed Account. The Policy Value will decrease by (1) any
surrenders, including applicable Excess Interest Adjustments and/or Surrender
Charges; (2) any decreases in the Policy Value due to investment results of
the selected Subaccounts; (3) the charges and deductions imposed by PFL; and
(4) any negative Excess Interest Adjustments on transfers.
The Policy Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Subaccount(s), as
well as the deductions for charges. A Valuation Period is the period between
successive Business Days. It begins at the close of
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business on each Business Day and ends at the close of business on the next
succeeding Business Day. A Business Day is each day that the New York Stock
Exchange is open for business. Holidays are generally not Business Days.
The Mutual Fund Account Value. When a Premium Payment is allocated or an
amount is transferred to a Subaccount of the Mutual Fund Account, it is
credited to the Policy Value in the form of Accumulation Units. Each
Subaccount of the Mutual Fund Account has a distinct Accumulation Unit value
(the "Unit Value"). The number of Accumulation Units credited is determined by
dividing the Premium Payment or amount transferred by the Unit Value of the
Subaccount as of the end of the Valuation Period during which the allocation
is made. When amounts are transferred out of, or surrendered or withdrawn from
a Subaccount, Accumulation Units are canceled or redeemed in a similar manner.
For each Subaccount, the Unit Value for a given Business Day is based on the
net asset value of a share of the corresponding Portfolio of the Underlying
Funds. Therefore, the Unit Values will fluctuate from day to day based on the
investment experience of the corresponding Portfolio. The determination of
Subaccount Unit Values is described in detail in the Statement of Additional
Information.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No registered representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of the
Code, regulations or published rulings. An Owner can refuse such a change by
giving Written Notice, but a refusal may result in adverse tax consequences.
NON-PARTICIPATING POLICY
The Policy does not participate or share in the profits or surplus earnings
of PFL. No dividends are payable on the Policy.
DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
Prior to the Annuity Commencement Date, the Owner may surrender all or a
portion of the Cash Value in exchange for a cash payment from PFL. The Cash
Value is the Policy Value less any applicable Surrender Charge and plus or
minus any Excess Interest Adjustments. (See "Annuity Payment Options," p. 46.)
The Policy cannot be surrendered after the Annuity Commencement Date. (See
"Annuity Payments," p. 44.)
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When requesting a partial withdrawal ($500 minimum), the Owner must tell PFL
how the withdrawal is to be allocated from among various Guaranteed Period
Options of the Fixed Account and/or the Subaccount(s) of the Mutual Fund
Account. If the Owner's request for a partial withdrawal from a Guaranteed
Period Option of the Fixed Account is greater than the Cash Value of that
Guaranteed Period Option, PFL will pay the Owner the amount of the Cash Value
of that Guaranteed Period Option. If no allocation instructions are given, the
withdrawal will be deducted from each Investment Option in the same proportion
that the Policy Owner's interest in each Investment Option bears to the
Policy's total Policy Value. PFL reserves the right to defer payment of the
Cash Value from the Fixed Account for up to six months.
Beginning in the second Policy Year, an Owner may request a partial
withdrawal of up to 10% of the Policy Value at the time of withdrawal without
an Excess Interest Adjustment and without a Surrender Charge if no withdrawal
has been made in the current Policy Year (-"10% Withdrawals"). Amounts
withdrawn from the Policy in excess of the 10% Withdrawal or withdrawn in the
same Policy Year as a previous 10% Withdrawal (and all surrenders in the first
Policy Year) are subject to the Excess Interest Adjustment and to the
Surrender Charge. Neither a Surrender Charge nor an Excess Interest Adjustment
will be assessed if the withdrawal is necessary to meet the minimum
distribution requirements for that Policy specified by the Code for tax-
qualified plans.
10% Withdrawals will reduce the Policy Value by the amount withdrawn.
Amounts requested in excess of the 10% Withdrawal are Excess Partial
Withdrawals. Excess Partial Withdrawals will reduce the Policy Value by an
amount equal to (X - Y + Z) where:
X = Excess Partial Withdrawal
Y = Excess Interest Adjustment applicable to the Excess Partial
Withdrawal
Z = Surrender Charge on X minus Y.
For a discussion of the Surrender Charge, see "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 53. For a discussion of the Excess Interest Adjustment,
see "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 43, and
Appendix A.
Since the Owner assumes the investment risk with respect to Premium Payments
allocated to the Mutual Fund Account, and because partial withdrawals may be
subject to an Excess Interest Adjustment and to a Surrender Charge, and
possibly income taxes or premium taxes, the total amount paid upon total
surrender of the Cash Value (taking any prior surrenders into account) may be
more or less than the total Premium Payments made. Following a surrender of
the total Cash Value, or at any time the Policy Value is zero, all rights of
the Owner and Annuitant will terminate.
In addition to the Excess Interest Adjustment and Surrender Charge and any
applicable premium taxes, surrenders may be subject to income taxes
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<PAGE>
and, if prior to age 59 1/2, a ten percent Federal penalty tax. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 56.)
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If the Owner or Owner's spouse (Annuitant or Annuitant's spouse if the Owner
is not a natural person): (1) has been confined in a hospital or nursing
facility for 30 consecutive days, or (2) has been diagnosed as having a
terminal condition as defined in the Policy or endorsement (generally a life
expectancy of 12 months or less), then the Surrender Charge and Excess
Interest Adjustment are not imposed on surrenders or partial withdrawals.
(This benefit may not be available in all states or in all Policy forms--see
the Policy or endorsement for details.)
EXCESS INTEREST ADJUSTMENT (EIA)
Surrenders, partial withdrawals, transfers, and amounts applied to a Payment
Option (prior to the end of a Guaranteed Period) from the Fixed Account
Guaranteed Period Options will be subject to an Excess Interest Adjustment
except as provided for under "Surrenders" or "Nursing Care and Terminal
Condition Withdrawal Option" above or "Systematic Payout Option," below. Prior
versions of the Policy or Policies offered in certain states may not be
subject to an Excess Interest Adjustment. (See Appendix B.)
The Excess Interest Adjustment partially compensates PFL for the foregoing
early removal of funds from the Guaranteed Period Options where interest rates
declared by PFL have risen since the date of the guarantee. Conversely, the
Excess Interest Adjustment allows PFL to share the benefit of falling interest
rates with the Owner upon such withdrawals.
Generally, if interest rates declared by PFL have risen since the date of
the guarantee, the application of the Excess Interest Adjustment (a negative
Excess Interest Adjustment in this case) will result in a lower payment upon
surrender. Conversely, if interest rates have fallen since the date of the
guarantee, the application of the Excess Interest Adjustment (a positive
Excess Interest Adjustment in this case) will result in a higher payment upon
surrender.
Excess Interest Adjustments will not reduce the Adjusted Policy Value for a
Guaranteed Period Option below the Premium Payments and transfers to that
Guaranteed Period Option, less any prior partial withdrawals and transfers
from that Guaranteed Period Option, plus interest at the Policy's minimum
guaranteed effective annual interest rate of 3%.
The formula for calculating the Excess Interest Adjustment and examples of
the application of the Excess Interest Adjustments are set forth in Appendix A
to this Prospectus.
SYSTEMATIC PAYOUT OPTION
Under the Systematic Payout Option, Policy Owners can instruct PFL to make
automatic payments to them monthly, quarterly, semi-annually or
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annually from a specified Subaccount. Monthly and quarterly payments can only
be sent by electronic funds transfer directly to a checking or savings
account. The minimum payment is $50. The maximum payment is 10% of the Policy
Value at the time the Systematic Payout is made divided by the number of
payouts made per year (for example, 12 for monthly). If this requested amount
is below the minimum distribution requirements for that policy specified by
the IRS for tax qualified plans, the maximum payment will be increased to this
minimum required distribution amount. The "Request for Systematic Payout" form
must specify a date for the first payment, which must be at least 30 days but
not more than one year after the form is submitted (i.e., Systematic Payouts
will start at the end of the payment mode selected, but not earlier than 30
days from the date of request).
The Surrender Charge and Excess Interest Adjustment will be waived for
Policy Owners under age 59 1/2 of Qualified Policies if they take Systematic
Payouts using one of the payout methods described in IRS Notice 89-25, Q&A-12
(the Life Expectancy Recalculation Option, Amortization, or Annuity Factor)
which generally require payments for life or life expectancy. These payments
must be continued until the later of age 59 1/2 or five years from their
commencement. No additional partial withdrawal may be taken during this time.
For Qualified Policies, when the Policy Owner is age 59 1/2 or older, the
Surrender Charge and Excess Interest Adjustment will be waived if payments are
made using the Life Expectancy Recalculation Option.
In addition, for either Qualified or Nonqualified Policies, the Surrender
Charge and Excess Interest Adjustment will not be imposed on Systematic
Payouts.
Qualified Policies are subject to complex rules with respect to restrictions
on and taxation of distributions, including the applicability of penalty
taxes. In addition, the tax treatment of systematic payouts from Nonqualified
Policies has had an unfavorable ruling regarding the ability to avoid the 10%
penalty tax. Therefore, the Policy Owner should consult a qualified tax
adviser before requesting a Systematic Payout. In certain circumstances
withdrawn amounts may be included in the Policy Owner's gross income. (See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 56.)
ANNUITY PAYMENTS
Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
selected by the Owner at the time the Owner applies for the Policy. The
Annuity Commencement Date may be changed from time to time by the Owner by
Written Notice to PFL, provided that notice of each change is received by PFL
at its Administrative and Service Office at least thirty (30) days prior to
the then current Annuity Commencement Date. Except as otherwise permitted by
PFL, a new Annuity Commencement Date
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<PAGE>
must be a date which is: (1) at least thirty (30) days after the date notice
of the change is received by PFL; and (2) not later than the last day of the
policy month starting after the Annuitant attains age 85. In no event will an
Annuity Commencement Date be permitted to be later than the last day of the
month following the month in which the Annuitant attains age 95. The Annuity
Commencement Date may also be changed by the Beneficiary's election of the
Annuity Option after the Annuitant's death.
Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, the Owner may choose an Annuity Payment
Option or change the election, but Written Notice of any election or change of
election must be received by PFL at its Administrative and Service Office at
least thirty (30) days prior to the Annuity Commencement Date. If no election
is made prior to the Annuity Commencement Date, Annuity Payments will be made
under (i) Option 3, life income with level payments for 10 years certain,
using the existing Adjusted Policy Value of the Fixed Account, or (ii) under
Option 3-V, life income with variable payments for 10 years certain using the
existing Adjusted Policy Value of the Mutual Fund Account, or (iii) in a
combination of (i) and (ii) if the Adjusted Policy Value is allocated among
both the Fixed Account and the Mutual Fund Account. If the Adjusted Policy
Value on the Annuity Commencement Date is less than $2000, PFL reserves the
right to pay it in one lump sum in lieu of applying it under an Annuity
Payment Option.
Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p. 49.) Subject to the restrictions of certain state
laws, Annuity Payments will be made on either a fixed basis or a variable
basis as selected by the Owner (or the Beneficiary, after the Annuitant's
death).
The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount PFL has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.
A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL
agrees.
Unless the Policy Owner specifies otherwise, the payee shall be the
Annuitant, or, after the Annuitant's death, the Beneficiary. PFL may require
written proof of the age of any person who has an annuity purchased under
Option 3, 3-V, 5 or 5-V.
Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a Payment Option, upon Surrender, or upon payment of death
proceeds. If so, PFL will deduct the premium tax before applying or paying the
proceeds.
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<PAGE>
Supplementary Policy. Once proceeds become payable and a Payment Option has
been chosen, PFL will issue a Supplementary Policy in settlement of the option
elected under the Policy setting forth the terms of the option elected. The
Supplementary Policy will name the payees and will describe the payment
schedule.
ANNUITY PAYMENT OPTIONS
The Policy provides five Payment Options which are described below. Three of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and two are only available as Fixed Payment Options. The Policy
Owner may elect a Fixed Payment Option, a Variable Payment Option, or a
combination of both. If the Policy Owner elects a combination, he must specify
what part of the Policy proceeds are to be applied to the Fixed and Variable
Options (and he must also specify which Subaccounts for the Variable Options).
NOTE CAREFULLY: Under Payment Options 3(1) and 5 (including 3-V(1) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second annuity payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third annuity payment; and so forth.
On the Annuity Commencement Date, the Policy's Adjusted Policy Value will be
applied to provide for Annuity Payments under the selected Annuity Option as
specified. The Adjusted Policy Value is the Policy Value (for the Valuation
Period which ends immediately preceding the Annuity Commencement Date),
increased or decreased by any applicable Excess Interest Adjustment.
The effect of choosing a Fixed Annuity Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Annuity Option is selected, the Adjusted Policy Value will be
transferred to the general account of PFL, and the Annuity Payments will be
fixed in amount by the fixed annuity provisions selected and the age and sex
(if consideration of sex is allowed under applicable law) of the Annuitant.
For further information, contact PFL at its Administrative and Service Office.
Guaranteed Values. There are five Fixed Annuity Options. Options 1, 2 and 4
are based on a guaranteed interest rate of 3%. Options 3 and 5 are based on a
guaranteed effective annual interest rate of 3% using the "1983 Table a"
(male, female, and unisex if required by law) mortality table improved to the
year 2000 with projection scale G. ("The 1983 Table a" mortality rates are
adjusted based on improvements in mortality since 1983 to more appropriately
reflect increased longevity. This is accomplished using a set of improvement
factors referred to as projection scale G.)
Option 1--Interest Payments. The policy proceeds may be left with PFL for
any term as agreed by PFL and the Owner. PFL will pay the interest in equal
payments or it may be left to accumulate. Withdrawal rights will be agreed
upon by the Owner and PFL when the option is elected.
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Option 2--Income for a Specified Period. Level payments of the proceeds with
interest are made for the fixed period elected, at which time the funds are
exhausted.
Option 3--Life Income. An election may be made between:
1. "No Period Certain"--Level payments will be made during the
lifetime of the Annuitant.
2. "10 Years Certain"--Level Payments will be made for the longer of
the Annuitant's lifetime or ten years.
3. "Guaranteed Return of Policy Proceeds"--Level payments will be
made for the longer of the Annuitant's lifetime or the number of
payments which, when added together, equals the proceeds applied
to the income option.
Option 4--Income of a Specified Amount. Payments are made for any specified
amount until the proceeds with interest are exhausted.
Option 5--Joint and Survivor Annuity. Payments are made during the joint
lifetime of the payee and a joint payee of the Owner's selection. Payments
will be made as long as either person is living.
Other options may be arranged by agreement with PFL. Certain options may not
be available in some states.
Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed amount (guaranteed amounts are based upon the
tables contained in the Policy). Current amounts may be obtained from PFL.
Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
a 5% effective annual assumed investment return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.) The dollar amount of subsequent Variable
Annuity Payments will vary based on the investment performance of the
Subaccount of the Mutual Fund Account selected by the Annuitant or
Beneficiary. If the actual investment performance exactly matched the Assumed
Investment Return of 5% at all times, the amount of each Variable Annuity
Payment would remain equal. If actual investment performance exceeds the
Assumed Investment Return, the amount of the payments would increase.
Conversely, if actual investment performance is worse than the Assumed
Investment Return, the amount of the payments would decrease.
Determination of the First Variable Payment. The amount of the first
variable payment depends upon the sex (if consideration of sex is allowed) and
adjusted age of the Annuitant. The adjusted age is the Annuitant's actual age
nearest birthday, at the Annuity Commencement Date, adjusted as follows:
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<PAGE>
<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- ------------
<S> <C>
Before 2001 Actual Age
2001-2010 Actual Age minus 1
2011-2020 Actual Age minus 2
2021-2030 Actual Age minus 3
2031-2040 Actual Age minus 4
After 2040 As determined by PFL
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
The following Variable Payment Options generally are available:
Option 3-V--Life Income. An election may be made between:
1. "No Period Certain"--Payments will be made during the lifetime of
the Annuitant.
2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.
Option 5-V--Joint and Survivor Annuity. Payments are made as long as either
the Annuitant or the joint Annuitant is living.
Certain options may not be available in some states.
Determination of Subsequent Variable Payments. All Variable Annuity Payments
other than the first are calculated using "Annuity Units" which are credited
to the Policy. The number of Annuity Units to be credited in respect of a
particular Subaccount is determined by dividing that portion of the first
Variable Annuity Payment attributable to that Subaccount by the Annuity Unit
Value of that Subaccount for the Annuity Commencement Date. The number of
Annuity Units of each particular Subaccount credited to the Policy then
remains fixed. The dollar value of variable Annuity Units in the chosen
Subaccount will increase or decrease reflecting the investment experience of
the chosen Subaccount. The dollar amount of each Variable Annuity Payment
after the first may increase, decrease or remain constant, and is equal to the
sum of the amounts determined by multiplying the number of Annuity Units of
each particular Subaccount credited to the Policy by the Annuity Unit Value
for the particular Subaccount on the date the payment is made.
Transfers. A Policy Owner may transfer the value of the Annuity Units from
one Subaccount to another within the Mutual Fund Account or to the Fixed
Account. However, after the Annuity Commencement Date no transfers may be made
from the Fixed Account to the Mutual Fund Account. The minimum amount which
may be transferred is the lesser of $10 of monthly income or the entire
monthly income of the variable Annuity Units in the Subaccount from which the
transfer is being made. The remaining Annuity Units in the Subaccount must
provide at least $10 of monthly income. If, after a transfer, the monthly
income of the remaining Annuity Units in a Subaccount would be less than $10,
PFL reserves the right to include those Annuity Units as part of the transfer.
PFL reserves the right to
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<PAGE>
limit transfers between Subaccounts or to the Fixed Account after the Annuity
Commencement Date to once per Policy Year.
Tax Withholding. A portion or the entire amount of the Annuity Payments may
be taxable as ordinary income. If, at the time the Annuity Payments begin, the
Policy Owner has not provided PFL with a written election not to have federal
income taxes withheld, PFL must by law withhold such taxes from the taxable
portion of such annuity payments and remit that amount to the federal
government. Withholding is mandatory for certain Qualified Policies. (See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 56.)
Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12
month intervals. If the individual payments provided for would be or become
less than $50, PFL may change, at its discretion, the frequency of payments to
such intervals as will result in payments of at least $50. If the Adjusted
Policy Value on the Annuity Commencement Date is less than $2,000, PFL may pay
such value in one sum in lieu of the payments otherwise provided for.
DEATH BENEFIT
Death of Annuitant Prior to Annuity Commencement Date. A Death Benefit will
be paid to the Beneficiary if the Owner, who is the Annuitant, dies prior to
the Annuity Commencement Date. The amount of the Death Benefit is the greatest
of the Policy Value, Cash Value or the Guaranteed Minimum Death Benefit
selected. Prior versions of the Policy or Policies offered in certain states
may provide for a different definition or calculation of the Death Benefit.
See Appendix B and the Policy or endorsement for details. The Death Benefit is
not payable upon the death of the Annuitant if the Annuitant and Owner are not
the same person, unless the Owner makes a separate election.
There are three Guaranteed Minimum Death Benefit Options available: (A) The
"5% Annually Compounding Death Benefit," (B) the "Annual Step-Up Death
Benefit," and (C) the "Return of Premium Death Benefit."
The "5% Annually Compounding Death Benefit" is the total Premium Payments
less any Adjusted Partial Withdrawals plus interest at an effective annual
rate of 5% from the payment or withdrawal date up to the date of death.
The "Annual Step-Up Guaranteed Minimum Death Benefit" is the highest Policy
Value on any Policy Anniversary prior to the earlier of the date of death or
the Owner's 81st birthday, plus Premium Payments less any Adjusted Partial
Withdrawals since that anniversary. For this purpose, the Policy Date will be
treated as a Policy Anniversary. Any applicable Excess Interest Adjustments on
transfers from the Fixed Account will affect the value of this Guaranteed
Minimum Death Benefit.
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<PAGE>
The "Return of Premium Death Benefit" is the total Premium Payments less any
Adjusted Partial Withdrawals (defined below) as of the date of death.
Under all Guaranteed Minimum Death Benefit Options, if the surviving spouse
elects to continue the Policy in lieu of receiving the Death Benefit, an
amount equal to the excess, if any, of the Guaranteed Minimum Death Benefit
over the Policy Value, will then be added to the Policy Value. This amount
will be added only once, at the time of such election.
The 5% Annually Compound Death Benefit is not available if either the
Annuitant or the Owner is age 75 or higher on the Policy Date. The Annual
Step-Up Death Benefit is not available if either the Annuitant or the Owner is
age 81 or higher on the Policy Date. If no choice is made in the Policy
application then the Return of Premium Death Benefit will apply.
After the Policy Date, an election cannot be made and the Guaranteed Minimum
Death Benefit option cannot be changed.
The Death Benefit is based on values determined on the later of when PFL
receives due proof of death and an election of a settlement option.
Adjusted Partial Withdrawal. The Adjusted Partial Withdrawal is the total
amount deducted from the Guaranteed Minimum Death Benefit following a partial
withdrawal of the Policy Value. Each Adjusted Partial Withdrawal is the sum of
(1) and (2), where:
(1) The 10% Withdrawal and,
(2) The amount that an Excess Partial Withdrawal reduces the Policy Value (See
"DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 41) times [(a) divided by
(b)] where:
(a) is the Death Benefit less any 10% Withdrawals; and
(b) is the Policy Value less any 10% Withdrawals.
If a partial withdrawal is taken when the Guaranteed Minimum Death Benefit
exceeds the Policy Value, then the amount deducted from the Guaranteed Minimum
Death Benefit as a result of the partial withdrawal (that is, the Adjusted
Partial Withdrawal) will exceed the amount of the partial withdrawal request.
In that case, the total proceeds of a partial withdrawal followed by a Death
Benefit could be less than total Premium Payments.
Due Proof of Death of the Annuitant is proof that the Annuitant who is the
Owner died prior to the commencement of Annuity Payments. Upon receipt of this
proof, an election of a method of settlement and return of the Policy, the
Death Benefit generally will be paid within seven days, or as soon thereafter
as PFL has sufficient information about the Beneficiary to make the payment.
The Beneficiary may receive the amount payable in a lump sum cash benefit, or,
subject to any limitation under any state or federal law, rule, or regulation,
under one of the Annuity Payment Options described above,
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<PAGE>
unless a settlement agreement is effective at the death of the Owner
preventing such election.
If the Annuitant was the Policy Owner, and the Beneficiary was not the
Annuitant's spouse, the Death Benefit must (1) be distributed within five
years of the date of the deceased Owner's death, or (2) payments under a
Payment Option must begin within one year of the deceased Owner's death and
must be made for the Beneficiary's lifetime or for a period certain (so long
as any certain period does not exceed the Beneficiary's life expectancy).
Death proceeds which are not paid to or for the benefit of a natural person
must be distributed within five years of the date of the deceased Owner's
death. If the sole Beneficiary is the deceased Owner's surviving spouse, such
spouse may elect to continue the Policy as the new Annuitant and Policy Owner
instead of receiving the Death Benefit. (See "Federal Tax Matters" in the
Statement of Additional Information.)
If the Annuitant is not the Owner, and the Owner dies prior to the Annuity
Commencement Date, a Successor Owner may surrender the Policy at any time for
the Adjusted Policy Value. If the Successor Owner is not the deceased Owner's
surviving spouse, however, this amount must be distributed within five years
after the date of death of the Owner, or payments under a Payment Option must
begin within one year of the deceased Owner's death and must be made for the
Beneficiary's lifetime or for a period certain (so long as any certain period
does not exceed the Beneficiary's life expectancy).
Death On or After Annuity Commencement Date. The death benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death.
Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. The Policy Owner may change the designated Beneficiary
by sending Written Notice to PFL. The Beneficiary's consent to such change is
not required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable Beneficiary dies, the Policy Owner may
then designate a new Beneficiary.) The change will take effect as of the date
the Policy Owner signs the Written Notice, whether or not the Policy Owner is
living when the Notice is received by PFL. PFL will not be liable for any
payment made before the Written Notice is received. If more than one
Beneficiary is designated, and the Policy Owner fails to specify their
interests, they will share equally.
DEATH OF OWNER
Federal tax law requires that if any Policy Owner (including any joint Owner
or any Successor Policy Owner who has become a current Owner) dies before the
Annuity Commencement Date, then the entire value of the
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Policy must generally be distributed within five years of the date of death of
such Policy Owner. Certain rules apply where 1) the spouse of the deceased
Owner is the sole beneficiary, 2) the Policy Owner is not a natural person and
the primary Annuitant dies or is changed, or 3) any Policy Owner dies after
the Annuity Commencement Date. See "Federal Tax Matters" in the Statement of
Additional Information for a detailed description of these rules. Other rules
may apply to Qualified Policies. (See also "DISTRIBUTIONS UNDER THE POLICY--
Death Benefit" p. 49)
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program (ORP) to withdraw their interest in a
variable annuity Policy issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education; (2)
retirement; or (3) death. Accordingly, a participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
the account can be redeemed.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Policy used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED POLICIES
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.
CHARGES AND DEDUCTIONS
No deductions are made from Premium Payments, so that the full amount of
each Premium Payment is invested in one or more of the Accounts. PFL will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Accounts
and the Policies. Charges may also be made for premium taxes, federal, state
or local taxes, or for certain transfers or other transactions. Charges and
expenses are also deducted from the Underlying Funds.
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<PAGE>
SURRENDER CHARGE
PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may deduct a Surrender Charge from any amount surrendered (i.e., withdrawn) in
connection with a partial withdrawal or a surrender in order to cover a
portion of such distribution expenses. A Surrender Charge will not be deducted
from a withdrawal, after the first Policy Year, of up to 10% of the Policy
Value, if there have been no partial withdrawals in the current Policy Year.
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 41.)
The Surrender Charge is not imposed upon exercise of the Nursing Care and
Terminal Condition Option. This feature may not be available in all states.
(See "DISTRIBUTIONS UNDER THE POLICY," p.41, and Appendix B.)
The amount of the Surrender Charge is determined by multiplying the amount
of the Premium Payments withdrawn by the applicable Surrender Charge
Percentage. The applicable Surrender Charge Percentage will depend upon the
number of years that have elapsed since the Premium Payment that is being
withdrawn was made. For this purpose, surrenders are allocated to Premium
Payments on a "first in-first out" basis, that is, first to the oldest Premium
Payment, then to the next oldest Premium Payment, and so on. Premium Payments
are deemed to be withdrawn before earnings, and after all Premium Payments
have been withdrawn, the remaining Adjusted Policy Value may be withdrawn
without any Surrender Charge. The following is the table of Surrender Charge
Percentages:
<TABLE>
<CAPTION>
APPLICABLE SURRENDER
CHARGE PERCENTAGE
NUMBER OF YEARS SINCE (AS PERCENTAGE OF
PREMIUM PAYMENT DATE PREMIUM PAYMENT WITHDRAWN)
--------------------- --------------------------
<S> <C>
Less than 1..................................... 7%
At least 1 and less than 2...................... 6%
At least 2 and less than 3...................... 5%
At least 3 and less than 4...................... 4%
At least 4 and less than 5...................... 3%
At least 5 and less than 6...................... 2%
At least 6 and less than 7...................... 1%
</TABLE>
PFL anticipates that the Surrender Charge will not generate sufficient funds
to pay the cost of distributing the Policies. If this charge is insufficient
to cover the distribution expenses, the deficiency will be met from PFL's
general funds, which will include amounts derived from the fee for mortality
and expense risks and the Distribution Financing Charge.
MORTALITY AND EXPENSE RISK FEE
PFL imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. For the 5% Annually Compounding
Death Benefit and the Annual Step-Up Death
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<PAGE>
Benefit, this charge is equal to an effective annual rate of 1.25% of the
daily net asset value of the Mutual Fund Account. For the Return of Premium
Death Benefit, the corresponding charge is equal to an effective annual rate
of 1.10% of the daily net asset value of the Mutual Fund Account. The
Mortality and Expense Risk Fee is reflected in the Accumulation or Annuity
Unit Values for the Policy for each Subaccount.
Policy Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by PFL. The mortality
risks assumed by PFL arise from its contractual obligations to make Annuity
Payments (determined in accordance with the Annuity tables and other
provisions contained in the Policy) and to pay Death Benefits prior to the
Annuity Commencement Date. Thus, Owners are assured that neither an
Annuitant's own longevity nor an unanticipated improvement in general life
expectancy will adversely affect the monthly Annuity payments that the
Annuitant will receive under the Policy.
PFL also bears substantial risk in connection with the Death Benefit
Guarantee since PFL will pay a Death Benefit equal to the Guaranteed Minimum
Death Benefit if that amount is higher than the Policy Value.
The expense risk assumed by PFL is the risk that PFL's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative Charges.
If the Mortality and Expense Risk Fee is insufficient to cover PFL's actual
costs, PFL will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to PFL. PFL expects a
profit from this charge. To the extent that the Surrender Charge is
insufficient to cover the actual cost of Policy distribution, the deficiency
will be met from PFL's general corporate assets, which may include amounts, if
any, derived from the Distribution Financing Charge and, if necessary, the
Mortality and Expense Risk Fee. A Mortality and Expense Risk Fee is assessed
during the annuity accumulation phase and during the phase for all Variable
Annuity Options including those that do not carry a life contingency.
ADMINISTRATIVE CHARGES
Service Charge. In order to cover the costs of administering the Policies,
PFL deducts a Service Charge from the Policy Value of each Policy. The annual
Service Charge is deducted from the Policy Value of each Policy on each Policy
Anniversary prior to the Annuity Commencement Date. PFL also reserves the
right to charge up to $35 at the time of surrender during any Policy Year. The
charge is not deducted after the Annuity Commencement Date. The annual Service
Charge is the lesser of 2% of the Policy Value or $35, and it will not be
increased in the future. This charge is waived if either the Policy Value or
the sum of all Premium Payments less the sum of all partial withdrawals equals
or exceeds $50,000 on a Policy Anniversary (or date of surrender). The Service
Charge will be deducted
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from the Investment Option(s) in the same proportion that the Owner's interest
in each Investment Option bears to the Owner's total Policy Value.
Administrative Charge. PFL also deducts a daily Administrative Charge from
the net assets of the Mutual Fund Account to partially cover expenses incurred
by PFL in connection with the administration of the Account and the Policies.
The effective annual rate of this charge is .15% of the daily net assets value
of the Mutual Fund Account. (See "CHARGES AND DEDUCTIONS--Administrative
Charges," p. 54.)
DISTRIBUTION FINANCING CHARGE
During the first seven Policy Years, PFL deducts a daily Distribution
Financing Charge equal to an effective annual rate of 0.15% of the daily net
asset value of the Mutual Fund Account. The cumulative amount of the charge,
plus the Surrender Charge, will never exceed 8.5% of the cumulative Premium
Payments for a Policy. The Distribution Financing Charge is paid to PFL and is
designed to partially compensate PFL for the cost of distributing the
Policies. The Distribution Financing Charge will be used to support marketing
efforts, training of representatives and reimbursement of expenses incurred by
broker/dealers who sell the Policies. The staff of the SEC deems such charge
to constitute a deferred sales charge.
PREMIUM TAXES
PFL currently makes no deduction from the Premium Payments for any state
premium taxes PFL pays in connection with Premium Payments under the Policies.
However, PFL will, when permitted by state law, deduct the aggregate premium
taxes paid on behalf of a particular Policy on (i) the Annuity Commencement
Date, (ii) the total surrender of a Policy, or (iii) payment of the death
proceeds of a Policy. Premium taxes currently range from 0% to 3.50% of
Premium Payments.
FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the accounts or the
policies.
TRANSFER CHARGE
There is no charge for the first 12 transfers between Investment Options in
each Policy Year. PFL reserves the right to impose a $10 charge for the
thirteenth and each subsequent transfer request made by the Owner during a
single Policy Year. For the purpose of determining whether a transfer charge
is payable, Premium Payment allocations are not considered transfers. All
transfer requests made simultaneously will be treated as a single request. No
transfer charge will be imposed for any transfer which is not at the Owner's
request.
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OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each of the Portfolios of the Underlying Funds is responsible for all of its
expenses. In addition, charges will be made against each of the Portfolios of
the Underlying Funds for investment advisory services provided to the
Portfolio. The net assets of each Portfolio of the Underlying Funds will
reflect deductions in connection with the investment advisory fee and other
expenses.
For more information concerning the investment advisory fee and other
charges against the Portfolios, see the prospectuses for the Underlying Funds,
current copies of which accompany this Prospectus.
EMPLOYEE AND AGENT PURCHASES
The Policy may be acquired by an employee or registered representative of
any broker/dealer authorized to sell the Policy or their spouse or minor
children, or by an officer, director, trustee or bona-fide full-time employee
of PFL or its affiliated companies or their spouse or minor children. In such
case, a bonus of 5% of each premium deposit may be credited to the Policy due
to lower acquisition costs PFL experiences on these purchases. The bonus will
be reported to the Internal Revenue Service as taxable income to the employee
or registered representative. Compensation to the registered representative
and broker/dealer will be reduced by the amount of such bonus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the
Internal Revenue Code of 1986, as amended (the "Code"), proposed and final
Treasury Regulations thereunder, judicial authority, and current
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons," and does not
discuss state, local, or foreign tax consequences. United States Persons means
citizens or residents of the United States, domestic corporations, domestic
partnerships and trusts or estates that are subject to United States federal
income tax regardless of the source of their income.
At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Nonqualified Policy or a
Qualified Policy. If the initial Premium Payment is derived from an exchange
or surrender of another annuity policy, PFL may require that the prospective
purchaser provide information with regard to the federal income tax status of
the previous annuity policy. PFL will require that persons purchase separate
Policies if they desire to invest monies qualifying for different annuity tax
treatment under the Code. Each such separate Policy would require the minimum
initial Premium Payment stated above.
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Subsequent Additional Premium Payments under a Policy must qualify for the
same federal income tax treatment as the initial Premium Payment under the
Policy; PFL will not accept a Subsequent Additional Premium Payment under a
Policy if the federal income tax treatment of such Premium Payment would be
different from that of the initial Premium Payment.
The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), or 408(a), or 457 of the Code and
individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS.
TAX STATUS OF THE POLICY
The following discussion is based on the assumption that the Policy
qualifies as an annuity contract for federal income tax purposes. The
Statement of Additional Information discusses the tax requirements for
qualifying as an annuity contract.
TAXATION OF ANNUITIES
The discussion below applies only to those Policies owned by natural
persons, and that qualify as annuity contracts for federal income tax
purposes. With respect to Owners who are natural persons, the Policy should be
treated as an annuity contract for federal income tax purposes.
In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification
and distribution requirements described in the Statement of Additional
Information should not be taxed on increases in the Policy Value until an
amount is received or deemed received, e.g., upon a partial withdrawal or
surrender or as Annuity Payments under the Annuity Option selected. Generally,
any amount received or deemed received under a Nonqualified Annuity Contract
prior to the Annuity Commencement Date is deemed to come first from any
"Income on the Contract" and then from the "Investment in the Contract." The
"Investment in the Contract" generally equals total premium payments less
amounts received which were not
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includable in gross income. To the extent that the Policy Value (Cash Value in
the event of a surrender) exceeds the "Investment in the Contract," such
excess constitutes the "Income on the Contract." For these purposes such
"Income on the Contract" shall be computed by reference to the aggregation
rules described below, and the amount includable in gross income will be
taxable as ordinary income. If at the time that any amount is received or
deemed received there is no "Income on the Contract" (e.g., because the gross
Policy Value does not exceed the "Investment in the Contract" and no
aggregation rule applies), then such amount received or deemed received will
not be includable in gross income, and will simply reduce the "Investment in
the Contract."
For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Policy Value (including assignment of Owner's right to
receive Annuity Payments prior to the Annuity Commencement Date) generally
will be treated as a distribution in the amount of such portion of the Policy
Value. Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a distribution under the Policy
in an amount equal to the Policy Value. A transfer of ownership or an
assignment of a Policy, or designation of an Annuitant or Beneficiary who is
not also the Owner, as well as the selection of certain Annuity Commencement
Dates, may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, designation,
selection or assignment of a Policy should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Aggregation Rules. Generally all nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all individual retirement annuities and accounts
under Section 408 of the Code for an individual are aggregated, and generally
all distributions therefrom during a calendar year are treated as one
distribution made as of the end of such year.
Surrenders or Partial Withdrawals. In the case of a partial withdrawal
(including systematic partial withdrawals) under a Nonqualified Policy, the
amount received generally will be includable in gross income to the extent
that it does not exceed the "Income on the Contract," which is generally equal
to the excess of the Policy Value immediately before the partial withdrawal
over the "Investment in the Contract" at that time. However, for these
purposes the Policy Value immediately before a partial withdrawal may have to
be increased by any positive Excess Interest Adjustment which results from
such a partial withdrawal or which could result from a simultaneous surrender,
and may need further adjustments if the aggregation rules apply. There is,
however, no definitive guidance on the proper tax treatment of Excess Interest
Adjustments, and the Owner should
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contact a competent tax adviser with respect to the potential tax consequences
of an Excess Interest Adjustment that may apply in the case of a Non-Qualified
Policy or a Qualified Policy. In the case of a partial withdrawal (including
systematic partial withdrawals) under a Qualified Policy (other than one
qualified under Section 457 of the Code), a ratable portion of the amount
received is generally excludable from gross income, based on the ratio of the
"Investment in the Contract" to the individual's total Policy Value or accrued
benefit under the retirement plan at the time of each such payment. For a
Qualified Policy, the "Investment in the Contract" can be zero. Special tax
rules may be available for certain distributions from a Qualified Policy. In
the case of a surrender under a Nonqualified Policy or a Qualified Policy, the
amount received generally will be taxable only to the extent it exceeds the
"Investment in the Contract", unless the aggregation rules apply.
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general only a portion of
the Annuity Payments received after the Annuity Commencement Date will be
includable in the gross income of the recipient.
For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected return resulting from the
Annuity Payments for the term of the payments. The remainder of each Annuity
Payment is includable in gross income. Once the "Investment in the Contract"
has been fully recovered, the full amount of any additional Annuity Payments
received is includable in gross income.
For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. The remainder of each
Annuity Payment is includable in gross income. Once the "Investment in the
Contract" has been fully recovered, the full amount of any additional Annuity
Payments is includable in gross income.
Where an Owner allocates a portion of the Adjusted Policy Value on the
Annuity Commencement Date to more than one annuity payment option (fixed or
variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
PFL makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of annuity payment options. Instead, any Owner is
advised to consult a competent tax adviser as to the potential tax effects of
allocating any amount of Adjusted Policy Value to any particular annuity
payment option.
If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment
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in the Contract" as of the Annuity Commencement Date over the aggregate amount
of Annuity Payments received on or after the Annuity Commencement Date that
was excluded from gross income is allowable as a deduction for the last
taxable year of the Annuitant.
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a surrender,
as described above, or (2) if distributed under an Annuity Payment Option,
they are taxed in the same manner as Annuity Payments, as described above. For
these purposes, the "Investment in the Contract" is not affected by the
Owner's or Annuitant's death. That is, the "Investment in the Contract"
remains generally the total premium payments less amounts received which were
not includable in gross income.
Penalty Taxes. In the case of any amount received or deemed received from
the Policy, e.g., upon a surrender of a Policy (including systematic
withdrawals) or a deemed distribution under a Policy resulting from a pledge,
assignment or agreement to pledge or assign or an Annuity Payment with respect
to a Policy, there may be imposed on the recipient a federal penalty tax equal
to 10% of the amount includable in gross income. The penalty tax generally
will not apply to any distribution: (i) made on or after the date on which the
taxpayer attains age 59 1/2; (ii) made as a result of the death of the holder
(generally the Owner); (iii) attributable to the disability of the taxpayer;
or (iv) which is part of a series of substantially equal periodic payments
made (not less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and the taxpayer's beneficiary. Other rules may apply to Qualified Policies.
Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided at the time distributions are
requested or made. For certain Qualified Policies, certain distributions are
subject to mandatory withholding.
Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into our Policy administration procedures. Owners,
participants and beneficiaries are responsible for
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determining that contributions, distributions and other transactions with
respect to the Policies comply with applicable law.
PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.
Individual Retirement Annuities. In order to qualify as an individual
retirement annuity under Section 408(b) of the Code, a Policy must contain
certain provisions: (i) the Owner must be the Annuitant; (ii) the Policy
generally is not transferable by the Owner, e.g., the Owner may not designate
a new Owner, designate a Contingent Owner or assign the Policy as collateral
security; (iii) the total Premium Payments for any calendar year may not
exceed $2,000, except in case of a rollover amount or contribution under
Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code; (iv) Annuity
Payments or partial withdrawals must begin no later than April 1 of the
calendar year following the calendar year in which the Annuitant attains age
70 1/2; (v) an Annuity Payment Option with a Period Certain that will
guarantee Annuity Payments beyond the life expectancy of the Annuitant and the
Beneficiary may not be selected; and (vi) certain payments of Death Benefits
must be made in the event the Annuitant dies prior to the distribution of the
Policy Value. Policies intended to qualify as individual retirement annuities
under Section 408(b) of the Code contain such provisions.
Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity ("IRA") should be invested in a life
insurance contract, but the regulations thereunder allow such funds to be
invested in an annuity contract that provides a death benefit that equals the
greater of the premiums paid or the cash value for the contract. The Policy
provides an enhanced death benefit that could exceed the amount of such a
permissible death benefit, but it is unclear to what extent such an enhanced
death benefit could disqualify the Policy under Section 408 of the Code. The
Internal Revenue Service has not reviewed the Policy for qualification as an
IRA, and has not addressed in a ruling of general applicability whether an
enhanced death benefit provision, such as the provision in the Policy,
comports with IRA qualification requirements.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after
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attainment of age 59 1/2, separation from service, disability, or financial
hardship, except that income attributable to elective contributions may not be
distributed in the case of hardship.
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans. Sections
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans for employees and self-employed individuals to
establish qualified plans for themselves and their employees. Such retirement
plans may permit the purchase of the Policies to accumulate retirement
savings. Adverse tax consequences to the plan, the participant or both may
result if the Policy is assigned or transferred to any individual as a means
to provide benefit payments.
Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Policies can be used with
such plans. Under such plans a participant may specify the form of investment
in which his or her participation will be made. All such investments, however,
are owned by, and are subject to, the claims of the general creditors of the
sponsoring employer. Depending on the terms of the particular plan, the
employer may be entitled to draw on deferred amounts for purposes unrelated to
its Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is
not a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Annuity Purchase Value as of the close of the
taxable year and all previous distributions under the Policy over (ii) the sum
of the Premium Payments paid for the taxable year and any prior taxable year
and the amounts includable in gross income for any prior taxable year with
respect to the Policy. For these purposes, the Policy Value at year end may
have to be increased by any positive Excess Interest Adjustment which could
result from a surrender at such time. There is, however, no definitive
guidance on the proper tax treatment of Excess Interest Adjustments, and the
Owner should contact a competent tax adviser with respect to the potential tax
consequences of an Excess Interest Adjustment. Notwithstanding the preceding
sentences in this paragraph, Section 72(u) of the Code does not apply to (i) a
Policy the nominal Owner of which is not a natural person but the beneficial
Owner of which is a natural person, (ii) a Policy acquired by the estate of a
decedent by reason of such decedent's death, (iii) a Qualified Policy (other
than one qualified under Section 457) or (iv) a single-payment annuity the
Annuity Commencement Date for which is no later than one year from the date of
the single Premium Payment; instead, such Policies are taxed as described
above under the heading "Taxation of Annuities."
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Possible Changes in Taxation. In past years, legislation has been proposed
in the U.S. Congress that would have adversely modified the federal taxation
of certain annuities. For example, one such proposal would have changed the
tax treatment of non-qualified annuities that did not have "substantial life
contingencies" by taxing income as it is credited to the annuity. Although as
of the date of this Prospectus Congress was not actively considering any
legislation regarding the taxation of annuities, there is always the
possibility that the tax treatment of annuities could change by legislation or
other means (such as IRS regulations, revenue rulings, judicial decisions,
etc.). Moreover, it is also possible that any change could be retroactive
(that is, effective prior to the date of the change).
DISTRIBUTOR OF THE POLICIES
AEGON USA Securities, Inc., an affiliate of PFL, is the principal
underwriter of the Policies. AEGON USA Securities, Inc. has entered or will
enter into one or more agreements with various broker-dealers for the
distribution of the Policies. Commissions on Policy sales are paid to
broker/dealers. Commissions payable to broker/dealers will be up to 6% of
Premium Payments, or 5% plus an annual continuing fee based on Policy Values.
In addition, certain broker/dealers may receive additional commissions,
expense allowances, and additional annual continuing fees based upon sales
volume, agent or service training responsibilities, and other factors. The
Distribution Financing Charge will be used by PFL to support these activities
and reimbursements. These commissions are not deducted from Premium Payments,
they are paid by PFL.
VOTING RIGHTS
To the extent required by law, PFL will vote the Underlying Funds shares
held by the Mutual Fund Account at regular and special shareholder meetings of
the Underlying Funds in accordance with instructions received from persons
having voting interests in the portfolios (although the Underlying Funds do
not hold regular annual shareholders' meetings). If, however, the 1940 Act or
any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result PFL determines that it is permitted to
vote the Underlying Funds' shares in its own right, it may elect to do so.
Before the Annuity Commencement Date, the Policy Owner holds the voting
interest in the selected Portfolios. The number of votes that an Owner has the
right to instruct will be calculated separately for each Subaccount. The
number of votes that an Owner has the right to instruct for a particular
Subaccount will be determined by dividing the Owner's Policy Value in the
Subaccount by the net asset value per share of the corresponding Portfolio in
which the Subaccount invests. Fractional shares will be counted.
After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as
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Annuity Payments are made and as the reserves for the Policy decrease. The
person's number of votes will be determined by dividing the reserve for the
Policy allocated to the applicable Subaccount by the net asset value per share
of the corresponding Portfolio. Fractional shares will be counted.
The number of votes that the Owner or person receiving income payments has
the right to instruct will be determined as of the date established by the
Underlying Funds for determining shareholders eligible to vote at the meeting
of the Underlying Funds. PFL will solicit voting instructions by sending
Owners or other persons entitled to vote written requests for instructions
prior to that meeting in accordance with procedures established by the
Underlying Funds. Portfolio shares as to which no timely instructions are
received and shares held by PFL in which Owners or other persons entitled to
vote have no beneficial interest will be voted in proportion to the voting
instructions that are received with respect to all Policies participating in
the same Subaccount.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Mutual Fund Account is a party
or to which the assets of the Account are subject. PFL is not involved in any
litigation that is of material importance in relation to its total assets or
that relates to the Mutual Fund Account.
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STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus.
The following is the Table of Contents for that Statement:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non-Participating........................................................ 5
Amendments............................................................... 5
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
Investment Experience...................................................... 6
State Regulation of PFL.................................................... 11
Administration............................................................. 11
Records and Reports........................................................ 11
Distribution of the Policies............................................... 11
Custody of Assets.......................................................... 11
Historical Performance Data................................................ 12
Money Market Yields...................................................... 12
Other Subaccount Yields.................................................. 13
Total Returns............................................................ 13
Other Performance Data................................................... 14
Hypothetical Performance Data............................................ 14
Legal Matters.............................................................. 15
Independent Auditors....................................................... 15
Other Information.......................................................... 15
Financial Statements....................................................... 15
</TABLE>
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APPENDIX A
EXCESS INTEREST ADJUSTMENT(1)
The formula which will be used to determine the Excess Interest Adjustment
(EIA) is:
S*(G - C)* (M/12)
S= Gross amount being withdrawn that is subject to the EIA
G= Guaranteed Interest Rate in effect for the policy
C= Current Guaranteed Interest Rate then being offered on new premiums for the
next longer option period than "M". If this policy form or such an option
period is no longer offered, "C" will be the U.S. Treasury rate for the
next longer maturity (in whole years) than "M" on the 25th day of the
previous calendar month, plus up to 2%.
M= Number of months remaining in the current option period, rounded up to the
next higher whole number of months.
EXAMPLE 1 (SURRENDER, RATES INCREASE BY 3%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Surrender: Middle of Contract Year 3
Policy Value at middle of Contract
Year 3 = 50,000* (1.055) (caret) 2.5 = 57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) (caret) 2.5 = 53,834.80
Excess Interest Adjustment
G = .055
C = .085
M = 30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 51,445.06* (.055 - .085)* (30/12)
= -3,858.38, but Excess Interest
Adjustment cannot cause the Adjusted
Policy Value to fall below the floor,
so the adjustment is limited to
53,834.80 - 57,161.18 = -3,326.38
Adjusted Policy Value ("APV") = APV + EIA = 57,161.18 +(-3,326.38) =
53,834.80
- ----------------------------------
(1) *represents multiplication;
(caret) represents exponentiation.
A-1
<PAGE>
Surrender Charges = (50,000 - 5,716.12)* .05
= 2,214.19
Net Surrender Value at middle of
Contract Year 3 = 53,834.80 - 2,214.19
= 51,620.61
EXAMPLE 2 (SURRENDER, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Surrender: Middle of Contract Year 3
Policy Value at middle of Contract = 50,000* (1.055) (caret) 2.5 =
Year 3 57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) (caret) 2.5 =
53,834.80
Excess Interest Adjustment
G = .055
C = .045
M = 30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 51,445.06* (.055 - .045)* (30/12)
= 1,286.13
Adjusted APV = 57,161.18 + 1,286.13 = 58,447.31
Surrender Charges = (50,000 - 5,716.12)* .05
= 2,214.19
Net Surrender Value at middle of
Contract Year 3 = 58,447.31 - 2,214.19
= 56,233.12
A-2
<PAGE>
On a partial withdrawal, PFL will pay the policy holder the full amount of
withdrawal requested (as long as the Policy Value is sufficient). Surrender
Charge free/adjustment free partial withdrawals will reduce the APV by the
amount withdrawn. Amounts withdrawn in excess of the Surrender Charge
free/adjustment free portion will reduce the APV by an amount equal to:
X - Y+Z
X= Excess Partial Withdrawal
Y= Excess Interest Adjustment = (X)*(G-C)*(M/12) where G, C, and M are defined
above.
Z= Surrender Charge on X - Y.
EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Wtihdrawal: $20,000; Middle of Contract Year 3
Policy Value at middle of Contract
Year 3
Penalty Free Amount at middle of
Contract Year 3 = 50,000* (1.055) (caret) 2.5 =
57,161.18
= 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge (SC) Adjustment
X= 20,000 - 5,716.12 = 14,283.88
G= .055
C= .065
M= 30
Y= 14,283.88* (.055 - .065)* (30/12) = -357.10
Z= .05* (20,000 - 5,716.12 - (-357.10)) = 732.05
Reduction to APV for Excess
Withdrawal: = X - Y + Z
= 14,283.88 - (-357.10) + 732.05
= 15,373.03
Remaining Policy Value at middle of Contract Year 3
= 57,161.18 - 5,716.12 - 15,373.03
= 36,072.03
A-3
<PAGE>
EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate:
5.50% per annum
Partial Withdrawal: $20,000; Middle of Contract Year 3
Policy Value at middle of
Contract Year 3 = 50,000* (1,055) (caret) 2.5 =
57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge Adjustment
X= 20,000 - 5,716.12 = 14,283.88
G= .055
C= .045
M= 30
Y= 14.283.88*(.055 - .045)*(30/12) = 357.10
Z= .05* (20,000 - 5,716.12 - 357.10) = 696.34
Reduction to APV for Excess Withdrawal:
= X-Y + Z
= 14,283.88 - 357.10 + 696.34
= 14,623.12
Remaining Policy Value at
middle of Contract Year 3 = 57,161.18 - 5,716.12 - 14,623.12
= 32,821.94
A-4
<PAGE>
APPENDIX B
The dates shown below are the approximate first issue dates of the various
versions of the Policy. These dates will vary by state in many cases. This
Appendix describes certain of the more significant differences in features of
the various versions of the Policy. There may be additional variations. Please
see your actual policy and any attachments for determining your specific
coverage.
<TABLE>
- ------------------------------------------------------------
<S> <C>
Policy Form/Endorsement Approximate First Issue Date
- ------------------------------------------------------------
AV201 101 65 189 (Policy Form) January 1991
- ------------------------------------------------------------
AE830 292 (endorsement) May 1992
- ------------------------------------------------------------
AE847 394 (endorsement) June 1994
- ------------------------------------------------------------
AE871 295 (endorsement) May 1995
- ------------------------------------------------------------
AV254 101 87 196 (Policy Form) June 1996
- ------------------------------------------------------------
AE909 496 (endorsement) June 1996
- ------------------------------------------------------------
AE890 196 (endorsement) June 1996
- ------------------------------------------------------------
AV320 101 99 197 (Policy Form) Anticipated: May 1997
- ------------------------------------------------------------
AE945 197 (endorsement) Anticipated: May 1997
- ------------------------------------------------------------
</TABLE>
B-1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Product Feature AV201 101 65 189 AV201 101 65 AV201 101 65 AV254 101 87 AV320 101 99 197, and
189, 189, 196, AE945
AE830 292, and AE847 394, and AE909 496, and 197
AE847 394 AE871 295 AE890 196
- -------------------------------------------------------------------------------------------------------------------------
Excess Interest Adjust- N/A N/A N/A yes yes
ment
- -------------------------------------------------------------------------------------------------------------------------
Guaranteed Minimum Death Total Premiums Paid, 5% Annually 5% Annually 5% Annually 5% Annually
Benefit Option(s) less any partial Compounding Compounding Compounding Compounding (Option
withdrawals and any (Option A). (Option A) or (Option A) or A), Annual Step-Up
surrender charges Annual Step-Up Annual Step-Up (Option B), or Return
made before death, (Option B). (Option B). of Premium (Option
accumulated at 4% to Option A is Option A is C). Option A is only
the date we receive only available only available available if Owner
due proof of death or if Owner and if Owner and and Annuitant are
the Policy Value on Annuitant are Annuitant are both under age 75.
the date we receive both under age both under age Option B is only
due proof of death, 75. 75. available if Owner
which ever is and Annuitant are
greater. under age 81.
- -------------------------------------------------------------------------------------------------------------------------
Guaranteed Period Op- 1 and 3 year 1 and 3 year 1 and 3 year 1, 3, 5, and 7 1, 3, 5, and 7 year
tions guaranteed periods guaranteed guaranteed year guaranteed guaranteed periods
(available in the Fixed available. periods periods periods available.
Account) available. available. available.
- -------------------------------------------------------------------------------------------------------------------------
Minimum effective annual 4% 4% 4% 3% 3%
interest rate applicable
to the fixed account
- -------------------------------------------------------------------------------------------------------------------------
Asset Rebalancing N/A N/A N/A Yes Yes
- -------------------------------------------------------------------------------------------------------------------------
Death Proceeds Greater of 1) the Greater of (a) Greatest of (a) Greatest of (a) Greatest of (a)
Policy Value on the Policy Value Annuity Annuity Policy Value, (b)
date we receive due and (b) 5% Purchase Value, Purchase Value, Cash Value, and (c)
proof of death, or 2) Annually (b) Cash Value, (b) Cash Value, Guaranteed Minimum
the total premiums Compounding and (c) and (c) Death Benefit.
paid for this policy, Death Benefit Guaranteed Guaranteed
less any partial Minimum Death Minimum Death
withdrawals and any Benefit Benefit.
surrender charges
made before death,
accumulated at 4%
interest per annum to
the date we receive
due proof of death
- -------------------------------------------------------------------------------------------------------------------------
Distribution Financing N/A N/A N/A N/A Applicable
Charge
- -------------------------------------------------------------------------------------------------------------------------
Dollar Cost Averaging N/A N/A N/A yes yes
Fixed
Account Option
- -------------------------------------------------------------------------------------------------------------------------
Service Charge $35 assessed on each $35 assessed Assessed only Assessed only Assessed either on a
Policy Anniversary. on each Policy on a Policy on a Policy Policy Anniversary or
Not deducted from the Anniversary. Anniversary; Anniversary; on Surrender; Waived
Fixed Account. Not deducted Waived if Sum Waived if Sum if Sum of Premium
from the Fixed of Premium of Premium Payments less partial
Account. Payments less Payments less withdrawals or the
partial partial Policy Value is at
withdrawals is withdrawals is least $50,000 on the
at least at least Policy Anniversary or
$50,000 on the $50,000 on the at the time of
Policy Policy Surrender. The
Anniversary. Anniversary. Service Charge is
Not deducted Not deducted deducted pro-rata
from the Fixed from the Fixed from the Fixed
Account. Account. Account and the Sub-
Accounts of the
Mutual Fund.
- -------------------------------------------------------------------------------------------------------------------------
Nursing Care and Termi- N/A yes yes yes yes
nal
Condition Withdrawal Op-
tion
</TABLE>
B-2
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE ENDEAVOR VARIABLE ANNUITY
Issued through
PFL ENDEAVOR VARIABLE
ANNUITY ACCOUNT
Offered by
PFL LIFE INSURANCE COMPANY
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Endeavor Variable Annuity (the "Policy") offered
by PFL Life Insurance Company. You may obtain a copy of the Prospectus dated May
1, 1997 by calling 1-800-525-6205, or by writing to the Administrative and
Service Office, Financial Markets Division--Variable Annuity Dept., 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001. Terms used in the current
Prospectus for the Policy are incorporated in this Statement of Additional
Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUSES FOR THE POLICY, ENDEAVOR SERIES
TRUST AND THE GROWTH PORTFOLIO OF THE WRL SERIES FUND, INC.
Dated: May 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Policy--General Provisions........................................... 3
Owner............................................................... 3
Entire Policy....................................................... 3
Delay of Payment and Transfers...................................... 3
Misstatement of Age or Sex.......................................... 4
Reallocation of Policy Values After the Annuity Commencement Date... 4
Assignment.......................................................... 4
Evidence of Survival................................................ 4
Non-Participating................................................... 5
Amendments.......................................................... 5
Federal Tax Matters (49)................................................. 5
Tax Status of the Policy............................................ 5
Taxation of PFL..................................................... 6
Investment Experience.................................................... 6
State Regulation of PFL.................................................. 11
Administration........................................................... 11
Records and Reports...................................................... 11
Distribution of the Policies (55)........................................ 11
Custody of Assets........................................................ 11
Historical Performance Data (19)......................................... 12
Money Market Yields................................................. 12
Other Subaccount Yields............................................. 13
Total Returns....................................................... 13
Other Performance Data.............................................. 14
Hypothetical Performance Data....................................... 14
Legal Matters............................................................ 15
Independent Auditors..................................................... 15
Other Information........................................................ 15
Financial Statements (18)................................................ 15
</TABLE>
(Numbers in parenthesis indicate corresponding pages of the Prospectus).
2
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about PFL and the Policy which may be of
interest to an Owner.
THE POLICY--GENERAL PROVISIONS
Owner
The Policy shall belong to the Owner upon issuance of the Policy after
completion of an application and delivery of the initial Premium Payment. While
the Annuitant is living, the Owner may: (1) assign the Policy; (2) surrender the
Policy; (3) amend or modify the Policy with PFL's consent; (4) receive annuity
payments or name a Payee to receive the payments; and (5) exercise, receive and
enjoy every other right and benefit contained in the Policy. The exercise of
these rights may be subject to the consent of any assignee or irrevocable
Beneficiary; and of the Owner's spouse in a community of marital property state.
A Successor Owner can be named in the Policy application or in a Written
Notice. The Successor Owner will become the new Owner upon the Owner's death, if
the Owner predeceases the Annuitant. If no Successor Owner survives the Owner
and the Owner predeceases the Annuitant, the Owner's estate will become the
Owner.
The Owner may change the ownership of the Policy in a Written Notice. When
this change takes effect, all rights of ownership in the Policy will pass to the
new Owner. A change of ownership may have adverse tax consequences.
When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any payment
PFL has made or action PFL has taken before recording the change. Changing the
Owner or naming a new Successor Owner cancels any prior choice of Successor
Owner, but does not change the designation of the Beneficiary or the Annuitant.
If ownership is transferred (except to the Owner's spouse) because the
Owner dies before the Annuitant, the Cash Value generally must be distributed to
the Successor Owner within five years of the Owner's death, or payments must be
made for a period certain or for the Successor Owner's lifetime so long as any
period certain does not exceed that Successor Owner's life expectancy, if the
first payment begins within one year of the Owner's death.
Entire Policy
The Policy and any endorsements thereon and the Policy application
constitute the entire contract between PFL and the Owner. All statements in the
application are representations and not warranties. No statement will cause the
Policy to be void or to be used in defense of a claim unless contained in the
application.
Delay of Payment and Transfers
Payment of any amount due from the Mutual Fund Account in respect of a
surrender, the Death Benefit or the death of the Owner of a Nonqualified Policy
generally will occur within seven business days from the date the Written Notice
(and any other required documentation or information) is received, except that
PFL may be permitted to defer such payment from the Mutual Fund Account if: (1)
the New York Stock Exchange is closed for other than usual weekends or holidays
or trading on the Exchange is otherwise restricted; or (2) an emergency exists
as defined by the SEC or the SEC requires that trading be restricted; or (3) the
SEC permits a delay for the protection of Owners. In addition, transfers of
amounts from the Subaccounts may be deferred under these circumstances.
3
<PAGE>
Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See page 26 of the Policy Prospectus.
Misstatement of Age or Sex
If the age or sex of the Annuitant has been misstated, PFL will change the
annuity benefit payable to that which the Premium Payments would have purchased
for the correct age or sex. The dollar amount of any underpayment made by PFL
shall be paid in full with the next payment due such person or the Beneficiary.
The dollar amount of any overpayment made by PFL due to any misstatement shall
be deducted from payments subsequently accruing to such person or Beneficiary.
Any underpayment or overpayment will include interest at 5% per year, from the
date of the wrong payment to the date of the adjustment. The age of the
Annuitant may be established at any time by the submission of proof satisfactory
to PFL.
Reallocation of Annuity Purchase Values After the Annuity Commencement Date
After the Annuity Commencement Date, the Policy Owner may reallocate the
value of a designated number of Annuity Units of a Subaccount of the Mutual Fund
Account then credited to a Policy into an equal value of Annuity Units of one or
more other Subaccounts of the Mutual Fund Account, or the Fixed Account. The
reallocation shall be based on the relative value of the Annuity Units of the
Account(s) or Subaccount(s) at the end of the Business Day on the next payment
date. The minimum amount which may be reallocated is the lesser of (1) $10 of
monthly income or (2) the entire monthly income of the Annuity Units in the
Account or Subaccount from which the transfer is being made. If the monthly
income of the Annuity Units remaining in an Account or Subaccount after a
reallocation is less than $10, PFL reserves the right to include the value of
those Annuity Units as part of the transfer. The request must be in writing to
PFL's Administrative and Service Office. There is no charge assessed in
connection with such reallocation. PFL reserves the right to limit the number of
times a reallocation of Annuity Purchase Value may be made in any given Policy
Year.
Assignment
During the lifetime of the Annuitant the Policy Owner may assign any rights
or benefits provided by the Policy. An assignment will not be binding on PFL
until a copy has been filed at its Administrative and Service Office. The rights
and benefits of the Policy Owner and Beneficiary are subject to the rights of
the assignee. PFL assumes no responsibility for the validity or effect of any
assignment. Any claim made under an assignment shall be subject to proof of
interest and the extent of the assignment. An assignment may have tax
consequences.
Unless the Policy Owner so directs by filing written notice with PFL, no
Beneficiary may assign any payments under the Policy before they are due. To the
extent permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.
Evidence of Survival
PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be made
until PFL receives such evidence.
Non-Participating
4
<PAGE>
The Policy will not share in PFL's surplus earnings; no dividends will be
paid.
Amendments
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No Registered Representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of
the Code, regulations or published rulings. A Policy Owner can refuse such a
change by giving Written Notice, but a refusal may result in adverse tax
consequences.
FEDERAL TAX MATTERS
Tax Status of the Policy
Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
ss. 1.817-5) apply a diversification requirement to each of the Subaccounts of
the Mutual Fund Account. The Mutual Fund Account, through the Underlying Funds
and their Portfolios, intends to comply with the diversification requirements of
the Treasury. PFL has entered into agreements regarding participation in the
Endeavor Series Trust and WRL Series Fund, Inc. that require the Underlying
Funds and their Portfolios to be operated in compliance with the Treasury
regulations.
Owner Control. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for Federal income tax purposes, of the
assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contractowner's gross income. Several years
ago, the IRS state in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contractowner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. More recently, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
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, 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 underlying assets."
The ownership rights under the contract are similar to, but different
in certain respects from those described by the IRS in rulings in which it was
determined that contractowners were not owners of separate account assets. For
example, the Owner of a Policy has the choice of one or more Subaccounts in
which to allocate premiums and Policy Values, and may be able to transfer among
these accounts more frequently than in such rulings. These differences could
result in policyowners being treated as the owners of the assets of the Mutual
Fund Account. In addition, PFL does not know what standards will be set forth,
if any, in the regulations or rulings with the Treasury Department has stated it
expects to issue. PFL therefore reserves the right to modify the Policies as
necessary to attempt to prevent the policyowners from being considered the
owners of a pro rata share of the assets of the Mutual Fund Account.
Distribution Requirements. The Code also requires that Nonqualified
Policies contain specific provisions for distribution of Policy proceeds upon
the death of any Owner. In order to be treated as an annuity contract for
federal income tax purposes, the Code requires that such Policies provide that
if any Owner dies on or after the Annuity
5
<PAGE>
Commencement Date and before the entire interest in the Policy has been
distributed, the remaining portion must be distributed at least as rapidly as
under the method in effect on such Owner's death. If any Owner dies before the
Annuity Commencement Date, the entire interest in the Policy must generally be
distributed within 5 years after such Owner's date of death or be used to
purchase an immediate annuity under which payments will begin within one year of
such Owner's death and will be made for the life of the Beneficiary or for a
period not extending beyond the life expectancy of the Beneficiary. However, if
upon such Owner's death prior to the Annuity Commencement Death, such Owner's
surviving spouse becomes the sole new Owner under the Policy, then the Policy
may be continued with the surviving spouse as the new Owner. If any Owner is not
a natural person, then for purposes of these distribution requirements, the
primary Annuitant shall be treated as the Owner and any death or change of such
primary Annuitant shall be treated as the Death of the Owner. The Nonqualified
Policies contain provisions intended to comply with these requirements of the
Code. No regulations interpreting these requirements of the Code have yet been
issued and thus no assurance can be given that the provisions contained in the
Policies satisfy all such Code requirements. The provisions contained in the
Policies will be reviewed and modified if necessary to assure that they comply
with the Code requirements when clarified by regulation or otherwise.
Taxation of PFL
PFL at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund Account is treated as part of PFL and,
accordingly, will not be taxed separately as a "regulated investment company"
under Subchapter M of the Code. PFL does not expect to incur any federal income
tax liability with respect to investment income and net capital gains arising
from the activities of the Mutual Fund Account retained as part of the reserves
under the Policy. Based on this expectation, it is anticipated that no charges
will be made against the Mutual Fund Account for federal income taxes. If, in
future years, any federal income taxes are incurred by PFL with respect to the
Mutual Fund Account, PFL may make a charge to the Mutual Fund Account.
INVESTMENT EXPERIENCE
An "Investment Experience Factor" is used to determine the value of
Accumulation Units and Annuity Units, and to determine annuity payment rates.
Accumulation Units
Upon allocation to the selected Subaccount of the Mutual Fund Account,
Premium Payments are converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited is determined by dividing the dollar
amount allocated to each Subaccount by the value of an Accumulation Unit for
that Subaccount as next determined after the Premium Payment is received at the
Administrative and Service Office or, in the case of the initial Premium
Payment, when the Policy application is completed, whichever is later. The value
of an Accumulation Unit was arbitrarily established at $1 (except the WRL Growth
Subaccount which was established at $10) at the inception of each Subaccount.
Thereafter, the value of an Accumulation Unit is determined as of the close of
trading on each day the New York Stock Exchange and PFL's Administrative and
Service Office are open for business.
An index (the "Investment Experience Factor") which measures the investment
performance of a Subaccount during a Valuation Period is used to determine the
value of an Accumulation Unit for the next subsequent Valuation Period. The
Investment Experience Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Policy Owner bears this
investment risk. The Net Investment Performance of a Subaccount and deduction of
certain charges affect the Accumulation Unit Value.
6
<PAGE>
The Investment Experience Factor for any Subaccount for any Valuation
Period is determined by dividing (a) by (b) and subtracting (c) from the result,
where:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
Subaccount determined at the end of the current Valuation Period, plus
(2) The per share amount of any dividend or capital gain
distribution made with respect to the shares held in the Subaccount if
the ex-dividend date occurs during the current Valuation Period, plus
or minus
(3) a per share credit or charge for any taxes determined by PFL
to have resulted from the investment operations of the Subaccount.
(b) is the net result of:
the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation
Period; and
(c) is the charge for Mortality and Expense Risk during the Valuation
Period (equal on an annual basis to 1.25% for both the 5% Annually
Compounding Death Benefit and the Annual Step-Up Death Benefit and 1.10%
for the Return of Premium Death Benefit) of the daily net asset value of
the Subaccount, plus the .15% Administrative Charge plus the Distribution
Financing Charge of .15%. The Distribution Financing Charge is assessed
only during the first seven Policy Years. The cumulative amount of the
Distribution Financing Charge, plus the Surrender Charge, will never exceed
8.5% of the cumulative Premium Payments for a Policy.
Illustration of Accumulation Unit Value Calculations
Formula and Illustration for Determining
the Investment Experience Factor
Assume either the 5% Annually Compounding Death Benefit
or the Annual Step-Up Death Benefit is in effect
Investment Experience Factor = (A + B - C) - E
----------
(D)
Where: A = The Net Asset Value of an Underlying Fund share as of the
end of the current Valuation Period. Assume A = $11.57
B = The per share amount of any dividend or capital gains
distribution since the end of the immediately preceding
Valuation Period.
Assume B = 0
C = The per share charge or credit for any taxes reserved for at
the end of the current Valuation Period.
Assume C = 0
7
<PAGE>
D = The Net Asset Value of an Underlying Fund share at the end
of the immediately preceding Valuation Period.
Assume D = $11.40
E = The daily deduction for the Mortality and Expense Risk Fee,
the Administrative Charge, and the Distribution Financing
Charge, which totals 1.55% on an annual basis for the first
seven years and 1.40 % thereafter.
On a daily basis, F equals .0000421409 for the first seven
years, and .0000380909 thereafter.
Then, the Investment Experience Factor =
(11.57 + 0 - 0) - .0000421409 = Z = 1.0148701398 for the first seven years and
- ---------------
(11.40)
(11.57 + 0 - 0) - .0000380909 = 1.0148741898 thereafter.
- ---------------
(11.40)
Formula and Illustration for Determining Accumulation Unit Value
Accumulation Unit Value = A x B
Where: A = The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume = $ X
B = The Net Investment Factor for the current Valuation Period.
Assume = Y
Then, the Accumulation Unit Value = $ X x Y = $ Z
Annuity Unit Value And Annuity Payment Rates
The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Subaccount
exceeds the assumed interest rate of 5% annually. Conversely, Annuity Unit
Values fall if the net investment performance of the Subaccount is less than the
assumed rate. The value of a variable Annuity Unit in each Subaccount was
established at $1.00 on the date operations began for that Subaccount. The value
of a variable Annuity Unit on any subsequent Business Day is equal to (a)
multiplied by (b) multiplied by (c), where:
(a) is the variable Annuity Unit Value on the immediately
preceding Business Day;
(b) is the net investment factor of the valuation period; and
(c) is the investment result adjustment factor for the valuation
period.
8
<PAGE>
The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.
The net investment factor for the Policy used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is determined
by dividing (i) by (ii) and subtracting (iii) from the result, where:
(i) is the result of:
(1) the net asset value of a fund share held in the Mutual
Fund Account for that Subaccount determined at the end of the
current valuation period; plus
(2) the per share amount of any dividend or capital gain
distributions made by the fund for shares held in the Mutual Fund
Account for that Subaccount if the ex-dividend date occurs during the
valuation period.
(ii) is the net asset value of a fund share held in the Mutual Fund
Account for that Subaccount determined as of the end of the immediately
preceding valuation period.
(iii) is a factor representing the Mortality and Expense Risk Fee, the
Administrative Charge and the Distribution Financing Charge (only applies
during the first seven policy years and only applies before the Annuity
Commencement Date). This factor is equal, on an annual basis and assuming
the Distribution Financing Charge is still applicable, to 1.55% for the 5%
Annually Compounding Death Benefit and the Annual Step-Up Death Benefit
(1.40% for the Return of Premium Death Benefit) of the daily net asset
value of a fund share held in the Mutual Fund Account for that Subaccount.
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date. The
Policy also contains a table for determining the adjusted age of the Annuitant.
Illustration of Calculations for Annuity Unit Value
and Variable Annuity Payments
Formula and Illustration for Determining Annuity Unit Value
Annuity Unit Value = A x B x C
Where: A = Annuity Unit Value for the immediately preceding
Valuation Period.
Assume = $ X
B = Investment Experience Factor for the Valuation Period for
which the Annuity Unit Value is being calculated.
Assume = Y
C = A factor to neutralize the assumed interest rate of 5% built
into the Annuity Tables used.
Assume = Z
Then, the Annuity Unit Value is: $ X x Y x Z = $ Q
9
<PAGE>
Formula and Illustration for Determining Amount
of First Monthly Variable Annuity Payment
First Monthly Variable Annuity Payment = A x B
------
$1,000
Where: A = The Annuity Purchase Value as of the Annuity Commencement
Date.
Assume = $ X
B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according
to the tables contained in the Policy.
Assume = $ Y
Then, the first Monthly Variable Annuity Payment = $ X x $ Y = $ Z
------
1,000
Formula and Illustration for Determining the Number of Annuity
Units Represented by Each Monthly Variable Annuity Payment
Number of Annuity Units = A
-
B
Where: A = The dollar amount of the first monthly Variable Annuity
Payment.
Assume = $ X
B = The Annuity Unit Value for the Valuation Date on which the
first monthly payment is due.
Assume = $ Y
Then, the number of Annuity Units = $ X = Z
---
$ Y
10
<PAGE>
STATE REGULATION OF PFL
PFL is subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of PFL for the preceding year and its financial condition as of the
end of such year. Regulation by the Division of Insurance includes periodic
examination to determine PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
ADMINISTRATION
PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the Mutual Fund Account will be
maintained by PFL. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, PFL will mail to all Policy Owners at
their last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law or
regulation. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.
DISTRIBUTION OF THE POLICIES
The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies.
AEGON USA Securities, Inc., an affiliate of PFL, will be the principal
underwriter of the Policies. AEGON USA Securities, Inc. has entered into
agreements with broker-dealers for the distribution of the Policies. During
1996, 1995, and 1994, the amount paid to AEGON USA Securities, Inc. and/or the
broker-dealers for their services was $19,668,001, $13,569,474, and $19,983,219,
respectively.
CUSTODY OF ASSETS
The assets of each of the Subaccounts of the Mutual Fund Account are held
by PFL. The assets of each of the Subaccounts of the Mutual Fund Account are
segregated and held separate and apart from the assets of the other Subaccounts
and from PFL's general account assets. PFL maintains records of all purchases
and redemptions of shares of the Underlying Funds held by each of the
Subaccounts. Additional protection for the assets of the Mutual Fund Account is
afforded by PFL's fidelity bond, presently in the amount of $5,000,000, covering
the acts of officers and employees of PFL.
11
<PAGE>
HISTORICAL PERFORMANCE DATA
Money Market Yields
PFL may from time to time disclose the current annualized yield of the TCW
Money Market Subaccount, which invests in the TCW Money Market Portfolio, for a
7-day period in a manner which does not take into consideration any realized or
unrealized gains or losses on shares of the TCW Money Market Portfolio or on its
portfolio securities. This current annualized yield is computed by determining
the net change (exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) at the end of the 7-day period in
the value of a hypothetical account having a balance of 1 unit of the TCW Money
Market Subaccount at the beginning of the 7-day period, dividing such net change
in account value by the value of the account at the beginning of the period to
determine the base period return, and annualizing this quotient on a 365-day
basis. The net change in account value reflects (i) net income from the
Portfolio attributable to the hypothetical account; and (ii) charges and
deductions imposed under a Policy that are attributable to the hypothetical
account. The charges and deductions include the per unit charges for the
hypothetical account for (i) the Administrative Charges; and (ii) the Mortality
and Expense Risk Fee and Distribution Financing Charge. Current Yield will be
calculated according to the following formula:
Current Yield = ((NCS-ES)/UV) * (365/7)
Where:
NCS = The net change in the value of the Portfolio (exclusive of
realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) for the 7-day period attributable
to a hypothetical account having a balance of 1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a Policy, the yield for
the TCW Money Market Subaccount will be lower than the yield for the TCW Money
Market Portfolio. The yield calculations do not reflect the effect of any
premium taxes or Surrender Charges that may be applicable to a particular
Policy. Surrender Charges range from 7% to 0% of the amount of premium withdrawn
based on the number of years since payment of the premium.
PFL may also disclose the effective yield of the TCW Money Market
Subaccount for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the base period return according to
the following formula:
Effective Yield = (1 + ((NCS - ES) / UV))/365/7/ - 1
Where:
NCS = The net change in the value of the Portfolio (exclusive of
realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) for the 7-day period attributable
to a hypothetical account having a balance of 1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
12
<PAGE>
The yield on amounts held in the TCW Money Market Subaccount normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The TCW Money Market Subaccount's actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the TCW
Money Market Portfolio, the types and quality of portfolio securities held by
the TCW Money Market Portfolio and its operating expenses. For the seven days
ended December 31, 1996, the yield of the TCW Money Market Subaccount was 2.73%,
and the effective yield was 2.76%.
Other Subaccount Yields
PFL may from time to time advertise or disclose the current annualized
yield of one or more of the Subaccounts of the Mutual Fund Account (except the
TCW Money Market Subaccount) for 30-day periods. The annualized yield of a
Subaccount refers to income generated by the Subaccount over a specific 30-day
period. Because the yield is annualized, the yield generated by a Subaccount
during the 30-day period is assumed to be generated each 30-day period over a
12-month period. The yield is computed by: (i) dividing the net investment
income of the Subaccount less Subaccount expenses for the period, by (ii) the
maximum offering price per unit on the last day of the period times the daily
average number of units outstanding for the period, (iii) compounding that yield
for a 6-month period, and (iv) multiplying that result by 2. Expenses
attributable to the Subaccount include (i) the Administrative Charge and (ii)
the Mortality and Expense Risk Fee and Distribution Financing Charge. The 30-day
yield is calculated according to the following formula:
Yield = 2 x ((((NI - ES)/(U x UV)) + 1)/6/ - 1)
Where:
NI = Net investment income of the Subaccount for the 30-day period
attributable to the Subaccount's unit.
ES = Expenses of the Subaccount for the 30-day period.
U = The average number of units outstanding.
UV = The unit value at the close (highest) of the last day in the
30-day period.
Because of the charges and deductions imposed by the Mutual Fund Account,
the yield for a Subaccount of the Mutual Fund Account will be lower than the
yield for its corresponding Portfolio. The yield calculations do not reflect the
effect of any premium taxes that may be applicable to a particular Policy.
Surrender Charges range from 7% to 0% of the amount of premium withdrawn based
on the number of years since payment of the premium.
The yield on amounts held in the Subaccounts of the Mutual Fund Account
normally will fluctuate over time. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates of
return. A Subaccount's actual yield is affected by the types and quality of its
investments and its operating expenses.
Total Returns
PFL may from time to time also advertise or disclose total returns for one
or more of the Subaccounts of the Mutual Fund Account for various periods of
time. One of the periods of time will include the period measured from the date
the Subaccount commenced operations. When a Subaccount has been in operation for
1, 5 and 10 years, respectively, the total return for these periods will be
provided. Total returns for other periods of time may from
13
<PAGE>
time to time also be disclosed. Total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000 to
the redemption value of that investment as of the last day of each of the
periods. The ending date for each period for which total return quotations are
provided will be for the most recent month end practicable, considering the type
and media of the communication and will be stated in the communication.
Total returns will be calculated using Subaccount Unit Values which PFL
calculates on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deductions for the Mortality and Expense Risk Fee,
the Distribution Financing Charge, and the Administrative Charge. Total return
calculations will reflect the effect of Surrender Charges that may be applicable
to a particular period. The total return will then be calculated according to
the following formula:
P(1 + T)/n/ = ERV
Where:
T = The average annual total return net of Subaccount recurring charges.
ERV = The ending redeemable value of the hypothetical account at the end of the
period.
P = A hypothetical initial payment of $1,000.
N = The number of years in the period.
Other Performance Data
PFL may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above. The
non-standard format will be identical to the standard format except that the
Surrender Charge percentage will be assumed to be 0%.
PFL may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the Surrender
Charge percentage will be 0%.
CTR = (ERV / P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of
the period.
P = A hypothetical initial payment of $1,000.
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.
Hypothetical Performance Data
From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date the Mutual Fund Account
commenced operations. Such performance information for the Subaccounts will be
calculated based on the performance of the various Portfolios and the assumption
that the Subaccounts were in
14
<PAGE>
existence for the same periods as those indicated for the Portfolios, with the
level of Policy charges that were in effect at the inception of the Subaccounts.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan L.L.P., of Washington D.C.
INDEPENDENT AUDITORS
The Financial Statements of PFL as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, and the Financial
Statements of PFL Endeavor Variable Annuity Account (which comprises a portion
of the PFL Endeavor VA Separate Account) at December 31, 1996, and for each of
the two years in the period then ended, included in this Statement of Additional
Information have been audited by Ernst & Young LLP, Independent Auditors, 801
Grand Avenue, Suite 3400, Des Moines, Iowa, 50309-2764.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus or this Statement of Additional
Information. Statements contained in the Prospectus and this Statement of
Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the terms
of these documents, reference should be made to the instruments filed with the
Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of the interest of Policy Owners in the Mutual Fund Account will
be affected solely by the investment results of the selected Subaccount(s).
Financial Statements of PFL Endeavor Variable Annuity Account (which comprises a
portion of the PFL Endeavor VA Separate Account) are contained herein. The
Financial Statements of PFL, which are included in this Statement of Additional
Information, should be considered only as bearing on the ability of PFL to meet
its obligations under the Policies. They should not be considered as bearing on
the investment performance of the assets held in the Mutual Fund Account.
15
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND CONTRACT OWNERS OF
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT,
PFL LIFE INSURANCE COMPANY:
We have audited the accompanying balance sheet of The PFL Endeavor Variable
Annuity Account (comprising, respectively, the TCW Money Market, TCW Managed
Asset Allocation, T. Rowe Price International Stock, Value Equity, Dreyfus
Small Cap Value, Dreyfus U.S. Government Securities, T. Rowe Price Equity
Income, T. Rowe Price Growth Stock, Opportunity Value and Growth subaccounts)
as of December 31, 1996, and the related statements of operations and changes
in contract owners' equity for the periods indicated therein. These financial
statements are the responsibility of the Variable Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of mutual fund shares owned as of December 31,
1996 by correspondence with the mutual funds' transfer agent. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting The PFL Endeavor Variable Annuity Account at December
31, 1996, and the results of their operations and changes in their contract
owners' equity for the periods indicated therein in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
January 31, 1997
16
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
T. ROWE T. ROWE T. ROWE
PRICE DREYFUS DREYFUS U.S. PRICE PRICE
INT'L. VALUE SMALL CAP GOV'T. EQUITY GROWTH OPPORTUNITY
STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
-------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3 4 -- -- 1 -- --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
121,702 -- -- -- -- -- -- --
-- 110,548 -- -- -- -- -- --
-- -- 76,482 -- -- -- -- --
-- -- -- 19,823 -- -- -- --
-- -- -- -- 64,935 -- -- --
-- -- -- -- -- 48,731 -- --
-- -- -- -- -- -- 315 --
-- -- -- -- -- -- -- 257,421
------- ------- ------ ------ ------ ------ --- -------
121,702 110,548 76,482 19,823 64,935 48,731 315 257,421
------- ------- ------ ------ ------ ------ --- -------
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======= ======= ====== ====== ====== ====== === =======
-- -- -- -- -- -- -- --
------- ------- ------ ------ ------ ------ --- -------
-- -- -- -- -- -- -- --
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
------- ------- ------ ------ ------ ------ --- -------
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======= ======= ====== ====== ====== ====== === =======
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
Year Ended December 31, 1996, Except as Noted
<TABLE>
<CAPTION>
TCW
TCW MANAGED
MONEY ASSET
MARKET ALLOCATION
TOTAL SUBACCT. SUBACCT.
-------- -------- ----------
<S> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends........................................ $ 27,904 1,245 3,793
Expenses (Note 5):
Administrative fee............................... 443 10 122
Mortality and expense risk charge................ 11,237 365 2,943
-------- ------ ------
Net investment income (loss)................... 16,224 870 728
-------- ------ ------
NET REALIZED AND UNREALIZED CAPITAL GAIN FROM
INVESTMENTS
Net realized capital gain from sales of
investments:
Proceeds from sales.............................. 70,848 24,793 15,228
Cost of investments sold......................... 60,774 24,793 12,264
-------- ------ ------
Net realized capital gain from sales of
investments...................................... 10,074 -- 2,964
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period.......................... 78,863 -- 25,121
End of the period................................ 175,289 -- 52,892
-------- ------ ------
Net change in unrealized
appreciation/depreciation of investments...... 96,426 -- 27,771
-------- ------ ------
Net realized and unrealized capital gain from
investments................................... 106,500 -- 30,735
-------- ------ ------
INCREASE FROM OPERATIONS.......................... $122,724 870 31,463
======== ====== ======
</TABLE>
/1/Period from November 18, 1996 (commencement of operations) to December 31,
1996.
See accompanying Notes to Financial Statements.
18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
T. ROWE T. ROWE T. ROWE
PRICE DREYFUS DREYFUS U.S. PRICE PRICE
INT'L. VALUE SMALL CAP GOV'T. EQUITY GROWTH OPPORTUNITY
STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT./1/ SUBACCT.
- -------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
729 1,976 2,674 436 354 525 -- 16,172
66 42 31 5 15 13 -- 139
1,464 1,198 852 202 540 456 -- 3,217
------ ------ ------ ----- ----- ----- --- ------
(801) 736 1,791 229 (201) 56 -- 12,816
------ ------ ------ ----- ----- ----- --- ------
4,813 3,499 4,065 1,853 970 1,628 37 13,962
4,276 2,344 3,504 1,664 696 1,210 37 9,986
------ ------ ------ ----- ----- ----- --- ------
537 1,155 561 189 274 418 -- 3,976
2,636 12,562 4,426 563 2,266 1,913 -- 29,376
16,143 27,439 15,836 455 9,138 7,517 -- 45,869
------ ------ ------ ----- ----- ----- --- ------
13,507 14,877 11,410 (108) 6,872 5,604 -- 16,493
------ ------ ------ ----- ----- ----- --- ------
14,044 16,032 11,971 81 7,146 6,022 -- 20,469
------ ------ ------ ----- ----- ----- --- ------
13,243 16,768 13,762 310 6,945 6,078 -- 33,285
====== ====== ====== ===== ===== ===== === ======
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (AMOUNTS IN THOUSANDS)
Years Ended December 31, 1996 and 1995, Except as Noted
<TABLE>
<CAPTION>
TCW TCW T. ROWE PRICE
MONEY MANAGED INTERNATIONAL
MARKET ASSET ALLOCATION STOCK
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- --------------- ------------------ ---------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- ------- ------- ------ -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss).................. $ 16,224 18,207 870 816 728 448 (801) 715
Net realized capital
gain.................... 10,074 5,077 -- -- 2,964 2,310 537 270
Net change in unrealized
appreciation/depreciation
of investments.......... 96,426 98,622 -- -- 27,771 31,591 13,507 6,070
-------- ------- ------- ------ -------- -------- ------- ------
Increase from
operations.............. 122,724 121,906 870 816 31,463 34,349 13,243 7,055
-------- ------- ------- ------ -------- -------- ------- ------
CONTRACT TRANSACTIONS
Net contract purchase
payments................ 150,050 88,212 12,211 5,842 13,250 12,410 16,257 9,185
Transfer payments from
(to) other subaccounts
or general account...... 78,317 11,541 5,680 1,552 2,506 (13,051) 10,431 (5,983)
Contract terminations,
withdrawals, and other
deductions.............. (52,551) (30,449) (11,765) (3,793) (12,118) (10,070) (6,132) (4,530)
-------- ------- ------- ------ -------- -------- ------- ------
Increase (decrease) from
contract transactions... 175,816 69,304 6,126 3,601 3,638 (10,711) 20,556 (1,328)
-------- ------- ------- ------ -------- -------- ------- ------
Net increase in contract
owners' equity.......... 298,540 191,210 6,996 4,417 35,101 23,638 33,799 5,727
-------- ------- ------- ------ -------- -------- ------- ------
CONTRACT OWNERS' EQUITY
Beginning of period...... 661,108 469,898 23,546 19,129 194,039 170,401 87,904 82,177
-------- ------- ------- ------ -------- -------- ------- ------
End of period............ $959,648 661,108 30,542 23,546 229,140 194,039 121,703 87,904
======== ======= ======= ====== ======== ======== ======= ======
</TABLE>
/1/Period from January 3, 1995 (commencement of operations) to December 31,
1995
/2/Period from November 18, 1996 (commencement of operations) to December 31,
1996
See accompanying Notes to Financial Statements.
20
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DREYFUS DREYFUS U.S. T. ROWE PRICE T. ROWE PRICE
VALUE SMALL CAP GOVERNMENT EQUITY GROWTH OPPORTUNITY
EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------- -------------- ------------- --------------- --------------- ----------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995/1/ 1996 1995/1/ 1996/2/ 1996 1995
- ------- ------ ------ ------ ------ ----- ------ ------- ------ ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
736 (230) 1,791 314 229 (25) (201) (107) 56 (119) -- 12,816 16,395
1,155 972 561 184 189 106 274 71 418 322 -- 3,976 842
14,877 11,749 11,410 4,328 (108) 568 6,872 2,266 5,604 1,913 -- 16,493 40,137
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
16,768 12,491 13,762 4,826 310 649 6,945 2,230 6,078 2,116 -- 33,285 57,374
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
20,562 12,996 11,126 8,736 6,793 4,592 21,213 8,911 13,844 8,446 193 34,601 17,094
13,551 9,310 5,637 2,469 4,193 1,487 19,065 8,365 10,830 9,027 166 6,258 (1,635)
(4,444) (2,587) (3,080) (1,976) (980) (280) (1,524) (270) (1,233) (376) (44) (11,231) (6,567)
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
29,669 19,719 13,683 9,229 10,006 5,799 38,754 17,006 23,441 17,097 315 29,628 8,892
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
46,437 32,210 27,445 14,055 10,316 6,448 45,699 19,236 29,519 19,213 315 62,913 66,266
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
64,114 31,904 49,041 34,986 9,507 3,059 19,236 -- 19,213 -- -- 194,508 128,242
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
110,551 64,114 76,486 49,041 19,823 9,507 64,935 19,236 48,732 19,213 315 257,421 194,508
======= ====== ====== ====== ====== ===== ====== ====== ====== ====== === ======= =======
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED)
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- The PFL Endeavor Variable Annuity Account ("Mutual Fund
Account") is a segregated investment account of PFL Life Insurance Company
("PFL Life"), an indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AUSA"),
a holding company. AUSA is an indirect, wholly-owned subsidiary of AEGON nv, a
holding company organized under the laws of The Netherlands.
The Opportunity Value Subaccount commenced operations on November 18, 1996. The
T. Rowe Price Equity Income Subaccount and the T. Rowe Price Growth Stock
Subaccount commenced operations on January 3, 1995. Effective May 1, 1996, the
names of the Money Market, Managed Asset Allocation, Quest for Value Equity,
Quest for Value Small Cap and U.S. Government Securities Portfolios and
Subaccounts were changed to TCW Money Market, TCW Managed Asset Allocation,
Value Equity, Value Small Cap and Dreyfus U.S. Government Securities Portfolios
and Subaccounts, respectively. Effective October 29, 1996, the names of the
Value Small Cap Portfolio and Subaccount were changed to Dreyfus Small Cap
Value Portfolio and Dreyfus Small Cap Value Subaccount, respectively. Effective
March 25, 1995, the names of the Global Growth Portfolio and Subaccount were
changed to T. Rowe Price International Stock Portfolio and Subaccount,
respectively. The investment objective of the portfolio was changed from an
investment on a global basis to an investment on an international basis (i.e.
non-U.S. companies). The investment advisor of the Endeavor Series Trust is
Endeavor Investment Advisors, a general partnership between Endeavor Management
Co. and AUSA Financial Markets, Inc., an affiliate of PFL Life. The investment
advisor for the WRL Series Fund, Inc. is Western Reserve Life Assurance Co. of
Ohio, an affiliate of PFL Life.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940.
Investments -- Net purchase payments received by the Mutual Fund Account are
invested in the portfolios of the Endeavor Series Trust, and the Growth
Portfolio of the WRL Series Fund, Inc. (collectively the "Series Funds"), as
selected by the contract owner. Investments are stated at the closing net asset
values per share on December 31, 1996.
Realized capital gains and losses from sale of shares in the Series Funds are
determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from investments in the Series Funds are credited or charged to contract
owners' equity.
Dividend Income -- Dividends received from the Series Funds investments are
reinvested to purchase additional mutual fund shares.
22
<PAGE>
- --------------------------------------------------------------------------------
2. INVESTMENTS
A summary of the mutual fund investment at December 31, 1996 follows:
<TABLE>
<CAPTION>
NET ASSET
NUMBER VALUE
OF SHARES PER SHARE MARKET
HELD (IN DOLLARS) VALUE COST
--------- ------------ -------- --------
<S> <C> <C> <C> <C>
Endeavor Series Trust
TCW Money Market Portfolio........... 30,542 $ 1.00 $ 30,542 $ 30,542
TCW Managed Asset Allocation
Portfolio........................... 12,163 18.84 229,142 176,250
T. Rowe Price International Stock
Portfolio........................... 8,724 13.95 121,702 105,559
Value Equity Portfolio............... 6,423 17.21 110,548 83,109
Dreyfus Small Cap Value Portfolio.... 5,203 14.70 76,482 60,646
Dreyfus U.S. Government Securities
Portfolio........................... 1,765 11.23 19,823 19,368
T. Rowe Price Equity Income
Portfolio........................... 4,192 15.49 64,935 55,797
T. Rowe Price Growth Stock
Portfolio........................... 2,991 16.29 48,731 41,214
Opportunity Value Portfolio.......... 31 10.06 315 315
WRL Series Fund, Inc.
Growth Portfolio..................... 7,355 35.001280 257,421 211,552
-------- --------
$959,641 $784,352
======== ========
</TABLE>
3. CONTRACT OWNERS' EQUITY
Contract owners' equity at December 31, 1996 includes an amount of $2,954,
which represents the current value of PFL Life's capital contribution of
$1,900. A summary of deferred annuity contracts terminable by owners at
December 31, 1996 follows:
<TABLE>
<CAPTION>
ACCUMULATION
UNIT
ACCUMULATION VALUE TOTAL
SUBACCOUNT UNITS OWNED (IN DOLLARS) CONTRACT VALUE
- ---------- ------------ ------------ --------------
<S> <C> <C> <C>
TCW Money Market...................... 26,461 $ 1.154219 $ 30,542
TCW Managed Asset Allocation.......... 124,999 1.833135 229,140
T. Rowe Price International Stock..... 91,462 1.330640 121,703
Value Equity.......................... 65,227 1.694854 110,551
Dreyfus Small Cap Value............... 51,125 1.496065 76,486
Dreyfus U.S. Government Securities.... 17,562 1.128769 19,823
T. Rowe Price Equity Income........... 42,673 1.521680 64,935
T. Rowe Price Growth Stock............ 30,238 1.611613 48,732
Opportunity Value..................... 314 1.004355 315
Growth................................ 15,174 16.964068 257,421
--------
$959,648
========
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
TCW T. ROWE DREYFUS DREYFUS T. ROWE T. ROWE
TCW MANAGED PRICE SMALL U.S. PRICE PRICE
MONEY ASSET INT'L. VALUE CAP GOV'T. EQUITY GROWTH OPPORTUNITY
MARKET ALLOCATION STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
-------- ---------- -------- -------- -------- ---------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at
1/1/95............... 17,837 130,910 76,518 30,512 32,607 3,103 -- -- -- 12,759
Units purchased....... 5,331 8,434 8,306 10,253 7,689 4,247 7,630 6,773 -- 1,344
Units redeemed and
transferred.......... (2,064) (16,369) (9,759) 5,430 340 1,107 7,313 7,424 -- (766)
------ ------- ------ ------ ------ ------ ------ ------ --- ------
Units outstanding at
12/31/95............. 21,104 122,975 75,065 46,195 40,636 8,457 14,943 14,197 -- 13,337
Units purchased....... 10,754 7,818 13,001 13,373 8,625 6,218 15,335 9,588 192 2,158
Units redeemed and
transferred.......... (5,397) (5,794) 3,396 5,659 1,864 2,887 12,395 6,453 122 (321)
------ ------- ------ ------ ------ ------ ------ ------ --- ------
Units outstanding at
12/31/96............. 26,461 124,999 91,462 65,227 51,125 17,562 42,673 30,238 314 15,174
====== ======= ====== ====== ====== ====== ====== ====== === ======
</TABLE>
4. TAXES
Operations of the Mutual Fund Account form a part of PFL Life, which is taxed
as a life insurance company under Subchapter L of the Internal Revenue Code of
1986, as amended (the "Code"). The operations of the Mutual Fund Account are
accounted for separately from other operations of PFL Life for purposes of
federal income taxation. The Mutual Fund Account is not separately taxable as a
regulated investment company under Subchapter M of the Code and is not
otherwise taxable as an entity separate from PFL Life. Under existing federal
income tax laws, the income of the Mutual Fund Account, to the extent applied
to increase reserves under the variable annuity contracts, is not taxable to
PFL Life.
5. ADMINISTRATIVE, MORTALITY AND EXPENSE RISK CHARGE
Administrative charges include an annual charge of the lesser of 2% of the
policy value or $35 per contract which will commence on the first policy
anniversary of each contract owner's account. For policies issued on or after
May 1, 1995, the fee is waived if the sum of the premium payments less the sum
of all partial withdrawals is at least $50,000 on the policy anniversary.
Charges for administrative fees to the variable annuity contracts are an
expense of the Mutual Fund Account.
PFL Life deducts a daily charge equal to an annual rate of 1.25% of the value
of the contract owners' account as a charge for assuming certain mortality and
expense risks. PFL Life also deducts a daily charge equal to an annual rate of
.15% of the contract owners' account for administrative expenses.
6. NET ASSETS
At December 31, 1996 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
TCW T. ROWE T. ROWE T. ROWE
TCW MANAGED PRICE DREYFUS DREYFUS U.S. PRICE PRICE
MONEY ASSET INT'L. VALUE SMALL CAP GOV'T. EQUITY GROWTH OPPORTUNITY
MARKET ALLOCATION STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
TOTAL SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
-------- -------- ---------- -------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit
transactions,
accumulated net
investment income
and realized
capital gains... $784,359 30,542 176,248 105,560 83,112 60,650 19,368 55,797 41,215 315 211,552
Adjustment for
appreciation/
depreciation to
market value.... 175,289 -- 52,892 16,143 27,439 15,836 455 9,138 7,517 -- 45,869
-------- ------ ------- ------- ------- ------ ------ ------ ------ --- -------
Total Contract
Owners' Equity.. $959,648 30,542 229,140 121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======== ====== ======= ======= ======= ====== ====== ====== ====== === =======
</TABLE>
24
<PAGE>
- --------------------------------------------------------------------------------
7. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 OR
COMMENCEMENT OF OPERATIONS TO DECEMBER 31
--------------------------------------------
1996 1995
---------------------- ---------------------
PURCHASES SALES PURCHASES SALES
------------ --------- ---------------------
<S> <C> <C> <C> <C>
Endeavor Series Trust
TCW Money Market Portfolio........ $ 31,789 24,793 26,533 22,147
TCW Managed Asset Allocation Port-
folio............................ 19,595 15,228 18,528 28,949
T. Rowe Price International Stock
Portfolio........................ 24,567 4,813 14,396 15,085
Value Equity Portfolio............ 33,901 3,499 25,078 5,610
Dreyfus Small Cap Value Portfo-
lio.............................. 19,535 4,065 16,203 6,683
Dreyfus U.S. Government Securities
Portfolio........................ 12,087 1,853 7,759 1,988
T. Rowe Price Equity Income Port-
folio............................ 39,523 970 18,189 1,290
T. Rowe Price Growth Stock Portfo-
lio.............................. 25,124 1,628 19,565 2,587
Opportunity Value Portfolio....... 352 37 -- --
WRL Series Fund, Inc.
Growth Portfolio.................. 56,406 13,962 38,417 13,226
----------- --------- ---------- ---------
$ 262,879 70,848 184,668 97,565
=========== ========= ========== =========
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1996 and 1995, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles.
The variances between such practices and generally accepted accounting
principles also are described in Note 1. The effects on the financial
statements of these variances are not reasonably determinable but are presumed
to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of PFL Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 in conformity with accounting practices prescribed or permitted by the
Insurance Division, Department of Commerce, of the State of Iowa. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic statutory-basis financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Des Moines, Iowa Ernst & Young L.L.P.
February 21, 1997
26
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net
of reinsurance:
Life.................................. $ 204,872 $ 114,704 $ 148,954
Annuity............................... 725,966 921,452 1,067,406
Accident and health................... 227,862 232,738 230,889
Net investment income................... 428,337 392,685 343,880
Amortization of interest maintenance
reserve................................ 2,434 4,341 2,871
Commissions and expense allowances on
reinsurance ceded...................... 73,931 77,071 94,635
---------- ---------- ----------
1,663,402 1,742,991 1,888,635
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health
benefits............................. 147,024 146,346 141,632
Surrender benefits.................... 512,810 498,626 392,064
Other benefits........................ 101,288 88,607 73,306
Increase in aggregate reserves for
policies and contracts:
Life................................ 140,126 50,071 82,062
Annuity............................. 188,002 528,330 569,341
Accident and health................. 26,790 17,694 22,144
Other............................... 19,969 16,017 11,223
---------- ---------- ----------
1,136,009 1,345,691 1,291,772
Insurance expenses:
Commissions........................... 177,466 200,706 215,635
General insurance expenses............ 57,282 57,623 52,166
Taxes, licenses and fees.............. 13,889 15,700 15,368
Transfer to separate account.......... 171,785 42,981 243,806
Other expenses........................ 526 760 1,014
---------- ---------- ----------
420,948 317,770 527,989
---------- ---------- ----------
1,556,957 1,663,461 1,819,761
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital losses on
investments.............................. 106,445 79,530 68,874
Federal income tax expense................ 41,177 33,335 23,858
---------- ---------- ----------
Gain from operations before net realized
capital losses on investments............ 65,268 46,195 45,016
Net realized capital losses on investments
(net of related federal income taxes and
amounts transferred to interest
maintenance reserve)..................... (3,503) (18,096) (3,624)
---------- ---------- ----------
Net income................................ $ 61,765 $ 28,099 $ 41,392
========== ========== ==========
</TABLE>
See accompanying notes.
27
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments........................ $ 50,737 $ 79,852
Bonds.................................................. 4,773,433 4,613,334
Stocks:
Preferred............................................ 3,097 9,336
Common (cost: 1996--$23,212; 1995--$19,061).......... 32,038 24,866
Affiliated entities (cost: 1996--$14,893; 1995--
$14,661)............................................ 6,934 6,794
Mortgage loans on real estate.......................... 911,705 680,414
Real estate, at cost less accumulated depreciation
($11,338 in 1996; $12,493 in 1995):
Home office properties............................... 10,372 20,403
Properties acquired in satisfaction of debt.......... 12,260 2,648
Investment properties................................ 35,922 40,453
Policy loans........................................... 54,214 52,675
Other invested assets.................................. 16,343 13,557
---------- ----------
Total cash and invested assets......................... 5,907,055 5,544,332
Premiums deferred and uncollected........................ 16,345 17,026
Accrued investment income................................ 70,401 68,065
Receivable from affiliates............................... 53,900 79,913
Federal income taxes recoverable......................... 4,018 9,776
Transfers from separate accounts......................... 38,528 --
Other assets............................................. 31,215 32,803
Separate account assets.................................. 1,844,515 1,418,157
---------- ----------
Total admitted assets.................................. $7,965,977 $7,170,072
========== ==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 736,100 $ 596,039
Annuity.............................................. 4,408,419 4,220,274
Accident and health.................................. 139,269 114,884
Policy and contract claim reserves:
Life................................................. 7,369 6,225
Accident and health.................................. 66,988 70,517
Other policyholders' funds............................. 126,672 105,371
Remittances and items not allocated.................... 64,064 123,710
Asset valuation reserve................................ 54,851 43,921
Interest maintenance reserve........................... 23,745 26,376
Other liabilities...................................... 70,663 67,070
Payable to affiliates.................................. 4,975 --
Separate account liabilities........................... 1,844,515 1,418,157
---------- ----------
Total liabilities...................................... 7,547,630 6,792,544
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding................................ 2,660 2,660
Paid-in surplus........................................ 154,129 154,129
Unassigned surplus..................................... 261,558 220,739
---------- ----------
Total capital and surplus.............................. 418,347 377,528
---------- ----------
Total liabilities and capital and surplus.............. $7,965,977 $7,170,072
========== ==========
</TABLE>
See accompanying notes.
28
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994.............. $2,660 $ 99,129 $212,982 $314,771
Capital contribution.................. -- 15,000 -- 15,000
Net income for 1994................... -- -- 41,392 41,392
Net unrealized capital losses......... -- -- (25,350) (25,350)
Increase in non-admitted assets....... -- -- (248) (248)
Decrease in asset valuation reserve... -- -- 6,040 6,040
Dividend to stockholder............... -- -- (20,900) (20,900)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 184 184
Amendment of reinsurance agreement.... -- -- 391 391
Decrease in liability for reinsurance
in unauthorized companies............ -- -- 505 505
Prior period adjustment............... -- -- (3,444) (3,444)
------ -------- -------- --------
Balance at December 31, 1994............ 2,660 114,129 211,552 328,341
Capital contribution.................. -- 40,000 -- 40,000
Net income for 1995................... -- -- 28,099 28,099
Net unrealized capital losses......... -- -- (7,574) (7,574)
Decrease in non-admitted assets....... -- -- 50 50
Increase in asset valuation reserve... -- -- (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 35 35
Cancellation of reinsurance
agreement............................ -- -- 585 585
Amendment of reinsurance agreement.... -- -- 419 419
Transfer of subsidiary investment to
stockholder.......................... -- -- (3,250) (3,250)
Change in reserve valuation
methodology.......................... -- -- (501) (501)
Increase in liability for reinsurance
in unauthorized companies............ -- -- (2,730) (2,730)
------ -------- -------- --------
Balance at December 31, 1995............ 2,660 154,129 220,739 377,528
Net income for 1996................... -- -- 61,765 61,765
Net unrealized capital gains.......... -- -- 2,351 2,351
Increase in non-admitted assets....... -- -- (148) (148)
Increase in asset valuation reserve... -- -- (10,930) (10,930)
Dividend to stockholder............... -- -- (20,000) (20,000)
Prior period adjustment............... -- -- 5,025 5,025
Surplus effect of sale of a division.. -- -- (384) (384)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 29 29
Amendment of reinsurance agreement.... -- -- 421 421
Decrease in liability for reinsurance
in unauthorized companies............ -- -- 2,690 2,690
------ -------- -------- --------
Balance at December 31, 1996............ $2,660 $154,129 $261,558 $418,347
====== ======== ======== ========
</TABLE>
See accompanying notes.
29
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations, net of
reinsurance.............................. $1,240,748 $1,353,407 $1,548,030
Net investment income..................... 431,456 398,051 339,856
---------- ---------- ----------
1,672,204 1,751,458 1,887,886
Life and accident and health claims....... (147,556) (140,798) (137,602)
Surrender benefits and other fund
withdrawals.............................. (512,810) (498,626) (392,064)
Other benefits to policyholders........... (101,254) (88,519) (73,237)
Commissions, other expenses and other
taxes.................................... (248,321) (278,241) (288,384)
Net transfers to separate accounts........ (210,312) (42,981) (243,806)
Dividends to policyholders................ (844) (940) (1,155)
Federal income taxes, excluding tax on
capital gains and IRS settlements........ (35,551) (32,905) (39,864)
---------- ---------- ----------
Net cash provided by operations........... 415,556 668,448 711,774
Proceeds from investments sold, matured or
repaid:
Bonds and preferred stocks.............. 2,112,831 1,757,229 1,430,339
Common stocks........................... 27,214 20,338 12,941
Mortgage loans on real estate........... 74,351 36,550 43,495
Real estate............................. 18,077 23,203 9,536
Other proceeds.......................... 22,567 381 189
---------- ---------- ----------
Total cash from investments............... 2,255,040 1,837,701 1,496,500
Capital contribution...................... -- 40,000 15,000
Dividend from subsidiary.................. -- -- 10,000
Cash received from ceding commissions
associated with the sale of a division... 45 55 284
Increase in remittances and items not
allocated................................ -- 88,295 16,177
Other sources............................. 19,381 12,758 24,855
---------- ---------- ----------
Total sources of cash..................... 2,690,022 2,647,257 2,274,590
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and preferred stocks.............. $2,270,105 $2,294,195 $2,043,615
Common stocks........................... 29,799 23,284 11,228
Mortgage loans on real estate........... 324,381 192,292 160,068
Net increase in policy loans............ 1,539 877 3,202
Real estate............................. 222 10,188 14,801
Other invested assets................... 5,169 2,670 664
---------- ---------- ----------
Total investments acquired................ 2,631,215 2,523,506 2,233,578
Dividends to stockholder.................. 20,000 -- 20,900
Cash paid associated with the sale of a
division................................. 539 -- --
Repayment of intercompany notes and
receivables, net......................... -- 48,070 365
Cash paid in conjunction with an amendment
of a reinsurance agreement............... 5,812 -- --
Decrease in remittances and items not
allocated................................ 59,646 -- --
Cash paid in conjunction with sales of a
division................................. 123 -- --
Other applications, net................... 1,802 29,887 3,820
---------- ---------- ----------
Total applications of cash................ 2,719,137 2,601,463 2,258,663
---------- ---------- ----------
Net change in cash and short-term
investments.............................. (29,115) 45,790 15,927
Cash and short-term investments at
beginning of year........................ 79,852 34,062 18,135
---------- ---------- ----------
Cash and short-term investments at end of
year..................................... $ 50,737 $ 79,852 $ 34,062
========== ========== ==========
</TABLE>
See accompanying notes.
30
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PFL Life Insurance Company ("the Company") is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. Effective June 1, 1995, the
Company transferred the common stock of its wholly-owned subsidiary, Equity
National Life Insurance Company ("Equity National"), to its stockholder, First
AUSA. Equity National was then merged with Life Investors Insurance Company of
America, a subsidiary of First AUSA. The financial statements presented herein
are prepared on the statutory accounting principles basis for the Company
only; as such, the accounts of the Company's subsidiary, Equity National, are
not consolidated with those of the Company.
In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through
mergers. In addition, the Company has canceled or entered into several
coinsurance and reinsurance agreements with affiliates and non-affiliates. The
following is a description of those transactions:
During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association,
an independent insurance agency, will be written by the insurance
subsidiaries of UICI and will not be shared with the Company and its
affiliates through coinsurance arrangements. As a result of the sale, the
Company transferred $123 in assets, substantially all of which was cash,
and $70 of liabilities. The difference between the assets and liabilities
of $(53) plus a tax credit of $19 was charged directly to unassigned
surplus.
Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference
between the assets and liabilities, net of a tax effect of $302 was
credited directly to unassigned surplus.
On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2 1/2% each year
(primarily group health business). As a result, the Company transferred
$3,881 in assets and $4,080 in liabilities during 1994. The difference
between the assets and liabilities of $199, plus a tax credit of $192, was
credited directly to unassigned surplus. During 1995, the Company
transferred $4,303 in assets and liabilities of $4,467. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets
and liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus.
During 1993, the Company sold the Oakbrook Division (primarily group
health business). The initial transfer of risk occurred through an
indemnity reinsurance agreement. The
31
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
policies will then be assumed by the reinsurer by novation as state
regulatory and policyholder approvals are received. In addition, the
Company will receive from the third party administrator a ceding commission
of one percent of the premiums collected between January 1, 1994 and
December 31, 1996. As a result of the sale, in 1994, the Company received
$284 for ceding commissions; the commissions net of the related tax effect
of $100 was credited directly to unassigned surplus. During 1995, the
Company received $55 for ceding commissions; the commissions net of the
related tax effect of $20 was credited directly to unassigned surplus.
During 1996, the Company received $45 for ceding commissions; the
commissions net of the related tax effect of $(16) was charged directly to
unassigned surplus. During 1996, the Company paid $539 in association with
this sale; the proceeds, net of a tax credit of $189, were charged directly
to unassigned surplus.
Nature of Business
The Company sells individual non-participating whole life, endowment and
term contracts, as well as a broad line of single fixed and flexible premium
annuity products. In addition, the Company offers group life, universal life,
and individual and specialty health coverages. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
primarily through an independent insurance agency of The Insurance Center, the
Company's agents, and financial institutions.
Basis of Presentation
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant
of these differences are as follows: (a) bonds are generally reported at
amortized cost rather than segregating the portfolio into held-to-maturity
(reported at amortized cost), available-for-sale (reported at fair value), and
trading (reported at fair value) classifications; (b) acquisition costs of
acquiring new business are charged to current operations as incurred rather
than deferred and amortized over the life of the policies; (c) policy reserves
on traditional life products are based on statutory mortality rates and
interest which may differ from reserves based on reasonable assumptions of
expected mortality, interest, and withdrawals which include a provision for
possible unfavorable deviation from such assumptions; (d) policy reserves on
certain investment products use discounting methodologies utilizing statutory
interest rates rather than full account values; (e) reinsurance amounts are
netted against the corresponding asset or liability rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (g) net realized gains or losses attributed to changes in the
level of interest
32
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
rates in the market are deferred and amortized over the remaining life of the
bond or mortgage loan, rather than recognized as gains or losses in the
statement of operations when the sale is completed; (h) declines in the
estimated realizable value of investments are provided for through the
establishment of a formula-determined statutory investment reserve (carried as
a liability) changes to which are charged directly to surplus, rather than
through recognition in the statement of operations for declines in value, when
such declines are judged to be other than temporary; (i) certain assets
designated as "non-admitted assets" have been charged to surplus rather than
being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; (m) gains or losses on
dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations; and (n) a
liability is established for "unauthorized reinsurers" and changes in this
liability are charged or credited directly to unassigned surplus. The effects
of these variances have not been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.
Investments
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-
term investments are reported at cost adjusted for amortization of premiums
and accrual of discounts. Amortization is computed using methods which result
in a level yield over the expected life of the security. The Company reviews
its prepayment assumptions on mortgage and other asset backed securities at
regular intervals and adjusts amortization rates prospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in good standing are reported at cost.
Investments in preferred stocks not in good standing are reported at the lower
of cost or market. Common stocks of affiliated and unaffiliated companies,
which may include shares of mutual funds (money market and other), are carried
at market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as
required or permitted by Iowa Insurance Laws.
33
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC
and are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses, net of amounts
attributed to changes in the general level of interest rates. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance
Reserve (IMR), the portion of realized gains and losses on sales of fixed
income investments, principally bonds and mortgage loans, attributable to
changes in the general level of interest rates and amortizes those deferrals
over the remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1996, 1995 and 1994,
the Company excluded investment income due and accrued of $1,541, $2,272 and
$4,622, respectively, with respect to such practices.
The Company entered into an interest-rate cap agreement on Five Year
Constant Maturities Treasury futures to hedge the exposure of increasing
interest rates. The cash flows from the interest rate cap will help offset
losses that might occur from disintermediation resulting from a rise in
interest rates. The Company paid a one-time premium to receive the difference
between the reference rate and the strike rate after a two-year delay. The
cost is included in interest expense ratably during the life of the agreement.
Income received as a result of the cap agreement will be recognized in
investment income as earned. Unamortized cost of the agreements is included in
other assets.
Aggregate Policy Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are
calculated using interest rates ranging from 2.00 to 6.00 percent and are
computed principally on the Net Level Premium Valuation and the Commissioners'
Reserve Valuation Methods. Reserves for universal life policies are based on
account balances adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 2.50 to 11.25 percent and mortality rates, where
appropriate, from a variety of tables.
34
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
Separate Account
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate account are valued at
market. Income and gains and losses with respect to the assets in the separate
account accrue to the benefit of the policyholders. The Company received
variable contract premiums of $227,864, $133,386 and $308,305 in 1996, 1995
and 1994, respectively. All variable account contracts are subject to
discretionary withdrawal by the policyholder at the market value of the
underlying assets less the current surrender charge.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No.
119, Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments, requires additional disclosure about derivatives. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparisons to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement of Financial Accounting Standards No. 107 and No. 119
exclude certain financial instruments and all nonfinancial instruments from
their disclosure requirements and allow companies to forego the disclosures
when those estimates can only be made at excessive cost. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
35
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities other than insurance subsidiaries are
based on quoted market prices. Fair value for the Company's insurance
subsidiary is the statutory net book value of that subsidiary.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Interest rate cap: Estimated fair value of the interest rate cap is based
upon the latest quoted market price.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1996 1995
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds.......................... $4,773,433 $4,867,770 $4,613,334 $4,824,635
Preferred stocks............... 3,097 7,133 9,336 12,275
Common stocks.................. 32,038 32,038 24,866 24,866
Affiliated common and preferred
stock......................... 6,934 6,934 6,794 6,794
Mortgage loans on real estate.. 911,705 922,010 680,414 714,399
Policy loans................... 54,214 54,214 52,675 52,675
Cash and short-term
investments................... 50,737 50,737 79,852 79,852
Interest rate cap.............. 6,797 6,975 7,971 7,250
Separate account assets........ 1,844,515 1,844,515 1,418,157 1,418,157
LIABILITIES
Investment contract
liabilities................... 4,532,568 4,398,630 4,323,188 4,310,505
Separate account annuities..... 1,803,057 1,803,057 1,417,842 1,417,842
</TABLE>
36
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and
agencies.................... $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other
government.................. 59,644 1,906 177 61,373
Public utilities............. 147,918 5,616 1,020 152,514
Industrial and
miscellaneous............... 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities... 2,470,740 43,896 15,610 2,499,026
---------- -------- ------- ----------
4,773,433 119,429 25,092 4,867,770
Preferred stocks............... 3,097 4,036 -- 7,133
---------- -------- ------- ----------
$4,776,530 $123,465 $25,092 $4,874,903
========== ======== ======= ==========
DECEMBER 31, 1995
Bonds:
United States Government and
agencies.................... $ 117,054 $ 5,808 $ 135 $ 122,727
State, municipal and other
government.................. 46,236 3,109 2 49,343
Public utilities............. 156,342 9,578 1,092 164,828
Industrial and
miscellaneous............... 1,781,149 112,074 7,146 1,886,077
Mortgage-backed securities... 2,512,553 93,420 4,313 2,601,660
---------- -------- ------- ----------
4,613,334 223,989 12,688 4,824,635
Preferred stocks............... 9,336 3,348 409 12,275
---------- -------- ------- ----------
$4,622,670 $227,337 $13,097 $4,836,910
========== ======== ======= ==========
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1996,
by contractual maturity, 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>
CARRYING ESTIMATED FAIR
VALUE VALUE
---------- --------------
<S> <C> <C>
Due in one year or less............................ $ 202,775 $ 204,980
Due after one year through five years.............. 896,912 921,711
Due after five years through ten years............. 954,555 977,421
Due after ten years................................ 248,451 264,632
---------- ----------
2,302,693 2,368,744
Mortgage and other asset-backed securities......... 2,470,740 2,499,026
---------- ----------
$4,773,433 $4,867,770
========== ==========
</TABLE>
37
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes...................... $364,356 $342,182 $294,145
Dividends on equity investments.................. 1,436 1,822 12,091
Interest on mortgage loans....................... 69,418 52,702 42,385
Rental income on real estate..................... 9,526 10,443 9,360
Interest on policy loans......................... 3,273 3,112 3,182
Other investment income.......................... 1,799 1,803 282
-------- -------- --------
Gross investment income.......................... 449,808 412,064 361,445
Investment expenses.............................. 21,471 19,379 17,565
-------- -------- --------
Net investment income............................ $428,337 $392,685 $343,880
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds................................ $2,112,831 $1,757,229 $1,430,339
========== ========== ==========
Gross realized gains.................... $ 19,876 $ 19,721 $ 15,411
Gross realized losses................... (19,634) (34,399) (33,044)
---------- ---------- ----------
Net realized gains (losses)............. $ 242 $ (14,678) $ (17,633)
========== ========== ==========
</TABLE>
At December 31, 1996, investments with an aggregate carrying value of
$5,825,802 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Debt securities................................ $ 242 $(14,678) $(17,633)
Short-term investments......................... (197) 24 (309)
Equity securities.............................. 1,798 504 1,322
Mortgage loans on real estate.................. (5,530) (1,053) (2,186)
Real estate.................................... 1,210 (1,908) (2,858)
Other invested assets.......................... 12 (970) 14
------- -------- --------
(2,465) (18,081) (21,650)
Tax effect..................................... (1,235) 7,878 7,236
Transfer to interest maintenance reserve....... 197 (7,891) 10,790
------- -------- --------
Net realized losses............................ $(3,503) $(18,096) $ (3,624)
======= ======== ========
</TABLE>
38
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
------------------------------
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Debt securities............................ $(115,867) $355,560 $(322,346)
Equity securities.......................... 2,929 (16,379) (23,202)
--------- -------- ---------
Change in unrealized appreciation
(depreciation)............................ $(112,938) $339,181 $(345,548)
========= ======== =========
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Unrealized gains.................................. $ 9,590 $ 6,833 $20,244
Unrealized losses................................. (8,723) (8,895) (5,927)
------- ------- -------
Net unrealized gains (losses)..................... $ 867 $(2,062) $14,317
======= ======= =======
</TABLE>
During 1996, the Company issued mortgage loans with interest rates ranging
from 6.83% to 8.75%. The maximum percentage of any one mortgage loan to the
value of the underlying real estate at origination was 85%. Mortgage loans
with a carrying value of $4,027 were non-income producing for the previous
twelve months. Accrued interest of $852 related to these mortgage loans was
excluded from investment income. The Company requires all mortgage loans to
carry fire insurance equal to the value of the underlying property.
During 1996, 1995 and 1994, mortgage loans of $13,163, $1,644 and $799,
respectively, were foreclosed and transferred to real estate. At December 31,
1996 and 1995, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $5,432 and $6,168, respectively. The mortgage loan
portfolio is diversified by geographic region and specific collateral property
type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
- -------------------------------------
DECEMBER 31
------------
1996 1995
----- -----
<S> <C> <C>
South Atlantic.......... 26% 26%
Mountain................ 10 12
W. South Central........ 12 14
Pacific................. 13 17
E. North Central........ 15 13
E. South Central........ 9 5
W. North Central........ 6 6
Middle Atlantic......... 6 3
New England............. 3 4
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE DISTRIBUTION
- -------------------------------------
DECEMBER 31
------------
1996 1995
----- -----
<S> <C> <C>
Retail.................. 37% 31%
Apartment............... 14 20
Office.................. 34 29
Industrial.............. 3 4
Other................... 12 16
</TABLE>
39
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
At December 31, 1996, the Company had the following investments (excluding
U. S. Government guaranteed or insured issues) which individually represented
more than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
--------------------------------- --------------
<S> <C>
Bonds:
Citibank.................................................... 70,661
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and
ceded amounts:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums.......................... $1,457,450 $1,591,531 $1,857,446
Reinsurance assumed...................... 1,796 2,356 1,832
Reinsurance ceded........................ (300,546) (324,993) (412,029)
---------- ---------- ----------
Net premiums earned...................... $1,158,700 $1,268,894 $1,447,249
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $168,155,
$167,287 and $148,414 during 1996, 1995 and 1994, respectively. At December
31, 1996 and 1995, estimated amounts recoverable from reinsurers that have
been deducted from policy and contract claim reserves totaled $63,226 and
$65,503, respectively. The aggregate reserves for policies and contracts were
reduced for reserve credits for reinsurance ceded at December 31, 1996 and
1995 of $2,737,441 and $2,920,034, respectively.
At December 31, 1996, amounts recoverable from unauthorized reinsurers of
$73,434 (1995--$70,516) and reserve credits for reinsurance ceded of $55,035
(1995--$48,992) were associated with a single reinsurer and its affiliates.
The Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $120,477 at December 31, 1996 that can be drawn on
for amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a tax-
sharing agreement between the Company and its affiliates, the Company computes
federal income tax expense as if it were filing a separate income tax return,
except that tax credits and net operating loss carryforwards are determined on
the basis of the consolidated group. Additionally, the alternative minimum tax
is computed for the consolidated group and the resulting tax, if any, is
allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
40
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%)..... $37,256 $27,835 $24,106
Tax reserve adjustment........................... 2,211 2,405 1,150
Excess tax depreciation.......................... (384) (365) (406)
Deferred acquisition costs--tax basis............ 5,583 4,581 7,378
Prior year over accrual.......................... (499) (306) (644)
Dividend received deduction...................... (454) (56) (3,513)
Charitable contribution.......................... -- -- (3,935)
Other items--net................................. (2,536) (759) (278)
------- ------- -------
Federal income tax expense....................... $41,177 $33,335 $23,858
======= ======= =======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($20,387 at December 31, 1996). To the extent dividends are
paid from the amount accumulated in the policyholders' surplus account, net
earnings would be reduced by the amount of tax required to be paid. Should the
entire amount in the policyholders' surplus account become taxable, the tax
thereon computed at current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual.
This included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related
interest of $1,686, net of a tax effect of $590. An examination is underway
for years 1988 through 1995.
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which
entitle policyholders to a share in the earnings of the participating
policies, provided that a dividend distribution, which is determined annually
based on mortality and persistency experience of the participating policies,
is authorized by the Company. Participating insurance constituted
approximately 1.0% and 1.2% of ordinary life insurance in force at December
31, 1996 and 1995, respectively.
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on
a variety of the Company's products that are not subject to significant
mortality or morbidity risk; however, there may be certain restrictions placed
upon the amount of funds that can be withdrawn without penalty. The amount of
reserves on these products, by withdrawal characteristics are summarized as
follows:
41
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------
1996 1995
------------------- -------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal
with market value adjustment....... $ 20,800 0% $ 699 --%
Subject to discretionary withdrawal
at book value less surrender
charge............................. 794,881 9 733,796 8%
Subject to discretionary withdrawal
at market value.................... 1,803,057 20 1,390,156 16%
Subject to discretionary withdrawal
at book value (minimal or no
charges or adjustments)............ 6,284,876 69 6,395,719 74%
Not subject to discretionary
withdrawal provision............... 174,416 2 139,330 2%
---------- --- ---------- ---
9,078,030 100 8,659,700 100%
Less reinsurance ceded.............. 2,677,432 2,866,160
---------- ----------
Total policy reserves on annuities
and deposit fund liabilities....... $6,400,598 $5,793,540
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts statement:
Transfers to separate accounts................. $227,864 $133,386 $308,305
Transfers from separate accounts............... 75,172 104,219 76,133
-------- -------- --------
Net transfers to separate accounts............... 152,692 29,167 232,172
Reconciling adjustments--charges for investment
management, administration fees and contract
guarantees...................................... 19,093 13,814 11,634
-------- -------- --------
Transfers as reported in the summary of
operations of the life, accident and health
annual statement................................ $171,785 $ 42,981 $243,806
======== ======== ========
</TABLE>
42
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1996 and 1995, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
------- ------- -------
<S> <C> <C> <C>
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business............. $ 2,657 $ 1,865 $ 792
Ordinary direct renewal business................ 23,307 7,180 16,127
Group life direct business...................... 1,788 1,195 593
Reinsurance ceded............................... (1,706) (438) (1,268)
------- ------- -------
26,046 9,802 16,244
Accident and health:
Direct.......................................... 104 -- 104
Reinsurance ceded............................... (3) -- (3)
------- ------- -------
Total accident and health......................... 101 -- 101
------- ------- -------
$26,147 $ 9,802 $16,345
======= ======= =======
DECEMBER 31, 1995
Life and annuity:
Ordinary direct first year business............. $ 3,151 $ 2,223 $ 928
Ordinary direct renewal business................ 24,250 7,792 16,458
Group life direct business...................... 1,537 779 758
Reinsurance ceded............................... (1,362) (141) (1,221)
------- ------- -------
27,576 10,653 16,923
Accident and health:
Direct.......................................... 1,296 -- 1,296
Reinsurance ceded............................... (1,193) -- (1,193)
------- ------- -------
Total accident and health......................... 103 -- 103
------- ------- -------
$27,679 $10,653 $17,026
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, the Company had insurance in force
aggregating $69,251 and $87,010, respectively, in which the gross premiums are
less than the net premiums required by the standard valuation standards
established by the Insurance Division, Department of Commerce, of the State of
Iowa. The Company established policy reserves of $1,252 and $1,417 to cover
these deficiencies at December 31, 1996 and 1995, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $501
was made for the year ended December 31, 1995, related to the change in
reserve methodology.
43
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $20,000 and $20,900 in 1996 and
1994, respectively. No dividends were paid in 1995.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB No. 87 expense as a percent of salaries. The benefits are based on years
of service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $1,056, $942 and $966 for the
years ended December 31, 1996, 1995 and 1994, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee
Retirement and Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974. Expense related to this plan was $297, $465 and $411 for
the years ended December 31, 1996, 1995 and 1994, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.
In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $184, $164 and $169 for the years ended December 31, 1996,
1995 and 1994, respectively.
44
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1996,
1995 and 1994, the Company paid $17,028, $14,214 and $11,820, respectively,
for these services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.5% at December 31, 1996. During 1996,
1995 and 1994, the Company paid net interest of $174, $71 and $23,
respectively, to affiliates.
During 1995 and 1994, the Company received capital contributions of $40,000
and $15,000, respectively, in cash from its parent and during 1994 received a
dividend of $10,000 from its subsidiary, Equity National, which was included
in net investment income.
During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable.
No gain was recognized on this sale. This note accrued interest at 5.65% and
matured during 1996.
During the year ended December 31, 1995, the Company restructured demand
notes and accrued interest of $13,250 and $745, respectively, related to an
affiliate. The Company received 9,750 shares of preferred stock from the
affiliate for satisfaction of debt. The Company realized a loss of $8,695
related to this transaction. At December 31, 1996 and 1995, the preferred
stock related to this affiliate was deemed to have no value and an unrealized
loss of $4,555 was recognized in 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of
available facts, that damages arising from such demands will not be material
to the Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. Assessments are charged to operations
when received by the Company except where right of offset against other taxes
paid is allowed by law; amounts available for future offsets are recorded as
an asset on the Company's balance sheet. Potential future obligations for
unknown insolvencies are not determinable by the Company. The future
obligation has been based on the most recent information available from the
National Organization of Life and Health Insurance Guaranty Associations
(NOLHGA). The Company has established a reserve of $21,774 and $21,747 and an
offsetting premium tax benefit of $8,752 and $9,457 at December 31, 1996 and
1995, respectively, for its estimated share of future guaranty fund
assessments related to several major insurer insolvencies. During 1994, $3,444
was charged to surplus as prior period adjustments to provide for this net
reserve plus certain assessments paid that related to several major insurer
insolvencies prior to 1992. The guaranty fund expense was $2,617, $5,859 and
$4,054 for December 31, 1996, 1995 and 1994, respectively.
45
<PAGE>
SCHEDULE I
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET (2)
------------------ ---------- ---------- -----------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and
authorities......................... $1,533,581 $1,554,339 $1,533,510
States, municipalities and political
subdivisions........................ 4,918 5,360 4,919
Foreign governments.................. 55,633 56,013 54,725
Public utilities..................... 150,346 152,514 147,918
All other corporate bonds............ 3,046,090 3,099,544 3,032,361
Redeemable preferred stock............. 3,097 7,133 3,097
---------- ---------- ----------
Total fixed maturities................. 4,793,665 4,874,903 4,776,530
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance........... 7,120 9,777 9,777
Industrial, miscellaneous and all
other............................... 16,092 22,261 22,261
---------- ---------- ----------
Total equity securities................ 23,212 32,038 32,038
Mortgage loans on real estate.......... 911,705 911,705
Real estate............................ 46,294 46,294
Real estate acquired in satisfaction of
debt.................................. 12,260 12,260
Policy loans........................... 54,214 54,214
Other long-term investments............ 9,546 9,546
Cash and short-term investments........ 50,737 50,737
---------- ----------
Total investments...................... $5,901,633 $5,893,324
========== ==========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments.
(2) Amount differs from cost as certain bonds have been adjusted to reflect
other than temporary decline in value charged to surplus, as prescribed by
the NAIC.
46
<PAGE>
SCHEDULE III
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
------------- -------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Individual life.............................. $ 734,350 $ -- $ 7,240
Individual health............................ 39,219 8,680 13,631
Group life and health........................ 78,418 14,702 53,486
Annuity...................................... 4,408,419 -- --
---------- ------- -------
$5,260,406 $23,382 $74,357
========== ======= =======
YEAR ENDED DECEMBER 31, 1995
Individual life.............................. $ 594,274 $ -- $ 6,066
Individual health............................ 24,225 7,768 11,863
Group life and health........................ 67,994 16,662 58,813
Annuity...................................... 4,220,274 -- --
---------- ------- -------
$4,906,767 $24,430 $76,742
========== ======= =======
YEAR ENDED DECEMBER 31, 1994
Individual life.............................. $ 544,087 $ -- $ 7,298
Individual health............................ 16,649 6,487 8,643
Group life and health........................ 60,207 17,680 57,959
Annuity...................................... 3,693,388 -- --
---------- ------- -------
$4,314,331 $24,167 $73,900
========== ======= =======
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NET INVESTMENT BENEFITS, CLAIMS LOSSES OTHER OPERATING
PREMIUM REVENUE INCOME* AND SETTLEMENT EXPENSES EXPENSES* PREMIUMS WRITTEN
- --------------- -------------- ----------------------- --------------- ----------------
<S> <C> <C> <C> <C>
$ 202,082 $ 66,538 $ 197,526 $ 38,067 --
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 --
- ---------- -------- ---------- --------
$1,158,700 $428,337 $1,136,009 $420,948
========== ======== ========== ========
$111,918 $ 49,929 $ 97,065 $ 37,933 --
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 --
- ---------- -------- ---------- --------
$1,268,894 $392,685 $1,345,691 $317,770
========== ======== ========== ========
$146,328 $ 43,025 $ 124,736 $ 42,309 --
38,811 3,983 22,323 22,707 $ 38,797
194,704 10,531 108,400 143,645 192,034
1,067,406 286,341 1,036,313 319,328 --
- ---------- -------- ---------- --------
$1,447,249 $343,880 $1,291,772 $527,989
========== ======== ========== ========
</TABLE>
- --------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
48
<PAGE>
SCHEDULE IV
PFL LIFE INSURANCE COMPANY
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Life insurance in force.. $4,863,416 $477,112 $ 30,685 $4,416,989 .7%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health...... 68,699 12,828 -- 55,871 --
Group life and health.. 390,296 215,515 -- 174,781 --
Annuity................ 794,311 68,345 -- 725,966 --
---------- -------- -------- ---------- ---
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1995
Life insurance in force.. $4,594,434 $468,811 $ 22,936 $4,148,559 .6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health...... 60,309 12,617 -- 47,692 --
Group life and health.. 408,097 220,265 -- 187,832 --
Annuity................ 1,009,191 88,270 531 921,452 .05%
---------- -------- -------- ---------- ---
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1994
Life insurance in force.. $4,713,817 $468,811 $112,054 $4,357,060 2.6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 148,702 $ 3,639 $ 1,265 $ 146,328 .9%
Individual health...... 50,303 11,492 -- 38,811 --
Group life and health.. 412,200 217,496 -- 194,704 --
Annuity................ 1,246,241 179,402 567 1,067,406 .05%
---------- -------- -------- ---------- ---
$1,857,446 $412,029 $ 1,832 $1,447,249 .1%
========== ======== ======== ========== ===
</TABLE>
49
<PAGE>
PROSPECTUS
May 1, 1997
THE ENDEAVOR FI VARIABLE ANNUITY
Issued Through
PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
by
PFL LIFE INSURANCE COMPANY
The Endeavor FI Variable Annuity Policy is a Flexible Premium Variable
Annuity that is offered by PFL Life Insurance Company ("PFL"). You can use the
Policy to accumulate funds for retirement or other long-term financial
planning purposes. You are generally not taxed on any earnings on amounts you
invest until you withdraw them or begin to receive annuity payments. The
Policy is a "variable" annuity because the value of your investments can go up
or down based on the performance of mutual fund portfolios that you select. It
is a flexible premium policy because after you purchase it you can generally
make additional investments of any amount of $50 or more, until the Annuity
Commencement Date when PFL begins making annuity payments to you.
You have twelve investment options to choose from. They include these eleven
mutual fund portfolios:
TCW Managed Asset Allocation Portfolio
Dreyfus Small Cap Value Portfolio
TCW Money Market Portfolio
Dreyfus U.S. Government Securities
Portfolio
T. Rowe Price International Stock Portfolio
T. Rowe Price Equity Income Portfolio
Value Equity Portfolio
T. Rowe Price Growth Stock Portfolio
Opportunity Value Portfolio
Enhanced Index Portfolio
WRL Growth Portfolio, managed by
Janus Capital Corporation
You as the Owner of the Policy, bear the entire investment risk for all
amounts that you allocate to any of the mutual funds. This means that you
could lose the amount that you invest. But if the mutual fund shares increase
in value, then the value of your Policy will also increase.
The twelfth investment option is the Fixed Account. If you invest in one of
the alternatives offered in the Fixed Account, then PFL guarantees to return
your investment with interest at rates that PFL will declare from time to
time.
Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).
LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
EFIVAP597
<PAGE>
You should only purchase a Policy as a long-term investment. However, you do
have access to all or some of the current cash value of your investments at
any time before the Annuity Commencement Date. But, if you do withdraw cash
from your Policy, there may be a surrender charge (also called a "Contingent
Deferred Sales Charge"). You may also have to pay income taxes on some or all
of the amount you withdraw, and if you are under the age of 59 1/2 there may
also be a tax penalty. Finally, there may be an interest penalty if you make a
premature withdrawal from the Fixed Account (this is called an "Excess
Interest Adjustment," and it could also result in you earning extra interest).
PFL has the right to postpone withdrawals from the Fixed Account.
Prospectuses for the mutual fund portfolios are attached to the back of this
Prospectus. This prospectus and the mutual fund prospectuses give you vital
information about the Policies and the mutual funds. Please read them
carefully before you invest. Keep them for future reference.
PLEASE NOTE THAT THE POLICIES AND THE MUTUAL FUNDS: ARE NOT BANK DEPOSITS,
ARE NOT FEDERALLY INSURED, ARE NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY
AND ARE NOT GUARANTEED TO ACHIEVE THEIR GOAL.
This Prospectus sets forth the information that a prospective purchaser
should consider before purchasing a Policy. A Statement of Additional
Information about the Policy and the Mutual Fund Account which has the same
date as this Prospectus has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of
Additional Information is available at no cost to any person requesting a copy
by writing PFL at the Administrative and Service Office or by calling 1-800-
525-6205. The table of contents of the Statement of Additional Information is
included at the end of this Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Policies and the Mutual Fund Account, except when the Fixed
Account is specifically mentioned.
Administrative and Service Office:
Financial Markets Division--Variable Annuity Department
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
- 2 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS............................................................... 5
SUMMARY................................................................... 9
CONDENSED FINANCIAL INFORMATION........................................... 20
FINANCIAL STATEMENTS...................................................... 22
HISTORICAL PERFORMANCE DATA............................................... 22
Standardized Performance Data........................................... 22
TCW Money Market Subaccount............................................. 22
Other Subaccounts....................................................... 22
WRL Growth Subaccount--Hypothetical Data................................ 25
Opportunity Value and Equity Index Portfolios........................... 25
Non-Standardized Performance Data....................................... 25
PUBLISHED RATINGS......................................................... 27
PFL LIFE INSURANCE COMPANY................................................ 27
THE ENDEAVOR ACCOUNTS..................................................... 27
The Mutual Fund Account................................................. 27
The Fixed Account....................................................... 32
Guaranteed Periods.................................................... 32
Dollar Cost Averaging Fixed Account Option............................ 33
Guaranteed Interest Rates............................................. 33
Transfers............................................................... 34
Reinstatements.......................................................... 35
Telephone Transactions.................................................. 35
Dollar Cost Averaging (DCA)............................................. 36
Asset Rebalancing....................................................... 37
THE POLICY................................................................ 37
Policy Application and Issuance of Policies--Premium Payments........... 37
Additional Premium Payments........................................... 38
Maximum Total Premium Payments........................................ 38
Allocation of Premium Payments........................................ 38
Payment Not Honored by Bank........................................... 39
Annuity Purchase Value.................................................. 39
The Mutual Fund Account Value......................................... 39
Adjusted Annuity Purchase Value (AAPV).................................. 40
Amendments.............................................................. 40
Non-participating Policy................................................ 40
DISTRIBUTIONS UNDER THE POLICY............................................ 40
Surrenders.............................................................. 40
Nursing Care and Terminal Condition Withdrawal Waiver................... 41
Excess Interest Adjustment (EIA)........................................ 42
Systematic Payout Option................................................ 42
Annuity Payments........................................................ 43
Annuity Commencement Date............................................. 43
Election of Payment Option............................................ 44
Premium Tax........................................................... 44
Supplementary Policy.................................................. 45
Annuity Payment Options................................................. 45
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Death Benefit........................................................... 48
Death of Annuitant Prior to Annuity Commencement Date................. 48
Death On or After Annuity Commencement Date........................... 50
Beneficiary........................................................... 50
Death of Owner.......................................................... 51
Restrictions Under the Texas Optional Retirement Program................ 51
Restrictions Under Section 403(b) Plans................................. 51
Restrictions Under Qualified Policies................................... 51
CHARGES AND DEDUCTIONS.................................................... 51
Contingent Deferred Sales Charge........................................ 52
Mortality and Expense Risk Charge....................................... 53
Administrative Charges.................................................. 53
Premium Taxes........................................................... 54
Federal, State and Local Taxes.......................................... 54
Transfer Charge......................................................... 54
Other Expenses Including Investment Advisory Fees....................... 54
Employee and Agent Purchases............................................ 55
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 55
Tax Status of the Policy................................................ 56
Taxation of Annuities................................................... 56
DISTRIBUTOR OF THE POLICIES............................................... 62
VOTING RIGHTS............................................................. 62
LEGAL PROCEEDINGS......................................................... 63
STATEMENT OF ADDITIONAL INFORMATION....................................... 64
Appendix A.............................................................. A-1
</TABLE>
- 4 -
<PAGE>
DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value in the Mutual Fund Account before the Annuity Commencement Date.
Adjusted Annuity Purchase Value--An amount equal to the Annuity Purchase
Value increased or decreased by any Excess Interest Adjustment applied at the
time of surrender or on the Annuity Commencement Date.
Administrative and Service Office--Financial Markets Division--Variable
Annuity Department, PFL Life Insurance Company, 4333 Edgewood Road, N.E.,
Cedar Rapids, Iowa 52499-0001.
Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which Annuity Payments are to
commence. This date may not be later than the last day of the policy month
starting after the Annuitant attains age 85, except as expressly allowed by
PFL, but in no event later than the last day of the month following the month
in which the Annuitant attains age 95.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.
Annuity Purchase Value--On or before the Annuity Commencement Date, an
amount equal to (a) the Premiums Paid; minus (b) partial withdrawals taken
(including any applicable Excess Interest Adjustment and/or Surrender Charges
on such withdrawals); plus (c) interest credited in the Fixed Account; plus or
minus (d) accumulated gains or losses in the Mutual Fund Account; minus (e)
any applicable service charges, premium or other taxes, and transfer fees, if
any. There is no Annuity Purchase Value after the Annuity Commencement Date.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment after the
Annuity Commencement Date.
Beneficiary--Before the Annuity Commencement Date, the person to whom the
death proceeds will be paid if the Annuitant, who is also the Owner, dies.
After the Annuity Commencement Date, the person to whom payments will be made
if the Annuitant dies. In the event the Annuitant, who is not the Owner, dies
prior to the Annuity Commencement Date, the Owner will become the Annuitant
unless the Owner specifically requests on the application or in writing before
the death of the Annuitant that the death benefit be paid to the Beneficiary
upon the Annuitant's death and PFL agrees to such an election.
Business Day--A day when the New York Stock Exchange is open for business.
- 5 -
<PAGE>
Cash Value--The Adjusted Annuity Purchase Value less the Contingent Deferred
Sales Charge, if any.
Code--The Internal Revenue Code of 1986, as amended.
Contingent Deferred Sales Charge--A percentage of each Premium Payment in an
amount from 7% to 0% depending upon the length of time form the date of each
Premium Payment. Also referred to as a surrender charge, it is assessed on
certain full or partial withdrawals of Premium Payments from the Policy.
Current Interest Guarantee--PFL's guarantee to pay a declared Current
Interest Rate on amounts under a Policy allocated to the Fixed Account. A
particular Current Interest Guarantee will be in effect for at least one year.
Current Interest Guarantee Period--The period during which a Current
Interest Guarantee is in effect.
Current Interest Rate--The interest rate currently guaranteed to be credited
on amounts under a Policy allocated to the Fixed Account. This interest rate
will always equal or exceed a minimum of 3%.
Date of Issue--The date the Policy is issued, as shown on the Policy Data
Page.
Due Proof of Death--A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by the attending physician, or any other proof
satisfactory to PFL will constitute Due Proof of Death.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial withdrawal or surrenders, to amounts transferred by the
Owner from the Fixed Account Guaranteed Period Options, or to amounts applied
to Annuity Payment Options. The adjustment reflects changes in the interest
rates declared by PFL since the date any payment was received by or an amount
was transferred to the Guaranteed Period Option. The Excess Interest
Adjustment (EIA) can either decrease or increase the amount to be received by
the Owner upon surrender or commencement of Annuity Payments, depending upon
whether there has been an increase or decrease in interest rates,
respectively.
Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account, that are part of the general assets of PFL that are
not in separate accounts.
Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.
Guaranteed Period Options--The various guaranteed interest rate periods
which may be offered by PFL under the Fixed Account into which premiums may be
paid or amounts transferred.
- 6 -
<PAGE>
Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, and the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account.
Mutual Fund Account--The PFL Endeavor Variable Annuity Account, which
comprises a portion of the PFL Endeavor VA Separate Account, a separate
account established and registered as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act") to which Premium Payments
under the Policies may be allocated and which invests in the Growth Portfolio
of the WRL Series Fund, Inc., the portfolios of the Endeavor Series Trust, and
such other mutual funds as PFL may determine from time-to-time.
Nonqualified Policy--A Policy other than a Qualified Policy.
PFL--PFL Life Insurance Company, the issuer of the Policies.
Policy--One of the variable annuity policies offered by this Prospectus.
Policy Anniversary--Each anniversary of the Date of Issue.
Policy Owner or Owner--The person who may exercise all rights and privileges
under the Policy. The Policy Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the Policy
Owner or a Successor Owner in the application.
Policy Value--The term used for the Annuity Purchase Value in prior versions
of the Policy and those Policies issued in certain states.
Policy Year--A Policy Year begins on the Date of Issue and on each Policy
Anniversary.
Premium Payment--An amount paid to PFL by the Policy Owner or on the Policy
Owner's behalf as consideration for the benefits provided by the Policy.
Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.
Subaccount--A segregated account within the Mutual Fund Account which
invests in a specified Portfolio of the Underlying Funds.
Successor Policy Owner--A person appointed by the Policy Owner to succeed to
ownership of the Policy in the event of the death of the Policy Owner (if the
Policy Owner is not the Annuitant) before the Annuity Commencement Date.
Surrender Charge--Another term for the "Contingent Deferred Sales Charge."
Underlying Funds--The Growth Portfolio of the WRL Series Fund, Inc., and the
portfolios of the Endeavor Series Trust.
- 7 -
<PAGE>
Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determination is made on each Business Day.
Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account.
Written Notice or Written Request--Written notice, signed by the Policy
Owner, that gives PFL the information it requires and is received at the
Administrative and Service Office. For some transactions, PFL may accept an
electronic notice such as telephone instructions. Such electronic notice must
meet the requirements PFL establishes for such notices.
- 8 -
<PAGE>
THE ENDEAVOR FI VARIABLE ANNUITY
SUMMARY
The following Summary provides a brief overview of the Policy. More detailed
information can be found in the sections of this Prospectus that follow, all
of which should be read in their entirety.
THE POLICY
The Endeavor FI Variable Annuity is a Flexible Premium Variable Annuity
which can be purchased as a Nonqualified Policy or as a Qualified Policy. The
Owner allocates the Premium Payments among the two Endeavor Accounts of PFL:
the PFL Endeavor Variable Annuity Account, (the "Mutual Fund Account") and the
Fixed Account.
THE ACCOUNTS
The Mutual Fund Account. The Mutual Fund Account is a separate account of
PFL, which invests exclusively in shares of the ten portfolios of the Endeavor
Series Trust, and the Growth Portfolio of the WRL Series Fund, Inc.
(collectively, the "Underlying Funds"). The Endeavor Series Trust is a mutual
fund managed by Endeavor Investment Advisers, a general partnership between
Endeavor Management Co. and AUSA Financial Markets, Inc. (an affiliate of
PFL), which contracts with several subadvisers (as described in separate
prospectuses that accompany this Prospectus) for investment advisory services.
The WRL Growth Portfolio is a portfolio within the WRL Series Fund, Inc. The
WRL Series Fund, Inc. is a mutual fund whose investment adviser is WRL
Investment Management, Inc., a subsidiary of Western Reserve Life Assurance
Co. of Ohio ("Western Reserve"), (an affiliate of PFL). WRL Investment
Management, Inc. contracts with Janus Capital Corporation as a sub-adviser to
the WRL Growth Portfolio for investment advisory services.
The Underlying Funds currently have eleven Portfolios: the WRL Growth
Portfolio, managed by Janus Capital Corporation; the TCW Managed Asset
Allocation Portfolio; the TCW Money Market Portfolio; the T. Rowe Price
International Stock Portfolio; the Value Equity Portfolio; the Dreyfus Small
Cap Value Portfolio; the Dreyfus U.S. Government Securities Portfolio; the T.
Rowe Price Equity Income Portfolio; the T. Rowe Price Growth Stock Portfolio;
the Opportunity Value Portfolio; and the Enhanced Index Portfolio. Each of the
eleven Subaccounts of the Mutual Fund Account invests solely in a
corresponding Portfolio of the Underlying Funds. Because the Policy Value may
depend on the investment experience of the selected Subaccounts, the Owner
bears the entire investment risk with respect to Premium Payments allocated
to, and amounts transferred to, the Mutual Fund Account. (See "THE ENDEAVOR
ACCOUNTS--The Mutual Fund Account," p. 27.)
The Fixed Account. The Fixed Account guarantees an annual effective credited
rate of at least 3% on: Premium Payments and transfers to, less partial
withdrawals and transfers from, the Fixed Account. PFL may, in its
- 9 -
<PAGE>
sole discretion, declare a higher Current Interest Rate. A Current Interest
Rate is guaranteed for at least one year. Upon surrender, PFL guarantees
return of at least the Premium Payments made to, less prior Partial
Withdrawals and transfers from, the Fixed Account. (See "THE ENDEAVOR
ACCOUNTS--The Fixed Account," p. 32.)
PREMIUM PAYMENTS
A Nonqualified Policy may be purchased with an initial Premium Payment of at
least $5,000, and a Qualified Policy generally may be purchased with an
initial Premium Payment of at least $1,000. A Policy purchased and used in
connection with a Tax Deferred 403(b) Annuity may be purchased with an initial
premium payment of $50. An Owner may make subsequent additional Premium
Payments of at least $50 each at any time before the Annuity Commencement
Date. The maximum total Premium Payments allowed without prior approval of PFL
is $1,000,000. At the time of each Premium Payment no charges or fees are
deducted, so the entire Premium Payment is invested immediately. (See
"CONTINGENT DEFERRED SALES CHARGE," p. 52 and CHARGES AND DEDUCTIONS--Premium
Taxes," p. 54.)
The Owner must allocate the initial Premium Payment among the Investment
Options (that is, among the options available under the Fixed Account or the
Subaccounts of the Mutual Fund Account or a combination of those options)
according to allocation percentages in the Policy application or transmittal
form. Any allocation must be in whole percents, and the total allocation must
equal 100%. Allocations specified by the Owner for the Initial Premium Payment
will be used for Subsequent Additional Premium Payments unless the Owner
requests a change in allocation. Allocations of additional Premium Payments
may be changed by sending Written Notice to PFL's Administrative and Service
Office. (See "THE POLICY--Policy Application and Issuance of Policies--Premium
Payments," p. 37.)
RIGHT TO CANCEL PERIOD
The Owner may, until the end of the period of time specified in the Policy
(the Right to Cancel period), examine the Policy and return it for a refund.
The applicable period will depend on the state in which the Policy is issued.
In most states the period is ten (10) days after the Policy is delivered to
the Owner. Several states allow for a longer period to return the Policy. The
amount of the refund will also depend on the state in which the Policy is
issued. Ordinarily the amount of the refund will be the Policy Value. However,
some states may require a return of the Premium Payments, or the greater of
the Premium Payments or the Annuity Purchase Value. PFL will pay the refund
within seven (7) days after it receives written notice of cancellation and the
returned Policy. The Policy will then be deemed void.
TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
An Owner may transfer Annuity Purchase Values from one Subaccount to another
within the Mutual Fund Account or to the Fixed Account, or may
- 10 -
<PAGE>
transfer Annuity Purchase Values or an amount equal to the interest credited
from the Guaranteed Period Options of the Fixed Account to the Mutual Fund
Account. Transfers of amount equal to interest credited to a Guaranteed Period
Option are referred to as "interest transfers." Except for certain 10%
Withdrawals and interest transfers, any Policy Values transferred out of the
Guaranteed Period Option of the Fixed Account before the end of the Guaranteed
Period are subject to an Excess Interest Adjustment. The minimum amount which
may be transferred is $500, or the entire Subaccount (or Guaranteed Period
Option) value, whichever is less. However, following a transfer out of a
particular Subaccount or Guaranteed Period Option, at least $500 must remain
in that Subaccount or Guaranteed Period Option, otherwise PFL reserves the
right to include remaining amounts in the transfer. Transfers currently may be
made either by telephone (subject to the provisions described below under
"Telephone Transactions," p. 35) or by sending Written Notice to the
Administrative and Service Office. (See "DISTRIBUTIONS UNDER THE POLICY--
Surrenders, " p. 40.)
An Owner may choose which Guaranteed Period Option to or from transfers may
be made. Transfers (and withdrawals) from a Guaranteed Period Option prior to
the end of a Guaranteed Period may be subject to the Excess Interest
Adjustment which may increase or decrease the amount available to transfer.
(See "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment (EIA)," p.
42.) PFL will offer the Owner the option to transfer an amount equal to any or
all of the interest credited in any of the Guaranteed Period Options to any
Subaccount(s) of the Separate Account prior to the end of the Guaranteed
Period. Any such "interest transfers" will not be subject to an Excess
Interest Adjustment.
Transfers from the Dollar Cost Averaging Fixed Account Option (see "THE
ENDEAVOR ACCOUNTS--Dollar Cost Averaging Fixed Account Option," p. 33), except
through automatic Dollar Cost Averaging transfers, are not allowed.
Policies issued in certain states may have additional restrictions on
transfers. See the Policy or endorsement for details.
A $10 charge may be imposed for each transfer in excess of 12 per Policy
Year, but currently PFL does not charge for any transfers. (See "THE ENDEAVOR
ACCOUNTS--Transfers," p. 34.)
SURRENDERS
The Owner may elect to surrender all or a portion of the Cash Value ($500
minimum) in exchange for a cash withdrawal payment from PFL at any time prior
to the earlier of the Annuitant's death or the Annuity Commencement Date. The
Cash Value equals the Adjusted Annuity Purchase Value less any applicable
Contingent Deferred Sales Charge (described below). A surrender request must
be made by Written Request, and a request for a partial surrender must specify
the Subaccount(s) and/or Guaranteed Period Options from which the withdrawal
is requested. There is currently
- 11 -
<PAGE>
no limit on the frequency or timing of withdrawals (See "Surrenders," p. 40),
although for Qualified Policies the retirement plan or applicable law may
restrict and/or penalize withdrawals. In addition to any applicable Contingent
Deferred Sales Charge, Excess Interest Adjustment, and premium tax, surrenders
may be subject to income taxes and a 10% tax penalty.
NURSING CARE AND TERMINAL CONDITION WAIVER
If the Owner or Owner's spouse (or Annuitant or Annuitant's spouse if the
Owner is not a natural person): (1) has been confined in a hospital or nursing
facility for 30 consecutive days or (2) has been diagnosed as having a
terminal condition, as defined in the Policy or endorsement (generally a life
expectancy of not more than 12 months), then partial withdrawals or surrenders
may be taken with no Surrender Charge and no Excess Interest Adjustment. (This
benefit may not be available in all states or for all policy forms. See the
Policy or endorsement for details.) (See "DISTRIBUTIONS UNDER THE POLICY--
Nursing Care and Terminal Condition Withdrawal Waiver," p. 41.)
CHARGES AND DEDUCTIONS
Contingent Deferred Sales Charge. In order to permit investment of the
entire Premium Payment, PFL does not deduct sales or other charges at the time
of investment. However, a Contingent Deferred Sales Charge of up to 7% of the
amount withdrawn is imposed on certain full or partial withdrawals of Premium
Payments in order to cover expenses relating to the sale of the Policies. The
applicable Contingent Deferred Sales Charge is based on the period of time
elapsed since payment of the Premium Payment(s) being withdrawn, and there
will be no Contingent Deferred Sales Charge imposed seven or more years after
a Premium Payment was paid. For purposes of determining the applicable
Contingent Deferred Sales Charge, Premium Payments are considered to be
withdrawn on a "first-in, first-out" basis. (See "CHARGES AND DEDUCTIONS--
Contingent Deferred Sales Charge," p. 52.) Note that for federal income tax
purposes, however, gains, if any, are deemed to be withdrawn first. (See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 55)
Excess Interest Adjustment. Withdrawals and transfers out of the Fixed
Account Guaranteed Period Options may be subject to an Excess Interest
Adjustment, which could eliminate all interest in excess of the minimum
guaranteed effective annual interest rate of 3%. (The Excess Interest
Adjustment could also result in the crediting of additional interest). (See
"DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment (EIA)," p. 42.)
Account Charges. PFL deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account for the mortality and expense risks assumed
by PFL. The effective annual rate of this charge is 1.25% of the Account's net
assets. (See "CHARGES AND DEDUCTIONS--Mortality and Expense Risk Charge," p.
53.)
- 12 -
<PAGE>
PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Account and the Policies. The effective annual
rate of this charge is .15% of the value of each Subaccount of the Mutual Fund
Account's net assets. (See "CHARGES AND DEDUCTIONS--Administrative Charges,"
p. 53.)
PFL guarantees that the account charges for mortality and expense risks and
administrative expenses will not exceed a total of 1.40%.
Policy Charges. There is also an annual Policy Maintenance Charge each year
for Policy maintenance and related administrative expenses. This charge is the
lesser of 2% of the Annuity Purchase Value or $35 per year and is deducted
only from the Mutual Fund Account. For certain Policies, this charge is waived
if the sum of all Premium Payments made less the sum of all Partial
Withdrawals is at least $50,000 on the Policy Anniversary.
Taxes. PFL may incur premium taxes relating to the Policies. When permitted
by state law, PFL will not deduct any premium taxes related to a particular
Policy from the Annuity Purchase Value until withdrawal of all Annuity
Purchase Value, payment of the death benefit, or the Annuity Commencement
Date. Premium Taxes currently range from 0% to 3.50% of Premium Payments. (See
"CHARGES AND DEDUCTIONS--Premium Taxes," p. 54.)
No charges are currently made against any of the Accounts for federal,
state, or local income taxes. Should PFL determine that any such taxes may be
imposed with respect to any of the Accounts, PFL may deduct such taxes from
amounts held in the relevant Account. (See "CHARGES AND DEDUCTIONS--Federal,
State and Local Taxes," p. 54.)
Charges Against the Underlying Funds. The value of the net assets of the
Subaccounts of the Mutual Fund Account will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. These fees and
expenses are detailed in the prospectuses for the Underlying Funds that
accompany this Prospectus.
- 13 -
<PAGE>
Expense Data. The charges and deductions are summarized in the following
tables. This tabular information regarding expenses assumes that the entire
Annuity Purchase Value is in the Mutual Fund Account.
<TABLE>
<CAPTION>
DREYFUS
TCW T. ROWE DREYFUS U.S.
TCW MANAGED PRICE SMALL GOVERNMENT
MONEY ASSET INTERNATIONAL VALUE CAP SECURITIES
MARKET ALLOCATION STOCK EQUITY VALUE PORTFOLIO
------ ---------- ------------- ------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
POLICY OWNER TRANSACTION
EXPENSES
Sales Load/1/ On
Purchase Payments...... 0 0 0 0 0 0
Maximum Surrender Charge
(as a % of Premium
Payment
Surrendered)(/2/)...... 7 7 7 7 7 7
Surrender Fees.......... 0 0 0 0 0 0
----------------------------------------------------
Annual Service
Charge(/1/)............ $35 Per Policy
----------------------------------------------------
Transfer Fee(/1/)....... Currently no fee for transfers.
MUTUAL FUND ACCOUNT
ANNUAL EXPENSES
(AS A PERCENTAGE OF
ACCOUNT VALUE)
Mortality and Expense
Risk Fees.............. 1.25 1.25 1.25 1.25 1.25 1.25
Administrative Charge... 0.15 0.15 0.15 0.15 0.15 0.15
---- ---- ---- ---- ---- ----
Total Mutual Fund
Account Annual
Expenses............... 1.40 1.40 1.40 1.40 1.40 1.40
UNDERLYING FUNDS ANNUAL
EXPENSES(/3/)
(AS A PERCENTAGE OF
AVERAGE NET ASSETS AND
AFTER EXPENSE
REIMBURSEMENT)
Management Fees......... 0.50 0.75 0.90 0.80 0.80 0.65
Other Expenses.......... 0.10 0.10 0.28 0.11 0.12 0.17
---- ---- ---- ---- ---- ----
Total Underlying Funds
Annual Expense(/4/).... 0.60 0.85 1.18 0.91 0.92 0.82
</TABLE>
<TABLE>
<CAPTION>
T. ROWE T. ROWE
PRICE PRICE
EQUITY GROWTH OPPORTUNITY ENHANCED WRL
INCOME STOCK VALUE INDEX GROWTH
------- ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C>
POLICY OWNER TRANSACTION EXPENSES
Sales Load/1/ On Purchase Pay-
ments............................ 0 0 0 0 0
Maximum Surrender Charge
(as a % of Premium Payment Sur-
rendered)(/2/)................... 7 7 7 7 7
Surrender Fees.................... 0 0 0 0 0
--------------------------------------
Annual Service Charge(/1/)........ $35 Per Policy
--------------------------------------
Transfer Fee(/1/)................. Currently no fee for transfers.
MUTUAL FUND ACCOUNT ANNUAL EX-
PENSES
(AS A PERCENTAGE OF ACCOUNT VAL-
UE)
Mortality and Expense Risk Fees... 1.25 1.25 1.25 1.25 1.25
Administrative Charge............. 0.15 0.15 0.15 0.15 0.15
---- ---- ---- ---- ----
Total Mutual Fund Account Annual
Expenses......................... 1.40 1.40 1.40 1.40 1.40
UNDERLYING FUNDS ANNUAL
EXPENSES(/3/)
(AS A PERCENTAGE OF AVERAGE NET
ASSETS AND AFTER EXPENSE
REIMBURSEMENTS)
Management Fees................... 0.80 0.80 0.80 0.75 0.80
Other Expenses.................... 0.16 0.21 0.50 .55 0.08
---- ---- ---- ---- ----
Total Underlying Funds Annual Ex-
pense(/4/)....................... 0.96 1.01 1.30 1.30 0.88
</TABLE>
- ----------------------------------
(1) The Contingent Deferred Sales Charge and Transfer Fee, if any is imposed,
apply to each Policy, regardless of how Annuity Purchase Value is
allocated among the Mutual Fund Account and the Fixed Account. The Annual
Service Charge and Mutual Fund Account Annual Expenses do not apply to the
Fixed Account. The Service Charge is deducted on each Policy Anniversary
and at the time of surrender, if surrender occurs during a Policy Year.
(See "CHARGES AND DEDUCTIONS--Other Expenses Including Investment Advisory
Fees," p. 54.)
(2) The Contingent Deferred Sales Charge is decreased based on the Policy Year
in which the withdrawal is made, from 7% in the Policy Year in which the
Premium Payment was made to 0% in the eighth Policy Year after the Premium
Payment was made.
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<PAGE>
(3) Endeavor Investment Advisers has agreed, until terminated by Endeavor
Investment Advisers, to assume expenses of the Portfolios that exceed the
following rates: TCW Money Market--0.99%; TCW Managed Asset Allocation--
1.25%; T. Rowe Price International Stock--1.53%; Value Equity--1.30%;
Dreyfus Small Cap Value--1.30%; Dreyfus U.S. Government Securities--1.00%;
T. Rowe Price Equity Income--1.30%; T. Rowe Price Growth Stock--1.30%;
Opportunity Value--1.30%; Enhanced Index--1.30%. Amounts shown for the
Enhanced Index Portfolios are estimated for 1997. During 1996, Endeavor
Investment Advisers waived fees relative to, or reimbursed, the
Opportunity Value Portfolio. The annualized operating expense ratio before
waiver/reimbursement by Endeavor Investment Advisers for the period ended
December 31, 1996, was 12.69%. The fee table information relating to the
Underlying Funds was provided to PFL by the Underlying Funds, and PFL has
not independently verified such information.
(4) Effective January 1, 1997, the WRL Series Fund, Inc. has adopted a Plan of
Distribution pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "1940 Act") ("Distribution Plan") and pursuant to the
Distribution Plan, has entered into a Distribution Agreement with
InterSecurities, Inc. ("ISI"), principal underwriter for the WRL Series
Fund, Inc. Under the Distribution Plan, the WRL Series Fund, Inc., on
behalf of the WRL Growth Portfolio, is authorized to pay to various
service providers, as direct payment for expenses incurred in connection
with the distribution of the Portfolio's shares, amounts equal to actual
expenses associated with distributing the Portfolio's shares, up to a
maximum rate of 0.15% (fifteen one-hundredths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it will not seek
payment by the WRL Series Fund, Inc. of distribution expenses with respect
to any portfolio (including the WRL Growth Portfolio) during the fiscal
year ending December 31, 1997. Owners will be notified in advance prior to
ISI's seeking such reimbursement.
- 15 -
<PAGE>
EXAMPLES
An Owner would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets and assuming the entire Annuity Purchase Value is
in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
TCW Money Market Portfolio...................... $91 $109 $137 $238
TCW Managed Asset Allocation Portfolio.......... $93 $117 $150 $264
T. Rowe Price International Stock Portfolio..... $97 $127 $166 $297
Value Equity Portfolio.......................... $94 $118 $153 $270
Dreyfus Small Cap Value Portfolio............... $94 $119 $153 $271
Dreyfus U.S. Government Securities Portfolio.... $93 $116 $148 $261
T. Rowe Price Equity Income Portfolio........... $94 $120 $155 $275
T. Rowe Price Growth Stock Portfolio............ $95 $121 $158 $280
Opportunity Value Portfolio..................... $98 $130 $172 $309
Enhanced Index Portfolio........................ $98 $130 $172 $309
WRL Growth Portfolio............................ $94 $117 $151 $267
2. If the Policy is annuitized at the end of the applicable time period:
TCW Money Market Portfolio...................... $21 $ 64 $111 $238
TCW Managed Asset Allocation Portfolio.......... $23 $ 72 $123 $264
T. Rowe Price International Stock Portfolio..... $27 $ 82 $140 $297
Value Equity Portfolio.......................... $24 $ 74 $126 $270
Dreyfus Small Cap Value Portfolio............... $24 $ 74 $127 $271
Dreyfus U.S. Government Securities Portfolio.... $23 $ 71 $122 $261
T. Rowe Price Equity Income Portfolio........... $24 $ 75 $129 $275
T. Rowe Price Growth Stock Portfolio............ $25 $ 77 $131 $280
Opportunity Value Portfolio..................... $28 $ 85 $146 $309
Enhanced Index Portfolio........................ $28 $ 85 $146 $309
WRL Growth Portfolio............................ $24 $ 73 $125 $267
3. If the Policy is not surrendered or annuitized:
TCW Money Market Portfolio...................... $21 $ 64 $111 $238
TCW Managed Asset Allocation Portfolio.......... $23 $ 72 $123 $264
T. Rowe Price International Stock Portfolio..... $27 $ 82 $140 $297
Value Equity Portfolio.......................... $24 $ 74 $126 $270
Dreyfus Small Cap Value Portfolio............... $24 $ 74 $127 $271
Dreyfus U.S. Government Securities Portfolio.... $23 $ 71 $122 $261
T. Rowe Price Equity Income Portfolio........... $24 $ 75 $129 $275
T. Rowe Price Growth Stock Portfolio............ $25 $ 77 $131 $280
Opportunity Value Portfolio..................... $28 $ 85 $146 $309
Enhanced Index Portfolio........................ $28 $ 85 $146 $309
WRL Growth Portfolio............................ $24 $ 73 $125 $267
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the
expenses of the Underlying Funds. See "CHARGES AND DEDUCTIONS," p. 51, and the
Underlying Funds' prospectuses. In addition to the expenses listed above,
premium taxes may be applicable.
- 16 -
<PAGE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND IS NOT A REPRESENTATION OF PAST
OR FUTURE RETURNS WHICH COULD BE GREATER OR LESS THAN THAT RATE. The figures
and data for the Underlying Fund annual expenses have been provided by Western
Reserve Life Assurance Co. of Ohio and Endeavor Investment Advisers, and while
PFL does not dispute these figures, PFL has not independently verified their
accuracy.
In these examples, the $35 Annual Policy Fee is reflected as a charge of
.0547% based on average Annuity Purchase Value of $64,005. Normally, the $35
Service Charge would be waived if the Premium Payment(s) less Partial
Withdrawals, or the Policy Value is at least $50,000. However, it was included
in these examples for illustrative purposes.
DEATH BENEFIT
Upon receipt of proof that the Annuitant, who is the Owner, has died before
the Annuity Commencement Date, the Death Benefit is calculated and is payable
to the Beneficiary when PFL receives due proof of death, an election of the
method of settlement and return of the Policy. The Death Benefit is only paid
if the Owner and Annuitant are the same person, and that person dies prior to
the Annuity Commencement Date. In the event that the Annuitant who is not the
Owner dies prior to the Annuity Commencement Date, the Owner will generally
become the Annuitant unless the Owner specifically requests on the application
or in writing prior to Annuitant's death that the death benefit be paid upon
the Annuitant's death and PFL agrees to such an election.
The amount of the Death Benefit will depend on the state where the Policy is
purchased and will depend on the Death Benefit option elected by the Owner.
However, the Death Benefit will always be at least equal to the greater of the
Policy Value or the Cash Value on the date PFL receives the documentation it
needs to process the Death Benefit.
The Death Benefit is not paid on the death of an Owner if the Owner is not
the Annuitant. If an Owner who is not the Annuitant dies before the Annuity
Commencement Date, the amount payable under the Policy upon surrender will be
the Adjusted Policy Value. (See "DISTRIBUTIONS UNDER THE POLICY--Death
Benefit," p. 48 or the Policy or endorsement for details.)
The Owner has the "one-time" option of choosing a Guaranteed Minimum Death
Benefit at the time of purchase of the Policy. The Owner may choose either (1)
the "5% Annually Compounding Death Benefit," or (2) the "Annual Step-Up Death
Benefit." Certain age restrictions may apply, and prior versions of the Policy
or Policies offered in certain states may not offer all Guaranteed Minimum
Death Benefit Options. See the Policy or endorsement for details. The Death
Benefit may be paid as either a lump sum cash benefit or as an annuity as
permitted by federal or state law.
- 17 -
<PAGE>
The 5% Compound Death Benefit is the total Premium Payments less any
"Adjusted Partial Withdrawal" (see p. 49) plus interest at an effective annual
rate of 5.0%. The Annual Step-Up Death Benefit is the highest Annuity Purchase
Value on any Policy Anniversary prior to the earlier of the owner's 81st
birthday or the date of death, plus any Premium Payments paid less any
"Adjusted Partial Withdrawals" since that anniversary.
VARIATIONS IN POLICY PROVISIONS
Certain provisions in versions of the Policies offered in certain states may
vary from the descriptions in this Prospectus in order to comply with
different state laws. Any such state variations will be included in the Policy
itself or in riders or endorsements attached to the Policy. See the Policy or
endorsement for details.
New Jersey residents: Annuity payments must begin on or before the Policy
Anniversary that is closest to the Annuitant's 70th birthday or the 10th
Policy Anniversary, whichever occurs last. The Owner may not select a
Guaranteed Period Option that would extend beyond that date. The Owner's
options at the Annuity Commencement Date are to elect a lump sum payment, or
elect to receive annuity payments under one of the Fixed Payment Options. New
Jersey residents cannot elect Variable Payment Options. Consult your agent and
the policy form itself for details regarding these and other terms applicable
to policies sold in New Jersey.
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY
With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Annuity Purchase Value until a distribution
under the Policy occurs (e.g., a surrender or Annuity Payment) or is deemed to
occur (e.g., a pledge or assignment of a Policy). Generally, a portion of any
distribution or deemed distribution will be taxable as ordinary income. The
taxable portion of certain distributions will be subject to withholding unless
the recipient elects otherwise. In addition, a tax penalty may apply to
certain distributions or deemed distributions under the Policy. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 55.)
- 18 -
<PAGE>
INQUIRIES, WRITTEN NOTICES AND WRITTEN REQUESTS
Any questions about procedures or the Policy, or any Written Notice or
Written Request required to be sent to PFL, should be sent to the
Administrative and Service Office, Financial Markets Division--Variable
Annuity Dept., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Telephone requests and inquires may be made by calling 800-525-6205. All
inquiries, Notices and Requests should include the Policy number, the Owner's
name and the Annuitant's name.
* * *
Note: The foregoing summary is qualified in its entirety by the detailed
information in the remainder of this Prospectus and in the Statement of
Additional Information and in the prospectuses for the Underlying Funds and in
the Policy, all of which should be referred to for more detailed information.
This Prospectus generally describes only the Policy and the Mutual Fund
Account. Separate prospectuses describe the Underlying Funds. (There is no
prospectus for the Fixed Account since interests in the Fixed Account are not
securities. See "THE ENDEAVOR ACCOUNTS--The Fixed Account," p. 32.)
- 19 -
<PAGE>
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units
outstanding for each Subaccount from the date of inception:
<TABLE>
<CAPTION>
TCW MONEY MARKET SUBACCOUNT*
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996.................... $1.11571 $1.15422 26,461,099.190
1995.................... $1.07242 $1.11571 21,103,926.232
1994.................... $1.05150 $1.07242 17,836,839.874
1993.................... $1.04313 $1.05150 12,190,857.625
1992.................... $1.02803 $1.04313 4,334,947.760
1991(/1/)............... $1.00000 $1.02803 1,855,372.177
<CAPTION>
TCW MANAGED ASSET ALLOCATION SUBACCOUNT**
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996.................... $1.577873 $1.833135 124,998,927.667
1995.................... $1.301669 $1.577873 122,974,873.030
1994.................... $1.393488 $1.301669 130,909,987.116
1993.................... $1.209859 $1.393488 69,252,242.665
1992.................... $1.125386 $1.209859 11,637,563.615
1991(/1/)............... $1.000000 $1.125386 3,775,618.731
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996.................... $1.171039 $1.330640 91,462,303.686
1995.................... $1.073958 $1.171039 75,065,177.549
1994.................... $1.156482 $1.073958 76,518,044.179
1993.................... $0.989782 $1.156482 45,569,234.403
1992.................... $1.041235 $0.989782 6,368,485.858
1991(/1/)............... $1.000000 $1.041235 3,068,279.081
<CAPTION>
VALUE EQUITY SUBACCOUNT***
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996.................... $1.387903 $1.694854 65,227,195.342
1995.................... $1.045610 $1.387903 46,194,663.692
1994.................... $1.018576 $1.045610 30,512,231.489
1993(/3/)............... $1.000000 $1.018576 10,958,836.984
<CAPTION>
DREYFUS SMALL CAP VALUE SUBACCOUNT****
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996.................... $1.206843 $1.496065 51,124,831.634
1995.................... $1.072941 $1.206843 40,635,696.978
1994.................... $1.107747 $1.072941 32,607,348.474
1993(/4/)............... $1.000000 $1.107747 11,449,956.948
</TABLE>
- 20 -
<PAGE>
<TABLE>
<CAPTION>
DREYFUS U.S. GOVERNMENT SECURITIES SUBACCOUNT*****
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $ 1.124292 $ 1.128769 17,561,825.527
1995......................... $ 0.985803 $ 1.124292 8,456,764.729
1994(/5/).................... $ 0.998670 $ 0.985803 3,102,671.789
<CAPTION>
T. ROWE PRICE EQUITY INCOME SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $ 1.287240 $ 1.521680 42,673,040.677
1995(/6/).................... $ 1.000000 $ 1.287240 14,943,358.393
<CAPTION>
T. ROWE PRICE GROWTH STOCK SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $ 1.353339 $ 1.611613 30,237,847.748
1995(/6/).................... $ 1.000000 $ 1.353339 14,196,707.745
<CAPTION>
OPPORTUNITY VALUE SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996(/7/).................... $ 1.000000 $ 1.004355 314,119.406
<CAPTION>
ENHANCED INDEX SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996(/8/).................... -- -- --
<CAPTION>
WRL GROWTH SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $14.583843 $16.964068 15,174,482.394
1995......................... $10.051117 $14.583843 13,337,196.679
1994......................... $11.114865 $10.051117 12,758,957.591
1993......................... $10.839753 $11.114865 9,252,403.800
1992(/2/).................... $10.000000 $10.839753 1,119,066,376
</TABLE>
- ----------------------------------
(1) Period from April 8, 1991 through December 31, 1991.
(2) Period from July 1, 1992 through December 31, 1992.
(3) Period from May 27, 1993 through December 31, 1993.
(4) Period from May 4, 1993 through December 31, 1993.
(5) Period from May 9, 1994 through December 31, 1994.
(6) Period from January 3, 1995 through December 31, 1995.
(7) Period from November 18, 1996, through December 31, 1996.
(8) The offering of the Enhanced Index Subaccount is expected to commence on
or about the date of this Prospectus. Accordingly, no comparable data is
available for that Subaccount.
- 21 -
<PAGE>
* Prior to May 1, 1996, known as the Money Market Subaccount.
** Prior to May 1, 1996, known as the Managed Asset Allocation Subaccount.
*** Prior to May 1, 1996, known as the Quest for Value Equity Subaccount.
**** Prior to October 29, 1996, known as the Value Small Cap Subaccount, and
prior to May 1, 1996, known as the Quest for Value Small Cap Subaccount.
***** Prior to May 1, 1996, known as the U.S. Government Securities
Subaccount.
FINANCIAL STATEMENTS
The financial statements of the Mutual Fund Account and PFL and the
independent auditors' reports thereon are in the Statement of Additional
Information which is available free upon request to the Administrative and
Service Office.
HISTORICAL PERFORMANCE DATA
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. In addition, PFL may advertise the
effective yield of the Subaccount investing in the TCW Money Market Portfolio
(the "TCW Money Market Subaccount"). These figures will be calculated
according to standardized methods prescribed by the Securities and Exchange
Commission ("SEC"). They will be based on historical earnings and are not
intended to indicate future performance.
TCW MONEY MARKET SUBACCOUNT
The yield of the TCW Money Market Subaccount for a Policy refers to the
annualized income generated by an investment under a Policy in the Subaccount
over a specified seven-day period. The yield is calculated by assuming that
the income generated for that seven-day period is generated each seven-day
period over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment under a Policy in the Subaccount is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
OTHER SUBACCOUNTS
The yield of a Subaccount of the Mutual Fund Account (other than the TCW
Money Market Subaccount) for a Policy refers to the annualized
- 22 -
<PAGE>
income generated by an investment under a Policy in the Subaccount over a
specified thirty-day period. The yield is calculated by assuming that the
income generated by the investment during that thirty-day period is generated
each thirty-day period over a 12-month period and is shown as a percentage of
the investment.
The total return of a Subaccount of the Mutual Fund Account refers to return
quotations assuming an investment under a Policy has been held in the
Subaccount for various periods of time including, but not limited to, a period
measured from the date the Subaccount commenced operations. When a Subaccount
has been in operation for one, five, and ten years, respectively, the total
return for these periods will be provided. The total return quotations for a
Subaccount will represent the average annual compounded rates of return that
equate an initial investment of $1,000 in the Subaccount to the redemption
value of that investment as of the first day of each of the periods for which
total return quotations are provided.
The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular Policy. The
yield calculations also do not reflect the effect of any Contingent Deferred
Sales Charge that may be applicable to a particular Policy. To the extent that
any or all of a premium tax and/or Contingent Deferred Sales Charge is
applicable to a particular Policy, the yield and/or total return of that
Policy will be reduced. For additional information regarding yields and total
returns calculated using the standard formats briefly summarized above, please
refer to the Statement of Additional Information, a copy of which may be
obtained from the Administrative and Service Office upon request.
- 23 -
<PAGE>
Based on the method of calculation described in the Statement of Additional
Information, the average annual total returns for periods from inception of
the Subaccounts to December 31, 1996 and for the year ended December 31, 1996
were as follows:
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
ONE YEAR FIVE INCEPTION
PERIOD YEARS OF THE SUBACCOUNT
ENDED ENDED SUBACCOUNT INCEPTION
SUBACCOUNT 12/31/96 12/31/96 TO 12/31/96 DATE
- ---------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C>
TCW Managed Asset Allocation... 10.80% 9.95% 10.91% April 8, 1991
T. Rowe Price International
Stock(/1/)................... 8.24% 4.68% 4.81% April 8, 1991
Value Equity................... 16.77% N/A 15.08% May 27, 1993
Dreyfus Small Cap Value........ 18.63% N/A 10.86% May 4, 1993
Dreyfus U.S. Government
Securities................... -5.07% N/A 3.09% May 9, 1994
T. Rowe Price Equity Income.... 12.84% N/A 21.26% January 3, 1995
T. Rowe Price Growth Stock..... 13.72% N/A 24.94% January 3, 1995
Opportunity Value.............. N/A N/A -6.56% November 18, 1996
Enhanced Index(/2/)............ N/A N/A N/A --
WRL Growth..................... 10.94% N/A 12.01% July 1, 1992
</TABLE>
- ----------------------------------
(1) Effective January 1, 1995, Rowe Price-Fleming International, Inc. became
the new adviser to the Global Growth Portfolio. The Portfolio's name
changed to the T. Rowe Price International Stock Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (that
is, non-U.S. companies).
(2) The Enhanced Index Subaccount is expected to begin operations on or about
the date of this Prospectus, therefore comparable information is not
available.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and the T.
Rowe Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception
periods would have been lower.
- 24 -
<PAGE>
WRL GROWTH SUBACCOUNT--HYPOTHETICAL DATA
Prior to July 1, 1992, the WRL Growth Subaccount had not yet commenced
operations. However, the following is standardized average annual total return
information based on the hypothetical assumption that the WRL Growth
Subaccount had been available to the PFL Endeavor Variable Annuity Account
since inception of the WRL Growth Portfolio:
<TABLE>
<CAPTION>
FIVE YEARS 10 YEARS
ENDED ENDED
SUBACCOUNT 12/31/96 12/31/96
- ---------- ---------- --------
<S> <C> <C>
WRL Growth.................................................. 9.10% 16.19%
</TABLE>
- ----------------------------------
* The performance data for periods prior to the date the WRL Growth Subaccount
commenced operations (July 1, 1992) is based on the performance of the WRL
Series Fund, Inc.'s Growth Portfolio and the assumption that the WRL Growth
Subaccount was in existence for the same period as the WRL Growth Portfolio,
with a level of charges equal to those currently assessed against the
Subaccount or against Owners' contract values under the Policies. The WRL
Growth Portfolio, commenced operations on October 2, 1986. For purposes of
the calculation of the performance data prior to July 1, 1992, the
deductions for the mortality and expense risk charge and administrative
charge are made on a monthly basis, rather than a daily basis. The monthly
deduction is made at the beginning of each month and generally approximates
the performance which would have resulted if the Subaccount had actually
been in existence since the inception of the WRL Growth Portfolio.
Performance data for periods of less than seven years reflect deduction of
the Contingent Deferred Sales Charge.
OPPORTUNITY VALUE AND EQUITY INDEX PORTFOLIOS
The Opportunity Value Portfolio and the Equity Index Portfolio are new and
therefore do not have (in the case of the Opportunity Value Portfolio, no
significant) historical performance data. However, their investment managers
(OpCap Advisors and J.P. Morgan Investment Management Inc. respectively) have
years of experience managing very similar portfolios with substantially the
same investment objectives and policies. Historical performance data showing
the results the investment managers achieved for those other portfolios is in
the prospectus for the Endeavor Series Trust, which is included with this
Prospectus. See "Performance Information" in the Endeavor Series Trust's
prospectus. That performance information in the Endeavor Series Trust's
prospectus does not take into account the fees and charges under the Policy;
if those fees and charges were reflected, the investment returns would be
lower.
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Contingent Deferred Sales Charge is applicable, and may also make other
assumptions.
- 25 -
<PAGE>
The following non-standardized average annual total return figures are based
on the assumption that the Policy is not surrendered, and therefore the
following figures assume that the Contingent Deferred Sales Charge is not
imposed.
AVERAGE ANNUAL TOTAL RETURNS
(ASSUMING NO SURRENDER CHARGE)
<TABLE>
<CAPTION>
ONE YEAR FIVE INCEPTION
PERIOD YEARS OF THE
ENDED ENDED SUBACCOUNT
SUBACCOUNT 12/31/96 12/31/96 TO 12/31/96 INCEPTION DATE
- ---------- --------- -------- ----------- ----------------
<S> <C> <C> <C> <C>
TCW Managed Asset Allocation... 16.10% 10.18% 11.08% April 8, 1991
T. Rowe Price International
Stock(/1/)................... 13.55% 4.97% 5.05% April 8, 1991
Value Equity................... 22.04% N/A 15.72% May 27, 1993
Dreyfus Small Cap Value........ 23.88% N/A 11.56% May 4, 1993
Dreyfus U.S. Government
Securities................... 0.33% N/A 4.66% May 9, 1994
T. Rowe Price Equity Income.... 18.14% N/A 23.35% January 3, 1995
T. Rowe Price Growth Stock..... 19.01% N/A 26.95% January 3, 1995
Opportunity Value.............. N/A N/A 0.44% November 18,1996
Enhanced Index(/2/)............ N/A N/A N/A --
WRL Growth..................... 16.24% N/A 12.38% July 1, 1992
</TABLE>
- ----------------------------------
(1) Effective January 1, 1995, Rowe Price-Fleming International, Inc. became
the new adviser to the Global Growth Portfolio. The Portfolio's name
changed to the T. Rowe Price International Stock Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (that
is, non-U.S. companies).
(2) The Enhanced Index Subaccount is expected to begin operations on or about
the date of this Prospectus, therefore comparable information is not
available.
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service office upon request.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and the T.
Rowe Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception
periods would have been lower.
- 26 -
<PAGE>
PUBLISHED RATINGS
PFL may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is to reflect the financial
strength and/or claims-paying ability of PFL and should not be considered as
bearing on the investment performance of assets held in the Mutual Fund
Account or of the safety or riskiness of an investment in the Mutual Fund
Account. Each year the A.M. Best Company reviews the financial status of
thousands of insurers, culminating in the assignment of Best's ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. In addition, the claims-paying ability of
PFL as measured by Standard & Poor's Insurance Ratings Services, Moody's
Investors Service or Duff & Phelps Credit Rating Co. may be referred to in
advertisements or sales literature or in reports to Owners. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. Claims-
paying ability ratings do not refer to an insurer's ability to meet non-policy
obligations (i.e., debt/commercial paper).
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("PFL"), 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499-0001, is a stock life insurance company. It was incorporated under
the name NN Investors Life Insurance Company, Inc. under the laws of the State
of Iowa on April 19, 1961. It is principally engaged in the sale of life
insurance and annuity policies, and is licensed in the District of Columbia,
Guam, and in all states except New York. As of December 31, 1996, PFL had
assets of approximately $7.9 billion. PFL is a wholly-owned indirect
subsidiary of AEGON USA, Inc., which conducts substantially all of its
operations through subsidiary companies engaged in the insurance business or
in providing non-insurance financial services. All of the stock of AEGON USA,
Inc. is indirectly owned by AEGON n.v. of the Netherlands. AEGON n.v., a
holding company, conducts its business through subsidiary companies engaged
primarily in the insurance business.
THE ENDEAVOR ACCOUNTS
Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Fixed Account, or to a combination of these Accounts.
THE MUTUAL FUND ACCOUNT
The PFL Endeavor Variable Annuity Account comprises a portion of the PFL
Endeavor VA Separate Account of PFL Life Insurance Company (the "Mutual Fund
Account"). The PFL Endeavor VA Separate Account was
- 27 -
<PAGE>
established as a separate investment account under the laws of the State of
Iowa on January 19, 1990. The Mutual Fund Account receives and invests the
Premium Payments under the Policies that are allocated to it for investment in
shares of the WRL Growth Portfolio, and the Endeavor Series Trust.
The Mutual Fund Account currently is divided into eleven Subaccounts.
Additional Subaccounts may be established in the future at the discretion of
PFL. Each Subaccount invests exclusively in shares of one of the Portfolios of
the Underlying Funds. Under Iowa law, the assets of the Mutual Fund Account
are owned by PFL, but they are held separately from the other assets of PFL.
To the extent that these assets are attributable to the Cash Value of the
Policies, these assets are not chargeable with liabilities incurred in any
other business operation of PFL. Income, gains, and losses incurred on the
assets in the Subaccounts of the Mutual Fund Account, whether or not realized,
are credited to or charged against that Subaccount without regard to other
income, gains or losses of any other Account or Subaccount of PFL. Therefore,
the investment performance of any Subaccount is entirely independent of the
investment performance of PFL's general account assets or any other Account or
Subaccount maintained by PFL.
The Mutual Fund Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a separate account under federal securities laws. However, the
SEC does not supervise the management or the investment practices or policies
of the Mutual Fund Account or PFL.
Underlying Funds. The Mutual Fund Account will invest exclusively in shares
of Endeavor Series Trust and the Growth Portfolio of the WRL Series Fund, Inc.
(collectively the "Underlying Funds"). The WRL Series Fund, Inc., and the
Endeavor Series Trust are each a series-type mutual fund registered with the
SEC under the 1940 Act as an open-end, diversified management investment
company. The Underlying Funds currently issue shares of the following eleven
Portfolios: The WRL Growth Portfolio, the TCW Managed Asset Allocation
Portfolio (formerly known as the Managed Asset Allocation Portfolio), the TCW
Money Market Portfolio (formerly known as the Money Market Portfolio), the T.
Rowe Price International Stock Portfolio, the Value Equity Portfolio (formerly
known as the Quest for Value Equity Portfolio), the Dreyfus Small Cap Value
Portfolio (formerly known as the Value Small Cap Portfolio, and prior to that
the Quest for Value Small Cap Portfolio), the Dreyfus U.S. Government
Securities Portfolio (formerly known as the U.S. Government Securities
Portfolio), the T. Rowe Price Equity Income Portfolio, the T. Rowe Price
Growth Stock Portfolio, the Opportunity Value Portfolio and the Enhanced Index
Portfolio. The assets of each Portfolio are held separate from the assets of
the other Portfolios, and each Portfolio has its own distinct investment
objectives and policies. Each Portfolio operates as a separate investment
fund, and the income or losses of one Portfolio generally have no effect on
the investment performance of any other Portfolio.
The registration of the Underlying Funds does not involve supervision of the
management or investment practices or policies of the Underlying Funds by the
SEC.
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Endeavor Investment Advisers (the "Manager"), an investment adviser
registered with the SEC under the Investment Advisers Act of 1940, is the
Endeavor Series Trust's manager. The Manager selects and contracts with
advisers for investment services for the Portfolios of Endeavor Series Trust,
reviews the advisers' activities, and otherwise performs administerial and
managerial functions for the Endeavor Series Trust. Five advisers, TCW Funds
Management, Inc. (a wholly-owned subsidiary of The TCW Group, Inc.), T. Rowe
Price Associates, Inc., Rowe Price-Fleming International, Inc. (a joint
venture between T. Rowe Price Associates, Inc. and Robert Fleming Holdings
Limited), OpCap Advisors (formerly known as Quest for Value Advisors), J.P.
Morgan Investment Management Inc. (a wholly owned subsidiary of J.P. Morgan
and Co. Incorporated), and The Dreyfus Corporation (a wholly owned subsidiary
of Mellon Bank, N.A.), as successor to The Boston Company Asset Management,
Inc., (the "Advisers"), each perform investment advisory services for
particular Portfolios of Endeavor Series Trust. TCW Funds Management, Inc. is
the Adviser for the TCW Managed Asset Allocation Portfolio and the TCW Money
Market Portfolio. T. Rowe Price Associates, Inc. is the Adviser for the T.
Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock
Portfolio. Rowe Price-Fleming International, Inc. is the Adviser for the T.
Rowe Price International Stock Portfolio.
OpCap Advisors is the Adviser for the Value Equity Portfolio and the
Opportunity Value Portfolio. J.P. Morgan Investment Management Inc. ("Morgan")
is the Adviser for the Enhanced Index Portfolio. The Dreyfus Corporation is
the Adviser for the Dreyfus U.S. Government Securities Portfolio, and the
Dreyfus Small Cap Value Portfolio. WRL Investment Management, Inc., a
subsidiary of Western Reserve Life Assurance Co. of Ohio, an affiliate of PFL,
is the Adviser for the WRL Series Fund, Inc. and contracts with Janus Capital
Corporation (also an "Adviser") as a sub-adviser to the WRL Growth Portfolio.
The Adviser of a Portfolio is responsible for selecting the investments of the
Portfolio consistent with the investment objectives and policies of the
Portfolio, and will conduct securities trading for the Portfolio. All Advisers
are investment advisers registered with the SEC under the Investment Advisers
Act of 1940.
The investment objectives of each Portfolio are summarized as follows:
TCW Money Market Portfolio--seeks current income, preservation of capital
and maintenance of liquidity through investment in short-term money market
securities. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share although no assurances can be given that such constant net
asset value will be maintained.
TCW Managed Asset Allocation Portfolio--seeks high total return through a
managed asset allocation portfolio of equity, fixed income and money market
securities.
T. Rowe Price International Stock Portfolio--seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
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Value Equity Portfolio--seeks long-term capital appreciation through
investment in securities (primarily equity securities) of companies that are
believed by the Portfolio's Adviser to be undervalued in the marketplace in
relation to factors such as the companies' assets or earnings.
Dreyfus Small Cap Value Portfolio--seeks capital appreciation through
investments in a diversified portfolio consisting primarily of equity
securities of companies with a median capitalization of approximately $750
million, provided that under normal market conditions at least 75% of the
Portfolio's investments will be in equity securities of companies with
capitalizations at the time of purchase between $150 million and $1.5 billion.
Dreyfus U.S. Government Securities Portfolio--seeks as high a level of total
return as is consistent with prudent investment strategies by investing under
normal circumstances at least 65% of its assets in debt obligations and
mortgage-backed securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
T. Rowe Price Equity Income Portfolio--seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend paying
stocks of established companies.
T. Rowe Price Growth Stock Portfolio--seeks long-term growth of capital and
to increase dividend income through investment primarily in common stocks of
well established growth companies.
Opportunity Value Portfolio--seeks growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based upon the Portfolio
Adviser's assessment of relative values.
Enhanced Index Portfolio--seeks to earn a total return modestly in excess of
the total return performance of the S&P 500 Composite Stock Index (the "S&P
500 Index") while maintaining a volatility of return similar to the S&P 500
Index.
WRL Growth Portfolio--seeks growth of capital. At most times, this Portfolio
will be invested primarily in equity securities which are selected solely for
their capital growth potential; investment income is not a consideration.
THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE.
MORE DETAILED INFORMATION, INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES AND A DESCRIPTION OF RISKS INVOLVED IN
INVESTING IN EACH OF THE PORTFOLIOS AND OF EACH PORTFOLIO'S FEES AND EXPENSES
IS CONTAINED IN THE PROSPECTUSES FOR THE UNDERLYING FUNDS, CURRENT COPIES OF
WHICH ARE ATTACHED TO THIS PROSPECTUS. INFORMATION CONTAINED IN THE UNDERLYING
FUNDS' PROSPECTUSES SHOULD BE READ CAREFULLY BEFORE INVESTING IN A SUBACCOUNT
OF THE MUTUAL FUND ACCOUNT.
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An investment in the Mutual Fund Account, or in any Portfolio, including the
TCW Money Market Portfolio and the Dreyfus U.S. Government Securities
Portfolio, is not insured or guaranteed by the U.S. government or any
government agency.
Addition, Deletion, or Substitution of Investments. PFL cannot and does not
guarantee that any of the Portfolios will always be available for Premium
Payments, allocations, or transfers. PFL retains the right, subject to any
applicable law, to make certain changes in the Mutual Fund Account and its
investments. PFL reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Underlying Funds, or of another registered open-end management investment
company for the shares of any Portfolio, if the shares of the Portfolio are no
longer available for investment or if, in PFL's judgment, investment in any
Portfolio would be inappropriate in view of the purposes of the Mutual Fund
Account. To the extent required by the 1940 Act, substitutions of shares
attributable to an Owner's interest in a Subaccount will not be made without
prior notice to the Owner and the prior approval of the SEC. Nothing contained
herein shall prevent the Mutual Fund Account from purchasing other securities
for other series or classes of variable annuity policies, or from effecting an
exchange between series or classes of variable annuity policies on the basis
of requests made by Owners.
New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio or
other investment vehicle. PFL may also eliminate one or more Subaccounts if,
in its sole discretion, marketing, tax, investment or other conditions warrant
such change. In the event any Subaccount is eliminated, PFL will notify Owners
and request a reallocation of the amounts invested in the eliminated
Subaccount. If no such reallocation is provided by the Owner, PFL will
reinvest the amounts invested in the eliminated Subaccount in the Subaccount
that invests in the TCW Money Market Portfolio (or in a similar portfolio of
money market instruments) or in another Subaccount, if appropriate.
In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Policies,
the Mutual Fund Account may be (i) operated as a management company under the
1940 Act or any other form permitted by law, (ii) deregistered under the 1940
Act in the event such registration is no longer required or (iii) combined
with one or more other separate accounts. To the extent permitted by
applicable law, PFL also may transfer the assets of the Mutual Fund Account
associated with the Policies to another account or accounts.
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<PAGE>
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy and the Mutual Fund Account. For more complete details
regarding the Fixed Account, see the Policy itself.
Premium Payments allocated and amounts transferred to the Fixed Account
become part of the general account of PFL, which supports insurance and
annuity obligations. Interests in the general account have not been registered
under the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the 1940 Act. Accordingly, neither
the general account nor any interests therein are generally subject to the
provisions of the 1933 or 1940 Acts and PFL has been advised that the staff of
the SEC has not reviewed the disclosures in this Prospectus which relate to
the Fixed Account.
The Fixed Account is part of all the general assets of PFL, other than those
in the Mutual Fund Account or in any other segregated asset account. The
Policy Owner may allocate Premium Payments to the Fixed Account at the time of
Premium Payment or by subsequent transfers from the Mutual Fund Account.
Instead of the Policy Owner bearing the investment risk, as is the case for
Annuity Purchase Value in the Mutual Fund Account, PFL bears the full
investment risk for all Annuity Purchase Value in the Fixed Account. PFL has
sole discretion to invest the assets of its general account, including the
Fixed Account, subject to applicable law. While PFL bears the full investment
risk for all Annuity Purchase Value in the Fixed Account, the Owner bears the
risk that PFL would not be able to satisfy its contractual obligations.
Premium payments applied to and any amounts transferred to the Fixed Account
will reflect a fixed interest rate. The interest rates PFL sets will be
credited for increments of at least one year measured from each premium
payment or transfer date. These rates will never be less than an effective
annual interest rate of 3%. Policies offered in certain states may have other
minimum effective annual interest rates specified in the Policy.
Upon surrender of the Policy, the Owner will receive at least the Premium
Payments and transfers allocated to, less prior withdrawals and transfers
from, the Fixed Account.
Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options") into which Premium Payments may be paid or
amounts transferred. For example, PFL may offer Guaranteed Period Options for
periods of 1, 3, 5, or 7 years from time to time. The current interest rate
PFL sets for funds entering each Guaranteed Period Option will be guaranteed
until the end of that Guaranteed Period Option's Guaranteed Period. At the end
of the Guaranteed Period, the Premium Payment or amount transferred into the
Guaranteed Period Option less any withdrawals or transfers from that
Guaranteed Period Option, including the effect of any Excess Interest
Adjustment or Contingent Deferred Sales Charge due to withdrawals or transfers
prior to the end of the Guaranteed Period, plus accrued interest, will be
rolled into a new Guaranteed Period Option(s).
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<PAGE>
The Policy Owner may choose the Guaranteed Period Option(s) in which the
Owner wants the funds placed by giving PFL notice within 30 days before the
end of the expiring Guaranteed Period Option's Guaranteed Period. In the
absence of such election, the new Guaranteed Period Option"s Guaranteed Period
will be the same as the expiring Guaranteed Period Option's period unless that
Guaranteed Period Option is no longer offered, in which case, the next shorter
Guaranteed Period Option offered will be used. PFL reserves the right, for new
Premium Payments, transfers, or rollovers, to offer or not to offer any
Guaranteed Period Option except that PFL will always offer at least a one-year
Guaranteed Period Option.
Withdrawals and transfers from a Guaranteed Period Option prior to the end
of the Guaranteed Period may be subject to an Excess Interest Adjustment (See
"DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment (EIA)," p. 42) An
Excess Interest Adjustment may result in a loss of interest credited, but the
Owner's Fixed Account Policy Values will always be credited with an effective
annual interest rate of at least 3%. Surrender charges, if any, are applied
after the Excess Interest Adjustment. However, upon full surrender, the Owner
is guaranteed return of Premium Payments and transfers to the Fixed Account
less withdrawals and transfers out of the Fixed Account.
For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
or transferred out first; the next oldest Premium Payment plus interest is
considered to be transferred out next, and so on (this is a "first-in, first-
out" procedure).
Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).
This option will have a one-year interest rate guarantee and will only be
available under a Dollar Cost Averaging program (see "Dollar Cost Averaging
(DCA)" p. 36.)
Prior to the Annuity Commencement Date, no transfers, except through the
automatic Dollar Cost Averaging program, will be allowed from the Dollar Cost
Averaging Fixed Account. Dollar Cost Averaging transfers must begin within 30
days after the Premium Payment or transfer to the Dollar Cost Averaging Fixed
Account. Transfers must be scheduled for at least six but not more than 24
months, or for at least four, but not more than eight quarters. No changes to
the amount transferred will be allowed, but changes can be made to the
Subaccounts to which these transfers are allocated. Dollar Cost Averaging
transfers from the Dollar Cost Averaging Fixed Account will not be subject to
an Excess Interest Adjustment.
Guaranteed Interest Rates. PFL periodically will establish an applicable
Guaranteed Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Guaranteed Interest Rates may be changed by PFL
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frequently or infrequently depending on interest rates on investments
available to PFL and other factors as described below, but once established,
the rate will be guaranteed for the entire duration of the Guaranteed Period.
However, except for limited situations, any amount withdrawn ortransferred
will be subject to an Excess Interest Adjustment, except those made at the end
of a Guaranteed Period Option. (See "Excess Interest Adjustment (EIA)," p.
42.)
The Guaranteed Interest Rate will not be less than 3% per year, regardless
of any application of the Excess Interest Adjustment. PFL has no specific
formula for determining the rate of interest that it will declare as a
Guaranteed Interest Rate, as this rate will be reflective of interest rates
available on the types of debt instruments in which PFL intends to invest
amounts allocated to the Fixed Account. In addition, PFL's management may
consider other factors in determining Guaranteed Interest Rates for a
particular Guaranteed Period including but not limited to: regulatory and tax
requirements; sales commissions and administrative expenses borne by the
Company; general economic trends; and competitive factors. There is no
obligation to declare a rate in excess of 3%; the Policy Owner assumes the
risk that declared rates will not exceed 3%. PFL has complete discretion to
declare any rate of at least 3%, regardless of market interest rates, the
amounts earned by PFL on its investments, or any other factors.
PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE
GUARANTEED INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED EFFECTIVE INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE
GUARANTEED INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.
TRANSFERS
An Owner can transfer Annuity Purchase Value from one Investment Option to
another within certain limits.
Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by the Policy Owner, to
the Administrative and Service Office. The minimum amount which may be
transferred is the lesser of $500 or the entire Subaccount or Guaranteed
Period Option Value. If the Subaccount or Guaranteed Period Option Value
remaining after a transfer is less than $500, PFL reserves the right, at its
discretion, either to deny the transfer request or to include that amount as
part of the transfer.
If the Excess Interest Adjustment (at the time of a transfer request) from
any Guaranteed Period Option is a negative adjustment, then the maximum amount
that can be transferred is 25% of that Guaranteed Period Option's Annuity
Purchase Value, less amounts previously transferred out of that Guaranteed
Period Option during the current Policy Year. No maximum
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<PAGE>
will apply to amounts transferred from any Guaranteed Period Option if the
Excess Interest Adjustment is a positive adjustment at the time of transfer.
PFL will offer the Owner the option to transfer interest credited in any of
the Guaranteed Period Option(s) to any Subaccount(s) of the Separate Account
with no Excess Interest Adjustment applied. The Owner must notify PFL within
30 days prior to the end of the Guaranteed Period Option to instruct PFL
regarding any transfers to be performed at that time.
Transfers prior to the Annuity Commencement Date currently may be made
without charge as often as the Owner wishes, subject to the minimum amount
specified above. PFL reserves the right to limit these transfers prior to the
Annuity Commencement Date to no more than 12 per Policy Year in the future or
to charge up to $10 per transfer in excess of 12 per Policy Year.
Transfers out of the Dollar Cost Averaging Fixed Account, except through an
automatic Dollar Cost Averaging program, are not allowed.
After the Annuity Commencement Date, transfers out of the Fixed Account are
not permitted and transfers between Subaccounts, or from Subaccount to the
Fixed Account, may be limited to once per Policy Year. (See "DISTRIBUTIONS
UNDER THE POLICY--Annuity Payment Options," p. 45.)
Transfers may be made by telephone, subject to the provisions described
below under "Telephone Transactions."
REINSTATEMENTS
Requests are occasionally received by PFL to reinstate funds which had been
transferred to another insurance company pursuant to a Section 1035 exchange
or trustee-to-trustee transfer under the Code. In this situation PFL will
require the Owner to replace the same total amount of money in the applicable
Subaccounts or Fixed Accounts as was taken from them to effect the Exchange.
The total dollar amount of funds reapplied to the Separate Account will be
used to purchase a number of Accumulation Units available for each Subaccount
based on the Accumulation Unit prices at the date of reinstatement (within two
days after the date the funds are received by PFL). The number of Accumulation
Units available on the reinstatement date may be more or less than the number
of Units surrendered for the exchange. Amounts reapplied to the Fixed Account
will receive the effective annual interest rate they would otherwise have
received, had they not been withdrawn. However, an adjustment will be made to
the amount reapplied to compensate PFL for the additional interest credited
during the period of time between the withdrawal and the reapplication of the
funds. Owners should consult a qualified tax adviser concerning the tax
consequences of any Section 1035 exchanges or reinstatements.
TELEPHONE TRANSACTIONS
An Owner (or the Owner's designated account executive) may make transfers
and/or change the allocation of subsequent Premium Payments by
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telephone if the "Telephone Transfer/Reallocation Authorization" box in the
Policy application has been checked or telephone transfers have been
subsequently authorized in writing by the Owner. PFL will not be liable for
following instructions communicated by telephone that it reasonably believes
to be genuine. However, PFL will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If PFL fails to do so, it
may be liable for any losses due to unauthorized or fraudulent instructions.
All telephone requests will be recorded on voice recorder equipment for the
protection of the Owner. The Owner, when making telephone requests, will be
required to provide the social security number or other information for
identification purposes.
Telephone requests must be received at the Administrative and Service Office
no later than 3:00 p.m. Central time in order to assure same day pricing of
the transaction.
At its discretion, PFL may discontinue the telephone transaction privilege
at any time as to some or all Owners, and PFL may require written confirmation
of any transaction request.
DOLLAR COST AVERAGING (DCA)
Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, the Owner can instruct PFL to automatically transfer a specified dollar
amount from the Dollar Cost Averaging Fixed Account Option, the TCW Money
Market Subaccount or the Dreyfus U.S. Government Securities Subaccount to any
other Subaccount or Subaccounts of the Mutual Fund Account. The automatic
transfers can occur monthly or quarterly and will occur on the 28th day of the
month. If the Dollar Cost Averaging request is received prior to the 28th day
of any month, the first transfer will occur on the 28th day of that month. If
the Dollar Cost Averaging request is received on or after the 28th day of any
month, the first transfer will occur on the 28th day of the following month.
The amount transferred each time must be at least $500. A minimum of six
monthly or four quarterly transfers are required and a maximum of 24 monthly
or eight quarterly transfers are allowed from the Dollar Cost Averaging Fixed
Account.
Dollar Cost Averaging results in the purchase of more units when the Unit
Value is low, and fewer units when the Unit Value is high. However, there is
no guarantee that the Dollar Cost Averaging program will result in higher
Annuity Purchase Values or will otherwise be successful. Dollar Cost Averaging
requires regular investment regardless of fluctuating prices and does not
guarantee profits nor prevent losses in a declining market. Before electing
this option, individuals should consider their financial ability to continue
transfers through periods of both high and low price levels.
The Owner may request Dollar Cost Averaging when purchasing the Policy or at
a later date. The program will terminate when the amount in the Dollar Cost
Averaging Fixed Account, the TCW Money Market Subaccount or the Dreyfus U.S.
Government Securities Subaccount is insufficient for the next transfer, at
which time the entire remaining balance is transferred.
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<PAGE>
Except for automatic Dollar Cost Averaging transfers from the Dollar Cost
Averaging Fixed Account Option the Owner may increase or decrease the amount
of the transfers by sending PFL a new Dollar Cost Averaging form. The Owner
may discontinue the program at any time by sending a Written Notice to the
Administrative and Service Office. The minimum number of transfers (6 monthly
or 4 quarterly) requirement must be satisfied each time the Dollar Cost
Averaging program is restarted following termination of the program for any
reason. There is no charge for participation in the Dollar Cost Averaging
program.
ASSET REBALANCING
Prior to the Annuity Commencement Date the Owner may instruct PFL to
automatically transfer amounts among the Subaccounts of the Mutual Fund
Account on a regular basis to maintain a desired allocation of the Annuity
Purchase Value among the various Subaccounts offered. Rebalancing will occur
on a monthly, quarterly, semi-annual, or annual basis, beginning on a date
selected by the Owner. If no date is selected, the account will be rebalanced
on the day of the month that the policy became effective. The Owner must
select the percentage of the Annuity Purchase Value desired in each of the
various Subaccounts offered (totaling 100%). Any amounts in the Fixed Account
are ignored for purposes of asset rebalancing. Rebalancing may be started,
stopped, or changed at any time, except that rebalancing will not be available
when:
(1) Dollar Cost Averaging is in effect; or
(2) any other transfer is requested.
THE POLICY
The Endeavor Variable Annuity Policy is a Flexible Premium Variable Annuity
Policy. The rights and benefits under the Policy are summarized below;
however, the description of the Policy contained in this Prospectus is
qualified in its entirety by reference to the Policy itself, a copy of which
is available upon request from PFL. The Policy may be purchased on a non-tax
qualified basis ("Nonqualified Policy"). The Policy may also be purchased and
used in connection with retirement plans or individual retirement accounts
that qualify for favorable federal income tax treatment ("Qualified Policy").
POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS
Before it will issue a Policy, PFL must receive a completed Policy
application or transmittal form and a minimum initial Premium Payment of
$5,000 for a Nonqualified Policy, $50 for a Policy purchased for use in
connection with a Tax Deferred 403(b) Annuity, or $1,000 for any other
Qualified Policy. A Policy ordinarily will be issued only in respect of
Annuitants Age 0 through 80. Acceptance or declination of an application shall
be based on PFL's underwriting standards, and PFL reserves the right
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<PAGE>
to reject any application or Premium Payment based on those underwriting
standards.
If the application or transmittal form can be accepted in the form received,
the initial Premium Payment will be credited to the Annuity Purchase Value
within two Business Days after the later of receipt of the information needed
to issue the Policy or receipt of the initial Premium Payment. If the initial
Premium Payment cannot be credited because the application or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay and the initial Premium
Payment will be returned at that time unless the applicant consents to PFL's
retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled.
The date on which the initial Premium Payment is credited to the Annuity
Purchase Value is the Policy Date. The Policy Date is the date used to
determine Policy Years and Policy Anniversaries.
All checks or drafts for Premium Payments should be made payable to PFL Life
Insurance Company and sent to the Administrative and Service Office. The Death
Benefit will not take effect until the Premium Payment is received and any
check or draft for the Premium Payment is honored.
Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, the Owner may make additional Premium Payments at
any time, and in any frequency. The minimum additional Premium Payment under
both a Nonqualified Policy and a Qualified Policy is $50. Additional Premium
Payments will be credited to the Policy and added to the Annuity Purchase
Value as of the Business Day when the premium and required information are
received.
Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of PFL is $1,000,000.
Allocation of Premium Payments. An Owner must allocate Premium Payments to
one or more of the Investment Options. The Owner must specify the initial
allocation in the Policy application or transmittal form. This allocation will
be used for Subsequent Additional Premium Payments unless the Owner requests a
change of allocation. All allocations must be made in whole percentages and
must total 100%. If Premium Payments are allocated to the Dollar Cost
Averaging Fixed Account, directions regarding the Subaccount(s) to which
transfers are to be made must be specified on the Application or other proper
Written Request. If the Owner fails to specify how Premium Payments are to be
allocated, the Premium Payment(s) cannot be accepted.
The Owner may change the allocation instructions for future subsequent
additional Premium Payments by sending Written Notice, signed by the Owner, to
PFL's Administrative and Service Office, or by telephone (subject to the
provisions described under "Telephone Transactions," p. 35.) The allocation
change will apply to Premium Payments received after the date the Written
Notice or telephone request is received.
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<PAGE>
Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.
ANNUITY PURCHASE VALUE
On the Policy Date, the Annuity Purchase Value equals the initial Premium
Payment. Thereafter, the Annuity Purchase Value equals the sum of the values
in the Mutual Fund Account and the Fixed Account. The Annuity Purchase Value
will increase by (1) any Subsequent Additional Premium Payments received by
PFL; (2) any increases in the Annuity Purchase Value due to investment results
of the selected Subaccount(s); (3) any positive Excess Interest Adjustments on
transfers, and (4) interest credited in the Fixed Account. The Annuity
Purchase Value will decrease by (1) any surrenders, including applicable
Excess Interest Adjustments and/or Contingent Deferred Sales Charges; (2) any
decreases in the Annuity Purchase Value due to investment results of the
selected Subaccounts; (3) the charges and deductions imposed by PFL; and (4)
any negative Excess Interest Adjustments on transfers.
The Annuity Purchase Value is expected to change from Valuation Period to
Valuation Period, reflecting the investment experience of the selected
Subaccount(s), as well as the deductions for charges. A Valuation Period is
the period between successive Business Days. It begins at the close of
business on each Business Day and ends at the close of business on the next
succeeding Business Day. A Business Day is each day that both the New York
Stock Exchange is open for business. Holidays are generally not Business Days.
The Mutual Fund Account Value. When a Premium Payment is allocated or an
amount is transferred to a Subaccount of the Mutual Fund Account, it is
credited to the Annuity Purchase Value in the form of Accumulation Units. Each
Subaccount of the Mutual Fund Account has a distinct Accumulation Unit value
(the "Unit Value"). The number of Accumulation Units credited is determined by
dividing the Premium Payment or amount transferred by the Unit Value of the
Subaccount as of the end of the Valuation Period during which the allocation
is made. When amounts are transferred out of, or surrendered or withdrawn from
a Subaccount, Accumulation Units are canceled or redeemed in a similar manner.
For each Subaccount, the Unit Value for a given Business Day is based on the
net asset value of a share of the corresponding Portfolio of the Underlying
Funds. Therefore, the Unit Values will fluctuate from day to day based on the
investment experience of the corresponding Portfolio. The determination of
Subaccount Unit Values is described in detail in the Statement of Additional
Information.
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ADJUSTED ANNUITY PURCHASE VALUE (AAPV)
The Adjusted Annuity Purchase Value is the Annuity Purchase Value increased
or decreased by any Excess Interest Adjustment applied at the time of
Surrender or on the Annuity Commencement Date.
The AAPV will be used on the Annuity Commencement Date to provide the amount
of annuity payments under a Policy.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No registered representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of the
Code, regulations or published rulings. An Owner can refuse such a change by
giving Written Notice, but a refusal may result in adverse tax consequences.
NON-PARTICIPATING POLICY
The Policy does not participate or share in the profits or surplus earnings
of PFL. No dividends are payable on the Policy.
DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
Prior to the Annuity Commencement Date, the Owner may surrender all or a
portion of the Cash Value in exchange for a cash withdrawal payment from PFL.
The Cash Value is the Adjusted Annuity Purchase Value less any applicable
Contingent Deferred Sales Charge and any applicable premium taxes. (See
"Annuity Payment Options," p. 45.) The Policy cannot be surrendered after the
Annuity Commencement Date. (See "Annuity Payments," p. 43.)
When requesting a partial withdrawal ($500 minimum), the Owner must tell PFL
how the withdrawal is to be allocated among various Guaranteed Period Options
of the Fixed Account and/or the Subaccount(s) of the Mutual Fund Account. If
the Owner's request for a partial withdrawal from a Guaranteed Period Options
of the Fixed Account is greater than the Cash Value of that Guaranteed Period
Option, PFL will pay the Owner the amount of the Cash Value of that Guaranteed
Period Option. If no allocation instructions are given, the withdrawal will be
deducted from each Investment Option in the same proportion that the Policy
Owner's interest in each Investment Option bears to the Policy's total Annuity
Purchase Value. PFL reserves the right to defer payment of the Cash Value from
the Fixed Account for up to six months.
Beginning in the second Policy Year, an Owner may surrender up to 10% of the
Annuity Purchase Value at the time of withdrawal without an Excess
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Interest Adjustment and without a Contingent Deferred Sales Charge if no
withdrawal has been made in the current Policy Year ("surrender charge
free/adjustment free withdrawals"). Amounts withdrawn from the Policy in
excess of this free withdrawal amount or withdrawn in the same Policy Year as
a previous withdrawal (and all surrenders in the first Policy Year) are
subject to the Excess Interest Adjustment and to the Contingent Deferred Sales
Charge. Neither a Contingent Deferred Sales Charge nor an Excess Interest
Adjustment will be assessed if the withdrawal is necessary to meet the minimum
distribution requirements for that Policy specified by the IRS for tax
qualified plans.
Withdrawals free of surrender charges and adjustments will reduce the
Annuity Purchase Value by the amount withdrawn. Amounts requested in excess of
the portion that is free of surrender charges and adjustments are Excess
Partial Withdrawals. Excess Partial Withdrawals will reduce the Annuity
Purchase Value by an amount equal to (X-Y + Z) where:
X = Excess Partial Withdrawal
Y = Excess Interest Adjustment = (X) X (G - C) X (M/12) where G, C, and M
are defined in the Excess Interest Adjustment Section.
Z = Contingent Deferred Sales Charge on X minus Y.
For a discussion of the Contingent Deferred Sales Charge, see "Contingent
Deferred Sales Charge," p. 52. For a discussion of the Excess Interest
Adjustment, see "Excess Interest Adjustment (EIA)", p. 42.
Since the Owner assumes the investment risk with respect to Premium Payments
allocated to the Mutual Fund Account, and because withdrawals are subject to
an Excess Interest Adjustment and to a Contingent Deferred Sales Charge, and
possibly income taxes or premium taxes, the total amount paid upon total
surrender of the Cash Value (taking any prior surrenders into account) may be
more or less than the total Premium Payments made. Following a surrender of
the total Cash Value, or at any time the Annuity Purchase Value is zero, all
rights of the Owner and Annuitant will terminate.
In addition to any applicable Excess Interest Adjustment, Contingent
Deferred Sales Charge, and premium tax, surrenders may be subject to income
taxes and, if prior to age 59 1/2, a ten percent Federal tax penalty. (See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 55.)
NURSING CARE AND TERMINAL CONDITION WAIVER
For Policies issued with form number AV254 101 87 196 or with Endorsement AE
890 196 or a similar endorsement (depending on the state of issuance) the
Excess Interest Adjustment and Contingent Deferred Sales Charge are not
imposed on partial or complete surrenders if the Owner: 1) has been confined
in a hospital or nursing facility for 30 consecutive days or 2) has been
diagnosed as having a terminal condition as defined in the Policy or
endorsement (generally a life expectancy of 12 months or less). (This benefit
is not available in all states--see the Policy or endorsement for details.) In
addition, neither a Contingent Deferred Sales Charge nor an
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Excess Interest Adjustment will be assessed if the policy withdrawal is
necessary to meet the minimum distribution requirements for that Policy
specified by the IRS for tax qualified plans.
EXCESS INTEREST ADJUSTMENT (EIA)
Full surrenders, partial withdrawals and transfers from the Fixed Account
Guaranteed Periods will be subject to an Excess Interest Adjustment except as
provided for under "Surrenders" above or "Systematic Payout Plan," below.
Excess Interest Adjustment = S X (G - C) X (M/12)
where: S is the gross amount (i.e. before premium taxes, if any) being
surrendered or withdrawn that is subject to the Excess Interest
Adjustment.
G is the guaranteed interest rate applicable to S.
C is the current guaranteed interest rate then being offered on new
Policies for the next longer option period than "M". If this Policy
form or such an option period is no longer offered, "C" will be the
U.S. Treasury rate for the next longer maturity (in whole years) than
"M" on the 25th day of the previous calendar month, plus up to 2%.
M is the number of months remaining in the option period for S,
rounded up to the next higher whole number of months.
If interest rates determined by PFL have increased from the time the
affected Guaranteed Period(s) started, until the time the Excess Interest
Adjustment is applied, the Adjustment will result in a decrease in the funds
available to the Owner. If interest rates have decreased from the time the
affected Guaranteed Period(s) started, until the time the Excess Interest
Adjustment is applied, the Adjustment will result in additional funds
available to the Owner.
Upon full surrender of the Policy, the EIA for each Guaranteed Period Option
will not reduce the portion of the Adjusted Annuity Purchase Value attributed
to that Guaranteed Period Option below the amount paid into, less any prior
partial withdrawals and transfers from that Guaranteed Period Option, plus
interest at the 3% guaranteed effective annual interest rate.
The formula for calculating the EIA and examples of the application of the
EIA are set forth in Appendix A to this Prospectus.
SYSTEMATIC PAYOUT OPTION
Under the Systematic Payout Option, Policy Owners can instruct PFL to make
automatic payments to them monthly, quarterly, semi-annually or annually from
a specified Subaccount or from a Guaranteed Period Option of the Fixed
Account. Monthly and quarterly payments can only be sent by
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electronic funds transfer directly to a checking or savings account. The
minimum payment is $50. The maximum payment is 10% of the Annuity Purchase
Value at the time the Systematic Payout is made divided by the number of
payouts made per year (e.g. 12 for monthly). If this amount is below the
minimum distribution requirements for that policy specified by the IRS for tax
qualified plans, the maximum payment will be increased to this minimum
required distribution amount. The "Request for Systematic Payout" form must
specify a date for the first payment, which must be at least 30 days but not
more than one year after the form is submitted (i.e., Systematic Payouts will
start at the end of the payment mode selected, but not earlier than 30 days
from the date of request).
The Contingent Deferred Sales Charge and Excess Interest Adjustment will be
waived for Policy Owners under age 59 1/2 of Qualified Policies if they take
Systematic Payouts using one of the payout methods described in I.R.S. Notice
89-25, Q&A-12 (the Life Expectancy Recalculation Option, Amortization, or
Annuity Factor) which generally require payments for life or life expectancy.
These payments must be continued until the later of age 59 1/2 or five years
from their commencement. No additional withdrawals may be taken during this
time. For Qualified Policies, Policy Owners age 59 1/2 or older, the
Contingent Deferred Sales Charge and Excess Interest Adjustment will be waived
if payments are made using the Life Expectancy Recalculation Option.
In addition, for either Qualified or Nonqualified Policies, the Contingent
Deferred Sales Charge and Excess Interest Adjustment will not be imposed on
Systematic Payouts.
Qualified Policies are subject to complex rules with respect to restrictions
on and taxation of distributions, including the applicability of penalty
taxes. In addition, the tax treatment of systematic payouts from Nonqualified
Policies has had an unfavorable ruling regarding the ability to avoid the 10%
tax penalty. Therefore, the Policy Owner should consult a qualified tax
adviser before requesting a Systematic Payout. In certain circumstances
withdrawn amounts may be included in the Policy Owner's gross income. (See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 55.)
ANNUITY PAYMENTS
Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
selected by the Policy Owner at the time the Owner applies for the Policy. The
Annuity Commencement Date may be changed from time to time by the Policy Owner
by Written Notice to PFL, provided that notice of each change is received by
PFL at its Administrative and Service Office at least thirty (30) days prior
to the then current Annuity Commencement Date. Except as otherwise permitted
by PFL, a new Annuity Commencement Date must be a date which is: (1) at least
thirty (30) days after the date notice of the change is received by PFL; and
(2) not later than
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the last day of the policy month starting after the Annuitant attains age 85.
In no event will an Annuity Commencement Date be permitted to be later than
the last day of the month following the month in which the Annuitant attains
age 95. The Annuity Commencement Date may also be changed by the Beneficiary's
election of the Annuity Option after the Annuitant's death.
Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, the Policy Owner may choose an Annuity
Payment Option or change the election, but Written Notice of any election or
change of election must be received by PFL at its Administrative and Service
Office at least thirty (30) days prior to the Annuity Commencement Date. If no
election is made prior to the Annuity Commencement Date, Annuity Payments will
be made under (i) Option 3, life income with level payments for 10 years
certain, using the existing Adjusted Annuity Purchase Value of the Fixed
Account, or (ii) under Option 3-V, life income with variable payments for 10
years certain using the existing Adjusted Annuity Purchase Value of the Mutual
Fund Account, or (iii) in a combination of (i) and (ii) if the Adjusted
Annuity Purchase Value is allocated among both the Fixed Account and the
Mutual Fund Account. If the Adjusted Annuity Purchase Value on the Annuity
Commencement Date is less than $2,000, PFL reserves the right to pay it in one
lump sum in lieu of applying it under an Annuity Payment Option.
Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p. 48.) Subject to the restrictions of certain state
laws, Annuity Payments will be made on either a fixed basis or a variable
basis as selected by the Policy Owner (or the Beneficiary, after the
Annuitant's death).
The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount PFL has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.
A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL
agrees.
Unless the Policy Owner specifies otherwise, the payee shall be the
Annuitant, or, after the Annuitant's death, the Beneficiary. PFL may require
written proof of the age of any person who has an annuity purchased under
Option 3, 3-V, 5 or 5-V.
Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a Payment Option or upon withdrawal. If so, PFL will deduct
the premium tax before applying or paying the proceeds.
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Supplementary Policy. Once proceeds become payable and a Payment Option has
been chosen, PFL will issue a Supplementary Policy in settlement of the option
elected under the Policy setting forth the terms of the option elected. The
Supplementary Policy will name the payees and will describe the payment
schedule.
ANNUITY PAYMENT OPTIONS
The Policy provides five Payment Options which are described below. Three of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and two are only available as Fixed Payment Options. The Policy
Owner may elect a Fixed Payment Option, a Variable Payment Option, or a
combination of both. If the Policy Owner elects a combination, he must specify
what part of the Policy proceeds are to be applied to the Fixed and Variable
Options (and he must also specify which Subaccounts for the Variable Options).
NOTE CAREFULLY: Under Payment Options 3(1) and 5 (including 3-V(1) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second annuity payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third annuity payment; and so forth.
On the Annuity Commencement Date, the Policy's Adjusted Annuity Purchase
Value will be applied to provide for Annuity Payments under the selected
Annuity Option as specified. The Adjusted Annuity Purchase Value is the
Annuity Purchase Value for the Valuation Period which ends immediately
preceding the Annuity Commencement Date, including the effect of any
applicable Excess Interest Adjustment.
The effect of choosing a Fixed Annuity Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Annuity Option is selected, the Adjusted Annuity Purchase Value will be
transferred to the general account of PFL, and the Annuity Payments will be
fixed in amount by the fixed annuity provisions selected and the age and sex
(if consideration of sex is allowed) of the Annuitant. For further
information, contact PFL at its Administrative and Service Office.
Guaranteed Values. There are five Fixed Annuity Options. Options 1, 2 and 4
are based on a guaranteed interest rate of 3%. Options 3 and 5 are based on a
guaranteed interest rate of 3% using the "1983 Table a" (male, female, and
unisex if required by law) mortality table improved to the year 2000 with
projection scale G. ("The 1983 Table a" mortality rates are adjusted based on
improvements in mortality since 1983 to more appropriately reflect increased
longevity. This is accomplished using a set of improvement factors referred to
as projection scale G.)
Option 1--Interest Payments. The policy proceeds may be left with PFL for
any term agreed to. PFL will pay the interest in equal payments or it
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may be left to accumulate. Withdrawal rights will be agreed upon by the Owner
and PFL when the option is elected.
Option 2--Income for a Specified Period. Level payments of the proceeds with
interest are made for the fixed period elected, at which time the funds are
exhausted.
Option 3--Life Income. An election may be made between:
1. "No Period Certain"--Level payments will be made during the
lifetime of the Annuitant.
2. "10 Years Certain"--Level Payments will be made for the longer of
the Annuitant's lifetime or ten years.
3. "Guaranteed Return of Policy Proceeds"--Level payments will be
made for the longer of the Annuitant's lifetime or the number of
payments which, when added together, equals the proceeds applied
to the income option.
Option 4--Income of a Specified Amount. Payments are made for any specified
amount until the proceeds with interest are exhausted.
Option 5--Joint and Survivor Annuity. Payments are made during the joint
lifetime of the payee and a joint payee of the Owner's selection. Payments
will be made as long as either person is living.
Other options may be arranged by agreement with PFL. Certain options may not
be available in some states.
Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed amount (guaranteed amounts are based upon the
tables contained in the Policy). Current amounts may be obtained from PFL.
Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
a 5% effective annual assumed investment return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.) The dollar amount of subsequent Variable
Annuity Payments will vary based on the investment performance of the
Subaccount of the Mutual Fund Account selected by the Annuitant or
Beneficiary. If the actual investment performance exactly matched the Assumed
Investment Return of 5% at all times, the amount of each Variable Annuity
Payment would remain equal. If actual investment performance exceeds the
Assumed Investment Return, the amount of the payments would increase.
Conversely, if actual investment performance is worse than the Assumed
Investment Return, the amount of the payments would decrease.
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Determination of the First Variable Payment. The amount of the first
variable payment depends upon the sex (if consideration of sex is allowed) and
adjusted age of the Annuitant. The adjusted age is the Annuitant's actual age
nearest birthday, at the Annuity Commencement Date, adjusted as follows:
<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- --------------------
<S> <C>
Before 2001 Actual Age
2001-2010 Actual Age minus 1
2011-2020 Actual Age minus 2
2021-2030 Actual Age minus 3
2031-2040 Actual Age minus 4
After 2040 As determined by PFL
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
The following Variable Payment Options generally are available:
Option 3-V--Life Income. An election may be made between:
1. "No Period Certain"--Payments will be made during the lifetime of
the Annuitant.
2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.
Option 5-V--Joint and Survivor Annuity. Payments are made as long as either
the Annuitant or the joint Annuitant is living.
Certain options may not be available in some states.
Determination of Subsequent Variable Payments. All Variable Annuity Payments
other than the first are calculated using "Annuity Units" which are credited
to the Policy. The number of Annuity Units to be credited in respect of a
particular Subaccount is determined by dividing that portion of the first
Variable Annuity Payment attributable to that Subaccount by the Annuity Unit
Value of that Subaccount for the Annuity Commencement Date. The number of
Annuity Units of each particular Subaccount credited to the Policy then
remains fixed. The dollar value of variable Annuity Units in the chosen
Subaccount will increase or decrease reflecting the investment experience of
the chosen Subaccount. The dollar amount of each Variable Annuity Payment
after the first may increase, decrease or remain constant, and is equal to the
sum of the amounts determined by multiplying the number of Annuity Units of
each particular Subaccount credited to the Policy by the Annuity Unit Value
for the particular Subaccount on the date the payment is made.
Transfers. A Policy Owner may transfer the value of the Annuity Units from
one Subaccount to another within the Mutual Fund Account or to the Fixed
Account. However, after the Annuity Commencement Date no transfers may be made
from the Fixed Account to the Mutual Fund Account. The minimum amount which
may be transferred is the lesser of $10 of
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monthly income or the entire monthly income of the variable Annuity Units in
the Subaccount from which the transfer is being made. The remaining Annuity
Units in the Subaccount must provide at least $10 of monthly income. If, after
a transfer, the monthly income of the remaining Annuity Units in a Subaccount
would be less than $10, PFL reserves the right to include those Annuity Units
as part of the transfer. PFL reserves the right to limit transfers between
Subaccounts or to the Fixed Account after the Annuity Commencement Date to
once per Policy Year.
* * *
Tax Withholding. A portion or the entire amount of the Annuity Payments may
be taxable as ordinary income. If, at the time the Annuity Payments begin, the
Policy Owner has not provided PFL with a written election not to have federal
income taxes withheld, PFL must by law withhold such taxes from the taxable
portion of such annuity payments and remit that amount to the federal
government. Withholding is mandatory for certain Qualified Policies. (See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 55).
Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12
month intervals. If the individual payments provided for would be or become
less than $50, PFL may change, at its discretion, the frequency of payments to
such intervals as will result in payments of at least $50. If the Adjusted
Annuity Purchase Value on the Annuity Commencement Date is less than $2,000,
PFL may pay such value in one sum in lieu of the payments otherwise provided
for.
DEATH BENEFIT
Death of Annuitant Prior to Annuity Commencement Date. A Death Benefit will
be paid to the Beneficiary if the Annuitant is also the Owner and the Owner
dies prior to the Annuity Commencement Date. The amount of the Death Benefit
will be the greater of a) the Annuity Purchase Value (or the Cash Value, if
greater) on the later of the date proof of the Owner's death and the date an
election of the method of settlement are received by PFL's Administrative and
Service Office, and b) the Guaranteed Minimum Death Benefit ("GMDB") described
below, plus Premium Payments less Partial Withdrawals, from the date of death
to the date the death proceeds are paid. Policies offered in certain states
may provide for a different definition or calculation of the Death Benefit.
See the Policy or endorsement for details. The Death Benefit is not payable
upon the death of the Annuitant if the Annuitant and Owner are not the same
person, unless the Owner makes a separate election.
There are two Guaranteed Minimum Death Benefit Options available: (A) the
"5% Annually Compounding Death Benefit," and (B) the "Annual Step-Up Death
Benefit."
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The 5% Compound Death Benefit is the total Premium Payments less any
Adjusted Partial Withdrawals plus interest at an effective annual rate of 5%
from the payment or withdrawal date up to the Annuitant's date of death.
The Annual Step-Up Guaranteed Minimum Death Benefit is the highest Annuity
Purchase Value on any Policy Anniversary prior to the earlier of the date of
death or the Owner's 81st birthday, plus Premium Payments less any adjusted
partial withdrawals since that anniversary. For this purpose, the issue date
will be treated as a Policy Anniversary.
Under both Death Benefit Options, if the surviving spouse elects to continue
the Policy in lieu of receiving the Death Benefit, an amount equal to the
excess, if any, of the Guaranteed Minimum Death Benefit (that is, either the
Annual Step-Up Death Benefit or the 5% Compound Death Benefit) over the
Annuity Purchase Value, will then be added to the Annuity Purchase Value. This
amount will be added only once, at the time of such election.
The 5% Compound Death Benefit is not available if either the Annuitant or
the Owner is age 75 or higher on the Date of Issue; in this case, the Annual
Step-Up Death Benefit will apply. For issue age under age 75, if no choice is
made in the Policy application then the 5% Compound Death Benefit will apply.
After the Date of Issue, an election cannot be made and the Death Benefit
option cannot be changed.
Adjusted Partial Withdrawal. To determine the Guaranteed Minimum Death
Benefit for each partial withdrawal, the Adjusted Partial Withdrawal is the
sum of (1) and (2), where
(1) The Surrender charge free/adjustment free withdrawal amount taken and,
(2) the product of (a) times (b) where:
(a) is the ratio of the amount of the Excess Partial Withdrawal to
the Annuity Purchase Value on the date of (but prior to) the
Excess Partial Withdrawal; and
(b) is the Death Benefit on the date of (but prior to) the Excess
Partial Withdrawal.
If a partial withdrawal is taken when the Guaranteed Minimum Death Benefit
exceeds the Annuity Purchase Value, then the amount that the death benefit is
reduced would be greater than the amount of the partial withdrawal. In that
case, the total proceeds of a partial withdrawal followed by a Death Benefit
could be less than total Premium Payments.
Due Proof of Death of the Annuitant is proof that the Annuitant who is the
Owner died prior to the commencement of Annuity Payments. Upon receipt of this
proof and an election of a method of settlement and return of
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the Policy, the Death Benefit generally will be paid within seven days, or as
soon thereafter as PFL has sufficient information about the Beneficiary to
make the payment. The Beneficiary may receive the amount payable in a lump sum
cash benefit, or, subject to any limitation under any state or federal law,
rule, or regulation, under one of the Annuity Payment Options described above,
unless a settlement agreement is effective at the death of the Owner
preventing such election.
If the Annuitant was the Policy Owner, and the Beneficiary was not the
Annuitant's spouse, the Death Benefit must (1) be distributed within five
years of the date of the deceased Owner's death, or (2) payments under a
Payment Option must begin no later than one year after the deceased Owner's
death and must be made for the Beneficiary's lifetime or for a period certain
(so long as any certain period does not exceed the Beneficiary's life
expectancy). Death proceeds which are not paid to or for the benefit of a
natural person must be distributed within five years of the date of the
deceased Owner's death. If the sole Beneficiary is the deceased Owner's
surviving spouse, such spouse may elect to continue the Policy as the new
Annuitant and Policy Owner instead of receiving the Death Benefit. (See
"Federal Tax Matters" in the Statement of Additional Information.)
If the Annuitant is not the Owner, and the Owner dies prior to the Annuity
Commencement Date, a Successor Owner may surrender the Policy at any time for
the Adjusted Policy Value. If the Successor Owner is not the deceased Owner's
surviving spouse, however, this amount must be distributed within five years
after the date of death of the Owner, or payments under a Payment Option must
begin within one year of the deceased Owner's death and must be made for the
Beneficiary's lifetime or for a period certain (so long as any certain period
does not exceed the Beneficiary's life expectancy).
Death On or After Annuity Commencement Date. The death benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death.
Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. The Policy Owner may change the designated Beneficiary
by sending Written Notice to PFL. The Beneficiary's consent to such change is
not required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable Beneficiary dies, the Policy Owner may
then designate a new Beneficiary.) The change will take effect as of the date
the Policy Owner signs the Written Notice, whether or not the Policy Owner is
living when the Notice is received by PFL. PFL will not be liable for any
payment made before the Written Notice is received. If more than one
Beneficiary is designated, and the Policy Owner fails to specify their
interests, they will share equally.
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DEATH OF OWNER
Federal tax law requires that if any Policy Owner (including any joint Owner
or any Successor Policy Owner who has become a current Owner) dies before the
Annuity Commencement Date, then the entire value of the Policy must generally
be distributed within five years of the date of death of such Policy Owner.
Certain rules apply where 1) the spouse of the deceased Owner is the sole
beneficiary, 2) the Policy Owner is not a natural person and the primary
Annuitant dies or is changed, or 3) any Policy Owner dies after the Annuity
Commencement Date. See "Federal Tax Matters" in the Statement of Additional
Information for a detailed description of these rules. Other rules may apply
to Qualified Policies. (See also "DISTRIBUTIONS UNDER THE POLICY--Death
Benefit," p. 48)
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program (ORP) to withdraw their interest in a
variable annuity Policy issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education;
(2) retirement; or (3) death. Accordingly, a participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
the account can be redeemed.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Policy used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED POLICIES
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.
CHARGES AND DEDUCTIONS
No deductions are made from Premium Payments, so that the full amount of
each Premium Payment is invested in one or more of the Accounts. PFL will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Accounts
and the Policies. Charges may also be made for
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premium taxes, federal, state or local taxes, or for certain transfers or
other transactions. Charges and expenses are also deducted from the Underlying
Funds.
CONTINGENT DEFERRED SALES CHARGE
PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may apply a Contingent Deferred Sales Charge to any amount surrendered (i.e.,
withdrawn) in connection with a full or partial Policy surrender in order to
cover distribution expenses. A Contingent Deferred Sales Charge will not be
applied to withdrawal, after the first Policy Year, of up to 10% of the
Annuity Purchase Value, if there have been no withdrawals in the current
Policy Year.
The Contingent Deferred Sales Charge is not imposed upon exercise of the
Nursing Care and Terminal Condition Option. This feature may not be available
in all states. (See "DISTRIBUTIONS UNDER THE POLICY," p. 40.)
The amount of the Contingent Deferred Sales Charge is determined by
multiplying the amount of the premium withdrawn by the applicable Contingent
Deferred Sales Charge Percentage. The applicable Contingent Deferred Sales
Charge Percentage will depend upon the number of Policy Anniversaries that
have elapsed since the Premium Payment that is being withdrawn was made. For
this purpose, surrenders are allocated to Premium Payments on a "first-in,
first-out" basis, that is, first to the oldest Premium Payment, then to the
next oldest Premium Payment, and so on. Premium Payments are deemed to be
withdrawn before earnings, and after all Premium Payments have been withdrawn,
the remaining Adjusted Annuity Purchase Value may be withdrawn without any
Contingent Deferred Sales Charge. The following is the table of Contingent
Deferred Sales Charge Percentages:
<TABLE>
<CAPTION>
NUMBER OF POLICY APPLICABLE CONTINGENT
YEARS SINCE DEFERRED SALES
PREMIUM PAYMENT CHARGE PERCENTAGE
---------------- ---------------------
<S> <C>
Less than 1.......................................... 7%
At least 1 and less than 2........................... 6%
At least 2 and less than 3........................... 5%
At least 3 and less than 4........................... 4%
At least 4 and less than 5........................... 3%
At least 5 and less than 6........................... 2%
At least 6 and less than 7........................... 1%
</TABLE>
PFL anticipates that the Contingent Deferred Sales Charge will not generate
sufficient funds to pay the cost of distributing the Policies. If this charge
is insufficient to cover the distribution expenses, the deficiency will be met
from PFL's general funds, which will include amounts derived from the charge
for mortality and expense risks.
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MORTALITY AND EXPENSE RISK CHARGE
PFL imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. This charge is equal to an
effective annual rate of 1.25% of the daily net asset value of a fund share
held in the Mutual Fund Account for each Subaccount. The Mortality and Expense
Risk Charge is reflected in the Accumulation or Annuity Unit Values for the
Policy for each Subaccount.
Annuity Purchase Values and Annuity Payments are not affected by changes in
actual mortality experience nor by actual expenses incurred by PFL. The
mortality risks assumed by PFL arise from its contractual obligations to make
Annuity Payments (determined in accordance with the Annuity tables and other
provisions contained in the Policy) and to pay Death Benefits prior to the
Annuity Commencement Date. Thus, Owners are assured that neither an
Annuitant's own longevity nor an unanticipated improvement in general life
expectancy will adversely affect the monthly Annuity payments that the
Annuitant will receive under the Policy.
PFL also bears substantial risk in connection with the Death Benefit
Guarantee since PFL will pay a Death Benefit equal to the Guaranteed Minimum
Guaranteed Death Benefit (that is, 5% Compound Death Benefit or Annual Step-Up
Death Benefit) if that amount is higher than the Annuity Purchase Value.
The expense risk assumed by PFL is the risk that PFL's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative and Policy Maintenance Charges.
If the Mortality and Expense Risk Charge is insufficient to cover PFL's
actual costs, PFL will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to PFL. To the extent
that the Contingent Deferred Sales Charge is insufficient to cover the actual
cost of Policy distribution, the deficiency will be met from PFL's general
corporate assets, which may include amounts, if any, derived from the
Mortality and Expense Risk Charge. A mortality and expense risk charge is
assessed during the annuity phase for all Variable Annuity Options including
those that do not carry a life contingency.
ADMINISTRATIVE CHARGES
In order to cover the costs of administering the Policies and the Accounts,
PFL deducts a Policy Maintenance Charge from the Annuity Purchase Value of
each Policy, and also deducts a daily Administrative Expense Charge from the
assets of each Subaccount of the Mutual Fund Account.
The annual Policy Maintenance Charge is deducted from the Annuity Purchase
Value of each Policy on each Policy Anniversary prior to the Annuity
Commencement Date. After the Annuity Commencement Date, the charge is not
deducted. This annual Policy Maintenance Charge generally is $35 and it will
not be increased. It will never exceed 2% of the Annuity
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Purchase Value. The Policy Maintenance Charge will be deducted only from the
Subaccounts in the Mutual Fund Account, in the same proportion that the Policy
Owner's interest in each Subaccount bears to the Annuity Purchase Value in the
Mutual Fund Account.
PFL also deducts a daily Administrative Expense Charge from the net assets
of each Subaccount of the Mutual Fund Account. This charge is equal to an
effective annual rate of .15% of the net assets in the Mutual Fund Account.
The Administrative Expense Charge may be increased in the future (but the
combined total of this charge and the Mortality and Expense Risk Charge will
never exceed 1.40%).
PREMIUM TAXES
PFL currently makes no deduction from the Premium Payments for any state
premium taxes PFL pays in connection with Premium Payments under the Policies.
However, PFL will, when permitted by state law, deduct the aggregate premium
taxes paid on behalf of a particular Policy from the Annuity Purchase Value on
(i) the Annuity Commencement Date (thus reducing the Adjusted Annuity Purchase
Value), (ii) the total surrender of a Policy, or (iii) payment of the death
proceeds of a Policy. Premium Taxes currently range from 0% to 3.50% of
Premium Payments.
FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the accounts or the
policies.
TRANSFER CHARGE
There is no charge for the first 12 transfers between Investment Options in
each Policy Year. PFL reserves the right to impose a $10 charge for the
thirteenth and each subsequent transfer request made by the Owner during a
single Policy Year. For the purpose of determining whether a transfer charge
is payable, Premium Payment allocations are not considered transfers. All
transfer requests made simultaneously will be treated as a single request. No
transfer charge will be imposed for any transfer which is not at the Owner's
request.
OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each of the Portfolios of the Underlying Funds is responsible for all of its
expenses. In addition, charges will be made against each of the Portfolios of
the Underlying Funds for investment advisory services provided to the
Portfolio. The net assets of each Portfolio of the Underlying Funds will
reflect deductions in connection with the investment advisory fee and other
expenses.
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For more information concerning the investment advisory fee and other
charges against the Portfolios, see the prospectuses for the Underlying Funds,
current copies of which accompany this Prospectus.
EMPLOYEE AND AGENT PURCHASES
The Policy may be acquired by an employee or registered representative of
any broker/dealer authorized to sell the Policy or their spouse or minor
children, or by an officer, director, trustee or bona-fide full-time employee
of PFL or its affiliated companies or their spouse or minor children. In such
case, a bonus of 5% of each premium deposit may be credited to the Policy due
to lower acquisition costs PFL experiences on these purchases. The bonus will
be reported to the Internal Revenue Service as taxable income to the employee
or registered representative. Compensation to the registered representative
and broker/dealer will be reduced by the amount of such bonus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the
Internal Revenue Code of 1986, as amended (the "Code"), proposed and final
Treasury Regulations thereunder, judicial authority, and current
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons," and does not
discuss state, local, or foreign tax consequences. United States Persons means
citizens or residents of the United States, domestic corporations, domestic
partnerships and trusts or estates that are subject to United States federal
income tax regardless of the source of their income.
At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Nonqualified Policy or a
Qualified Policy. If the initial Premium Payment is derived from an exchange
or surrender of another annuity policy, PFL may require that the prospective
purchaser provide information with regard to the federal income tax status of
the previous annuity policy. PFL will require that persons purchase separate
Policies if they desire to invest monies qualifying for different annuity tax
treatment under the Code. Each such separate Policy would require the minimum
initial Premium Payment stated above. Subsequent Additional Premium Payments
under a Policy must qualify for the same federal income tax treatment as the
initial Premium Payment under the Policy; PFL will not accept a Subsequent
Additional Premium Payment under a Policy if the federal income tax treatment
of such Premium Payment would be different from that of the initial Premium
Payment.
The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), or 408(a), or 457 of the Code and
individuals purchasing individual retirement annuities that qualify for
special
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federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS.
TAX STATUS OF THE POLICY
The following discussion is based on the assumption that the Policy
qualifies as an annuity contract for federal income tax purposes. The
Statement of Additional Information discusses the tax requirements for
qualifying as an annuity contract.
TAXATION OF ANNUITIES
The discussion below applies only to those Policies owned by natural
persons, and that qualify as annuity contracts for federal income tax
purposes. With respect to Owners who are natural persons, the Policy should be
treated as an annuity contract for federal income tax purposes.
In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification
and distribution requirements described in the Statement of Additional
Information should not be taxed on increases in the Annuity Purchase Value
until an amount is received or deemed received, e.g., upon a partial or full
surrender or as Annuity Payments under the Annuity Option selected. Generally,
any amount received or deemed received under a Nonqualified Annuity Contract
prior to the Annuity Commencement Date is deemed to come first from any
"Income on the Contract" and then from the "Investment in the Contract." The
"Investment in the Contract" generally equals total premium payments less
amounts received which were not includable in gross income. To the extent that
the Annuity Purchase Value (Cash Value in the event of a Surrender) exceeds
the "Investment in the Contract," such excess constitutes the "Income on the
Contract." For these purposes such "Income on the Contract" shall be computed
by reference to the aggregation rules described below, and the amount
includable in gross income will be taxable as ordinary income. If at the time
that any amount is received or deemed received there is no "Income on the
Contract" (e.g., because the gross Annuity Purchase Value does not exceed the
"Investment in the Contract" and no aggregation rule applies), then such
amount
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received or deemed received will not be includable in gross income, and will
simply reduce the "Investment in the Contract."
For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Annuity Purchase Value (including assignment of Owner's
right to receive Annuity Payments prior to the Annuity Commencement Date)
generally will be treated as a distribution in the amount of such portion of
the Annuity Purchase Value. Additionally, if an Owner designates a new Owner
prior to the Annuity Commencement Date without receiving full and adequate
consideration, the old Owner generally will be treated as receiving a
distribution under the Policy in an amount equal to the Annuity Purchase
Value. A transfer of ownership or an assignment of a Policy, or designation of
an Annuitant or Beneficiary who is not also the Owner, as well as the
selection of certain Annuity Commencement Dates, may result in certain tax
consequences to the Owner that are not discussed herein. An Owner
contemplating any such transfer, designation, selection or assignment of a
Policy should contact a competent tax adviser with respect to the potential
tax effects of such a transaction.
Aggregation Rules. Generally all nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all individual retirement annuities and accounts
under Section 408 of the Code for an individual are aggregated, and generally
all distributions therefrom during a calendar year are treated as one
distribution made as of the end of such year.
Surrenders or Withdrawals. In the case of a partial surrender (including
systematic withdrawals) under a Nonqualified Policy, the amount received
generally will be includable in gross income to the extent that it does not
exceed the "Income on the Contract," which is generally equal to the excess of
the Annuity Purchase Value immediately before the partial surrender over the
"Investment in the Contract" at that time. However, for these purposes the
Annuity Purchase Value immediately before a partial surrender may have to be
increased by any positive Excess Interest Adjustment which results from such a
partial surrender or which could result from a simultaneous full surrender,
and may need further adjustments if the aggregation rules apply. There is,
however, no definitive guidance on the proper tax treatment of Excess Interest
Adjustments, and the Owner should contact a competent tax adviser with respect
to the potential tax consequences of an Excess Interest Adjustment that may
apply in the case of a Non-Qualified Policy or a Qualified Policy. In the case
of a partial surrender (including systematic withdrawals) under a Qualified
Policy (other than one qualified under Section 457 of the Code), a ratable
portion of the amount received is generally excludable from gross income,
based on the ratio of the "Investment in the Contract" to the individual's
total account balance or accrued benefit under the retirement plan at the time
of each such payment. For a Qualified Policy, the "Investment in the Contract"
can
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be zero. Special tax rules may be available for certain distributions from a
Qualified Policy. In the case of a full surrender under a Nonqualified Policy
or a Qualified Policy, the amount received generally will be taxable only to
the extent it exceeds the "Investment in the Contract, unless the aggregation
rules apply."
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general only a portion of
the Annuity Payments received after the Annuity Commencement Date will be
includable in the gross income of the recipient.
For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected value of the Annuity Payments
for the term of the payments. The remainder of each Annuity Payment is
includable in gross income. Once the "Investment in the Contract" has been
fully recovered, the full amount of any additional Annuity Payments received
is includable in gross income.
For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. The remainder of each
Annuity Payment is includable in gross income. Once the "Investment in the
Contract" has been fully recovered, the full amount of any additional Annuity
Payments is includable in gross income.
Where an Owner allocates a portion of the Adjusted Annuity Purchase Value on
the Annuity Commencement Date to more than one annuity payment option (fixed
or variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
PFL makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of options. Instead, any Owner is advised to
consult a competent tax adviser as to the potential tax effects of allocating
any amount of Adjusted Annuity Purchase Value to any particular annuity
payment option.
If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner
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as a full surrender, as described above, or (2) if distributed under an
Annuity Option, they are taxed in the same manner as Annuity Payments, as
described above. For these purposes, the "Investment in the Contract" is not
affected by the Owner's or Annuitant's death. That is, the "Investment in the
Contract" remains generally the total premium payments less amounts received
which were not includable in gross income.
Penalty Taxes. In the case of any amount received or deemed received from
the Policy, e.g., upon a surrender of a Policy (including systematic
withdrawals) or a deemed distribution under a Policy resulting from a pledge,
assignment or agreement to pledge or assign or an Annuity Payment with respect
to a Policy, there may be imposed on the recipient a federal tax penalty equal
to 10% of the amount includable in gross income. The tax penalty generally
will not apply to any distribution: (i) made on or after the date on which the
taxpayer attains age 59 1/2; (ii) made as a result of the death of the holder
(generally the Owner); (iii) attributable to the disability of the taxpayer;
or (iv) which is part of a series of substantially equal periodic payments
made (not less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and his/her beneficiary. Other rules may apply to Qualified Policies.
Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided at the time distributions are
requested or made. For certain Qualified Policies, certain distributions are
subject to mandatory withholding.
Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into our Policy administration procedures. Owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Policies comply with applicable law.
PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.
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Individual Retirement Annuities. In order to qualify as an individual
retirement annuity under Section 408(b) of the Code, a Policy must contain
certain provisions: (i) the Owner must be the Annuitant; (ii) the Policy
generally is not transferable by the Owner, e.g., the Owner may not designate
a new Owner, designate a Contingent Owner or assign the Policy as collateral
security; (iii) the total Premium Payments for any calendar year may not
exceed $2,000, except in case of a rollover amount or contribution under
Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code; (iv) Annuity
Payments or withdrawals must begin no later than April 1 of the calendar year
following the calendar year in which the Annuitant attains age 70 1/2; (v) an
Annuity Payment Option with a Period Certain that will guarantee Annuity
Payments beyond the life expectancy of the Annuitant and the Beneficiary may
not be selected; and (vi) certain payments of Death Benefits must be made in
the event the Annuitant dies prior to the distribution of the Annuity Purchase
Value. Policies intended to qualify as individual retirement annuities under
Section 408(b) of the Code contain such provisions.
Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity ("IRA") should be invested in a life
insurance contract, but the regulations thereunder allow such funds to be
invested in an annuity contract that provides a death benefit that equals the
greater of the premiums paid or the cash value for the contract. The Policy
provides an enhanced death benefit that could exceed the amount of such a
permissible death benefit, but it is unclear to what extent such an enhanced
death benefit could disqualify the Policy under Section 408 of the Code. The
Internal Revenue Service has not reviewed the Policy for qualification as an
IRA, and has not addressed in a ruling of general applicability whether an
enhanced death benefit provision, such as the provision in the Policy,
comports with IRA qualification requirements.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age 59
1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the
case of hardship.
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans. Sections
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans for employees and self-employed individuals to
establish qualified plans for themselves and their employees.
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Such retirement plans may permit the purchase of the Policies to accumulate
retirement savings. Adverse tax consequences to the plan, the participant or
both may result if the Policy is assigned or transferred to any individual as
a means to provide benefit payments.
Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Policies can be used with
such plans. Under such plans a participant may specify the form of investment
in which his or her participation will be made. All such investments, however,
are owned by, and are subject to, the claims of the general creditors of the
sponsoring employer. Depending on the terms of the particular plan, the
employer may be entitled to draw on deferred amounts for purposes unrelated to
its Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is
not a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Annuity Purchase Value as of the close of the
taxable year and all previous distributions under the Policy over (ii) the sum
of the Premium Payments paid for the taxable year and any prior taxable year
and the amounts includable in gross income for any prior taxable year with
respect to the Policy. For these purposes, the Annuity Purchase Value at year
end may have to be increased by any positive Excess Interest Adjustment which
could result from a full surrender at such time. There is, however, no
definitive guidance on the proper tax treatment of Excess Interest
Adjustments, and the Owner should contact a competent tax adviser with respect
to the potential tax consequences of an Excess Interest Adjustment.
Notwithstanding the preceding sentences in this paragraph, Section 72(u) of
the Code does not apply to (i) a Policy the nominal Owner of which is not a
natural person but the beneficial Owner of which is a natural person, (ii) a
Policy acquired by the estate of a decedent by reason of such decedent's
death, (iii) a Qualified Policy (other than one qualified under Section 457)
or (iv) a single-payment annuity the Annuity Commencement Date for which is no
later than one year from the date of the single Premium Payment; instead, such
Policies are taxed as described above under the heading "Taxation of
Annuities."
Possible Changes in Taxation. In past years, legislation has been proposed
in the U.S. Congress that would have adversely modified the federal taxation
of certain annuities. For example, one such proposal would have changed the
tax treatment of non-qualified annuities that did not have "substantial life
contingencies" by taxing income as it is credited to the annuity. Although as
of the date of this Prospectus Congress was not
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actively considering any legislation regarding the taxation of annuities,
there is always the possibility that the tax treatment of annuities could
change by legislation or other means (such as IRS regulations, revenue
rulings, judicial decisions, etc.). Moreover, it is also possible that any
change could be retroactive (that is, effective prior to the date of the
change).
DISTRIBUTOR OF THE POLICIES
AEGON USA Securities, Inc., an affiliate of PFL, is the principal
underwriter of the Policies. AEGON USA Securities, Inc. has entered or will
enter into one or more agreements with various broker-dealers for the
distribution of the Policies. Commissions on Policy sales are paid to dealers.
Commissions payable to a broker-dealer will be up to 6% of Premium Payments,
or 5% plus an annual continuing fee based on Policy Values. In addition,
certain broker-dealers may receive additional commissions, expense allowances,
and additional annual continuing fees based upon sales volume, agent or
service training responsibilities, and other factors. These commissions are
not deducted from Premium Payments, they are paid by PFL.
VOTING RIGHTS
To the extent required by law, PFL will vote the Underlying Funds shares
held by the Mutual Fund Account at regular and special shareholder meetings of
the Underlying Funds in accordance with instructions received from persons
having voting interests in the portfolios although the Underlying Funds do not
hold regular annual shareholders' meetings. If, however, the 1940 Act or any
regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result PFL determines that it is permitted to
vote the Underlying Funds' shares in its own right, it may elect to do so.
Before the Annuity Commencement Date, the Policy Owner holds the voting
interest in the selected Portfolios. The number of votes that an Owner has the
right to instruct will be calculated separately for each Subaccount. The
number of votes that an Owner has the right to instruct for a particular
Subaccount will be determined by dividing his or her Annuity Purchase Value in
the Subaccount by the net asset value per share of the corresponding Portfolio
in which the Subaccount invests. Fractional shares will be counted.
After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as Annuity Payments
are made and as the reserves for the Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy allocated to
the applicable Subaccount by the net asset value per share of the
corresponding Portfolio. Fractional shares will be counted.
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The number of votes that the Owner or person receiving income payments has
the right to instruct will be determined as of the date established by the
Underlying Funds for determining shareholders eligible to vote at the meeting
of the Underlying Funds. PFL will solicit voting instructions by sending
Owners or other persons entitled to vote written requests for instructions
prior to that meeting in accordance with procedures established by the
Underlying Funds. Portfolio shares as to which no timely instructions are
received and shares held by PFL in which Owners or other persons entitled to
vote have no beneficial interest will be voted in proportion to the voting
instructions that are received with respect to all Policies participating in
the same Subaccount.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Mutual Fund Account is a party
or to which the assets of the Account are subject. PFL is not involved in any
litigation that is of material importance in relation to its total assets or
that relates to the Mutual Fund Account.
- 63 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus.
The following is the Table of Contents for that Statement:
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non-Participating........................................................
Amendments............................................................... 4
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
Investment Experience...................................................... 6
State Regulation of PFL.................................................... 10
Administration............................................................. 10
Records and Reports........................................................ 10
Distribution of the Policies............................................... 10
Custody of Assets.......................................................... 10
Historical Performance Data................................................ 11
Money Market Yields...................................................... 11
Other Subaccount Yields.................................................. 12
Total Returns............................................................ 12
Other Performance Data................................................... 13
Legal Matters.............................................................. 13
Independent Auditors....................................................... 14
Other Information.......................................................... 14
Financial Statements....................................................... 14
</TABLE>
- 64 -
<PAGE>
APPENDIX A
EXCESS INTEREST ADJUSTMENT(1)
The formula which will be used to determine the Excess Interest Adjustment
(EIA) is:
S* (G (caret) - C)* (M/12)
S=Gross amount being withdrawn that is subject to the EIA
G=Guaranteed Interest Rate in effect for the policy
C= Current Guaranteed Interest Rate then being offered on new premiums for
the next longer option period than "M". If this policy form or such an
option period is no longer offered, "C" will be the U.S. Treasury rate for
the next longer maturity (in whole years) than "M" on the 25th day of the
previous calendar month, plus up to 2%.
M= Number of months remaining in the current option period, rounded up to the
next higher whole number of months.
EXAMPLE 1 (FULL SURRENDER, RATES INCREASE BY 3%):
Single Premium:$50,000
Guarantee Period:5 Years
Guarantee Rate:5.50% per annum
Full Surrender:Middle of Contract Year 3
Annuity Purchase Value ("APV") at
middle of Contract Year 3 = 50,000* (1.055) (caret) 2.5 =
57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) (caret) 2.5 =
53,834.80
Excess Interest Adjustment
G= .055
C= .085
M= 30
Excess Interest Adjustment = S* (G (caret) - C)* (M/12)
= 51,445.06* (.055 - .085)* (30/12)
= (3,858.38), but Excess Interest
Adjustment cannot cause the Adjusted
APV to fall below the floor, so the
adjustment is limited to 53,834.80 -
57,161.18 = (3,326.38)
Adjusted (APV) = APV + EIA = 57,161.18 + (3,326.38) =
53,834.80
A-1
<PAGE>
Surrender Charges = (50,000 - 5,716.12)* .05
= 2,214.19
Net Surrender Value at middle of
Contract Year 3 = 53,834.80 - 2,214.19
= 51,620.61
EXAMPLE 2 (FULL SURRENDER, RATES DECREASE BY 1%):
Single Premium:$50,000
Guarantee Period:5 Years
Guarantee Rate:5.50% per annum
Full Surrender:Middle of Contract Year 3
Annuity Purchase Value at middle
of Contract Year 3 = 50,000* (1.055) (caret) 2.5 = 57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) (caret) 2.5 = 53,834.80
Excess Interest Adjustment
G= .055
C= .045
M= 30
Excess Interest Adjustment = S* (G (caret) - C)* (M/12)
= 51,445.06* (.055 (caret) - .045)*
(30/12)
= 1,286.13
Adjusted APV = 57,161.18 + 1,286.13 = 58,447.31
Surrender Charges = (50,000 (caret) - 5,716.12)* .05
= 2,214.19
Net Surrender Value at middle of
Contract Year 3 = 58,447.31 (caret) - 2,214.19
= 56,233.12
A-2
<PAGE>
On a partial surrender, PFL will pay the policy holder the full amount of
withdrawal requested (as long as the Annuity Purchase Value is sufficient).
Surrender Charge free/adjustment free withdrawals will reduce the APV by the
amount withdrawn. Amounts withdrawn in excess of the Surrender Charge
free/adjustment free portion will reduce the APV by an amount equal to:
X - Y + Z
X= Excess Partial Withdrawal
Y= Excess Interest Adjustment = (X)* (G - C)* (M/12) where G, C, and M are
defined above.
Z= Surrender Charge on X - Y.
EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $20,000; Middle of Contract Year 3
Annuity Purchase Value at middle
of Contract Year 3 = 50,000 (caret) (1.055) (caret) 2.5 =
57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge (SC) Adjustment
X= 20,000 - 5,716.12 = 14,283.88
G= .055
C= .065
M= 30
Y= 14,283.88* (.055 - .065)* (30/12) = (357.10)
Z= .05* (20,000 - 5,716.12 - (357.10)) =732.05
Reduction to APV for Excess
Withdrawal: =X - Y + Z
=14,283.88 - (357.10) + 732.05
=15,373.03
Remaining Annuity Purchase Value
at middle of Contract Year 3
= 57,161.18 - 5,716.12 - 15,373.03
= 36,072.03
A-3
<PAGE>
EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $20,000; Middle of Contract Year 3
Annuity Purchase Value at middle
of Contract Year 3 =50,000* (1,055) (caret) 2.5 =
57,161.18
Penalty Free Amount at middle of
Contract Year 3 =57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge Adjustment
X= 20,000 (caret) - 5,716.12 = 14,283.88
G= .055
C= .045
M= 30
Y= 14.283.88* (.055 (caret) - .045)* (30/12) = 357.10
Z= .05* (20,000 - 5,716.12 - 357.10) = 696.34
Reduction to APV for Excess Withdrawal:
=X - Y + Z
=14,283.88 - 357.10 + 696.34
=14,623.12
Remaining Annuity Purchase Value at
middle of Contract Year 3
=57,161.18 (caret) - 5,716.12 (caret) -
14,623.12
=36,821.94
(1) * represents multiplication;
(caret) represents exponentiation.
A-4
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE ENDEAVOR FI VARIABLE ANNUITY
Issued through
PFL ENDEAVOR VARIABLE
ANNUITY ACCOUNT
Offered by
PFL LIFE INSURANCE COMPANY
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Endeavor FI Variable Annuity (the "Policy")
offered by PFL Life Insurance Company. You may obtain a copy of the Prospectus
dated May 1, 1997 by calling 1-800-525-6205, or by writing to the Administrative
and Service Office, Financial Markets Division--Variable Annuity Dept., 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001. Terms used in the current
Prospectus for the Policy are incorporated in this Statement of Additional
Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUSES FOR THE POLICY, ENDEAVOR SERIES
TRUST AND THE GROWTH PORTFOLIO OF THE WRL SERIES FUND, INC.
Dated: May 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Policy--General Provisions........................................... 3
Owner.................................................................. 3
Entire Policy.......................................................... 3
Delay of Payment and Transfers......................................... 3
Misstatement of Age or Sex............................................. 4
Reallocation of Annuity Purchase
Values After the Annuity Commencement Date............................ 4
Assignment............................................................. 4
Evidence of Survival................................................... 4
Non-Participating......................................................
Amendments............................................................. 4
Federal Tax Matters (49)................................................. 5
Tax Status of the Policy............................................... 5
Taxation of PFL........................................................ 6
Investment Experience.................................................... 6
State Regulation of PFL.................................................. 10
Administration........................................................... 10
Records and Reports...................................................... 10
Distribution of the Policies (55)........................................ 10
Custody of Assets........................................................ 10
Historical Performance Data (19)......................................... 11
Money Market Yields.................................................... 11
Other Subaccount Yields................................................ 12
Total Returns.......................................................... 12
Other Performance Data................................................. 13
Legal Matters............................................................ 13
Independent Auditors..................................................... 14
Other Information........................................................ 14
Financial Statements (18)................................................ 14
</TABLE>
(Numbers in parenthesis indicate corresponding pages of the Prospectus).
2
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about PFL and the Policy which may be of
interest to an Owner.
THE POLICY--GENERAL PROVISIONS
Owner
The Policy shall belong to the Policy Owner upon issuance of the Policy
after completion of an application and delivery of the initial Premium Payment.
While the Annuitant is living, the Owner may: (1) assign the Policy; (2)
surrender the Policy; (3) amend or modify the Policy with PFL's consent; (4)
receive annuity payments or name a Payee to receive the payments; and (5)
exercise, receive and enjoy every other right and benefit contained in the
Policy. The exercise of these rights may be subject to the consent of any
assignee or irrevocable Beneficiary and of the Owner's spouse in a community or
marital property state.
A Successor Owner can be named in the Policy application or in a Written
Notice. The Successor Owner will become the new Owner upon the Owner's death, if
the Owner predeceases the Annuitant. If no Successor Owner survives the Owner
and the Owner predeceases the Annuitant, the Owner's estate will become the
Owner.
The Owner may change the ownership of the Policy in a Written Notice. When
this change takes effect, all rights of ownership in the Policy will pass to the
new Owner. A change of ownership may have adverse tax consequences.
When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any payment
PFL has made or action PFL has taken before recording the change. Changing the
Owner or naming a new Successor Owner cancels any prior choice of Successor
Owner, but does not change the designation of the Beneficiary or the Annuitant.
If ownership is transferred (except to the Owner's spouse) because the
Owner dies before the Annuitant, the Cash Value generally must be distributed to
the Successor Owner within five years of the Owner's death, or payments must be
made for a period certain or for the Successor Owner's lifetime so long as any
period certain does not exceed that Successor Owner's life expectancy, if the
first payment begins within one year of the Owner's death.
Entire Policy
The Policy and any endorsements thereon and the Policy application
constitute the entire contract between PFL and the Owner. All statements in the
application are representations and not warranties. No statement will cause the
Policy to be void or to be used in defense of a claim unless contained in the
application.
Delay of Payment and Transfers
Payment of any amount due from the Mutual Fund Account in respect of a
surrender, the Death Benefit or the death of the Owner of a Nonqualified Policy
generally will occur within seven business days from the date the Written Notice
(and any other required documentation or information) is received, except that
PFL may be permitted to defer such payment from the Mutual Fund Account if: (1)
the New York Stock Exchange is closed for other than usual weekends or holidays
or trading on the Exchange is otherwise restricted; or (2) an emergency exists
as defined by the SEC or the SEC requires that trading be restricted; or (3) the
SEC permits a delay for the protection of Owners. In addition, transfers of
amounts from the Subaccounts may be deferred under these circumstances.
3
<PAGE>
Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See page 28 of the Policy Prospectus.
Misstatement of Age or Sex
If the age or sex of the Annuitant has been misstated, PFL will change the
annuity benefit payable to that which the Premium Payments would have purchased
for the correct age or sex. The dollar amount of any underpayment made by PFL
shall be paid in full with the next payment due such person or the Beneficiary.
The dollar amount of any overpayment made by PFL due to any misstatement shall
be deducted from payments subsequently accruing to such person or Beneficiary.
Any underpayment or overpayment will include interest at 5% per year, from the
date of the wrong payment to the date of the adjustment. The age of the
Annuitant may be established at any time by the submission of proof satisfactory
to PFL.
Reallocation of Annuity Purchase Values After the Annuity Commencement Date
After the Annuity Commencement Date, the Policy Owner may reallocate the
value of a designated number of Annuity Units of a Subaccount of the Mutual Fund
Account then credited to a Policy into an equal value of Annuity Units of one or
more other Subaccounts of the Mutual Fund Account, or the Fixed Account. The
reallocation shall be based on the relative value of the Annuity Units of the
Account(s) or Subaccount(s) at the end of the Business Day on the next payment
date. The minimum amount which may be reallocated is the lesser of (1) $10 of
monthly income or (2) the entire monthly income of the Annuity Units in the
Account or Subaccount from which the transfer is being made. If the monthly
income of the Annuity Units remaining in an Account or Subaccount after a
reallocation is less than $10, PFL reserves the right to include the value of
those Annuity Units as part of the transfer. The request must be in writing to
PFL's Administrative and Service Office. There is no charge assessed in
connection with such reallocation. PFL reserves the right to limit the number of
times a reallocation of Annuity Purchase Value may be made in any given Policy
Year.
Assignment
During the lifetime of the Annuitant the Policy Owner may assign any rights
or benefits provided by the Policy. An assignment will not be binding on PFL
until a copy has been filed at its Administrative and Service Office. The rights
and benefits of the Policy Owner and Beneficiary are subject to the rights of
the assignee. PFL assumes no responsibility for the validity or effect of any
assignment. Any claim made under an assignment shall be subject to proof of
interest and the extent of the assignment. An assignment may have tax
consequences.
Unless the Policy Owner so directs by filing written notice with PFL, no
Beneficiary may assign any payments under the Policy before they are due. To the
extent permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.
Evidence of Survival
PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be made
until PFL receives such evidence.
Non-Participating
The Policy will not share in PFL's surplus earnings; no dividends will be
paid.
4
<PAGE>
Amendments
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No Registered Representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of
the Code, regulations or published rulings. A Policy Owner can refuse such a
change by giving Written Notice, but a refusal may result in adverse tax
consequences.
FEDERAL TAX MATTERS
Tax Status of the Policy
Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
(S) 1.817-5) apply a diversification requirement to each of the Subaccounts of
the Mutual Fund Account. The Mutual Fund Account, through the Underlying Funds
and their Portfolios, intends to comply with the diversification requirements of
the Treasury. PFL has entered into agreements regarding participation in the
Endeavor Series Trust and WRL Series Fund, Inc. that require the Underlying
Funds and their Portfolios to be operated in compliance with the Treasury
regulations.
Owner Control. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for federal income tax purposes, of the
assets of the separate accounts used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable contract owner's gross income. 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 possess incidents of ownership in
those assets, such as the ability to exercise investment control over the
assets. The Treasury Department has 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
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."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating Premium Payments and
Policy Values. These differences could result in an Owner being treated as the
owner of a pro rata portion of the assets of the Mutual Fund Account. In
addition, PFL does 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. PFL therefore reserves the right to modify the Policy as necessary to
attempt to prevent an Owner from being considered the owner of a pro rata share
of the assets of the Mutual Fund Account.
Distribution Requirements. The Code also requires that Nonqualified
Policies contain specific provisions for distribution of Policy proceeds upon
the death of the Owner. In order to be treated as an annuity contract for
federal income tax purposes, the Code requires that such Policies provide that
if any Owner dies on or after the Annuity Commencement Date and before the
entire interest in the Policy has been distributed, the remaining portion must
be distributed at least as rapidly as under the method in effect on such Owner's
death. If any Owner dies before the Annuity Commencement Date, the entire
interest in the Policy must generally be distributed within 5 years after such
Owner's date of death or be used to purchase an immediate annuity under which
payments will begin within one year of such Owner's death and will be made for
the life of the Beneficiary or for a period not extending beyond the life
expectancy of the Beneficiary. However, if upon such Owner's death prior to the
Annuity
5
<PAGE>
Commencement Death, such Owner's surviving spouse becomes the sole new Owner
under the Policy, then the Policy may be continued with the surviving spouse as
the new Owner. If any Owner is not a natural person, then for purposes of these
distribution requirements, the primary Annuitant shall be treated as the Owner
and any death or change of such primary Annuitant shall be treated as the Death
of the Owner. The Policy contains provisions intended to comply with these
requirements of the Code. No regulations interpreting these requirements of the
Code have yet been issued and thus no assurance can be given that the provisions
contained in the Policies satisfy all such Code requirements. The provisions
contained in the Policies will be reviewed and modified if necessary to assure
that they comply with the Code requirements when clarified by regulation or
otherwise.
Taxation of PFL
PFL at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund Account is treated as part of PFL and,
accordingly, will not be taxed separately as a "regulated investment company"
under Subchapter M of the Code. PFL does not expect to incur any federal income
tax liability with respect to investment income and net capital gains arising
from the activities of the Mutual Fund Account retained as part of the reserves
under the Policy. Based on this expectation, it is anticipated that no charges
will be made against the Mutual Fund Account for federal income taxes. If, in
future years, any federal income taxes are incurred by PFL with respect to the
Mutual Fund Account, PFL may make a charge to the Mutual Fund Account.
INVESTMENT EXPERIENCE
An "Investment Experience Factor" is used to determine the value of
Accumulation Units and Annuity Units, and to determine annuity payment rates.
Accumulation Units
Upon allocation to the selected Subaccount of the Mutual Fund Account,
Premium Payments are converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited is determined by dividing the dollar
amount allocated to each Subaccount by the value of an Accumulation Unit for
that Subaccount as next determined after the Premium Payment is received at the
Administrative and Service Office or, in the case of the initial Premium
Payment, when the Policy application is completed, whichever is later. The value
of an Accumulation Unit was arbitrarily established at $1 (except the WRL Growth
Subaccount which was established at $10) at the inception of each Subaccount.
Thereafter, the value of an Accumulation Unit is determined as of the close of
trading on each day the New York Stock Exchange and PFL's Administrative and
Service Office are open for business.
An index (the "Investment Experience Factor") which measures the investment
performance of a Subaccount during a Valuation Period is used to determine the
value of an Accumulation Unit for the next subsequent Valuation Period. The
Investment Experience Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Policy Owner bears this
investment risk. The Net Investment Performance of a Subaccount and deduction of
certain charges affect the Accumulation Unit Value.
The Investment Experience Factor for any Subaccount for any Valuation
Period is determined by dividing (a) by (b) and subtracting (c) from the result,
where:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
Subaccount determined at the end of the current Valuation Period,
plus
6
<PAGE>
(2) The per share amount of any dividend or capital gain
distribution made with respect to the shares held in the Subaccount if
the ex-dividend date occurs during the current Valuation Period, plus
or minus
(3) a per share credit or charge for any taxes determined by PFL
to have resulted from the investment operations of the Subaccount and
for which it has created a reserve;
(b) is the net result of
the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation
Period.
(c) is the charge for mortality and expense risk during the Valuation
Period equal on an annual basis to 1.25% of the daily net asset value
of the Subaccount, plus the .15% administrative charge.
Illustration of Accumulation Unit Value Calculations
Formula and Illustration for Determining
the Investment Experience Factor
Investment Experience Factor = (A + B - C) - E
----------
D
Where: A = The Net Asset Value of an Underlying Fund share as of the end
of the current Valuation Period.
Assume........................................A = $11.57
B = The per share amount of any dividend or capital gains
distribution since the end of the immediately preceding
Valuation Period.
Assume.............................................B = 0
C = The per share charge or credit for any taxes reserved for at the
end of the current Valuation Period.
Assume.............................................C = 0
D = The Net Asset Value of an Underlying Fund share at the end of
the immediately preceding Valuation Period.
Assume........................................D = $11.40
E = The daily deduction for mortality and expense risk and
administrative charges, which totals 1.40% on an annual basis.
On a daily basis......................... = .0000380909
Then, the Investment Experience
Factor = (11.57 + 0 - 0) - .0000380909 = Z =1.0148741898
----------------
11.40
Formula and Illustration for Determining Accumulation Unit Value
Accumulation Unit Value = A * B
7
<PAGE>
Where: A = The Accumulation Unit Value for the immediately preceding Valuation
Period.
Assume........................................ = $ X
B = The Net Investment Factor for the current Valuation Period.
Assume........................................ = Y
Then, the Accumulation Unit Value = $ X * Y = $ Z
Annuity Unit Value And Annuity Payment Rates
The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Subaccount
exceeds the assumed interest rate of 5% annually. Conversely, Annuity Unit
Values fall if the net investment performance of the Subaccount is less than the
assumed rate. The value of a variable Annuity Unit in each Subaccount was
established at $1.00 on the date operations began for that Subaccount. The value
of a variable Annuity Unit on any subsequent Business Day is equal to (a)
multiplied by (b) multiplied by (c), where:
(a) is the variable Annuity Unit Value on the immediately preceding
Business Day;
(b) is the net investment factor of the valuation period; and
(c) is the investment result adjustment factor for the valuation
period.
The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.
The net investment factor for the Policy used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is determined
by dividing (i) by (ii) and subtracting (iii) from the result, where:
(i) is the result of:
(1) the net asset value of a fund share held in the Mutual Fund
Account for that Subaccount determined at the end of the current
valuation period; plus
(2) the per share amount of any dividend or capital gain
distributions made by the fund for shares held in the Mutual Fund
Account for that Subaccount if the ex-dividend date occurs during the
valuation period.
(ii) is the net asset value of a fund share held in the Mutual Fund
Account for that Subaccount determined as of the end of the immediately
preceding valuation period.
(iii) is a factor representing the mortality and expense risk fee and
administrative charge. This factor is equal, on an annual basis, to 1.40%
of the daily net asset value of a fund share held in the Mutual Fund
Account for that Subaccount.
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date. The
Policy also contains a table for determining the adjusted age of the Annuitant.
8
<PAGE>
Illustration of Calculations for Annuity Unit Value
and Variable Annuity Payments
Formula and Illustration for Determining Annuity Unit Value
Annuity Unit Value = A * B * C
Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume...............................................= $ X
B = Investment Experience Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
Assume................................................ = Y
C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables used.
Assume................................................ = Z
Then, the Annuity Unit Value is:
$ X * Y * Z = $ Q
Formula and Illustration for Determining Amount
of First Monthly Variable Annuity Payment
First Monthly Variable Annuity Payment = A * B
------
$1,000
Where: A = The Annuity Purchase Value as of the Annuity Commencement Date.
Assume = $ X
B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according to
the tables contained in the Policy.
Assume = $ Y
Then, the first Monthly Variable Annuity
Payment = $ X * $ Y = $ Z
-----
1,000
Formula and Illustration for Determining the Number of Annuity
Units Represented by Each Monthly Variable Annuity Payment
Number of Annuity Units = A
-
B
Where: A = The dollar amount of the first monthly Variable Annuity
Payment.
Assume........................................................= $ X
B = The Annuity Unit Value for the Valuation Date on which the first
monthly payment is due.
Assume........................................................= $ Y
Then, the number of Annuity Units = $ X = Z
---
$ Y
9
<PAGE>
STATE REGULATION OF PFL
PFL is subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of PFL for the preceding year and its financial condition as of the
end of such year. Regulation by the Division of Insurance includes periodic
examination to determine PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
ADMINISTRATION
PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the Mutual Fund Account will be
maintained by PFL. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, PFL will mail to all Policy Owners at
their last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law or
regulation. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.
DISTRIBUTION OF THE POLICIES
The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies.
AEGON USA Securities, Inc., an affiliate of PFL, will be the principal
underwriter of the Policies. AEGON USA Securities, Inc. has entered into
agreements with broker-dealers for the distribution of the Policies. During
1996, 1995 and 1994, the amount paid to AEGON USA Securities, Inc. and/or the
broker-dealers for their services was $19,668,001, $13,569,474, and $19,983,219,
respectively.
CUSTODY OF ASSETS
The assets of each of the Subaccounts of the Mutual Fund Account are held
by PFL. The assets of each of the Subaccounts of the Mutual Fund Account are
segregated and held separate and apart from the assets of the other Subaccounts
and from PFL's general account assets. PFL maintains records of all purchases
and redemptions of shares of the Underlying Funds held by each of the
Subaccounts. Additional protection for the assets of the Mutual Fund Account is
afforded by PFL's fidelity bond, presently in the amount of $5,000,000, covering
the acts of officers and employees of PFL.
10
<PAGE>
HISTORICAL PERFORMANCE DATA
Money Market Yields
PFL may from time to time disclose the current annualized yield of the TCW
Money Market Subaccount, which invests in the TCW Money Market Portfolio, for a
7-day period in a manner which does not take into consideration any realized or
unrealized gains or losses on shares of the TCW Money Market Portfolio or on its
portfolio securities. This current annualized yield is computed by determining
the net change (exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) at the end of the 7-day period in
the value of a hypothetical account having a balance of 1 unit of the TCW Money
Market Subaccount at the beginning of the 7-day period, dividing such net change
in account value by the value of the account at the beginning of the period to
determine the base period return, and annualizing this quotient on a 365-day
basis. The net change in account value reflects (i) net income from the
Portfolio attributable to the hypothetical account; and (ii) charges and
deductions imposed under a Policy that are attributable to the hypothetical
account. The charges and deductions include the per unit charges for the
hypothetical account for (i) the Administrative Charges; and (ii) the Mortality
and Expense Risk Charge. Current Yield will be calculated according to the
following formula:
Current Yield = ((NCS - ES)/UV)/6/ (365/7)
Where:
NCS = The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized appreciation
and depreciation) for the 7-day period attributable to a hypothetical
account having a balance of 1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a Policy, the yield for
the TCW Money Market Subaccount will be lower than the yield for the TCW Money
Market Portfolio. The yield calculations do not reflect the effect of any
premium taxes or Contingent Deferred Sales Charges that may be applicable to a
particular Policy. Contingent Deferred Sales Charges range from 7% to 0% of the
amount of premium withdrawn based on the Policy Year since payment of the
premium.
PFL may also disclose the effective yield of the TCW Money Market
Subaccount for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the base period return according to
the following formula:
Effective Yield = (1 + ((NCS - ES)/UV))/365/7/- 1
Where:
NCS = The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized appreciation
and depreciation) for the 7-day period attributable to a hypothetical
account having a balance of 1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
The yield on amounts held in the TCW Money Market Subaccount normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The TCW Money Market Subaccount's actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the TCW
Money Market Portfolio, the types and quality of portfolio securities held by
the TCW Money Market Portfolio and its operating expenses. For the seven days
ended December 31, 1995, the yield of the TCW Money Market Subaccount was 2.73%,
and the effective yield was 2.76%.
11
<PAGE>
Other Subaccount Yields
PFL may from time to time advertise or disclose the current annualized
yield of one or more of the Subaccounts of the Mutual Fund Account (except the
TCW Money Market Subaccount) for 30-day periods. The annualized yield of a
Subaccount refers to income generated by the Subaccount over a specific 30-day
period. Because the yield is annualized, the yield generated by a Subaccount
during the 30-day period is assumed to be generated each 30-day period over a
12-month period. The yield is computed by: (i) dividing the net investment
income of the Subaccount less Subaccount expenses for the period, by (ii) the
maximum offering price per unit on the last day of the period times the daily
average number of units outstanding for the period, (iii) compounding that yield
for a 6-month period, and (iv) multiplying that result by 2. Expenses
attributable to the Subaccount include (i) the Administrative Charge and (ii)
the Mortality and Expense Risk Charge. The 30-day yield is calculated according
to the following formula:
Yield = 2 * ((((NI - ES)/(U * UV)) + 1)/6/ - 1)
Where:
NI = Net investment income of the Subaccount for the 30-day period
attributable to the Subaccount's unit.
ES = Expenses of the Subaccount for the 30-day period.
U = The average number of units outstanding.
UV = The unit value at the close (highest) of the last day in the 30-day
period.
Because of the charges and deductions imposed by the Mutual Fund Account,
the yield for a Subaccount of the Mutual Fund Account will be lower than the
yield for its corresponding Portfolio. The yield calculations do not reflect the
effect of any premium taxes that may be applicable to a particular Policy.
Contingent Deferred Sales Charges range from 7% to 0% of the amount of premium
withdrawn based on the number of years since payment of the premium.
The yield on amounts held in the Subaccounts of the Mutual Fund Account
normally will fluctuate over time. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates of
return. A Subaccount's actual yield is affected by the types and quality of its
investments and its operating expenses.
Total Returns
PFL may from time to time also advertise or disclose total returns for one
or more of the Subaccounts of the Mutual Fund Account for various periods of
time. One of the periods of time will include the period measured from the date
the Subaccount commenced operations. When a Subaccount has been in operation for
1, 5 and 10 years, respectively, the total return for these periods will be
provided. Total returns for other periods of time may from time to time also be
disclosed. Total returns represent the average annual compounded rates of return
that would equate an initial investment of $1,000 to the redemption value of
that investment as of the last day of each of the periods. The ending date for
each period for which total return quotations are provided will be for the most
recent month end practicable, considering the type and media of the
communication and will be stated in the communication.
Total returns will be calculated using Subaccount Unit Values which PFL
calculates on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deductions for the Mortality and Expense Risk
Charge and the Administrative Charges. Total return calculations will reflect
the effect of Contingent Deferred Sales Charges that may be applicable to a
particular period. The total return will then be calculated according to the
following formula:
12
<PAGE>
P(1 + T)/n/= ERV
Where:
T = The average annual total return net of Subaccount recurring charges.
ERV = The ending redeemable value of the hypothetical account at the end
of the period.
P = A hypothetical initial payment of $1,000.
N = The number of years in the period.
Other Performance Data
PFL may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above. The
non-standard format will be identical to the standard format except that the
Contingent Deferred Sales Charge percentage will be assumed to be 0%.
PFL may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the Contingent
Deferred Sales Charge percentage will be 0%.
CTR = (ERV/P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of
the period.
P = A hypothetical initial payment of $1,000.
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.
Hypothetical Performance Data
From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date the Mutual Fund Account
commenced operations. Such performance information for the Subaccounts will be
calculated based on the performance of the various Portfolios and the assumption
that the Subaccounts were in existence for the same periods as those indicated
for the Portfolios, with the level of Policy charges that were in effect at the
inception of the Subaccounts.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan L.L.P., of Washington D.C.
13
<PAGE>
INDEPENDENT AUDITORS
The Financial Statements of PFL as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, and the Financial
Statements of PFL Endeavor Variable Annuity Account (which comprises a portion
of the PFL Endeavor VA Separate Account) at December 31, 1996, and for each of
the two years in the period then ended, included in this Statement of Additional
Information have been audited by Ernst & Young LLP, Independent Auditors, 801
Grand Avenue, Suite 3400, Des Moines, Iowa, 50309-2764.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus or this Statement of Additional
Information. Statements contained in the Prospectus and this Statement of
Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the terms
of these documents, reference should be made to the instruments filed with the
Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of the interest of Policy Owners in the Mutual Fund Account will
be affected solely by the investment results of the selected Subaccount(s).
Financial Statements of PFL Endeavor Variable Annuity Account (which comprises a
portion of the PFL Endeavor VA Separate Account) are contained herein. The
Financial Statements of PFL, which are included in this Statement of Additional
Information, should be considered only as bearing on the ability of PFL to meet
its obligations under the Policies. They should not be considered as bearing on
the investment performance of the assets held in the Mutual Fund Account.
14
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND CONTRACT OWNERS OF
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT,
PFL LIFE INSURANCE COMPANY:
We have audited the accompanying balance sheet of The PFL Endeavor Variable
Annuity Account (comprising, respectively, the TCW Money Market, TCW Managed
Asset Allocation, T. Rowe Price International Stock, Value Equity, Dreyfus
Small Cap Value, Dreyfus U.S. Government Securities, T. Rowe Price Equity
Income, T. Rowe Price Growth Stock, Opportunity Value and Growth subaccounts)
as of December 31, 1996, and the related statements of operations and changes
in contract owners' equity for the periods indicated therein. These financial
statements are the responsibility of the Variable Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of mutual fund shares owned as of December 31,
1996 by correspondence with the mutual funds' transfer agent. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting The PFL Endeavor Variable Annuity Account at December
31, 1996, and the results of their operations and changes in their contract
owners' equity for the periods indicated therein in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
January 31, 1997
15
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
BALANCE SHEET (AMOUNTS IN THOUSANDS)
December 31, 1996
<TABLE>
<CAPTION>
TCW
TCW MANAGED
MONEY ASSET
MARKET ALLOCATION
TOTAL SUBACCT. SUBACCT.
-------- -------- ----------
<S> <C> <C> <C>
ASSETS
Cash.............................................. $ 9 -- --
Investments in mutual funds, at current market
value (Note 2):
Endeavor Series Trust--TCW Money Market
Portfolio....................................... 30,542 30,542 --
Endeavor Series Trust--TCW Managed Asset
Allocation Portfolio............................ 229,142 -- 229,142
Endeavor Series Trust--T. Rowe Price
International Stock Portfolio................... 121,702 -- --
Endeavor Series Trust--Value Equity Portfolio.... 110,548 -- --
Endeavor Series Trust--Dreyfus Small Cap Value
Portfolio....................................... 76,482 -- --
Endeavor Series Trust--Dreyfus U.S. Government
Securities Portfolio............................ 19,823 -- --
Endeavor Series Trust--T. Rowe Price Equity
Income Portfolio................................ 64,935 -- --
Endeavor Series Trust--T. Rowe Price Growth Stock
Portfolio....................................... 48,731 -- --
Endeavor Series Trust--Opportunity Value
Portfolio....................................... 315 -- --
WRL Series Fund, Inc.--Growth Portfolio.......... 257,421 -- --
-------- ------ -------
Total investments in mutual funds................ 959,641 30,542 229,142
-------- ------ -------
Total Assets..................................... $959,650 30,542 229,142
======== ====== =======
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable.................... $ 2 -- 2
-------- ------ -------
Total Liabilities................................ 2 -- 2
Contract Owners' Equity:
Deferred annuity contracts terminable by owners
(Notes 3 and 6)................................. 959,648 30,542 229,140
-------- ------ -------
$959,650 30,542 229,142
======== ====== =======
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
T. ROWE T. ROWE T. ROWE
PRICE DREYFUS DREYFUS U.S. PRICE PRICE
INT'L. VALUE SMALL CAP GOV'T. EQUITY GROWTH OPPORTUNITY
STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
-------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3 4 -- -- 1 -- --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
121,702 -- -- -- -- -- -- --
-- 110,548 -- -- -- -- -- --
-- -- 76,482 -- -- -- -- --
-- -- -- 19,823 -- -- -- --
-- -- -- -- 64,935 -- -- --
-- -- -- -- -- 48,731 -- --
-- -- -- -- -- -- 315 --
-- -- -- -- -- -- -- 257,421
------- ------- ------ ------ ------ ------ --- -------
121,702 110,548 76,482 19,823 64,935 48,731 315 257,421
------- ------- ------ ------ ------ ------ --- -------
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======= ======= ====== ====== ====== ====== === =======
-- -- -- -- -- -- -- --
------- ------- ------ ------ ------ ------ --- -------
-- -- -- -- -- -- -- --
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
------- ------- ------ ------ ------ ------ --- -------
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======= ======= ====== ====== ====== ====== === =======
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
Year Ended December 31, 1996, Except as Noted
<TABLE>
<CAPTION>
TCW
TCW MANAGED
MONEY ASSET
MARKET ALLOCATION
TOTAL SUBACCT. SUBACCT.
-------- -------- ----------
<S> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends........................................ $ 27,904 1,245 3,793
Expenses (Note 5):
Administrative fee............................... 443 10 122
Mortality and expense risk charge................ 11,237 365 2,943
-------- ------ ------
Net investment income (loss)................... 16,224 870 728
-------- ------ ------
NET REALIZED AND UNREALIZED CAPITAL GAIN FROM
INVESTMENTS
Net realized capital gain from sales of
investments:
Proceeds from sales.............................. 70,848 24,793 15,228
Cost of investments sold......................... 60,774 24,793 12,264
-------- ------ ------
Net realized capital gain from sales of
investments...................................... 10,074 -- 2,964
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period.......................... 78,863 -- 25,121
End of the period................................ 175,289 -- 52,892
-------- ------ ------
Net change in unrealized
appreciation/depreciation of investments...... 96,426 -- 27,771
-------- ------ ------
Net realized and unrealized capital gain from
investments................................... 106,500 -- 30,735
-------- ------ ------
INCREASE FROM OPERATIONS.......................... $122,724 870 31,463
======== ====== ======
</TABLE>
/1/Period from November 18, 1996 (commencement of operations) to December 31,
1996.
See accompanying Notes to Financial Statements.
18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
T. ROWE T. ROWE T. ROWE
PRICE DREYFUS DREYFUS U.S. PRICE PRICE
INT'L. VALUE SMALL CAP GOV'T. EQUITY GROWTH OPPORTUNITY
STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT./1/ SUBACCT.
- -------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
729 1,976 2,674 436 354 525 -- 16,172
66 42 31 5 15 13 -- 139
1,464 1,198 852 202 540 456 -- 3,217
------ ------ ------ ----- ----- ----- --- ------
(801) 736 1,791 229 (201) 56 -- 12,816
------ ------ ------ ----- ----- ----- --- ------
4,813 3,499 4,065 1,853 970 1,628 37 13,962
4,276 2,344 3,504 1,664 696 1,210 37 9,986
------ ------ ------ ----- ----- ----- --- ------
537 1,155 561 189 274 418 -- 3,976
2,636 12,562 4,426 563 2,266 1,913 -- 29,376
16,143 27,439 15,836 455 9,138 7,517 -- 45,869
------ ------ ------ ----- ----- ----- --- ------
13,507 14,877 11,410 (108) 6,872 5,604 -- 16,493
------ ------ ------ ----- ----- ----- --- ------
14,044 16,032 11,971 81 7,146 6,022 -- 20,469
------ ------ ------ ----- ----- ----- --- ------
13,243 16,768 13,762 310 6,945 6,078 -- 33,285
====== ====== ====== ===== ===== ===== === ======
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (AMOUNTS IN THOUSANDS)
Years Ended December 31, 1996 and 1995, Except as Noted
<TABLE>
<CAPTION>
TCW TCW T. ROWE PRICE
MONEY MANAGED INTERNATIONAL
MARKET ASSET ALLOCATION STOCK
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- --------------- ------------------ ---------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- ------- ------- ------ -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss).................. $ 16,224 18,207 870 816 728 448 (801) 715
Net realized capital
gain.................... 10,074 5,077 -- -- 2,964 2,310 537 270
Net change in unrealized
appreciation/depreciation
of investments.......... 96,426 98,622 -- -- 27,771 31,591 13,507 6,070
-------- ------- ------- ------ -------- -------- ------- ------
Increase from
operations.............. 122,724 121,906 870 816 31,463 34,349 13,243 7,055
-------- ------- ------- ------ -------- -------- ------- ------
CONTRACT TRANSACTIONS
Net contract purchase
payments................ 150,050 88,212 12,211 5,842 13,250 12,410 16,257 9,185
Transfer payments from
(to) other subaccounts
or general account...... 78,317 11,541 5,680 1,552 2,506 (13,051) 10,431 (5,983)
Contract terminations,
withdrawals, and other
deductions.............. (52,551) (30,449) (11,765) (3,793) (12,118) (10,070) (6,132) (4,530)
-------- ------- ------- ------ -------- -------- ------- ------
Increase (decrease) from
contract transactions... 175,816 69,304 6,126 3,601 3,638 (10,711) 20,556 (1,328)
-------- ------- ------- ------ -------- -------- ------- ------
Net increase in contract
owners' equity.......... 298,540 191,210 6,996 4,417 35,101 23,638 33,799 5,727
-------- ------- ------- ------ -------- -------- ------- ------
CONTRACT OWNERS' EQUITY
Beginning of period...... 661,108 469,898 23,546 19,129 194,039 170,401 87,904 82,177
-------- ------- ------- ------ -------- -------- ------- ------
End of period............ $959,648 661,108 30,542 23,546 229,140 194,039 121,703 87,904
======== ======= ======= ====== ======== ======== ======= ======
</TABLE>
/1/Period from January 3, 1995 (commencement of operations) to December 31,
1995
/2/Period from November 18, 1996 (commencement of operations) to December 31,
1996
See accompanying Notes to Financial Statements.
20
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DREYFUS DREYFUS U.S. T. ROWE PRICE T. ROWE PRICE
VALUE SMALL CAP GOVERNMENT EQUITY GROWTH OPPORTUNITY
EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------- -------------- ------------- --------------- --------------- ----------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995/1/ 1996 1995/1/ 1996/2/ 1996 1995
- ------- ------ ------ ------ ------ ----- ------ ------- ------ ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
736 (230) 1,791 314 229 (25) (201) (107) 56 (119) -- 12,816 16,395
1,155 972 561 184 189 106 274 71 418 322 -- 3,976 842
14,877 11,749 11,410 4,328 (108) 568 6,872 2,266 5,604 1,913 -- 16,493 40,137
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
16,768 12,491 13,762 4,826 310 649 6,945 2,230 6,078 2,116 -- 33,285 57,374
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
20,562 12,996 11,126 8,736 6,793 4,592 21,213 8,911 13,844 8,446 193 34,601 17,094
13,551 9,310 5,637 2,469 4,193 1,487 19,065 8,365 10,830 9,027 166 6,258 (1,635)
(4,444) (2,587) (3,080) (1,976) (980) (280) (1,524) (270) (1,233) (376) (44) (11,231) (6,567)
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
29,669 19,719 13,683 9,229 10,006 5,799 38,754 17,006 23,441 17,097 315 29,628 8,892
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
46,437 32,210 27,445 14,055 10,316 6,448 45,699 19,236 29,519 19,213 315 62,913 66,266
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
64,114 31,904 49,041 34,986 9,507 3,059 19,236 -- 19,213 -- -- 194,508 128,242
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
110,551 64,114 76,486 49,041 19,823 9,507 64,935 19,236 48,732 19,213 315 257,421 194,508
======= ====== ====== ====== ====== ===== ====== ====== ====== ====== === ======= =======
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
NOTES TO FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT WHERE NOTED)
December 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- The PFL Endeavor Variable Annuity Account ("Mutual Fund
Account") is a segregated investment account of PFL Life Insurance Company
("PFL Life"), an indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AUSA"),
a holding company. AUSA is an indirect, wholly-owned subsidiary of AEGON nv, a
holding company organized under the laws of The Netherlands.
The Opportunity Value Subaccount commenced operations on November 18, 1996. The
T. Rowe Price Equity Income Subaccount and the T. Rowe Price Growth Stock
Subaccount commenced operations on January 3, 1995. Effective May 1, 1996, the
names of the Money Market, Managed Asset Allocation, Quest for Value Equity,
Quest for Value Small Cap and U.S. Government Securities Portfolios and
Subaccounts were changed to TCW Money Market, TCW Managed Asset Allocation,
Value Equity, Value Small Cap and Dreyfus U.S. Government Securities Portfolios
and Subaccounts, respectively. Effective October 29, 1996, the names of the
Value Small Cap Portfolio and Subaccount were changed to Dreyfus Small Cap
Value Portfolio and Dreyfus Small Cap Value Subaccount, respectively. Effective
March 25, 1995, the names of the Global Growth Portfolio and Subaccount were
changed to T. Rowe Price International Stock Portfolio and Subaccount,
respectively. The investment objective of the portfolio was changed from an
investment on a global basis to an investment on an international basis (i.e.
non-U.S. companies). The investment advisor of the Endeavor Series Trust is
Endeavor Investment Advisors, a general partnership between Endeavor Management
Co. and AUSA Financial Markets, Inc., an affiliate of PFL Life. The investment
advisor for the WRL Series Fund, Inc. is Western Reserve Life Assurance Co. of
Ohio, an affiliate of PFL Life.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940.
Investments -- Net purchase payments received by the Mutual Fund Account are
invested in the portfolios of the Endeavor Series Trust, and the Growth
Portfolio of the WRL Series Fund, Inc. (collectively the "Series Funds"), as
selected by the contract owner. Investments are stated at the closing net asset
values per share on December 31, 1996.
Realized capital gains and losses from sale of shares in the Series Funds are
determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from investments in the Series Funds are credited or charged to contract
owners' equity.
Dividend Income -- Dividends received from the Series Funds investments are
reinvested to purchase additional mutual fund shares.
22
<PAGE>
- --------------------------------------------------------------------------------
2. INVESTMENTS
A summary of the mutual fund investment at December 31, 1996 follows:
<TABLE>
<CAPTION>
NET ASSET
NUMBER VALUE
OF SHARES PER SHARE MARKET
HELD (IN DOLLARS) VALUE COST
--------- ------------ -------- --------
<S> <C> <C> <C> <C>
Endeavor Series Trust
TCW Money Market Portfolio........... 30,542 $ 1.00 $ 30,542 $ 30,542
TCW Managed Asset Allocation
Portfolio........................... 12,163 18.84 229,142 176,250
T. Rowe Price International Stock
Portfolio........................... 8,724 13.95 121,702 105,559
Value Equity Portfolio............... 6,423 17.21 110,548 83,109
Dreyfus Small Cap Value Portfolio.... 5,203 14.70 76,482 60,646
Dreyfus U.S. Government Securities
Portfolio........................... 1,765 11.23 19,823 19,368
T. Rowe Price Equity Income
Portfolio........................... 4,192 15.49 64,935 55,797
T. Rowe Price Growth Stock
Portfolio........................... 2,991 16.29 48,731 41,214
Opportunity Value Portfolio.......... 31 10.06 315 315
WRL Series Fund, Inc.
Growth Portfolio..................... 7,355 35.001280 257,421 211,552
-------- --------
$959,641 $784,352
======== ========
</TABLE>
3. CONTRACT OWNERS' EQUITY
Contract owners' equity at December 31, 1996 includes an amount of $2,954,
which represents the current value of PFL Life's capital contribution of
$1,900. A summary of deferred annuity contracts terminable by owners at
December 31, 1996 follows:
<TABLE>
<CAPTION>
ACCUMULATION
UNIT
ACCUMULATION VALUE TOTAL
SUBACCOUNT UNITS OWNED (IN DOLLARS) CONTRACT VALUE
- ---------- ------------ ------------ --------------
<S> <C> <C> <C>
TCW Money Market...................... 26,461 $ 1.154219 $ 30,542
TCW Managed Asset Allocation.......... 124,999 1.833135 229,140
T. Rowe Price International Stock..... 91,462 1.330640 121,703
Value Equity.......................... 65,227 1.694854 110,551
Dreyfus Small Cap Value............... 51,125 1.496065 76,486
Dreyfus U.S. Government Securities.... 17,562 1.128769 19,823
T. Rowe Price Equity Income........... 42,673 1.521680 64,935
T. Rowe Price Growth Stock............ 30,238 1.611613 48,732
Opportunity Value..................... 314 1.004355 315
Growth................................ 15,174 16.964068 257,421
--------
$959,648
========
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
TCW T. ROWE DREYFUS DREYFUS T. ROWE T. ROWE
TCW MANAGED PRICE SMALL U.S. PRICE PRICE
MONEY ASSET INT'L. VALUE CAP GOV'T. EQUITY GROWTH OPPORTUNITY
MARKET ALLOCATION STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
-------- ---------- -------- -------- -------- ---------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at
1/1/95............... 17,837 130,910 76,518 30,512 32,607 3,103 -- -- -- 12,759
Units purchased....... 5,331 8,434 8,306 10,253 7,689 4,247 7,630 6,773 -- 1,344
Units redeemed and
transferred.......... (2,064) (16,369) (9,759) 5,430 340 1,107 7,313 7,424 -- (766)
------ ------- ------ ------ ------ ------ ------ ------ --- ------
Units outstanding at
12/31/95............. 21,104 122,975 75,065 46,195 40,636 8,457 14,943 14,197 -- 13,337
Units purchased....... 10,754 7,818 13,001 13,373 8,625 6,218 15,335 9,588 192 2,158
Units redeemed and
transferred.......... (5,397) (5,794) 3,396 5,659 1,864 2,887 12,395 6,453 122 (321)
------ ------- ------ ------ ------ ------ ------ ------ --- ------
Units outstanding at
12/31/96............. 26,461 124,999 91,462 65,227 51,125 17,562 42,673 30,238 314 15,174
====== ======= ====== ====== ====== ====== ====== ====== === ======
</TABLE>
4. TAXES
Operations of the Mutual Fund Account form a part of PFL Life, which is taxed
as a life insurance company under Subchapter L of the Internal Revenue Code of
1986, as amended (the "Code"). The operations of the Mutual Fund Account are
accounted for separately from other operations of PFL Life for purposes of
federal income taxation. The Mutual Fund Account is not separately taxable as a
regulated investment company under Subchapter M of the Code and is not
otherwise taxable as an entity separate from PFL Life. Under existing federal
income tax laws, the income of the Mutual Fund Account, to the extent applied
to increase reserves under the variable annuity contracts, is not taxable to
PFL Life.
5. ADMINISTRATIVE, MORTALITY AND EXPENSE RISK CHARGE
Administrative charges include an annual charge of the lesser of 2% of the
policy value or $35 per contract which will commence on the first policy
anniversary of each contract owner's account. For policies issued on or after
May 1, 1995, the fee is waived if the sum of the premium payments less the sum
of all partial withdrawals is at least $50,000 on the policy anniversary.
Charges for administrative fees to the variable annuity contracts are an
expense of the Mutual Fund Account.
PFL Life deducts a daily charge equal to an annual rate of 1.25% of the value
of the contract owners' account as a charge for assuming certain mortality and
expense risks. PFL Life also deducts a daily charge equal to an annual rate of
.15% of the contract owners' account for administrative expenses.
6. NET ASSETS
At December 31, 1996 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
TCW T. ROWE T. ROWE T. ROWE
TCW MANAGED PRICE DREYFUS DREYFUS U.S. PRICE PRICE
MONEY ASSET INT'L. VALUE SMALL CAP GOV'T. EQUITY GROWTH OPPORTUNITY
MARKET ALLOCATION STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
TOTAL SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
-------- -------- ---------- -------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit
transactions,
accumulated net
investment income
and realized
capital gains... $784,359 30,542 176,248 105,560 83,112 60,650 19,368 55,797 41,215 315 211,552
Adjustment for
appreciation/
depreciation to
market value.... 175,289 -- 52,892 16,143 27,439 15,836 455 9,138 7,517 -- 45,869
-------- ------ ------- ------- ------- ------ ------ ------ ------ --- -------
Total Contract
Owners' Equity.. $959,648 30,542 229,140 121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======== ====== ======= ======= ======= ====== ====== ====== ====== === =======
</TABLE>
24
<PAGE>
- --------------------------------------------------------------------------------
7. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 OR
COMMENCEMENT OF OPERATIONS TO DECEMBER 31
--------------------------------------------
1996 1995
---------------------- ---------------------
PURCHASES SALES PURCHASES SALES
------------ --------- ---------------------
<S> <C> <C> <C> <C>
Endeavor Series Trust
TCW Money Market Portfolio........ $ 31,789 24,793 26,533 22,147
TCW Managed Asset Allocation Port-
folio............................ 19,595 15,228 18,528 28,949
T. Rowe Price International Stock
Portfolio........................ 24,567 4,813 14,396 15,085
Value Equity Portfolio............ 33,901 3,499 25,078 5,610
Dreyfus Small Cap Value Portfo-
lio.............................. 19,535 4,065 16,203 6,683
Dreyfus U.S. Government Securities
Portfolio........................ 12,087 1,853 7,759 1,988
T. Rowe Price Equity Income Port-
folio............................ 39,523 970 18,189 1,290
T. Rowe Price Growth Stock Portfo-
lio.............................. 25,124 1,628 19,565 2,587
Opportunity Value Portfolio....... 352 37 -- --
WRL Series Fund, Inc.
Growth Portfolio.................. 56,406 13,962 38,417 13,226
----------- --------- ---------- ---------
$ 262,879 70,848 184,668 97,565
=========== ========= ========== =========
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1996 and 1995, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles.
The variances between such practices and generally accepted accounting
principles also are described in Note 1. The effects on the financial
statements of these variances are not reasonably determinable but are presumed
to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of PFL Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 in conformity with accounting practices prescribed or permitted by the
Insurance Division, Department of Commerce, of the State of Iowa. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic statutory-basis financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Des Moines, Iowa Ernst & Young LLP
February 21, 1997
26
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net
of reinsurance:
Life.................................. $ 204,872 $ 114,704 $ 148,954
Annuity............................... 725,966 921,452 1,067,406
Accident and health................... 227,862 232,738 230,889
Net investment income................... 428,337 392,685 343,880
Amortization of interest maintenance
reserve................................ 2,434 4,341 2,871
Commissions and expense allowances on
reinsurance ceded...................... 73,931 77,071 94,635
---------- ---------- ----------
1,663,402 1,742,991 1,888,635
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health
benefits............................. 147,024 146,346 141,632
Surrender benefits.................... 512,810 498,626 392,064
Other benefits........................ 101,288 88,607 73,306
Increase in aggregate reserves for
policies and contracts:
Life................................ 140,126 50,071 82,062
Annuity............................. 188,002 528,330 569,341
Accident and health................. 26,790 17,694 22,144
Other............................... 19,969 16,017 11,223
---------- ---------- ----------
1,136,009 1,345,691 1,291,772
Insurance expenses:
Commissions........................... 177,466 200,706 215,635
General insurance expenses............ 57,282 57,623 52,166
Taxes, licenses and fees.............. 13,889 15,700 15,368
Transfer to separate account.......... 171,785 42,981 243,806
Other expenses........................ 526 760 1,014
---------- ---------- ----------
420,948 317,770 527,989
---------- ---------- ----------
1,556,957 1,663,461 1,819,761
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital losses on
investments.............................. 106,445 79,530 68,874
Federal income tax expense................ 41,177 33,335 23,858
---------- ---------- ----------
Gain from operations before net realized
capital losses on investments............ 65,268 46,195 45,016
Net realized capital losses on investments
(net of related federal income taxes and
amounts transferred to interest
maintenance reserve)..................... (3,503) (18,096) (3,624)
---------- ---------- ----------
Net income................................ $ 61,765 $ 28,099 $ 41,392
========== ========== ==========
</TABLE>
See accompanying notes.
27
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments........................ $ 50,737 $ 79,852
Bonds.................................................. 4,773,433 4,613,334
Stocks:
Preferred............................................ 3,097 9,336
Common (cost: 1996--$23,212; 1995--$19,061).......... 32,038 24,866
Affiliated entities (cost: 1996--$14,893; 1995--
$14,661)............................................ 6,934 6,794
Mortgage loans on real estate.......................... 911,705 680,414
Real estate, at cost less accumulated depreciation
($11,338 in 1996; $12,493 in 1995):
Home office properties............................... 10,372 20,403
Properties acquired in satisfaction of debt.......... 12,260 2,648
Investment properties................................ 35,922 40,453
Policy loans........................................... 54,214 52,675
Other invested assets.................................. 16,343 13,557
---------- ----------
Total cash and invested assets......................... 5,907,055 5,544,332
Premiums deferred and uncollected........................ 16,345 17,026
Accrued investment income................................ 70,401 68,065
Receivable from affiliates............................... 53,900 79,913
Federal income taxes recoverable......................... 4,018 9,776
Transfers from separate accounts......................... 38,528 --
Other assets............................................. 31,215 32,803
Separate account assets.................................. 1,844,515 1,418,157
---------- ----------
Total admitted assets.................................. $7,965,977 $7,170,072
========== ==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 736,100 $ 596,039
Annuity.............................................. 4,408,419 4,220,274
Accident and health.................................. 139,269 114,884
Policy and contract claim reserves:
Life................................................. 7,369 6,225
Accident and health.................................. 66,988 70,517
Other policyholders' funds............................. 126,672 105,371
Remittances and items not allocated.................... 64,064 123,710
Asset valuation reserve................................ 54,851 43,921
Interest maintenance reserve........................... 23,745 26,376
Other liabilities...................................... 70,663 67,070
Payable to affiliates.................................. 4,975 --
Separate account liabilities........................... 1,844,515 1,418,157
---------- ----------
Total liabilities...................................... 7,547,630 6,792,544
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding................................ 2,660 2,660
Paid-in surplus........................................ 154,129 154,129
Unassigned surplus..................................... 261,558 220,739
---------- ----------
Total capital and surplus.............................. 418,347 377,528
---------- ----------
Total liabilities and capital and surplus.............. $7,965,977 $7,170,072
========== ==========
</TABLE>
See accompanying notes.
28
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994.............. $2,660 $ 99,129 $212,982 $314,771
Capital contribution.................. -- 15,000 -- 15,000
Net income for 1994................... -- -- 41,392 41,392
Net unrealized capital losses......... -- -- (25,350) (25,350)
Increase in non-admitted assets....... -- -- (248) (248)
Decrease in asset valuation reserve... -- -- 6,040 6,040
Dividend to stockholder............... -- -- (20,900) (20,900)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 184 184
Amendment of reinsurance agreement.... -- -- 391 391
Decrease in liability for reinsurance
in unauthorized companies............ -- -- 505 505
Prior period adjustment............... -- -- (3,444) (3,444)
------ -------- -------- --------
Balance at December 31, 1994............ 2,660 114,129 211,552 328,341
Capital contribution.................. -- 40,000 -- 40,000
Net income for 1995................... -- -- 28,099 28,099
Net unrealized capital losses......... -- -- (7,574) (7,574)
Decrease in non-admitted assets....... -- -- 50 50
Increase in asset valuation reserve... -- -- (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 35 35
Cancellation of reinsurance
agreement............................ -- -- 585 585
Amendment of reinsurance agreement.... -- -- 419 419
Transfer of subsidiary investment to
stockholder.......................... -- -- (3,250) (3,250)
Change in reserve valuation
methodology.......................... -- -- (501) (501)
Increase in liability for reinsurance
in unauthorized companies............ -- -- (2,730) (2,730)
------ -------- -------- --------
Balance at December 31, 1995............ 2,660 154,129 220,739 377,528
Net income for 1996................... -- -- 61,765 61,765
Net unrealized capital gains.......... -- -- 2,351 2,351
Increase in non-admitted assets....... -- -- (148) (148)
Increase in asset valuation reserve... -- -- (10,930) (10,930)
Dividend to stockholder............... -- -- (20,000) (20,000)
Prior period adjustment............... -- -- 5,025 5,025
Surplus effect of sale of a division.. -- -- (384) (384)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 29 29
Amendment of reinsurance agreement.... -- -- 421 421
Decrease in liability for reinsurance
in unauthorized companies............ -- -- 2,690 2,690
------ -------- -------- --------
Balance at December 31, 1996............ $2,660 $154,129 $261,558 $418,347
====== ======== ======== ========
</TABLE>
See accompanying notes.
29
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations, net of
reinsurance.............................. $1,240,748 $1,353,407 $1,548,030
Net investment income..................... 431,456 398,051 339,856
---------- ---------- ----------
1,672,204 1,751,458 1,887,886
Life and accident and health claims....... (147,556) (140,798) (137,602)
Surrender benefits and other fund
withdrawals.............................. (512,810) (498,626) (392,064)
Other benefits to policyholders........... (101,254) (88,519) (73,237)
Commissions, other expenses and other
taxes.................................... (248,321) (278,241) (288,384)
Net transfers to separate accounts........ (210,312) (42,981) (243,806)
Dividends to policyholders................ (844) (940) (1,155)
Federal income taxes, excluding tax on
capital gains and IRS settlements........ (35,551) (32,905) (39,864)
---------- ---------- ----------
Net cash provided by operations........... 415,556 668,448 711,774
Proceeds from investments sold, matured or
repaid:
Bonds and preferred stocks.............. 2,112,831 1,757,229 1,430,339
Common stocks........................... 27,214 20,338 12,941
Mortgage loans on real estate........... 74,351 36,550 43,495
Real estate............................. 18,077 23,203 9,536
Other proceeds.......................... 22,567 381 189
---------- ---------- ----------
Total cash from investments............... 2,255,040 1,837,701 1,496,500
Capital contribution...................... -- 40,000 15,000
Dividend from subsidiary.................. -- -- 10,000
Cash received from ceding commissions
associated with the sale of a division... 45 55 284
Increase in remittances and items not
allocated................................ -- 88,295 16,177
Other sources............................. 19,381 12,758 24,855
---------- ---------- ----------
Total sources of cash..................... 2,690,022 2,647,257 2,274,590
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and preferred stocks.............. $2,270,105 $2,294,195 $2,043,615
Common stocks........................... 29,799 23,284 11,228
Mortgage loans on real estate........... 324,381 192,292 160,068
Net increase in policy loans............ 1,539 877 3,202
Real estate............................. 222 10,188 14,801
Other invested assets................... 5,169 2,670 664
---------- ---------- ----------
Total investments acquired................ 2,631,215 2,523,506 2,233,578
Dividends to stockholder.................. 20,000 -- 20,900
Cash paid associated with the sale of a
division................................. 539 -- --
Repayment of intercompany notes and
receivables, net......................... -- 48,070 365
Cash paid in conjunction with an amendment
of a reinsurance agreement............... 5,812 -- --
Decrease in remittances and items not
allocated................................ 59,646 -- --
Cash paid in conjunction with sales of a
division................................. 123 -- --
Other applications, net................... 1,802 29,887 3,820
---------- ---------- ----------
Total applications of cash................ 2,719,137 2,601,463 2,258,663
---------- ---------- ----------
Net change in cash and short-term
investments.............................. (29,115) 45,790 15,927
Cash and short-term investments at
beginning of year........................ 79,852 34,062 18,135
---------- ---------- ----------
Cash and short-term investments at end of
year..................................... $ 50,737 $ 79,852 $ 34,062
========== ========== ==========
</TABLE>
See accompanying notes.
30
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PFL Life Insurance Company ("the Company") is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. Effective June 1, 1995, the
Company transferred the common stock of its wholly-owned subsidiary, Equity
National Life Insurance Company ("Equity National"), to its stockholder, First
AUSA. Equity National was then merged with Life Investors Insurance Company of
America, a subsidiary of First AUSA. The financial statements presented herein
are prepared on the statutory accounting principles basis for the Company
only; as such, the accounts of the Company's subsidiary, Equity National, are
not consolidated with those of the Company.
In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through
mergers. In addition, the Company has canceled or entered into several
coinsurance and reinsurance agreements with affiliates and non-affiliates. The
following is a description of those transactions:
During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association,
an independent insurance agency, will be written by the insurance
subsidiaries of UICI and will not be shared with the Company and its
affiliates through coinsurance arrangements. As a result of the sale, the
Company transferred $123 in assets, substantially all of which was cash,
and $70 of liabilities. The difference between the assets and liabilities
of $(53) plus a tax credit of $19 was charged directly to unassigned
surplus.
Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference
between the assets and liabilities, net of a tax effect of $302 was
credited directly to unassigned surplus.
On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2 1/2% each year
(primarily group health business). As a result, the Company transferred
$3,881 in assets and $4,080 in liabilities during 1994. The difference
between the assets and liabilities of $199, plus a tax credit of $192, was
credited directly to unassigned surplus. During 1995, the Company
transferred $4,303 in assets and liabilities of $4,467. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets
and liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus.
During 1993, the Company sold the Oakbrook Division (primarily group
health business). The initial transfer of risk occurred through an
indemnity reinsurance agreement. The
31
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
policies will then be assumed by the reinsurer by novation as state
regulatory and policyholder approvals are received. In addition, the
Company will receive from the third party administrator a ceding commission
of one percent of the premiums collected between January 1, 1994 and
December 31, 1996. As a result of the sale, in 1994, the Company received
$284 for ceding commissions; the commissions net of the related tax effect
of $100 was credited directly to unassigned surplus. During 1995, the
Company received $55 for ceding commissions; the commissions net of the
related tax effect of $20 was credited directly to unassigned surplus.
During 1996, the Company received $45 for ceding commissions; the
commissions net of the related tax effect of $(16) was charged directly to
unassigned surplus. During 1996, the Company paid $539 in association with
this sale; the proceeds, net of a tax credit of $189, were charged directly
to unassigned surplus.
Nature of Business
The Company sells individual non-participating whole life, endowment and
term contracts, as well as a broad line of single fixed and flexible premium
annuity products. In addition, the Company offers group life, universal life,
and individual and specialty health coverages. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
primarily through an independent insurance agency of The Insurance Center, the
Company's agents, and financial institutions.
Basis of Presentation
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant
of these differences are as follows: (a) bonds are generally reported at
amortized cost rather than segregating the portfolio into held-to-maturity
(reported at amortized cost), available-for-sale (reported at fair value), and
trading (reported at fair value) classifications; (b) acquisition costs of
acquiring new business are charged to current operations as incurred rather
than deferred and amortized over the life of the policies; (c) policy reserves
on traditional life products are based on statutory mortality rates and
interest which may differ from reserves based on reasonable assumptions of
expected mortality, interest, and withdrawals which include a provision for
possible unfavorable deviation from such assumptions; (d) policy reserves on
certain investment products use discounting methodologies utilizing statutory
interest rates rather than full account values; (e) reinsurance amounts are
netted against the corresponding asset or liability rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (g) net realized gains or losses attributed to changes in the
level of interest
32
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
rates in the market are deferred and amortized over the remaining life of the
bond or mortgage loan, rather than recognized as gains or losses in the
statement of operations when the sale is completed; (h) declines in the
estimated realizable value of investments are provided for through the
establishment of a formula-determined statutory investment reserve (carried as
a liability) changes to which are charged directly to surplus, rather than
through recognition in the statement of operations for declines in value, when
such declines are judged to be other than temporary; (i) certain assets
designated as "non-admitted assets" have been charged to surplus rather than
being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; (m) gains or losses on
dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations; and (n) a
liability is established for "unauthorized reinsurers" and changes in this
liability are charged or credited directly to unassigned surplus. The effects
of these variances have not been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.
Investments
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-
term investments are reported at cost adjusted for amortization of premiums
and accrual of discounts. Amortization is computed using methods which result
in a level yield over the expected life of the security. The Company reviews
its prepayment assumptions on mortgage and other asset backed securities at
regular intervals and adjusts amortization rates prospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in good standing are reported at cost.
Investments in preferred stocks not in good standing are reported at the lower
of cost or market. Common stocks of affiliated and unaffiliated companies,
which may include shares of mutual funds (money market and other), are carried
at market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as
required or permitted by Iowa Insurance Laws.
33
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC
and are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses, net of amounts
attributed to changes in the general level of interest rates. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance
Reserve (IMR), the portion of realized gains and losses on sales of fixed
income investments, principally bonds and mortgage loans, attributable to
changes in the general level of interest rates and amortizes those deferrals
over the remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1996, 1995 and 1994,
the Company excluded investment income due and accrued of $1,541, $2,272 and
$4,622, respectively, with respect to such practices.
The Company entered into an interest-rate cap agreement on Five Year
Constant Maturities Treasury futures to hedge the exposure of increasing
interest rates. The cash flows from the interest rate cap will help offset
losses that might occur from disintermediation resulting from a rise in
interest rates. The Company paid a one-time premium to receive the difference
between the reference rate and the strike rate after a two-year delay. The
cost is included in interest expense ratably during the life of the agreement.
Income received as a result of the cap agreement will be recognized in
investment income as earned. Unamortized cost of the agreements is included in
other assets.
Aggregate Policy Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are
calculated using interest rates ranging from 2.00 to 6.00 percent and are
computed principally on the Net Level Premium Valuation and the Commissioners'
Reserve Valuation Methods. Reserves for universal life policies are based on
account balances adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 2.50 to 11.25 percent and mortality rates, where
appropriate, from a variety of tables.
34
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
Separate Account
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate account are valued at
market. Income and gains and losses with respect to the assets in the separate
account accrue to the benefit of the policyholders. The Company received
variable contract premiums of $227,864, $133,386 and $308,305 in 1996, 1995
and 1994, respectively. All variable account contracts are subject to
discretionary withdrawal by the policyholder at the market value of the
underlying assets less the current surrender charge.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No.
119, Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments, requires additional disclosure about derivatives. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparisons to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement of Financial Accounting Standards No. 107 and No. 119
exclude certain financial instruments and all nonfinancial instruments from
their disclosure requirements and allow companies to forego the disclosures
when those estimates can only be made at excessive cost. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
35
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities other than insurance subsidiaries are
based on quoted market prices. Fair value for the Company's insurance
subsidiary is the statutory net book value of that subsidiary.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Interest rate cap: Estimated fair value of the interest rate cap is based
upon the latest quoted market price.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1996 1995
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds.......................... $4,773,433 $4,867,770 $4,613,334 $4,824,635
Preferred stocks............... 3,097 7,133 9,336 12,275
Common stocks.................. 32,038 32,038 24,866 24,866
Affiliated common and preferred
stock......................... 6,934 6,934 6,794 6,794
Mortgage loans on real estate.. 911,705 922,010 680,414 714,399
Policy loans................... 54,214 54,214 52,675 52,675
Cash and short-term
investments................... 50,737 50,737 79,852 79,852
Interest rate cap.............. 6,797 6,975 7,971 7,250
Separate account assets........ 1,844,515 1,844,515 1,418,157 1,418,157
LIABILITIES
Investment contract
liabilities................... 4,532,568 4,398,630 4,323,188 4,310,505
Separate account annuities..... 1,803,057 1,803,057 1,417,842 1,417,842
</TABLE>
36
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and
agencies.................... $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other
government.................. 59,644 1,906 177 61,373
Public utilities............. 147,918 5,616 1,020 152,514
Industrial and
miscellaneous............... 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities... 2,470,740 43,896 15,610 2,499,026
---------- -------- ------- ----------
4,773,433 119,429 25,092 4,867,770
Preferred stocks............... 3,097 4,036 -- 7,133
---------- -------- ------- ----------
$4,776,530 $123,465 $25,092 $4,874,903
========== ======== ======= ==========
DECEMBER 31, 1995
Bonds:
United States Government and
agencies.................... $ 117,054 $ 5,808 $ 135 $ 122,727
State, municipal and other
government.................. 46,236 3,109 2 49,343
Public utilities............. 156,342 9,578 1,092 164,828
Industrial and
miscellaneous............... 1,781,149 112,074 7,146 1,886,077
Mortgage-backed securities... 2,512,553 93,420 4,313 2,601,660
---------- -------- ------- ----------
4,613,334 223,989 12,688 4,824,635
Preferred stocks............... 9,336 3,348 409 12,275
---------- -------- ------- ----------
$4,622,670 $227,337 $13,097 $4,836,910
========== ======== ======= ==========
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1996,
by contractual maturity, 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>
CARRYING ESTIMATED FAIR
VALUE VALUE
---------- --------------
<S> <C> <C>
Due in one year or less............................ $ 202,775 $ 204,980
Due after one year through five years.............. 896,912 921,711
Due after five years through ten years............. 954,555 977,421
Due after ten years................................ 248,451 264,632
---------- ----------
2,302,693 2,368,744
Mortgage and other asset-backed securities......... 2,470,740 2,499,026
---------- ----------
$4,773,433 $4,867,770
========== ==========
</TABLE>
37
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes...................... $364,356 $342,182 $294,145
Dividends on equity investments.................. 1,436 1,822 12,091
Interest on mortgage loans....................... 69,418 52,702 42,385
Rental income on real estate..................... 9,526 10,443 9,360
Interest on policy loans......................... 3,273 3,112 3,182
Other investment income.......................... 1,799 1,803 282
-------- -------- --------
Gross investment income.......................... 449,808 412,064 361,445
Investment expenses.............................. 21,471 19,379 17,565
-------- -------- --------
Net investment income............................ $428,337 $392,685 $343,880
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds................................ $2,112,831 $1,757,229 $1,430,339
========== ========== ==========
Gross realized gains.................... $ 19,876 $ 19,721 $ 15,411
Gross realized losses................... (19,634) (34,399) (33,044)
---------- ---------- ----------
Net realized gains (losses)............. $ 242 $ (14,678) $ (17,633)
========== ========== ==========
</TABLE>
At December 31, 1996, investments with an aggregate carrying value of
$5,825,802 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Debt securities................................ $ 242 $(14,678) $(17,633)
Short-term investments......................... (197) 24 (309)
Equity securities.............................. 1,798 504 1,322
Mortgage loans on real estate.................. (5,530) (1,053) (2,186)
Real estate.................................... 1,210 (1,908) (2,858)
Other invested assets.......................... 12 (970) 14
------- -------- --------
(2,465) (18,081) (21,650)
Tax effect..................................... (1,235) 7,878 7,236
Transfer to interest maintenance reserve....... 197 (7,891) 10,790
------- -------- --------
Net realized losses............................ $(3,503) $(18,096) $ (3,624)
======= ======== ========
</TABLE>
38
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
------------------------------
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Debt securities............................ $(115,867) $355,560 $(322,346)
Equity securities.......................... 2,929 (16,379) (23,202)
--------- -------- ---------
Change in unrealized appreciation
(depreciation)............................ $(112,938) $339,181 $(345,548)
========= ======== =========
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Unrealized gains.................................. $ 9,590 $ 6,833 $20,244
Unrealized losses................................. (8,723) (8,895) (5,927)
------- ------- -------
Net unrealized gains (losses)..................... $ 867 $(2,062) $14,317
======= ======= =======
</TABLE>
During 1996, the Company issued mortgage loans with interest rates ranging
from 6.83% to 8.75%. The maximum percentage of any one mortgage loan to the
value of the underlying real estate at origination was 85%. Mortgage loans
with a carrying value of $4,027 were non-income producing for the previous
twelve months. Accrued interest of $852 related to these mortgage loans was
excluded from investment income. The Company requires all mortgage loans to
carry fire insurance equal to the value of the underlying property.
During 1996, 1995 and 1994, mortgage loans of $13,163, $1,644 and $799,
respectively, were foreclosed and transferred to real estate. At December 31,
1996 and 1995, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $5,432 and $6,168, respectively. The mortgage loan
portfolio is diversified by geographic region and specific collateral property
type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
- -------------------------------------
DECEMBER 31
------------
1996 1995
----- -----
<S> <C> <C>
South Atlantic.......... 26% 26%
Mountain................ 10 12
W. South Central........ 12 14
Pacific................. 13 17
E. North Central........ 15 13
E. South Central........ 9 5
W. North Central........ 6 6
Middle Atlantic......... 6 3
New England............. 3 4
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE DISTRIBUTION
- -------------------------------------
DECEMBER 31
------------
1996 1995
----- -----
<S> <C> <C>
Retail.................. 37% 31%
Apartment............... 14 20
Office.................. 34 29
Industrial.............. 3 4
Other................... 12 16
</TABLE>
39
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
At December 31, 1996, the Company had the following investments (excluding
U. S. Government guaranteed or insured issues) which individually represented
more than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
--------------------------------- --------------
<S> <C>
Bonds:
Citibank.................................................... 70,661
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and
ceded amounts:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums.......................... $1,457,450 $1,591,531 $1,857,446
Reinsurance assumed...................... 1,796 2,356 1,832
Reinsurance ceded........................ (300,546) (324,993) (412,029)
---------- ---------- ----------
Net premiums earned...................... $1,158,700 $1,268,894 $1,447,249
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $168,155,
$167,287 and $148,414 during 1996, 1995 and 1994, respectively. At December
31, 1996 and 1995, estimated amounts recoverable from reinsurers that have
been deducted from policy and contract claim reserves totaled $63,226 and
$65,503, respectively. The aggregate reserves for policies and contracts were
reduced for reserve credits for reinsurance ceded at December 31, 1996 and
1995 of $2,737,441 and $2,920,034, respectively.
At December 31, 1996, amounts recoverable from unauthorized reinsurers of
$73,434 (1995--$70,516) and reserve credits for reinsurance ceded of $55,035
(1995--$48,992) were associated with a single reinsurer and its affiliates.
The Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $120,477 at December 31, 1996 that can be drawn on
for amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a tax-
sharing agreement between the Company and its affiliates, the Company computes
federal income tax expense as if it were filing a separate income tax return,
except that tax credits and net operating loss carryforwards are determined on
the basis of the consolidated group. Additionally, the alternative minimum tax
is computed for the consolidated group and the resulting tax, if any, is
allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
40
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%)..... $37,256 $27,835 $24,106
Tax reserve adjustment........................... 2,211 2,405 1,150
Excess tax depreciation.......................... (384) (365) (406)
Deferred acquisition costs--tax basis............ 5,583 4,581 7,378
Prior year over accrual.......................... (499) (306) (644)
Dividend received deduction...................... (454) (56) (3,513)
Charitable contribution.......................... -- -- (3,935)
Other items--net................................. (2,536) (759) (278)
------- ------- -------
Federal income tax expense....................... $41,177 $33,335 $23,858
======= ======= =======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($20,387 at December 31, 1996). To the extent dividends are
paid from the amount accumulated in the policyholders' surplus account, net
earnings would be reduced by the amount of tax required to be paid. Should the
entire amount in the policyholders' surplus account become taxable, the tax
thereon computed at current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual.
This included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related
interest of $1,686, net of a tax effect of $590. An examination is underway
for years 1988 through 1995.
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which
entitle policyholders to a share in the earnings of the participating
policies, provided that a dividend distribution, which is determined annually
based on mortality and persistency experience of the participating policies,
is authorized by the Company. Participating insurance constituted
approximately 1.0% and 1.2% of ordinary life insurance in force at December
31, 1996 and 1995, respectively.
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on
a variety of the Company's products that are not subject to significant
mortality or morbidity risk; however, there may be certain restrictions placed
upon the amount of funds that can be withdrawn without penalty. The amount of
reserves on these products, by withdrawal characteristics are summarized as
follows:
41
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------
1996 1995
------------------- -------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal
with market value adjustment....... $ 20,800 0% $ 699 --%
Subject to discretionary withdrawal
at book value less surrender
charge............................. 794,881 9 733,796 8%
Subject to discretionary withdrawal
at market value.................... 1,803,057 20 1,390,156 16%
Subject to discretionary withdrawal
at book value (minimal or no
charges or adjustments)............ 6,284,876 69 6,395,719 74%
Not subject to discretionary
withdrawal provision............... 174,416 2 139,330 2%
---------- --- ---------- ---
9,078,030 100 8,659,700 100%
Less reinsurance ceded.............. 2,677,432 2,866,160
---------- ----------
Total policy reserves on annuities
and deposit fund liabilities....... $6,400,598 $5,793,540
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts statement:
Transfers to separate accounts................. $227,864 $133,386 $308,305
Transfers from separate accounts............... 75,172 104,219 76,133
-------- -------- --------
Net transfers to separate accounts............... 152,692 29,167 232,172
Reconciling adjustments--charges for investment
management, administration fees and contract
guarantees...................................... 19,093 13,814 11,634
-------- -------- --------
Transfers as reported in the summary of
operations of the life, accident and health
annual statement................................ $171,785 $ 42,981 $243,806
======== ======== ========
</TABLE>
42
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1996 and 1995, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
------- ------- -------
<S> <C> <C> <C>
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business............. $ 2,657 $ 1,865 $ 792
Ordinary direct renewal business................ 23,307 7,180 16,127
Group life direct business...................... 1,788 1,195 593
Reinsurance ceded............................... (1,706) (438) (1,268)
------- ------- -------
26,046 9,802 16,244
Accident and health:
Direct.......................................... 104 -- 104
Reinsurance ceded............................... (3) -- (3)
------- ------- -------
Total accident and health......................... 101 -- 101
------- ------- -------
$26,147 $ 9,802 $16,345
======= ======= =======
DECEMBER 31, 1995
Life and annuity:
Ordinary direct first year business............. $ 3,151 $ 2,223 $ 928
Ordinary direct renewal business................ 24,250 7,792 16,458
Group life direct business...................... 1,537 779 758
Reinsurance ceded............................... (1,362) (141) (1,221)
------- ------- -------
27,576 10,653 16,923
Accident and health:
Direct.......................................... 1,296 -- 1,296
Reinsurance ceded............................... (1,193) -- (1,193)
------- ------- -------
Total accident and health......................... 103 -- 103
------- ------- -------
$27,679 $10,653 $17,026
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, the Company had insurance in force
aggregating $69,251 and $87,010, respectively, in which the gross premiums are
less than the net premiums required by the standard valuation standards
established by the Insurance Division, Department of Commerce, of the State of
Iowa. The Company established policy reserves of $1,252 and $1,417 to cover
these deficiencies at December 31, 1996 and 1995, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $501
was made for the year ended December 31, 1995, related to the change in
reserve methodology.
43
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $20,000 and $20,900 in 1996 and
1994, respectively. No dividends were paid in 1995.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB No. 87 expense as a percent of salaries. The benefits are based on years
of service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $1,056, $942 and $966 for the
years ended December 31, 1996, 1995 and 1994, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee
Retirement and Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974. Expense related to this plan was $297, $465 and $411 for
the years ended December 31, 1996, 1995 and 1994, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.
In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $184, $164 and $169 for the years ended December 31, 1996,
1995 and 1994, respectively.
44
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1996,
1995 and 1994, the Company paid $17,028, $14,214 and $11,820, respectively,
for these services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.5% at December 31, 1996. During 1996,
1995 and 1994, the Company paid net interest of $174, $71 and $23,
respectively, to affiliates.
During 1995 and 1994, the Company received capital contributions of $40,000
and $15,000, respectively, in cash from its parent and during 1994 received a
dividend of $10,000 from its subsidiary, Equity National, which was included
in net investment income.
During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable.
No gain was recognized on this sale. This note accrued interest at 5.65% and
matured during 1996.
During the year ended December 31, 1995, the Company restructured demand
notes and accrued interest of $13,250 and $745, respectively, related to an
affiliate. The Company received 9,750 shares of preferred stock from the
affiliate for satisfaction of debt. The Company realized a loss of $8,695
related to this transaction. At December 31, 1996 and 1995, the preferred
stock related to this affiliate was deemed to have no value and an unrealized
loss of $4,555 was recognized in 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of
available facts, that damages arising from such demands will not be material
to the Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. Assessments are charged to operations
when received by the Company except where right of offset against other taxes
paid is allowed by law; amounts available for future offsets are recorded as
an asset on the Company's balance sheet. Potential future obligations for
unknown insolvencies are not determinable by the Company. The future
obligation has been based on the most recent information available from the
National Organization of Life and Health Insurance Guaranty Associations
(NOLHGA). The Company has established a reserve of $21,774 and $21,747 and an
offsetting premium tax benefit of $8,752 and $9,457 at December 31, 1996 and
1995, respectively, for its estimated share of future guaranty fund
assessments related to several major insurer insolvencies. During 1994, $3,444
was charged to surplus as prior period adjustments to provide for this net
reserve plus certain assessments paid that related to several major insurer
insolvencies prior to 1992. The guaranty fund expense was $2,617, $5,859 and
$4,054 for December 31, 1996, 1995 and 1994, respectively.
45
<PAGE>
SCHEDULE I
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET (2)
------------------ ---------- ---------- -----------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and
authorities......................... $1,533,581 $1,554,339 $1,533,510
States, municipalities and political
subdivisions........................ 4,918 5,360 4,919
Foreign governments.................. 55,633 56,013 54,725
Public utilities..................... 150,346 152,514 147,918
All other corporate bonds............ 3,046,090 3,099,544 3,032,361
Redeemable preferred stock............. 3,097 7,133 3,097
---------- ---------- ----------
Total fixed maturities................. 4,793,665 4,874,903 4,776,530
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance........... 7,120 9,777 9,777
Industrial, miscellaneous and all
other............................... 16,092 22,261 22,261
---------- ---------- ----------
Total equity securities................ 23,212 32,038 32,038
Mortgage loans on real estate.......... 911,705 911,705
Real estate............................ 46,294 46,294
Real estate acquired in satisfaction of
debt.................................. 12,260 12,260
Policy loans........................... 54,214 54,214
Other long-term investments............ 9,546 9,546
Cash and short-term investments........ 50,737 50,737
---------- ----------
Total investments...................... $5,901,633 $5,893,324
========== ==========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments.
(2) Amount differs from cost as certain bonds have been adjusted to reflect
other than temporary decline in value charged to surplus, as prescribed by
the NAIC.
46
<PAGE>
SCHEDULE III
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
------------- -------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Individual life.............................. $ 734,350 $ -- $ 7,240
Individual health............................ 39,219 8,680 13,631
Group life and health........................ 78,418 14,702 53,486
Annuity...................................... 4,408,419 -- --
---------- ------- -------
$5,260,406 $23,382 $74,357
========== ======= =======
YEAR ENDED DECEMBER 31, 1995
Individual life.............................. $ 594,274 $ -- $ 6,066
Individual health............................ 24,225 7,768 11,863
Group life and health........................ 67,994 16,662 58,813
Annuity...................................... 4,220,274 -- --
---------- ------- -------
$4,906,767 $24,430 $76,742
========== ======= =======
YEAR ENDED DECEMBER 31, 1994
Individual life.............................. $ 544,087 $ -- $ 7,298
Individual health............................ 16,649 6,487 8,643
Group life and health........................ 60,207 17,680 57,959
Annuity...................................... 3,693,388 -- --
---------- ------- -------
$4,314,331 $24,167 $73,900
========== ======= =======
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NET INVESTMENT BENEFITS, CLAIMS LOSSES OTHER OPERATING
PREMIUM REVENUE INCOME* AND SETTLEMENT EXPENSES EXPENSES* PREMIUMS WRITTEN
- --------------- -------------- ----------------------- --------------- ----------------
<S> <C> <C> <C> <C>
$ 202,082 $ 66,538 $ 197,526 $ 38,067 --
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 --
- ---------- -------- ---------- --------
$1,158,700 $428,337 $1,136,009 $420,948
========== ======== ========== ========
$111,918 $ 49,929 $ 97,065 $ 37,933 --
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 --
- ---------- -------- ---------- --------
$1,268,894 $392,685 $1,345,691 $317,770
========== ======== ========== ========
$146,328 $ 43,025 $ 124,736 $ 42,309 --
38,811 3,983 22,323 22,707 $ 38,797
194,704 10,531 108,400 143,645 192,034
1,067,406 286,341 1,036,313 319,328 --
- ---------- -------- ---------- --------
$1,447,249 $343,880 $1,291,772 $527,989
========== ======== ========== ========
</TABLE>
- --------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
48
<PAGE>
SCHEDULE IV
PFL LIFE INSURANCE COMPANY
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Life insurance in force.. $4,863,416 $477,112 $ 30,685 $4,416,989 .7%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health...... 68,699 12,828 -- 55,871 --
Group life and health.. 390,296 215,515 -- 174,781 --
Annuity................ 794,311 68,345 -- 725,966 --
---------- -------- -------- ---------- ---
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1995
Life insurance in force.. $4,594,434 $468,811 $ 22,936 $4,148,559 .6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health...... 60,309 12,617 -- 47,692 --
Group life and health.. 408,097 220,265 -- 187,832 --
Annuity................ 1,009,191 88,270 531 921,452 .05%
---------- -------- -------- ---------- ---
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1994
Life insurance in force.. $4,713,817 $468,811 $112,054 $4,357,060 2.6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 148,702 $ 3,639 $ 1,265 $ 146,328 .9%
Individual health...... 50,303 11,492 -- 38,811 --
Group life and health.. 412,200 217,496 -- 194,704 --
Annuity................ 1,246,241 179,402 567 1,067,406 .05%
---------- -------- -------- ---------- ---
$1,857,446 $412,029 $ 1,832 $1,447,249 .1%
========== ======== ======== ========== ===
</TABLE>
49
<PAGE>
PROSPECTUS May 1, 1997
THE ENDEAVOR ML VARIABLE ANNUITY
Issued Through
PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
by
PFL LIFE INSURANCE COMPANY
The Endeavor ML Variable Annuity Policy is a Flexible Premium Variable
Annuity that is offered by PFL Life Insurance Company ("PFL"). You can use the
Policy to accumulate funds for retirement or other long-term financial
planning purposes. You are generally not taxed on any earnings on amounts you
invest until you withdraw them or begin to receive annuity payments. The
Policy is a "variable" annuity because the value of your investments can go up
or down based on the performance of mutual fund portfolios that you select. It
is a flexible premium policy because after you purchase it you can generally
make additional investments of any amount of $50 or more, until the Annuity
Commencement Date when PFL begins making annuity payments to you.
You have fifteen investment options to choose from. They include these
fourteen mutual fund portfolios:
MERRILL LYNCH VARIABLE SERIES FUNDS, ENDEAVOR SERIES TRUST:
INC.:
TCW Managed Asset Allocation Portfolio
Basic Value Focus Fund
High Current Income Fund TCW Money Market Portfolio
Developing Capital Markets Focus Fund T. Rowe Price International Stock
Portfolio
T. Rowe Price Equity Income Portfolio
WRL SERIES FUND, INC.:
T. Rowe Price Growth Stock Portfolio
WRL Growth Portfolio,
managed by Janus Capital Corporation
Dreyfus Small Cap Value Portfolio
Dreyfus U.S. Government Securities
Portfolio
Value Equity Portfolio
Opportunity Value Portfolio
Enhanced Index Portfolio
YOU AS THE OWNER OF THE POLICY, BEAR THE ENTIRE INVESTMENT RISK FOR ALL
AMOUNTS THAT YOU ALLOCATE TO ANY OF THE MUTUAL FUNDS. THIS MEANS THAT YOU
COULD LOSE THE AMOUNT THAT YOU INVEST. But if the mutual fund shares increase
in value, then the value of your Policy will also increase.
The fifteenth investment option is the Fixed Account. If you invest in one
of the alternatives offered in the Fixed Account, then PFL guarantees to
return your investment with interest at rates that PFL will declare from time
to time.
Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).
LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
You should only purchase a Policy as a long-term investment. However, you do
have access to all or some of the current cash value of your investments at
any time before the Annuity Commencement Date. But, if you do withdraw cash
from your Policy, there may be a surrender charge. You may also have to pay
income taxes on some or all of the amount you withdraw, and if you are under
the age 59 1/2 there may also be a tax penalty. Finally, there may be an
interest penalty if you make a premature withdrawal from the Fixed Account
(this is called an "Excess Interest Adjustment," and it could also result in
you earning extra interest). PFL has the right to postpone withdrawals from
the Fixed Account.
Prospectuses for the mutual fund portfolios are attached to the back of this
prospectus. This prospectus and the mutual fund prospectuses give you vital
information about the Policies and the mutual funds. Please read them
carefully before you invest. Keep them for future reference.
PLEASE NOTE THAT THE POLICIES AND THE MUTUAL FUNDS: ARE NOT BANK DEPOSITS,
ARE NOT FEDERALLY INSURED, ARE NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY
AND ARE NOT GUARANTEED TO ACHIEVE THEIR GOAL.
This Prospectus sets forth the information that a prospective purchaser
should consider before purchasing a Policy. A Statement of Additional
Information about the Policy and the Mutual Fund Account which has the same
date as this Prospectus has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of
Additional Information is available at no cost to any person requesting a copy
by writing PFL at the Administrative and Service Office or by calling 1-800-
525-6205. The table of contents of the Statement of Additional Information is
included at the end of this Prospectus.
This Prospectus and the Statement of Additional Information generally
describe only the Policies and the Mutual Fund Account, except when the Fixed
Account is specifically mentioned.
Administrative and Service Office:
Financial Markets Division--Variable Annuity Department
PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
- 2 -
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................................ 5
SUMMARY.................................................................... 9
CONDENSED FINANCIAL INFORMATION............................................ 24
FINANCIAL STATEMENTS....................................................... 26
HISTORICAL PERFORMANCE DATA................................................ 26
Standardized Performance Data............................................ 26
TCW Money Market Subaccount.............................................. 27
Other Subaccounts........................................................ 27
Merrill Lynch Variable Series Funds, Inc.--Hypothetical Data............. 30
WRL Growth Subaccount--Hypothetical Data................................. 31
Opportunity Value and Equity Index Portfolios............................ 31
Non-Standardized Performance Data........................................ 32
PUBLISHED RATINGS.......................................................... 34
PFL LIFE INSURANCE COMPANY................................................. 34
THE ENDEAVOR ACCOUNTS...................................................... 35
The Mutual Fund Account.................................................. 35
The Fixed Account........................................................ 40
Guaranteed Periods..................................................... 40
Dollar Cost Averaging Fixed Account Option............................. 41
Guaranteed Interest Rates.............................................. 41
Transfers................................................................ 42
Reinstatements........................................................... 43
Telephone Transactions................................................... 44
Dollar Cost Averaging (DCA).............................................. 44
Asset Rebalancing........................................................ 45
THE POLICY................................................................. 46
Policy Application and Issuance of Policies--Premium Payments............ 46
Additional Premium Payments............................................ 46
Maximum Total Premium Payments......................................... 47
Allocation of Premium Payments......................................... 47
Payment Not Honored by Bank............................................ 47
Policy Value............................................................. 47
The Mutual Fund Account Value.......................................... 48
Amendments............................................................... 48
Non-participating Policy................................................. 48
DISTRIBUTIONS UNDER THE POLICY............................................. 48
Surrenders............................................................... 48
Nursing Care and Terminal Condition Withdrawal Option.................... 50
Excess Interest Adjustment (EIA)......................................... 50
Systematic Payout Option................................................. 51
Annuity Payments......................................................... 51
Annuity Commencement Date.............................................. 51
Election of Payment Option............................................. 52
Premium Tax............................................................ 53
Supplementary Policy................................................... 53
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Annuity Payment Options.................................................. 53
Death Benefit............................................................ 56
Death of Annuitant Prior to Annuity Commencement Date.................. 56
Death On or After Annuity Commencement Date............................ 58
Beneficiary............................................................ 58
Death of Owner........................................................... 59
Restrictions Under the Texas Optional Retirement Program................. 59
Restrictions Under Section 403(b) Plans.................................. 59
Restrictions Under Qualified Policies.................................... 59
CHARGES AND DEDUCTIONS..................................................... 59
Surrender Charge......................................................... 60
Mortality and Expense Risk Fee........................................... 60
Administrative Charges................................................... 61
Distribution Financing Charge............................................ 62
Premium Taxes............................................................ 62
Federal, State and Local Taxes........................................... 62
Transfer Charge.......................................................... 62
Other Expenses Including Investment Advisory Fees........................ 62
Employee and Agent Purchases............................................. 63
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 63
Tax Status of the Policy................................................. 64
Taxation of Annuities.................................................... 64
DISTRIBUTOR OF THE POLICIES................................................ 70
VOTING RIGHTS.............................................................. 70
LEGAL PROCEEDINGS.......................................................... 71
STATEMENT OF ADDITIONAL INFORMATION........................................ 71
Appendix A............................................................... A-1
</TABLE>
- 4 -
<PAGE>
DEFINITIONS
Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value in the Mutual Fund Account before the Annuity Commencement Date.
Adjusted Policy Value--An amount equal to the Policy Value increased or
decreased by any Excess Interest Adjustment applied at the time of surrender
or on the Annuity Commencement Date.
Administrative and Service Office--Financial Markets Division--Variable
Annuity Department, PFL Life Insurance Company, 4333 Edgewood Road, N.E.,
Cedar Rapids, Iowa 52499-0001.
Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.
Annuity Commencement Date--The date upon which Annuity Payments are to
commence. This date may not be later than the last day of the policy month
starting after the Annuitant attains age 85, except as expressly allowed by
PFL, but in no event later than the last day of the month following the month
in which the Annuitant attains age 95.
Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.
Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment after the
Annuity Commencement Date.
Beneficiary--The person who has the right to the death benefit set forth in
the Policy.
Business Day--Any day when the New York Stock Exchange is open for business.
Cash Value--The Policy Value increased or decreased by any Excess Interest
Adjustment, less the Surrender Charge, if any.
Code--The Internal Revenue Code of 1986, as amended.
Current Interest Rate--The interest rate or rates currently guaranteed to be
credited on amounts under a Policy allocated to the Fixed Account. This
interest rate will always equal or exceed a minimum of 3%.
Due Proof of Death--A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by the attending physician, or any other proof
satisfactory to PFL will constitute Due Proof of Death.
- 5 -
<PAGE>
Distribution Financing Charge--a daily charge for the first seven Policy
Years equal to an effective annual rate of 0.15% of the Mutual Fund Account's
net assets.
Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial withdrawal or surrenders, to amounts transferred by the
Owner from the Fixed Account Guaranteed Period Options, or to amounts applied
to Annuity Payment Options. The adjustment reflects changes in the interest
rates declared by PFL since the date any payment was received by or an amount
was transferred to the Guaranteed Period Option. The Excess Interest
Adjustment (EIA) can either decrease or increase the amount to be received by
the Owner upon surrender or commencement of Annuity Payments, depending upon
whether there has been an increase or decrease in interest rates,
respectively.
Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account, that are part of the general assets of PFL that are
not in separate accounts.
Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.
Guaranteed Period Options--The various guaranteed interest rate periods
which may be offered by PFL under the Fixed Account into which premiums may be
paid or amounts transferred.
Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account.
Mutual Fund Account--The PFL Endeavor Variable Annuity Account, which
comprises a portion of the PFL Endeavor VA Separate Account, a separate
account established and registered as a unit investment trust under the
Investment Company Act of 1940 to which Premium Payments under the Policies
may be allocated and which invests in the Growth Portfolio of the WRL Series
Fund, Inc., the portfolios of the Endeavor Series Trust, certain portfolios of
the Merrill Lynch Variable Series Funds, Inc. and such other mutual funds as
PFL may determine from time-to-time.
Nonqualified Policy--A Policy other than a Qualified Policy.
PFL--PFL Life Insurance Company, the issuer of the Policies.
Policy--One of the variable annuity policies offered by this Prospectus.
Policy Anniversary--Each anniversary of the Policy Date.
Policy Date--The date shown on the Policy data page attached to the Policy
and the date on which the Policy becomes effective.
- 6 -
<PAGE>
Policy Owner or Owner--The person who may exercise all rights and privileges
under the Policy. The Policy Owner during the lifetime of the Annuitant and
prior to the Annuity Commencement Date is the person designated as the Policy
Owner or a Successor Owner in the application.
Policy Value--On or before the Annuity Commencement Date, this is an amount
equal to (a) the Premium Payments; minus (b) partial withdrawals taken
(including any applicable Excess Interest Adjustments and Surrender Charges on
such partial withdrawals); plus (c) interest credited in the Fixed Account;
plus or minus (d) accumulated gains or losses in the Mutual Fund Account;
minus (e) any applicable service charges, premium taxes, and transfer fees, if
any.
Policy Year--Each 12-month period beginning on the Policy Date shown on the
Policy Data page and each Policy Anniversary thereafter.
Premium Payment--An amount paid to PFL by the Policy Owner or on the Policy
Owner's behalf as consideration for the benefits provided by the Policy.
Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.
Service Charge--An annual charge on each Policy Anniversary (and a charge at
the time of surrender during any Policy Year) for Policy maintenance and
related administrative expenses. This annual charge is the lesser of 2% of the
Policy Value or $35.
Subaccount--A subdivision within the Mutual Fund Account, the assets of
which are invested in a specified Portfolio of the Underlying Funds.
Successor Policy Owner--A person appointed by the Policy Owner to succeed to
ownership of the Policy in the event of the death of the Policy Owner (if the
Policy Owner is not the Annuitant) before the Annuity Commencement Date.
Surrender Charge--A percentage of each Premium Payment in an amount from 7%
to 0% depending upon the length of time from the date of each Premium Payment.
The Surrender Charge is assessed on surrenders of, or partial withdrawals
from, the Policy. A Surrender Charge may also be referred to as a "Contingent
Deferred Sales Charge."
Underlying Funds--The Growth Portfolio of the WRL Series Fund, Inc., the
portfolios of the Endeavor Series Trust, and certain portfolios of the Merrill
Lynch Variable Insurance Series Funds, Inc.
Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determination is made on each Business Day.
- 7 -
<PAGE>
Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account.
Written Notice or Written Request--Written notice, signed by the Policy
Owner, that gives PFL the information it requires and is received at the
Administrative and Service Office. For some transactions, PFL may accept an
electronic notice such as telephone instructions. Such electronic notice must
meet the requirements PFL establishes for such notices.
- 8 -
<PAGE>
THE ENDEAVOR ML VARIABLE ANNUITY
SUMMARY
The following summary is intended to provide a brief overview of the Policy.
More detailed information can be found in the sections of this Prospectus that
follow, all of which should be read in their entirety.
THE POLICY
The Endeavor ML Variable Annuity is a Flexible Premium Variable Annuity
which can be purchased as a Nonqualified Policy or as a Qualified Policy. The
Owner allocates the Premium Payments among the two Endeavor Accounts of PFL:
the PFL Endeavor Variable Annuity Account, (the "Mutual Fund Account") and the
Fixed Account. Certain features described in this Prospectus may only be
available to Policies purchased after the effective date of the Policy form
used. (See "Variations in Policy Provisions," p. 22.)
THE ACCOUNTS
The Mutual Fund Account. The Mutual Fund Account is a separate account of
PFL, which invests exclusively in shares of certain portfolios of the Merrill
Lynch Variable Series Funds, Inc., the ten portfolios of the Endeavor Series
Trust, and the Growth Portfolio of the WRL Series Fund, Inc., (collectively,
the "Underlying Funds"). The Merrill Lynch Variable Series Funds, Inc. is an
investment company, whose investment adviser is Merrill Lynch Asset
Management, L.P. ("MLAM"), an indirect wholly owned subsidiary of Merrill
Lynch & Co., Inc. A separate prospectus accompanies this Prospectus for the
portfolios advised by MLAM, which describe further information about MLAM and
the Merrill Lynch Variable Series Funds, Inc. The Endeavor Series Trust is a
mutual fund managed by Endeavor Investment Advisers, a general partnership
between Endeavor Management Co. and AUSA Financial Markets, Inc. (an affiliate
of PFL), which contracts with several subadvisers (as described in separate
prospectuses that accompany this Prospectus) for investment advisory services.
The WRL Growth Portfolio is a portfolio within the WRL Series Fund, Inc. The
WRL Series Fund, Inc. is a mutual fund whose investment adviser is WRL
Investment Management, Inc., a subsidiary of Western Reserve Life Assurance
Co. of Ohio ("Western Reserve"), (an affiliate of PFL). WRL Investment
Management, Inc. contracts with Janus Capital Corporation as a sub-adviser to
the WRL Growth Portfolio for investment advisory services, as described in a
separate portfolio prospectus that accompanies this Prospectus.
The Underlying Funds currently comprise fourteen separate Portfolios: three
funds of the Merrill Lynch Variable Series Funds, Inc.: the Merrill Lynch
Basic Value Focus Fund, the Merrill Lynch Developing Capital Markets Fund, and
the Merrill Lynch High Current Income Fund; the ten portfolios under the
Endeavor Series Trust: the TCW Managed Asset Allocation Portfolio; the TCW
Money Market Portfolio; the T. Rowe Price
- 9 -
<PAGE>
International Stock Portfolio; the Value Equity Portfolio; the Dreyfus Small
Cap Value Portfolio; the Dreyfus U.S. Government Securities Portfolio; the T.
Rowe Price Equity Income Portfolio; the T. Rowe Price Growth Stock Portfolio;
the Opportunity Value Portfolio; and the Enhanced Index Portfolio; and one
portfolio under the WRL Series Fund, Inc., the WRL Growth Portfolio, managed
by Janus Capital Corporation. Each of the fourteen Subaccounts of the Mutual
Fund Account invests solely in a corresponding Portfolio of the Underlying
Funds. Because the Policy Value may depend on the investment experience of the
selected Subaccounts, the Owner bears the entire investment risk with respect
to Premium Payments allocated to, and amounts transferred to, the Mutual Fund
Account. (See "THE ENDEAVOR ACCOUNTS--The Mutual Fund Account," p. 35.)
The Fixed Account. The Fixed Account guarantees an annual effective interest
rate of at least 3% on: Premium Payments and transfers to, less partial
withdrawals and transfers from, the Fixed Account (see Appendix "B" for
variations in the minimum guaranteed effective annual interest rate for prior
versions of Policies and for Policies offered in certain states). PFL may, in
its sole discretion, declare a higher Current Interest Rate. A Current
Interest Rate is guaranteed for at least one year. Upon surrender, PFL
guarantees return of at least the Premium Payments made to, less prior Partial
Withdrawals and transfers from, the Fixed Account. (See "THE ENDEAVOR
ACCOUNTS--The Fixed Account," p. 40.)
PREMIUM PAYMENTS
A Nonqualified Policy may be purchased with an initial Premium Payment of at
least $5,000, and a Qualified Policy generally may be purchased with an
initial Premium Payment of at least $1,000. A Policy purchased and used in
connection with a Tax Deferred 403(b) Annuity may be purchased with an initial
premium payment in any amount chosen by the purchaser, however, PFL must
receive the initial Premium Payment within 90 days following the Policy Date,
otherwise the Policy will be canceled. An Owner may make subsequent additional
Premium Payments of at least $50 each at any time before the Annuity
Commencement Date. The maximum total Premium Payments allowed without prior
approval of PFL is $1,000,000. At the time of each Premium Payment no charges
or fees are deducted, so the entire Premium Payment is invested immediately.
(See "CHARGES AND DEDUCTIONS--Surrender Charge," p. 60 and "CHARGES AND
DEDUCTIONS--Premium Taxes," p. 62.)
The Owner must allocate the initial Premium Payment among the Investment
Options (that is, among the options available under the Fixed Account or the
Subaccounts of the Mutual Fund Account or a combination of those options)
according to allocation percentages in the Policy application or transmittal
form. Any allocation must be in whole percents, and the total allocation must
equal 100%. Allocations specified by the Owner for the Initial Premium Payment
will be used for Subsequent Additional Premium Payments unless the Owner
requests a change in allocation. Allocations of additional Premium Payments
may be changed by sending
- 10 -
<PAGE>
Written Notice to PFL's Administrative and Service Office. (See "THE POLICY--
Policy Application and Issuance of Policies--Premium Payments," p. 46.)
RIGHT TO CANCEL PERIOD
The Owner may, until the end of the period of time specified in the Policy
(the Right to Cancel period), examine the Policy and return it for a refund.
The applicable period will depend on the state in which the Policy is issued.
In most states the period is ten (10) days after the Policy is delivered to
the Owner. Several states allow for a longer period to return the Policy. The
amount of the refund will also depend on the state in which the Policy is
issued. Ordinarily the amount of the refund will be the Policy Value. However,
some states may require a return of the Premium Payments, or the greater of
the Premium Payments or the Policy Value. PFL will pay the refund within seven
(7) days after it receives written notice of cancellation and the returned
Policy. The Policy will then be deemed void.
TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
An Owner may transfer Policy Values from one Subaccount to another within
the Mutual Fund Account or to the Fixed Account, or may transfer Policy Values
or an amount equal to the interest credited from the Guaranteed Period Options
of the Fixed Account to the Mutual Fund Account. Transfers of amounts equal to
interest credited to a Guaranteed Period Option are referred to as "interest
transfers." Except for interest transfers, before the end of the Guaranteed
Period, any Policy Values transferred out of the Fixed Account are subject to
an Excess Interest Adjustment. The minimum amount which may be transferred is
$500, or the entire Subaccount (or Guaranteed Period Option) Policy Value,
whichever is less. However, following a transfer out of a particular
Subaccount or Guaranteed Period Option, at least $500 must remain in that
Subaccount or Guaranteed Period Option, otherwise PFL reserves the right to
include remaining amounts in the transfer. Transfers currently may be made
either by telephone (subject to the provisions described below under
"Telephone Transactions," p. 44) or by sending Written Notice to the
Administrative and Service Office. Due to the manner of crediting interest in
the Fixed Account, however, interest transfers may affect the rate of interest
credited on funds remaining in the Fixed Account. (See "THE ENDEAVOR
ACCOUNTS--Transfers," p. 42.)
An Owner may choose which Guaranteed Period Option to or from transfers may
be made. Transfers of Policy Value from a Guaranteed Period Option prior to
the end of a Guaranteed Period are subject to an Excess Interest Adjustment
which may increase or decrease the amount removed from the Guaranteed Period
Option in order to honor the transfer amount requested. "Interest transfers"
are not subject to an Excess Interest Adjustment. (See "DISTRIBUTIONS UNDER
THE POLICY--Excess Interest Adjustment (EIA)," p. 50 and "THE ENDEAVOR
ACCOUNTS--Transfers," p. 42.)
- 11 -
<PAGE>
Transfers from the Dollar Cost Averaging Fixed Account Option, except
through automatic Dollar Cost Averaging transfers, are not allowed. (see "THE
ENDEAVOR ACCOUNTS--Dollar Cost Averaging Fixed Account Option," p. 41.)
Policies issued in certain states may have additional restrictions on
transfers. See the Policy or endorsement for details.
A $10 charge may be imposed for each transfer in excess of 12 transfers per
Policy Year. Currently PFL does not charge for any transfers. (See "THE
ENDEAVOR ACCOUNTS--Transfers," p. 42.)
SURRENDERS AND PARTIAL WITHDRAWALS
The Owner may elect to surrender the Policy or make a partial withdrawal
from the Policy ($500 minimum) in exchange for a cash payment from PFL at any
time prior to the earlier of the Annuitant's death or the Annuity Commencement
Date. A surrender or partial withdrawal may be subject to deductions for
Surrender Charges, Excess Interest Adjustments, and Service Charges. (See
"CHARGES AND DEDUCTIONS," p. 59.) A surrender or partial withdrawal request
must be made by Written Request, and a request for a partial withdrawal must
specify the Subaccounts or Guaranteed Period Options from which the withdrawal
is requested. There is currently no limit on the frequency or timing of
partial withdrawals. (See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p.
48). For Qualified Policies the retirement plan or applicable law may restrict
or penalize partial withdrawals. In addition to the applicable charges and
deductions under the Policy, surrenders and partial withdrawals may be subject
to premium taxes, income taxes and a 10% Federal penalty tax.
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If the Owner or Owner's spouse (or Annuitant or Annuitant's spouse if the
Owner is not a natural person): (1) has been confined in a hospital or nursing
facility for 30 consecutive days or (2) has been diagnosed as having a
terminal condition, as defined in the Policy or endorsement (generally a life
expectancy of not more than 12 months), then partial withdrawals or surrenders
may be taken with no Surrender Charge and no Excess Interest Adjustment. (This
benefit may not be available in all states or for all policy forms. See the
Policy or endorsement for details.) (See "DISTRIBUTIONS UNDER THE POLICY--
Nursing Care and Terminal Condition Withdrawal Option," p. 50.)
CHARGES AND DEDUCTIONS
Surrender Charge. In order to permit investment of the entire Premium
Payment, PFL does not deduct sales or other charges at the time the Policy is
purchased. However, a Surrender Charge of up to 7% of the amount withdrawn is
imposed on certain surrenders or partial withdrawals of Premium Payments in
order to cover expenses relating to the sale of the Policies. The applicable
Surrender Charge is based on the period of time elapsed since payment of the
Premium Payment(s) being withdrawn. There
- 12 -
<PAGE>
is no Surrender Charge imposed seven or more years after a Premium Payment was
paid. For purposes of determining the applicable Surrender Charge, Premium
Payments are considered to be withdrawn on a "first in-, first-out" basis.
(See "CHARGES AND DEDUCTIONS--Surrender Charge," p. 60.) Note that for income
tax purposes, however, gains are deemed to be withdrawn first. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 63.) After the first Policy Year, up to
10% of the Policy Value may be withdrawn once per Policy Year without an
Excess Interest Adjustment and without a Surrender Charge if it is the first
withdrawal in that Policy Year.
Excess Interest Adjustment. Surrenders, partial withdrawals and transfers
(other than "10% Withdrawals" and "interest transfers") out of Fixed Account
Guaranteed Period Options, which occur prior to the end of the Guaranteed
Period, may be subject to an Excess Interest Adjustment, which could eliminate
all credited interest in excess of the minimum guaranteed effective annual
interest rate of 3%. The Excess Interest Adjustment, if a positive adjustment,
could also result in the crediting of additional interest. (See "DISTRIBUTIONS
UNDER THE POLICY--Excess Interest Adjustment (EIA)," p. 50.)
Account Charges. PFL deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account for the mortality and expense risks assumed
by PFL. For Guaranteed Minimum Death Benefit Options "A" (5% Annually
Compounding Death Benefit) and "B" (Annual Step-Up Death Benefit), the
effective annual rate of this charge is 1.25% of the value of the Mutual Fund
Account's net assets. For Guaranteed Minimum Death Benefit Option "C" (Return
of Premium Death Benefit), the effective annual rate of this charge is 1.10%
of the value of the Mutual Fund Account's net assets. (See "CHARGES AND
DEDUCTIONS--Mortality and Expense Risk Fee," p. 60, and "DISTRIBUTIONS UNDER
THE POLICY--Death Benefit," p. 56.)
PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Mutual Fund Account and the Policies. The
effective annual rate of this charge is .15% of the value of the Mutual Fund
Account's net assets. (See "CHARGES AND DEDUCTIONS--Administrative Charges,"
p. 61.)
PFL guarantees that the account charges for mortality and expense risks and
administrative expenses will not exceed a total of 1.40% for the 5% Annually
Compounding Death Benefit or the Annual Step Up Death Benefit, and 1.25% for
the Return of Premium Death Benefit.
Service Charge. Prior to the Annuity Commencement Date, there is an annual
Service Charge on each Policy Anniversary (and a charge at the time of
surrender during any Policy Year) for Policy maintenance and related
administrative expenses. This annual charge is the lesser of 2% of the Policy
Value or $35. The Service Charge is deducted from each Investment Option in
proportion to each Investment Option's percentage of the Policy Value just
prior to such charge. This charge is waived if either the Policy Value or
- 13 -
<PAGE>
the sum of all Premium Payments less the sum of all partial withdrawals equals
or exceeds $50,000 on a Policy Anniversary (or date of surrender). PFL
guarantees that this charge will not be increased in the future. (See "CHARGES
AND DEDUCTIONS--Administrative Charges," p. 61.)
Distribution Financing Charges. During the first seven Policy Years, PFL
imposes a daily Distribution Financing Charge equal to an effective annual
rate of .15% of the Mutual Fund Account's net assets. This charge is used by
PFL to defray a portion of the cost of distribution of the Policies. The sum
of the cumulative Distribution Financing Charges and the Surrender Charges
will never exceed 8.5% of the cumulative Premium Payments. (See "CHARGES AND
DEDUCTIONS--Distribution Financing Charge," p. 62.)
Taxes. PFL may incur premium taxes relating to the Policies. When permitted
by state law, PFL will not deduct any premium taxes related to a particular
Policy from the Policy Value until the time of surrender, payment of the death
benefit, or the Annuity Commencement Date. Premium taxes currently range from
0% to 3.50% of Premium Payments. (See "CHARGES AND DEDUCTIONS--Premium Taxes,"
p. 62.)
No charges are currently made against the Fixed Account or the Mutual Fund
Account for federal, state, or local income taxes. Should PFL determine that
any such taxes may be imposed, PFL may deduct such taxes from amounts held in
the relevant Account. (See "CHARGES AND DEDUCTIONS--Federal, State and Local
Taxes," p. 62.)
Charges Against the Underlying Funds. The value of the net assets of the
Subaccounts of the Mutual Fund Account will reflect the investment advisory
fee and other expenses incurred by the Underlying Funds. Those fees and
expenses are detailed in the prospectuses for the Underlying Funds that
accompany this Prospectus.
- 14 -
<PAGE>
Expense Data. The charges and deductions are summarized in the following
tables. This tabular information regarding expenses assumes that the entire
Policy Value is in the Mutual Fund Account.
<TABLE>
<CAPTION>
MERRILL LYNCH VARIABLE
SERIES FUNDS, INC.(/5/) ENDEAVOR SERIES TRUST(/4/)
------------------------ --------------------------------------
DEVELOPING TCW T. ROWE
BASIC CAPITAL HIGH TCW MANAGED PRICE
VALUE MARKETS CURRENT MONEY ASSET INTERNATIONAL VALUE
FOCUS FOCUS INCOME MARKET ALLOCATION STOCK EQUITY
----- ---------- ------- ------ ---------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
POLICY OWNER TRANSACTION
EXPENSES
Sales Load On Purchase
Payments(/1/).......... 0 0 0 0 0 0 0
Maximum Surrender Charge
(as a % of Premium
Payment
Surrendered)(/2/)...... 7 7 7 7 7 7 7
Surrender Fees.......... 0 0 0 0 0 0 0
------------------------------------------------------------------
Annual Service
Charge(/1/)............ $35 Per Policy
Transfer Fee(/1/)....... Currently no fee
------------------------------------------------------------------
MUTUAL FUND ACCOUNT
ANNUAL EXPENSES
(AS A % OF ACCOUNT
VALUE)
Mortality and Expense
Risk Fees(/3/)......... 1.25 1.25 1.25 1.25 1.25 1.25 1.25
Administrative Charge... 0.15 0.15 0.15 0.15 0.15 0.15 0.15
Distribution Financing
Charge................. 0.15 0.15 0.15 0.15 0.15 0.15 0.15
---- ---- ---- ---- ---- ---- ----
Total Mutual Fund
Account Annual
Expenses............... 1.55 1.55 1.55 1.55 1.55 1.55 1.55
UNDERLYING FUNDS ANNUAL
EXPENSES(/4/)(5)(6)
(as a % of average net
assets and after
expense reimbursements)
Management Fees......... 0.60 1.00 0.49 0.50 0.75 0.90 0.80
Other Expenses.......... 0.06 0.25 0.05 0.10 0.10 0.28 0.11
---- ---- ---- ---- ---- ---- ----
Total Underlying Funds
Annual Expenses........ 0.66 1.25 0.54 0.60 0.85 1.18 0.91
</TABLE>
- 15 -
<PAGE>
<TABLE>
<CAPTION>
WRL
SERIES
FUND,
ENDEAVOR SERIES TRUST(/4/) INC.(/6/)
--------------------------------------------------------- --------------------------
DREYFUS
U.S. T. ROWE T. ROWE
DREYFUS GOVERNMENT PRICE PRICE
SMALL CAP SECURITIES EQUITY GROWTH OPPORTUNITY ENHANCED WRL
VALUE PORTFOLIO INCOME STOCK VALUE INDEX GROWTH
--------- ---------- ------- ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
POLICY OWNER TRANSACTION
EXPENSES
Sales Load On Purchase
Payments(/1/).......... 0 0 0 0 0 0 0
Maximum Surrender Charge
(as a % of Premium
Payments
Surrendered)(/2/)...... 7 7 7 7 7 7 7
Surrender Fees.......... 0 0 0 0 0 0 0
Annual Service
Charge(/1/)............
-------------------------------------------------------------------------------------------
Transfer Fee(/1/) ...... Currently no fee
-------------------------------------------------------------------------------------------
MUTUAL FUND ACCOUNT
ANNUAL EXPENSES
(AS A % OF ACCOUNT
VALUE)
Mortality and Expense
Risk Fees(/3/)......... 1.25 1.25 1.25 1.25 1.25 1.25 1.25
Administrative Charge... 0.15 0.15 0.15 0.15 0.15 0.15 0.15
Distribution Financing
Charge................. 0.15 0.15 0.15 0.15 0.15 0.15 0.15
---- ---- ---- ---- ---- ---- ----
Total Mutual Fund
Account Annual
Expenses............... 1.55 1.55 1.55 1.55 1.55 1.55 1.55
UNDERLYING FUNDS ANNUAL
EXPENSES(/4/)(5)(6)
(as a % of average net
assets and after
expense reimbursements)
Management Fees......... 0.80 0.65 0.80 0.80 0.80 0.75 0.80
Other Expenses.......... 0.12 0.17 0.16 0.21 0.50 0.55 0.08
---- ---- ---- ---- ---- ---- ----
Total Underlying Funds
Annual Expense(/1/).... 0.92 0.82 0.96 1.01 1.30 1.30 0.88
</TABLE>
- ----------------------------------
(1) The Surrender Charge and Transfer Fee, if any is imposed, apply to each
Policy, regardless of how the Policy Value is allocated among the Mutual
Fund Account and the Fixed Account. The Service Charge applies to both the
Fixed Account and the Mutual Fund Account, and is assessed on a prorata
basis relative to each Account's Policy Value as a percentage of the
Policy's total Policy Value. The Service Charge is deducted on each Policy
Anniversary and at the time of surrender, if surrender occurs during a
Policy Year. (See "CHARGES AND DEDUCTIONS--Other Expenses Including
Investment Advisory Fees," p. 62.)
(2) The Surrender Charge is decreased based on the number of years since the
premium payment date in which the withdrawal is made, from 7% in the first
year in which the Premium Payment was made to 0% in the eighth year after
the Premium Payment was made.
(3) The Mortality and Expense Risk Fees shown (1.25%) are for the 5% Annually
Compounding Death Benefit and the Annual Step Up Death Benefit. The
corresponding Fee for the Return of Premium Death
- 16 -
<PAGE>
Benefit is 1.10% for each Subaccount. (See "DISTRIBUTIONS UNDER THE
POLICY--Death Benefit," p. 56.)
(4) Endeavor Investment Advisers has agreed, until terminated by Endeavor
Investment Advisers, to assume expenses of the Endeavor Series Trust
Portfolios that exceed the following rates: TCW Money Market--0.99%; TCW
Managed Asset Allocation--1.25%; T. Rowe Price International Stock--1.53%;
Value Equity--1.30%; Dreyfus Small Cap Value--1.30%; Dreyfus U.S.
Government Securities--1.00%; T. Rowe Price Equity Income--1.30%; T. Rowe
Price Growth Stock--1.30%; Opportunity Value--1.30%; Enhanced Index--
1.30%. Amounts shown for the Enhanced Index Portfolios are estimated for
1997. During 1996, Endeavor Investment Advisers waived fees relative to,
or reimbursed, the Opportunity Value Portfolio. The annualized operating
expense ratio before waiver/reimbursement by Endeavor Investment Advisers
for the period ended December 31, 1996, was 12.69%.
(5) These are estimates of expenses for 1997. Reimbursement agreements are in
effect that limit operating expenses paid by each portfolio of the Merrill
Lynch Variable Series Funds, Inc. in a given year to 1.25% of its average
daily net assets. Any expenses in excess of 1.25% of the average daily net
assets will be reimbursed to the portfolio by MLAM, which in turn will be
reimbursed by Merrill Lynch Life Agency, Inc., an affiliate of MLAM.
During 1996, MLAM waived management fees and reimbursed expenses totaling
0.06% for the Developing Capital Markets Focus Fund.
(6) Effective January 1, 1997, the WRL Series Fund, Inc. has adopted a Plan of
Distribution pursuant to Rule 12b-1 under the Investment Company Act of
1940 (the "1940 Act") ("Distribution Plan") and pursuant to the
Distribution Plan, has entered into a Distribution Agreement with
InterSecurities, Inc. ("ISI"), principal underwriter for the WRL Series
Fund, Inc. Under the Distribution Plan, the WRL Series Fund, Inc., on
behalf of the WRL Growth Portfolio, is authorized to pay to various
service providers, as direct payment for expenses incurred in connection
with the distribution of the Portfolio's shares, amounts equal to actual
expenses associated with distributing the Portfolio's shares, up to a
maximum rate of 0.15% (fifteen one-hundredths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it will not seek
payment by the WRL Series Fund, Inc. of distribution expenses with respect
to any portfolio (including the WRL Growth Portfolio) during the fiscal
year ending December 31, 1997. Owners will be notified in advance prior to
ISI's seeking such reimbursement.
- 17 -
<PAGE>
EXAMPLES
I. An Owner would pay the following expenses on a $1,000 investment, assuming
Return of Premium Death Benefit, a hypothetical 5% annual return on assets,
and assuming the entire Policy Value is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund.......... $91 $111 $140 $239
Merrill Lynch Developing Capital Markets Focus
Fund........................................ $97 $129 $170 $298
Merrill Lynch High Current Income Fund........ $90 $107 $134 $227
TCW Money Market Portfolio.................... $91 $109 $137 $233
TCW Managed Asset Allocation Portfolio........ $93 $117 $150 $259
T. Rowe Price International Stock Portfolio... $97 $127 $166 $292
Value Equity Portfolio........................ $94 $118 $153 $265
Dreyfus Small Cap Value Portfolio............. $94 $119 $153 $266
Dreyfus U.S. Government Securities Portfolio.. $93 $116 $148 $256
T. Rowe Price Equity Income Portfolio......... $94 $120 $155 $270
T. Rowe Price Growth Stock Portfolio.......... $95 $121 $158 $275
Opportunity Value Portfolio................... $98 $130 $172 $303
Enhanced Index Portfolio...................... $98 $130 $172 $303
WRL Growth Portfolio.......................... $94 $117 $151 $262
</TABLE>
2. If the Policy is annuitized at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund.......... $21 $66 $114 $239
Merrill Lynch Developing Capital Markets Focus
Fund........................................ $27 $84 $143 $298
Merrill Lynch High Current Income Fund........ $20 $63 $108 $227
TCW Money Market Portfolio.................... $21 $64 $111 $233
TCW Managed Asset Allocation Portfolio........ $23 $72 $123 $259
T. Rowe Price International Stock Portfolio... $27 $82 $140 $292
Value Equity Portfolio........................ $24 $74 $126 $265
Dreyfus Small Cap Value Portfolio............. $24 $74 $127 $266
Dreyfus U.S. Government Securities Portfolio.. $23 $71 $122 $256
T. Rowe Price Equity Income Portfolio......... $24 $75 $129 $270
T. Rowe Price Growth Stock Portfolio.......... $25 $77 $131 $275
Opportunity Value Portfolio................... $28 $85 $146 $303
Enhanced Index Portfolio...................... $28 $85 $146 $303
WRL Growth Portfolio.......................... $24 $73 $125 $262
</TABLE>
- 18 -
<PAGE>
3. If the Policy is not surrendered or annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund.......... $21 $66 $114 $239
Merrill Lynch Developing Capital Markets Focus
Fund........................................ $27 $84 $143 $298
Merrill Lynch High Current Income Fund........ $20 $63 $108 $227
TCW Money Market Portfolio.................... $21 $64 $111 $233
TCW Managed Asset Allocation Portfolio........ $23 $72 $123 $259
T. Rowe Price International Stock Portfolio... $27 $82 $140 $292
Value Equity Portfolio........................ $24 $74 $126 $265
Dreyfus Small Cap Value Portfolio............. $24 $74 $127 $266
Dreyfus U.S. Government Securities Portfolio.. $23 $71 $122 $256
T. Rowe Price Equity Income Portfolio......... $24 $75 $129 $270
T. Rowe Price Growth Stock Portfolio.......... $25 $77 $131 $275
Opportunity Value Portfolio................... $28 $85 $146 $303
Enhanced Index Portfolio...................... $28 $85 $146 $303
WRL Growth Portfolio.......................... $24 $73 $125 $262
II. An Owner would pay the following expenses on a $1,000 investment, assuming
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit, a
hypothetical 5% annual return on assets, and assuming the entire Policy Value
is in the applicable Subaccount:
1. If the Policy is surrendered at the end of the applicable time period:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund.......... $93 $115 $148 $255
Merrill Lynch Developing Capital Markets Focus
Fund........................................ $99 $133 $177 $313
Merrill Lynch High Current Income Fund........ $92 $112 $142 $242
TCW Money Market Portfolio.................... $92 $114 $145 $248
TCW Managed Asset Allocation Portfolio........ $95 $121 $157 $274
T. Rowe Price International Stock Portfolio... $98 $131 $174 $306
Value Equity Portfolio........................ $95 $123 $160 $280
Dreyfus Small Cap Value Portfolio............. $96 $123 $161 $281
Dreyfus U.S. Government Securities Portfolio.. $95 $120 $156 $271
T. Rowe Price Equity Income Portfolio......... $96 $124 $163 $285
T. Rowe Price Growth Stock Portfolio.......... $96 $126 $165 $290
Opportunity Value Portfolio................... $99 $135 $180 $318
Enhanced Index Portfolio...................... $99 $135 $180 $318
WRL Growth Portfolio.......................... $95 $122 $159 $277
</TABLE>
- 19 -
<PAGE>
2. If the Policy is annuitized at the end of the applicable time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund.......... $23 $71 $121 $255
Merrill Lynch Developing Capital Markets Focus
Fund........................................ $29 $88 $151 $313
Merrill Lynch High Current Income Fund........ $22 $67 $115 $242
TCW Money Market Portfolio.................... $22 $69 $118 $248
TCW Managed Asset Allocation Portfolio........ $25 $77 $131 $274
T. Rowe Price International Stock Portfolio... $28 $86 $147 $306
Value Equity Portfolio........................ $25 $78 $134 $280
Dreyfus Small Cap Value Portfolio............. $26 $79 $134 $281
Dreyfus U.S. Government Securities Portfolio.. $25 $76 $129 $271
T. Rowe Price Equity Income Portfolio......... $26 $80 $136 $285
T. Rowe Price Growth Stock Portfolio.......... $26 $81 $139 $290
Opportunity Value Portfolio................... $29 $90 $153 $318
Enhanced Index Portfolio...................... $29 $90 $153 $318
WRL Growth Portfolio.......................... $25 $77 $132 $277
3. If the Policy is not surrendered or annuitized:
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Merrill Lynch Basic Value Focus Fund.......... $23 $71 $121 $255
Merrill Lynch Developing Capital Markets Focus
Fund........................................ $29 $88 $151 $313
Merrill Lynch High Current Income Fund........ $22 $67 $115 $242
TCW Money Market Portfolio.................... $22 $69 $118 $248
TCW Managed Asset Allocation Portfolio........ $25 $77 $131 $274
T. Rowe Price International Stock Portfolio... $28 $86 $147 $306
Value Equity Portfolio........................ $25 $78 $134 $280
Dreyfus Small Cap Value Portfolio............. $26 $79 $134 $281
Dreyfus U.S. Government Securities Portfolio.. $25 $76 $129 $271
T. Rowe Price Equity Income Portfolio......... $26 $80 $136 $285
T. Rowe Price Growth Stock Portfolio.......... $26 $81 $139 $290
Opportunity Value Portfolio................... $29 $90 $153 $318
Enhanced Index Portfolio...................... $29 $90 $153 $318
WRL Growth Portfolio.......................... $25 $77 $132 $277
</TABLE>
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne, directly or indirectly. These include the
expenses of the Underlying Funds. (See "CHARGES AND DEDUCTIONS," p. 59, and
the Underlying Funds' prospectuses.) In addition to the expenses listed above,
premium taxes may be applicable.
- 20 -
<PAGE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH COULD BE GREATER OR
LESS THAN THE ASSUMED RATE. The figures and data for the Underlying Fund
annual expenses have been provided by WRL Investment Management, Inc.,
Endeavor Investment Advisers, and Merrill Lynch Asset Management, L.P. and
while PFL does not dispute these figures, PFL has not independently verified
their accuracy.
In these examples, the $35 Annual Service Charge is reflected as a charge of
.0547% based on average Policy Value of $64,005. Normally, the $35 Service
Charge would be waived if the Premium Payment(s) less partial withdrawals, or
the Policy Value is at least $50,000. However, it was included in these
examples for illustrative purposes.
These examples include the 1.25% Mortality and Expense Risk Fee for the 5%
Annually Compounding and Annual Step-Up Death Benefits; and the 1.10%
Mortality and Expense Risk Fee for the Return of Premium Death Benefit.
DEATH BENEFIT
Upon receipt of proof that the Annuitant, who is the Owner, has died before
the Annuity Commencement Date, the Death Benefit is calculated and is payable
to the Beneficiary when PFL receives due proof of death, an election of the
method of settlement and return of the Policy. The Death Benefit is only paid
if the Owner and Annuitant are the same person, and that person dies prior to
the Annuity Commencement Date. In the event that the Annuitant who is not the
Owner dies prior to the Annuity Commencement Date, the Owner will generally
become the Annuitant unless the Owner specifically requests on the application
or in writing prior to Annuitant's death that the death benefit be paid upon
the Annuitant's death and PFL agrees to such an election.
The amount of the Death Benefit will depend on the state where the Policy is
purchased and will depend on the Death Benefit option elected by the Owner.
However, the Death Benefit will always be at least equal to the greater of the
Policy Value or the Cash Value on the date PFL receives the documentation it
needs to process the Death Benefit.
The Death Benefit is not paid on the death of an Owner if the Owner is not
the Annuitant. If an Owner who is not the Annuitant dies before the Annuity
Commencement Date, the amount payable under the Policy upon surrender will be
the Adjusted Policy Value. (See "DISTRIBUTIONS UNDER THE POLICY--Death
Benefit," p. 56, or the Policy or endorsement for details.)
The Owner has the "one-time" option of choosing a Guaranteed Minimum Death
Benefit at the time of purchase of the Policy. The Owner may choose among the
"5% Annually Compounding Death Benefit," the
- 21 -
<PAGE>
"Annual Step-Up Death Benefit," or the "Return of Premium Death Benefit."
Certain age restrictions may apply, and prior versions of the Policy or
Policies offered in certain states may not offer all Guaranteed Minimum Death
Benefit Options. See the Policy or endorsement for details. If no Guaranteed
Minimum Death Benefit Option election is made by the Owner, the contract will
be issued with the Return of Premium Death Benefit. The Death Benefit may be
paid as either a lump sum cash benefit or as an annuity as permitted by
federal or state law.
VARIATIONS IN POLICY PROVISIONS
Certain provisions of the Policies (sold before May 1, 1997) offered in
certain states may vary from the descriptions in this Prospectus in order to
comply with different state laws. Any such state variations will be included
in the Policy itself or in riders or endorsements attached to the Policy. See
the Policy or endorsement for details.
New Jersey residents: Annuity payments must begin on or before the Policy
Anniversary that is closest to the Annuitant's 70th birthday or the 10th
Policy Anniversary, whichever occurs last. The Owner may not select a
Guaranteed Period Option that would extend beyond that date. The Owner's
options at the Annuity Commencement Date are to elect a lump sum payment, or
elect to receive annuity payments under one of the Fixed Payment Options. New
Jersey residents cannot elect Variable Payment Options. Consult your agent and
the policy form itself for details regarding these and other terms applicable
to policies sold in New Jersey.
FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY
With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (for example, a surrender, partial withdrawal, or Annuity
Payment) or is deemed t occur (for example, a pledge or assignment of a
Policy). Generally, a portion of any distribution or deemed distribution will
be taxable as ordinary income. The taxable portion of certain distributions
will be subject to withholding unless the recipient elects otherwise. In
addition, a penalty tax may apply to certain distributions or deemed
distributions under the Policy. (See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," p. 63.)
* * *
Note: The foregoing summary is qualified in its entirety by the more detailed
information in the remainder of this Prospectus, in the Statement of
Additional Information, in the prospectuses for the Underlying Funds, and in
the Policy itself. Prospective purchasers should refer to those sources before
purchasing a Policy. This Prospectus generally describes only the Policy and
the Mutual Fund Account. Separate prospectuses describe the Underlying Funds.
(There is no prospectus for the Fixed Ac count since interests in the Fixed
Account are not securities. See "THE ENDEAVOR ACCOUNTS--The Fixed Account," p.
40.)
- 22 -
<PAGE>
INQUIRIES, WRITTEN NOTICES AND WRITTEN REQUESTS
Any questions about procedures or the Policy, or any Written Notice or
Written Request required to be sent to PFL, should be sent to the
Administrative and Service Office, Financial Markets Division--Variable
Annuity Department, 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.
Telephone requests and inquiries may be made by calling 800-525-6205. All
inquiries, Notices and Requests should include the Policy number, the Owner's
name and the Annuitant's name.
- 23 -
<PAGE>
CONDENSED FINANCIAL INFORMATION
The Accumulation Unit Values and the number of Accumulation Units
outstanding for each Subaccount from the date of inception:
<TABLE>
<CAPTION>
TCW MONEY MARKET SUBACCOUNT*
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.11571 $1.15422 26,461,099.190
1995......................... $1.07242 $1.11571 21,103,926.232
1994......................... $1.05150 $1.07242 17,836,839.874
1993......................... $1.04313 $1.05150 12,190,857.625
1992......................... $1.02803 $1.04313 4,334,947.760
1991(/1/).................... $1.00000 $1.02803 1,855,372.177
<CAPTION>
TCW MANAGED ASSET ALLOCATION SUBACCOUNT**
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.577873 $1.833135 124,998,927.667
1995......................... $1.301669 $1.577873 122,974,873.030
1994......................... $1.393488 $1.301669 130,909,987.116
1993......................... $1.209859 $1.393488 69,252,242.665
1992......................... $1.125386 $1.209859 11,637,563.615
1991(/1/).................... $1.000000 $1.125386 3,775,618.731
<CAPTION>
T. ROWE PRICE INTERNATIONAL STOCK SUBACCOUNT
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.171039 $1.330640 91,462,303.686
1995......................... $1.073958 $1.171039 75,065,177.549
1994......................... $1.156482 $1.073958 76,518,044.179
1993......................... $0.989782 $1.156482 45,569,234.403
1992......................... $1.041235 $0.989782 6,368,485.858
1991(/1/).................... $1.000000 $1.041235 3,068,279.081
<CAPTION>
VALUE EQUITY SUBACCOUNT***
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.387903 $1.694854 65,227,195.342
1995......................... $1.045610 $1.387903 46,194,663.692
1994......................... $1.018576 $1.045610 30,512,231.489
1993(/3/).................... $1.000000 $1.018576 10,958,836.984
<CAPTION>
DREYFUS SMALL CAP VALUE SUBACCOUNT****
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... $1.206843 $1.496065 51,124,831.634
1995......................... $1.072941 $1.206843 40,635,696.978
1994......................... $1.107747 $1.072941 32,607,348.474
1993(/4/).................... $1.000000 $1.107747 11,449,956.948
</TABLE>
- 24 -
<PAGE>
<TABLE>
<CAPTION>
DREYFUS U.S. GOVERNMENT SECURITIES SUBACCOUNT*****
-----------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ---------------------
<S> <C> <C> <C>
1996...................... $ 1.124292 $ 1.128769 17,561,825.527
1995...................... $ 0.985803 $ 1.124292 8,456,764.729
1994(/5/)................. $ 0.998670 $ 0.985803 3,102,671.789
<CAPTION>
T. ROWE PRICE EQUITY INCOME SUBACCOUNT
-----------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS AT
BEGINNING OF YEAR END OF YEAR END OF YEAR
----------------- ------------- ---------------------
<S> <C> <C> <C>
1996...................... $ 1.287240 $ 1.521680 42,673,040.677
1995(/6/)................. $ 1.000000 $ 1.287240 14,943,358.393
<CAPTION>
T. ROWE PRICE GROWTH STOCK SUBACCOUNT
-----------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS AT
BEGINNING OF YEAR END OF YEAR END OF YEAR
----------------- ------------- ---------------------
<S> <C> <C> <C>
1996...................... $ 1.353339 $ 1.611613 30,237,847.748
1995(/6/)................. $ 1.000000 $ 1.353339 14,196,707.745
<CAPTION>
OPPORTUNITY VALUE SUBACCOUNT
-----------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS AT
BEGINNING OF YEAR END OF YEAR END OF YEAR
----------------- ------------- ---------------------
<S> <C> <C> <C>
1996(/7/)................. $ 1.000000 $ 1.004355 314,119.406
<CAPTION>
ENHANCED INDEX SUBACCOUNT
-----------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS AT
BEGINNING OF YEAR END OF YEAR END OF YEAR
----------------- ------------- ---------------------
<S> <C> <C> <C>
1996(/8/)................. -- -- --
<CAPTION>
WRL GROWTH SUBACCOUNT
-----------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ---------------------
<S> <C> <C> <C>
1996...................... $14.583843 $16.964068 15,174,482.394
1995...................... $10.051117 $14.583843 13,337,196.679
1994...................... $11.114865 $10.051117 12,758,957.591
1993...................... $10.839753 $11.114865 9,252,403.800
1992(/2/)................. $10.000000 $10.839753 1,119,066,376
<CAPTION>
MERRILL LYNCH BASIC VALUE FOCUS SUBACCOUNT (/8/)
-----------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ---------------------
<S> <C> <C> <C>
1996...................... N/A N/A N/A
</TABLE>
- 25 -
<PAGE>
<TABLE>
<CAPTION>
MERRILL LYNCH DEVELOPING CAPITAL MARKETS FOCUS
SUBACCOUNT (/8/)
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... N/A N/A N/A
<CAPTION>
MERRILL LYNCH HIGH CURRENT INCOME SUBACCOUNT (/8/)
--------------------------------------------------
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE AT UNIT VALUE AT ACCUMULATION UNITS
BEGINNING OF YEAR END OF YEAR AT END OF YEAR
----------------- ------------- ------------------
<S> <C> <C> <C>
1996......................... N/A N/A N/A
</TABLE>
- ----------------------------------
(1) Period from April 8, 1991 through December 31, 1991.
(2) Period from July 1, 1992 through December 31, 1992.
(3) Period from May 27, 1993 through December 31, 1993.
(4) Period from May 4, 1993 through December 31, 1993.
(5) Period from May 9, 1994 through December 31, 1994.
(6) Period from January 3, 1995 through December 31, 1995.
(7) Period from November 18, 1996, through December 31, 1996.
(8) The offerings of the Enhanced Index Subaccount, the Merrill Lynch Basic
Value Focus Subaccount, the Merrill Lynch Developing Capital Markets
Focus Subaccount and the Merrill Lynch High Current Income Subaccount are
expected to commence on or about the date of this Prospectus.
Accordingly, no comparable data is available for those Subaccounts.
* Prior to May 1, 1996, known as the Money Market Subaccount.
** Prior to May 1, 1996, known as the Managed Asset Allocation Subaccount.
*** Prior to May 1, 1996, known as the Quest for Value Equity Subaccount.
**** Prior to October 29, 1996, known as the Value Small Cap Subaccount, and
prior to May 1, 1996, known as the Quest for Value Small Cap Subaccount.
***** Prior to May 1, 1996, known as the U.S. Government Securities
Subaccount.
FINANCIAL STATEMENTS
The financial statements of the Mutual Fund Account and PFL and the
independent auditors' reports thereon are in the Statement of Additional
Information which is available free upon request to the Administrative and
Service Office.
HISTORICAL PERFORMANCE DATA
STANDARDIZED PERFORMANCE DATA
From time to time, PFL may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. In addition, PFL may advertise the
effective yield of the Subaccount investing in the TCW Money Market Portfolio
(the "TCW Money Market Subaccount"). These figures will be calculated
according to standardized methods prescribed by the Securities and Exchange
Commission ("SEC"). They will be based on historical earnings and are not
intended to indicate future performance.
- 26 -
<PAGE>
TCW MONEY MARKET SUBACCOUNT
The yield of the TCW Money Market Subaccount for a Policy refers to the
annualized income generated by an investment under a Policy in the Subaccount
over a specified seven-day period. The yield is calculated by assuming that
the income generated for that seven-day period is generated each seven-day
period over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment under a Policy in the Subaccount is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
OTHER SUBACCOUNTS
The yield of a Subaccount of the Mutual Fund Account (other than the TCW
Money Market Subaccount) for a Policy refers to the annualized income
generated by an investment under a Policy in the Subaccount over a specified
thirty-day period. The yield is calculated by assuming that the income
generated by the investment during that thirty-day period is generated each
thirty-day period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount of the Mutual Fund Account refers to return
quotations assuming an investment under a Policy has been held in the
Subaccount for various periods of time including, but not limited to, a period
measured from the date the Subaccount commenced operations. When a Subaccount
has been in operation for one, five, and ten years, respectively, the total
return for these periods will be provided. The total return quotations for a
Subaccount will represent the average annual compounded rates of return that
equate an initial investment of $1,000 in the Subaccount to the redemption
value of that investment as of the first day of each of the periods for which
total return quotations are provided.
The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular Policy. The
yield calculations also do not reflect the effect of any Surrender Charge that
may be applicable to a particular Policy. To the extent that any or all of a
premium tax and/or Surrender Charge is applicable to a particular Policy, the
yield and/or total return of that Policy will be reduced. For additional
information regarding yields and total returns calculated using the standard
formats briefly summarized above, please refer to the Statement of Additional
Information, a copy of which may be obtained from the Administrative and
Service Office upon request.
Based on the method of calculation described in the Statement of Additional
Information, the average annual total returns for periods from inception of
the Subaccounts to December 31, 1996, and for the one and five year periods
ended December 31, 1996 were as follows:
- 27 -
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.40%)
<TABLE>
<CAPTION>
ONE
YEAR FIVE INCEPTION
PERIOD YEARS OF THE
ENDED ENDED SUBACCOUNT SUBACCOUNT
12/31/96 12/31/96 TO 12/31/96 INCEPTION DATE
-------- -------- ----------- -----------------
<S> <C> <C> <C> <C>
SUBACCOUNT
- ----------
TCW Managed Asset Allocation.. 10.80% 9.95% 10.91% April 8, 1991
T. Rowe Price International
Stock(/1/).................. 8.24% 4.68% 4.81% April 8, 1991
Value Equity.................. 16.77% N/A 15.08% May 27, 1993
Dreyfus Small Cap Value....... 18.63% N/A 10.86% May 4, 1993
Dreyfus U.S. Government
Securities.................. -5.07% N/A 3.09% May 9, 1994
T. Rowe Price Equity Income... 12.84% N/A 21.26% January 3, 1995
T. Rowe Price Growth Stock.... 13.72% N/A 24.94% January 3, 1995
Opportunity Value............. N/A N/A -6.56% November 18, 1996
Enhanced Index(/2/)........... N/A N/A N/A --
WRL Growth.................... 10.94% N/A 12.01% July 1, 1992
Merrill Lynch Basic Value
Focus(/2/).................. N/A N/A N/A --
Merrill Lynch Developing
Capital Markets Focus(/2/).. N/A N/A N/A --
Merrill Lynch High Current
Income(/2/)................. N/A N/A N/A --
</TABLE>
- 28 -
<PAGE>
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ONE
YEAR FIVE INCEPTION
PERIOD YEARS OF THE
ENDED ENDED SUBACCOUNT SUBACCOUNT
12/31/96 12/31/96 TO 12/31/96 INCEPTION DATE
SUBACCOUNT -------- -------- ----------- -----------------
<S> <C> <C> <C> <C>
TCW Managed Asset Allocation.. 10.63% 9.79% 10.74% April 8, 1991
T. Rowe Price International
Stock(/1/).................. 8.07% 4.52% 4.65% April 8, 1991
Value Equity.................. 16.59% N/A 14.91% May 27, 1993
Dreyfus Small Cap Value....... 18.38% N/A 10.73% May 4, 1993
Dreyfus U.S. Government
Securities.................. -5.22% N/A 2.93% May 9, 1994
T. Rowe Price Equity Income... 12.71% N/A 21.07% January 3, 1995
T. Rowe Price Growth Stock.... 13.54% N/A 24.75% January 3, 1995
Opportunity Value............. N/A N/A -6.56% November 18, 1996
Enhanced Index(/2/)........... N/A N/A N/A --
WRL Growth.................... 10.79% N/A 11.85% July 1, 1992
Merrill Lynch Basic Value
Focus(/2/).................. N/A N/A N/A --
Merrill Lynch Developing
Capital Markets Focus(/2/).. N/A N/A N/A --
Merrill Lynch High Current
Income(/2/)................. N/A N/A N/A --
</TABLE>
- ----------------------------------
(1) Effective January 1, 1995, Rowe Price-Fleming International, Inc. became
the new adviser to the Global Growth Portfolio. The Portfolio's name
changed to the T. Rowe Price International Stock Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (that
is, non-U.S. companies).
(2) The Enhanced Index Subaccount, the Merrill Lynch Basic Value Focus
Subaccount, the Merrill Lynch Developing Capital Markets Focus Subaccount,
and the Merrill Lynch High Current Income Subaccount are expected to begin
operations on or about the date of this Prospectus, therefore, comparable
information is not available.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and the T.
Rowe Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception
periods would have been lower.
- 29 -
<PAGE>
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.--HYPOTHETICAL DATA
The Merrill Lynch Basic Value Focus Subaccount, the Merrill Lynch Developing
Capital Markets Focus Subaccount, and the Merrill Lynch High Current Income
Subaccounts (the "Merrill Lynch Subaccounts") have not commenced operations
prior to the date of this Prospectus. However, the following is standardized
average annual total return information based on the hypothetical assumption
that those Subaccounts have been available to the PFL Endeavor Variable
Annuity Account since inception of the underlying portfolios.
Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.40%)
<TABLE>
<CAPTION>
10 YEAR OR
SUBACCOUNT ONE YEAR FIVE YEAR INCEPTION
- ---------- -------- --------- ----------
<S> <C> <C> <C>
Merrill Lynch Basic Value Focus.................. 13.88% N/A 13.79%
Merrill Lynch Developing Capital Markets Focus... 3.70% N/A -1.90%
Merrill Lynch High Current Income................ 4.38% 10.42% 9.85%
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.55%)
<CAPTION>
10 YEAR OR
SUBACCOUNT ONE YEAR FIVE YEAR INCEPTION
- ---------- -------- --------- ----------
<S> <C> <C> <C>
Merrill Lynch Basic Value Focus.................. 13.62% N/A 13.69%
Merrill Lynch Developing Capital Markets Focus... 3.54% N/A -2.07%
Merrill Lynch High Current Income................ 4.22% 10.26% 9.69%
</TABLE>
- ----------------------------------
* The performance data for periods prior to the date the Merrill Lynch
Subaccounts commenced operations is based on the performance of the
underlying portfolios and the assumption that the Merrill Lynch Subaccounts
were in existence for the same period as the corresponding portfolios, with
a level of charges equal to those currently assessed against the Subaccount
or against Owners' contract values under the Policies. The Merrill Lynch
Basic Value Fund commenced operations on July 1, 1993; the Merrill Lynch
Developing Capital Markets Focus Fund commenced operations on May 2, 1994;
and the Merrill Lynch High Current Income Fund commenced operations on April
20, 1982. For purposes of the calculation of the performance data prior to
dates of inception of the underlying portfolios, the deductions for the
Mortality and Expense Risk Fee, and Administrative Charge are made on a
monthly basis, rather than a daily basis. The monthly deduction is made at
the beginning of each month and generally approximates the performance which
would have resulted if the Merrill Lynch Subaccounts had actually been in
existence since the inception of the underlying portfolios. Performance data
for periods of less than seven years reflect deduction of the Surrender
Charge.
- 30 -
<PAGE>
WRL GROWTH SUBACCOUNT--HYPOTHETICAL DATA
Prior to July 1, 1992, the WRL Growth Subaccount had not yet commenced
operations. However, the following is standardized average annual total return
information based on the hypothetical assumption that the WRL Growth
Subaccount had been available to the PFL Endeavor Variable Annuity Account
since inception of the WRL Growth Portfolio:
Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.40%)
<TABLE>
<CAPTION>
FIVE YEARS 10 YEARS
ENDED ENDED
SUBACCOUNT 12/31/96 12/31/96
- ---------- ---------- --------
<S> <C> <C>
WRL Growth.................................................. 9.10% 16.19%
</TABLE>
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
FIVE YEARS 10 YEARS
ENDED ENDED
SUBACCOUNT 12/31/96 12/31/96
- ---------- ---------- --------
<S> <C> <C>
WRL Growth.................................................. 8.94% 16.02%
</TABLE>
- ----------------------------------
* The performance data for periods prior to the date the WRL Growth Subaccount
commenced operations (July 1, 1992) is based on the performance of the WRL
Growth Portfolio and the assumption that the WRL Growth Subaccount was in
existence for the same period as the WRL Growth Portfolio, with a level of
charges equal to those currently assessed against the Subaccount or against
Owners' contract values under the Policies. The WRL Growth Portfolio,
commenced operations on October 2, 1986. For purposes of the calculation of
the performance data prior to July 1, 1992, the deductions for the Mortality
and Expense Risk Fee, and Administrative Charge are made on a monthly basis,
rather than a daily basis. The monthly deduction is made at the beginning of
each month and generally approximates the performance which would have
resulted if the Subaccount had actually been in existence since the
inception of the WRL Growth Portfolio. Performance data for periods of less
than seven years reflect deduction of the Surrender Charge.
OPPORTUNITY VALUE AND EQUITY INDEX PORTFOLIOS
The Opportunity Value Portfolio and the Equity Index Portfolio are new and
therefore do not have (in the case of the Opportunity Value Portfolio, no
significant) historical performance data. However, their investment managers
(OpCap Advisors and J.P. Morgan Investment Management, Inc. respectively) have
years of experience managing very similar portfolios with substantially the
same investment objectives and policies. Historical performance data showing
the results the investment managers achieved for those other portfolios is in
the prospectus for the Endeavor Series Trust, which is included with this
Prospectus. See "Performance Information" in the Endeavor Series Trust's
prospectus. That performance information in the Endeavor Series Trust's
prospectus does not take into account the fees
- 31 -
<PAGE>
and charges under the Policy; if those fees and charges were reflected, the
investment returns would be lower.
NON-STANDARDIZED PERFORMANCE DATA
PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Surrender Charge is applicable, and may also make other assumptions such as
the amount invested in a Subaccount, differences in time periods to be shown,
or the effect of partial withdrawals or annuity payments.
The following non-standardized average annual total return figures are based
on the assumption that the Policy is not surrendered, and therefore the
Surrender Charge is not imposed.
AVERAGE ANNUAL TOTAL RETURNS
(ASSUMING NO SURRENDER CHARGE)
Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.40%)
<TABLE>
<CAPTION>
INCEPTION
ONE YEAR FIVE OF THE
PERIOD YEARS SUBACCOUNT
ENDED ENDED TO SUBACCOUNT
SUBACCOUNT 12/31/96 12/31/96 12/31/96 INCEPTION DATE
- ---------- -------- -------- ---------- -----------------
<S> <C> <C> <C> <C>
TCW Managed Asset Allocation... 16.10% 10.18% 11.08% April 8, 1991
T. Rowe Price International
Stock(/1/)................... 13.55% 4.97% 5.05% April 8, 1991
Value Equity................... 22.04% N/A 15.72% May 27, 1993
Dreyfus Small Cap Value........ 23.88% N/A 11.56% May 4, 1993
Dreyfus U.S. Government
Securities................... 0.33% N/A 4.66% May 9, 1994
T. Rowe Price Equity Income.... 18.14% N/A 23.35% January 3, 1995
T. Rowe Price Growth Stock..... 19.01% N/A 26.95% January 3, 1995
Opportunity Value.............. N/A N/A 0.44% November 18, 1996
Enhanced Index(/2/)............ N/A N/A N/A --
WRL Growth..................... 16.24% N/A 12.38% July 1, 1992
Merrill Lynch Basic Value Focus
Fund(/2/).................... N/A N/A N/A --
Merrill Lynch Developing
Capital Markets Focus
Fund(/2/).................... N/A N/A N/A --
Merrill Lynch High Current
Income Fund(/2/)............. N/A N/A N/A --
</TABLE>
- 32 -
<PAGE>
5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.55%)
<TABLE>
<CAPTION>
ONE
YEAR FIVE INCEPTION
PERIOD YEARS OF THE
ENDED ENDED SUBACCOUNT SUBACCOUNT
SUBACCOUNT 12/31/96 12/31/96 TO 12/31/96 INCEPTION DATE
- ---------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C>
TCW Managed Asset Allocation.. 15.93% 10.02% 10.92% April 8, 1991
T. Rowe Price International
Stock(/1/).................. 13.39% 4.81% 4.89% April 8, 1991
Value Equity.................. 21.86% N/A 15.55% May 27, 1993
Dreyfus Small Cap Value....... 23.64% N/A 11.43% May 4, 1993
Dreyfus U.S. Government
Securities.................. 0.18% N/A 4.51% May 9, 1994
T. Rowe Price Equity Income... 18.01% N/A 23.24% January 3, 1995
T. Rowe Price Growth Stock.... 18.83% N/A 26.76% January 3, 1995
Opportunity Value............. N/A N/A 0.44% November 18, 1996
Enhanced Index(/2/)........... --
WRL Growth.................... 16.09% N/A 12.22% July 1, 1992
Merrill Lynch Basic Value
Focus Fund(/2/)............. N/A N/A N/A --
Merrill Lynch Developing
Capital Markets Focus
Fund(/2/)................... N/A N/A N/A --
Merrill Lynch High Current
Income Fund(/2/)............ N/A N/A N/A --
</TABLE>
- ----------------------------------
(1) Effective January 1, 1995, Rowe Price-Fleming International, Inc. became
the new adviser to the Global Growth Portfolio. The Portfolio's name
changed to the T. Rowe Price International Stock Portfolio and the
Portfolio's shareholders approved a change in investment objective from
investments in small capitalization companies on a global basis to
investments in a broad range of companies on an international basis (that
is, non-U.S. companies).
(2) The Enhanced Index Subaccount, the Merrill Lynch Basic Value Focus Fund
Subaccount, the Merrill Lynch Developing Capital Markets Focus Subaccount,
and the Merrill Lynch High Current Income Subaccount are expected to begin
operations on or about the date of this Prospectus, therefore, comparable
information is not available.
The figures for the "five year" and "from inception" periods in the above
tables reflect waiver of advisory fees and reimbursement of other expenses for
all portfolios except the T. Rowe Price Equity Income Portfolio and the T.
Rowe Price Growth Stock Portfolio. In the absence of such waivers, the average
annual total return figures above from the five year and from inception
periods would have been lower.
- 33 -
<PAGE>
All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained from the
Administrative and Service office upon request.
PUBLISHED RATINGS
PFL may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is to reflect the financial
strength and/or claims-paying ability of PFL and should not be considered as
bearing on the investment performance of assets held in the Mutual Fund
Account or of the safety or riskiness of an investment in the Mutual Fund
Account. Each year the A.M. Best Company reviews the financial status of
thousands of insurers, culminating in the assignment of Best's ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. In addition, the claims-paying ability of
PFL as measured by Standard & Poor's Insurance Ratings Services, Moody's
Investors Service or Duff & Phelps Credit Rating Co. may be referred to in
advertisements or sales literature or in reports to Owners. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. Claims-
paying ability ratings do not refer to an insurer's ability to meet non-policy
obligations (i.e., debt/commercial paper).
PFL LIFE INSURANCE COMPANY
PFL Life Insurance Company ("PFL"), 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499-0001, is a stock life insurance company. It was incorporated under
the name NN Investors Life Insurance Company, Inc. under the laws of the State
of Iowa on April 19, 1961. It is principally engaged in the sale of life
insurance and annuity policies, and is licensed in the District of Columbia,
Guam, and in all states except New York. As of December 31, 1996, PFL had
assets of approximately $7.9 billion. PFL i s a wholly-owned indirect
subsidiary of AEGON USA, Inc., which conducts substantially all of its
operations through subsidiary companies engaged in the insurance business or
in providing non-insurance financial services. All of the stock of AEGON USA,
Inc . is indirectly owned by AEGON n.v. of the Netherlands. AEGON n.v., a
holding company, conducts its business through subsidiary companies engaged
primarily in the insurance business.
- 34 -
<PAGE>
THE ENDEAVOR ACCOUNTS
Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Fixed Account, or to a combination of these Accounts.
THE MUTUAL FUND ACCOUNT
The PFL Endeavor Variable Annuity Account comprises a portion of the PFL
Endeavor VA Separate Account of PFL Life Insurance Company (the "Mutual Fund
Account"). The PFL Endeavor VA Separate Account was established as a separate
investment account under the laws of the State of Iowa on January 19, 1990.
The Mutual Fund Account receives and invests the Premium Payments under the
Policies that are allocated to it for investment in shares of certain
portfolios of the Merrill Lynch Variable Series Funds, Inc., the Endeavor
Series Trust, and the WRL Growth Portfolio.
The Mutual Fund Account currently is divided into fourteen Subaccounts.
Additional Subaccounts may be established in the future at the discretion of
PFL. Each Subaccount invests exclusively in shares of one of the Portfolios of
the Underlying Funds. Under Iowa law, the assets of the Mutual Fund Account
are owned by PFL, but they are held separately from the other assets of PFL.
To the extent that these assets are attributable to the Policy Value of the
Policies, these assets are not chargeable with liabilities incurred in any
other business operation of PFL. Income, gains, and losses incurred on the
assets in the Subaccounts of the Mutual Fund Account, whether or not realized,
are credited to or charged against that Subaccount without regard to other
income, gains or losses of any other Account or Subaccount of PFL. Therefore,
the investment performance of any Subaccount is entirely independent of the
investment performance of PFL's general account assets or any other Account or
Subaccount maintained by PFL.
The Mutual Fund Account is registered with the SEC under the 1940 Act as a
unit investment trust and meets the definition of a separate account under
federal securities laws. However, the SEC does not supervise the management or
the investment practices or policies of the Mutual Fund Account or PFL.
Underlying Funds. The Mutual Fund Account will invest exclusively in shares
of Endeavor Series Trust and the Growth Portfolio of the WRL Series Fund, Inc.
(collectively the "Underlying Funds"). The WRL Series Fund, Inc., and the
Endeavor Series Trust are each a series-type mutual fund registered with the
SEC under the 1940 Act as an open-end, diversified management investment
company. The registration of the Underlying Funds does not, however, involve
supervision of the management or investment practices or policies of the
Underlying Funds by the SEC.
The Underlying Funds currently issue shares of the following Portfolios:
Three portfolios under the Merrill Lynch Variable Series Funds, Inc.: the
Merrill Lynch Basic Value Focus Fund, the Merrill Lynch Developing Capital
Markets Focus Fund, and the Merrill Lynch High Current Income Fund; ten
portfolios under the Endeavor Series Trust, the TCW Managed Asset
- 35 -
<PAGE>
Allocation, the TCW Money Market Portfolio, the T. Rowe Price International
Stock Portfolio, the Value Equity Portfolio, the Dreyfus Small Cap Value
Portfolio, the Dreyfus U.S. Government Securities Portfolio, the T. Rowe Price
Equity Income Portfolio, the T. Rowe Price Growth Stock Portfolio, the
Opportunity Value Portfolio, and the Enhanced Index Portfolio; and one
portfolio under the WRL Series Fund, Inc., the WRL Growth Portfolio, managed
by Janus Capital Corporation. The assets of each Portfolio are held separate
from the assets of the other Portfolios, and each Portfolio has its own
distinct investment objectives and policies. Each Portfolio operates as a
separate investment fund, and the income or losses of one Port folio generally
have no effect on the investment performance of any other Portfolio.
Merrill Lynch Asset Management, L.P. is the Adviser for the portfolios of
the Merrill Lynch Variable Series Funds, Inc. including the Merrill Lynch
Basic Value Focus Fund, the Merrill Lynch Developing Capital Markets Focus
Fund, and the Merrill Lynch High Current Income Fund.
Endeavor Investment Advisers, an investment adviser registered with the SEC
under the Investment Advisers Act of 1940, is the Endeavor Series Trust's
manager. Endeavor Investment Advisers selects and contracts with advisers for
investment services for the Portfolios of Endeavor Series Trust, reviews the
advisers' activities, and otherwise performs administerial and managerial
functions for the Endeavor Series Trust. Six advisers (the "Advisers") each
perform investment advisory services for particular Portfolios of Endeavor
Series Trust.
TCW Funds Management, Inc. (a wholly-owned subsidiary of The TCW Group,
Inc.), is the Adviser for the TCW Managed Asset Allocation Portfolio and the
TCW Money Market Portfolio. T. Rowe Price Associates, Inc. is the Adviser for
the T. Rowe Price Equity Income Portfolio and the T. Rowe Price Growth Stock
Portfolio. Rowe Price-Fleming International, Inc. (a joint venture between T.
Rowe Price Associates, Inc. and Robert Fleming Holdings Limited), is the
Adviser for the T. Rowe Price International Stock Portfolio. OpCap Advisors
(formerly known as Quest for Value Advisors), is the Adviser for the Value
Equity Portfolio and the Opportunity Value Portfolio. J.P. Morgan Investment
Management Inc. ("Morgan") (a wholly owned subsidiary of J.P. Morgan and Co.
Incorporated) is the Adviser for the Enhanced Index Portfolio. The Dreyfus
Corporation (a wholly owned subsidiary of Mellon Bank, N.A.), as successor to
The Boston Company Asset Management, Inc., is the Adviser for the Dreyfus U.S.
Government Securities Portfolio, and the Dreyfus Small Cap Value Portfolio.
WRL Investment Management, Inc., a subsidiary of Western Reserve Life
Assurance Co. of Ohio, (an affiliate of PFL), is the Adviser for the WRL
Series Fund, Inc. and contracts with Janus Capital Corporation (also an
"Adviser") as a sub-adviser to the WRL Growth Portfolio.
The Adviser of a Portfolio is responsible for selecting the investments of
the Portfolio consistent with the investment objectives and policies of the
Portfolio, and will conduct securities trading for the Portfolio. All Advisers
- 36 -
<PAGE>
are investment advisers registered with the SEC under the Investment Advisers
Act of 1940. The investment objectives of each Portfolio are summarized as
follows:
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
Merrill Lynch Basic Value Focus Fund--seeks capital appreciation and,
secondarily, income by investment in securities, primarily equities, that
management of the Fund believes are undervalued and therefore represent basic
investment value.
Merrill Lynch Developing Capital Markets Focus Fund--seeks long-term capital
appreciation by investing in securities, principally equities, of issuers in
countries having smaller capital markets. Investing on an international basis
involves special considerations. Investing in smaller capital markets entails
the risk of significant volatility in the Fund's security prices. See "Other
Portfolio Strategies-Foreign Securities" in the Merrill Lynch Variable Series
Funds, Inc. prospectus.
Merrill Lynch High Current Income Fund--seeks as a primary objective high a
level of current income as is consistent with its investment policies and
prudent investment management, and as a secondary objective capital
appreciation to the extent consistent with its primary objective. The Fund
invests principally in fixed-income securities that are rated in the lower
rating categories of the established rating services or in unrated securities
of comparable quality. These securities (known as "junk bonds") present
special risks. Because investment in such high-yield securities entail
relatively greater risk of loss of income or principal, an investment in the
High Current Income Fund may not be appropriate as the exclusive investment to
fund the Contracts for all Contract Owners. See "Risks of High Yield
Securities" in the Merrill Lynch Variable Series Funds, Inc. prospectus.
ENDEAVOR SERIES TRUST.
TCW Money Market Portfolio--seeks current income, preservation of capital
and maintenance of liquidity through investment in short-term money market
securities. The Portfolio seeks to maintain a constant net asset value of
$1.00 per share although no assurances can be given that such constant net
asset value will be maintained.
TCW Managed Asset Allocation Portfolio--seeks high total return through a
managed asset allocation portfolio of equity, fixed income and money market
securities.
T. Rowe Price International Stock Portfolio--seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
Value Equity Portfolio--seeks long-term capital appreciation through
investment in securities (primarily equity securities) of companies that are
believed by the Portfolio's Adviser to be undervalued in the marketplace in
relation to factors such as the companies' assets or earnings.
- 37 -
<PAGE>
Dreyfus Small Cap Value Portfolio--seeks capital appreciation through
investments in a diversified portfolio consisting primarily of equity
securities of companies with a median capitalization of approximately $750
million, provided that under normal market conditions at least 75% of the
Portfolio's investments will be in equity securities of companies with
capitalizations at the time of purchase between $150 million and $1.5 billion.
Dreyfus U.S. Government Securities Portfolio--seeks as high a level of total
return as is consistent with prudent investment strategies by investing under
normal circumstances at least 65% of its assets in debt obligations and
mortgage-backed securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
T. Rowe Price Equity Income Portfolio--seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend paying
stocks of established companies.
T. Rowe Price Growth Stock Portfolio--seeks long-term growth of capital and
to increase dividend income through investment primarily in common stocks of
well established growth companies.
Opportunity Value Portfolio--seeks growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based upon the Portfolio
Adviser's assessment of relative values.
Enhanced Index Portfolio--seeks to earn a total return modestly in excess of
the total return performance of the S&P 500 Composite Stock Index (the "S&P
500 Index") while maintaining a volatility of return similar to the S&P 500
Index.
WRL SERIES FUND, INC.
WRL Growth Portfolio managed by Janus Capital Corporation--seeks growth of
capital. At most times, this Portfolio will be invested primarily in equity
securities which are selected solely for their capital growth potential;
investment income is not a consideration.
THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE.
MORE DETAILED INFORMATION, INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES AND A DESCRIPTION OF RISKS INVOLVED IN
INVESTING IN EACH OF THE PORTFOLIOS AND OF EACH PORTFOLIO'S FEES AND EXPENSES
IS CONTAINED IN THE PROSPECTUSES FOR THE UNDERLYING FUNDS, CURRENT COPIES OF
WHICH ARE ATTACHED TO THIS PROSPECTUS. INFORMATION CONTAINED IN THE UNDERLYING
FUNDS' PROSPECTUSES SHOULD BE READ CAREFULLY BEFORE INVESTING IN A SUBACCOUNT
OF THE MUTUAL FUND ACCOUNT.
PFL may receive expense reimbursements or other revenues from the Underlying
Fund or their investment advisors.
- 38 -
<PAGE>
An investment in the Mutual Fund Account, and in any Subaccount or
Portfolio, including the TCW Money Market Portfolio and the Dreyfus U.S.
Government Securities Portfolio, is not insured or guaranteed by the U.S.
government or any government agency.
Addition, Deletion, or Substitution of Investments. PFL cannot and does not
guarantee that any of the Portfolios will always be available for Premium
Payments, allocations, or transfers. PFL retains the right, subject to any
applicable law, to make certain changes in the Mutual Fund Account and its
investments. PFL reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Underlying Funds, or of another registered open-end management investment
company for the shares of any Portfolio, if the shares of the Portfolio are no
longer available for investment or if, in PFL's judgment, investment in any
Portfolio would be inappropriate in view of the purposes of the Mutual Fund
Account. To the extent required by the 1940 Act, substitutions of shares
attributable to an Owner's interest in a Subaccount will not be made without
prior notice to the Owner and the prior approval of the SEC. Nothing contained
herein shall prevent the Mutual Fund Account from purchasing other securities
for other series or classes of variable annuity policies, or from effecting an
exchange between series or classes of variable annuity policies on the basis
of requests made by Owners.
New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio or
other investment vehicle. PFL may also eliminate one or more Subaccounts if,
in its sole discretion, marketing, tax, investment or other conditions warrant
such change. In the event any Subaccount is eliminated, PFL will notify Owners
and request a reallocation of the amounts invested in the eliminated
Subaccount. If no such reallocation is provided by the Owner, PFL will
reinvest the amounts invested in the eliminated Subaccount in the Subaccount
that invests in the TCW Money Market Portfolio (or in a similar portfolio of
money market instruments) or in another Subaccount, if appropriate.
In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Policies,
the Mutual Fund Account may be (i) operated as a management company under the
1940 Act or any other form permitted by law, (ii) deregistered under the 1940
Act in the event such registration is no longer required or (iii) combined
with one or more other separate accounts. To the extent permitted by
applicable law, PFL also may transfer the assets of the Mutual Fund Account
associated with the Policies to another account or accounts.
- 39 -
<PAGE>
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy and the Mutual Fund Account. For more complete details
regarding the Fixed Account, see the Policy itself.
Premium Payments allocated and amounts transferred to the Fixed Account
become part of the general account of PFL, which supports insurance and
annuity obligations. Interests in the general account have not been registered
under the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the 1940 Act. Accordingly, neither
the general account nor any interests therein are generally subject to the
provisions of the 1933 or 1940 Acts and PFL has been advised that the staff of
the SEC has not reviewed the disclosures in this Prospectus which relate to
the Fixed Account.
The Fixed Account is part of the general assets of PFL, other than those in
the Mutual Fund Account or in any other segregated asset account. The Policy
Owner may allocate Premium Payments to the Fixed Account at the time of
Premium Payment or by subsequent transfers from the Mutual Fund Account.
Instead of the Policy Owner bearing the investment risk, as is the case for
Policy Value in the Mutual Fund Account, PFL bears the full investment risk
for all Policy Value in the Fixed Account. PFL has sole discretion to invest
the assets of its general account, including the Fixed Account, subject to
applicable law. While PFL bears the full investment risk for all Policy Value
in the Fixed Account, the Owner bears the risk that PFL would not be able to
satisfy its contractual obligations.
Premium payments applied to and any amounts transferred to the Fixed Account
will reflect a fixed interest rate. The interest rates PFL sets will be
credited for increments of at least one year measured from each premium
payment or transfer date. These rates will never be less than a minimum
effective annual interest rate of 3%. Prior versions of the Policy and
Policies offered in certain states will have the minimum effective annual
interest rates specified in the Policy.
Upon Surrender of the Policy, the Owner will receive at least the Premium
Payments applied to, less prior Partial Withdrawals and transfers from, the
Fixed Account.
Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options" or "GPOs") into which Premium Payments may be
paid or amounts transferred. For example, PFL may, from time to time, offer
Guaranteed Period Options for periods of 1, 5, or 7 years. The current
interest rate PFL sets for funds placed in each Guaranteed Period Option will
apply to those funds until the end of the Guaranteed Period. At the end of the
Guaranteed Period, the Premium Payment or amount transferred into the
Guaranteed Period Option less any partial withdrawals or transfers from that
Guaranteed Period Option, including the effect of any Excess Interest
Adjustment or Surrender Charge due to partial withdrawals or transfers prior
to the end of the Guaranteed Period, plus accrued interest, will be rolled
into a new Guaranteed Period Option.
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The Owner may choose the Guaranteed Period Option into which the funds are
to be placed by giving PFL notice within 30 days before the end of the
expiring Guaranteed Period. In the absence of such election, the new
Guaranteed Period will be the same as the expiring one. If that Guaranteed
Period Option is no longer offered by PFL, the next shorter Guaranteed Period
Option then being offered will be used. PFL reserves the right, for new
Premium Payments, transfers, or rollovers, whether or not to offer any
Guaranteed Period Option. PFL will, however, always offer at least a one-year
Guaranteed Period Option.
Surrenders, partial withdrawals and transfers from a Guaranteed Period
Option prior to the end of the Guaranteed Period may be subject to an Excess
Interest Adjustment. An Excess Interest Adjustment may result in a loss of
interest credited, but the Owner's Fixed Account Policy Values will always be
credited with an effective annual interest rate of at least 3%. Surrender
charges, if any, are applied after the Excess Interest Adjustment. However,
upon full surrender the Owner is guaranteed return of Premium Payments to the
Fixed Account, less Partial Withdrawals and transfers from the Fixed Account.
(See "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment (EIA)," p.
50.)
For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
or transferred out first; the next oldest Premium Payment plus interest is
considered to be transferred out next, and so on (this is a "first-in, first-
out" procedure).
Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).
This option will have a one-year interest rate guarantee and will only be
available under a Dollar Cost Averaging (DCA) program. The current interest
rate PFL credits for the DCA Fixed Account may differ from the rates credited
on other Guaranteed Period Option(s) in the Fixed Account.
Prior to the Annuity Commencement Date, the Owner can instruct PFL to make
automatic transfers from the Dollar Cost Averaging Fixed Account to one or
more subaccounts of the Mutual Fund Account. Transfers must be scheduled for
at least six but not more than 24 months, or for at least four, but not more
than eight quarters. No changes to the automatic amount transferred will be
allowed, but changes can be made to the Subaccounts to which these transfers
are allocated. Dollar Cost Averaging transfers from the Dollar Cost Averaging
Fixed Account will not be subject to an Excess Interest Adjustment. (See
"Dollar Cost Averaging (DCA)" p. 44.)
Guaranteed Interest Rates. PFL periodically will establish an applicable
Guaranteed Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Guaranteed Interest Rate may be changed by PFL frequently or infrequently
depending on interest rates on investments available to PFL and other factors
as described below, but once established,
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the rate will be guaranteed for the entire duration of the Guaranteed Period.
However, except for limited situations, any amount withdrawn or transferred
will be subject to an Excess Interest Adjustment, except at the end of the
Guaranteed Period Option. (See "Excess Interest Adjustment (EIA)," p. 50.)
The Guaranteed Interest Rate will not be less than 3% per year, regardless
of any application of the Excess Interest Adjustment. PFL has no specific
formula for determining the rate of interest that it will declare as a
Guaranteed Interest Rate, as this rate will be reflective of interest rates
available on the types of debt instruments in which PFL intends to invest
amounts allocated to the Fixed Account. In addition, PFL's management may
consider other factors in determining Guaranteed Interest Rates for a
particular Guaranteed Period including but not limited to: regulatory and tax
requirements; sales commissions and administrative expenses borne by the
Company; general economic trends; and competitive factors. There is no
obligation to declare a rate in excess of 3%; the Policy Owner assumes the
risk that declared rates will not exceed 3%. PFL has complete discretion to
declare any rate of at least 3%, regardless of market interest rates, the
amounts earned by PFL on its investments, or any other factors.
PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE
GUARANTEED INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE GUARANTEED
EFFECTIVE INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.
TRANSFERS
An Owner can transfer Policy Values from one Investment Option to another
within certain limits. In addition, transfers (from the Guaranteed Period
Option(s) of the Fixed Account) of an amount equal to the interest credited
(that is, "interest transfers") are not subject to an Excess Interest
Adjustment, but may affect the interest crediting rates on the remaining funds
in the Guaranteed Period Option.
Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by the Owner, to the
Administrative and Service Office. The minimum amount which may be transferred
is the lesser of $500 or the entire Subaccount or Guaranteed Period Option
Value. If the Subaccount or Guaranteed Period Option Value remaining after a
transfer is less than $500, PFL reserves the right, at its discretion, either
to deny the transfer request or to include that amount as part of the
transfer.
If the Excess Interest Adjustment (at time of a transfer request) from any
Guaranteed Period Option is a negative adjustment, then the maximum amount of
Policy Value that can be transferred is 25% of the Guaranteed
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Period Option's Policy Value, less amounts previously transferred out of that
Guaranteed Period Option during the current Policy Year. No maximum will apply
to amounts transferred from any Guaranteed Period Option if the Excess
Interest Adjustment is a positive adjustment at the time of transfer. The
Owner must notify PFL within 30 days prior to the end of any expiring
Guaranteed Period Option to instruct PFL regarding any transfers to be
performed at that time.
Transfers prior to the Annuity Commencement Date currently may be made
without charge as often as the Owner wishes, subject to the minimum amount
specified above. PFL reserves the right to limit these transfers to no more
than 12 per Policy Year in the future or to charge up to $10 per transfer in
excess of 12 per Policy Year.
The Owner may transfer an amount up to the interest credited in any of the
Guaranteed Period Option(s) to any Subaccount(s) of the Mutual Fund Account
prior to the end of the Guaranteed Period. No Excess Interest Adjustment will
apply to such interest transfers. Interest transfers may affect the interest
crediting rates on the remaining funds in the Guaranteed Period Option. This
is because interest transfers may have the effect of reducing or eliminating
principal amounts in the Guaranteed Period Options since, for purposes of
crediting interest, PFL considers the oldest Premium Payment or transfer into
the Guaranteed Period Option, plus interest allocable to that particular
Premium Payment or transfer, to be withdrawn first.
Transfers out of the Dollar Cost Averaging Fixed Account, except through an
automatic Dollar Cost Averaging program, are not allowed.
After the Annuity Commencement Date, transfers out of the Fixed Account are
not permitted, and transfers between Subaccounts or from Subaccounts to the
Fixed Account may be limited to once per Policy Year. (See "DISTRIBUTIONS
UNDER THE POLICY--Annuity Payment Options," p. 53.)
Transfers may be made by telephone, subject to the provisions described
below under "Telephone Transactions."
REINSTATEMENTS
Requests are occasionally received by PFL to reinstate funds which had been
transferred to another insurance company pursuant to a Section 1035 exchange
or trustee-to-trustee transfer under the Code. In this situation PFL will
require the Owner to replace the same total amount of money in the applicable
Subaccounts or Fixed Accounts as taken from them to effect the exchange. The
total dollar amount of funds reapplied to the Separate Account will be used to
purchase a number of Accumulation Units available for each Subaccount based on
the Accumulation Unit prices at the date of reinstatement (within two days
after the date the funds are received by PFL). The number of Accumulation
Units available on the reinstatement date may be more or less than the number
of Units surrendered for the exchange. Amounts reapplied to the Fixed Account
will receive the effective
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annual interest rate they would otherwise have received, had they not been
withdrawn. However, an adjustment will be made to the amount reapplied to
compensate PFL for the additional interest credited during the period of time
between the withdrawal and the reapplication of the funds. Owners should
consult a qualified tax adviser concerning the tax consequences of any Section
1035 exchanges or reinstatements.
TELEPHONE TRANSACTIONS
An Owner (or the Owner's designated account executive) may make transfers
and/or change the allocation of subsequent Premium Payments by telephone.
Telephone transfers are only allowed if the "Telephone Transfer/Reallocation
Authorization" box in the Policy application has been checked or telephone
transfers have been subsequently authorized in writing on a form provided by
PFL by the Owner. PFL will not be liable for following instructions
communicated by telephone that it reasonably believes to be genuine. PFL will
employ reasonable procedures, however, to confirm that instructions
communicated by telephone are genuine. If PFL fails to do so, it may be liable
for any losses due to unauthorized or fraudulent instructions. All telephone
requests will be recorded on voice recorder equipment for the protection of
the Owner. The Owner, when making telephone requests, will be required to
provide a social security number or other information for identification
purposes.
Telephone requests must be received at the Administrative and Service Office
no later than 3:00 p.m. Central time in order to assure same day pricing of
the transaction.
At its discretion, PFL may discontinue the telephone transaction privilege
at any time as to some or all Owners, and PFL may require written confirmation
of any transaction request.
DOLLAR COST AVERAGING (DCA)
Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, the Owner can instruct PFL to automatically transfer a specified dollar
amount from the Dollar Cost Averaging Fixed Account Option, the TCW Money
Market Subaccount or the Dreyfus U.S. Government Securities Subaccount to any
other Subaccount or Subaccounts of the Mutual Fund Account. The automatic
transfers can occur monthly or quarterly and will occur on the 28th day of the
month. If the Dollar Cost Averaging request is received prior to the 28th day
of any month, the first transfer will occur on the 28th day of that month. If
the Dollar Cost Averaging request is received on or after the 28th day of any
month, the first transfer will occur on the 28th day of the following month.
The amount transferred each time must be at least $500. A minimum of six
monthly or four quarterly transfers are required and a maximum of 24 monthly
or eight quarterly transfers are allowed from the Dollar Cost Averaging Fixed
Account.
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Dollar Cost Averaging results in the purchase of more units when the Unit
Value is low, and fewer units when the Unit Value is high. However, there is
no guarantee that the Dollar Cost Averaging program will result in higher
Policy Values or will otherwise be successful. Dollar Cost Averaging requires
regular investment regardless of fluctuating prices and does not guarantee
profits nor prevent losses in a declining market. Before electing this option,
individuals should consider their financial ability to continue transfers
through periods of both high and low price levels.
The Owner may request Dollar Cost Averaging when purchasing the Policy or at
a later date. The program will terminate when the amount in the Dollar Cost
Averaging Fixed Account, the TCW Money Market Subaccount or the Dreyfus U.S.
Government Securities Subaccount is insufficient for the next transfer, at
which time the entire remaining balance is transferred.
Except for automatic Dollar Cost Averaging transfers from the Dollar Cost
Averaging Fixed Account Option the Owner may increase or decrease the amount
of the transfers by sending PFL a new Dollar Cost Averaging form. The Owner
may discontinue the program at any time by sending a Written Notice to the
Administrative and Service Office. The minimum number of transfers (6 monthly
or 4 quarterly) requirement must be satisfied each time the Dollar Cost
Averaging program is restarted following termination of the program for any
reason. There is no charge for participation in the Dollar Cost Averaging
program.
ASSET REBALANCING
Prior to the Annuity Commencement Date the Owner may instruct PFL to
automatically transfer amounts among the Subaccounts of the Mutual Fund
Account on a regular basis to maintain a desired allocation of the Policy
Value among the various Subaccounts offered. Rebalancing will occur on a
monthly, quarterly, semi-annual, or annual basis, beginning on a date selected
by the Owner. If no date is selected, the account will be rebalanced on the
day of the month the Policy was effective. The Owner must select the
percentage of the Policy Value desired in each of the various Subaccounts
offered (totaling 100%). Any amounts in the Fixed Account are ignored for
purposes of asset rebalancing. Rebalancing may be started, stopped, or changed
at any time, except that rebalancing will not be available when:
(1) Automatic Dollar Cost Averaging transfers are being made; or
(2) any other transfer is requested.
There is no charge for participation in the asset rebalancing program.
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THE POLICY
The Endeavor Variable Annuity Policy is a Flexible Premium Variable Annuity
Policy. The rights and benefits under the Policy are summarized below;
however, the description of the Policy contained in this Prospectus is
qualified in its entirety by reference to the Policy itself, a copy of which
is available upon request from PFL. The Policy may be purchased on a non-tax
qualified basis ("Nonqualified Policy"). The Policy may also be purchased and
used in connection with retirement plans or individual retirement accounts
that qualify for favorable federal income tax treatment ("Qualified Policy").
POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS
Before it will issue a Policy, PFL must receive a completed Policy
application or transmittal form and a minimum initial Premium Payment of
$5,000 for a Nonqualified Policy, or $1,000 for a Qualified Policy. There is
no minimum initial Premium Payment required for tax deferred 403(b) annuity
purchases, any amount selected by the Owner in such case, up to the maximum
total premium payment allowed by PFL, may be used to start a Policy. The
initial Premium Payment for tax deferred 403(b) purchases must be received
within 90 days following the Policy Date, otherwise the Policy will be
canceled. The initial Premium Payment is the only Premium Payment required to
be paid under a Policy. A Policy ordinarily will be issued only in respect of
Annuitants Age 0 through 80. Acceptance or declination of an application shall
be based on PFL's underwriting standards, and PFL reserves the right to reject
any application or Premium Payment based on those underwriting standards.
If the application or transmittal form can be accepted in the form received,
the initial Premium Payment will be credited to the Policy Value within two
Business Days after the later of receipt of the information needed to issue
the Policy or receipt of the initial Premium Payment. If the initial Premium
Payment cannot be credited because the application or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay and the initial Premium
Payment will be returned at that time unless the applicant consents to PFL's
retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled.
The date on which the initial Premium Payment is credited to the Policy
Value is the Policy Date. The Policy Date is the date used to determine Policy
Years and Policy Anniversaries.
All checks or drafts for Premium Payments should be made payable to PFL Life
Insurance Company and sent to the Administrative and Service Office. The Death
Benefit will not take effect until the Premium Payment is received and any
check or draft for the Premium Payment is honored.
Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, the Owner may make additional
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Premium Payments at any time, and in any frequency. The minimum additional
Premium Payment under both a Nonqualified Policy and a Qualified Policy is
$50. Additional Premium Payments will be credited to the Policy and added to
the Policy Value as of the Business Day when the premium and required
information are received.
Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of PFL is $1,000,000.
Allocation of Premium Payments. An Owner must allocate Premium Payments to
one or more of the Investment Options. The Owner must specify the initial
allocation in the Policy application or transmittal form. This allocation will
be used for Subsequent Additional Premium Payments unless the Owner requests a
change of allocation. All allocations must be made in whole percentages and
must total 100%. If Premium Payments are allocated to the Dollar Cost
Averaging Fixed Account, directions regarding the Subaccount(s) to which
transfers are to be made must be specified on the Application or other proper
Written Request. If the Owner fails to specify how Premium Payments are to be
allocated, the Premium Payment(s) cannot be accepted.
The Owner may change the allocation instructions for future subsequent
additional Premium Payments by sending Written Notice, signed by the Owner, to
PFL's Administrative and Service Office, or by telephone (subject to the
provisions described under "Telephone Transactions," p. 44.) The allocation
change will apply to Premium Payments received after the date the Written
Notice or telephone request is received.
Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.
POLICY VALUE
On the Policy Date, the Policy Value equals the initial Premium Payment.
Thereafter, the Policy Value equals the sum of the values in the Mutual Fund
Account and the Fixed Account. The Policy Value will increase by: (1) any
Subsequent Additional Premium Payments received by PFL; (2) any increases in
the Policy Value due to investment results of the selected Subaccount(s); (3)
any positive Excess Interest Adjustments on transfers, and (4) interest
credited in the Fixed Account. The Policy Value will decrease by (1) any
surrenders, including applicable Excess Interest Adjustments and/or Surrender
Charges; (2) any decreases in the Policy Value due to investment results of
the selected Subaccounts; (3) the charges and deductions imposed by PFL; and
(4) any negative Excess Interest Adjustments on transfers.
The Policy Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Subaccount(s), as
well as the deductions for charges. A Valuation Period is
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the period between successive Business Days. It begins at the close of
business on each Business Day and ends at the close of business on the next
succeeding Business Day. A Business Day is each day that the New York Stock
Exchange is open for business. Holidays are generally not Business Days.
The Mutual Fund Account Value. When a Premium Payment is allocated or an
amount is transferred to a Subaccount of the Mutual Fund Account, it is
credited to the Policy Value in the form of Accumulation Units. Each
Subaccount of the Mutual Fund Account has a distinct Accumulation Unit value
(the "Unit Value"). The number of Accumulation Units credited is determined by
dividing the Premium Payment or amount transferred by the Unit Value of the
Subaccount as of the end of the Valuation Period during which the allocation
is made. When amounts are transferred out of, or surrendered or withdrawn from
a Subaccount, Accumulation Units are canceled or redeemed in a similar manner.
For each Subaccount, the Unit Value for a given Business Day is based on the
net asset value of a share of the corresponding Portfolio of the Underlying
Funds. Therefore, the Unit Values will fluctuate from day to day based on the
investment experience of the corresponding Portfolio. The determination of
Subaccount Unit Values is described in detail in the Statement of Additional
Information.
AMENDMENTS
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No registered representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of the
Code, regulations or published rulings. An Owner can refuse such a change by
giving Written Notice, but a refusal may result in adverse tax consequences.
NON-PARTICIPATING POLICY
The Policy does not participate or share in the profits or surplus earnings
of PFL. No dividends are payable on the Policy.
DISTRIBUTIONS UNDER THE POLICY
SURRENDERS
Prior to the Annuity Commencement Date, the Owner may surrender all or a
portion of the Cash Value in exchange for a cash payment from PFL. The Cash
Value is the Policy Value less any applicable Surrender Charge plus or minus
any Excess Interest Adjustments. (See "Annuity Payment Options," p. 53.) The
Policy cannot be surrendered after the Annuity Commencement Date. (See
"Annuity Payments," p. 51.)
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When requesting a partial withdrawal ($500 minimum), the Owner must tell PFL
how the withdrawal is to be allocated from among various Guaranteed Period
Options of the Fixed Account and/or the Subaccount(s) of the Mutual Fund
Account. If the Owner's request for a partial withdrawal from a Guaranteed
Period Option of the Fixed Account is greater than the Cash Value of that
Guaranteed Period Option, PFL will pay the Owner the amount of the Cash Value
of that Guaranteed Period Option. If no allocation instructions are given, the
withdrawal will be deducted from each Investment Option in the same proportion
that the Policy Owner's interest in each Investment Option bears to the
Policy's total Policy Value. PFL reserves the right to defer payment of the
Cash Value from the Fixed Account for up to six months.
Beginning in the second Policy Year, an Owner may request a partial
withdrawal of up to 10% of the Policy Value at the time of withdrawal without
an Excess Interest Adjustment and without a Surrender Charge if no withdrawal
has been made in the current Policy Year ("10% Withdrawals"). Amounts
withdrawn from the Policy in excess of the 10% Withdrawal or withdrawn in the
same Policy Year as a previous 10% Withdrawal (and all surrenders in the first
Policy Year) are subject to the Excess Interest Adjustment and to the
Surrender Charge. Neither a Surrender Charge nor an Excess Interest Adjustment
will be assessed if the withdrawal is necessary to meet the minimum
distribution requirements for that Policy specified by the Code for tax-
qualified plans.
10% Withdrawals will reduce the Policy Value by the amount withdrawn.
Amounts requested in excess of the 10% Withdrawal are Excess Partial
Withdrawals. Excess Partial Withdrawals will reduce the Policy Value by an
amount equal to (X-Y + Z) where:
X = Excess Partial Withdrawal
Y = Excess Interest Adjustment applicable to the Excess Partial Withdrawal
Z = Surrender Charge on X minus Y.
For a discussion of the Surrender Charge, see "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 60. For a discussion of the Excess Interest Adjustment,
see "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment (EIA)," p. 50,
and Appendix A.
Since the Owner assumes the investment risk with respect to Premium Payments
allocated to the Mutual Fund Account, and because partial withdrawals may be
subject to an Excess Interest Adjustment and to a Surrender Charge, and
possibly income taxes or premium taxes, the total amount paid upon total
surrender of the Cash Value (taking any prior surrenders into account) may be
more or less than the total Premium Payments made. Following a surrender of
the total Cash Value, or at any time the Policy Value is zero, all rights of
the Owner and Annuitant will terminate.
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In addition to the Excess Interest Adjustment and Surrender Charge and any
applicable premium taxes, surrenders may be subject to income taxes and, if
prior to age 59 1/2, a ten percent Federal penalty tax. (See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES," p. 63.)
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If the Owner or Owner's spouse (Annuitant or Annuitant's spouse if the Owner
is not a natural person): (1) has been confined in a hospital or nursing
facility for 30 consecutive days, or (2) has been diagnosed as having a
terminal condition as defined in the Policy or endorsement (generally a life
expectancy of 12 months or less), then the Surrender Charge, and Excess
Interest Adjustment, are not imposed on surrenders or partial withdrawals.
(This benefit may not be available in all states or in all Policy forms--see
the Policy or endorsement for details.)
EXCESS INTEREST ADJUSTMENT (EIA)
Surrenders, partial withdrawals, transfers, and amounts applied to a Payment
Option (prior to the end of a Guaranteed Period) from the Fixed Account
Guaranteed Period Options will be subject to an Excess Interest Adjustment
except as provided for under "Surrenders" or "Nursing Care and Terminal
Condition Withdrawal Option" above or "Systematic Payout Option," below. Prior
versions of the Policy or Policies offered in certain states may not be
subject to an Excess Interest Adjustment.
The Excess Interest Adjustment partially compensates PFL for the foregoing
early removal of funds from the Guaranteed Period Options where interest rates
declared by PFL have risen since the date of the guarantee. Conversely, the
Excess Interest Adjustment allows PFL to share the benefit of falling interest
rates with the Owner upon such withdrawals.
Generally, if interest rates declared by PFL have risen since the date of
the guarantee, the application of the Excess Interest Adjustment (a negative
Excess Interest Adjustment in this case) will result in a lower payment upon
surrender. Conversely, if interest rates have fallen since the date of the
guarantee, the application of the Excess Interest Adjustment (a positive
Excess Interest Adjustment in this case) will result in a higher payment upon
surrender.
Excess Interest Adjustments will not reduce the Adjusted Policy Value for a
Guaranteed Period Option below the Premium Payments and transfers to that
Guaranteed Period Option, less any prior partial withdrawals and transfers
from that Guaranteed Period Option, plus interest at the Policy's minimum
guaranteed effective annual interest rate of 3%.
The formula for calculating the Excess Interest Adjustment and examples of
the application of the Excess Interest Adjustments are set forth in Appendix A
to this Prospectus.
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SYSTEMATIC PAYOUT OPTION
Under the Systematic Payout Option, Policy Owners can instruct PFL to make
automatic payments to them monthly, quarterly, semi-annually or annually from
a specified Subaccount. Monthly and quarterly payments can only be sent by
electronic funds transfer directly to a checking or savings account. The
minimum payment is $50. The maximum payment is 10% of the Policy Value at the
time the Systematic Payout is made divided by the number of payouts made per
year (for example, 12 for monthly). If this requested amount is below the
minimum distribution requirements for that policy specified by the IRS for tax
qualified plans, the maximum payment will be increased to this minimum
required distribution amount. The "Request for Systematic Payout" form must
specify a date for the first payment, which must be at least 30 days but not
more than one year after the form is submitted (i.e., Systematic Payouts will
start at the end of the payment mode selected, but not earlier than 30 days
from the date of request).
The Surrender Charge and Excess Interest Adjustment will be waived for
Policy Owners under age 59 1/2 of Qualified Policies if they take Systematic
Payouts using one of the payout methods described in IRS Notice 89-25, Q&A-12
(the Life Expectancy Recalculation Option, Amortization, or Annuity Factor)
which generally require payments for life or life expectancy. These payments
must be continued until the later of age 59 1/2 or five years from their
commencement. No additional partial withdrawal may be taken during this time.
For Qualified Policies, when the Policy Owner is age 59 1/2 or older, the
Surrender Charge and Excess Interest Adjustment will be waived if payments are
made using the Life Expectancy Recalculation Option.
In addition, for either Qualified or Nonqualified Policies, the Surrender
Charge and Excess Interest Adjustment will not be imposed on Systematic
Payouts.
Qualified Policies are subject to complex rules with respect to restrictions
on and taxation of distributions, including the applicability of penalty
taxes. In addition, the tax treatment of systematic payouts from Nonqualified
Policies has had an unfavorable ruling regarding the ability to avoid the 10%
penalty tax. Therefore, the Policy Owner should consult a qualified tax
adviser before requesting a Systematic Payout. In certain circumstances
withdrawn amounts may be included in the Policy Owner' s gross income. (See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 63.)
ANNUITY PAYMENTS
Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
selected by the Owner at the time the Owner applies for the Policy. The
Annuity Commencement Date may be changed from time to time by the Owner by
Written Notice to PFL, provided that notice of each
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change is received by PFL at its Administrative and Service Office at least
thirty (30) days prior to the then current Annuity Commencement Date. Except
as otherwise permitted by PFL, a new Annuity Commencement Date must be a date
which is: (1) at least thirty (30) days after the date notice of the change is
received by PFL; and (2) not later than the last day of the policy month
starting after the Annuitant attains age 85. In no event will an Annuity
Commencement Date be permitted to be later than the last day of the month
following the month in which the Annuitant attains age 95. The Annuity
Commencement Date may also be changed by the Beneficiary's election of the
Annuity Option after the Annuitant's death.
Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, the Owner may choose an Annuity Payment
Option or change the election, but Written Notice of any election or change of
election must be received by PFL at its Administrative and Service Office at
least thirty (30) days prior to the Annuity Commencement Date. If no election
is made prior to the Annuity Commencement Date, Annuity Payments will be made
under (i) Option 3, life income with level payments for 10 years certain,
using the existing Adjusted Policy Value of the Fixed Account, or (ii) under
Option 3-V, life income with variable payments for 10 years certain using the
existing Adjusted Policy Value of the Mutual Fund Account, or (iii) in a
combination of (i) and (ii) if the Adjusted Policy Value is allocated among
both the Fixed Account and the Mutual Fund Account. If the Adjusted Policy
Value on the Annuity Commencement Date is less than $2000, PFL reserves the
right to pay it in one lump sum in lieu of applying it under an Annuity
Payment Option.
Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p. 56.) Subject to the restrictions of certain state
laws, Annuity Payments will be made on either a fixed basis or a variable
basis as selected by the Owner (or the Beneficiary, after the Annuitant's
death).
The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount PFL has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.
A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL
agrees.
Unless the Policy Owner specifies otherwise, the payee shall be the
Annuitant, or, after the Annuitant's death, the Beneficiary. PFL may require
written proof of the age of any person who has an annuity purchased under
Option 3, 3-V, 5 or 5-V.
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Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a Payment Option, upon Surrender, or upon payment of death
proceeds. If so, PFL will deduct the premium tax before applying or paying the
proceeds.
Supplementary Policy. Once proceeds become payable and a Payment Option has
been chosen, PFL will issue a Supplementary Policy in settlement of the option
elected under the Policy setting forth the terms of the option elected. The
Supplementary Policy will name the payees and will describe the payment
schedule.
ANNUITY PAYMENT OPTIONS
The Policy provides five Payment Options which are described below. Three of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and two are only available as Fixed Payment Options. The Policy
Owner may elect a Fixed Payment Option, a Variable Payment Option, or a
combination of both. If the Policy Owner elects a combination, he must specify
what part of the Policy proceeds are to be applied to the Fixed and Variable
Options (and he must also specify which Subaccounts for the Variable Options).
NOTE CAREFULLY: Under Payment Options 3(1) and 5 (including 3-V(1) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second annuity payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third annuity payment; and so forth.
On the Annuity Commencement Date, the Policy's Adjusted Policy Value will be
applied to provide for Annuity Payments under the selected Annuity Option as
specified. The Adjusted Policy Value is the Policy Value (for the Valuation
Period which ends immediately preceding the Annuity Commencement Date),
increased or decreased by any applicable Excess Interest Adjustment.
The effect of choosing a Fixed Annuity Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Annuity Option is selected, the Adjusted Policy Value will be
transferred to the general account of PFL, and the Annuity Payments will be
fixed in amount by the fixed annuity provisions selected and the age and sex
(if consideration of sex is allowed under applicable law) of the Annuitant.
For further information, contact PFL at its Administrative and Service Office.
Guaranteed Values. There are five Fixed Annuity Options. Options 1, 2 and 4
are based on a guaranteed interest rate of 3%. Options 3 and 5 are based on a
guaranteed effective annual interest rate of 3% using the "1983 Table a"
(male, female, and unisex if required by law) mortality table improved to the
year 2000 with projection scale G. ("The 1983 Table a" mortality rates are
adjusted based on improvements in mortality since 1983 to more appropriately
reflect increased longevity. This is accomplished using a set of improvement
factors referred to as projection scale G.)
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Option 1--Interest Payments. The policy proceeds may be left with PFL for
any term as agreed by PFL and the Owner. PFL will pay the interest in equal
payments or it may be left to accumulate. Withdrawal rights will be agreed
upon by the Owner and PFL when the option is elected.
Option 2--Income for a Specified Period. Level payments of the proceeds with
interest are made for the fixed period elected, at which time the funds are
exhausted.
Option 3--Life Income. An election may be made between:
1. "No Period Certain"--Level payments will be made during the
lifetime of the Annuitant.
2. "10 Years Certain"--Level Payments will be made for the longer of
the Annuitant's lifetime or ten years.
3. "Guaranteed Return of Policy Proceeds"--Level payments will be
made for the longer of the Annuitant's lifetime or the number of
payments which, when added together, equals the proceeds applied
to the income option.
Option 4--Income of a Specified Amount. Payments are made for any specified
amount until the proceeds with interest are exhausted.
Option 5--Joint and Survivor Annuity. Payments are made during the joint
lifetime of the payee and a joint payee of the Owner's selection. Payments
will be made as long as either person is living.
Other options may be arranged by agreement with PFL. Certain options may not
be available in some states.
Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed amount (guaranteed amounts are based upon the
tables contained in the Policy). Current amounts may be obtained from PFL.
Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
a 5% effective annual assumed investment return and the "1983 Table a" (male,
female, and unisex if required by law) mortality table improved to the year
2000 with projection Scale G. ("The 1983 Table a" mortality rates are adjusted
based on improvements in mortality since 1983 to more appropriately reflect
increased longevity. This is accomplished using a set of improvement factors
referred to as projection scale G.) The dollar amount of subsequent Variable
Annuity Payments will vary based on the investment performance of the
Subaccount of the Mutual Fund Account selected by the Annuitant or
Beneficiary. If the actual investment performance exactly matched the Assumed
Investment Return of 5% at all times, the amount of each Variable Annuity
Payment would remain equal. If actual investment performance exceeds the
Assumed Investment Return, the amount of the payments would increase.
Conversely, if actual investment performance is worse than the Assumed
Investment Return, the amount of the payments would decrease.
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Determination of the First Variable Payment. The amount of the first
variable payment depends upon the sex (if consideration of sex is allowed) and
adjusted age of the Annuitant. The adjusted age is the Annuitant's actual age
nearest birthday, at the Annuity Commencement Date, adjusted as follows:
<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- --------------------
<S> <C>
Before 2001 Actual Age
2001-2010 Actual Age minus 1
2011-2020 Actual Age minus 2
2021-2030 Actual Age minus 3
2031-2040 Actual Age minus 4
After 2040 As determined by PFL
</TABLE>
This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.
The following Variable Payment Options generally are available:
Option 3-V--Life Income. An election may be made between:
1. "No Period Certain"--Payments will be made during the lifetime of
the Annuitant.
2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.
Option 5-V--Joint and Survivor Annuity. Payments are made as long as either
the Annuitant or the joint Annuitant is living.
Certain options may not be available in some states.
Determination of Subsequent Variable Payments. All Variable Annuity Payments
other than the first are calculated using "Annuity Units" which are credited
to the Policy. The number of Annuity Units to be credited in respect of a
particular Subaccount is determined by dividing that portion of the first
Variable Annuity Payment attributable to that Subaccount by the Annuity Unit
Value of that Subaccount for the Annuity Commencement Date. The number of
Annuity Units of each particular Subaccount credited to the Policy then
remains fixed. The dollar value of variable Annuity Units in the chosen
Subaccount will increase or decrease reflecting the investment experience of
the chosen Subaccount. The dollar amount of each Variable Annuity Payment
after the first may increase, decrease or remain constant, and is equal to the
sum of the amounts determined by multiplying the number of Annuity Units of
each particular Subaccount credited to the Policy by the Annuity Unit Value
for the particular Subaccount on the date the payment is made.
Transfers. A Policy Owner may transfer the value of the Annuity Units from
one Subaccount to another within the Mutual Fund Account or to the Fixed
Account. However, after the Annuity Commencement Date no transfers may be made
from the Fixed Account to the Mutual Fund Account. The minimum amount which
may be transferred is the lesser of $10 of
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monthly income or the entire monthly income of the variable Annuity Units in
the Subaccount from which the transfer is being made. The remaining Annuity
Units in the Subaccount must provide at least $10 of monthly income. If, after
a transfer, the monthly income of the remaining Annuity Units in a Subaccount
would be less than $10, PFL reserves the right to include those Annuity Units
as part of the transfer. PFL reserves the right to limit transfers between
Subaccounts or to the Fixed Account after the Annuity Commencement Date to
once per Policy Year.
Tax Withholding. A portion or the entire amount of the Annuity Payments may
be taxable as ordinary income. If, at the time the Annuity Payments begin, the
Policy Owner has not provided PFL with a written election not to have federal
income taxes withheld, PFL must by law withhold such taxes from the taxable
portion of such annuity payments and remit that amount to the federal
government. Withholding is mandatory for certain Qualified Policies. (See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 63.)
Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12
month intervals. If the individual payments provided for would be or become
less than $50, PFL may change, at its discretion, the frequency of payments to
such intervals as will result in payments of at least $50. If the Adjusted
Policy Value on the Annuity Commencement Date is less than $2,000, PFL may pay
such value in one sum in lieu of the payments otherwise provided for.
DEATH BENEFIT
Death of Annuitant Prior to Annuity Commencement Date. A Death Benefit will
be paid to the Beneficiary if the Owner, who is the Annuitant, dies prior to
the Annuity Commencement Date. The amount of the Death Benefit is the greatest
of the Policy Value, Cash Value or the Guaranteed Minimum Death Benefit
selected. Prior versions of the Policy or Policies offered in certain states
may provide for a different definition or calculation of the Death Benefit.
See the Policy or endorsement for details. The Death Benefit is not payable
upon the death of the Annuitant if the Annuitant and the Owner are not the
same person unless the Owner makes a separate election.
There are three Guaranteed Minimum Death Benefit Options available: (A) The
"5% Annually Compounding Death Benefit," (B) the "Annual Step-Up Death
Benefit," and (C) the "Return of Premium Death Benefit."
The "5% Annually Compounding Death Benefit" is the total Premium Payments
less any Adjusted Partial Withdrawals plus interest at an effective annual
rate of 5% from the payment or withdrawal date up to the date of death.
The "Annual Step-Up Guaranteed Minimum Death Benefit" is the highest Policy
Value on any Policy Anniversary prior to the earlier of the date of death or
the Owner's 81st birthday, plus Premium Payments less any Adjusted Partial
Withdrawals since that anniversary. For this purpose, the
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Policy Date will be treated as a Policy Anniversary. Any applicable Excess
Interest Adjustments on transfers from the Fixed Account will affect the value
of this Guaranteed Minimum Death Benefit.
The "Return of Premium Death Benefit" is the total Premium Payments less any
Adjusted Partial Withdrawals (defined below) as of the date of death.
Under all Guaranteed Minimum Death Benefit Options, if the surviving spouse
elects to continue the Policy in lieu of receiving the Death Benefit, an
amount equal to the excess, if any, of the Guaranteed Minimum Death Benefit
over the Policy Value, will then be added to the Policy Value. This amount
will be added only once, at the time of such election.
The 5% Annually Compound Death Benefit is not available if either the
Annuitant or the Owner is age 75 or higher on the Policy Date. The Annual
Step-Up Death Benefit is not available if either the Annuitant or the Owner is
age 81 or higher on the Policy Date. If no choice is made in the Policy
application then the Return of Premium Death Benefit will apply.
After the Policy Date, an election cannot be made and the Guaranteed Minimum
Death Benefit option cannot be changed.
The Death Benefit is based on values determined on the later of when PFL
receives due proof of death and an election of a settlement option.
Adjusted Partial Withdrawal. The Adjusted Partial Withdrawal is the total
amount deducted from the Guaranteed Minimum Death Benefit following a partial
withdrawal of the Policy Value. Each Adjusted Partial Withdrawal is the sum of
(1) and (2), where:
(1) The 10% Withdrawal and,
(2) The amount that an Excess Partial Withdrawal reduces the Policy Value.
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 48) times [(a)
divided by (b)] where:
(a) is the Death Benefit less any 10% Withdrawals; and
(b) is the Policy Value less any 10% Withdrawals.
If a partial withdrawal is taken when the Guaranteed Minimum Death Benefit
exceeds the Policy Value, then the amount deducted from the Guaranteed Minimum
Death Benefit as a result of the partial withdrawal (that is, the Adjusted
Partial Withdrawal) will exceed the amount of the partial withdrawal request.
In that case, the total proceeds of a partial withdrawal followed by a Death
Benefit could be less than total Premium Payments.
Due Proof of Death of the Annuitant is proof that the Annuitant who is the
Owner died prior to the commencement of Annuity Payments. Upon receipt of this
proof, an election of a method of settlement and return of the Policy, the
Death Benefit generally will be paid within seven days, or as soon thereafter
as PFL has sufficient information about the Beneficiary to make
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the payment. The Beneficiary may receive the amount payable in a lump sum cash
benefit, or, subject to any limitation under any state or federal law, rule,
or regulation, under one of the Annuity Payment Options described above,
unless a settlement agreement is effective at the death of the Owner
preventing such election.
If the Annuitant was the Policy Owner, and the Beneficiary was not the
Annuitant's spouse, the Death Benefit must (1) be distributed within five
years of the date of the deceased Owner's death, or (2) payments under a
Payment Option must begin within one year of the deceased Owner's death and
must be made for the Beneficiary's lifetime or for a period certain (so long
as any certain period does not exceed the Beneficiary's life expectancy).
Death proceeds which are not paid to or for the benefit of a natural person
must be distributed within five years of the date of the deceased Owner's
death. If the sole Beneficiary is the deceased Owner's surviving spouse, such
spouse may elect to continue the Policy as the new Annuitant and Policy Owner
instead of receiving the Death Benefit. (See "Federal Tax Matters" in the
Statement of Additional Information.)
If the Annuitant is not the Owner, and the Owner dies prior to the Annuity
Commencement Date, a Successor Owner may surrender the Policy at any time for
the Adjusted Policy Value. If the Successor Owner is not the deceased Owner's
surviving spouse, however, this amount must be distributed within five years
after the date of death of the Owner, or payments under a Payment Option must
begin within one year of the deceased Owner's death and must be made for the
Beneficiary's lifetime or for a period certain (so long as any certain period
does not exceed the Beneficiary's life expectancy).
Death On or After Annuity Commencement Date. The death benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death.
Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. The Policy Owner may change the designated Beneficiary
by sending Written Notice to PFL. The Beneficiary's consent to such change is
not required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable Beneficiary dies, the Policy Owner may
then designate a new Beneficiary.) The change will take effect as of the date
the Policy Owner signs the Written Notice, whether or not the Policy Owner is
living when the Notice is received by PFL. PFL will not be liable for any
payment made before the Written Notice is received. If more than one
Beneficiary is designated, and the Policy Owner fails to specify their
interests, they will share equally.
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<PAGE>
DEATH OF OWNER
Federal tax law requires that if any Policy Owner (including any joint Owner
or any Successor Policy Owner who has become a current Owner) dies before the
Annuity Commencement Date, then the entire value of the Policy must generally
be distributed within five years of the date of death of such Policy Owner.
Certain rules apply where 1) the spouse of the deceased Owner is the sole
beneficiary, 2) the Policy Owner is not a natural person and the primary
Annuitant dies or is changed, or 3) any Policy Owner dies after the Annuity
Commencement Date. See "Federal Tax Matters" in the Statement of Additional
Information for a detailed description of these rules. Other rules may apply
to Qualified Policies. (See also "DISTRIBUTIONS UNDER THE POLICY--Death
Benefit" p. 56.)
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program (ORP) to withdraw their interest in a
variable annuity Policy issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education;
(2) retirement; or (3) death. Accordingly, a participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
the account can be redeemed.
RESTRICTIONS UNDER SECTION 403(B) PLANS
Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Policy used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.
RESTRICTIONS UNDER QUALIFIED POLICIES
Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.
CHARGES AND DEDUCTIONS
No deductions are made from Premium Payments, so that the full amount of
each Premium Payment is invested in one or more of the Accounts. PFL will make
certain charges and deductions in connection with the Policy in order to
compensate it for incurring expenses in distributing the Policy, bearing
mortality and expense risks under the Policy, and administering the Accounts
and the Policies. Charges may also be made for premium taxes, federal, state
or local taxes, or for certain transfers or other transactions. Charges and
expenses are also deducted from the Underlying Funds.
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SURRENDER CHARGE
PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may deduct a Surrender Charge from any amount surrendered (i.e., withdrawn) in
connection with a partial withdrawal or a surrender in order to cover a
portion of such distribution expenses. A Surrender Charge will not be deducted
from a withdrawal, after the first Policy Year, of up to 10% of the Policy
Value, if there have been no partial withdrawals in the current Policy Year.
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 48.)
The Surrender Charge is not imposed upon exercise of the Nursing Care and
Terminal Condition Option. This feature may not be available in all states.
(See "DISTRIBUTIONS UNDER THE POLICY," p. 48.)
The amount of the Surrender Charge is determined by multiplying the amount
of the Premium Payments withdrawn by the applicable Surrender Charge
Percentage. The applicable Surrender Charge Percentage will depend upon the
number of years that have elapsed since the Premium Payment that is being
withdrawn was made. For this purpose, surrenders are allocated to Premium
Payments on a "first-in, first-out" basis, that is, first to the oldest
Premium Payment, then to the next oldest Premium Payment, and so on. Premium
Payments are deemed to be withdrawn before earnings, and after all Premium
Payments have been withdrawn, the remaining Adjusted Policy Value may be
withdrawn without any Surrender Charge. The following is the table of
Surrender Charge Percentages:
<TABLE>
<CAPTION>
APPLICABLE SURRENDER
CHARGE PERCENTAGE
(AS PERCENTAGE OF
NUMBER OF YEARS SINCE PREMIUM PAYMENT
PREMIUM PAYMENT DATE WITHDRAWN)
--------------------- --------------------
<S> <C>
Less than 1........................................... 7%
At least 1 and less than 2............................ 6%
At least 2 and less than 3............................ 5%
At least 3 and less than 4............................ 4%
At least 4 and less than 5............................ 3%
At least 5 and less than 6............................ 2%
At least 6 and less than 7............................ 1%
</TABLE>
PFL anticipates that the Surrender Charge will not generate sufficient funds
to pay the cost of distributing the Policies. If this charge is insufficient
to cover the distribution expenses, the deficiency will be met from PFL's
general funds, which will include amounts derived from the fee for mortality
and expense risks and the Distribution Financing Charge.
MORTALITY AND EXPENSE RISK FEE
PFL imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. For the 5% Annually Compounding
Death Benefit and the Annual Step-Up Death Benefit, this charge is equal to an
effective annual rate of 1.25% of the daily
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net asset value of the Mutual Fund Account. For the Return of Premium Death
Benefit, the corresponding charge is equal to an effective annual rate of
1.10% of the daily net asset value of the Mutual Fund Account. The Mortality
and Expense Risk Fee is reflected in the Accumulation or Annuity Unit Values
for the Policy for each Subaccount.
Policy Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by PFL. The mortality
risks assumed by PFL arise from its contractual obligations to make Annuity
Payments (determined in accordance with the Annuity tables and other
provisions contained in the Policy) and to pay Death Benefits prior to the
Annuity Commencement Date. Thus, Owners are assured that neither an
Annuitant's own longevity nor an unanticipated improvement in genera l life
expectancy will adversely affect the monthly Annuity payments that the
Annuitant will receive under the Policy.
PFL also bears substantial risk in connection with the Death Benefit
Guarantee since PFL will pay a Death Benefit equal to the Guaranteed Minimum
Death Benefit if that amount is higher than the Policy Value.
The expense risk assumed by PFL is the risk that PFL's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative Charges.
If the Mortality and Expense Risk Fee is insufficient to cover PFL's actual
costs, PFL will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to PFL. PFL expects a
profit from this charge. To the extent that the Surrender Charge is
insufficient to cover the actual cost of Policy distribution, the deficiency
will be met from PFL's general corporate assets, which may include amounts, if
any, derived from the Distribution Financing Charge and, if necessary, the
Mortality and Expense Risk Fee. A Mortality and Expense Risk Fee is assessed
during the accumulation phase and during the annuity phase for all Variable
Annuity Options including those that do not carry a life contingency.
ADMINISTRATIVE CHARGES
Service Charge. In order to cover the costs of administering the Policies,
PFL deducts a Service Charge from the Policy Value of each Policy. The annual
Service Charge is deducted from the Policy Value of each Policy on each Policy
Anniversary prior to the Annuity Commencement Date. PFL also reserves the
right to charge up to $35 at the time of surrender during any Policy Year. The
charge is not deducted after the Annuity Commencement Date. The annual Service
Charge is the lesser of 2% of the Policy Value or $35, and it will not be
increased in the future. This charge is waived if either the Policy Value or
the sum of all Premium Payments less the sum of all partial withdrawals equals
or exceeds $50,000 on a Policy Anniversary (or date of surrender). The Service
Charge will be deducted from the Investment Option(s) in the same proportion
that the Owner's interest in each Investment Option bears to the Owner's total
Policy Value.
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<PAGE>
Administrative Charge. PFL also deducts a daily Administrative Charge from
the net assets of the Mutual Fund Account to partially cover expenses incurred
by PFL in connection with the administration of the Account and the Policies.
The effective annual rate of this charge is .15% of the daily net assets value
of the Mutual Fund Account. (See "CHARGES AND DEDUCTIONS--Administrative
Charges," p. 61.)
DISTRIBUTION FINANCING CHARGE
During the first seven Policy Years, PFL deducts a daily Distribution
Financing Charge equal to an effective annual rate of 0.15% of the daily net
asset value of the Mutual Fund Account. The cumulative amount of the charge,
plus the Surrender Charge, will never exceed 8.5% of the cumulative Premium
Payments for a Policy. The Distribution Financing Charge is paid to PFL and is
designed to partially compensate PFL for the cost of distributing the
Policies. The Distribution Financing Charge will be used to support marketing
efforts, training of representatives and reimbursement of expenses incurred by
broker/dealers who sell the Policies. The staff of the SEC deems such charge
to constitute a deferred sales charge.
PREMIUM TAXES
PFL currently makes no deduction from the Premium Payments for any state
premium taxes PFL pays in connection with Premium Payments under the Policies.
However, PFL will, when permitted by state law, deduct the aggregate premium
taxes paid on behalf of a particular Policy on (i) the Annuity Commencement
Date, (ii) the total surrender of a Policy, or (iii) payment of the death
proceeds of a Policy. Premium taxes currently range from 0% to 3.50% of
Premium Payments.
FEDERAL, STATE AND LOCAL TAXES
No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the accounts or the
policies.
TRANSFER CHARGE
There is no charge for the first 12 transfers between Investment Options in
each Policy Year. PFL reserves the right to impose a $10 charge for the
thirteenth and each subsequent transfer request made by the Owner during a
single Policy Year. For the purpose of determining whether a transfer charge
is payable, Premium Payment allocations are not considered transfers. All
transfer requests made simultaneously will be treated as a single request. No
transfer charge will be imposed for any transfer which is not at the Owner's
request.
OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES
Each of the Portfolios of the Underlying Funds is responsible for all of its
expenses. In addition, charges will be made against each of the Portfolios
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of the Underlying Funds for investment advisory services provided to the
Portfolio. The net assets of each Portfolio of the Underlying Funds will
reflect deductions in connection with the investment advisory fee and other
expenses.
For more information concerning the investment advisory fee and other
charges against the Portfolios, see the prospectuses for the Underlying Funds,
current copies of which accompany this Prospectus.
EMPLOYEE AND AGENT PURCHASES
The Policy may be acquired by an employee or registered representative of
any broker/dealer authorized to sell the Policy or their spouse or minor
children, or by an officer, director, trustee or bona-fide full-time employee
of PFL or its affiliated companies or their spouse or minor children. In such
case, a bonus of 5% of each premium deposit may be credited to the Policy due
to lower acquisition costs PFL experiences on these purchases. The bonus will
be reported to the Internal Revenue Service as taxable income to the employee
or registered representative. Compensation to the registered representative
and broker/dealer will be reduced by the amount of such bonus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the
Internal Revenue Code of 1986, as amended (the "Code"), proposed and final
Treasury Regulations thereunder, judicial authority, and current
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons," and does not
discuss state, local, or foreign tax consequences. United States Persons means
citizens or residents of the United States, domestic corporations, domestic
partnerships and trusts or estates that are subject to United States federal
income tax regardless of the source of their income.
At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Nonqualified Policy or a
Qualified Policy. If the initial Premium Payment is derived from an exchange
or surrender of another annuity policy, PFL may require that the prospective
purchaser provide information with regard to the federal income tax status of
the previous annuity policy. PFL will require that persons purchase separate
Policies if they desire to invest monies qualifying for different annuity tax
treatment under the Code. Each such separate Policy would require the minimum
initial Premium Payment stated above. Subsequent Additional Premium Payments
under a Policy must qualify for the same federal income tax treatment as the
initial Premium Payment under the Policy; PFL will not accept a Subsequent
Additional Premium Payment under a Policy if the federal income tax treatment
of such Premium Payment would be different from that of the initial Premium
Payment.
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<PAGE>
The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), or 408(a), or 457 of the Code and
individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS
TAX STATUS OF THE POLICY
The following discussion is based on the assumption that the Policy
qualifies as an annuity contract for federal income tax purposes. The
Statement of Additional Information discusses the tax requirements for
qualifying as an annuity contract.
TAXATION OF ANNUITIES
The discussion below applies only to those Policies owned by natural
persons, and that qualify as annuity contracts for federal income tax
purposes. With respect to Owners who are natural persons, the Policy should be
treated as an annuity contract for federal income tax purposes.
In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification
and distribution requirements described in the Statement of Additional
Information should not be taxed on increases in the Policy Value until an
amount is received or deemed received, e.g., upon a partial withdrawal or
surrender or as Annuity Payments under the Annuity Option selected. Generally,
any amount received or deemed received under a Nonqualified Annuity Contract
prior to the Annuity Commencement Date is deemed to come first from any
"Income on the Contract" and then from the "Investment in the Contract." The
"Investment in the Contract" generally equals total premium payments less
amounts received which were not includable in gross income. To the extent that
the Policy Value (Cash Value in the event of a surrender) exceeds the
"Investment in the Contract," such excess constitutes the "Income on the
Contract." For these purposes such "Income on the Contract" shall be computed
by reference to the aggregation rules described below, and the amount
includable in gross income will be taxable as ordinary income. If at the time
that any amount is received or
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<PAGE>
deemed received there is no "Income on the Contract" (e.g., because the gross
Policy Value does not exceed the "Investment in the Contract" and no
aggregation rule applies), then such amount received or deemed received will
not be includable in gross income, and will simply reduce the "Investment in
the Contract."
For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Policy Value (including assignment of Owner's right to
receive Annuity Payments prior to the Annuity Commencement Date) generally
will be treated as a distribution in the amount of such portion of the Policy
Value. Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a distribution under the Policy
in an amount equal to the Policy Value. A transfer of ownership or an
assignment of a Policy, or designation of an Annuitant or Beneficiary who is
not also the Owner, as well as the selection of certain Annuity Commencement
Dates, may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, designation,
selection or assignment of a Policy should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Aggregation Rules. Generally all nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all individual retirement annuities and accounts
under Section 408 of the Code for an individual are aggregated, and generally
all distributions therefrom during a calendar year are treated as one
distribution made as of the end of such year.
Surrenders or Partial Withdrawals. In the case of a partial withdrawal
(including systematic partial withdrawals) under a Nonqualified Policy, the
amount received generally will be includable in gross income to the extent
that it does not exceed the "Income on the Contract," which is generally equal
to the excess of the Policy Value immediately before the partial withdrawal
over the "Investment in the Contract" at that time. However, for these
purposes the Policy Value immediately before a partial withdrawal may have to
be increased by any positive Excess Interest Adjustment which results from
such a partial withdrawal or which could result from a simultaneous surrender,
and may need further adjustments if the aggregation rules apply. There is,
however, no definitive guidance on the proper tax treatment of Excess Interest
Adjustments, and the Owner should contact a competent tax adviser with respect
to the potential tax consequences of an Excess Interest Adjustment that may
apply in the case of a Non-Qualified Policy or a Qualified Policy. In the case
of a partial withdrawal (including systematic partial withdrawals) under a
Qualified Policy (other than one qualified under Section 457 of the Code), a
ratable portion of the amount received is generally excludable from gross
income,
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<PAGE>
based on the ratio of the "Investment in the Contract" to the individual's
total Policy Value or accrued benefit under the retirement plan at the time of
each such payment. For a Qualified Policy, the "Investment in the Contract"
can be zero. Special tax rules may be available for certain distributions from
a Qualified Policy. In the case of a surrender under a Nonqualified Policy or
a Qualified Policy, the amount received generally will be taxable only to the
extent it exceeds the "Investment in the Contract", unless the aggregation
rules apply.
Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general only a portion of
the Annuity Payments received after the Annuity Commencement Date will be
includable in the gross income of the recipient.
For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected return resulting from the
Annuity Payments for the term of the payments. The remainder of each Annuity
Payment is includable in gross income. Once the "Investment in the Contract"
has been fully recovered, the full amount of any additional Annuity Payments
received is includable in gross income.
For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. The remainder of each
Annuity Payment is includable in gross income. Once the "Investment in the
Contract" has been fully recovered, the full amount of any additional Annuity
Payments is includable in gross income.
Where an Owner allocates a portion of the Adjusted Policy Value on the
Annuity Commencement Date to more than one annuity payment option (fixed or
variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
PFL makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of annuity payment options. Instead, any Owner is
advised to consult a competent tax adviser as to the potential tax effects of
allocating any amount of Adjusted Policy Value to any particular annuity
payment option.
If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.
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<PAGE>
Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a surrender,
as described above, or (2) if distributed under an Annuity Payment Option,
they are taxed in the same manner as Annuity Payments, as described above. For
these purposes, the "Investment in the Contract" is not affected by the
Owner's or Annuitant's death. That is, the "Investment in the Contract"
remains generally the total premium payments less amounts received which were
not includable in gross income.
Penalty Taxes. In the case of any amount received or deemed received from
the Policy, e.g., upon a surrender of a Policy (including systematic
withdrawals) or a deemed distribution under a Policy resulting from a pledge,
assignment or agreement to pledge or assign or an Annuity Payment with respect
to a Policy, there may be imposed on the recipient a federal penalty tax equal
to 10% of the amount includable in gross income. The penalty tax generally
will not apply to any distribution: (i) made on or after the date on which the
taxpayer attains age 59 1/2; (ii) made as a result of the death of the holder
(generally the Owner); (iii) attributable to the disability of the taxpayer;
or (iv) which is part of a series of substantially equal periodic payments
made (not less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and the taxpayer's beneficiary. Other rules may apply to Qualified Policies.
Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided at the time distributions are
requested or made. For certain Qualified Policies, certain distributions are
subject to mandatory withholding.
Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into our Policy administration procedures. Owners,
participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the
Policies comply with applicable law.
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<PAGE>
PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.
Individual Retirement Annuities. In order to qualify as an individual
retirement annuity under Section 408(b) of the Code, a Policy must contain
certain provisions: (i) the Owner must be the Annuitant; (ii) the Policy
generally is not transferable by the Owner, e.g., the Owner may not designate
a new Owner, designate a Contingent Owner or assign the Policy as collateral
security; (iii) the total Premium Payments for any calendar year may not
exceed $2,000, except in case of a rollover amount or contribution under
Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code; (iv) Annuity
Payments or partial withdrawals must begin no later than April 1 of the
calendar year following the calendar year in which the Annuitant attains age
70 1/2; (v) an Annuity Payment Option with a Period Certain that will
guarantee Annuity Payments beyond the life expectancy of the Annuitant and the
Beneficiary may not be selected; and (vi) certain payments of Death Benefits
must be made in the event the Annuitant dies prior to the distribution of the
Policy Value. Policies intended to qualify as individual retirement annuities
under Section 408(b) of the Code contain such provisions.
Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity ("IRA") should be invested in a life
insurance contract, but the regulations thereunder allow such funds to be
invested in an annuity contract that provides a death benefit that equals the
greater of the premiums paid or the cash value for the contract. The Policy
provides an enhanced death benefit that could exceed the amount of such a
permissible death benefit, but it is unclear to what extent such an enhanced
death benefit could disqualify the Policy under Section 408 of the Code. The
Internal Revenue Service has not reviewed the Policy for qualification as an
IRA, and has not addressed in a ruling of general applicability whether an
enhanced death benefit provision, such as the provision in the Policy,
comports with IRA qualification requirements.
Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age 59
1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the
case of hardship.
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<PAGE>
Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans. Sections
401(a) and 403(a) of the Code permit corporate employers to establish various
types of retirement plans for employees and self-employed individuals to
establish qualified plans for themselves and their employees. Such retirement
plans may permit the purchase of the Policies to accumulate retirement
savings. Adverse tax consequences to the plan, the participant or both may
result if the Policy is assigned or transferred to any individual as a means
to provide benefit payments.
Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Policies can be used with
such plans. Under such plans a participant may specify the form of investment
in which his or her participation will be made. All such investments, however,
are owned by, and are subject to, the claims of the general creditors of the
sponsoring employer. Depending on the terms of the particular plan, the
employer may be entitled to draw on deferred amounts for purposes unrelated to
its Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages.
Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is
not a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Annuity Purchase Value as of the close of the
taxable year and all previous distributions under the Policy over (ii) the sum
of the Premium Payments paid for the taxable year and any prior taxable year
and the amounts includable in gross income for any prior taxable year with
respect to the Policy. For these purposes, the Policy Value at year end may
have to be increased by any positive Excess Interest Adjustment which could
result from a surrender at such time. There is, however, no definitive
guidance on the proper tax treatment of Excess Interest Adjustments, and the
Owner should contact a competent tax adviser with respect to the potential tax
consequences of an Excess Interest Adjustment. Notwithstanding the preceding
sentences in this paragraph, Section 72(u) of the Code does not apply to (i) a
Policy the nominal Owner of which is not a natural person but the beneficial
Owner of which is a natural person, (ii) a Policy acquired by the estate of a
decedent by reason of such decedent's death, (iii) a Qualified Policy (other
than one qualified under Section 457) or (iv) a single-payment annuity the
Annuity Commencement Date for which is no later than one year from the date of
the single Premium Payment; instead, such Policies are taxed as described
above under the heading "Taxation of Annuities."
Possible Changes in Taxation. In past years, legislation has been proposed
in the U.S. Congress that would have adversely modified the
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<PAGE>
federal taxation of certain annuities. For example, one such proposal would
have changed the tax treatment of non-qualified annuities that did not have
"substantial life contingencies" by taxing income as it is credited to the
annuity. Although as of the date of this Prospectus Congress was not actively
considering any legislation regarding the taxation of annuities, there is
always the possibility that the tax treatment of annuities could change by
legislation or other means (such as IRS regulations, revenue rulings, judicial
decisions, etc.). Moreover, it is also possible that any change could be
retroactive (that is, effective prior to the date of the change).
DISTRIBUTOR OF THE POLICIES
AEGON USA Securities, Inc., an affiliate of PFL, is the principal
underwriter of the Policies. AEGON USA Securities, Inc. has entered or will
enter into one or more agreements with various broker-dealers for the
distribution of the Policies. Commissions on Policy sales are paid to
broker/dealers. Commissions payable to broker/dealers will be up to 6% of
Premium Payments, or 5% plus an annual continuing fee based on Policy Values.
In addition, certain broker/dealers may receive additional commissions,
expense allowances, and additional annual continuing fees based upon sales
volume, agent or service training responsibilities, and other factors. The
Distribution Financing Charge will be used by PFL to support these activities
and reimbursements. These commissions are not deducted from Premium Payments,
they are paid by PFL.
VOTING RIGHTS
To the extent required by law, PFL will vote the Underlying Funds shares
held by the Mutual Fund Account at regular and special shareholder meetings of
the Underlying Funds in accordance with instructions received from persons
having voting interests in the portfolios (although the Underlying Funds do
not hold regular annual shareholders' meetings). If, however, the 1940 Act or
any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result PFL determines that it is permitted to
vote the Underlying Funds' shares in its own right, it may elect to do so.
Before the Annuity Commencement Date, the Policy Owner holds the voting
interest in the selected Portfolios. The number of votes that an Owner has the
right to instruct will be calculated separately for each Subaccount. The
number of votes that an Owner has the right to instruct for a particular
Subaccount will be determined by dividing the Owner's Policy Value in the
Subaccount by the net asset value per share of the corresponding Portfolio in
which the Subaccount invests. Fractional shares will be counted.
After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as Annuity Payments
are made and as the reserves for the Policy decrease. The
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<PAGE>
person's number of votes will be determined by dividing the reserve for the
Policy allocated to the applicable Subaccount by the net asset value per share
of the corresponding Portfolio. Fractional shares will be counted.
The number of votes that the Owner or person receiving income payments has
the right to instruct will be determined as of the date established by the
Underlying Funds for determining shareholders eligible to vote at the meeting
of the Underlying Funds. PFL will solicit voting instructions by sending
Owners or other persons entitled to vote written requests for instructions
prior to that meeting in accordance with procedures established by the
Underlying Funds. Portfolio shares as to which no timely instructions are
received and shares held by PFL in which Owners or other persons entitled to
vote have no beneficial interest will be voted in proportion to the voting
instructions that are received with respect to all Policies participating in
the same Subaccount.
Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Mutual Fund Account is a party
or to which the assets of the Account are subject. PFL is not involved in any
litigation that is of material importance in relation to its total assets or
that relates to he Mutual Fund Account.
STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus.
The following is the Table of Contents for that Statement:
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non-Participating........................................................ 5
Amendments............................................................... 5
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
Investment Experience...................................................... 6
State Regulation of PFL.................................................... 11
Administration............................................................. 11
Records and Reports........................................................ 11
Distribution of the Policies............................................... 11
Custody of Assets.......................................................... 11
Historical Performance Data................................................ 12
Money Market Yields...................................................... 12
Other Subaccount Yields.................................................. 13
Total Returns............................................................ 13
Other Performance Data................................................... 14
Hypothetical Performance Data............................................ 14
Legal Matters.............................................................. 15
Independent Auditors....................................................... 15
Other Information.......................................................... 15
Financial Statements....................................................... 15
</TABLE>
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<PAGE>
APPENDIX A
EXCESS INTEREST ADJUSTMENT(1)
The formula which will be used to determine the Excess Interest Adjustment
(EIA) is:
S* (G - C)* (M/12)
S= Gross amount being withdrawn that is subject to the EIA
G= Guaranteed Interest Rate in effect for the policy
C= Current Guaranteed Interest Rate then being offered on new premiums for
the next longer option period than "M". If this policy form or such an
option period is no longer offered, "C" will be the U.S. Treasury rate for
the next longer maturity (in whole years) than "M" on the 25th day of the
previous calendar month, plus up to 2%.
M= Number of months remaining in the current option period, rounded up to the
next higher whole number of months.
EXAMPLE 1 (SURRENDER, RATES INCREASE BY 3%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Surrender: Middle of Contract Year 3
Policy Value at middle of Contract
Year 3 = 50,000* (1.055) (caret) 2.5 =
57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) (caret) 2.5 =
53,834.80
Excess Interest Adjustment
G= .055
C= .085
M = 30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 51,445.06* (.055 - .085)* (30/12)
= -3,858.38, but Excess Interest
Adjustment cannot cause the Adjusted
Policy Value to fall below the
floor, so the adjustment is limited
to 53,834.80 - 57,161.18 = -3,326.38
Adjusted Policy Value ("APV") = APV + EIA = 57,161.18 + (-3,326.38)
= 53,834.80
- ----------------------------------
(1) * represents multiplication;
(caret) represents exponentiation.
A-1
<PAGE>
Surrender Charges = (50,000 - 5,716.12)* .05
= 2,214.19
Net Surrender Value at middle of
Contract Year 3 = 53,834.80 - 2,214.19
= 51,620.61
EXAMPLE 2 (SURRENDER, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Surrender: Middle of Contract Year 3
Policy Value at middle of Contract
Year 3 = 50,000* (1.055) (caret) 2.5 =
57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Amount Subject to EIA = 57,161.18 - 5,716.12 = 51,445.06
EIA Floor = 50,000* (1.03) (caret) 2.5 = 53,834.80
Excess Interest Adjustment
G = .055
C = .045
M = 30
Excess Interest Adjustment = S* (G - C)* (M/12)
= 51,445.06* (.055 - .045)* (30/12)
= 1,286.13
Adjusted APV = 57,161.18 + 1,286.13 = 58,447.31
Surrender Charges = (50,000 - 5,716.12)* .05
= 2,214.19
Net Surrender Value at middle of
Contract Year 3 = 58,447.31 - 2,214.19
= 56,233.12
A-2
<PAGE>
On a partial withdrawal, PFL will pay the policy holder the full amount of
withdrawal requested (as long as the Policy Value is sufficient). Surrender
Charge free/adjustment free partial withdrawals will reduce the APV by the
amount withdrawn. Amounts withdrawn in excess of the Surrender Charge
free/adjustment free portion will reduce the APV by an amount equal to:
X - Y+Z
X= Excess Partial Withdrawal
Y= Excess Interest Adjustment = (X)* (G - C)* (M/12) where G, C, and M are
defined above.
Z= Surrender Charge on X - Y.
EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Withdrawal: $20,000; Middle of Contract Year 3
Policy Value at middle of Contract
Year 3
= 50,000* (1.055) (caret) 2.5 =
57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge (SC) Adjustment
X= 20,000 - 5,716.12 = 14,283.88
G= .055
C= .065
M= 30
Y= 14,283.88* (.055 - .065)* (30/12) = (357.10)
Z= .05* (20,000 - 5,716.12 - (-357.10)) = 732.05
Reduction to APV for Excess
Withdrawal: = X - Y + Z
= 14,283.88 - (-357.10) + 732.05
= 15,373.03
Remaining Policy Value at middle of Contract Year 3
= 57,161.18 - 5,716.12 - 15,373.03
= 36,072.03
A-3
<PAGE>
EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):
Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Withdrawal: $20,000; Middle of Contract Year 3
Policy Value at middle of
Contract Year 3 = 50,000* (1,055) (caret) 2.5 =
57,161.18
Penalty Free Amount at middle of
Contract Year 3 = 57,161.18* .10 = 5,716.12
Excess Interest/Surrender Charge Adjustment
X= 20,000 - 5,716.12 = 14,283.88
G= .055
C= .045
M= 30
Y= 14.283.88* (.055 - .045)* (30/12) = 357.10
Z= .05* (20,000 - 5,716.12 - 357.10) = 696.34
Reduction to APV for Excess Withdrawal:
= X-Y + Z
= 14,283.88 - 357.10 + 696.34
= 14,623.12
Remaining Policy Value at
middle of Contract Year 3 = 57,161.18 - 5,716.12 - 14,623.12
= 32,821.94
A-4
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE ENDEAVOR ML VARIABLE ANNUITY
Issued through
PFL ENDEAVOR VARIABLE
ANNUITY ACCOUNT
Offered by
PFL LIFE INSURANCE COMPANY
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Endeavor ML Variable Annuity (the "Policy")
offered by PFL Life Insurance Company. You may obtain a copy of the Prospectus
dated May 1, 1997 by calling 1-800-525-6205, or by writing to the Administrative
and Service Office, Financial Markets Division--Variable Annuity Dept., 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001. Terms used in the current
Prospectus for the Policy are incorporated in this Statement of Additional
Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUSES FOR THE POLICY, ENDEAVOR SERIES
TRUST, THE GROWTH PORTFOLIO OF THE WRL SERIES FUND, INC., AND THE MERRILL LYNCH
VARIABLE SERIES FUNDS, INC.
Dated: May 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
The Policy--General Provisions.......................................... 3
Owner.............................................................. 3
Entire Policy...................................................... 3
Delay of Payment and Transfers..................................... 3
Misstatement of Age or Sex......................................... 4
Reallocation of Policy Values After the Annuity Commencement Date.. 4
Assignment......................................................... 4
Evidence of Survival............................................... 4
Non-Participating.................................................. 5
Amendments......................................................... 5
Federal Tax Matters (49)................................................ 5
Tax Status of the Policy........................................... 5
Taxation of PFL.................................................... 6
Investment Experience................................................... 6
State Regulation of PFL................................................. 11
Administration.......................................................... 11
Records and Reports..................................................... 11
Distribution of the Policies (55)....................................... 11
Custody of Assets....................................................... 11
Historical Performance Data (19)........................................ 12
Money Market Yields................................................ 12
Other Subaccount Yields............................................ 13
Total Returns...................................................... 13
Other Performance Data............................................. 14
Hypothetical Performance Data...................................... 14
Legal Matters........................................................... 15
Independent Auditors.................................................... 15
Other Information....................................................... 15
Financial Statements (18)............................................... 15
</TABLE>
(Numbers in parenthesis indicate corresponding pages of the Prospectus).
2
<PAGE>
In order to supplement the description in the Prospectus, the following
provides additional information about PFL and the Policy which may be of
interest to an Owner.
THE POLICY--GENERAL PROVISIONS
Owner
The Policy shall belong to the Owner upon issuance of the Policy after
completion of an application and delivery of the initial Premium Payment. While
the Annuitant is living, the Owner may: (1) assign the Policy; (2) surrender the
Policy; (3) amend or modify the Policy with PFL's consent; (4) receive annuity
payments or name a Payee to receive the payments; and (5) exercise, receive and
enjoy every other right and benefit contained in the Policy. The exercise of
these rights may be subject to the consent of any assignee or irrevocable
Beneficiary; and of the Owner's spouse in a community of marital property state.
A Successor Owner can be named in the Policy application or in a Written
Notice. The Successor Owner will become the new Owner upon the Owner's death, if
the Owner predeceases the Annuitant. If no Successor Owner survives the Owner
and the Owner predeceases the Annuitant, the Owner's estate will become the
Owner.
The Owner may change the ownership of the Policy in a Written Notice. When
this change takes effect, all rights of ownership in the Policy will pass to the
new Owner. A change of ownership may have adverse tax consequences.
When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any payment
PFL has made or action PFL has taken before recording the change. Changing the
Owner or naming a new Successor Owner cancels any prior choice of Successor
Owner, but does not change the designation of the Beneficiary or the Annuitant.
If ownership is transferred (except to the Owner's spouse) because the
Owner dies before the Annuitant, the Cash Value generally must be distributed to
the Successor Owner within five years of the Owner's death, or payments must be
made for a period certain or for the Successor Owner's lifetime so long as any
period certain does not exceed that Successor Owner's life expectancy, if the
first payment begins within one year of the Owner's death.
Entire Policy
The Policy and any endorsements thereon and the Policy application
constitute the entire contract between PFL and the Owner. All statements in the
application are representations and not warranties. No statement will cause the
Policy to be void or to be used in defense of a claim unless contained in the
application.
Delay of Payment and Transfers
Payment of any amount due from the Mutual Fund Account in respect of a
surrender, the Death Benefit or the death of the Owner of a Nonqualified Policy
generally will occur within seven business days from the date the Written Notice
(and any other required documentation or information) is received, except that
PFL may be permitted to defer such payment from the Mutual Fund Account if: (1)
the New York Stock Exchange is closed for other than usual weekends or holidays
or trading on the Exchange is otherwise restricted; or (2) an emergency exists
as defined by the SEC or the SEC requires that trading be restricted; or (3) the
SEC permits a delay for the protection of Owners. In addition, transfers of
amounts from the Subaccounts may be deferred under these circumstances.
3
<PAGE>
Certain delays and restrictions apply to transfers of amounts out of the
Fixed Account. See page 26 of the Policy Prospectus.
Misstatement of Age or Sex
If the age or sex of the Annuitant has been misstated, PFL will change the
annuity benefit payable to that which the Premium Payments would have purchased
for the correct age or sex. The dollar amount of any underpayment made by PFL
shall be paid in full with the next payment due such person or the Beneficiary.
The dollar amount of any overpayment made by PFL due to any misstatement shall
be deducted from payments subsequently accruing to such person or Beneficiary.
Any underpayment or overpayment will include interest at 5% per year, from the
date of the wrong payment to the date of the adjustment. The age of the
Annuitant may be established at any time by the submission of proof satisfactory
to PFL.
Reallocation of Annuity Purchase Values After the Annuity Commencement Date
After the Annuity Commencement Date, the Policy Owner may reallocate the
value of a designated number of Annuity Units of a Subaccount of the Mutual Fund
Account then credited to a Policy into an equal value of Annuity Units of one or
more other Subaccounts of the Mutual Fund Account, or the Fixed Account. The
reallocation shall be based on the relative value of the Annuity Units of the
Account(s) or Subaccount(s) at the end of the Business Day on the next payment
date. The minimum amount which may be reallocated is the lesser of (1) $10 of
monthly income or (2) the entire monthly income of the Annuity Units in the
Account or Subaccount from which the transfer is being made. If the monthly
income of the Annuity Units remaining in an Account or Subaccount after a
reallocation is less than $10, PFL reserves the right to include the value of
those Annuity Units as part of the transfer. The request must be in writing to
PFL's Administrative and Service Office. There is no charge assessed in
connection with such reallocation. PFL reserves the right to limit the number of
times a reallocation of Annuity Purchase Value may be made in any given Policy
Year.
Assignment
During the lifetime of the Annuitant the Policy Owner may assign any rights
or benefits provided by the Policy. An assignment will not be binding on PFL
until a copy has been filed at its Administrative and Service Office. The rights
and benefits of the Policy Owner and Beneficiary are subject to the rights of
the assignee. PFL assumes no responsibility for the validity or effect of any
assignment. Any claim made under an assignment shall be subject to proof of
interest and the extent of the assignment. An assignment may have tax
consequences.
Unless the Policy Owner so directs by filing written notice with PFL, no
Beneficiary may assign any payments under the Policy before they are due. To the
extent permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.
Evidence of Survival
PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be made
until PFL receives such evidence.
Non-Participating
4
<PAGE>
The Policy will not share in PFL's surplus earnings; no dividends will be
paid.
Amendments
No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No Registered Representative has authority to change
or waive any provision of the Policy.
PFL reserves the right to amend the Policies to meet the requirements of
the Code, regulations or published rulings. A Policy Owner can refuse such a
change by giving Written Notice, but a refusal may result in adverse tax
consequences.
FEDERAL TAX MATTERS
Tax Status of the Policy
Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
ss. 1.817-5) apply a diversification requirement to each of the Subaccounts of
the Mutual Fund Account. The Mutual Fund Account, through the Underlying Funds
and their Portfolios, intends to comply with the diversification requirements of
the Treasury. PFL has entered into agreements regarding participation in Merrill
Lynch Variable Series Funds, Inc., the Endeavor Series Trust and WRL Series
Fund, Inc. that require the Underlying Funds and their Portfolios to be operated
in compliance with the Treasury regulations.
Owner Control. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for Federal income tax purposes, of the
assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contractowner's gross income. Several years
ago, the IRS state in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contractowner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. More recently, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
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, 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 underlying assets."
The ownership rights under the contract are similar to, but different
in certain respects from those described by the IRS in rulings in which it was
determined that contractowners were not owners of separate account assets. For
example, the Owner of a Policy has the choice of one or more Subaccounts in
which to allocate premiums and Policy Values, and may be able to transfer among
these accounts more frequently than in such rulings. These differences could
result in policyowners being treated as the owners of the assets of the Mutual
Fund Account. In addition, PFL does not know what standards will be set forth,
if any, in the regulations or rulings with the Treasury Department has stated it
expects to issue. PFL therefore reserves the right to modify the Policies as
necessary to attempt to prevent the policyowners from being considered the
owners of a pro rata share of the assets of the Mutual Fund Account.
Distribution Requirements. The Code also requires that Nonqualified
Policies contain specific provisions for distribution of Policy proceeds upon
the death of any Owner. In order to be treated as an annuity contract for
federal income tax purposes, the Code requires that such Policies provide that
if any Owner dies on or after the Annuity
5
<PAGE>
Commencement Date and before the entire interest in the Policy has been
distributed, the remaining portion must be distributed at least as rapidly as
under the method in effect on such Owner's death. If any Owner dies before the
Annuity Commencement Date, the entire interest in the Policy must generally be
distributed within 5 years after such Owner's date of death or be used to
purchase an immediate annuity under which payments will begin within one year of
such Owner's death and will be made for the life of the Beneficiary or for a
period not extending beyond the life expectancy of the Beneficiary. However, if
upon such Owner's death prior to the Annuity Commencement Death, such Owner's
surviving spouse becomes the sole new Owner under the Policy, then the Policy
may be continued with the surviving spouse as the new Owner. If any Owner is not
a natural person, then for purposes of these distribution requirements, the
primary Annuitant shall be treated as the Owner and any death or change of such
primary Annuitant shall be treated as the Death of the Owner. The Nonqualified
Policies contain provisions intended to comply with these requirements of the
Code. No regulations interpreting these requirements of the Code have yet been
issued and thus no assurance can be given that the provisions contained in the
Policies satisfy all such Code requirements. The provisions contained in the
Policies will be reviewed and modified if necessary to assure that they comply
with the Code requirements when clarified by regulation or otherwise.
Taxation of PFL
PFL at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund Account is treated as part of PFL and,
accordingly, will not be taxed separately as a "regulated investment company"
under Subchapter M of the Code. PFL does not expect to incur any federal income
tax liability with respect to investment income and net capital gains arising
from the activities of the Mutual Fund Account retained as part of the reserves
under the Policy. Based on this expectation, it is anticipated that no charges
will be made against the Mutual Fund Account for federal income taxes. If, in
future years, any federal income taxes are incurred by PFL with respect to the
Mutual Fund Account, PFL may make a charge to the Mutual Fund Account.
INVESTMENT EXPERIENCE
An "Investment Experience Factor" is used to determine the value of
Accumulation Units and Annuity Units, and to determine annuity payment rates.
Accumulation Units
Upon allocation to the selected Subaccount of the Mutual Fund Account,
Premium Payments are converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited is determined by dividing the dollar
amount allocated to each Subaccount by the value of an Accumulation Unit for
that Subaccount as next determined after the Premium Payment is received at the
Administrative and Service Office or, in the case of the initial Premium
Payment, when the Policy application is completed, whichever is later. The value
of an Accumulation Unit was arbitrarily established at $1 (except the WRL Growth
Subaccount which was established at $10) at the inception of each Subaccount.
Thereafter, the value of an Accumulation Unit is determined as of the close of
trading on each day the New York Stock Exchange and PFL's Administrative and
Service Office are open for business.
An index (the "Investment Experience Factor") which measures the investment
performance of a Subaccount during a Valuation Period is used to determine the
value of an Accumulation Unit for the next subsequent Valuation Period. The
Investment Experience Factor may be greater or less than or equal to one;
therefore, the value of an Accumulation Unit may increase, decrease or remain
the same from one Valuation Period to the next. The Policy Owner bears this
investment risk. The Net Investment Performance of a Subaccount and deduction of
certain charges affect the Accumulation Unit Value.
6
<PAGE>
The Investment Experience Factor for any Subaccount for any Valuation
Period is determined by dividing (a) by (b) and subtracting (c) from the result,
where:
(a) is the net result of:
(1) the net asset value per share of the shares held in the
Subaccount determined at the end of the current Valuation Period, plus
(2) The per share amount of any dividend or capital gain
distribution made with respect to the shares held in the Subaccount if
the ex-dividend date occurs during the current Valuation Period, plus
or minus
(3) a per share credit or charge for any taxes determined by PFL
to have resulted from the investment operations of the Subaccount.
(b) is the result of the net asset value per share of the shares held
in the Subaccount determined as of the end of the immediately preceding
Valuation Period.
(c) is the charge for Mortality and Expense Risk during the Valuation
Period (equal on an annual basis to 1.25% for both the 5% Annually
Compounding Death Benefit and the Annual Step-Up Death Benefit and 1.10%
for the Return of Premium Death Benefit) of the daily net asset value of
the Subaccount, plus the .15% Administrative Charge plus the Distribution
Financing Charge of .15%. The Distribution Financing Charge is assessed
only during the first seven Policy Years. The cumulative amount of the
Distribution Financing Charge, plus the Surrender Charge, will never exceed
8.5% of the cumulative Premium Payments for a Policy.
Illustration of Accumulation Unit Value Calculations
Formula and Illustration for Determining
the Investment Experience Factor
Assume either the 5% Annually Compounding Death Benefit
or the Annual Step-Up Death Benefit is in effect
Investment Experience Factor = (A + B - C) - E
---------
(D)
Where: A = The Net Asset Value of an Underlying Fund share as of the end of the
current Valuation Period.
Assume A = $11.57
B = The per share amount of any dividend or capital gains distribution
since the end of the immediately preceding Valuation Period.
Assume B = 0
C = The per share charge or credit for any taxes reserved for at
the end of the current Valuation Period.
Assume C = 0
7
<PAGE>
D = The Net Asset Value of an Underlying Fund share at the end of
the immediately preceding Valuation Period.
Assume D = $11.40
E = The daily deduction for the Mortality and Expense Risk Fee, the
Administrative Charge, and the Distribution Financing Charge, which
totals 1.55% on an annual basis for the first seven years and 1.40%
thereafter. On a daily basis, F equals .0000421409 for the first
seven years, and .0000380909 thereafter.
Then, the Investment Experience Factor =
(11.57 + 0 - 0) - .0000421409 = Z = 1.0148701398 for the first seven years and
-------------
(11.40)
(11.57 + 0 - 0) - .0000380909 = 1.0148741898 thereafter.
-------------
(11.40)
Formula and Illustration for Determining Accumulation Unit Value
Accumulation Unit Value = A x B
Where: A = The Accumulation Unit Value for the immediately preceding Valuation
Period.
Assume = $ X
B = The Net Investment Factor for the current Valuation Period.
Assume = Y
Then, the Accumulation Unit Value = $ X x Y = $ Z
Annuity Unit Value And Annuity Payment Rates
The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Subaccount
exceeds the assumed interest rate of 5% annually. Conversely, Annuity Unit
Values fall if the net investment performance of the Subaccount is less than the
assumed rate. The value of a variable Annuity Unit in each Subaccount was
established at $1.00 on the date operations began for that Subaccount. The value
of a variable Annuity Unit on any subsequent Business Day is equal to (a)
multiplied by (b) multiplied by (c), where:
(a) is the variable Annuity Unit Value on the immediately preceding
Business Day;
(b) is the net investment factor of the valuation period; and
(c) is the investment result adjustment factor for the valuation period.
8
<PAGE>
The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.
The net investment factor for the Policy used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is determined
by dividing (i) by (ii) and subtracting (iii) from the result, where:
(i) is the result of:
(1) the net asset value of a fund share held in the Mutual Fund
Account for that Subaccount determined at the end of the current
valuation period; plus
(2) the per share amount of any dividend or capital gain
distributions made by the fund for shares held in the Mutual Fund
Account for that Subaccount if the ex-dividend date occurs during the
valuation period.
(ii) is the net asset value of a fund share held in the Mutual Fund
Account for that Subaccount determined as of the end of the immediately
preceding valuation period.
(iii) is a factor representing the Mortality and Expense Risk Fee, the
Administrative Charge and the Distribution Financing Charge (only applies
during the first seven policy years and only applies before the Annuity
Commencement Date). This factor is equal, on an annual basis and assuming
the Distribution Financing Charge is still applicable, to 1.55% for the 5%
Annually Compounding Death Benefit and the Annual Step-Up Death Benefit
(1.40% for the Return of Premium Death Benefit) of the daily net asset
value of a fund share held in the Mutual Fund Account for that Subaccount.
The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.
The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date. The
Policy also contains a table for determining the adjusted age of the Annuitant.
Illustration of Calculations for Annuity Unit Value
and Variable Annuity Payments
Formula and Illustration for Determining Annuity Unit Value
Annuity Unit Value = A x B x C
Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume = $ X
B = Investment Experience Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
Assume = Y
C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables used.
Assume = Z
Then, the Annuity Unit Value is: $ X x Y x Z = $ Q
9
<PAGE>
Formula and Illustration for Determining Amount
of First Monthly Variable Annuity Payment
First Monthly Variable Annuity Payment = A x B
------
$1,000
Where: A = The Annuity Purchase Value as of the Annuity Commencement Date.
Assume = $ X
B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according to the tables
contained in the Policy.
Assume = $ Y
Then, the first Monthly Variable Annuity Payment = $ X x $ Y = $ Z
-----
1,000
Formula and Illustration for Determining the Number of Annuity
Units Represented by Each Monthly Variable Annuity Payment
Number of Annuity Units = A
-
B
Where: A = The dollar amount of the first monthly Variable Annuity Payment.
Assume = $ X
B = The Annuity Unit Value for the Valuation Date on which the first
monthly payment is due.
Assume = $ Y
Then, the number of Annuity Units = $ X = Z
----
$ Y
10
<PAGE>
STATE REGULATION OF PFL
PFL is subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of PFL for the preceding year and its financial condition as of the
end of such year. Regulation by the Division of Insurance includes periodic
examination to determine PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.
ADMINISTRATION
PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.
RECORDS AND REPORTS
All records and accounts relating to the Mutual Fund Account will be
maintained by PFL. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, PFL will mail to all Policy Owners at
their last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law or
regulation. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.
DISTRIBUTION OF THE POLICIES
The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies. AEGON USA Securities, Inc., an affiliate of PFL, will be the principal
underwriter of the Policies. AEGON USA Securities, Inc. has entered into
agreements with broker-dealers for the distribution of the Policies.
CUSTODY OF ASSETS
The assets of each of the Subaccounts of the Mutual Fund Account are held
by PFL. The assets of each of the Subaccounts of the Mutual Fund Account are
segregated and held separate and apart from the assets of the other Subaccounts
and from PFL's general account assets. PFL maintains records of all purchases
and redemptions of shares of the Underlying Funds held by each of the
Subaccounts. Additional protection for the assets of the Mutual Fund Account is
afforded by PFL's fidelity bond, presently in the amount of $5,000,000, covering
the acts of officers and employees of PFL.
11
<PAGE>
HISTORICAL PERFORMANCE DATA
Money Market Yields
PFL may from time to time disclose the current annualized yield of the TCW
Money Market Subaccount, which invests in the TCW Money Market Portfolio, for a
7-day period in a manner which does not take into consideration any realized or
unrealized gains or losses on shares of the TCW Money Market Portfolio or on its
portfolio securities. This current annualized yield is computed by determining
the net change (exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) at the end of the 7-day period in
the value of a hypothetical account having a balance of 1 unit of the TCW Money
Market Subaccount at the beginning of the 7-day period, dividing such net change
in account value by the value of the account at the beginning of the period to
determine the base period return, and annualizing this quotient on a 365-day
basis. The net change in account value reflects (i) net income from the
Portfolio attributable to the hypothetical account; and (ii) charges and
deductions imposed under a Policy that are attributable to the hypothetical
account. The charges and deductions include the per unit charges for the
hypothetical account for (i) the Administrative Charges; and (ii) the Mortality
and Expense Risk Fee and Distribution Financing Charge. Current Yield will be
calculated according to the following formula:
Current Yield = ((NCS-ES)/UV) x (365/7)
Where:
NCS = The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized appreciation and
depreciation) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a Policy, the yield for
the TCW Money Market Subaccount will be lower than the yield for the TCW Money
Market Portfolio. The yield calculations do not reflect the effect of any
premium taxes or Surrender Charges that may be applicable to a particular
Policy. Surrender Charges range from 7% to 0% of the amount of premium withdrawn
based on the number of years since payment of the premium.
PFL may also disclose the effective yield of the TCW Money Market
Subaccount for the same 7-day period, determined on a compounded basis. The
effective yield is calculated by compounding the base period return according to
the following formula:
Effective Yield = (1 + ((NCS - ES) / UV))/365/7/ - 1
Where:
NCS = The net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized appreciation and
depreciation) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.
ES = Per unit expenses of the Subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
12
<PAGE>
The yield on amounts held in the TCW Money Market Subaccount normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The TCW Money Market Subaccount's actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the TCW
Money Market Portfolio, the types and quality of portfolio securities held by
the TCW Money Market Portfolio and its operating expenses. For the seven days
ended December 31, 1996, the yield of the TCW Money Market Subaccount was 2.73%,
and the effective yield was 2.76%.
Other Subaccount Yields
PFL may from time to time advertise or disclose the current annualized
yield of one or more of the Subaccounts of the Mutual Fund Account (except the
TCW Money Market Subaccount) for 30-day periods. The annualized yield of a
Subaccount refers to income generated by the Subaccount over a specific 30-day
period. Because the yield is annualized, the yield generated by a Subaccount
during the 30-day period is assumed to be generated each 30-day period over a
12-month period. The yield is computed by: (i) dividing the net investment
income of the Subaccount less Subaccount expenses for the period, by (ii) the
maximum offering price per unit on the last day of the period times the daily
average number of units outstanding for the period, (iii) compounding that yield
for a 6-month period, and (iv) multiplying that result by 2. Expenses
attributable to the Subaccount include (i) the Administrative Charge and (ii)
the Mortality and Expense Risk Fee and Distribution Financing Charge. The 30-day
yield is calculated according to the following formula:
Yield = 2 x ((((NI - ES)/(U x UV)) + 1)/6/ - 1)
Where:
NI = Net investment income of the Subaccount for the 30-day period
attributable to the Subaccount's unit.
ES = Expenses of the Subaccount for the 30-day period.
U = The average number of units outstanding.
UV = The unit value at the close (highest) of the last day in the 30-day
period.
Because of the charges and deductions imposed by the Mutual Fund Account,
the yield for a Subaccount of the Mutual Fund Account will be lower than the
yield for its corresponding Portfolio. The yield calculations do not reflect the
effect of any premium taxes that may be applicable to a particular Policy.
Surrender Charges range from 7% to 0% of the amount of premium withdrawn based
on the number of years since payment of the premium.
The yield on amounts held in the Subaccounts of the Mutual Fund Account
normally will fluctuate over time. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates of
return. A Subaccount's actual yield is affected by the types and quality of its
investments and its operating expenses.
Total Returns
PFL may from time to time also advertise or disclose total returns for one
or more of the Subaccounts of the Mutual Fund Account for various periods of
time. One of the periods of time will include the period measured from the date
the Subaccount commenced operations. When a Subaccount has been in operation for
1, 5 and 10 years, respectively, the total return for these periods will be
provided. Total returns for other periods of time may from
13
<PAGE>
time to time also be disclosed. Total returns represent the average annual
compounded rates of return that would equate an initial investment of $1,000 to
the redemption value of that investment as of the last day of each of the
periods. The ending date for each period for which total return quotations are
provided will be for the most recent month end practicable, considering the type
and media of the communication and will be stated in the communication.
Total returns will be calculated using Subaccount Unit Values which PFL
calculates on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deductions for the Mortality and Expense Risk Fee,
the Distribution Financing Charge, and the Administrative Charge. Total return
calculations will reflect the effect of Surrender Charges that may be applicable
to a particular period. The total return will then be calculated according to
the following formula:
P(1 + T)/n/ = ERV
Where:
T = The average annual total return net of Subaccount recurring charges.
ERV = The ending redeemable value of the hypothetical account at the end of the
period.
P = A hypothetical initial payment of $1,000.
N = The number of years in the period.
Other Performance Data
PFL may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above. The
non-standard format will be identical to the standard format except that the
Surrender Charge percentage will be assumed to be 0%.
PFL may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the Surrender
Charge percentage will be 0%.
CTR = (ERV / P) - 1
Where:
CTR = The cumulative total return net of Subaccount recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of
the period.
P = A hypothetical initial payment of $1,000.
All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.
Hypothetical Performance Data
From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date the Mutual Fund Account
commenced operations. Such performance information for the Subaccounts will be
calculated based on the performance of the various Portfolios and the assumption
that the Subaccounts were in
14
<PAGE>
existence for the same periods as those indicated for the Portfolios, with the
level of Policy charges that were in effect at the inception of the Subaccounts.
LEGAL MATTERS
Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan L.L.P., of Washington D.C.
INDEPENDENT AUDITORS
The Financial Statements of PFL as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, and the Financial
Statements of PFL Endeavor Variable Annuity Account (which comprises a portion
of the PFL Endeavor VA Separate Account) at December 31, 1996, and for each of
the two years in the period then ended, included in this Statement of Additional
Information have been audited by Ernst & Young LLP, Independent Auditors, 801
Grand Avenue, Suite 3400, Des Moines, Iowa, 50309-2764.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus or this Statement of Additional
Information. Statements contained in the Prospectus and this Statement of
Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the terms
of these documents, reference should be made to the instruments filed with the
Securities and Exchange Commission.
FINANCIAL STATEMENTS
The values of the interest of Policy Owners in the Mutual Fund Account will
be affected solely by the investment results of the selected Subaccount(s).
Financial Statements of PFL Endeavor Variable Annuity Account (which comprises a
portion of the PFL Endeavor VA Separate Account) are contained herein. The
Financial Statements of PFL, which are included in this Statement of Additional
Information, should be considered only as bearing on the ability of PFL to meet
its obligations under the Policies. They should not be considered as bearing on
the investment performance of the assets held in the Mutual Fund Account.
15
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND CONTRACT OWNERS OF
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT,
PFL LIFE INSURANCE COMPANY:
We have audited the accompanying balance sheet of The PFL Endeavor Variable
Annuity Account (comprising, respectively, the TCW Money Market, TCW Managed
Asset Allocation, T. Rowe Price International Stock, Value Equity, Dreyfus
Small Cap Value, Dreyfus U.S. Government Securities, T. Rowe Price Equity
Income, T. Rowe Price Growth Stock, Opportunity Value and Growth subaccounts)
as of December 31, 1996, and the related statements of operations and changes
in contract owners' equity for the periods indicated therein. These financial
statements are the responsibility of the Variable Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of mutual fund shares owned as of December 31,
1996 by correspondence with the mutual funds' transfer agent. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting The PFL Endeavor Variable Annuity Account at December
31, 1996, and the results of their operations and changes in their contract
owners' equity for the periods indicated therein in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Des Moines, Iowa
January 31, 1997
16
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
BALANCE SHEET (AMOUNTS IN THOUSANDS)
December 31, 1996
<TABLE>
<CAPTION>
TCW
TCW MANAGED
MONEY ASSET
MARKET ALLOCATION
TOTAL SUBACCT. SUBACCT.
-------- -------- ----------
<S> <C> <C> <C>
ASSETS
Cash.............................................. $ 9 -- --
Investments in mutual funds, at current market
value (Note 2):
Endeavor Series Trust--TCW Money Market
Portfolio....................................... 30,542 30,542 --
Endeavor Series Trust--TCW Managed Asset
Allocation Portfolio............................ 229,142 -- 229,142
Endeavor Series Trust--T. Rowe Price
International Stock Portfolio................... 121,702 -- --
Endeavor Series Trust--Value Equity Portfolio.... 110,548 -- --
Endeavor Series Trust--Dreyfus Small Cap Value
Portfolio....................................... 76,482 -- --
Endeavor Series Trust--Dreyfus U.S. Government
Securities Portfolio............................ 19,823 -- --
Endeavor Series Trust--T. Rowe Price Equity
Income Portfolio................................ 64,935 -- --
Endeavor Series Trust--T. Rowe Price Growth Stock
Portfolio....................................... 48,731 -- --
Endeavor Series Trust--Opportunity Value
Portfolio....................................... 315 -- --
WRL Series Fund, Inc.--Growth Portfolio.......... 257,421 -- --
-------- ------ -------
Total investments in mutual funds................ 959,641 30,542 229,142
-------- ------ -------
Total Assets..................................... $959,650 30,542 229,142
======== ====== =======
LIABILITIES AND CONTRACT OWNERS' EQUITY
Liabilities:
Contract terminations payable.................... $ 2 -- 2
-------- ------ -------
Total Liabilities................................ 2 -- 2
Contract Owners' Equity:
Deferred annuity contracts terminable by owners
(Notes 3 and 6)................................. 959,648 30,542 229,140
-------- ------ -------
$959,650 30,542 229,142
======== ====== =======
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
T. ROWE T. ROWE T. ROWE
PRICE DREYFUS DREYFUS U.S. PRICE PRICE
INT'L. VALUE SMALL CAP GOV'T. EQUITY GROWTH OPPORTUNITY
STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT.
-------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 3 4 -- -- 1 -- --
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
121,702 -- -- -- -- -- -- --
-- 110,548 -- -- -- -- -- --
-- -- 76,482 -- -- -- -- --
-- -- -- 19,823 -- -- -- --
-- -- -- -- 64,935 -- -- --
-- -- -- -- -- 48,731 -- --
-- -- -- -- -- -- 315 --
-- -- -- -- -- -- -- 257,421
------- ------- ------ ------ ------ ------ --- -------
121,702 110,548 76,482 19,823 64,935 48,731 315 257,421
------- ------- ------ ------ ------ ------ --- -------
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======= ======= ====== ====== ====== ====== === =======
-- -- -- -- -- -- -- --
------- ------- ------ ------ ------ ------ --- -------
-- -- -- -- -- -- -- --
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
------- ------- ------ ------ ------ ------ --- -------
121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======= ======= ====== ====== ====== ====== === =======
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
STATEMENT OF OPERATIONS (AMOUNTS IN THOUSANDS)
Year Ended December 31, 1996, Except as Noted
<TABLE>
<CAPTION>
TCW
TCW MANAGED
MONEY ASSET
MARKET ALLOCATION
TOTAL SUBACCT. SUBACCT.
-------- -------- ----------
<S> <C> <C> <C>
NET INVESTMENT INCOME (LOSS)
Income:
Dividends........................................ $ 27,904 1,245 3,793
Expenses (Note 5):
Administrative fee............................... 443 10 122
Mortality and expense risk charge................ 11,237 365 2,943
-------- ------ ------
Net investment income (loss)................... 16,224 870 728
-------- ------ ------
NET REALIZED AND UNREALIZED CAPITAL GAIN FROM
INVESTMENTS
Net realized capital gain from sales of
investments:
Proceeds from sales.............................. 70,848 24,793 15,228
Cost of investments sold......................... 60,774 24,793 12,264
-------- ------ ------
Net realized capital gain from sales of
investments...................................... 10,074 -- 2,964
Net change in unrealized appreciation/depreciation
of investments:
Beginning of the period.......................... 78,863 -- 25,121
End of the period................................ 175,289 -- 52,892
-------- ------ ------
Net change in unrealized
appreciation/depreciation of investments...... 96,426 -- 27,771
-------- ------ ------
Net realized and unrealized capital gain from
investments................................... 106,500 -- 30,735
-------- ------ ------
INCREASE FROM OPERATIONS.......................... $122,724 870 31,463
======== ====== ======
</TABLE>
/1/Period from November 18, 1996 (commencement of operations) to December 31,
1996.
See accompanying Notes to Financial Statements.
19
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
T. ROWE T. ROWE T. ROWE
PRICE DREYFUS DREYFUS U.S. PRICE PRICE
INT'L. VALUE SMALL CAP GOV'T. EQUITY GROWTH OPPORTUNITY
STOCK EQUITY VALUE SECURITIES INCOME STOCK VALUE GROWTH
SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT. SUBACCT./1/ SUBACCT.
- -------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
729 1,976 2,674 436 354 525 -- 16,172
66 42 31 5 15 13 -- 139
1,464 1,198 852 202 540 456 -- 3,217
------ ------ ------ ----- ----- ----- --- ------
(801) 736 1,791 229 (201) 56 -- 12,816
------ ------ ------ ----- ----- ----- --- ------
4,813 3,499 4,065 1,853 970 1,628 37 13,962
4,276 2,344 3,504 1,664 696 1,210 37 9,986
------ ------ ------ ----- ----- ----- --- ------
537 1,155 561 189 274 418 -- 3,976
2,636 12,562 4,426 563 2,266 1,913 -- 29,376
16,143 27,439 15,836 455 9,138 7,517 -- 45,869
------ ------ ------ ----- ----- ----- --- ------
13,507 14,877 11,410 (108) 6,872 5,604 -- 16,493
------ ------ ------ ----- ----- ----- --- ------
14,044 16,032 11,971 81 7,146 6,022 -- 20,469
------ ------ ------ ----- ----- ----- --- ------
13,243 16,768 13,762 310 6,945 6,078 -- 33,285
====== ====== ====== ===== ===== ===== === ======
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
THE PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY (AMOUNTS IN THOUSANDS)
Years Ended December 31, 1996 and 1995, Except as Noted
<TABLE>
<CAPTION>
TCW TCW T. ROWE PRICE
MONEY MANAGED INTERNATIONAL
MARKET ASSET ALLOCATION STOCK
TOTAL SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- --------------- ------------------ ---------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- ------- ------- ------ -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income
(loss).................. $ 16,224 18,207 870 816 728 448 (801) 715
Net realized capital
gain.................... 10,074 5,077 -- -- 2,964 2,310 537 270
Net change in unrealized
appreciation/depreciation
of investments.......... 96,426 98,622 -- -- 27,771 31,591 13,507 6,070
-------- ------- ------- ------ -------- -------- ------- ------
Increase from
operations.............. 122,724 121,906 870 816 31,463 34,349 13,243 7,055
-------- ------- ------- ------ -------- -------- ------- ------
CONTRACT TRANSACTIONS
Net contract purchase
payments................ 150,050 88,212 12,211 5,842 13,250 12,410 16,257 9,185
Transfer payments from
(to) other subaccounts
or general account...... 78,317 11,541 5,680 1,552 2,506 (13,051) 10,431 (5,983)
Contract terminations,
withdrawals, and other
deductions.............. (52,551) (30,449) (11,765) (3,793) (12,118) (10,070) (6,132) (4,530)
-------- ------- ------- ------ -------- -------- ------- ------
Increase (decrease) from
contract transactions... 175,816 69,304 6,126 3,601 3,638 (10,711) 20,556 (1,328)
-------- ------- ------- ------ -------- -------- ------- ------
Net increase in contract
owners' equity.......... 298,540 191,210 6,996 4,417 35,101 23,638 33,799 5,727
-------- ------- ------- ------ -------- -------- ------- ------
CONTRACT OWNERS' EQUITY
Beginning of period...... 661,108 469,898 23,546 19,129 194,039 170,401 87,904 82,177
-------- ------- ------- ------ -------- -------- ------- ------
End of period............ $959,648 661,108 30,542 23,546 229,140 194,039 121,703 87,904
======== ======= ======= ====== ======== ======== ======= ======
</TABLE>
/1/Period from January 3, 1995 (commencement of operations) to December 31,
1995
/2/Period from November 18, 1996 (commencement of operations) to December 31,
1996
See accompanying Notes to Financial Statements.
21
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Dreyfus Dreyfus U.s. T. Rowe Price T. Rowe Price
Value Small Cap Government Equity Growth Opportunity
Equity Value Securities Income Stock Value Growth
Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount Subaccount
- --------------- -------------- ------------- --------------- --------------- ----------- ----------------
1996 1995 1996 1995 1996 1995 1996 1995/1/ 1996 1995/1/ 1996/2/ 1996 1995
- ------- ------ ------ ------ ------ ----- ------ ------- ------ ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
736 (230) 1,791 314 229 (25) (201) (107) 56 (119) -- 12,816 16,395
1,155 972 561 184 189 106 274 71 418 322 -- 3,976 842
14,877 11,749 11,410 4,328 (108) 568 6,872 2,266 5,604 1,913 -- 16,493 40,137
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
16,768 12,491 13,762 4,826 310 649 6,945 2,230 6,078 2,116 -- 33,285 57,374
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
20,562 12,996 11,126 8,736 6,793 4,592 21,213 8,911 13,844 8,446 193 34,601 17,094
13,551 9,310 5,637 2,469 4,193 1,487 19,065 8,365 10,830 9,027 166 6,258 (1,635)
(4,444) (2,587) (3,080) (1,976) (980) (280) (1,524) (270) (1,233) (376) (44) (11,231) (6,567)
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
29,669 19,719 13,683 9,229 10,006 5,799 38,754 17,006 23,441 17,097 315 29,628 8,892
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
46,437 32,210 27,445 14,055 10,316 6,448 45,699 19,236 29,519 19,213 315 62,913 66,266
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
64,114 31,904 49,041 34,986 9,507 3,059 19,236 -- 19,213 -- -- 194,508 128,242
- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ --- ------- -------
110,551 64,114 76,486 49,041 19,823 9,507 64,935 19,236 48,732 19,213 315 257,421 194,508
======= ====== ====== ====== ====== ===== ====== ====== ====== ====== === ======= =======
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
The PFL Endeavor Variable Annuity Account
Notes to Financial Statements (Amounts in Thousands, Except Where Noted)
December 31, 1996
1. Organization and Summary of Significant Accounting Policies
Organization -- The PFL Endeavor Variable Annuity Account ("Mutual Fund
Account") is a segregated investment account of PFL Life Insurance Company
("PFL Life"), an indirect, wholly-owned subsidiary of AEGON USA, Inc. ("AUSA"),
a holding company. AUSA is an indirect, wholly-owned subsidiary of AEGON nv, a
holding company organized under the laws of The Netherlands.
The Opportunity Value Subaccount commenced operations on November 18, 1996. The
T. Rowe Price Equity Income Subaccount and the T. Rowe Price Growth Stock
Subaccount commenced operations on January 3, 1995. Effective May 1, 1996, the
names of the Money Market, Managed Asset Allocation, Quest for Value Equity,
Quest for Value Small Cap and U.S. Government Securities Portfolios and
Subaccounts were changed to TCW Money Market, TCW Managed Asset Allocation,
Value Equity, Value Small Cap and Dreyfus U.S. Government Securities Portfolios
and Subaccounts, respectively. Effective October 29, 1996, the names of the
Value Small Cap Portfolio and Subaccount were changed to Dreyfus Small Cap
Value Portfolio and Dreyfus Small Cap Value Subaccount, respectively. Effective
March 25, 1995, the names of the Global Growth Portfolio and Subaccount were
changed to T. Rowe Price International Stock Portfolio and Subaccount,
respectively. The investment objective of the portfolio was changed from an
investment on a global basis to an investment on an international basis (i.e.
non-U.S. companies). The investment advisor of the Endeavor Series Trust is
Endeavor Investment Advisors, a general partnership between Endeavor Management
Co. and AUSA Financial Markets, Inc., an affiliate of PFL Life. The investment
advisor for the WRL Series Fund, Inc. is Western Reserve Life Assurance Co. of
Ohio, an affiliate of PFL Life.
The Mutual Fund Account is registered with the Securities and Exchange
Commission as a Unit Investment Trust pursuant to provisions of the Investment
Company Act of 1940.
Investments -- Net purchase payments received by the Mutual Fund Account are
invested in the portfolios of the Endeavor Series Trust, and the Growth
Portfolio of the WRL Series Fund, Inc. (collectively the "Series Funds"), as
selected by the contract owner. Investments are stated at the closing net asset
values per share on December 31, 1996.
Realized capital gains and losses from sale of shares in the Series Funds are
determined on the first-in, first-out basis. Investment transactions are
accounted for on the trade date (date the order to buy or sell is executed) and
dividend income is recorded on the ex-dividend date. Unrealized gains or losses
from investments in the Series Funds are credited or charged to contract
owners' equity.
Dividend Income -- Dividends received from the Series Funds investments are
reinvested to purchase additional mutual fund shares.
23
<PAGE>
- --------------------------------------------------------------------------------
2. Investments
A summary of the mutual fund investment at December 31, 1996 follows:
<TABLE>
<CAPTION>
Net Asset
Number Value
of Shares Per Share Market
Held (in Dollars) Value Cost
--------- ------------ -------- --------
<S> <C> <C> <C> <C>
Endeavor Series Trust
TCW Money Market Portfolio........... 30,542 $ 1.00 $ 30,542 $ 30,542
TCW Managed Asset Allocation
Portfolio........................... 12,163 18.84 229,142 176,250
T. Rowe Price International Stock
Portfolio........................... 8,724 13.95 121,702 105,559
Value Equity Portfolio............... 6,423 17.21 110,548 83,109
Dreyfus Small Cap Value Portfolio.... 5,203 14.70 76,482 60,646
Dreyfus U.S. Government Securities
Portfolio........................... 1,765 11.23 19,823 19,368
T. Rowe Price Equity Income
Portfolio........................... 4,192 15.49 64,935 55,797
T. Rowe Price Growth Stock
Portfolio........................... 2,991 16.29 48,731 41,214
Opportunity Value Portfolio.......... 31 10.06 315 315
WRL Series Fund, Inc.
Growth Portfolio..................... 7,355 35.001280 257,421 211,552
-------- --------
$959,641 $784,352
======== ========
</TABLE>
3. Contract Owners' Equity
Contract owners' equity at December 31, 1996 includes an amount of $2,954,
which represents the current value of PFL Life's capital contribution of
$1,900. A summary of deferred annuity contracts terminable by owners at
December 31, 1996 follows:
<TABLE>
<CAPTION>
Accumulation
Unit
Accumulation Value Total
Subaccount Units Owned (in Dollars) Contract Value
---------- ------------ ------------ --------------
<S> <C> <C> <C>
TCW Money Market...................... 26,461 $ 1.154219 $ 30,542
TCW Managed Asset Allocation.......... 124,999 1.833135 229,140
T. Rowe Price International Stock..... 91,462 1.330640 121,703
Value Equity.......................... 65,227 1.694854 110,551
Dreyfus Small Cap Value............... 51,125 1.496065 76,486
Dreyfus U.S. Government Securities.... 17,562 1.128769 19,823
T. Rowe Price Equity Income........... 42,673 1.521680 64,935
T. Rowe Price Growth Stock............ 30,238 1.611613 48,732
Opportunity Value..................... 314 1.004355 315
Growth................................ 15,174 16.964068 257,421
--------
$959,648
========
</TABLE>
24
<PAGE>
- --------------------------------------------------------------------------------
A summary of changes in contract owners' account units follows:
<TABLE>
<CAPTION>
TCW T. Rowe Dreyfus Dreyfus T. Rowe T. Rowe
TCW Managed Price Small U.S. Price Price
Money Asset Int'l. Value Cap Gov't. Equity Growth Opportunity
Market Allocation Stock Equity Value Securities Income Stock Value Growth
Subacct. Subacct. Subacct. Subacct. Subacct. Subacct. Subacct. Subacct. Subacct. Subacct.
-------- ---------- -------- -------- -------- ---------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at
1/1/95............... 17,837 130,910 76,518 30,512 32,607 3,103 -- -- -- 12,759
Units purchased....... 5,331 8,434 8,306 10,253 7,689 4,247 7,630 6,773 -- 1,344
Units redeemed and
transferred.......... (2,064) (16,369) (9,759) 5,430 340 1,107 7,313 7,424 -- (766)
------ ------- ------ ------ ------ ------ ------ ------ --- ------
Units outstanding at
12/31/95............. 21,104 122,975 75,065 46,195 40,636 8,457 14,943 14,197 -- 13,337
Units purchased....... 10,754 7,818 13,001 13,373 8,625 6,218 15,335 9,588 192 2,158
Units redeemed and
transferred.......... (5,397) (5,794) 3,396 5,659 1,864 2,887 12,395 6,453 122 (321)
------ ------- ------ ------ ------ ------ ------ ------ --- ------
Units outstanding at
12/31/96............. 26,461 124,999 91,462 65,227 51,125 17,562 42,673 30,238 314 15,174
====== ======= ====== ====== ====== ====== ====== ====== === ======
</TABLE>
4. Taxes
Operations of the Mutual Fund Account form a part of PFL Life, which is taxed
as a life insurance company under Subchapter L of the Internal Revenue Code of
1986, as amended (the "Code"). The operations of the Mutual Fund Account are
accounted for separately from other operations of PFL Life for purposes of
federal income taxation. The Mutual Fund Account is not separately taxable as a
regulated investment company under Subchapter M of the Code and is not
otherwise taxable as an entity separate from PFL Life. Under existing federal
income tax laws, the income of the Mutual Fund Account, to the extent applied
to increase reserves under the variable annuity contracts, is not taxable to
PFL Life.
5. Administrative, Mortality and Expense Risk Charge
Administrative charges include an annual charge of the lesser of 2% of the
policy value or $35 per contract which will commence on the first policy
anniversary of each contract owner's account. For policies issued on or after
May 1, 1995, the fee is waived if the sum of the premium payments less the sum
of all partial withdrawals is at least $50,000 on the policy anniversary.
Charges for administrative fees to the variable annuity contracts are an
expense of the Mutual Fund Account.
PFL Life deducts a daily charge equal to an annual rate of 1.25% of the value
of the contract owners' account as a charge for assuming certain mortality and
expense risks. PFL Life also deducts a daily charge equal to an annual rate of
.15% of the contract owners' account for administrative expenses.
6. Net Assets
At December 31, 1996 contract owners' equity was comprised of:
<TABLE>
<CAPTION>
TCW T. Rowe T. Rowe T. Rowe
TCW Managed Price Dreyfus Dreyfus U.S Price Price
Money Asset Int'l. Value Small Cap Gov't. Equity Growth Opportunity
Market Allocation Stock Equity Value Securities Income Stock Value Growth
Total Subacct. Subacct. Subacct. Subacct. Subacct. Subacct. Subacct. Subacct. Subacct. Subacct.
-------- -------- ---------- -------- -------- --------- ------------ -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit
transactions,
accumulated net
investment income
and realized
capital gains... $784,359 30,542 176,248 105,560 83,112 60,650 19,368 55,797 41,215 315 211,552
Adjustment for
appreciation/
depreciation to
market value.... 175,289 -- 52,892 16,143 27,439 15,836 455 9,138 7,517 -- 45,869
-------- ------ ------- ------- ------- ------ ------ ------ ------ --- -------
Total Contract
Owners' Equity.. $959,648 30,542 229,140 121,703 110,551 76,486 19,823 64,935 48,732 315 257,421
======== ====== ======= ======= ======= ====== ====== ====== ====== === =======
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
7. Purchases and Sales of Investment Securities
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31 or
Commencement of Operations to December 31
--------------------------------------------
1996 1995
---------------------- -------------------
Purchases Sales Purchases Sales
----------- --------- --------- -------
<S> <C> <C> <C> <C>
Endeavor Series Trust
TCW Money Market Portfolio........ $ 31,789 24,793 26,533 22,147
TCW Managed Asset Allocation
Port folio....................... 19,595 15,228 18,528 28,949
T. Rowe Price International Stock
Portfolio........................ 24,567 4,813 14,396 15,085
Value Equity Portfolio............ 33,901 3,499 25,078 5,610
Dreyfus Small Cap Value
Portfolio........................ 19,535 4,065 16,203 6,683
Dreyfus U.S. Government Securities
Portfolio........................ 12,087 1,853 7,759 1,988
T. Rowe Price Equity Income
Portfolio........................ 39,523 970 18,189 1,290
T. Rowe Price Growth Stock
Portfolio........................ 25,124 1,628 19,565 2,587
Opportunity Value Portfolio....... 352 37 -- --
WRL Series Fund, Inc.
Growth Portfolio.................. 56,406 13,962 38,417 13,226
----------- --------- ---------- ---------
$ 262,879 70,848 184,668 97,565
=========== ========= ========== =========
</TABLE>
26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1996 and 1995, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles.
The variances between such practices and generally accepted accounting
principles also are described in Note 1. The effects on the financial
statements of these variances are not reasonably determinable but are presumed
to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of PFL Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 in conformity with accounting practices prescribed or permitted by the
Insurance Division, Department of Commerce, of the State of Iowa. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic statutory-basis financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Ernst & Young L.L.P.
Des Moines, Iowa
February 21, 1997
27
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net
of reinsurance:
Life.................................. $ 204,872 $ 114,704 $ 148,954
Annuity............................... 725,966 921,452 1,067,406
Accident and health................... 227,862 232,738 230,889
Net investment income................... 428,337 392,685 343,880
Amortization of interest maintenance
reserve................................ 2,434 4,341 2,871
Commissions and expense allowances on
reinsurance ceded...................... 73,931 77,071 94,635
---------- ---------- ----------
1,663,402 1,742,991 1,888,635
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health
benefits............................. 147,024 146,346 141,632
Surrender benefits.................... 512,810 498,626 392,064
Other benefits........................ 101,288 88,607 73,306
Increase in aggregate reserves for
policies and contracts:
Life................................ 140,126 50,071 82,062
Annuity............................. 188,002 528,330 569,341
Accident and health................. 26,790 17,694 22,144
Other............................... 19,969 16,017 11,223
---------- ---------- ----------
1,136,009 1,345,691 1,291,772
Insurance expenses:
Commissions........................... 177,466 200,706 215,635
General insurance expenses............ 57,282 57,623 52,166
Taxes, licenses and fees.............. 13,889 15,700 15,368
Transfer to separate account.......... 171,785 42,981 243,806
Other expenses........................ 526 760 1,014
---------- ---------- ----------
420,948 317,770 527,989
---------- ---------- ----------
1,556,957 1,663,461 1,819,761
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital losses on
investments.............................. 106,445 79,530 68,874
Federal income tax expense................ 41,177 33,335 23,858
---------- ---------- ----------
Gain from operations before net realized
capital losses on investments............ 65,268 46,195 45,016
Net realized capital losses on investments
(net of related federal income taxes and
amounts transferred to interest
maintenance reserve)..................... (3,503) (18,096) (3,624)
---------- ---------- ----------
Net income................................ $ 61,765 $ 28,099 $ 41,392
========== ========== ==========
</TABLE>
See accompanying notes.
28
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments........................ $ 50,737 $ 79,852
Bonds.................................................. 4,773,433 4,613,334
Stocks:
Preferred............................................ 3,097 9,336
Common (cost: 1996--$23,212; 1995--$19,061).......... 32,038 24,866
Affiliated entities (cost: 1996--$14,893; 1995--
$14,661)............................................ 6,934 6,794
Mortgage loans on real estate.......................... 911,705 680,414
Real estate, at cost less accumulated depreciation
($11,338 in 1996; $12,493 in 1995):
Home office properties............................... 10,372 20,403
Properties acquired in satisfaction of debt.......... 12,260 2,648
Investment properties................................ 35,922 40,453
Policy loans........................................... 54,214 52,675
Other invested assets.................................. 16,343 13,557
---------- ----------
Total cash and invested assets......................... 5,907,055 5,544,332
Premiums deferred and uncollected........................ 16,345 17,026
Accrued investment income................................ 70,401 68,065
Receivable from affiliates............................... 53,900 79,913
Federal income taxes recoverable......................... 4,018 9,776
Transfers from separate accounts......................... 38,528 --
Other assets............................................. 31,215 32,803
Separate account assets.................................. 1,844,515 1,418,157
---------- ----------
Total admitted assets.................................. $7,965,977 $7,170,072
========== ==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 736,100 $ 596,039
Annuity.............................................. 4,408,419 4,220,274
Accident and health.................................. 139,269 114,884
Policy and contract claim reserves:
Life................................................. 7,369 6,225
Accident and health.................................. 66,988 70,517
Other policyholders' funds............................. 126,672 105,371
Remittances and items not allocated.................... 64,064 123,710
Asset valuation reserve................................ 54,851 43,921
Interest maintenance reserve........................... 23,745 26,376
Other liabilities...................................... 70,663 67,070
Payable to affiliates.................................. 4,975 --
Separate account liabilities........................... 1,844,515 1,418,157
---------- ----------
Total liabilities...................................... 7,547,630 6,792,544
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding................................ 2,660 2,660
Paid-in surplus........................................ 154,129 154,129
Unassigned surplus..................................... 261,558 220,739
---------- ----------
Total capital and surplus.............................. 418,347 377,528
---------- ----------
Total liabilities and capital and surplus.............. $7,965,977 $7,170,072
========== ==========
</TABLE>
See accompanying notes.
29
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994.............. $2,660 $ 99,129 $212,982 $314,771
Capital contribution.................. -- 15,000 -- 15,000
Net income for 1994................... -- -- 41,392 41,392
Net unrealized capital losses......... -- -- (25,350) (25,350)
Increase in non-admitted assets....... -- -- (248) (248)
Decrease in asset valuation reserve... -- -- 6,040 6,040
Dividend to stockholder............... -- -- (20,900) (20,900)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 184 184
Amendment of reinsurance agreement.... -- -- 391 391
Decrease in liability for reinsurance
in unauthorized companies............ -- -- 505 505
Prior period adjustment............... -- -- (3,444) (3,444)
------ -------- -------- --------
Balance at December 31, 1994............ 2,660 114,129 211,552 328,341
Capital contribution.................. -- 40,000 -- 40,000
Net income for 1995................... -- -- 28,099 28,099
Net unrealized capital losses......... -- -- (7,574) (7,574)
Decrease in non-admitted assets....... -- -- 50 50
Increase in asset valuation reserve... -- -- (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 35 35
Cancellation of reinsurance
agreement............................ -- -- 585 585
Amendment of reinsurance agreement.... -- -- 419 419
Transfer of subsidiary investment to
stockholder.......................... -- -- (3,250) (3,250)
Change in reserve valuation
methodology.......................... -- -- (501) (501)
Increase in liability for reinsurance
in unauthorized companies............ -- -- (2,730) (2,730)
------ -------- -------- --------
Balance at December 31, 1995............ 2,660 154,129 220,739 377,528
Net income for 1996................... -- -- 61,765 61,765
Net unrealized capital gains.......... -- -- 2,351 2,351
Increase in non-admitted assets....... -- -- (148) (148)
Increase in asset valuation reserve... -- -- (10,930) (10,930)
Dividend to stockholder............... -- -- (20,000) (20,000)
Prior period adjustment............... -- -- 5,025 5,025
Surplus effect of sale of a division.. -- -- (384) (384)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 29 29
Amendment of reinsurance agreement.... -- -- 421 421
Decrease in liability for reinsurance
in unauthorized companies............ -- -- 2,690 2,690
------ -------- -------- --------
Balance at December 31, 1996............ $2,660 $154,129 $261,558 $418,347
====== ======== ======== ========
</TABLE>
See accompanying notes.
30
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations, net of
reinsurance.............................. $1,240,748 $1,353,407 $1,548,030
Net investment income..................... 431,456 398,051 339,856
---------- ---------- ----------
1,672,204 1,751,458 1,887,886
Life and accident and health claims....... (147,556) (140,798) (137,602)
Surrender benefits and other fund
withdrawals.............................. (512,810) (498,626) (392,064)
Other benefits to policyholders........... (101,254) (88,519) (73,237)
Commissions, other expenses and other
taxes.................................... (248,321) (278,241) (288,384)
Net transfers to separate accounts........ (210,312) (42,981) (243,806)
Dividends to policyholders................ (844) (940) (1,155)
Federal income taxes, excluding tax on
capital gains and IRS settlements........ (35,551) (32,905) (39,864)
---------- ---------- ----------
Net cash provided by operations........... 415,556 668,448 711,774
Proceeds from investments sold, matured or
repaid:
Bonds and preferred stocks.............. 2,112,831 1,757,229 1,430,339
Common stocks........................... 27,214 20,338 12,941
Mortgage loans on real estate........... 74,351 36,550 43,495
Real estate............................. 18,077 23,203 9,536
Other proceeds.......................... 22,567 381 189
---------- ---------- ----------
Total cash from investments............... 2,255,040 1,837,701 1,496,500
Capital contribution...................... -- 40,000 15,000
Dividend from subsidiary.................. -- -- 10,000
Cash received from ceding commissions
associated with the sale of a division... 45 55 284
Increase in remittances and items not
allocated................................ -- 88,295 16,177
Other sources............................. 19,381 12,758 24,855
---------- ---------- ----------
Total sources of cash..................... 2,690,022 2,647,257 2,274,590
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and preferred stocks.............. $2,270,105 $2,294,195 $2,043,615
Common stocks........................... 29,799 23,284 11,228
Mortgage loans on real estate........... 324,381 192,292 160,068
Net increase in policy loans............ 1,539 877 3,202
Real estate............................. 222 10,188 14,801
Other invested assets................... 5,169 2,670 664
---------- ---------- ----------
Total investments acquired................ 2,631,215 2,523,506 2,233,578
Dividends to stockholder.................. 20,000 -- 20,900
Cash paid associated with the sale of a
division................................. 539 -- --
Repayment of intercompany notes and
receivables, net......................... -- 48,070 365
Cash paid in conjunction with an amendment
of a reinsurance agreement............... 5,812 -- --
Decrease in remittances and items not
allocated................................ 59,646 -- --
Cash paid in conjunction with sales of a
division................................. 123 -- --
Other applications, net................... 1,802 29,887 3,820
---------- ---------- ----------
Total applications of cash................ 2,719,137 2,601,463 2,258,663
---------- ---------- ----------
Net change in cash and short-term
investments.............................. (29,115) 45,790 15,927
Cash and short-term investments at
beginning of year........................ 79,852 34,062 18,135
---------- ---------- ----------
Cash and short-term investments at end of
year..................................... $ 50,737 $ 79,852 $ 34,062
========== ========== ==========
</TABLE>
See accompanying notes.
31
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PFL Life Insurance Company ("the Company") is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. Effective June 1, 1995, the
Company transferred the common stock of its wholly-owned subsidiary, Equity
National Life Insurance Company ("Equity National"), to its stockholder, First
AUSA. Equity National was then merged with Life Investors Insurance Company of
America, a subsidiary of First AUSA. The financial statements presented herein
are prepared on the statutory accounting principles basis for the Company
only; as such, the accounts of the Company's subsidiary, Equity National, are
not consolidated with those of the Company.
In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through
mergers. In addition, the Company has canceled or entered into several
coinsurance and reinsurance agreements with affiliates and non-affiliates. The
following is a description of those transactions:
During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association,
an independent insurance agency, will be written by the insurance
subsidiaries of UICI and will not be shared with the Company and its
affiliates through coinsurance arrangements. As a result of the sale, the
Company transferred $123 in assets, substantially all of which was cash,
and $70 of liabilities. The difference between the assets and liabilities
of $(53) plus a tax credit of $19 was charged directly to unassigned
surplus.
Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference
between the assets and liabilities, net of a tax effect of $302 was
credited directly to unassigned surplus.
On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2 1/2% each year
(primarily group health business). As a result, the Company transferred
$3,881 in assets and $4,080 in liabilities during 1994. The difference
between the assets and liabilities of $199, plus a tax credit of $192, was
credited directly to unassigned surplus. During 1995, the Company
transferred $4,303 in assets and liabilities of $4,467. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets
and liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus.
During 1993, the Company sold the Oakbrook Division (primarily group
health business). The initial transfer of risk occurred through an
indemnity reinsurance agreement. The
32
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
policies will then be assumed by the reinsurer by novation as state
regulatory and policyholder approvals are received. In addition, the
Company will receive from the third party administrator a ceding commission
of one percent of the premiums collected between January 1, 1994 and
December 31, 1996. As a result of the sale, in 1994, the Company received
$284 for ceding commissions; the commissions net of the related tax effect
of $100 was credited directly to unassigned surplus. During 1995, the
Company received $55 for ceding commissions; the commissions net of the
related tax effect of $20 was credited directly to unassigned surplus.
During 1996, the Company received $45 for ceding commissions; the
commissions net of the related tax effect of $(16) was charged directly to
unassigned surplus. During 1996, the Company paid $539 in association with
this sale; the proceeds, net of a tax credit of $189, were charged directly
to unassigned surplus.
Nature of Business
The Company sells individual non-participating whole life, endowment and
term contracts, as well as a broad line of single fixed and flexible premium
annuity products. In addition, the Company offers group life, universal life,
and individual and specialty health coverages. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
primarily through an independent insurance agency of The Insurance Center, the
Company's agents, and financial institutions.
Basis of Presentation
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant
of these differences are as follows: (a) bonds are generally reported at
amortized cost rather than segregating the portfolio into held-to-maturity
(reported at amortized cost), available-for-sale (reported at fair value), and
trading (reported at fair value) classifications; (b) acquisition costs of
acquiring new business are charged to current operations as incurred rather
than deferred and amortized over the life of the policies; (c) policy reserves
on traditional life products are based on statutory mortality rates and
interest which may differ from reserves based on reasonable assumptions of
expected mortality, interest, and withdrawals which include a provision for
possible unfavorable deviation from such assumptions; (d) policy reserves on
certain investment products use discounting methodologies utilizing statutory
interest rates rather than full account values; (e) reinsurance amounts are
netted against the corresponding asset or liability rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (g) net realized gains or losses attributed to changes in the
level of interest
33
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
rates in the market are deferred and amortized over the remaining life of the
bond or mortgage loan, rather than recognized as gains or losses in the
statement of operations when the sale is completed; (h) declines in the
estimated realizable value of investments are provided for through the
establishment of a formula-determined statutory investment reserve (carried as
a liability) changes to which are charged directly to surplus, rather than
through recognition in the statement of operations for declines in value, when
such declines are judged to be other than temporary; (i) certain assets
designated as "non-admitted assets" have been charged to surplus rather than
being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; (m) gains or losses on
dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations; and (n) a
liability is established for "unauthorized reinsurers" and changes in this
liability are charged or credited directly to unassigned surplus. The effects
of these variances have not been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.
Investments
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-
term investments are reported at cost adjusted for amortization of premiums
and accrual of discounts. Amortization is computed using methods which result
in a level yield over the expected life of the security. The Company reviews
its prepayment assumptions on mortgage and other asset backed securities at
regular intervals and adjusts amortization rates prospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in good standing are reported at cost.
Investments in preferred stocks not in good standing are reported at the lower
of cost or market. Common stocks of affiliated and unaffiliated companies,
which may include shares of mutual funds (money market and other), are carried
at market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as
required or permitted by Iowa Insurance Laws.
34
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC
and are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses, net of amounts
attributed to changes in the general level of interest rates. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance
Reserve (IMR), the portion of realized gains and losses on sales of fixed
income investments, principally bonds and mortgage loans, attributable to
changes in the general level of interest rates and amortizes those deferrals
over the remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1996, 1995 and 1994,
the Company excluded investment income due and accrued of $1,541, $2,272 and
$4,622, respectively, with respect to such practices.
The Company entered into an interest-rate cap agreement on Five Year
Constant Maturities Treasury futures to hedge the exposure of increasing
interest rates. The cash flows from the interest rate cap will help offset
losses that might occur from disintermediation resulting from a rise in
interest rates. The Company paid a one-time premium to receive the difference
between the reference rate and the strike rate after a two-year delay. The
cost is included in interest expense ratably during the life of the agreement.
Income received as a result of the cap agreement will be recognized in
investment income as earned. Unamortized cost of the agreements is included in
other assets.
Aggregate Policy Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are
calculated using interest rates ranging from 2.00 to 6.00 percent and are
computed principally on the Net Level Premium Valuation and the Commissioners'
Reserve Valuation Methods. Reserves for universal life policies are based on
account balances adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 2.50 to 11.25 percent and mortality rates, where
appropriate, from a variety of tables.
35
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
Separate Account
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate account are valued at
market. Income and gains and losses with respect to the assets in the separate
account accrue to the benefit of the policyholders. The Company received
variable contract premiums of $227,864, $133,386 and $308,305 in 1996, 1995
and 1994, respectively. All variable account contracts are subject to
discretionary withdrawal by the policyholder at the market value of the
underlying assets less the current surrender charge.
Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No.
119, Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments, requires additional disclosure about derivatives. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparisons to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement of Financial Accounting Standards No. 107 and No. 119
exclude certain financial instruments and all nonfinancial instruments from
their disclosure requirements and allow companies to forego the disclosures
when those estimates can only be made at excessive cost. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
36
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities other than insurance subsidiaries are
based on quoted market prices. Fair value for the Company's insurance
subsidiary is the statutory net book value of that subsidiary.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Interest rate cap: Estimated fair value of the interest rate cap is based
upon the latest quoted market price.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1996 1995
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds.......................... $4,773,433 $4,867,770 $4,613,334 $4,824,635
Preferred stocks............... 3,097 7,133 9,336 12,275
Common stocks.................. 32,038 32,038 24,866 24,866
Affiliated common and preferred
stock......................... 6,934 6,934 6,794 6,794
Mortgage loans on real estate.. 911,705 922,010 680,414 714,399
Policy loans................... 54,214 54,214 52,675 52,675
Cash and short-term
investments................... 50,737 50,737 79,852 79,852
Interest rate cap.............. 6,797 6,975 7,971 7,250
Separate account assets........ 1,844,515 1,844,515 1,418,157 1,418,157
LIABILITIES
Investment contract
liabilities................... 4,532,568 4,398,630 4,323,188 4,310,505
Separate account annuities..... 1,803,057 1,803,057 1,417,842 1,417,842
</TABLE>
37
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and
agencies.................... $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other
government.................. 59,644 1,906 177 61,373
Public utilities............. 147,918 5,616 1,020 152,514
Industrial and
miscellaneous............... 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities... 2,470,740 43,896 15,610 2,499,026
---------- -------- ------- ----------
4,773,433 119,429 25,092 4,867,770
Preferred stocks............... 3,097 4,036 -- 7,133
---------- -------- ------- ----------
$4,776,530 $123,465 $25,092 $4,874,903
========== ======== ======= ==========
DECEMBER 31, 1995
Bonds:
United States Government and
agencies.................... $ 117,054 $ 5,808 $ 135 $ 122,727
State, municipal and other
government.................. 46,236 3,109 2 49,343
Public utilities............. 156,342 9,578 1,092 164,828
Industrial and
miscellaneous............... 1,781,149 112,074 7,146 1,886,077
Mortgage-backed securities... 2,512,553 93,420 4,313 2,601,660
---------- -------- ------- ----------
4,613,334 223,989 12,688 4,824,635
Preferred stocks............... 9,336 3,348 409 12,275
---------- -------- ------- ----------
$4,622,670 $227,337 $13,097 $4,836,910
========== ======== ======= ==========
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1996,
by contractual maturity, 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>
CARRYING ESTIMATED FAIR
VALUE VALUE
---------- --------------
<S> <C> <C>
Due in one year or less............................ $ 202,775 $ 204,980
Due after one year through five years.............. 896,912 921,711
Due after five years through ten years............. 954,555 977,421
Due after ten years................................ 248,451 264,632
---------- ----------
2,302,693 2,368,744
Mortgage and other asset-backed securities......... 2,470,740 2,499,026
---------- ----------
$4,773,433 $4,867,770
========== ==========
</TABLE>
38
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes...................... $364,356 $342,182 $294,145
Dividends on equity investments.................. 1,436 1,822 12,091
Interest on mortgage loans....................... 69,418 52,702 42,385
Rental income on real estate..................... 9,526 10,443 9,360
Interest on policy loans......................... 3,273 3,112 3,182
Other investment income.......................... 1,799 1,803 282
-------- -------- --------
Gross investment income.......................... 449,808 412,064 361,445
Investment expenses.............................. 21,471 19,379 17,565
-------- -------- --------
Net investment income............................ $428,337 $392,685 $343,880
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds................................ $2,112,831 $1,757,229 $1,430,339
========== ========== ==========
Gross realized gains.................... $ 19,876 $ 19,721 $ 15,411
Gross realized losses................... (19,634) (34,399) (33,044)
---------- ---------- ----------
Net realized gains (losses)............. $ 242 $ (14,678) $ (17,633)
========== ========== ==========
</TABLE>
At December 31, 1996, investments with an aggregate carrying value of
$5,825,802 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Debt securities................................ $ 242 $(14,678) $(17,633)
Short-term investments......................... (197) 24 (309)
Equity securities.............................. 1,798 504 1,322
Mortgage loans on real estate.................. (5,530) (1,053) (2,186)
Real estate.................................... 1,210 (1,908) (2,858)
Other invested assets.......................... 12 (970) 14
------- -------- --------
(2,465) (18,081) (21,650)
Tax effect..................................... (1,235) 7,878 7,236
Transfer to interest maintenance reserve....... 197 (7,891) 10,790
------- -------- --------
Net realized losses............................ $(3,503) $(18,096) $ (3,624)
======= ======== ========
</TABLE>
39
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
------------------------------
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Debt securities............................ $(115,867) $355,560 $(322,346)
Equity securities.......................... 2,929 (16,379) (23,202)
--------- -------- ---------
Change in unrealized appreciation
(depreciation)............................ $(112,938) $339,181 $(345,548)
========= ======== =========
</TABLE>
Gross unrealized gains and gross unrealized losses on equity securities were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Unrealized gains.................................. $ 9,590 $ 6,833 $20,244
Unrealized losses................................. (8,723) (8,895) (5,927)
------- ------- -------
Net unrealized gains (losses)..................... $ 867 $(2,062) $14,317
======= ======= =======
</TABLE>
During 1996, the Company issued mortgage loans with interest rates ranging
from 6.83% to 8.75%. The maximum percentage of any one mortgage loan to the
value of the underlying real estate at origination was 85%. Mortgage loans
with a carrying value of $4,027 were non-income producing for the previous
twelve months. Accrued interest of $852 related to these mortgage loans was
excluded from investment income. The Company requires all mortgage loans to
carry fire insurance equal to the value of the underlying property.
During 1996, 1995 and 1994, mortgage loans of $13,163, $1,644 and $799,
respectively, were foreclosed and transferred to real estate. At December 31,
1996 and 1995, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $5,432 and $6,168, respectively. The mortgage loan
portfolio is diversified by geographic region and specific collateral property
type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
- -------------------------------------
DECEMBER 31
------------
1996 1995
----- -----
<S> <C> <C>
South Atlantic.......... 26% 26%
Mountain................ 10 12
W. South Central........ 12 14
Pacific................. 13 17
E. North Central........ 15 13
E. South Central........ 9 5
W. North Central........ 6 6
Middle Atlantic......... 6 3
New England............. 3 4
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE DISTRIBUTION
- -------------------------------------
DECEMBER 31
------------
1996 1995
----- -----
<S> <C> <C>
Retail.................. 37% 31%
Apartment............... 14 20
Office.................. 34 29
Industrial.............. 3 4
Other................... 12 16
</TABLE>
40
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
At December 31, 1996, the Company had the following investments (excluding
U. S. Government guaranteed or insured issues) which individually represented
more than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
--------------------------------- --------------
<S> <C>
Bonds:
Citibank.................................................... 70,661
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and
ceded amounts:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums.......................... $1,457,450 $1,591,531 $1,857,446
Reinsurance assumed...................... 1,796 2,356 1,832
Reinsurance ceded........................ (300,546) (324,993) (412,029)
---------- ---------- ----------
Net premiums earned...................... $1,158,700 $1,268,894 $1,447,249
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $168,155,
$167,287 and $148,414 during 1996, 1995 and 1994, respectively. At December
31, 1996 and 1995, estimated amounts recoverable from reinsurers that have
been deducted from policy and contract claim reserves totaled $63,226 and
$65,503, respectively. The aggregate reserves for policies and contracts were
reduced for reserve credits for reinsurance ceded at December 31, 1996 and
1995 of $2,737,441 and $2,920,034, respectively.
At December 31, 1996, amounts recoverable from unauthorized reinsurers of
$73,434 (1995--$70,516) and reserve credits for reinsurance ceded of $55,035
(1995--$48,992) were associated with a single reinsurer and its affiliates.
The Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $120,477 at December 31, 1996 that can be drawn on
for amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a tax-
sharing agreement between the Company and its affiliates, the Company computes
federal income tax expense as if it were filing a separate income tax return,
except that tax credits and net operating loss carryforwards are determined on
the basis of the consolidated group. Additionally, the alternative minimum tax
is computed for the consolidated group and the resulting tax, if any, is
allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
41
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%)..... $37,256 $27,835 $24,106
Tax reserve adjustment........................... 2,211 2,405 1,150
Excess tax depreciation.......................... (384) (365) (406)
Deferred acquisition costs--tax basis............ 5,583 4,581 7,378
Prior year over accrual.......................... (499) (306) (644)
Dividend received deduction...................... (454) (56) (3,513)
Charitable contribution.......................... -- -- (3,935)
Other items--net................................. (2,536) (759) (278)
------- ------- -------
Federal income tax expense....................... $41,177 $33,335 $23,858
======= ======= =======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($20,387 at December 31, 1996). To the extent dividends are
paid from the amount accumulated in the policyholders' surplus account, net
earnings would be reduced by the amount of tax required to be paid. Should the
entire amount in the policyholders' surplus account become taxable, the tax
thereon computed at current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual.
This included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related
interest of $1,686, net of a tax effect of $590. An examination is underway
for years 1988 through 1995.
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which
entitle policyholders to a share in the earnings of the participating
policies, provided that a dividend distribution, which is determined annually
based on mortality and persistency experience of the participating policies,
is authorized by the Company. Participating insurance constituted
approximately 1.0% and 1.2% of ordinary life insurance in force at December
31, 1996 and 1995, respectively.
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on
a variety of the Company's products that are not subject to significant
mortality or morbidity risk; however, there may be certain restrictions placed
upon the amount of funds that can be withdrawn without penalty. The amount of
reserves on these products, by withdrawal characteristics are summarized as
follows:
42
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------
1996 1995
------------------- -------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal
with market value adjustment....... $ 20,800 0% $ 699 --%
Subject to discretionary withdrawal
at book value less surrender
charge............................. 794,881 9 733,796 8%
Subject to discretionary withdrawal
at market value.................... 1,803,057 20 1,390,156 16%
Subject to discretionary withdrawal
at book value (minimal or no
charges or adjustments)............ 6,284,876 69 6,395,719 74%
Not subject to discretionary
withdrawal provision............... 174,416 2 139,330 2%
---------- --- ---------- ---
9,078,030 100 8,659,700 100%
Less reinsurance ceded.............. 2,677,432 2,866,160
---------- ----------
Total policy reserves on annuities
and deposit fund liabilities....... $6,400,598 $5,793,540
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts statement:
Transfers to separate accounts................. $227,864 $133,386 $308,305
Transfers from separate accounts............... 75,172 104,219 76,133
-------- -------- --------
Net transfers to separate accounts............... 152,692 29,167 232,172
Reconciling adjustments--charges for investment
management, administration fees and contract
guarantees...................................... 19,093 13,814 11,634
-------- -------- --------
Transfers as reported in the summary of
operations of the life, accident and health
annual statement................................ $171,785 $ 42,981 $243,806
======== ======== ========
</TABLE>
43
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1996 and 1995, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
------- ------- -------
<S> <C> <C> <C>
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business............. $ 2,657 $ 1,865 $ 792
Ordinary direct renewal business................ 23,307 7,180 16,127
Group life direct business...................... 1,788 1,195 593
Reinsurance ceded............................... (1,706) (438) (1,268)
------- ------- -------
26,046 9,802 16,244
Accident and health:
Direct.......................................... 104 -- 104
Reinsurance ceded............................... (3) -- (3)
------- ------- -------
Total accident and health......................... 101 -- 101
------- ------- -------
$26,147 $ 9,802 $16,345
======= ======= =======
DECEMBER 31, 1995
Life and annuity:
Ordinary direct first year business............. $ 3,151 $ 2,223 $ 928
Ordinary direct renewal business................ 24,250 7,792 16,458
Group life direct business...................... 1,537 779 758
Reinsurance ceded............................... (1,362) (141) (1,221)
------- ------- -------
27,576 10,653 16,923
Accident and health:
Direct.......................................... 1,296 -- 1,296
Reinsurance ceded............................... (1,193) -- (1,193)
------- ------- -------
Total accident and health......................... 103 -- 103
------- ------- -------
$27,679 $10,653 $17,026
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, the Company had insurance in force
aggregating $69,251 and $87,010, respectively, in which the gross premiums are
less than the net premiums required by the standard valuation standards
established by the Insurance Division, Department of Commerce, of the State of
Iowa. The Company established policy reserves of $1,252 and $1,417 to cover
these deficiencies at December 31, 1996 and 1995, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $501
was made for the year ended December 31, 1995, related to the change in
reserve methodology.
44
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $20,000 and $20,900 in 1996 and
1994, respectively. No dividends were paid in 1995.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB No. 87 expense as a percent of salaries. The benefits are based on years
of service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $1,056, $942 and $966 for the
years ended December 31, 1996, 1995 and 1994, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee
Retirement and Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974. Expense related to this plan was $297, $465 and $411 for
the years ended December 31, 1996, 1995 and 1994, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.
In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $184, $164 and $169 for the years ended December 31, 1996,
1995 and 1994, respectively.
45
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1996,
1995 and 1994, the Company paid $17,028, $14,214 and $11,820, respectively,
for these services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.5% at December 31, 1996. During 1996,
1995 and 1994, the Company paid net interest of $174, $71 and $23,
respectively, to affiliates.
During 1995 and 1994, the Company received capital contributions of $40,000
and $15,000, respectively, in cash from its parent and during 1994 received a
dividend of $10,000 from its subsidiary, Equity National, which was included
in net investment income.
During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable.
No gain was recognized on this sale. This note accrued interest at 5.65% and
matured during 1996.
During the year ended December 31, 1995, the Company restructured demand
notes and accrued interest of $13,250 and $745, respectively, related to an
affiliate. The Company received 9,750 shares of preferred stock from the
affiliate for satisfaction of debt. The Company realized a loss of $8,695
related to this transaction. At December 31, 1996 and 1995, the preferred
stock related to this affiliate was deemed to have no value and an unrealized
loss of $4,555 was recognized in 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of
available facts, that damages arising from such demands will not be material
to the Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. Assessments are charged to operations
when received by the Company except where right of offset against other taxes
paid is allowed by law; amounts available for future offsets are recorded as
an asset on the Company's balance sheet. Potential future obligations for
unknown insolvencies are not determinable by the Company. The future
obligation has been based on the most recent information available from the
National Organization of Life and Health Insurance Guaranty Associations
(NOLHGA). The Company has established a reserve of $21,774 and $21,747 and an
offsetting premium tax benefit of $8,752 and $9,457 at December 31, 1996 and
1995, respectively, for its estimated share of future guaranty fund
assessments related to several major insurer insolvencies. During 1994, $3,444
was charged to surplus as prior period adjustments to provide for this net
reserve plus certain assessments paid that related to several major insurer
insolvencies prior to 1992. The guaranty fund expense was $2,617, $5,859 and
$4,054 for December 31, 1996, 1995 and 1994, respectively.
46
<PAGE>
SCHEDULE I
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET (2)
------------------ ---------- ---------- -----------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and
authorities......................... $1,533,581 $1,554,339 $1,533,510
States, municipalities and political
subdivisions........................ 4,918 5,360 4,919
Foreign governments.................. 55,633 56,013 54,725
Public utilities..................... 150,346 152,514 147,918
All other corporate bonds............ 3,046,090 3,099,544 3,032,361
Redeemable preferred stock............. 3,097 7,133 3,097
---------- ---------- ----------
Total fixed maturities................. 4,793,665 4,874,903 4,776,530
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance........... 7,120 9,777 9,777
Industrial, miscellaneous and all
other............................... 16,092 22,261 22,261
---------- ---------- ----------
Total equity securities................ 23,212 32,038 32,038
Mortgage loans on real estate.......... 911,705 911,705
Real estate............................ 46,294 46,294
Real estate acquired in satisfaction of
debt.................................. 12,260 12,260
Policy loans........................... 54,214 54,214
Other long-term investments............ 9,546 9,546
Cash and short-term investments........ 50,737 50,737
---------- ----------
Total investments...................... $5,901,633 $5,893,324
========== ==========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments.
(2) Amount differs from cost as certain bonds have been adjusted to reflect
other than temporary decline in value charged to surplus, as prescribed by
the NAIC.
47
<PAGE>
SCHEDULE III
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
------------- -------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Individual life.............................. $ 734,350 $ -- $ 7,240
Individual health............................ 39,219 8,680 13,631
Group life and health........................ 78,418 14,702 53,486
Annuity...................................... 4,408,419 -- --
---------- ------- -------
$5,260,406 $23,382 $74,357
========== ======= =======
YEAR ENDED DECEMBER 31, 1995
Individual life.............................. $ 594,274 $ -- $ 6,066
Individual health............................ 24,225 7,768 11,863
Group life and health........................ 67,994 16,662 58,813
Annuity...................................... 4,220,274 -- --
---------- ------- -------
$4,906,767 $24,430 $76,742
========== ======= =======
YEAR ENDED DECEMBER 31, 1994
Individual life.............................. $ 544,087 $ -- $ 7,298
Individual health............................ 16,649 6,487 8,643
Group life and health........................ 60,207 17,680 57,959
Annuity...................................... 3,693,388 -- --
---------- ------- -------
$4,314,331 $24,167 $73,900
========== ======= =======
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NET INVESTMENT BENEFITS, CLAIMS LOSSES OTHER OPERATING
PREMIUM REVENUE INCOME* AND SETTLEMENT EXPENSES EXPENSES* PREMIUMS WRITTEN
- --------------- -------------- ----------------------- --------------- ----------------
<S> <C> <C> <C> <C>
$ 202,082 $ 66,538 $ 197,526 $ 38,067 --
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 --
- ---------- -------- ---------- --------
$1,158,700 $428,337 $1,136,009 $420,948
========== ======== ========== ========
$111,918 $ 49,929 $ 97,065 $ 37,933 --
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 --
- ---------- -------- ---------- --------
$1,268,894 $392,685 $1,345,691 $317,770
========== ======== ========== ========
$146,328 $ 43,025 $ 124,736 $ 42,309 --
38,811 3,983 22,323 22,707 $ 38,797
194,704 10,531 108,400 143,645 192,034
1,067,406 286,341 1,036,313 319,328 --
- ---------- -------- ---------- --------
$1,447,249 $343,880 $1,291,772 $527,989
========== ======== ========== ========
</TABLE>
- --------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
49
<PAGE>
SCHEDULE IV
PFL LIFE INSURANCE COMPANY
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Life insurance in force.. $4,863,416 $477,112 $ 30,685 $4,416,989 .7%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health...... 68,699 12,828 -- 55,871 --
Group life and health.. 390,296 215,515 -- 174,781 --
Annuity................ 794,311 68,345 -- 725,966 --
---------- -------- -------- ---------- ---
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1995
Life insurance in force.. $4,594,434 $468,811 $ 22,936 $4,148,559 .6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health...... 60,309 12,617 -- 47,692 --
Group life and health.. 408,097 220,265 -- 187,832 --
Annuity................ 1,009,191 88,270 531 921,452 .05%
---------- -------- -------- ---------- ---
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1994
Life insurance in force.. $4,713,817 $468,811 $112,054 $4,357,060 2.6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 148,702 $ 3,639 $ 1,265 $ 146,328 .9%
Individual health...... 50,303 11,492 -- 38,811 --
Group life and health.. 412,200 217,496 -- 194,704 --
Annuity................ 1,246,241 179,402 567 1,067,406 .05%
---------- -------- -------- ---------- ---
$1,857,446 $412,029 $ 1,832 $1,447,249 .1%
========== ======== ======== ========== ===
</TABLE>
50
<PAGE>
PART C OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits: The following exhibits are filed herewith:
(1) (a) Resolution of the Board of Directors of PFL Life
Insurance Company authorizing establishment of the Mutual
Fund Account. Note 1.
(b) Authorization Changing Name of the Mutual Fund Account.
Note 9.
(2) Not Applicable.
(3) (a) Principal Underwriting Agreement by and between PFL Life
Insurance Company, on its own behalf and on the behalf of
the Mutual Fund Account, and MidAmerica Management
Corporation. Note 3.
(b) Form of Broker/Dealer Supervision and Sales Agreement by
and between AEGON USA Securities, Inc. and the
Broker/Dealer. Note 11.
(4) (a) Form of Policy for the Endeavor Variable Annuity. Note 3.
(b) Form of Policy Endorsement (Required Distributions). Note
3.
(c) Form of Policy Endorsement (Death Benefits). Note 4.
(d) Form of Policy Endorsement (Nursing Care). Note 7.
(e) Form of Policy Endorsement (Death Benefit). Note 8.
(f) Form of Policy for the Endeavor Variable Annuity. Note
10.
(g) Form of Policy Endorsement (Nursing Care). Note 10.
(h) Form of Policy for the Endeavor FI Variable Annuity.
Note 11.
(i) Form of Policy Endorsement for the Endeavor FI (Nursing
Care). Note 11
(j) Form of Policy Endorsement for the Endeavor Variable
Annuity. (Nursing Care) Note 11.
(5) (a) Form of Application for the Endeavor Variable Annuity.
Note 11.
(b) Form of Application for the Endeavor FI Variable Annuity.
Note 11.
(c) Form of Application for the Endeavor ML Variable
Annuity. Note 11.
(6) (a) Articles of Incorporation of PFL Life Insurance Company.
Note 3.
(b) Bylaws of PFL Life Insurance Company. Note 3.
1
<PAGE>
(7) Not Applicable.
(8) (a) Participation Agreement by and between PFL Life Insurance
Company and Endeavor Series Trust. Note 3.
(b) Participation Agreement with WRL Series Fund, Inc. Note
5.
(c) Administrative Services Agreement by and between PFL Life
Insurance Company and State Street Bank and Trust Company
(assigned to Vantage Computer Systems, Inc.). Note 2.
(d) Amendment and Assignment of Administrative Services
Agreement. Note 3.
(e) Second Amendment to Administrative Services Agreement.
Note 4.
(f) Termination Notice of Administrative Services Agreement
by and between PFL Life Insurance Company and Vantage
Computer Systems, Inc. Note 10.
(g) Participation Agreement by and between PFL Life Insurance
Company and Merrill Lynch Asset Management L.P. for the
Endeavor ML Variable Annuity Note 11.
(h) Amendment to Participation Agreement by and between PFL
Life Insurance Company and Endeavor Series Trust.
Note 11.
(9) (a) Opinion and Consent of Counsel. Note 2.
(b) Consent of Counsel. Note 2.
(10) (a) Consent of Independent Auditors. Note 11.
(b) Opinion and Consent of Actuary. Note 10.
(11) Not Applicable.
(12) Not Applicable.
(13) Performance Data Calculations. Note 7.
(14) Powers of Attorney (P.S. Baird, W.L. Busler, P.E.
Falconio, D.C. Kolsrud, R.J. Kontz). Note 6.
(Craig D. Vermie) Note 9. (Brenda K. Clancy) Note 10.
Note 1. Filed with the initial filing of this Form N-4 Registration
Statement (File No. 33-33085 on January 23, 1990.
Note 2. Filed with Pre-Effective Amendment No. 1 to this Form N-4
Registration Statement (File No. 33-33085) on April 9, 1990.
Note 3. Filed with Post-Effective Amendment No. 2 to this Form N-4
Registration Statement (File No. 33-33085) on April 1, 1991.
Note 4. Filed with Post-Effective Amendment No. 3 to this Form N-4
Registration Statement (File No. 33-33085) on April 29, 1992.
Note 5. Filed with Post-Effective Amendment No. 5 to this Form N-4
Registration Statement (File No. 33-33085) on April 30, 1993.
2
<PAGE>
Note 6. Filed with Post-Effective Amendment No. 6 to this Form N-4
Registration Statement (File No. 33-33085) on January 28,
1994.
Note 7. Filed with Post-Effective Amendment No. 7 to this Form N-4
Registration Statement (File No. 33-33085) on March 29, 1994.
Note 8. Filed with Post-Effective Amendment No. 10 to this Form N-4
Registration Statement (File No. 33-33085) on April 27, 1995.
Note 9. Filed with Post-Effective Amendment No. 11 to this Form N-4
Registration Statement (File No. 33-33085) on April 24, 1996.
Note 10. Filed with Post-Effective Amendment No. 12 to this Form N-4
Registration Statement (File No. 33-33085) on February 28,
1997.
Note 11. Filed herewith.
3
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
<TABLE>
<CAPTION>
PRINCIPAL POSITIONS
NAME AND AND OFFICES WITH
BUSINESS ADDRESS DEPOSITOR
- ---------------- ---------
<S> <C>
William L. Busler Director, Chairman of
4333 Edgewood Road, N.E. the Board and President
Cedar Rapids, IA 52499
Patrick S. Baird Director, Senior Vice President
4333 Edgewood Road, N.E. and Chief Financial
Cedar Rapids, IA 52499 Officer
Craig D. Vermie Director
4333 Edgewood Road, N.E. Vice President,
Cedar Rapids, IA 52499 Secretary, and Corporate
Counsel
Douglas C. Kolsrud Director, Vice President
4333 Edgewood Road, N.E. and Corporate Actuary
Cedar Rapids, IA 52499
Robert J. Kontz Vice President and
4333 Edgewood Road, N.E. Controller
Cedar Rapids, IA 52499
Patrick E. Falconio Director, Senior Vice
4333 Edgewood Road, N.E. President and Chief
Cedar Rapids, IA 52499 Investment Officer
Brenda K. Clancy Vice President
4333 Edgewood Road, N.E. Treasurer and Chief
Cedar Rapids, IA 52499 Financial Officer
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
DEPOSITOR OR REGISTRANT
<TABLE>
<S> <C> <C> <C> <C> <C>
---------------------------
VERENIGING AEGON
NETHERLANDS MEMBERSHIP
ASSOCIATION
---------------------------
+
53.00%
---------------------------
AEGON N.V.
NETHERLANDS CORPORATION
----------------------------
+
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ + + +
100% 100% 100% 100%
---------------------- ------------------------ ------------------------ -----------------------------
AEGON Netherland N.V. AEGON INTERNATIONAL N.V. AEGON NEWAK HOLDING S.V. GRONINGER FINANCIERINGEN B.V.
Netherlands Corporation Netherlands Corporation Netherlands Corporation Netherlands Corporation
---------------------- ------------------------ ------------------------ -----------------------------
+
DE
-------------------
VOTING TRUST
Trustees: K.J. Storm
Donald J. Sheperd
H.B. Van Wild
Dennis Hersch
-------------------
+
DE 100%
-------------------
AEGON U.S. HOLDING
CORPORATION
-------------------
+ +
++++++++++++++++++++++++++++++++++++ +
+ IA 100%(1)
+ -------------------
+ AEGON USA, INC.
+ -------------------
+ +
+ +++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ + +
+ MD 100% MD
+ ----------------- ------------
+ FIRST AUSA LIFE AUSA HOLDING
+ INSURANCE COMPANY COMPANY
+ ----------------- ------------
+ + +
+ + ++++++++++++++++++++++++++++++++++++++++++++++
+ + + ++
+ + MD 100% IA 100% DE
+ + -------------------- ------------- ++ ----------------------
+ + MONUMENTAL GENERAL AUSA FINACIAL +++ DIVERSIFIED INVESTMENT
+ + INSURANCE GROUP, INC ++ MARKETS, INC. ++ ADVISORS, INC.
+ + -------------------- + ------------- ++ ----------------------
NJ 100% + NY + MD 100% + ++
- ----------------- + ------------------- + ----------------- + ++
SHORT HILLS + AUSA LIFE INSURANCE +++ MONUMENTAL LIFE + IA 100% ++ DE 100%
MANAGEMENT COMPANY+ COMPANY, INC + INSURANCE COMPANY++ MD 100% + ----------- ++ ---------------------
- ----------------- + ------------------- + ----------------- + ------------------- + UNIVERSAL ++ DIVERSIFIED INVESTORS
+ + + MONUMENTAL GENERAL + BENEFITS +++++++ SECURITIES CORP.
+ + + ADMINISTRATORS, INC.+ CORPORATION ++ --------------------
+ + MD 100% + ------------------- + ++
NY + ----------------- + ----------------- + + ----------- ++
- ---------------- + LIFE INVESTORS + MONUMENTAL GENERAL+ + + ++ IA 100%
CORPA REINSURANCE + INSURANCE COMPANY + CASUALTY COMPANY + + IA 100% ++ ----------------
COMPANY ++ ++ OF AMERICA ++ ----------------- + MD 100% + ---------- ++++++++ AEGON USA
- ---------------- ++ ----------------- + MD 100% + ----------------- + INVESTORS ++ +++ SECURITIES, INC.
++ + --------------- + EXECUTIVE MANAGE- + WARRANTY ++ + ----------------
IN 100% ++ ------------------- + UNITED FINACIAL + MENT AND CONSULT- + OF AMERICA, ++ +
- ---------------- +++BANKERS UNITED LIFE + SERVICES, INC. +++ ANT SERVICES, INC.+ + INC. ++ +
AEGON MANAGEMENT ++ ASSURANCE COMPANY +++ --------------- + ----------------- + ---------- ++ + MD
COMPANY + ------------------- + + MD 100% + IA 100% ++ + -----------------
- ---------------- + + AZ (*) + ------------------ + ------------- ++ +++ AEGON USA MANAGED
+ ----------------- + ---------------- + MONUMENTAL GENERAL+ + MASSACHUSETTS ++ PORTFOLIOS INC.
DE 100% + PFL LIFE ++++ BANKERS FINACIAL + MASS MARKETING INC. FIDELTY TRUST +++ -----------------
- ----------------- + INSURANCE COMPANY + LIFE INSURANCE +++ ------------------- COMPANY ++
RCC NORTH AMERICA + ----------------- + COMPANY + ------------ ++
INC. ++ AZ 100% VOTING + ---------------- + DE 100% ++ IA 100%
- ----------------- + CHAIRMAN MD 100% + ------------------ ++ ------------------
---------------------+ -------------- + MONEY SERVICES, INC.++++ AMERICAN FORUM FOR
SOUTHWEST EQUITY LIFE+ THE WHITESTONE + ------------------- ++ FISCAL FITNESS, INC.
INSURANCE COMPANY+++ CORPORATION +++++ CA 100% -------------------
---------------------+ -------------- ------------------- ++ IN 100%
AZ 100% Voting Chairman (2) + IA 100% ZAHORIK COMPANY INC+++ --------------
----------------------- + ------------------ --------------------++ SUPPLEMENTAL
IOWA FIDELITY LIFE +++ CADET HOLDING CORP + ++ INSURANCE
INSURANCE COMPANY + ------------------ AL 100% ++ DIVISION INC.
----------------------- + ---------- +++++++ --------------
OH 100% + ZCI, INC. ++ MI 100%
--------------------- --------- +++++++ ------------------
WESTERN RESERVE LIFE + +++++++++++++++++++++++++++++++++++++ CREDITOR RESOURCES
++++ ASSURANCE CO. OF OHIO+++ DE + ++ INC.
+ --------------------- --------------- + ++ ------------------
+ --------------- INTERSECURITIES+++++++++++++ ++ +
++++++++ WRL SERIES FUND ++++++ INC. +++++ + ++ CN 100%
INC. + --------------- + + ++ -------------------
--------------- + + + ++ CRC CREDITOR
MA + CA 100% + + MN 100% RESOURCES CANADIAN
--------- + ---------------- + + ------------------------ ++ DEALER NETWORK, INC.
IDEX FUND++++++ ISI INSURANCE + + AUSA INSTITUTIONAL ++++++++++ -------------------
--------- + AGENCY INC. AND+++++ + MARKETING PARTNERS, INC. ++
+ ITS SUBSIDIARIES + + ------------------------ ++ IA 100%
MA + ---------------- + + MN 100% ++ --------------------
----------- + MN 100% + + ---------------- ++++ AEGON USA INVEST-
IDEX II +++++++ ------------------- + + COLORADO ANNUITY+++++++++++++++ MENT MANAGEMENT, INC.
SERIES FUND + ASSOCIATED MARINER ++ + AGENCY INC. + ---------------------
----------- + FINANCIAL GROUP, INC.+++ + ---------------- + IA 100%(12)
MA + ------------------- + + + -----------------
----------- + MI 100% + +++++ AEGON USA REALTY
IDEX FUND 3 +++++ ----------------- + + ++++ ADVISORS, INC.
----------- + MARINER FINANCIAL+++++ + + -----------------
+ SERVICES, INC. + + + DE 100%
+ ----------------- + + + -----------
+ + + +++++++ QUANTRA
+ MI 100% + + + CORPORATION
+ ------------------ + + + -----------
+ MARINER'S PLANNING + + + +
+ CORPORATION + + + DE 100%
+ ------------------ + + + ----------------
+ + + + QUANTRA SOFTWARE
+ MI 100%(10) + + + CORPORATION
+ ------------------- + + + ----------------
+ ASSOCIATED MARINER + + + IA 100%
+ AGENCY INC. AND ITS++++ + + ---------------
+ SUBSIDIARIES + + ++++LANDAUER REALTY
+ ------------------- + + + ADVISORS, INC.
+ MI 100% + + + ---------------
+ ---------------- + + + DE 100%
+ MARINER MORTGAGE + + + ----------------
+ CORP. ++++++ + ++++++ LANDAUER
+ ---------------- + + ASSOCIATES, INC.
+ + + ----------------
+ FL 100% + + IA 100%
+ -------------- + + ----------------
+ IDEX INVESTOR +++++++++++++ ++++++ AEGON USA REALTY
+++++SERVICES, INC. + + MANAGEMENT, INC
+ -------------- + + ----------------
+ DE 50%(7) + + IA 100%(11)
+ --------------- + + ------------------
+ IDEX MANAGEMENT,+++++++++++ +++++ REALTY INFORMATION
++++ INC. SYSTEMS, INC.
--------------- ------------------
IA (4)
----------------
USP REAL ESTATE++++
INVESTMENT TRUST +
---------------- +
(5) +
----------------- +
CEDAR INCOME FUND+++
LTD.
-----------------
</TABLE>
See Footnotes Page 2
Effective January 1, 1997
Page 2
Footnotes
(1) 150,000 shares of Class B Non-Voting Common Stock owned by Ennia
Reinsurance Antilles N.V.
(2) Ordinary common stock is allowed 60% of total cumulative vote.
Participating common stock is allowed 40% of total cumulative vote.
(3) Denotes relationships as advisor, administrator, sponsor, underwriter or
general partner.
(4) First AUSA Life Insurance Company owns 12.89%. PFL Life Insurance Company
owns 13.11%. Bankers United Life Assurance Company owns 4.86%.
(5) PFL Life Insurance Company owns 16.73%. Bankers United Life Assurance
Company owns 3.77%. Life Investors Insurance Company of America owns
3.38%. AEGON USA Realty Advisors, Inc. owns 1.97%. First AUSA Life
Insurance Company owns .18%.
(6) Class B Common stock is allocated 75% of total cumulative vote. Class A
Common stock is allocated 25% of total cumulative vote.
(7) 50% of Idex Management, Inc. is owned by Janus Capital Corporation, a
Colorado corporation.
(8) RCC Group: FGH Realty Credit Corp., FGH USA, Inc., RCC North America,
Inc., FGH USA Realty, Inc., FGH Eastern Region, Inc., FGH Appraisal
Services, Inc., FGH Western Region, Inc., ALH Properties, Inc., First FGP,
Inc., Second FGP, Inc., Third FGP, Inc., Fourth FGP, Inc., Fifth FGP, Inc.,
Sixth FGP, Inc., Seventh FGP, Inc., FGP Midwood, Inc., FGP Parsippany,
Inc., ALH Properties Two, Inc., ALH Properties Three, Inc., ALH Properties
Four, Inc., ALH Properties Five, Inc., ALH Properties Six, Inc., ALH
Properties Seven, Inc., ALH Properties Eight, Inc., ALH Properties Nine,
Inc., ALH Properties Ten, Inc., ALH Properties Eleven, Inc., ALH Properties
Twelve, Inc., ALH Properties Thirteen, Inc., ALH Properties Fourteen, Inc.,
ALH Properties Fifteen, Inc., ALH Properties Sixteen, Inc., ALH Properties
Seventeen, Inc., FGP Keene, Inc., FGP Broadway, Inc., FGP West Street,
Inc., FGP West Street Two, Inc., FGP 90 West Street, Inc., FGP Branford,
Inc., FGP Franklin, Inc., FGP Bala, Inc., FGP Twenty-One, Inc., FGP Twenty-
Two, Inc., FGP Twenty-Five, Inc., FGP Schenectady, Inc., FGP Country
Estates, Inc., FGP Eleventh Street, Inc., FGP 109th Street, Inc., FGP
Seventy-Second Street, Inc., FGP Gaithersburg, Inc., FGP West 32nd Street,
Inc., FGP Beekman, Inc., Dutch Hotel Management, Inc., FGP Landmark, Inc.,
FGP Islandia, Inc., FGP Bridgeport, Inc., FGP Varick, Inc., The RCC Group,
Inc., FGP Union Gardens, Inc., FGP Burkewood, Inc., FGP Stamford, Inc., FGP
Meadow Lane, Inc., FGP Main Street, Inc., FGP Property Services, Inc., FGP
Merrick, Inc., FGP West 14th Street, Inc., FGP 106 Fulton, Inc., FGP Bush
Terminal, Inc., FGP Northern Boulevard, Inc., FGP Seventh Avenue, Inc., FGP
Parsons, Inc., FGP City Hall, Inc., FGP West 88th Street, Inc., FGP
Lincoln, Inc., FGP Emerson, Inc., FGP Brooke, Inc., FGP 86th Street, Inc.,
FGP Edison, Inc., FGP Rider Avenue, Inc., FGP Remsen, Inc., FGP Rockbeach,
Inc., FGP Carter Drive, Inc., FGP Centereach, Inc., FGP Colonial Plaza,
Inc., FGP Coram, Inc., FGP Herald Center, Inc., Eighty Six Yorkville, Inc.
(9) Subsidiaries of ISI Insurance Agency, Inc. are: ISI Insurance Agency of
Ohio, Inc., ISI Insurance Agency of Massachusetts, Inc., and ISI Insurance
Agency of Texas, Inc.
(10) Subsidiaries of Associated Mariner Agency, Inc. are Associated Mariner
Agency of Hawaii, Inc., Associated Mariner Insurance Agency of
Massachusetts, Inc., Associated Mariner Agency Ohio, Inc., Associated
Mariner Agency Texas, Inc., and Associated Mariner Agency New Mexico, Inc.
(11) Owns 50% interest in DJA Partners (a.k.a. "Teleres"), a Delaware general
partnership. Also owns 10% interest in Datalytics, Inc., an Ohio
corporation.
(12) Owns 49% of Quantra Consulting, Inc., a Delaware corporation.
*Includes qualifying shares for Directors.
AEGON USA, Inc. - Holding Company
Life Investors Insurance Company of America - Insurance
International Life Investors Insurance Company - Insurance
Transunion Casualty Company - Insurance
Investors Warranty of America, Inc. - Provider of automobile extended
maintenance contracts
Supplemental Insurance Division, Inc. - Insurance
4
<PAGE>
Creditor Resources, Inc. - Credit Insurance
AEGON USA Investment Management, Inc. - Investment Advisor
AEGON USA Realty Advisors, Inc. - Provides real estate administrative
and real estate investment services
AEGON USA Realty Management, Inc. - Real Estate Management
AEGON USA Securities, Inc. - Broker-Dealer
AEGON USA Managed Portfolios, Inc. - Mutual Fund
USP Real Estate Investment Trust - Real Estate Investment Trust
Cedar Income Fund, Ltd. - Real Estate Investment Trust
First AUSA Life Insurance Company - Insurance
Bankers United Life Assurance Company - Insurance
Universal Benefits Corporation - Third party administrator
Massachusetts Fidelity Trust Company - Trust company
Money Services, Inc. - Provides financial counseling for employees and
agents of affiliated companies
Zahorik Company, Inc. - Broker-Dealer
Cadet Holding Corp. - Holding company
ISI Insurance Agency, Inc. - Broker/Dealer
Southwest Equity Life Insurance Company - Insurance
Iowa Fidelity Life Insurance Company - Insurance
The Whitestone Corporation - Insurance agency
Monumental Life Insurance Company - Insurance
5
<PAGE>
United Financial Services, Inc. - General agency
Monumental General Insurance Group, Inc. - Holding company
Monumental General Administrators, Inc. - Provides management services
to unaffiliated third party administrator
Executive Management and Consultant Services, Inc. - Provides
actuarial consulting services
Monumental General Mass Marketing, Inc. - Marketing arm for sale of
mass marketed insurance coverages
Bankers Financial Life Insurance Company - Insurance
Monumental General Casualty Company - Insurance
AUSA Holding Company - Holding company
JLW Financial Management Systems, Inc. - Management and Administrative
Services
ZCI, Inc. - Insurance agency
AUSA Financial Markets, Inc. - Marketing
CRC Creditor Resources Canadian Dealer Network Inc. - Insurance agency
American Forum For Fiscal Fitness, Inc. - Marketing
Western Reserve Life Assurance Co. of Ohio - Insurance
Landauer Realty Advisors, Inc. - Real estate counseling
Landauer Associates, Inc. - Real estate counseling
WRL Series Fund, Inc. - Mutual fund
Intersecurities, Inc. - Broker-dealer
Idex Investor Services, Inc. - Shareholder services
Idex Management, Inc. - Investment advisor
Idex Total Income Trust - Mutual fund
Idex Fund - Mutual fund
Idex II Series Fund - Mutual fund
6
<PAGE>
Idex Fund 3 - Mutual fund
AUSA Life Insurance Company, Inc. - Insurance
Diversified Investment Advisors, Inc. - Registered Investment Advisor
Diversified Investors Securities Corp. - Broker-Dealer
Associated Mariner Financial Group, Inc. - Holding company management
services
Mariner Financial Services, Inc. - Broker/Dealer
Mariner/ISI Planning Corporation - Financial planning
Associated Mariner Agency, Inc. - Insurance agency
Mariner Mortgage Corp. - Mortgage origination
AUSA Institutional Marketing Group, Inc. - Insurance Agency
Colorado Annuity Agency, Inc. - Insurance agency
Realty Information Systems, Inc. - Information Systems for real estate
investment management
Melson and Associates, Inc. - Real estate financial management consulting
ITEM 27. NUMBER OF POLICYOWNERS
As of December 31, 1996, there were 19,013 Owners of the Policies.
ITEM 28. INDEMNIFICATION
The Iowa Code (Sections 490.850 et. seq.) provides for permissive
indemnification in certain situations, mandatory indemnification in other
situations, and prohibits indemnification in certain situations. The Code also
specifies procedures for determining when indemnification payments can be made.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Depositor pursuant to the foregoing provisions, or otherwise, the Depositor
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Depositor of expenses incurred
or paid by a director, officer or controlling person in connection with the
securities being registered), the Depositor will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
7
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITER
AEGON USA Securities, Inc.
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499
The directors and officers of
AEGON USA Securities, Inc.
are as follows:5
Patrick E. Falconio Lisa Wachendorf
Director Vice President
William L Busler Linda Gilmer
Director Vice President and Treasurer
Brenda K. Clancy Donna M. Craft
Director Vice President
Robert A. Thelen Frank A. Camp
Senior Vice-President Secretary
Lorri E. Mehaffey Shelley Davenport
President Assistant Vice President
Billy J. Berger
Vice President and Assistant Treasurer
_____________________
/5/ The principal business address of each person listed is AEGON USA
Securities, Inc., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499.
Commissions and Other Compensation Received by Principal Underwriter.
AEGON USA Securities, Inc. and/or the broker-dealers received $19,668,001
from the Registrant during the last fiscal year for its services in distributing
the Policies. No other commission or compensation was received by the principal
underwriter, directly or indirectly, from the Registrant during the fiscal
year.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 promulgated thereunder,
are maintained by PFL Life Insurance Company at 4333 Edgewood Road, N.E., Cedar
Rapids, Iowa 52499.
ITEM 31. MANAGEMENT SERVICES.
8
<PAGE>
All management Policies are discussed in Part A or Part B.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes that it will file a post-effective
amendment to this registration statement as frequently as necessary to ensure
that the audited financial statements in the registration statement are never
more than 16 months old for so long as Premiums under the Policy may be
accepted.
(b) Registrant undertakes that it will include either (i) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information or (ii) a space in the Policy application that an applicant can
check to request a Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request to PFL at the address or phone
number listed in the Prospectus.
(d) PFL Life Insurance Company hereby represents that the fees and
charges deducted under the policies, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by PFL Life Insurance Company.
SECTION 403(B) REPRESENTATIONS
PFL represents that it is relying on a no-action letter dated November
28, 1988, to the American Council of Life Insurance (Ref. No. IP-6-88),
regarding Sections 22(e), 27(c)(1), and 27(d) of the Investment Company Act of
1940, in connection with redeemability restrictions on Section 403(b) Policies,
and that paragraphs numbered (1) through (4) of that letter will be complied
with.
STATEMENT PURSUANT TO RULE 6C-7: TEXAS OPTIONAL RETIREMENT PROGRAM
PFL and the Mutual Fund Account rely on 17 C.F.R. Sec. 270.6c-7, and
represent that the provisions of that Rule have been or will be complied with.
9
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant hereby certifies that this Amendment to the Registration
Statement meets the requirements for effectiveness pursuant to paragraph (b) of
Rule 485 and has caused this Registration Statement to be signed on its behalf,
in the City of Cedar Rapids and State of Iowa, on this 28th day of April, 1997.
PFL ENDEAVOR VA SEPARATE
ACCOUNT
PFL LIFE INSURANCE COMPANY
Depositor
/s/ William L. Busler
----------------------------
William L. Busler
President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the duties indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Patrick S. Baird Director April,28 1997
- -----------------------
Patrick S. Baird
/s/ Craig D. Vermie Director April,28 1997
- -----------------------
Craig D. Vermie
/s/ William L. Busler Director April,28 1997
- -----------------------
William L. Busler (Principal Executive Officer)
/s/ Patrick E. Falconio Director April,28 1997
- -----------------------
Patrick E. Falconio
/s/ Douglas C. Kolsrud Director April,28 1997
- -----------------------
Douglas C. Kolsrud
/s/ Robert J. Kontz Vice President and April,28 1997
- ----------------------- Corporate Controller
Robert J. Kontz
/s/ Brenda K. Clancy Treasurer April,28 1997
- -----------------------
Brenda K. Clancy
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit Page No.
- ----------- ---------------------- --------
(3)(b) Form of Broker/Dealer Supervision and Sales
Agreement by and between AEGON USA Securities,
Inc. and the Broker/Dealer.
(4)(h) Form of Policy for the Endeavor F1
Variable Annuity.
(4)(i) Form of Policy Endorsement for the Endeavor
F1 Variable Annuity
(4)(j) Form of Policy Endorsement for the Endeavor
Variable Annuity.
(5)(a) Form of Application for the Endeavor Variable
Annuity.
(5)(b) Form of Application for the Endeavor F1
Variable Annuity.
(5)(c) Form of Application for the Endeavor ML
Variable Annuity
(8)(g) Participation Agreement by and between
PFL Life Insurance Company and Merrill
Lynch Asset Management, L.P. for the
Endeavor ML Variable Annuity.
(h) Amendment to Participation Agreement by and
between PFL Life Insurance Company and
Endeavor Series Trust.
(10)(a) Consent of Independent Auditors.
- --------------------------
Page numbers included only in manually executed original.
<PAGE>
Registration No.
33-33085
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
EXHIBITS
TO
FORM N-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FOR
PFL ENDEAVOR VARIABLE ANNUITY ACCOUNT
---------------
<PAGE>
EXHIBIT (3)(b)
--------------
FORM OF BROKER/DEALER
SUPERVISION AND SALES AGREEMENT
BY AND BETWEEN
AEGON USA SECURITIES, INC. AND BROKER/DEALER
<PAGE>
SELECTED BROKER AGREEMENT
AGREEMENT dated_________________________ ,19____, by and between AEGON
USA Securities, Inc. (Distributor), an Iowa corporation
____________________________ and (Broker), a___________________________
corporation. This Agreement replaces any prior Selected Broker Agreement between
the parties hereto.
WITNESSETH:
In consideration of the mutual promises contained herein, the parties hereto
agree as follows:
A. Definitions
-----------
(1) Contracts--Variable life insurance contracts and/or variable annuity
contracts described in Schedule A attached hereto and issued by PFL
Life Insurance Company (hereinafter called the "Company") and for which
Distributor has been appointed the principal underwriter pursuant to
Distribution Agreements, copies of which have been furnished to Broker.
(2) Accounts--Separate accounts established and maintained by Company
pursuant to the laws of Iowa, as applicable, to fund the benefits under
the Contracts.
(3) The Fund-An open-end management investment company registered under the
1940 Act, shares of which are sold to the Accounts in connection with
the sale of the Contracts.
(4) Registration Statement--The registration statements and amendments
thereto relating to the Contracts, the Accounts, and the Fund,
including financial statements and all exhibits.
(5) Prospectus--The prospectuses included within the Registration
Statements referred to herein.
(6) 1933 Act--The Securities Act of 1933, as amended.
(7) 1934 Act--The Securities Exchange Act of 1934, as amended.
(8) SEC--The Securities and Exchange Commission.
B. Agreements of Distributor
-------------------------
(1) Pursuant to the authority delegated to it by Company, Distributor
hereby authorizes Broker during the term of this Agreement to solicit
applications for Contracts from eligible persons provided that there is
an effective Registration Statement relating to such Contracts and
provided further that Broker has been notified by Distributor that the
Contracts are qualified for sale under all applicable securities and
insurance laws of the state or jurisdiction in which the application
will be solicited. In connection with the solicitation of applications
for Contracts, Broker is hereby authorized to offer riders that are
available with the Contracts in accordance with instructions furnished
by Distributor or Company.
(2) Distributor, during the term of this Agreement, will notify Broker of
the issuance by the SEC of any stop order with respect to the
Registration Statement or any amendments thereto or the initiation of
any proceedings for that purpose or for any other purpose relating to
the registration and/or offering of the Contracts and of any other
action or circumstance that may prevent the lawful sale of the
Contracts in any state or jurisdiction.
(3) During the term of this Agreement, Distributor shall advise Broker of
any amendment to the Registration Statement or any amendment or
supplement to any Prospectus.
C. Agreements of Broker
--------------------
(1) It is understood and agreed that Broker is a registered broker/dealer
under the 1934 Act and a member of the National Association of
Securities Dealers, Inc. and that the agents or representatives of
Broker who will be soliciting applications for the Contracts also will
be duly registered representative of Broker.
(2) Commencing at such time as Distributor and Broker shall agree upon,
Broker agrees to use its best efforts to find purchasers for the
contracts acceptable to Company. In meeting its obligation to use its
best efforts to solicit applications for Contracts, Broker shall,
during the term of this Agreement, engage in the following activities:
(a) Continuously utilize training, sales and promotional materials
which have been approved by Company.
(b) Establish and implement reasonable procedures for periodic
inspection and supervision of sales practices of its agents or
representatives and submit periodic reports to Distributor as may be
requested on the results of such inspections and the compliance with
such procedures.
(c) Broker shall take reasonable steps to ensure that the various
representatives appointed be it shall not make recommendations to an
applicant to purchase a Contract in the absence of reasonable grounds
to believe that the purchase of the Contract is suitable for such
applicant. While not limited to the following, a determination of
suitability shall be based on information furnished to a representative
after reasonable inquiry of such applicant concerning the applicant's
insurance and investment objectives, financial situation and needs,
and, if applicable, the likelihood that the applicant will be capable
of making the premium payments contemplated by the Contract.
(3) All payments for Contracts collected by agents or representatives of
Broker shall be held at all times in a fiduciary capacity and shall be
remitted promptly in full together with such applications, forms and
other required documentation to an office of the Company designated by
Distributor. Checks or money orders in payment of
<PAGE>
initial premiums shall be drawn to the order of "PFL Life Insurance
Company." Broker acknowledges that the Company retains the ultimate
right to control the sale of the Contracts and that the Distributor or
Company shall have the unconditional right to reject, in whole or part,
any application for the Contract. In the event Company or Distributor
rejects an application, Company immediately will return all payments
directly to the purchaser and Broker will be notified of such action.
In the event that any purchaser of an Contract elects to return such
Contract pursuant to the free look right, the purchaser will receive a
refund of any premium payments, plus or minus any change due to
investment performance in the value of the invested portion of such
premiums; however, if applicable state law so requires, the purchaser
who exercises his short-term cancellation right will receive a refund
of all payments made, unadjusted for investment experience prior to the
cancellation. The Broker will be notified of any such action. In the
event that any purchaser of an Contract elects to return such Contract
pursuant to the free look right, the purchaser will receive a refund
from the Company of the amount set forth in the Prospectus.
(4) Broker shall act as an independent contractor, and nothing herein
contained shall constitute Broker, its agents or representatives, or
any employees thereof as employees of Company or Distributor in
connection with solicitation of applications for Contracts. Broker, its
agents or representatives, and its employees shall not hold themselves
out to be employees of Company or Distributor in this connection or in
any dealings with the public.
(5) Broker agrees that any material it develops, approves or uses for
sales, training, explanatory or other purposes in connection with the
solicitation of applications for Contracts hereunder (other than
generic advertising materials which do not make specific reference to
the Contracts) will not be used without the prior written consent of
Distributor and, where appropriate, the endorsement of Company to be
obtained by Distributor.
(6) Solicitation and other activities by Broker shall be undertaken only in
accordance with applicable laws and regulations. No agent or
representative of Broker shall solicit applications for the contracts
until duly licensed and appointed by Company as a life insurance and
variable contract broker or agent of Company in the appropriate states
or other jurisdictions. Broker shall ensure that such agents or
representatives fulfill any training requirements necessary to be
licensed and that such agents or representatives are properly
supervised and controlled. Broker understands and acknowledges that
neither it nor its agents or representatives is authorized by
Distributor or Company to give any information or make any
representation in connection with this Agreement or the offering of the
Contracts other than those contained in the Prospectus or other
solicitation material authorized in writing by Distributor or Company.
(7) Broker shall not have authority on behalf of Distributor or Company to:
make, alter or discharge any Contract or other form; waive any
forfeiture, extend the time of paying any premium; receive any monies
or premiums due, or to become due, to Company, except as set forth in
Section C(3) of this Agreement. Broker shall not expend, nor contract
for the expenditure of the funds of Distributor, nor shall Broker
possess or exercise any authority on behalf of Broker by this
Agreement.
(8) Broker shall have the responsibility for maintaining the records of its
representatives licensed, registered and otherwise qualified to sell
the Contracts. Broker shall maintain such other records as are required
of it by applicable laws and regulations. The books, accounts and
records of the Company, the Account, Distributor and Broker relating to
the sale of the Contracts shall be maintained so as to clearly and
accurately disclose the nature and details of the transactions. All
records maintained by the Broker in connection with this Agreement
shall be the property of the Company and shall be returned to the
Company upon termination of this Agreement, free from any claims or
retention of rights by the Broker. Nothing in this Section C(8) shall
be interpreted to prevent the Broker from retaining copies of any such
records which the Broker, in its discretion, deems necessary or
desirable to keep. The Broker shall keep confidential any information
obtained pursuant to this Agreement and shall disclose such information
only if the Company has authorized such disclosure or if such
disclosure is expressly required by applicable federal or state
regulatory authorities.
D. Compensation
------------
(1) Pursuant to the Distribution Agreement between Distributor and Company,
Distributor shall cause Company to arrange for the payment of
commissions to Broker as compensation for the sale of each contract
sold by an agent or representative of Broker. Such amounts shall be
paid to Broker or its subsidiary insurance agency, whichever is
authorized to receive insurance commissions under applicable insurance
laws, in accordance with the General Agent Agreement and commission
schedule attached thereto. All terms and conditions of the General
Agent Agreement not otherwise conflicting with the terms herein, shall
be incorporated by reference herein. Company shall identify to Broker
with each such payment the name of the agent or representative of
Broker who solicited each Contract covered by the payment.
(2) Neither Broker nor any of its agents or representatives shall have any
right to withhold or deduct any part of any premium it shall receive
for purposes of payment of commission or otherwise. Neither Broker nor
any of its agents or representatives shall have an interest in any
compensation paid by Company to Distributor , now or hereafter, in
connection with the sale of any Contracts hereunder.
E. Complaints and Investigations
-----------------------------
(1) Broker and Distributor jointly agree to cooperate fully in any
insurance or securities regulatory investigation or proceeding or
judicial proceeding arising in connection with the Contracts marketed
under this Agreement. Broker, upon receipt, will notify Distributor of
any customer complaint or notice of any regulatory investigation or
proceeding or judicial proceeding in connection with the Contracts.
Broker and Distributor further agree to cooperate fully in any
<PAGE>
securities regulatory investigation or proceeding or judicial
proceeding with respect to Broker, Distributor, their affiliates and
their agents or representatives to the extent that such investigation
or proceeding is in connection with Contracts marketed under this
Agreement. Broker shall furnish applicable federal and state regulatory
authorities with any information or reports in connection with its
services under this Agreement which such authorities may request in
order to ascertain whether the Company's operations are being conducted
in a manner consistent with any applicable law or regulation.
F. Term of Agreement
-----------------
(1) This Agreement shall continue in force for one year from its effective
date and thereafter shall automatically be renewed every year for a
further one year period; provided that either party may unilaterally
terminate this Agreement upon thirty(30) days' written notice to the
other party of its intention to do so.
(2) Upon termination of this Agreement, all authorizations, rights and
obligations shall cease except (a) the agreements contained in Section
E hereof; (b) the indemnity set forth in Section G hereof; and (c) the
obligations to settle accounts hereunder, including commission payments
on premiums subsequently received for Contracts in effect at the time
of termination or issued pursuant to applications received by Broker
prior to termination.
(3) Distributor and Company reserve the right, without notice to Broker,
to suspend, withdraw or modify the offering of the Contracts or to
change the conditions of their offering.
G. Indemnity
---------
(1) Broker shall be held to the exercise of reasonable care in carrying
out the provisions of this Agreement.
(2) Distributor agrees to indemnify and hold harmless Broker and each
officer or director of Broker against any losses, claims, damages or
liability, joint or several, to which Broker or such officer or
director become subject, under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact, required to be stated therein or
necessary to make the statements therein not misleading, contained in
any Registration Statement or any post-effective amendment thereof or
in the Prospectus or any amendment or supplement to the Prospectus, or
any sales literature provided by the Company or by the Distributor.
(3) Broker agrees to indemnify and hold harmless Company and Distributor
and each of their current and former directors and officers and each
person, if any, who controls or has controlled Company or Distributor
within the meaning of the 1933 Act or the 1934 Act, against any losses,
claims, damages or liabilities to which Company or Distributor and any
such director or officer or controlling person may become subject,
under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(a) Any unauthorized use of sales materials or any verbal or written
misrepresentations or any unlawful sales practices concerning the
Contracts by Brokers, its agents, employees or representatives; or
(b) Claims by agents or representatives or employees of Broker for
commissions, service fees, development allowances or other compensation
or remuneration of any type;
(c) The failure of Broker, its officers, employees, or agents to comply
with the provisions of this Agreement; and Broker will reimburse
Company and Distributor and any director or officer or controlling
person of either for any legal or other expenses reasonably incurred by
Company, Distributor, or such director, officer of controlling person
in connection with investigating or defending any such loss, claims,
damage, liability or action. This indemnity agreement will be in
addition to any liability which Broker may otherwise have.
H. Assignability
-------------
This Agreement shall not be assigned by either party without the
written consent of the other.
I. Governing Law
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of Iowa.
In Witness Whereof, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
____________________________
(Broker Dealer Name)
By:_________________________
Title:______________________
AEGON USA SECURITIES, INC.
(Distributor)
By:_________________________
President
<PAGE>
EXHIBIT (4)(h)
--------------
FORM OF POLICY FOR
THE ENDEAVOR FI VARIABLE ANNUITY.
<PAGE>
[PFL LOGO APPEARS HERE]
PFL Life Insurance Company
A Stock Company
Home Office located at: 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499
(Hereafter called the Company, we, our or us) (319) 398-8511
- --------------------------------------------------------------------------------
================================================================================
================================================================================
ANNUITANT: JOHN DOE
OWNER(S): JOHN DOE
POLICY NUMBER: CO - 111111
POLICY DATE: February 5, 1996
WE AGREE
* To provide annuity payments as set forth in this policy;
* Or to pay withdrawal benefits in accordance with Section 5 of this policy;
* Or to pay death proceeds in accordance with Section 9 of this policy.
Withdrawals may be subject to an Excess Interest Adjustment reflecting changes
in interest rates in accordance with Section 5 of this policy.
These agreements are subject to the provisions of this policy. This policy is
issued in consideration of any application and payment of the initial premium.
This Contract may be applied for and issued to qualify as a tax-qualified
annuity under the applicable sections of the Internal Revenue Code.
20 DAY RIGHT TO CANCEL
You may cancel this policy by delivering or mailing a written notice or sending
a telegram to us. You must return the policy before midnight of the twentieth
day after the day you receive it. Notice given by mail and return of the policy
by mail are effective on being postmarked, properly addressed and postage
prepaid.
We will pay you an amount equal to the sum of:
* the premiums paid; and
* the accumulated gains or losses, if any, in the Separate Account on the
date of cancellation;
unless otherwise required by law.
Signed for us at our home office.
/s/ Craig D. Vermie /s/ William L. Busler
SECRETARY PRESIDENT
This policy is a legal contract
between the policyowner and the company.
READ YOUR POLICY CAREFULLY
Flexible Premium Variable Annuity
Income Payable At Annuity Commencement Date
Benefits Based On The Performance Of The Separate Account
Are Variable And Are Not Guaranteed As To Dollar Amount
(See Sections 6 and 10C)
AV254 101 87 196 Non-Participating
<PAGE>
SECTION 1
DEFINITIONS
ANNUITANT
The person to whom annuity payments will be made.
ANNUITY COMMENCEMENT DATE
Date the annuitant will begin receiving payments from this annuity, which may
not be later than the last day of the policy month starting after the Annuitant
attains age 85, except as expressly allowed by us, but in no event later than
the last day of the month following the month in which the Annuitant attains age
95.
ADJUSTED ANNUITY PURCHASE VALUE
Amount, defined in Section 4, that can be used to fund one of the Payment
Options.
CASH VALUE
Amount, defined in Section 5, that can be withdrawn if the annuity is
surrendered.
DISTRIBUTION
A withdrawal or disbursement of funds from the Annuity Purchase Value or Cash
Value.
PAYMENT OPTIONS
Options through which the distribution of the Adjusted Annuity Purchase Value
can be directed.
POLICY YEAR
The 12 month periods following the Policy Date shown on the Policy Data page.
The first Policy Year starts on the Policy Date. Each subsequent year starts on
the anniversary of the Policy Date.
SEPARATE ACCOUNT
The separate investment account established by us, as described in Section 6.
SUB-ACCOUNT
A division of the Separate Account, as described in Section 6.
WITHDRAWAL
A distribution of funds from the Annuity Purchase Value or Cash Value.
YOU, YOUR
The owner of this policy. Unless otherwise specified on the Policy Data page,
the annuitant and the owner shall be one and the same person.
PAGE 2
AVB254
<PAGE>
SECTION 2 - POLICY DATA
POLICY NUMBER: 07- 111111 ANNUITANT: JOHN DOE
INITIAL
PREMIUM: $5,000.00 ISSUE AGE/SEX: 35/MALE
POLICY DATE: February 5, 1996 OWNER(S): JOHN DOE
ANNUITY DEATH BENEFIT
COMMENCEMENT OPTION: A
DATE: February 1, 2046
Mortality and Expense Risk Fee and Administrative Charge: 1.40%
AV254 101 87 196 SP PAGE 3
<PAGE>
SECTION 3 - PREMIUMS
PAYMENT OF PREMIUMS
Premiums may be paid any time while this policy is in force before the Annuity
Commencement Date. You may start or stop, increase or decrease, or skip any
premium payments.
MAXIMUM AND MINIMUM PREMIUM
The premiums paid may not be more than the amount permitted by law if this is a
tax-qualified annuity. The minimum initial premium is $5,000. If this policy is
being used as a tax-qualified annuity, the minimum initial premium is $1,000
($50 for Tax Deferred 403(b) Annuities). The minimum subsequent premium payment
we will accept is $50, including payments through automatic deduction. The
maximum total premiums which we will accept is $1,000,000 without prior Company
approval.
PREMIUM PAYMENT DATE
The premium payment date is the date on which the premium is credited to the
policy. The initial premium payment will be credited to the policy within two
business days of receipt of the premium and the information needed. Subsequent
additional premium payments will be credited to the policy as of the business
day when the premium and required information are received. A business day is
any day on which the New York Stock Exchange is open for trading.
ALLOCATION OF PREMIUM PAYMENTS
Premium payments may be applied to various Guaranteed Periods of the Fixed
Account and/or to one or more of the Sub-accounts which we make available. You
must indicate what percent of each premium payment to allocate to various
Guaranteed Periods of the Fixed Account and/or among one or more of the
Sub-accounts (making a total of 100%). Each percent may be either zero or any
whole number.
We will use the allocation percentages you choose for the first and any later
premium payments until you change the allocation percentages.
CHANGE OF ALLOCATION
You may change the allocation of premium payments to various Guaranteed Periods
of the Fixed Account and/or among the Sub-accounts. You must tell us in a notice
you sign which gives us the facts that we need. Payments received after the date
on which we receive your notice will be applied on the basis of the new
allocation.
SECTION 4 - ANNUITY PURCHASE VALUE
ANNUITY PURCHASE VALUE
On or before the Annuity Commencement Date, the Annuity Purchase Value is equal
to your:
(a) premiums paid; minus
(b) partial withdrawals taken; plus
(c) interest credited in the Fixed Account; plus
(d) accumulated gains or losses in the Separate Account;
minus
(e) service charges, premium taxes and transfer fees, if any.
ADJUSTED ANNUITY PURCHASE VALUE
The Adjusted Annuity Purchase Value is the Annuity Purchase Value increased or
decreased by any Excess Interest Adjustment.
You may only use the Adjusted Annuity Purchase Value on the Annuity Commencement
Date to provide lifetime income or income for a period of five or more years
under the Annuity Payment Options in Section 10.
SERVICE CHARGE
On each policy anniversary before the Annuity Commencement Date, we reserve the
right to charge up to $35 for policy administration expenses. It will be
deducted from each Sub-account in proportion to their percentage of the Annuity
Purchase Value in the Sub-accounts before such charge on that policy
anniversary. This fee will not be deducted from the Fixed Account. In no event
will the Service Charge exceed 2% of the Annuity Purchase Value on that
anniversary.
The Service Charge will not be deducted on a policy anniversary if the sum of
all premiums paid minus the sum of all withdrawals taken equals at least $50,000
on that policy anniversary.
SECTION 5 - CASH VALUE AND PARTIAL WITHDRAWALS
CASH VALUE
The Cash Value may be partially withdrawn or will be paid in the event of a full
surrender of the policy. We must receive your written withdrawal or surrender
request before the Annuity Commencement Date.
On or before the Annuity Commencement Date, the Cash Value is equal to the
Adjusted Annuity Purchase Value less any surrender charges. There is no Cash
Value after the Annuity Commencement Date. When you ask, we will tell you how
much the Cash Value is.
EXCESS INTEREST ADJUSTMENT
Full Surrenders, partial withdrawals and transfers from the Fixed Account
Guaranteed Periods described in Section 7 will be subject to an Excess Interest
Adjustment except as provided for in the Partial Withdrawals provision below.
PAGE 4
M672
<PAGE>
SECTION 5 - CONTD
Excess Interest Adjustment = S x (G-C) x (M/ 1 2)
where: S is the gross (i.e. before surrender charges and premium
taxes, if any) amount being surrendered, withdrawn or
transferred that is subject to the Excess Interest Adjustment.
G is the guaranteed interest rate applicable to S.
C is the current guaranteed interest rate then being offered on
new premiums for the next longer Guaranteed Period than "M". If
this policy form or such a Guaranteed Period is no longer
offered, "C" will be the U.S. Treasury rate for the next longer
maturity (in whole years) than "M" on the 25th day of the
previous calendar month, plus up to 2%.
M is the number of months remaining in the Guaranteed Period
for S, rounded up to the next higher whole number of months.
Upon transfer from any Guaranteed Period or upon full surrender of the policy,
the Excess Interest Adjustment for each Guaranteed Period will not reduce the
Adjusted Annuity Purchase Value for that Guaranteed Period below the amount paid
into, less any prior withdrawals and transfers from that Guaranteed Period, plus
interest at the 3% guaranteed effective annual interest rate.
PARTIAL WITHDRAWALS
We will pay you a portion of or all of the Cash Value as a lump sum partial
withdrawal ($500 minimum) provided we receive your written request while the
policy is in effect and before the Annuity Commencement Date. When you request a
partial withdrawal you must tell us how it is to be allocated among the various
Guaranteed Periods of the Fixed Account and/or the Sub-accounts. If your request
for a partial withdrawal from any Guaranteed Period of the Fixed Account and/or
a Sub-account is greater than the Cash Value in that account, we will pay you
the Cash Value of that account
Partial Withdrawals may be made with no Excess Interest Adjustment and free of
Surrender Charges in three different ways:
1. Lump Sum
After the first policy year, amounts up to 10% of the Annuity Purchase
Value at the time of withdrawal are available as a lump sum distribution
once per policy year with no Excess Interest Adjustment and no Surrender
Charges.
2. Systematic Payout Option
During any policy year, including the first, a Systematic Payout Option
(SPO) is available on a monthly, quarterly, semi-annual or annual basis.
SPO payouts must be at least $50 each and may not exceed 10% of the
Annuity Purchase Value at the time SPO is elected divided by the number of
payouts made per year (e.g. 12 for monthly). Monthly and quarterly payouts
must be sent through electronic funds transfer directly to your checking
or savings account. No Excess Interest Adjustment and no Surrender Charges
will apply to the SPO payout. You may start or stop SPO payouts only one
time in any twelve months. Twelve months must pass from the date a SPO is
stopped before you may elect a partial lump sum distribution under number
1. above. If you have elected a partial lump sum distribution prior to a
SPO, or if you elected SPO in the first policy year, you must wait a
minimum time before beginning the SPO: one month for a monthly SPO, three
months for quarterly, six months for semi-annual, or twelve months for
annual.
3. Minimum Required Distribution
For a tax-qualified annuity, partial withdrawals taken to satisfy minimum
distribution requirements under Section 401(a)(9) of the Internal Revenue
Code (IRC) are available with no Excess Interest Adjustment and no
Surrender Charge. The amount available from this annuity with respect to
the minimum distribution requirement is based solely on this policy. The
owner must be at least 70 1/2 years old in the calendar year of
distribution, must submit a written request to us and must take the
distribution before year end. If the owner attains age 70 1/2 in the
calendar year of distribution, a written request which is postmarked no
later than the end of the current calendar year must be submitted to us.
Unless the minimum distribution requirement is met under SPO, twelve
months must pass from the date of each adjustment free/Surrender Charge
free withdrawal before future adjustment free/Surrender Charge free
withdrawals are permitted. Any amount in excess of the IRC minimum
required distribution will have the appropriate Surrender
Charge/adjustment applied.
Surrender Charge free/adjustment free withdrawals will reduce the Annuity
Purchase Value by the amounts withdrawn. Withdrawal amounts in excess of the
Surrender Charge free/adjustment free portion are Excess Partial Withdrawals.
Excess Partial Withdrawals will reduce the Annuity Purchase Value by an amount
equal to (X-Y+Z) where: X = Excess Partial Withdrawal Y = Excess Interest
Adjustment = (X) x (G-C) x (M/12) where G, C and M are defined in the Excess
Interest Adjustment provision above. Z = Surrender Charge on X and Y
PAGE 5
U672
<PAGE>
SECTION 5 - CONTD
If any partial withdrawal reduces the Cash Value below $500, we reserve the
right to pay the full Cash Value and terminate this policy. We may delay payment
of the Cash Value for up to 6 months after we receive your request.
Premiums withdrawn seven or more policy anniversaries after their payment date
are not subject to Surrender Charges.
SURRENDER CHARGES
Amounts withdrawn in excess of the Surrender Charge free withdrawal provisions
above are subject to a Surrender Charge. The amount of this charge, if any, will
be a percentage, as shown in the table below, of the amount of premium
withdrawn:
<TABLE>
<CAPTION>
Number of Policy Percentage
Anniversaries Since of Premium
Premium Payment Date Withdrawn
<S> <C>
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7 and later 0%
</TABLE>
For Surrender Charge purposes, the oldest premium payment is considered to be
withdrawn first.
If the amount withdrawn exceeds this, the next oldest premium payment is
considered to be withdrawn, and so on until the most recent premium payment is
considered to be withdrawn.
After all premium payments are considered to be withdrawn, the remaining
Adjusted Annuity Purchase Value may be withdrawn free of any Surrender Charge.
GUARANTEED RETURN OF FIXED ACCOUNT PAYMENTS
Upon full surrender of the policy, you will always receive at least the premiums
paid to, less prior withdrawals and transfers from, the Fixed Account.
SECTION 6 - SEPARATE ACCOUNT
SEPARATE ACCOUNT
We have established and will maintain a Separate Account under the laws of the
state of Iowa. Any realized or unrealized income, net gains and losses from the
assets of the Separate Account are credited to or charged against it without
regard to our other income, gains or losses. Assets are put in the Separate
Account for this policy, as well as for other variable life insurance and
annuity policies. The Separate Account may invest assets in shares of one or
more mutual funds. Fund shares are purchased, redeemed and valued on behalf of
the Separate Account.
The Separate Account is divided into Sub-accounts. Each Sub-account invests
exclusively in shares of one of the portfolios of an underlying fund. We reserve
the right to add or remove any Sub-account of the Separate Account.
The assets of the Separate Account are our property. These assets will equal or
exceed the reserves and other contract liabilities of the Separate Account.
These assets will not be chargeable with liabilities arising out of any other
business we conduct. We reserve the right to transfer assets of a Sub-account,
in excess of the reserves and other contract liabilities with respect to that
Sub-account, to another Sub-account or to our General Account.
We will determine the fair market value of the assets of the Separate Account in
accordance with a method of valuation which we establish in good faith.
Valuation Period means the period of time from one determination of the value of
each Sub-account to the next. Such determinations are made when the value of the
assets and liabilities of each Sub-account is calculated. This is generally each
day on which the New York Stock Exchange is open.
We also reserve the right to transfer assets of the Separate Account, which we
determine to be associated with the class of policies to which this policy
belongs, to another separate account. If this type of transfer is made, the term
"Separate Account", as used in this policy, shall then mean the separate account
to which the assets were transferred.
We also reserve the right, when permitted by law, to:
(a) deregister the Separate Account under the
Investment Company Act of 1940;
(b) manage the Separate Account under the direction
of a committee at any time;
(c) restrict or eliminate any voting rights of
policyowners or other persons who have voting
rights as to the Separate Account; and
(d) combine the Separate Account with one or
more other separate accounts.
P651 PAGE 6
<PAGE>
SECTION 6 - SEPARATE ACCOUNT - CONT.
CHANGE IN INVESTMENT OBJECTIVE OR POLICY OF A MUTUAL FUND
If required by law or regulation, an investment policy of the Separate Account
will only be changed if approved by the appropriate insurance official of the
state of Iowa or deemed approved in accordance with such law or regulation. If
so required, the process for obtaining such approval is filed with the insurance
official of the state or district in which this policy is delivered.
ACCUMULATION UNITS
The Annuity Purchase Value in the Separate Account before the Annuity
Commencement Date is represented by accumulation units. The dollar value of
accumulation units for each Sub-account may change from day to day reflecting
the investment experience of the Sub-account.
Payments allocated to and any amounts transferred to the Sub-accounts will be
applied to provide accumulation units in those Sub-accounts. The number of
accumulation units purchased in a Sub-account will be determined by dividing the
premium allocated to or any amount transferred to that Sub-account, by the value
of an accumulation unit for that Sub-account on the payment or transfer date.
The number of accumulation units withdrawn or transferred from the Sub-accounts
will be determined by dividing the amount withdrawn or transferred by the value
of an accumulation unit for that Sub-account on the withdrawal or transfer date.
The value of an accumulation unit on any business day is determined by
multiplying the value of that unit at the end of the immediately preceding
valuation period by the net investment factor for the valuation period.
The net investment factor used to calculate the value of an accumulation unit in
each Sub-account for the valuation period is determined by dividing (a) by (b)
and subtracting (c) from the result, where:
(a) is the result of:
(1) the net asset value of a fund share held in that Sub-account
determined as of the end of the current valuation period; plus
(2) the per share amount of any dividend or capital gain distributions
made by the fund for shares held in that Sub-account if the ex-
dividend date occurs during the valuation period; plus or minus
(3) a per share charge or credit for any taxes reserved for, which we
determine to have resulted from the investment operations of that Sub-
account.
(b) is the net asset value of a fund share held in that
Sub-account determined as of the end of the immediately
preceding valuation period.
(c) is a factor representing the mortality and expense risk fee, and
administrative charge. This factor is less than or equal to, on an annual
basis, the percentage shown on page 3 of the daily net asset value of a
fund share held in that Sub-account.
Since the net investment factor may be greater or less than one, the
accumulation unit value may increase, or decrease.
SECTION 7 - FIXED ACCOUNT
FIXED ACCOUNT
Payments applied to and any amounts transferred to the Fixed Account will
reflect a fixed interest rate. The interest rates we set will be credited for
increments of at least one year measured from each premium payment or transfer
date. These rates will never be less than an effective annual interest rate of
3%.
GUARANTEED PERIODS
We may offer optional Guaranteed Periods into which premiums may be paid or
amounts transferred. The current interest rate we set for funds entering each
option is guaranteed until the end of that option's guaranteed period. At that
time, the premium paid or amount transferred into the option less any
withdrawals or transfers from that option, plus accrued interest, will be rolled
into a new option or options.
You may choose the option(s) you want the funds rolled into by giving us notice
within 30 days before the end of the expiring option's period. In the absence of
such election, the new option's period will be the same as the expiring option's
period unless that option is no longer offered, in which case, the next shorter
option offered will be used. We reserve the right for new premiums, transfers,
or rollovers to offer or not to offer any Guaranteed Period option, except that
we will always offer at least a one year Guaranteed Period option.
For purposes of crediting interest when funds' are withdrawn from or transferred
into a Guaranteed Period, the amount of the oldest premium payment, transfer, or
rollover into that Guaranteed Period plus interest associated with that amount
is considered to be withdrawn or transferred first. If the amount withdrawn or
transferred exceeds this, the next oldest premium payment, transfer, or
rollover, plus interest is considered to be withdrawn or transferred next, and
so on until the most recent premium payment, transfer or rollover is considered
to be withdrawn (this is a "First-In, First-Out" or FIFO procedure).
PB851 PAGE 7
<PAGE>
SECTION 7 - CONT
Payments applied to a Guaranteed Period are subject to an Excess Interest
Adjustment as described in Section 5.
DOLLAR COST AVERAGING FIXED ACCOUNT OPTION
We may offer a Dollar Cost Averaging Fixed Account Option separate from the
Guaranteed Periods. This option will only be available under a Dollar Cost
Averaging program as described in Section 8.
SECTION 8 - TRANSFERS
A. TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE
Prior to the Annuity Commencement Date, you may transfer the value of the
accumulation units from one Sub-account to another within the Separate Account
or to the Fixed Account, or from the Guaranteed Periods of the Fixed Account to
the Separate Account. We may, at our discretion, offer you the option to
transfer interest earned in any of the Guaranteed Periods to any Sub-account(s)
of the Separate Account. No Excess Interest Adjustment will apply to such
transfers of interest. If you want to transfer, you must tell us in a notice you
sign or through an electronic notice which gives us the facts that we need.
You may choose which Guaranteed Period to transfer to or from. Transfers from a
Guaranteed Period are subject to the Excess Interest Adjustment described in
Section 5. If the Excess Interest Adjustment at the time of a transfer request
from any Guaranteed Period is a negative adjustment, then the maximum amount
that can be transferred is 25% of that Guaranteed Period's Annuity Purchase
Value, less amounts previously transferred out of that Guaranteed Period during
the current policy year. No maximum will apply to amounts transferred from any
Guaranteed Period if the Excess Interest Adjustment is a positive adjustment at
the time of transfer.
No transfers will be allowed out of the Dollar Cost Averaging Fixed Account
Option except through dollar cost averaging.
The minimum amount which may be transferred is the lesser of $500 or the entire
Sub-account or Guaranteed Period value. However, if the remaining Sub-account or
Guaranteed Period value is less than $500, we have the right to include that
amount as part of the transfer.
We reserve the right to limit transfers to no more than 12 in any one
policy year. Any transfers in excess of 12 per policy year may be charged
a $10 transfer fee.
DOLLAR COST AVERAGING OPTION
Prior to the Annuity Commencement Date, you may instruct us to automatically
transfer a specified amount from the Money Market Sub-account, the Dollar Cost
Averaging Fixed Account Option or the U.S. Government Securities Sub-account to
any other Sub-account or Sub-accounts of the Separate Account. The automatic
transfers can occur monthly or quarterly and will occur on the 28th day of the
month. The first transfer will occur on the 28th day of the month following our
receipt of the Dollar Cost Averaging request.
You may elect Dollar Cost Averaging at any time. Transfers will continue until
the Sub-account value is depleted. The amount transferred each time must be at
least $500. A minimum of 6 monthly or 4 quarterly transfers are required each
time the Dollar Cost Averaging program is started or restarted following
termination of the program for any reason.
Except for Dollar Cost Averaging transfers from the Dollar Cost Averaging Fixed
Account Option, you may start or stop, or increase or decrease the amount of the
transfers by sending us a new Dollar Cost Averaging form or you may discontinue
the Dollar Cost Averaging at any time.
DOLLAR COST AVERAGING FIXED ACCOUNT OPTION
Prior to the Annuity Commencement Date, no transfers, except through dollar cost
averaging (DCA) will be allowed from the DCA Fixed Account. DCA transfers must
begin within 30 days after the premium payment or transfer to the DCA Fixed
Account. Transfers must be scheduled for at least 6, but not more than 24 months
or for at least 4, but not more than 8 quarters. This option will have a one
year interest rate guarantee. No changes to the amount transferred will be
allowed, but changes can be made to the Sub-accounts to which these transfers
are allocated. DCA transfers from the DCA Fixed Account will not be subject to
an Excess Interest Adjustment.
ASSET REBALANCING
Prior to the Annuity Commencement Date, you may instruct us to automatically
transfer amounts among the Sub-accounts of the Separate Account on a regular
basis to maintain a desired allocation of the Annuity Purchase Value among the
various Sub-accounts offered. Rebalancing will occur on a monthly, quarterly,
semi-annual or annual basis, beginning on a date you select. You must select the
percentage of the Annuity Purchase Value you desire in each of the various
Sub-accounts offered (totaling 100%). Any amounts in the Fixed Account are
ignored for the purposes of asset rebalancing. Rebalancing can be started,
stopped or changed at any time, except that rebalancing will not be available
when:
1) Dollar Cost Averaging is in effect, or
2) any other transfer is requested.
V862 PAGE 8
<PAGE>
SECTION 8 - CONT
B. TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
After the Annuity Commencement Date, you may transfer the value of the variable
annuity units from one Sub-account to another within the Separate Account or to
the Fixed Account. If you want to transfer the value of the variable annuity
units, you must tell us in a notice you sign or through an electronic notice
which gives us the facts that we need.
The minimum amount which may be transferred is the lesser of $10 monthly income
or the entire monthly income of the variable annuity units in the Sub-account
from which the transfer is being made. If the monthly income of the remaining
units in a Sub-account is less than $10, we have the right to include the value
of those variable annuity units as part of the transfer.
After the Annuity Commencement Date, no transfers may be made from the Fixed
Account to the Separate Account.
We reserve the right to limit transfers between the Sub-accounts or to
the Fixed Account to once per policy year except under the Dollar Cost Averaging
Option.
SECTION 9 - DEATH PROCEEDS
A. DEATH PROCEEDS PRIOR TO ANNUITY COMMENCEMENT DATE
The amount of death proceeds will be the greater of (a), (b) or (c) where:
(a) is the Annuity Purchase Value on the date we receive due proof of death
and an election of a method of settlement;
(b) is the Cash Value on the date we receive due proof of death and an
election of a method of settlement, and;
(c) is the Guaranteed Minimum Death Benefit (GMDB).
If you have not selected a payment option by the date of death, the beneficiary
may make such election within 60 days of the date we receive due proof of death.
The beneficiary may elect to receive the death proceeds as a lump sum payment or
may use the death proceeds to provide any of the annuity payment options
described in Section 10. Interest on death proceeds will be paid as required by
law.
B. GUARANTEED MINIMUM DEATH BENEFIT
The amount of the Guaranteed Minimum Death Benefit depends on the option shown
on page 3. You may not change the Guaranteed Minimum Death Benefit option after
the policy is issued.
Option A: 5% Compound Death Benefit
The Guaranteed Minimum Death Benefit is equal to the total premiums
paid for this policy, less any partial withdrawals, accumulated at 5%
interest per annum from the payment or withdrawal date to the date of
death.
Option B: Annual Step-Up Death Benefit
The Guaranteed Minimum Death Benefit is equal to the largest Annuity
Purchase Value on the issue date or on any policy anniversary prior to the
earlier of the date of death or the owner's 81st birthday, plus any
premiums paid, less any partial withdrawals taken, subsequent to the date
of the largest anniversary Annuity Purchase Value.
Each partial withdrawal as used in the above GMDB definition is the sum of (1)
and (2) where:
(1) = The Surrender Charge free/adjustment free withdrawals, as described
in Section 5 (Partial Withdrawals), and
(2) = The Excess Partial Withdrawal as described in Section 5 (Partial
Withdrawals), times a) the amount of the death proceeds on the date of,
but prior to the Excess Partial Withdrawal, divided by b) the Annuity
Purchase Value on the date of, but prior to the Excess Partial
Withdrawal.
C. DEATH PRIOR TO ANNUITY COMMENCEMENT DATE
Death proceeds are payable contingent upon the relationships between the owner,
annuitant, successor owner and beneficiary as outlined below. The policy must be
surrendered upon settlement or on proof of death.
1. Annuitant and owner are the same.
When we have due proof that the owner died before the Annuity Commencement
Date, we will provide the death proceeds to the beneficiary.
a) Beneficiary is the deceased owner's surviving spouse. The beneficiary
may elect to continue this policy rather than receiving the death
proceeds. If the policy is continued, an amount equal to the excess, if
any, of the Guaranteed Minimum Death Benefit over the Annuity Purchase
Value will then be added to the Annuity Purchase Value. This amount
will be added only once, at the time of such election.
If this beneficiary elects to have the death proceeds paid, the death
proceeds must be distributed:
(1) by the end of 5 years after the date of the deceased owner's
death, or
(2) payments must begin no later than one year after the deceased
owner's death and must be made for a period certain or for
this beneficiary's lifetime, so long as any period certain
does not exceed this beneficiary's life expectancy.
VB862 PAGE 9
<PAGE>
SECTION 9 - CONT.
b) Beneficiary is not the deceased owner's surviving spouse. The death
proceeds must be distributed as provided in I.a)(1) or I.a)(2) above.
c) Death proceeds which are not paid to or for the benefit of a natural
person must be distributed by the end of 5 years after the date of
the deceased owner's death.
II. Annuitant and owner are different and the annuitant dies.
When we have due proof that the annuitant died prior to the Annuity
Commencement Date, the owner will become the new annuitant and no death
proceeds are payable.
However, the owner may elect to have the death proceeds paid upon the
annuitant's death if we agree to such an election. In such case, when we
have due proof that the annuitant died prior to the Annuity Commencement
Date, we will provide the death proceeds to the beneficiary.
a) Beneficiary is the deceased annuitant's surviving spouse. The
beneficiary may elect to continue this policy rather than receiving
the death proceeds. If the policy is continued, an amount equal to
the excess, if any, of the Guaranteed Minimum Death Benefit over the
Annuity Purchase Value will then be added to the Annuity Purchase
Value. This amount will be added only once, at the time of such
election.
If this beneficiary elects to have the death proceeds paid, the death
proceeds must be distributed as provided in I.a)(1) or I.a)(2) above.
b) Beneficiary is not the deceased annuitant's surviving spouse.
The death proceeds must be distributed as provided in I.a)(1) or
I.a)(2) above.
c) Death proceeds which are not paid to or for the benefit of a natural
person must be distributed by the end of 5 years after the date of
the annuitant's death.
III. Annuitant and owner are different and the owner dies.
If the owner dies prior to the Annuity Commencement Date and before the
entire interest in the policy is distributed, the successor owner will
become the new owner. The remaining portion of any interest in the policy
must be distributed to the extent provided below in III.a), III.b) or
III.c).
a) Successor owner is the deceased owner's surviving spouse. The
successor owner may elect to continue this policy rather than receive
the Cash Value. If the successor owner elects to receive the Cash
Value, the Cash Value must be distributed:
(1) by the end of 5 years after the date of the deceased owner's
death, or
(2) payments must begin no later than one year after the deceased
owner's death and must be made for a period certain or for the
successor owner's lifetime, so long as any period certain does not
exceed the successor owner's life expectancy.
b) Successor owner is not the deceased owner's surviving spouse.
The Cash Value must be distributed as provided in III.a)(1) or
III.a)(2) above.
c) No successor owner survives the deceased owner. The deceased
owner's estate will become the new owner and the Cash Value must be
distributed by the end 5 years after the date of the deceased
owner's death.
IV. More than one Owner.
If there is more than one owner, then the death of any owner will be
treated the same as the death of the owner.
D. DEATH ON OR AFTER THE ANNUITY COMMENCEMENT DATE
The death proceeds on or after the Annuity Commencement Date depend on the
payment option selected. If any annuitant dies on or after the Annuity
Commencement Date, but before the entire interest under the policy is
distributed, the remaining portion of such interest in the contract will be
distributed at least as rapidly as under the method of distribution being used
as of the date of that annuitant's death.
E. AN OWNER IS NOT AN INDIVIDUAL
In the case of a non tax-qualified annuity, if any owner is not an individual,
then for purposes of the federal income tax mandatory distribution provisions in
subsection C or D above, (1) the primary annuitant will be treated as the owner
of the policy, and (2) if there is any change in the primary annuitant, such a
change will be treated as the death of the owner.
S843 PAGE 10
<PAGE>
SECTION 10 - ANNUITY PAYMENTS
A. GENERAL PAYMENT PROVISIONS
Payment
If this policy is in force on the Annuity Commencement Date, we will use the
Adjusted Annuity Purchase Value to make annuity payments to the Payee under
Option 3-V with 10 years certain or if elected, under one or more of the other
options described in this section. You may become the annuitant at the Annuity
Commencement Date, or the prior annuitant may continue as the annuitant Payments
will be made at 1, 3, 6 or 12 month intervals. We reserve the right to change
the frequency of payments to avoid making payments of less than $50.00. Before
the Annuity Commencement Date, if the death proceeds become payable or if you
surrender this policy, we will pay any proceeds in one sum, or if elected, all
or part of these proceeds may be placed under one or more of the options
described in this section. If we agree, the proceeds may be placed under some
other method of payment instead.
Election of Optional Method of Payment
Before the Annuity Commencement Date you can elect or change a payment option.
You may elect, in a notice you sign which gives us the facts that we need,
annuity payments that may be either variable, fixed, or a combination of both.
If you elect a combination, you must also tell us what part of the policy
proceeds on the Annuity Commencement Date is to be applied to provide each type
of payment. The amount of a combined payment will be the sum of the variable and
fixed payments. Payments under a variable payment option will reflect the
investment performance of the selected Sub-account of the Separate Account.
Payee
Unless you specify otherwise, the payee shall be the annuitant, or the
beneficiary as specified in the Beneficiary provision.
Facility of Payment
No payment will be made to any payee who, in our opinion, is not capable of
giving valid receipt and discharge for the payment. We may make payment, in
installments of not more than $50 per month, to the persons who, in our opinion,
are caring for and supporting such payee. Such payment will be made until claim
is made by a legal representative of such payee. Payment to such persons will
discharge our liability to the extent of such payment. We will not be
responsible for the proper use of the payments.
Proof of Age
We may require proof of the age of any person who has an annuity purchased under
Options 3, 3-V, 5 and 5-V of this section before we make the first payment.
Minimum Proceeds
If the proceeds are less than $2,000, we reserve the right to pay them out as a
lump sum instead of applying them to a payment option.
Premium Tax
We may be required by law to pay premium tax on the amount applied to a
payment option. If so, we will deduct the premium tax before applying the
proceeds.
Supplementary Contract
Once proceeds become payable and a choice has been made, we will issue a
supplementary contract in exchange for this policy. The contract will name the
payees and will describe the payment schedule.
B. FIXED ACCOUNT PAYMENTS
Guaranteed Payment Options
The fixed account payment is determined by multiplying each $1,000 of policy
proceeds allocated to a fixed payment option by the amounts shown on page 12 for
the option you select. Options 1, 2 and 4 are based on a guaranteed interest
rate of 3%. Options 3 and 5 are based on a guaranteed interest rate of 3% and
the "1983 Table a" (male, female, and unisex if required by law) mortality table
improved to the year 2000 with projection scale G.
Option 1 - Interest Payments
The Adjusted Annuity Purchase Value may be left with us for any term agreed to.
We will pay the interest in periodic payments or it may be left to accumulate.
Withdrawal rights will be agreed upon by you and us when the option is elected.
Option 2 - Income for a Specified Period
Payments are made for the fixed period elected. In the event of the death of the
person receiving payments prior to the end of the guaranteed period, payments
will be continued to that person's beneficiary or their present value may be
paid in a single sum.
Option 3 - Life Income
An election may be made between "No Period Certain", "10 Years Certain" or
"Guaranteed Return of Policy Proceeds". In the event of the death of the person
receiving payments prior to the end of the guaranteed period, payments will be
continued to that person's beneficiary or their present value may be paid in a
single sum.
Option 4 - Income of a Specified Amount
Payments are made for any specified amount until the proceeds with interest are
exhausted. In the event of the death of the person receiving payments prior to
the end of the guaranteed period, payments will be continued to that person's
beneficiary or their present value may be paid in a single sum.
Option 5 - Joint and Survivor Annuity
Payments are made during the joint lifetime of the payee and a nominee of your
selection. Payments will be made as long as either person is living.
Current Payment Options
The amounts shown in the tables on page 12 are the guaranteed amounts.
Current amounts may be obtained from us.
SB843 PAGE 11
<PAGE>
SECTION 10 - CONT
C. VARIABLE ACCOUNT PAYMENT OPTIONS
Variable Annuity Units
The policy proceeds you tell us to apply to a variable payment option will be
used to purchase variable annuity units in your chosen Sub-accounts. The dollar
value of variable annuity units in your chosen Sub-accounts will increase or
decrease reflecting the investment experience of your chosen Sub-accounts. The
value of a variable annuity unit in a particular Sub-account on any business day
is equal to (a) multiplied by (b) multiplied by (c), where:
(a) is the variable annuity unit value for that Sub-account on the immediately
preceding business day;
(b) is the net investment factor for that Sub-account for the Valuation Period;
and
(c) is the Assumed Investment Return adjustment factor for the Valuation Period.
The Assumed Investment Return adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5.0% effective
annual Assumed Investment Return.
The net investment factor used to calculate the value of a variable annuity unit
in each Sub-account for the Valuation Period is determined by dividing (a) by
(b) and subtracting (c) from the result, where:
(a) is the net result of:
(1) the net asset value of a fund share held in that Sub-account
determined as of the end of the current valuation period; plus
(2) the per share amount of any dividend or capital gain distributions
made by the fund for shares held in that Sub-account if the
ex-dividend date occurs during the Valuation Period; plus or minus
(3) a per share charge or credit for any taxes reserved for, which we
determine to have resulted from the investment operations of the
Sub-account.
(b) is the net asset value of a fund share held in that Sub-account
determined as of the end of the immediately preceding Valuation Period.
(c) is a factor representing the mortality and expense risk fee, and
administrative charge. This factor is less than or equal to, on an annual
basis, 1.40% of the daily net asset value of a fund share held in the
Separate Account for that Sub-account
Determination of the First Variable Payment
The amount of the first variable payment is determined by multiplying each
$1,000 of policy proceeds allocated to a variable payment option by the amounts
shown on page 13 for the variable option you select The tables are based on a 5%
effective annual Assumed Investment Return and the "1983 Table a" (male, female,
and unisex if required by law) mortality table improved to the year 2000 with
projection scale G.
The amount of the first payment depends upon the adjusted age of the annuitant.
The adjusted age is the annuitant's actual age on the annuitant's nearest
birthday, at the Annuity Commencement Date, adjusted as follows:
Annuity
Commencement Date Adjusted Age
----------------- ------------------
Before 2001 Actual Age
2001 - 2010 Actual Age minus 1
2011 - 2020 Actual Age minus 2
2021 - 2030 Actual Age minus 3
2031 - 2040 Actual Age minus 4
After 2040 as determined by us.
Option 3-V - Life Income
An election may be made between:
1. "No Period Certain" - Payments will be made during the lifetime
of the annuitant
2. "10 Years Certain" - Payments will be made for the longer of the
annuitant's lifetime or 10 years.
Option 5-V - Joint and Survivor Annuity
Payments are made as long as either the annuitant or the joint annuitant
is living.
Determination of Subsequent Variable Payments
The amount of each variable annuity payment after the first will increase or
decrease according to the value of the variable annuity units which reflect the
investment experience of the selected Sub-accounts. Each variable annuity
payment after the first will be equal to the number of variable annuity units in
the selected Sub-accounts multiplied by the variable annuity unit value on the
date the payment is made. The number of variable annuity units in each selected
Sub-account is determined by dividing the first variable annuity payment
allocated to the Sub-account by the variable annuity unit value of that
Sub-account on the Annuity Commencement Date.
S844 PAGE 11(A)
<PAGE>
GUARANTEED FIXED ACCOUNT PAYMENT OPTIONS
The amounts shown in these tables are the guaranteed amounts for each $1,000 of
the policy proceeds. Higher current amounts may be available at the time of
settlement.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Option 2, Table 1 Option 3, Table II Option 3, Table III Option 3, Table IV
-------------------------------------------------------------------------------------------------------------
Number Amount Monthly Installment Monthly Installment Monthly Installment For Life
of Years of Monthly For Life for Life Guaranteed Return Of
Payable Installment No Period Certain 10 Years Certain Policy Proceeds
-------------------------------------------------------------------------------------------------------------
Age Male Female Unisex Male Female Unisex Male Female Unisex
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 $3.87 $3.55 $3.71 $3.84 $3.54 $3.70 $3.73 $3.49 $3.61
51 3.93 3.60 3.77 3.90 3.59 3.75 3.79 3.53 3.66
52 4.00 3.65 3.83 3.97 3.64 3.81 3.84 3.58 3.71
53 4.07 3.71 3.90 4.04 3.70 3.87 3.90 3.63 3.76
5 $17.91 54 4.15 3.77 3.97 4.11 3.75 3.94 3.96 3.68 3.82
6 15.14 55 4.23 3.83 4.04 4.19 3.82 4.01 4.03 3.73 3.88
7 13.16 56 4.32 3.90 4.11 4.27 3.88 4.08 4.10 3.79 3.94
8 11.68 57 4.41 3.97 4.19 4.35 3.95 4.15 4.17 3.85 4.00
9 10.53 58 4.50 4.06 4.28 4.44 4.02 4.24 4.24 3.91 4.07
10 9.61 59 4.61 4.13 4.37 4.53 4.10 4.32 4.32 3.97 4.14
11 8.86 60 4.72 4.21 4.47 4.63 4.18 4.41 4.40 4.04 4.22
12 8.24 61 4.84 4.30 4.57 4.74 4.26 4.51 4.49 4.12 4.30
13 7.71 62 4.96 4.40 4.68 4.85 4.35 4.61 4.58 4.19 4.38
14 7.26 63 5.10 4.50 4.80 4.97 4.45 4.71 4.68 4.28 4.47
15 6.87 64 5.24 4.61 4.93 5.09 4.55 4.83 4.78 4.36 4.56
16 6.53 65 5.40 4.73 5.06 5.22 4.66 4.95 4.88 4.45 4.66
17 6.23 66 5.56 4.85 5.21 5.36 4.77 5.07 4.99 4.55 4.76
18 5.96 67 5.74 4.99 5.36 5.50 4.89 5.20 5.11 4.65 4.87
19 5.73 68 5.93 5.13 5.53 5.65 5.02 5.34 5.24 4.76 4.98
20 5.51 69 6.13 5.29 5.71 5.80 5.15 5.49 5.37 4.87 5.10
70 6.34 5.45 5.90 5.96 5.30 6.64 5.51 4.99 5.23
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Option 5, Table V
-------------------------------------------------------------------------------------------------------------
Monthly Installment For Joint and Full Survivor
-------------------------------------------------------------------------------------------------------------
Age of Age of Female Annuitant*
Male
Annuitant
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
15 Years 12 Years 9 Years 6 Years 3 Years 3 Years
Less Than Less Than Less Than Less Than Less Than Same As More Than
Male Male Male Male Male Male Male
-------------------------------------------------------------------------------------------------------------
50 $2.99 $3.05 $3.11 $3.18 $3.25 $3.32 $3.39
55 3.11 3.19 3.27 3.35 3.44 3.53 3.63
60 3.27 3.37 3.47 3.58 3.70 3.82 3.95
65 3.47 3.60 3.74 3.89 4.05 4.22 4.39
70 3.74 3.91 4.10 4.31 4.53 4.77 5.02
-------------------------------------------------------------------------------------------------------------
Monthly Installment for Unisex Joint and Full Survivor
-------------------------------------------------------------------------------------------------------------
Age of Age of Joint Annuitant *
First
Annuitant*
-------------------------------------------------------------------------------------------------------------
15 Years 12 Years 9 Years 6 Years 3 Years 3 Years
Less Than Less Than Less Than Less Than Less Than Same As More Than
First First First First First First First
-------------------------------------------------------------------------------------------------------------
50 $3.04 $3.09 $3.15 $3.21 $3.27 $3.33 $3.39
55 3.17 3.24 3.32 3.40 3.48 3.56 3.63
60 3.34 3.44 3.54 3.64 3.75 3.85 3.95
65 3.57 3.70 3.83 3.97 4.11 4.26 4.39
70 3.87 4.04 4.22 4.42 4.62 4.82 5.01
-------------------------------------------------------------------------------------------------------------
</TABLE>
* Age nearest birthday
- --------------------------------------------------------------------------------
The annual, semi-annual or quarterly installments under Option 2 shall be the
monthly installment shown multiplied by 11.84, 5.96 or 2.99 respectively, and
for Options 3 and 5 the monthly installment shown multiplied by 11.80, 5.95 or
2.99 respectively.
- --------------------------------------------------------------------------------
Dollar amounts of monthly installments not shown in the above tables will be
calculated on the same basis as those shown and may be obtained from the
Company.
PAGE 12
T819
<PAGE>
VARIABLE PAYMENT OPTIONS
BASED ON ASSUMED INVESTMENT RETURN
The amounts shown in these tables are the initial payment amounts based on a
5.0% Assumed Investment Return for each $1,000 of the policy proceeds.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Option 3 - V, Table II Option 3 - V, Table III
- ------------------------------------------------------------------------------------------------------------------------------------
Monthly Installment for Life Monthly Installment For Life
No Period Certain 10 Years Certain
- ------------------------------------------------------------------------------------------------------------------------------------
Age Male Female Unisex Male Female Unisex
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
50 $5.11 $4.81 $4.96 $5.07 $4.79 $4.94
51 5.17 4.85 5.02 5.13 4.83 4.99
52 5.24 4.90 5.07 5.19 4.88 5.04
53 5.31 4.95 5.13 5.25 4.93 5.10
54 5.38 5.01 5.20 5.32 4.98 5.16
55 5.46 5.06 5.26 5.39 5.04 5.22
56 5.54 5.12 5.34 5.47 5.09 5.28
57 5.63 5.19 5.41 5.54 5.16 5.36
58 5.72 5.26 5.49 5.63 5.22 5.43
59 5.82 5.34 5.58 5.72 5.29 5.51
60 5.93 5.42 5.68 5.81 5.37 5.60
61 6.04 5.50 5.78 5.91 5.44 5.69
62 6.17 5.60 5.89 6.02 5.53 5.78
63 6.30 5.69 6.00 6.13 5.62 5.88
64 6.44 5.80 6.13 6.25 5.71 5.99
65 6.60 5.91 6.26 6.37 5.82 6.10
66 6.76 6.04 6.40 6.50 5.92 6.22
67 6.94 6.17 6.56 6.63 6.04 6.35
68 7.13 6.31 6.72 6.77 6.16 6.48
69 7.33 6.46 6.90 6.92 6.29 6.62
70 7.55 6.63 7.09 7.07 6.43 6.76
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Option 5V, Table V
- ------------------------------------------------------------------------------------------------------------------------------------
Monthly Installment For Joint and Full Survivor
- ------------------------------------------------------------------------------------------------------------------------------------
Age of
Age of Female Annuitant
Male -------------------------------------------------------------------------------------------------------------------
15 Years 12 Years 9 Years 6 Years 3 Years 3 Years
Annuitant * Less Than Less Than Less Than Less Than Less Than Same As More Than
Male Male Male Male Male Male Male
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
50 $4.32 $4.36 $4.41 $4.46 $4.51 $4.57 $4.62
55 4.42 4.47 4.53 4.60 4.67 4.75 4.83
60 4.54 4.62 4.70 4.80 4.90 5.01 5.12
65 4.72 4.82 4.94 5.07 5.22 5.37 5.53
70 4.95 5.10 5.27 5.46 5.67 5.89 6.13
- ------------------------------------------------------------------------------------------------------------------------------------
Monthly Installment for Unisex Joint and Full Survivor
- ------------------------------------------------------------------------------------------------------------------------------------
Age of
Age of Joint Annuitant *
First -------------------------------------------------------------------------------------------------------------------
15 Years 12 Years 9 Years 6 Years 3 Years 3 Years
Annuitant* Less Than Less Than Less Than Less Than Less Than Same As More Than
First First First First First First First
- ------------------------------------------------------------------------------------------------------------------------------------
50 $4.40 $4.45 $4.50 $4.55 $4.61 $4.67 $4.72
55 4.52 4.59 4.66 4.73 4.81 4.89 4.96
60 4.69 4.78 4.87 4.97 5.08 5.19 5.29
65 4.91 5.04 5.17 5.31 5.46 5.62 5.77
70 5.22 5.40 5.59 5.79 6.02 6.24 6.47
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Age nearest birthday
- --------------------------------------------------------------------------------
The annual, semi-annual or quarterly installments shall be the monthly
installment shown for Options 3-V and 5-V multiplied by 11.70, 5.93 or 2.99
respectively.
- --------------------------------------------------------------------------------
Dollar amounts of monthly installments not shown in the above tables will be
calculated on the same basis as those shown and may be obtained from the
Company.
PAGE 13
<PAGE>
SECTION 11 - GENERAL PROVISIONS
THE CONTRACT
The entire contract consists of this policy, endorsements, if any, and any
application.
MODIFICATION OF POLICY
No change in this policy is valid unless made in writing by us and approved by
one of our officers. No Registered Representative has authority to change or
waive any provision of your policy.
TAX QUALIFICATION
This policy is intended to qualify as an annuity contract for federal income tax
purposes. The provisions of this policy are to be interpreted to maintain such
qualification, notwithstanding any other provisions to the contrary. To maintain
such tax qualification, we reserve the right to amend this policy to reflect any
clarifications that may be needed or are appropriate to maintain such tax
qualification or to conform this policy to any applicable changes in the tax
qualification requirements. We will send you a copy in the event of any such
amendment. If you refuse such an amendment it must be by giving us written
notice, and your refusal may result in adverse tax consequences.
NON-PARTICIPATING
This policy will not share in our surplus earnings.
AGE OR SEX CORRECTIONS
If the age or sex of the annuitant has been misstated, the benefits will be
those which the premiums paid would have purchased for the correct age and sex.
If required by law to ignore differences in the sex of the annuitant the payment
options will be determined using the unisex factors in Section 10.
Any underpayment made by us will be paid with the next payment. Any overpayment
made by us will be deducted from future payments. Any underpayment or
overpayment, will include interest at 5% per year, from the date of the wrong
payment to the date of the adjustment
INCONTESTABILITY
This policy shall be incontestable from the policy date.
EVIDENCE OF SURVIVAL
We have the right to require satisfactory evidence that a person was
alive if a payment is based on that person being alive. No payment will be
made until we receive the evidence.
SETTLEMENT
Any payment by us under this policy is payable at our Home Office.
PREMIUM TAXES
Your state may impose a premium tax. It may be imposed when a premium payment is
made, or on the Annuity Commencement Date or date of withdrawal. When permitted
by state law, we will not deduct the tax until the Annuity Commencement Date or
date of withdrawal.
RIGHTS OF OWNER
The owner may, while the annuitant is living:
1. Assign this policy.
2. Surrender the policy to us.
3. Amend or modify the policy with our consent
4. Receive annuity payments or name a Payee to receive the payments.
5. Exercise, receive and enjoy every other right and benefit contained
in the policy.
The use of these rights may be subject to the consent of any assignee or
irrevocable beneficiary.
SUCCESSOR OWNER
A successor owner can be named in any application, or in a notice you sign which
gives us the facts that we need. The successor owner will become the new owner
when you die, if you die before the annuitant. If no successor owner survives
you and you die before the annuitant, your estate will become the new owner.
CHANGE OF OWNERSHIP
In the case of a non-tax qualified annuity, you can change the owner of this
policy, from yourself to a new owner, in a notice you sign which gives us the
facts that we need. When this change takes effect, all rights of ownership in
this policy will pass to the new owner.
A change of owner or successor owner will not be effective until it is recorded
in our records. After it has been so recorded, the change will take effect as of
the date you signed the notice. However, if the annuitant dies before the notice
has been so recorded, it will not be effective as to those proceeds we have paid
before the change was recorded in our records. We may require that the change be
endorsed in the policy. Changing the owner or naming a new successor owner
cancels any prior choice of successor owner, but does not change the beneficiary
or the annuitant
OPTION TO CHANGE ANNUITY COMMENCEMENT DATE
You may change the Annuity Commencement Date at any time before the Annuity
Commencement Date. You must give us 30 days written notice. However, the Annuity
Commencement Date may not be later than the last day of the policy month
starting after the Annuitant attains age 85, except as expressly allowed by us,
but in no event later than the last day of the month following the month in
which the Annuitant attains age 95.
H457 PAGE 14
<PAGE>
SECTION 11 - CONT
ASSIGNMENT
(a) In the case of a non-tax qualified annuity, this policy may be assigned.
The assignment must be in writing and filed with us.
(b) We assume no responsibility for the validity of any assignment. Any claim
made under an assignment shall be subject to proof of interest and the
extent of the assignment.
(c) This policy may be applied for and issued to qualify as a tax-qualified
annuity under certain sections of the Internal Revenue Code. Ownership
of this policy then is restricted so that it will comply with provisions
of the Internal Revenue Code.
BENEFICIARY
Death proceeds, when payable in accordance with Section 9, are payable to the
designated beneficiary or beneficiaries. Such beneficiary(ies) must be named in
any application and may be changed without consent (unless irrevocably
designated or required by law) by notifying us in writing on a form acceptable
to us. The change will take effect upon the date you sign it, whether or not you
are living when we receive it. The notice must have been postmarked (or show
other evidence of delivery that is acceptable to us) on or before the date of
death. Your most recent change of beneficiary notice will replace any prior
beneficiary designations. No change will apply to any payment we made before the
written notice was received. If an irrevocable beneficiary dies, you may
designate a new beneficiary.
You may direct that the beneficiary shall not have the right to withdraw, assign
or commute any sum payable under an option. In the absence of such election or
direction, the beneficiary may change the manner of payment or make an election
of any option.
If any primary or contingent beneficiary dies before the annuitant, that
beneficiary's interest in this policy ends with that beneficiary's death. Only
those beneficiaries living at the time of the annuitant's death will be eligible
to receive their share of the Death Proceeds. In the event no contingent
beneficiaries have been named and all primary beneficiaries have died before the
death proceeds become payable, the owner will become the annuitant unless
elected otherwise in accordance with Section 9. If both primary and contingent
beneficiaries have been named, payment will be made to the named primary
beneficiaries living at the time the death proceeds become payable. If there is
more than one beneficiary and you failed to specify their interest, they will
share equally. Payment will be made to the named contingent beneficiary(ies)
only if all primary beneficiaries have died before the death proceeds become
payable. If any primary beneficiary is alive at the time the death proceeds
become payable, but dies before receiving their payment, their share will be
paid to their estate.
In cases where the annuitant dies and the owner (who is not the annuitant)
elected to receive the death benefit in accordance with Section 9, if the estate
has been named as beneficiary, then payment will be made to the owner.
PROTECTION OF PROCEEDS
Unless you so direct by filing written notice with us, no beneficiary may assign
any payments under this policy before the same are due. To the extent permitted
by law, no payments under this policy will be subject to the claims of creditors
of any beneficiary.
DEFERMENT
We will pay any partial withdrawals or surrender proceeds within 7 days after we
receive all requirements that we need. However, it may happen that the New York
Stock Exchange is closed for trading (other than the usual weekend or holiday
closings), or the Securities and Exchange Commission restricts trading or
determines that an emergency exists. If so, it may not be practical for us to
determine the investment experience of the Separate Account. In that case, we
may defer transfers among the Sub-accounts and to the Fixed Account, and
determination or payment of partial withdrawals or surrender proceeds.
When permitted by law, we may defer paying any partial withdrawals or surrender
proceeds for up to 6 months from the withdrawal or surrender date. Interest will
be paid on any amount deferred for 30 days or more. This rate will be 3% per
year unless otherwise required by law.
REPORTS TO OWNER
We will give you an annual report at least once each policy year. This report
will show the number and value of the accumulation units held in each of the
Sub-accounts as well as the value of the Fixed Account. It will also give you
any other facts required by law or regulation.
MINIMUM VALUES
Benefits available under this policy are not less than those required by any
statute of the state in which the policy is delivered.
J457 PAGE 15
<PAGE>
EXHIBIT (4)(i)
--------------
FORM OF POLICY ENDORSEMENT FOR
THE ENDEAVOR FI VARIABLE ANNUITY.
<PAGE>
[PFL LIFE INSURANCE COMPANY LOGO APPEARS HERE]
PFL Life Insurance Company
A Stock Company
Home Office located at: 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499
(Hereafter called the Company, we, our or us) (319) 398-8511
AMENDATORY ENDORSEMENT
The Policy to which this Amendatory Endorsement is attached is amended by the
addition of the following language:
DEFINITIONS
Custodial Care - Care designed essentially to help a person with the activities
of daily living which does not require the continuous attention of trained
medical or paramedical personnel.
Hospital - An institution which 1) is operated pursuant to the laws of the
jurisdiction in which it is located, 2) operates primarily for the care and
treatment of sick and injured persons on an inpatient basis, 3) provides 24-hour
a day nursing service by or under the supervision of registered graduate
professional nurses, 4) is supervised by a staff of one or more licensed
physicians, and 5) has medical, surgical and diagnostic facilities or access to
such facilities.
Nursing Facility - A facility which 1) is operated pursuant to the laws of the
jurisdiction in which it is located, 2) provides Nursing Care or Custodial Care,
3) primarily provides nursing care under the direction of a licensed physician,
registered graduate professional nurse, or licensed vocational nurse, except
when receiving custodial care, and 4), is not other than incidentally a
hospital, a home for the aged, a retirement home, a rest home, a community
living center or a place mainly for the treatment of alcoholism, mental illness
or drug abuse.
Nursing Care - Nursing care prescribed by a physician and performed or
supervised by a registered graduate nurse. Such care includes nursing and
rehabilitation services available 24 hours a day.
Physician - Doctor of Medicine or Doctor of Osteopathy who is licensed as such
and operating within the scope of the license.
Terminal Condition - A condition resulting from an accident or illness which, as
determined by a physician, has reduced life expectancy to not more than 12
months, despite appropriate medical care.
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If the owner or owner's spouse (annuitant or annuitants spouse if the owner is
not a natural person) has been 1) confined in a hospital or Nursing Facility for
30 consecutive days or 2) diagnosed after the policy date shown on page 3 of
your policy as having a Terminal Condition, you may elect to withdraw all or a
portion of the Annuity Purchase Value without Surrender Charges or Excess
Interest Adjustments.
For Nursing Care, we must receive each withdrawal request and proof of
eligibility with each request no later than 90 days following the date that
confinement has ceased, unless it can be shown that it was not reasonably
possible to provide the notice and proof within the above time period and that
the notice and proof were given as soon as reasonably possible. However, in no
event, except the absence of legal capacity, shall the notice and proof be
provided later than one year following the date that confinement has ceased. For
a Terminal Condition, we must receive each withdrawal request and the applicable
proof of eligibility no later than one year following diagnosis of the Terminal
Condition. Proof of a Terminal Condition is required only with the initial
withdrawal request and must be furnished by the owner's or the owner's spouse's
physician. Proof of confinement may be a physician's statement or a statement
from a hospital or nursing facility administrator.
The minimum withdrawal under this option is $1000. The withdrawal will reduce
the Annuity Purchase Value by the amount withdrawn. A partial withdrawal taken
in accordance with this provision will not affect (a) the adjustment
free/Surrender Charge free withdrawals, available under the Partial Withdrawals
Provision nor (b) the Excess Partial Withdrawal adjustments applied to death
proceeds as described in the Guaranteed Minimum Death Benefit provision.
We may terminate the policy and pay you the full Annuity Purchase Value if the
withdrawal reduces the Annuity Purchase Value below $500.
This Amendatory Endorsement takes effect and expires concurrently with the
Policy to which it is attached and is subject to all the terms and conditions of
the Policy not inconsistent herewith.
Signed for us at our home office.
/s/ Craig D. Vermie /s/ William L. Busler
SECRETARY PRESIDENT
AE 890 196
<PAGE>
[PFL LIFE INSURANCE COMPANY LOGO APPEARS HERE]
PFL Life Insurance Company
A Stock Company
Home Office located at: 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499
(Hereafter called the Company, we, our or us) (319) 398-8511
AMENDATORY ENDORSEMENT
The Policy to which this Amendatory Endorsement is attached is amended as
follows:
SECTION 9
D. DEATH ON OR AFTER THE ANNUITY COMMENCEMENT DATE
The death proceeds on or after the Annuity Commencement Date depend on
the payment option selected. If any owner dies on or after the Annuity
Commencement Date, but before the entire interest under the policy is
distributed, the remaining portion of such interest in the policy will
be distributed at least as rapidly as under the method of distribution
being used as of the date of that owner's death.
This Amendatory Endorsement takes effect and expires concurrently with the
Policy to which it is attached and is subject to all the terms and conditions of
the Policy not inconsistent herewith.
Signed for us at our home office.
/s/ Craig D. Vermie /s/ William L. Busler
SECRETARY PRESIDENT
AE 945 197
<PAGE>
EXHIBIT (4)(j)
--------------
FORM OF POLICY ENDORSEMENT FOR
THE ENDEAVOR VARIABLE ANNUITY.
<PAGE>
[LOGO OF PFL LIFE INSURANCE
COMPANY APPEARS HERE
PFL Life Insurance Company
A Stock Company
Home Office located at: 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499
(Hereafter called the Company, we, our or us)
AMENDATORY ENDORSEMENT
The Policy to which this Amendatory Endorsement is attached is amended by the
addition of the following language:
DEFINITIONS
Custodial Care - Care designed essentially to help a person with the activities
of daily living which does not require the continuous attention of trained
medical or paramedical personnel.
Hospital - An institution which 1) is operated pursuant to the laws of the
jurisdiction in which it is located, 2) operates primarily for the care and
treatment of sick and injured persons on an inpatient basis, 3) provides 24-hour
a day nursing service by or under the supervision of registered graduate
professional nurses, 4) is supervised by a staff of one or more licensed
physicians, and 5) has medical, surgical and diagnostic facilities or access to
such facilities.
Nursing Facility - A facility which 1) is operated pursuant to the laws of the
jurisdiction in which it is located, 2) provides Nursing Care or Custodial Care,
3) primarily provides nursing care under the direction of a licensed physician,
registered graduate professional nurse, or licensed vocational nurse, except
when receiving custodial care, and 4), is not other than incidentally a
hospital, a home for the aged, a retirement home, a rest home, a community
living center or a place mainly for the treatment of alcoholism, mental illness
or drug abuse.
Nursing Care - Nursing care prescribed by a physician and performed or
supervised by a registered graduate nurse. Such care includes nursing and
rehabilitation services available 24 hours a day.
Physician - Doctor of Medicine or Doctor of Osteopathy who is licensed as such
and operating within the scope of the license.
Terminal Condition - A condition resulting from an accident or illness which, as
determined by a physician, has reduced life expectancy to not more than 12
months, despite appropriate medical care.
NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION
If the owner or owner's spouse (annuitant or annuitants spouse if the owner is
not a natural person) has been 1) confined in a hospital or Nursing Facility for
30 consecutive days or 2) diagnosed as having a Terminal Condition, you may
elect to withdraw all or a portion of the Policy Value without Surrender Charges
or Excess Interest Adjustments.
For Nursing Care, we must receive each withdrawal request and proof of
eligibility with each request no later than 90 days following the date that
confinement has ceased, unless it can be shown that it was not reasonably
possible to provide the notice and proof within the above time period and that
the notice and proof were given as soon as reasonably possible. However, in no
event, except the absence of legal capacity, shall the notice and proof be
provided later than one year following the date that confinement has ceased. For
a Terminal Condition, we must receive each withdrawal request and the applicable
proof of eligibility no later than one year following diagnosis of the Terminal
Condition. Proof of a Terminal Condition is required only with the initial
withdrawal request and must be furnished by the owner's or the owner's spouse's
physician. Proof of confinement may be a physician's statement or a statement
from a hospital or nursing facility administrator.
The minimum withdrawal under this option is $1000. The withdrawal will reduce
the Policy Value by the amount withdrawn. A partial withdrawal taken in
accordance with this provision will not affect the Excess Interest
Adjustment-free / Surrender Charge-free withdrawals, available under the Partial
Withdrawals Provision.
We may terminate the policy and pay you the full Cash Value if the withdrawal
reduces the Cash Value below $500.
This Amendatory Endorsement takes effect and expires concurrently with the
Policy to which it is attached and is subject to all the terms and conditions of
the Policy not inconsistent herewith.
Signed for us at our home office.
/s/ Craig D. Vermie /s/ William L. Busler
SECRETARY PRESIDENT
AE 945 197
<PAGE>
EXHIBIT (5)(a)
--------------
FORM OF APPLICATION
FOR THE ENDEAVOR VARIABLE ANNUITY
<PAGE>
- --------------------------------------------------------------------------------
[LOGO OF PFL LIFE PFL Life Insurance Company
APPEARS HERE] 4333 EDGEWOOD ROAD N.E.,
CEDAR RAPIDS, IOWA 52499
APPLICATION FOR VARIABLE ANNUITY POLICY
1. DESIGNATED ANNUITANT
- --------------------------------------------------------------------------------
NAME:
---------------------------------------------------------------------------
ADDRESS:
------------------------------------------------------------------------
CITY, STATE:
--------------------------------------------------------------------
ZIP: TELEPHONE: ( )
-------------------------- ---- ------------------------------
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE
--------------------- -------
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
----------------------------------
2. POLICY OWNER (IF OTHER THAN ABOVE)
In the event the owner is a trust, please provide verification of trustees.
- --------------------------------------------------------------------------------
NAME:
---------------------------------------------------------------------------
ADDRESS:
------------------------------------------------------------------------
CITY, STATE:
--------------------------------------------------------------------
ZIP: TELEPHONE: ( )
-------------------------- ---- ------------------------------
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE
--------------------- -------
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
----------------------------------
3. [_] JOINT POLICY OWNER [_] SUCCESSOR POLICY OWNER
- --------------------------------------------------------------------------------
In the event the owner is a trust, please provide verification of trustees.
NAME:
---------------------------------------------------------------------------
ADDRESS:
------------------------------------------------------------------------
CITY, STATE:
--------------------------------------------------------------------
ZIP: TELEPHONE: ( )
-------------------------- ---- ------------------------------
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE
--------------------- -------
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
----------------------------------
4. BENEFICIARY DESIGNATION (Include Relationship to Annuitant)
- --------------------------------------------------------------------------------
PRIMARY: /
------------------------------------- ------------------------------
Relationship
PRIMARY: /
------------------------------------- ------------------------------
Relationship
CONTINGENT: /
---------------------------------- ------------------------------
Relationship
CONTINGENT: /
---------------------------------- ------------------------------
Relationship
5. TYPE OF ANNUITY
- --------------------------------------------------------------------------------
[_] NON-QUALIFIED [_] IRA (Also complete Box 6)
[_] HR - 10 [_] SEP (Also complete Box 6)
[_] 403 (b) [_] OTHER
---------------------------------------
6. IRA/SEP INFORMATION
- --------------------------------------------------------------------------------
$ CONTRIBUTION FOR TAX YEAR
----------------- -------------------------------
$ TRUSTEE TO TRUSTEE TRANSFER
-----------------
$ ROLLOVER FROM: (Check one) [_] 403(b) [_] Pension
-----------------
[_] HR-10 [_] Other:
----------------------------------------------------
7. WILL THIS ANNUITY REPLACE ANY EXISTING ANNUITY OR LIFE INSURANCE?
- --------------------------------------------------------------------------------
[_] NO [_] YES - Please state Policy No. and Company
Name:
---------------------------------------------------------------------------
8. MINIMUM DEATH BENEFIT OPTION (Select Only One)
- --------------------------------------------------------------------------------
This selection cannot be changed after the policy has been issued. If no
option has been specified, the policy will be issued with the Return of Premium
Death Benefit (Option C below).
[_] Option A: 5% Annually Compounding Death Benefit: (Only available if
owner(s) and the annuitant are under age 75 at time of purchase.)
Annual Mortality and Expense (M & E) Risk Fee and Admin. Charge 1.40%
[_] Option B: Annual Step-Up Death Benefit: (Only available if owner(s) and
the annuitant are under age 81 at time of purchase.) Annual M & E Risk Fee
and Admin. Charge 1.40%
[_] Option C: Return of Premium Death Benefit:
Annual M & E Risk Fee and Admin. Charge 1.25%
- --------------------------------------------------------------------------------
9. PURCHASE PAYMENT (Make check payable to PFL Life Insurance Company)
- --------------------------------------------------------------------------------
INITIAL PREMIUM AMOUNT $
---------------------------------------------------
- --------------------------------------------------------------------------------
10. ALLOCATION OF PREMIUM PAYMENTS (Whole percentages only)
- --------------------------------------------------------------------------------
[_] Check this box only if you want to allocate the premium payments
EQUALLY to each of the Portfolios listed below. No funds will be allocated to
the TCW Money Market Portfolio, nor the PFL Life Fixed Accounts. If this box is
checked, any allocations below will be disregarded. DO NOT check this box if you
intend to elect Dollar Cost Averaging (DCA).
- --------------------------------------------------------------------------------
T. Rowe Price Associates, Inc.
- --------------------------------------------------------------------------------
EQUITY INCOME PORTFOLIO .0%
---------------
GROWTH STOCK PORTFOLIO .0%
---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Rowe Price-Fleming International, Inc.
INTERNATIONAL STOCK PORTFOLIO .0%
---------------
- --------------------------------------------------------------------------------
TCW Funds Management, Inc.
MANAGED ASSET ALLOCATION PORTFOLIO .0%
----------------
MONEY MARKET PORTFOLIO .0%
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OpCap Advisors
OPPORTUNITY VALUE PORTFOLIO .0%
----------------
VALUE EQUITY PORTFOLIO .0%
----------------
- --------------------------------------------------------------------------------
The Dreyfus Corporation
U.S. GOVERNMENT SECURITIES PORTFOLIO .0%
---------------
SMALL CAP VALUE PORTFOLIO .0%
---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Janus
GROWTH PORTFOLIO (WRL SERIES FUND) .0%
---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JP Morgan Investment Management, Inc.
ENHANCED INDEX PORTFOLIO .0%
---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PFL Life Insurance Company - Fixed Account Options
Dollar Cost Averaging (DCA) Fixed Account: .0%
- --------------------------------------------------------------------------------
Guaranteed Periods (with Excess Interest Adjustment):
1 YEAR .0% 5 YEARS .0% 8 YEARS .0%
------------------ ------------------ -----------------
2 YEARS .0% 6 YEARS .0% 9 YEARS .0%
------------------ ------------------ -----------------
3 YEARS .0% 7 YEARS .0% 10 YEARS .0%
------------------ ------------------ -----------------
4 YEARS .0%
------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Additional: .0%
---------------------------------------------------------------------
.0%
- --------------------------------------------------------------------------------
.0%
- --------------------------------------------------------------------------------
.0%
- --------------------------------------------------------------------------------
.0%
- --------------------------------------------------------------------------------
.0%
- --------------------------------------------------------------------------------
INVESTMENT ALLOCATIONS MUST TOTAL 100%
- --------------------------------------------------------------------------------
11. TELEPHONE TRANSFER/REALLOCATION AUTHORIZATION
- --------------------------------------------------------------------------------
By checking one of the following boxes, I authorize the company to accept
telephone transfers/reallocation instructions from:
ONLY MYSELF [_] MYSELF & MY ACCOUNT EXECUTIVE [_]
Acct. Exec. Name:
----------------------------------------------------------
To change the allocation of any purchase payments and/or to transfer funds
among my investment choices based on my telephone instructions and/or the
telephone instructions of my account executive (if indicated above), I
agree to the established conditions and requirements stated in the
prospectus.
I am aware that telephone instructions will be recorded to protect me and
the company and will be put into effect when proper identification is
provided.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
APPLICATION FOR VARIABLE ANNUITY POLICY
- --------------------------------------------------------------------------------
12. DOLLAR COST AVERAGING
By signing below I (We) authorize PFL Life Insurance Company to transfer funds
from my selected account to invest in the portfolio(s), in the amount indicated
below. Transfers will be made monthly, unless indicated differently below. I
understand that the transfers will continue until I terminate the program in
writing, or until my balance under the program falls below the minimum transfer
amount. If this happens, the balance will be transferred as indicated below, but
on a pro-rata basis. I also understand that PFL Life's Dollar Cost Averaging
program is subject to the rules and restrictions associated with the PFL Life
policy and at the time the program begins there must be sufficient Policy Value
to cover six month's transfers.
Transfer From; [_] DCA Fixed Account; or
[_] Money Market Portfolio; or
[_] U.S. Govt. Securities Portfolio
Please Invest: $ ($500 min.)
--------------
Monthly Transfers (6 Min.)
--------
Quarterly Transfers (4 Min.)
--------
Please Invest in Following Accounts For Each Transfer
(Allocation Must Total 100%):
TCW Managed Asset Dreyfus U.S. Govt.
Allocation .0% Sec. .0%
--- ---
Janus WRL Series Fund Dreyfus Small Cap
Growth .0% Value .0%
--- ---
T. Rowe Price JP Morgan
Growth .0% Investment .0%
--- ---
T. Rowe Price Equity Additional:
Income .0% .0%
--- --------------------- ---
OpCap Opportunity Value .0% .0%
--- --------------------- ---
OpCap Value Equity .0% .0%
--- --------------------- ---
Rowe Price Fleming Int'l .0%
---
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13. ASSET REBALANCING...Not available when Dollar Cost Averaging is in
effect or when any other transfer is requested.
[_] Yes, by checking this box I am authorizing PFL Life Insurance Company to
automatically transfer amounts among the sub-accounts (as indicated below) on a
regular basis to maintain a desired allocation of the Policy Value among the
various sub-accounts offered. Asset Rebalancing is not available for any amounts
in the Fixed Account nor when Dollar Cost Averaging is in effect.
Rebalance:
[_] Monthly
[_] Quarterly
[_] Semi-annual
[_] Annual
Date to Begin:
/ /
--- --- ---
Rebalance in Following Accounts (Allocation must equal 100%)
TCW Managed Asset Allocation .0% OpCap Value Equity .0%
--- ---
TCW Money Market .0% Rowe Price-Fleming Int'l .0%
--- ---
Janus WRL Series Fund Growth .0% Dreyfus U.S. Govt. Sec. .0%
--- ---
T. Rowe Price Growth .0% Dreyfus Small Cap Value .0%
--- ---
T. Rowe Price Equity Income .0% JP Morgan Investment .0%
--- ---
OpCap Opportunity Value .0%
---
Additional:
.0%
- --------------------- ---
.0%
- --------------------- ---
.0%
- --------------------- ---
TOTAL: 100.0%
------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
14. If you have chosen to name someone other than yourself as the Annuitant,
please select one of the following regarding payment of the death benefit.
If neither is selected, the first option will be utilized.
[_] At the Annuitant's death, I wish to become
the annuitant and defer payout of the death benefit
until my death.
- -------------------------
Signature of Policy Owner
[_] At the Annuitant's death, I wish to have the
death benefit paid to the named beneficiary.
(Policy Owner Signature required for this option)
- -----------------------------------------
Signature of Joint/Successor Policy Owner
- --------------------------------------------------------------------------------
To the best of my knowledge and belief, my answers to the questions on this
application are correct and true, and I agree that this application shall be a
part of any annuity policy issued to me. I also understand that the Company
reserves the right to reject any application or purchase payment. If this
application is declined, there shall be not liability on the part of the Company
and any purchase payments submitted shall be returned.
I UNDERSTAND THAT ANNUITY PAYMENTS AND TERMINATION VALUES, WHEN BASED ON
INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT OF THE COMPANY, ARE VARIABLE AND ARE
NOT GUARANTEED AS TO A FIXED DOLLAR AMOUNT.
Receipt of a current prospectus of the PFL Endeavor Variable Annuity
Account, Endeavor Series Trust and WRL Series Fund, Inc. is hereby acknowledged.
[_] Please check if you wish to receive the Statement of Additional
Information.
I HAVE REVIEWED MY EXISTING ANNUITY COVERAGE AND FIND THIS POLICY IS
SUITABLE FOR MY NEEDS.
When funds are allocated to the Guaranteed Periods of the Fixed Account, cash
values under the policy may increase or decrease in accordance with the Excess
Interest Adjustment prior to the end of any Guaranteed Period.
ADDITIONAL FORMS ARE REQUIRED FOR SYSTEMATIC PAYOUT OPTION.
- --------------------------------------------------------------------------------
15a. BE SURE TO COMPLETE THIS SECTION
--------------------------------------------------------------
Under penalties of perjury, I hereby certify (1) that the
Social Security or Tax ID Number listed above is correct and
(2) that I am currently not subject to backup withholding
[cross out (2) if not correct] (see below). The Internal
Revenue Service does not require your consent to any
provision of this application other than the certifications
required to avoid backup withholding.
--------------------------------------------------------------
Signed at (City, State) this
------------------------------------------ -----------------------
day of 19
------ -------------- ----
- ---------------------------------------------
Annuitant Signature
- ---------------------------------------------
Owner Signature (if different from Annuitant)
- ---------------------------------------------
Joint Owner (successor owner signature)
------------------------------------------------------------------------------
15b. Spousal consent is required when spouse is not designated a Policy Owner
and/or a Primary Beneficiary if the policy is purchased in or the
Owner(s) reside in a community property or marital property state (AZ,
CA, ID, LA, MN, NV, TX, WA and WI). By signing below, I (consenting
spouse) hereby give my consent to the designation of any person or entity
as primary beneficiary or owner of the policy being applied for. I
understand that such designation may change the community property or
marital property rights I may have in the policy. If there is no spouse,
please indicate marital status by checking applicable box:
[_] Never married; or [_] Spouse deceased;or [_] I am divorced
, 19
----------------------------- ------------ ---
Signature of Spouse Date Signed
------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16a. SELLING AGENT USE ONLY - NOT TO BE FILLED IN BY APPLICANT
I HAVE REVIEWED THE APPLICANT'S EXISTING ANNUITY COVERAGE AND FIND THIS POLICY
IS SUITABLE FOR HIS/HER NEEDS.
- -------------------------------
Agent Name (Please Print)
( ) -
- -------------------------
Agent Telephone
/ /
- -------------------------------------------------- ----------------
Licensed Agent Signature [_] No Trail [_] Trail Date
- ---------------------------------------------- --------------------------------
Agent Address Broker/Dealer Client Account No.
- ---------------------- ----------------------- --------------------------------
Agent Firm PFL Life Agent No. (If Applicable) Florida Agent
License I.D. No.
16b. Do you have reason to believe the policy applied for is to replace any
existing annuity or insurance owned by applicant?
[_] No [_] Yes, Company Name
-----------------------------------------
- --------------------------------------------------------------------------------
Please make check payable to PFL LIFE INSURANCE COMPANY (Use following address
for mail, Fed. Express, etc.)
Send check with application to PFL Life Insurance Company, Attn: Annuity
Department, 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499-0001
- --------------------------------------------------------------------------------
** Purpose of Statement. This statement is for the payer (Insurance Company) of
interest, dividends, and certain other payments so that you will not be subject
to the 20% backup withholding that became effective January 1, 1984.
This statement is used to report and certify your taxpayer identification
number (TIN) to the payer, to certify that you are not subject to backup
withholding because of underreporting interest and dividends on your tax return,
and to claim exemption from backup withholding if you are an exempt payee.
If you do not certify your TIN, the payer may be required to withhold 20%
of payments made to you.
What is Backup Withholding. The Interest and Dividend Tax Compliance Act of 1983
requires payers to withhold and pay to IRS 20% of payments of interest,
dividends, and certain other payments under certain conditions. This is called
"backup withholding." If you give your correct TIN, certify your TIN when
required, and report all of your taxable interest and dividends on your tax
return, your payments will not be subject to backup withholding.
Payments you receive will be subject to backup withholding if: (1) You do
not furnish your TIN to the payer, or; (2) IRS notifies the payer that you
furnished an incorrect TIN, or; (3) You are notified by IRS that you are
subject to backup withholding because you failed to report all your
interest and dividends on your tax return (for interest and dividend
accounts only), or; (4) You fail to certify to the payer that you are not
subject to backup withholding under (3) above (for interest and dividend
accounts opened after 1983 only), or; (5) You fail to certify your TIN.
This applies only to interest, dividend broker, or barter exchange accounts
opened after 1983, or broker accounts considered inactive in 1983. For
other payments, you are subject to backup withholding only if (1) or (2)
above applies.
- --------------------------------------------------------------------------------
VA-APP 497 B
PLEASE FILL OUT THE FRONT PAGE
<PAGE>
EXHIBIT (5)(b)
--------------
FORM OF APPLICATION
FOR THE ENDEAVOR FI VARIABLE ANNUITY
<PAGE>
- -----------------------------------[ ]-------------------------------------
[LOGO OF PFL PFL LIFE INSURANCE COMPANY
LIFE INSURANCE 4333 EDGEWOOD ROAD N.E.,
COMPANY APPEARS HERE] CEDAR RAPIDS, IOWA 52499
APPLICATION FOR VARIABLE ANNUITY CONTRACT
- -------------------------------------------------------------------------------
1. DESIGNATED ANNUITANT
NAME:
--------------------------------------------------------------------------
ADDRESS:
-----------------------------------------------------------------------
CITY, STATE:
-------------------------------------------------------------------
ZIP: - TELEPHONE:( )
----- ---- ------------------------------------------------------
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE
------------------------ ----------
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
-----------------------------------------
===============================================================================
2. CONTRACT OWNER (IF OTHER THAN ABOVE)
In the event the owner is a trust, please provide verification of trustees.
NAME:
--------------------------------------------------------------------------
ADDRESS:
-----------------------------------------------------------------------
CITY, STATE:
-------------------------------------------------------------------
ZIP: - TELEPHONE:( )
----- ---- ------------------------------------------------------
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE
------------------------ ----------
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
-----------------------------------------
===============================================================================
3. [_] JOINT CONTRACT OWNER [_] SUCCESSOR CONTRACT OWNER
In the event the owner is a trust, please provide verification of trustees.
NAME:
--------------------------------------------------------------------------
ADDRESS:
-----------------------------------------------------------------------
CITY, STATE:
-------------------------------------------------------------------
ZIP: - TELEPHONE:( )
----- ---- ------------------------------------------------------
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE
------------------------ ----------
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
-----------------------------------------
===============================================================================
4. BENEFICIARY DESIGNATION (Include Relationship to Annuitant)
PRIMARY:
-----------------------------------------------------------------------
RELATIONSHIP:
----------------------------------------------------------------
CONTINGENT:
--------------------------------------------------------------------
RELATIONSHIP:
----------------------------------------------------------------
===============================================================================
5. TYPE OF ANNUITY
[_] NON-QUALIFIED [_] IRA (Also complete Box 6)
[_] HR - 10 [_] SEP (Also complete Box 6)
[_] 403 (b) [_] OTHER
-------------------------------------
===============================================================================
6. IRA/SEP INFORMATION
$ CONTRIBUTION FOR TAX YEAR
------------------ --------------------------------
$ TRUSTEE TO TRUSTEE TRANSFER
------------------
$ ROLLOVER FROM: (Check one) [_] 403(b) [_] Pension
------------------
[_] HR-10 [_] Other:
----------------------------------------------------------
===============================================================================
7. WILL THIS ANNUITY REPLACE ANY EXISTING ANNUITY OR LIFE INSURANCE?
[_] NO [_] YES - Please state Policy No. and Company
Name:
---------------------------------------------------------------------------
================================================================================
8. MINIMUM DEATH BENEFIT OPTION (Select Only One)
This selection cannot be changed after the policy has been issued.
[_] 5% Compound Death Benefit (Not available for owners or annuitants over
74 years old);
[_] Annual Step-Up Death Benefit (required if owner(s) or annuitant is over
74 years old.)
NOTE: If no option has been specified, the contract will be issued with:
5% Compound Death Benefit (when owner and annuitant under age 75); or Annual
Step-Up (if owner(s) or annuitant is age 75 or older).
================================================================================
9. PURCHASE PAYMENT (Make check payable to PFL Life Insurance Company)
INITIAL PREMIUM AMOUNT $
----------------------------------------------------
- --------------------------------------------------------------------------------
10. FUTURE PREMIUM AMOUNT $
----------------------------------------------------
[_] BILL ME MONTHLY; OR [_] BILL ME QUARTERLY; OR
[_] I DO NOT WANT TO BE BILLED FOR FUTURE PREMIUM AMOUNTS.
- --------------------------------------------------------------------------------
11. ALLOCATION OF PREMIUM PAYMENTS (Whole percentages only)
- --------------------------------------------------------------------------------
T. Rowe Price Associates, Inc.
EQUITY INCOME PORTFOLIO .0%
----------------
GROWTH STOCK PORTFOLIO .0%
----------------
Rowe Price-Fleming International, Inc.
INTERNATIONAL STOCK PORTFOLIO .0%
----------------
TCW Funds Management, Inc.
MANAGED ASSET ALLOCATION PORTFOLIO .0%
----------------
MONEY MARKET PORTFOLIO .0%
----------------
OpCap Advisors
VALUE SMALL CAP PORTFOLIO .0%
----------------
VALUE EQUITY PORTFOLIO .0%
----------------
The Dreyfus Corporation
U.S. GOVERNMENT SECURITIES PORTFOLIO .0%
----------------
Janus Capital Corp.
GROWTH PORTFOLIO (WRL SERIES FUND) .0%
----------------
PFL Life Insurance Company - Fixed Account Options
Dollar Cost Averaging (DCA) Fixed Account:
----------------------------------------------------------------------------
Guaranteed Periods (with Excess Interest Adjustment):
1 YEAR .0% 5 YEARS .0% 8 YEARS .0%
-------------- --------------- -------------
2 YEARS .0% 6 YEARS .0% 9 YEARS .0%
-------------- --------------- -------------
3 YEARS .0% 7 YEARS .0% 10 YEARS .0%
-------------- --------------- -------------
4 YEARS .0%
--------------
Additional: .0%
----------------------------------------------------- --------------
.0%
----------------------------------------------------- --------------
.0%
----------------------------------------------------- --------------
.0%
----------------------------------------------------- --------------
.0%
----------------------------------------------------- --------------
.0%
----------------------------------------------------- --------------
INVESTMENT ALLOCATIONS MUST TOTAL 100%
12. TELEPHONE TRANSFER/REALLOCATION AUTHORIZATION
By checking one of the following boxes, I authorize the company to accept
telephone transfers/reallocation instructions from:
ONLY MYSELF [_] MYSELF & MY ACCOUNT EXECUTIVE [_]
Acct. Exec. Name:
-----------------------------------------------------------
To change the allocation of any purchase payments and/or to transfer funds
among my investment choices based on my telephone instructions and/or the
telephone instructions of my account executive (if indicated above), I agree
to the established conditions and requirements stated in the prospectus.
I am aware that telephone instructions will be recorded to protect me and
the company and will be put into effect when proper identification is
provided.
VA-APP 296 YOUR SIGNATURE IS REQUIRED ON THE BACK PAGE
(CONTINUED ON THE BACK PAGE)
<PAGE>
- ------------------------------[ ]------------------------------
APPLICATION FOR VARIABLE ANNUITY CONTRACT
- --------------------------------------------------------------------------------
13. DOLLAR COST AVERAGING
By signing below I (We) authorize PFL Life Insurance Company to transfer
funds from my selected account to invest in the portfolio(s), in the amount
indicated below. Transfers will be made monthly, unless indicated differently
below. I understand that the transfers will continue until I terminate the
program in writing, or until my balance under the program falls below the
minimum transfer amount. If this happens, the balance will be transferred as
indicated below, but on a pro-rata basis. I also understand that PFL Life's
Dollar Cost Averaging program is subject to the rules and restrictions
associated with the PFL Life contract and at the time the program begins
there must be sufficient Annuity Purchase Value to cover six month's
transfers.
Transfer From: [_] DCA Fixed Account; or
[_] Money Market Portfolio; or
[_] U.S. Govt. Securities Portfolio
Please Invest: $ ($500 min.)
--------------
[_] Monthly (Six Transfers Minimum)
[_] Quarterly (Four Transfers Minimum)
Please Invest in Following Accounts for Each Transfer (Allocation Must
Total 100%):
Managed Asset Allocation .0% International Stock (Mang.
------ by Rowe Price-Fleming .0%
WRL Series Fund Growth Portfolio ------
(Mang. by Janus Capital Corp.) .0% U.S. Govt. Sec. Port. .0%
------ ------
Growth (Mang. by T. Rowe Price) .0% Value Equity Portfolio .0%
------ ------
Equity Inc. (Mang. by T. Rowe Price) .0% Value Small Cap Portfolio .0%
------ ------
Additional .0%
------------------------------------------------------------ ------
Additional .0%
------------------------------------------------------------ ------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
14. ASSET REBALANCING...Not available when Dollar Cost Averaging is in effect
or when any other transfer is requested.
[_] Yes, by checking this box I am authorizing PFL Life Insurance Company to
automatically transfer amounts among the sub-accounts (as indicated below) on a
regular basis to maintain a desired allocation of the Annuity Purchase Value
among the various sub-accounts offered. Asset Rebalancing is not available for
any amounts in the Fixed Account nor when Dollar Cost Averaging is in effect.
Rebalance:
[_] Monthly
[_] Quarterly
[_] Semi-Annual
[_] Annual
Rebalance in Following Accounts (Allocation must equal 100%)
Managed Asset Allocation .0% International Stock (Mang.
------ by Rowe Price-Fleming .0%
WRL Series Fund Growth Portfolio ------
(Mang. by Janus Capital Corp.) .0% U.S. Govt. Sec. Port .0%
------ ------
Growth (Mang. by T. Rowe Price) .0% Value Equity Portfolio .0%
------ ------
Equity Inc. (Mang. by T. Rowe Price) .0% Value Small Cap Portfolio .0%
------ ------
Money Market Port. .0%
------
Additional: .0%
------
.0%
------------------------------------ ------
.0%
------------------------------------ ------
.0%
------------------------------------ ------
TOTAL 100%
------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15. If you have chosen to name someone other than yourself as the Annuitant,
please select one of the following regarding payment of the death benefit.
If neither is selected, the first option will be utilized.
[_] At the Annuitant's death, I wish to become the annuitant and defer payout of
the death benefit until my death.
---------------------------------------------------
Signature of Contract Owner
[_] At the Annuitant's death, I wish to have the death benefit paid to the named
beneficiary. (Contract Owner Signature required for this option)
---------------------------------------------------
Signature of Joint/Successor Contract Owner
To the best of my knowledge and belief, my answers to the questions on this
application are correct and true, and I agree that this application shall be a
part of any annuity contract issued to me. I also understand that the Company
reserves the right to reject any application or purchase payment. If this
application is declined, there shall be no liability on the part of the Company
and any purchase payments submitted shall be returned.
I UNDERSTAND THAT ANNUITY PAYMENTS AND TERMINATION VALUES, WHEN BASED ON
INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT OF THE COMPANY, ARE VARIABLE AND ARE
NOT GUARANTEED AS TO A FIXED DOLLAR AMOUNT.
Receipt of a current prospectus of the PFL Endeavor Variable Annuity
Account, Endeavor Series Trust and WRL Series Fund, Inc. is hereby
acknowledged.
[_] Please check if you wish to receive the Statement of Additional
Information.
I HAVE REVIEWED MY EXISTING ANNUITY COVERAGE AND FIND THIS POLICY IS
SUITABLE FOR MY NEEDS.
When funds are allocated to the Guaranteed Periods of the Fixed Account, cash
values under the contract may increase or decrease in accordance with the Excess
Interest Adjustment prior to the end of any Guaranteed Period.
ADDITIONAL FORMS ARE REQUIRED FOR SYSTEMATIC PAYOUT OPTION.
- --------------------------------------------------------------------------------
16a. BE SURE TO COMPLETE THIS SECTION
Signed at this day of , 19
----------------------- ------------------- -------- -------
- -------------------------- -------------------------- ------------------------
Annuitant Signature Owner Signature Joint Owner
(if different (successor owner
from Annuitant) signature)
- --------------------------------------------------------------------------------
16b. Spousal consent is required when spouse is not designated a Contract Owner
and/or a Primary Beneficiary if the policy is purchased in or the Owner(s)
reside in a community property or marital property state (AZ, CA, ID, LA,
NM, NV, TX, WA and WI). By signing below, I (consenting spouse) hereby give
my consent to the designation of any person or entity as primary
beneficiary or owner of the policy being applied for. I understand that
such designation may change the community property or marital property
rights I may have in the policy.
If there is no spouse, please indicate marital status by checking
applicable box. 19
----------------------------------- ------------, -------
Signature of Spouse Date Signed
[_] Never married; or [_] Spouse deceased;or [_] I am divorced
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
17a. SELLING AGENT USE ONLY - NOT TO BE FILLED IN BY APPLICANT
( ) / /
- ---------------------------- ----------- --------------------------- -----------
Agent Name (Please Print) Agent Agent Signature Date
Telephone
- -------------------------------------------- -----------------------------------
Agent Address Broker/Dealer Client Account No.
- ---------------------- ----------------------- ---------------------------------
Agent Firm PFL Life Agent No. (If Applicable) Florida Agent
License I.D. No.
17b. Do you have reason to believe the contract applied for is to replace any
existing annuity or insurance owned by applicant?
[_] No [_] Yes, Company Name
----------------------------------
- --------------------------------------------------------------------------------
Please make check payable to PFL LIFE INSURANCE COMPANY (Use following address
for mail, Fed. Express, etc.)
Send check with application to
PFL Life Insurance Company,
Attn: Annuity Department,
4333 Edgewood Road N.E.,
Cedar Rapids, Iowa 52499-0001
VA-APP 296 B PLEASE FILL OUT THE FRONT PAGE
<PAGE>
EXHIBIT (5)(c)
--------------
FORM OF APPLICATION FOR THE
ENDEAVOR ML VARIABLE ANNUITY
<PAGE>
[PFL LOGO APPEARS HERE]
PFL Life Insurance Company
4333 EDGEWOOD ROAD N.E.,
CEDAR RAPIDS, IOWA 52499
APPLICATION FOR VARIABLE ANNUITY POLICY
1. DESIGNATED ANNUITANT
NAME:
ADDRESS:
CITY, STATE:
ZIP: TELEPHONE: ( ) -
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
2. POLICY OWNER (IF OTHER THAN ABOVE)
In the event the owner is a trust, please provide verification of trustees.
NAME:
ADDRESS:
CITY, STATE:
ZIP: TELEPHONE: ( ) -
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
3. [_] JOINT POLICY OWNER [_] SUCCESSOR POLICY OWNER
In the event the owner is a trust, please provide verification of trustees.
NAME:
ADDRESS:
CITY, STATE:
ZIP: TELEPHONE: ( ) -
DATE OF BIRTH: AGE: SEX: [_] FEMALE [_] MALE [_]
SS#: CITIZENSHIP: [_] U.S. [_] OTHER
4. BENEFICIARY DESIGNATION (Include Relationship to Annuitant)
PRIMARY: /
-------------------------
- -------------------------
Relationship
PRIMARY: /
-------------------------
- -------------------------
Relationship
CONTINGENT: /
-------------------------
- -------------------------
Relationship
CONTINGENT: /
-------------------------
- -------------------------
Relationship
5. TYPE OF ANNUITY
[_] NON-QUALIFIED [_] IRA (Also complete Box 6)
[_] HR - 10 [_] SEP (Also complete Box 6)
[_] 403 (b) [_] OTHER
---------------------
6. IRA/SEP INFORMATION
$ CONTRIBUTION FOR TAX YEAR
---------- ----------------
$ TRUSTEE TO TRUSTEE TRANSFER
----------
$ ROLLOVER FROM: (Check one) [_] 403(b) [_]
----------
Pension
[_] HR-10 [_] Other:
-------------------------
<PAGE>
7. WILL THIS ANNUITY REPLACE ANY EXISTING ANNUITY OR
LIFE INSURANCE?
[_] NO [_] YES - Please state Policy No. and Company
Name:
- ---------------------------------------------------
8. MINIMUM DEATH BENEFIT OPTION (Select Only One)
This selection cannot be changed after the policy has been issued. If no option
has been specified, the policy will be issued with the Return of Premium Death
Benefit (Option C below).
[_] Option A: 5% Annually Compounding Death Benefit:
(Only available if owner(s) and the annuitant are under age
75 at time of purchase.)
[_] Option B: Annual Step-Up Death Benefit: (Only
available if owner(s) and the annuitant are under age 81 at
time of purchase.) Annual M & E Risk Fee and Admin. Charge
1.40%
[_] Option C: Return of Premium Death Benefit:
Annual M & E Risk Fee and Admin. Charge 1.25%
9. PURCHASE PAYMENT (Make check payable to PFL Life Insurance Company)
INITIAL PREMIUM AMOUNT $
- --------------------------------
10. ALLOCATION OF PREMIUM PAYMENTS (Whole percentages only)
Merrill Lynch Asset Management, L.P.
HIGH CURRENT INCOME FUND .0%
----------
DEVELOPING CAPITAL MARKETS FOCUS FUND .0%
----------
BASIC VALUE FOCUS FUND .0%
----------
T. Rowe Price Associates, Inc.
EQUITY INCOME PORTFOLIO .0%
----------
GROWTH STOCK PORTFOLIO .0%
----------
Rowe Price-Fleming International, Inc.
INTERNATIONAL STOCK PORTFOLIO .0%
----------
TCW Funds Management, Inc.
MANAGED ASSET ALLOCATION PORTFOLIO .0%
----------
MONEY MARKET PORTFOLIO .0%
----------
OpCap Advisors
OPPORTUNITY VALUE PORTFOLIO .0%
----------
VALUE EQUITY PORTFOLIO .0%
----------
The Dreyfus Corporation
<PAGE>
U.S. GOVERNMENT SECURITIES PORTFOLIO .0%
----------
SMALL CAP VALUE PORTFOLIO .0%
----------
Janus Capital Corporation
GROWTH PORTFOLIO (WRL SERIES FUND) .0%
----------
JP Morgan Investment Management, Inc.
ENHANCED INDEX PORTFOLIO .0%
----------
PFL Life Insurance Company - Fixed Account Options
Dollar Cost Averaging (DCA) Fixed Account: .0%
----------
Guaranteed Periods (with Excess Interest Adjustment):
1 YEAR .0% 7 YEARS .0%
---------- -----------
Additional:
.0%
- ----------------------------------------------------
.0%
- ----------------------------------------------------
.0%
- ----------------------------------------------------
INVESTMENT ALLOCATIONS MUST TOTAL 100%
11. TELEPHONE TRANSFER/REALLOCATION AUTHORIZATION
By checking one of the following boxes, I authorize the company to accept
telephone transfers/reallocation instructions from:
ONLY MYSELF [_] MYSELF & MY ACCOUNT EXECUTIVE [_]
To change the allocation of any purchase payments and/or to transfer
funds among my investment choices based on my telephone instructions
and/or the telephone instructions of my account executive (if indicated
above), I agree to the established conditions and requirements stated in
the prospectus.
I am aware that telephone instructions will be recorded to
protect me and the company and will be put into effect when
proper identification is provided.
MLVA-APP 497 (CONTINUED ON THE BACK PAGE)
YOUR SIGNATURE IS REQUIRED ON THE BACK PAGE
<PAGE>
APPLICATION FOR VARIABLE ANNUITY POLICY
12. DOLLAR COST AVERAGING
By signing below I (We) authorize PFL Life Insurance Company to transfer funds
from my selected account to invest in the portfolio(s), in the amount indicated
below. Transfers will be made monthly, unless indicated differently below. I
understand that the transfers will continue until I terminate the program in
writing, or until my balance under the program falls below the minimum transfer
amount. If this happens, the balance will be transferred as indicated below, but
on a pro-rata basis. I also understand that PFL Life's Dollar Cost Averaging
program is subject to the rules and restrictions associated with the PFL Life
policy and at the time the program begins there must be sufficient Policy Value
to cover six month's transfers.
Transfer From: [_] DCA Fixed Account; or
[_] Money Market Portfolio; or
[_] U.S. Govt. Securities Portfolio
Please Invest: $ ($500 min.)
------
[__] Monthly Transfers (6 min.)
[__] Quarterly Transfers (4 min.)
Please Invest in Following Accounts for Each Transfer
(Allocation Must Total 100%)
Merrill Lynch High Curr., Inc. .0% OpCap Opportunity Value .0%
--- ---
Merrill Lynch Dev. Cap., Mkt. .0% OpCap Value Equity .0%
--- ---
Merrill Lynch Basic Value .0% Dreyfus Small Cap Value .0%
--- ---
T. Rowe Price Equity Income .0% Janus WRL Series Fund Growth .0%
--- ---
T. Rowe Price Growth .0% JP Morgan Enhanced Index .0%
--- ---
Rowe-Price Fleming Int'l .0% .0%
--- ----------------------------- -----
TCW Managed Asset Allocation .0% TOTAL 100.0%
--- -----
13. ASSET REBALANCING...Not available when Dollar Cost Averaging is in effect
or when any other transfer is requested.
[_] Yes, by checking this box I am authorizing PFL Life Insurance Company to
automatically transfer amounts among the sub-accounts (as indicated below) on a
regular basis to maintain a desired allocation of the Policy Value among the
various sub-accounts offered. Asset Rebalancing is not available for any amounts
in the Fixed Account nor when Dollar Cost Averaging is in effect.
Rebalance:
[_] Monthly
[_] Quarterly
[_] Semi-Annual
Annual
Date to Begin:
/ /
- ------------
Rebalance in Following Accounts (Allocation must equal 100%)
Merrill Lynch High Curr., Inc. .0% TCW Managed Asset Allocation .0%
--- ---
Merrill Lynch Dev. Cap., Mkt. .0% TCW Money Market .0%
--- ---
Merrill Lynch Basic Val. .0% OpCap Opportunity Value .0%
--- ---
T. Rowe Price Equity Income .0% OpCap Value Equity .0%
--- ---
T. Rowe Price Growth .0% Dreyfus U.S. Govt. Sec. .0%
--- ---
Rowe Price-Fleming Int'l .0% Dreyfus Small Cap Value .0%
--- ---
Janus WRL Series Fund Growth .0%
---
JP Morgan Enhanced Index .0%
---
Additional: .0%
---
TOTAL: 100.0%
14. If you have chosen to name someone other than yourself as the Annuitant,
please select one of the following regarding payment of the death benefit. If
neither is selected, the first option will be utilized.
[_] At the Annuitant's death, I wish to become
the annuitant and deer payout of the death benefit
until my death.
- -------------------------
Signature of Policy Owner
[_] At the Annuitant's death, I wish to have the
death benefit paid to the named beneficiary.
(Policy Owner Signature required for this option)
- -----------------------------------------
Signature of Joint/Successor Policy Owner
To the best of my knowledge and belief, my answers to the questions on this
application are correct and true, and I agree that this application shall be a
part of any annuity policy issued to me. I also understand that the Company
reserves the right to reject any application or purchase payment. If this
application is declined, there shall be not liability on the part of the Company
and any purchase payments submitted shall be returned.
I UNDERSTAND THAT ANNUITY PAYMENTS AND TERMINATION VALUES, WHEN BASED ON
INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT OF THE COMPANY, ARE VARIABLE AND ARE
NOT GUARANTEED AS TO A FIXED DOLLAR AMOUNT.
Receipt of a current prospectus of the PFL Endeavor Variable annuity Account,
Endeavor Series Trust , Merrill Lynch Variable Series Funds, Inc., and WRL
Series Fund, Inc. is hereby acknowledged.
[_] Please check if you wish to receive the Statement of Additional Information.
I HAVE REVIEWED MY EXISTING ANNUITY COVERAGE AND FIND THIS POLICY IS SUITABLE
FOR MY NEEDS.
When funds are allocated to the Guaranteed Periods of the Fixed Account, cash
values under the policy may increase or decrease in accordance with the Excess
Interest Adjustment prior to the end of any Guaranteed Period.
<PAGE>
ADDITIONAL FORMS ARE REQUIRED FOR SYSTEMATIC PAYOUT OPTION.
15a. BE SURE TO COMPLETE THIS SECTION
Under penalties of perjury, I hereby certify (1) that the
Social Security or Tax ID Number listed above is correct and
(2) that I am currently not subject to backup withholding
[cross out (2) if not correct] (see below). The Internal
Revenue Service does not require your consent to any
provision of this application other than the certifications
required to avoid backup withholding.
---------------------------------------------------------------
Signed at (City, State)
---------------------------------------------
this day of , 19
-------- -------------------- -------
- ---------------------------------------------
Annuitant Signature
- ---------------------------------------------
Owner Signature (if different from Annuitant)
- ---------------------------------------------
Joint Owner (successor owner signature)
15b. Spousal consent is required when spouse is not designated a Policy Owner
and/or a Primary Beneficiary if the policy is purchased in or the Owner(s)
reside in a community property or marital property state (AZ, CA, ID, LA, MN,
NV, TX, WA and WI). By signing below, I (consenting spouse) hereby give my
consent to the designation of any person or entity as primary beneficiary or
owner of the policy being applied for. I understand that such designation may
change the community property or marital property rights I may have in the
policy. If there is not spouse, please indicate marital status by checking
applicable box.
[_] Never married; or [_] Spouse deceased; or [_] I am divorced
, 19
-------------------------------- ----------- --------
Signature of Spouse
Date Signed
16a. SELLING AGENT USE ONLY - NOT TO BE FILLED IN BY APPLICANT
I HAVE REVIEWED THE APPLICANT'S EXISTING ANNUITY COVERAGE AND FIND
THIS POLICY IS SUITABLE FOR HIS/HER NEEDS.
- -------------------------------
Agent Name (Please Print)
( ) -
- -------------------------------
Agent Telephone
- ------------------------------------------------------------
Licensed Agent Signature [_] No Trail [_] m Trail
--------------------
Date
- ---------------------------------------------- --------------------------------
Agent Address Broker/Dealer Client Account No.
- ---------------------- ----------------------- --------------------------------
Agent Firm PFL Life Agent No. (If Applicable) Florida Agent
License I.D. No.
16b. Do you have reason to believe the policy applied for is to replace
any existing annuity or insurance owned by applicant?
[_] No [_] Yes, Company Name
----------------------------------------------
Please make check payable to PFL LIFE INSURANCE COMPANY
(Use following address for mail, Fed. Express, etc.)
Send check with application to PFL Life Insurance Company, Attn: Annuity
Department, 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499-0001
** Purpose of Statement. This statement is for the payer (Insurance Company) of
interest, dividends, and certain other payments so that you will not be subject
to the 20% backup withholding that became effective January 1, 1984. This
statement is used to report and certify your taxpayer identification number
(TIN) to the payer, to certify that you are not subject to backup withholding
because of underreporting interest and dividends on your tax return, and to
claim exemption from backup withholding if you are an exempt payee.
If you do not certify your TIN, the payer may be required to withhold 20% of
payments made to you.
What is Backup Withholding. The Interest and Dividend Tax Compliance Act
of 1983 required payers to withhold and pay to IRS 20% of payments of interest,
dividends, and certain other payments under certain conditions. This is called
"backup withholding." If you give your correct TIN, certify your TIN when
required, and report all of your taxable interest and dividends on your tax
return, your payments will not be subject to backup withholding.
Payments you receive will be subject to backup withholding if:
1) You do no furnish your TIN to the payer, or; (2) IRS notifies the payer that
you furnished an incorrect TIN, or; (3) You are notified by IRS that you are
subject to backup withholding because you failed to report all your interest and
dividends on your tax return (for interest and dividend accounts only), or; (4)
You fail to certify to the payer that you are not subject to backup withholding
under (3) above (for interest and dividend accounts opened after 1983 only), or;
(5) You fail to
<PAGE>
certify your TIN. This applies only to interest, dividend broker, or barter
exchange accounts opened after 1983, or broker accounts considered inactive in
1983.
For other payments, you are subject to backup withholding only if (1) or
(2) above applies.
MLVA-APP 497 B
PLEASE FILL OUT THE FRONT PAGE
<PAGE>
EXHIBIT (8)(g)
--------------
PARTICIPATION AGREEMENT BY AND BETWEEN
PFL LIFE INSURANCE COMPANY AND
MERRILL LYNCH ASSET MANAGEMENT, L.P.
FOR THE ENDEAVOR ML VARIABLE ANNUITY.
<PAGE>
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made as of the 21st day of April, 1997, between
MERRILL LYNCH VARIABLE SERIES FUNDS, INC., an open-end management investment
company organized as a Maryland corporation (the "Fund"), and PFL LIFE INSURANCE
COMPANY, a life insurance company organized under the laws of the state of Iowa
(the "Company"), on its own behalf and on behalf of each segregated asset
account of the Company set forth on Schedule A as attached hereto, as such
----------
schedule may be amended from time to time (the "Accounts").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Fund has filed a registration statement with the
Securities and Exchange Commission to register itself as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and to register the offer and sale of its shares under the
Securities Act of 1933, as amended (the "1933 Act"); and
WHEREAS, the Fund desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Fund (the "Participating Insurance
Companies"); and
WHEREAS, Merrill Lynch Funds Distributors, Inc. (the "Underwriter") is
registered as a broker-dealer with the Securities and Exchange Commission (the
"SEC") under the Securities Exchange Act of 1934, as amended (the "1934 Act"),
is a member in good standing of The National Association of Securities Dealers,
Inc. (the "NASD") and acts as principal underwriter of the shares of the Fund;
and
WHEREAS, the capital stock of the Fund is divided into several series
of shares, each series representing an interest in a particular managed
portfolio of securities and other assets; and
WHEREAS, each series of shares of the Fund is divided into Class A
Shares and Class B Shares, which represent identical ownership rights with
respect to a particular portfolio of securities and other assets except that the
Class B Shares exclusively bear certain expenses relating to
distribution-related services incurred in connection with such shares; and
WHEREAS, the several series of shares of the Fund offered by the Fund
to the Company and the Accounts are set forth on Schedule B attached hereto
----------
(each, a "Portfolio," and, collectively, the "Portfolios"), together with the
applicable share class; and
WHEREAS, the Fund has received an order from the SEC granting
Participating Insurance Companies and their separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and
rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent necessary to
permit shares of the Fund to be sold to and held by variable annuity and
variable life insurance separate accounts of both affiliated and unaffiliated
life insurance companies and certain qualified pension and retirement plans (the
"Shared Fund Exemptive Order"); and
1
<PAGE>
WHEREAS, Merrill Lynch Asset Management, L.P. ("MLAM") is duly
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended, and any applicable state securities law, and acts as the Fund's
investment adviser; and
WHEREAS, the Company has registered or will register under the 1933 Act
certain variable life insurance policies and/or variable annuity contracts
funded or to be funded through one or more of the Accounts (the "Contracts");
and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios (the "Shares") on behalf of the Accounts to fund the Contracts, and
the Fund intends to sell such Shares to the relevant Accounts at such Shares'
net asset value.
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE 1
Sale of the Fund Shares
-----------------------
1.1 Subject to Section 1.3 of this Agreement, the Fund shall cause the
Underwriter to make Shares of the Portfolios available to the Accounts at such
Shares' most recent net asset value provided to the Company prior to receipt of
such purchase order by the Fund (or the Underwriter as its agent), in accordance
with the operational procedures mutually agreed to by the Underwriter and the
Company from time to time and the provisions of the then-current prospectus of
the Fund. Shares of a particular Portfolio of the Fund shall be ordered in such
quantities and at such times as determined by the Company to be necessary to
meet the requirements of the Contracts. The Directors of the Fund (the
"Directors") may refuse to sell Shares of any Portfolio to any person (including
the Company and the Accounts), or suspend or terminate the offering of Shares of
any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Directors acting in
good faith and in light of their fiduciary duties under federal and any
applicable state laws, necessary in the best interests of the shareholders of
such Portfolio.
1.2 Subject to Section 1.3 of this Agreement, the Fund will redeem any
full or fractional Shares of any Portfolio when requested by the Company on
behalf of an Account at such Shares' most recent net asset value provided to the
Company prior to receipt by the Fund (or the Underwriter as its agent) of the
request for redemption, as established in accordance with the operational
procedures mutually agreed to by the Underwriter and the Company from time to
time and the provisions of the then current-prospectus of the Fund. The Fund
shall make payment for such Shares in the manner established from time to time
by the Fund, but in no event shall payment be delayed for a greater period than
is permitted by the 1940 Act (including any Rule or order of the SEC
thereunder).
1.3 The Fund shall accept purchase and redemption orders resulting from
investment in and payments under the Contracts on each Business Day, provided
that such orders are received prior to 9:00 a.m. on such Business Day and
reflect instructions received by the Company from Contract holders in good order
prior to the time the net asset value of each Portfolio is priced in accordance
with its prospectus (such Portfolio's "valuation time") on the prior Business
Day. Any purchase or redemption
2
<PAGE>
order for Shares of any Portfolio received, on any Business Day, after such
Portfolio's valuation time on such Business Day shall be deemed received prior
to 9:00 a.m. on the next succeeding Business Day. "Business Day" shall mean any
day on which the New York Stock Exchange is open for trading and on which the
Fund calculates its net asset value pursuant to the rules of the SEC. Purchase
and redemption orders shall be provided by the Company to the Underwriter as
agent for the Fund in such written or electronic form (including facsimile) as
may be mutually acceptable to the Company and the Underwriter. The Underwriter
may reject purchase and redemption orders that are not in proper form. In the
event that the Company and the Underwriter agree to use a form of written or
electronic communication that is not capable of recording the time, date and
recipient of any communication and confirming good transmission, the Company
agrees that it shall be responsible (i) for confirming with the Underwriter that
any communication sent by the Company was in fact received by the Underwriter in
proper form, and (ii) for the effect of any delay in the Underwriter's receipt
of such communication in proper form. The Fund and its agents shall be entitled
to rely, and shall be fully protected from all liability in acting, upon the
instructions of the persons named in the list of authorized individuals attached
hereto as Schedule C, or any subsequent list of authorized individuals provided
----------
to the Fund or its agents by the Company in such form, without being required to
determine the authenticity of the authorization or the authority of the persons
named therein.
1.4 Purchase orders that are transmitted to the Fund in accordance with
Section 1.3 of this Agreement shall be paid for no later than 12:00 noon on the
same Business Day that the Fund receives notice of the order. Payments shall be
made in federal funds transmitted by wire. In the event that the Company shall
fail to pay in a timely manner for any purchase order validly received by the
Underwriter on behalf of the Fund pursuant to Section 1.3 of this Agreement
(whether or not such failure is the fault of the Company), the Company shall
hold the Fund harmless from any losses reasonably sustained by the Fund as the
result of acting in reliance on such purchase order.
1.5 Issuance and transfer of the Fund's Shares will be by book entry
only. Stock certificates will not be issued to the Company or to any Account.
Shares ordered from the Fund will be recorded in the appropriate title for each
Account.
1.6 The Fund shall furnish prompt notice to the Company of any income,
dividends or capital gain distribution payable on Shares of any Portfolio. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on a Portfolio's Shares in additional Shares of
that Portfolio. The Fund shall notify the Company of the number of Shares so
issued as payment of such dividends and distributions.
1.7 The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after such net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 6:30 p.m., New
York time.
1.8 The Company agrees that it will not take any action to operate any
Account as a management investment company under the 1940 Act without the Fund's
and the Underwriter's prior written consent.
1.9 The Fund agrees that its Shares will be sold only to Participating
Insurance Companies and their separate accounts. No Shares of any Portfolio will
be sold directly to the general public. The
3
<PAGE>
Company agrees that Fund Shares will be used only for the purposes of funding
the Contracts and Accounts listed in Schedule A, as such schedule may be amended
----------
from time to time.
1.10 The Fund agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.10 and
Article 4 of this Agreement.
1.11 So long as it shall be the intention of the Fund to maintain the
net asset value per share of any Portfolio at $1.00, on any day on which (a) the
net asset value per share of the Shares is determined, (b) MLAM determines, in
the manner described in the then-current prospectus of the Fund, that the net
income of such Portfolio on such day is negative, and (c) MLAM delivers a
certificate to the Company setting forth the reduction in the number of
outstanding Shares to be effected as described in the then-current prospectus of
the Fund in connection with such determination, the Company, on behalf of itself
and the Accounts, agrees to return to the Fund its pro rata share of the number
of Shares to be reduced and agrees that, upon delivery by MLAM to the Company of
such certificate, (a) the Company's ownership interest in the Shares so to be
returned shall immediately cease, (b) such Shares shall be deemed to have been
canceled and to be no longer outstanding, and (c) all rights in respect of such
Shares shall cease.
ARTICLE 2
Obligation of the Parties
--------------------------
2.1 The Fund shall prepare and be responsible for filing with the SEC
and any state securities regulators requiring such filing, all shareholder
reports, notices, proxy materials (or similar materials such as voting
instruction solicitation materials), prospectuses and statements of additional
information of the Fund. The Fund shall bear the costs or registration and
qualification of its Shares, preparation and filing of the documents listed in
this Section 2.1 and all taxes to which an issuer is subject on the issuance and
transfer of its shares.
2.2 At least annually, the Fund or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios ) for the Shares as the Company may reasonably
request for distribution to existing Contract owners whose Contracts are funded
by such Shares. The Fund or its designee shall provide the Company, at the
Company's expense, with as many copies of the current prospectus for the Shares
as the Company may reasonably request for distribution to prospective purchasers
of Contracts. If requested by the Company in lieu thereof, the Fund or its
designee shall provide such documentation (including a "camera ready" copy of
the new prospectus as set in type or, at the request of the Company, in a
computer-readable format) and other assistance as is reasonably necessary in
order for the parties hereto once each year (or more frequently if the
prospectus for the Shares is supplemented or amended) to have the prospectus for
the Contracts and the prospectus for the Shares printed together in one
document; the expenses of such printing to be borne by the Company. In the event
that the Company requests that the Fund or its designee provide the Fund's
prospectus in a "camera ready" or computer-readable format, the Fund shall be
responsible solely for providing the prospectus in the format in which it is
accustomed to formatting prospectuses and shall bear the expense of providing
the prospectus in such format (e.g., typesetting expenses), and the Company
---
shall bear the expense of adjusting or changing the format to conform with any
of its prospectuses.
4
<PAGE>
2.3 The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Fund or its
designee. The Fund or its designee, at its expense, shall print and provide such
statement of additional information to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to any owner
of a Contract funded by the Shares. The Fund or its designee, at the Company's
expense, shall print and provide such statement to the Company (or a master of
such statement suitable for duplication by the Company) for distribution to a
prospective purchaser who requests such statement.
2.4 The Fund or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Fund's proxy
materials, reports to Shareholders and other communications to Shareholders in
such quantity as the Company shall reasonably require for distribution to
Contract owners.
2.5 The Company shall furnish, or cause to be furnished, to the Fund or
its designee, a copy of each prospectus for the Contracts or statement of
additional information for the Contracts in which the Fund or its investment
adviser is named prior to the filing of such document with the SEC. The Company
shall furnish, or shall cause to be furnished, to the Fund or its designee, each
piece of sales literature or other promotional material in which the Fund or its
investment adviser is named, at least five Business Days prior to its use. No
such prospectus, statement of additional information or material shall be used
if the Fund or its designee reasonably objects to such use within five Business
Days after receipt of such material.
2.6 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund or
its investment adviser in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Fund Shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
reports of the Fund, Fund-sponsored proxy statement, or in sales literature or
other promotional material approved by the Fund or its designee, except with the
written permission of the Fund or its designee.
2.7 The Fund shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may by amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
with the written permission of the Company.
2.8 The Company shall amend the registration statement of the Contracts
under the 1933 Act and registration statement for each Account under the 1940
Act from time to time as required in order to effect the continuous offering of
the Contracts or as may otherwise be required by applicable law. The Company
shall register and qualify the Contracts for sale to the extent required by
applicable securities laws and insurance laws of the various states.
2.9 The Company shall be responsible for assuring that any prospectus
offering a Contract that is a life insurance contract where it is reasonably
probable that such Contract would be a "modified endowment contract," as that
term is defined in Section 7702A of the Internal Revenue Code of 1986, as
amended (the "Code"), will identify such Contract as a modified endowment
contract (or policy).
5
<PAGE>
2.10 Solely with respect to Contracts and Accounts that are subject to
the 1940 Act, so long as, and to the extent that, the SEC interprets the 1940
Act to require pass-through voting privileges for variable policyowners: (a) the
Company will provide pass-through voting privileges to owners of Contracts or
policies whose cash values are invested, through the Accounts, in Shares of the
Fund; (b) the Fund shall require all Participating Insurance Companies to
calculate voting privileges in the same manner and the Company shall be
responsible for assuring that the Accounts calculate voting privileges in the
manner established by the Fund; (c) with respect to each Account, the Company
will vote Shares of the Fund held by the Account and for which no timely voting
instructions from Contract- or policyowners are received, as well as Shares held
by the Account that are owned by the Company for its general account, in the
same proportion as the Company votes Shares held by the Account for which timely
voting instructions are received from Contract- or policyowners; and (d) the
Company and its agents will in no way recommend or oppose or interfere with the
solicitation of proxies for Fund Shares held by Contract owners without the
prior written consent of the Fund, which consent may be withheld in the Fund's
sole discretion.
ARTICLE 3
Representations and Warranties
------------------------------
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Iowa and has
established each Account as a segregated asset account under such law on the
date set forth in Schedule A.
----------
3.2 The Company represents and warrants that it has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
3.3 The Company represents and warrants that the issuance of the
Contracts will be registered under the 1933 Act prior to any issuance or sale of
the Contracts; the Contracts will be issued and sold in compliance in all
material respects will all applicable federal and state laws; and the sale of
the Contracts shall comply in all material respects with state insurance
suitability requirements.
3.4 The Company represents and warrants that the Contracts are
currently and at the time of issuance will be treated as annuity contracts or
life insurance policies, whichever is appropriate, under applicable provisions
of the Code. The Company shall make every effort to maintain such treatment and
shall notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future.
3.5 The Fund represents and warrants that it is duly organized and
validly existing under the laws of the State of Maryland.
3.6 The Fund represents and warrants that the sale of the Fund Shares
offered and sold pursuant to this Agreement will be registered under the 1933
Act and that the Fund is registered under the 1940 Act. The Fund shall use its
best efforts to amend its registration statement under the 1933 Act and the 1940
Act from time to time as required in order to affect the continuous offering of
its shares. The Company shall advise the Fund of any state requirements to
register Shares for sale in such states. If the Fund determines registration is
appropriate, the Fund shall use its best efforts to register and qualify its
Shares for sale in accordance with the laws of all fifty states, the District of
Columbia, Virgin Islands and Puerto Rico and such other jurisdictions reasonably
requested by the Company.
6
<PAGE>
3.7 The Fund represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in section
817(h) of the Code and the rules and regulations thereunder.
ARTICLE 4
Potential Conflicts
-------------------
4.1 The parties acknowledge that the Fund's Shares may be made
available for investment to other Participating Insurance Companies. In such
event, the Directors will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may arise
for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities decision in any relevant proceeding; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Directors shall promptly inform the Company
if they determine that an irreconcilable material conflict exists and the
implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Directors. The Company will assist the
Directors in carrying out their responsibilities under the Shared Fund Exemptive
Order by providing the Directors with all information reasonably necessary for
the Directors to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Directors, or a majority
of the Fund's Directors who are not affiliated with Merrill Lynch Asset
Management, L.P. or the Underwriter (the "Disinterested Directors"), that a
material irreconcilable conflict exists that affects the interests of Contract
owners, the Company shall, in cooperation with other Participating Insurance
Companies whose contract owners are also affected, at its expense and to the
extent reasonably practicable (as determined by the Directors) take whatever
steps are necessary to remedy or eliminate the irreconcilable material conflict,
which steps could include: (a) withdrawing the assets allocable to some or all
of the Accounts from the Fund or any Portfolio and reinvesting such assets in a
different investment medium, including (but not limited to) another Portfolio of
the Fund, or submitting the question of whether or not such segregation should
be implemented to a vote of all affected Contracts owners and, as appropriate,
segregating the assets of any appropriate group (i.e., annuity contract owners,
life insurance contract owners, or variable contract owners of one or more
Participating Insurance Companies) that votes in favor of such segregation, or
offering to the affected Contract owners the option of making such a change; and
(b) establishing a new registered management investment company or managed
separate account.
4.4 If a material irreconcilable conflict arises because of a decision
by the Company to disregard Contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's or
Accounts' investment in the Fund and terminate this Agreement with respect to
such Account(s); provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the
7
<PAGE>
Disinterested Directors. Any such withdrawal and termination must take place
within 30 days after the Fund gives written notice that this provision is being
implemented. Until the end of such 30 day- period, the Fund shall continue to
accept and implement orders by the Company for the purchase and redemption of
Shares of the Fund.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Fund informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the Disinterested
Directors. Until the end of such 30- day period, the Fund shall continue to
accept and implement orders by the Company for the purchase and redemption of
Shares of the Fund.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the Disinterested Directors shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no event
will the Company be required to establish a new funding medium for the Contracts
if an offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Directors determine that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw the
affected Account's (or Accounts') investment in the Fund and terminate this
Agreement with respect to such Account(s) within 30 days after the Directors
inform the Company in writing of the foregoing determination; provided, however,
that such withdrawal and termination shall be limited to the extent required by
any such material irreconcilable conflict as determined by a majority of the
Disinterested Directors.
4.7 The Company shall at least annually submit to the Directors such
reports, materials or data as the Directors may reasonably request so that the
Directors may fully carry out the duties imposed upon them by the Shared Fund
Exemptive Order, and said reports, materials and data shall be submitted more
frequently if deemed appropriate by the Directors.
4.8 If and to the extent that (a) Rule 6e-2 and Rule 6e-3 (T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the application for the Shared Fund Exemptive
Order) on terms and conditions materially different from those contained in the
application for the Shared Fund Exemptive Order, or (b) the Shared Fund
Exemptive Order is granted on terms and conditions that differ from those set
forth in this Article 4, then the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary (a) to
comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to
the extent such rules are applicable, or (b) to conform this Article 4 to the
terms and conditions contained in the Shared Fund Exemptive Order, as the case
may be.
ARTICLE 5
Indemnification
---------------
5.1 Indemnification by the Company. The Company agrees to indemnify and
------------------------------
hold harmless the Fund and each of its Directors, officers, employees and agents
and each person, if any, who controls
8
<PAGE>
the Fund within the meaning of Section 15 of the 1933 Act (collectively the
"Indemnified Parties" for purposes of this Article 5) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or expenses (including the reasonable costs
of investigating or defending any alleged loss, claim, damage, liability or
expense and reasonable legal counsel fees incurred in connection therewith)
(collectively, "Losses"), to which such Indemnified Parties may become subject
under any statute or regulation, or common law or otherwise, insofar as such
Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in a
registration statement or prospectus for the Contracts or in the
Contracts themselves or in sales literature generated or approved by
the Company on behalf of the Contracts or Accounts (or any amendment or
supplement to any of the foregoing) (collectively, "Company Documents"
for the purposes of this Article 5), or arise out of or are based upon
the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, provided that this indemnity shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and was accurately
derived from written information furnished to the Company by or on
behalf of the Fund for use in Company Documents or otherwise for use in
connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statements or representations
(other than statements or representations contained in and accurately
derived from Fund Documents (as defined in Section 5.2(a) below) or
wrongful conduct of the Company or persons under its control, with
respect to the sale or acquisition of the Contracts or Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Fund Documents
or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such statement or omission was made in
reliance upon and accurately derived from written information furnished
to the Fund by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company
to provide the services or furnish the materials required under the
terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company.
5.2 Indemnification by the Fund. The Fund agrees to indemnify and hold
---------------------------
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this
Article 5) against any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or expenses
(including the reasonable costs of investigating or defending any alleged loss,
claim, damage liability or expense and reasonable legal
9
<PAGE>
counsel fees incurred in connection therewith) (collectively, "Losses"), to
which such Indemnified Parties may become subject under any statute or
regulation, or at common law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or
alleged untrue statement of any material fact contained in the
registration statement or prospectus for the Fund (or any amendment or
supplement thereto) or in sales literature approved by the Fund (but
solely with respect to statements regarding the Fund), (collectively,
"Fund Documents" for the purposes of this Article 5), or arise out of
or are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this indemnity shall
not apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and was
accurately derived from written information furnished to the Fund by or
on behalf of the Company for use in Fund Documents or otherwise for use
in connection with the sale of the Contracts or Shares; or
(b) arise out of or result from statement or representations
(other than statements or representations contained in and accurately
derived from Company Documents) or wrongful conduct of the Fund or
persons under its control, with respect to the sale or acquisition of
the Contracts or Shares; or
(c) arise out of or result from any untrue statement or
alleged untrue statement of a material fact contained in Company
Documents or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was
made in reliance upon and accurately derived from written information
furnished to the Company by or on behalf of the Fund; or
(d) arise out of or result from any failure by the Fund to
provide the services or furnish the materials required under the
terms of this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Fund.
5.3 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any Losses incurred or assessed against any Indemnified Party to the extent such
Losses arise out of or result from such Indemnified Party's willful misfeasance,
bad faith or negligence in the performance of such Indemnified Party's duties or
by reason of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement.
5.4 Neither the Company nor the Fund shall be liable under the
indemnification provisions of Section 5.1 or 5.2, as applicable, with respect to
any claim made against an Indemnified Party unless such Indemnified Party shall
have notified the party against whom indemnification is sought in writing within
a reasonable time after the summons, or other first written notification, giving
information of the nature of the claim shall have been served upon or otherwise
received by such Indemnified Party (or after such Indemnified Party shall have
received notice of service upon or other notification to any
10
<PAGE>
designated agent), but failure to notify the party against whom indemnification
is sought of any such claim or shall not relieve that party from any liability
that it may have to the Indemnified Party in the absence of Sections 5.1 and
5.2.
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the Indemnified
Party of an election to assume such defense, the Indemnified Party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such
Indemnified Party independently in connection with the defense thereof other
than reasonable costs of investigation.
ARTICLE 6
Termination
-----------
6.1 This Agreement may be terminated by either party for any reason by
six (6) months' advance written notice to the other party, and may be terminated
by the Fund pursuant to Sections 6.2 through 6.4 below upon written notice to
the Company.
6.2 This Agreement may be terminated at the option of the Fund upon
institution of formal proceedings against the Company by the NASD, the SEC, the
insurance department of any state, or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of the Contracts,
the operation of the Account, the administration of the Contracts or the
purchase of the Shares, or an expected or anticipated ruling, judgment or
outcome that would, in the Fund's reasonable judgment, materially impair the
Company's ability to meet and perform the Company's obligations and duties
hereunder.
6.3 This Agreement may be terminated at the option of the Fund if the
Contracts cease to qualify as annuity contracts or life insurance policies, as
applicable, under the Code, or if the Fund reasonably believes that the
Contracts may fail to so qualify.
6.4 This Agreement may be terminated by the Fund, at its option, if the
Fund shall determine, in its sole judgment exercised in good faith, that either
(1) the Company shall have suffered a material adverse change in its business or
financial condition or (2) the Company shall have been the subject of material
adverse publicity that is likely to have a material adverse impact upon the
business and operations of either the Fund or the Underwriter
6.5 Notwithstanding any termination of this Agreement pursuant to this
Article 6, the Fund and the Underwriter may, at the option of the Fund, continue
to make available additional Fund Shares for so long after the termination of
this Agreement as the Fund desires pursuant to the terms and conditions of this
Agreement as provided in Section 6.6 below, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, if the Fund or
Underwriter so elects to make additional Shares available, the owners of the
Existing Contracts or the Company, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in the Fund, redeem investments
in the Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts.
11
<PAGE>
6.6 In the event of a termination of this Agreement pursuant to this
Article 6, the Fund and the Underwriter shall promptly notify the Company
whether the Underwriter and the Fund will continue to make Shares available
after such termination; if the Underwriter and the Fund will continue to make
Shares so available, the provisions of this Agreement shall remain in effect
except for Section 6.1 hereof and thereafter either the Fund or the Company may
terminate the Agreement, as so continued pursuant to this Section 6.6, upon
prior written notice to the other party, such notice to be for a period that is
reasonable under the circumstances but, if given by the Fund, need not be
greater than six months.
6.7 The provisions of Article 5 shall survive the termination of this
Agreement, and the provisions of Article 4 and Sections 2.4 and 2.10 shall
survive the termination of this Agreement so long as Shares of the Fund are held
on behalf of Contract owners in accordance with Section 6.5.
ARTICLE 7
Notices
-------
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
Merrill Lynch Variable Series Funds, Inc.
c/o Merrill Lynch Asset Management, L.P.
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Attention: General Counsel
If to the Company:
PFL Life Insurance Company
Financial Markets Division
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499-0001
Attention: Division General Counsel
ARTICLE 8
Miscellaneous
-------------
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12
<PAGE>
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York,
shall be subject to the provisions of the 1933, 1934, and 1940 Acts, and the
rules, regulations and rulings thereunder, including such exemptions from those
statutes, rules and regulations as the SEC may grant and the terms hereof shall
be interpreted and construed in accordance therewith.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Fund arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Fund and that no Director, officer, agent, or holder of shares of
beneficial interest of the Fund shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, that the parties hereto are entitled to under
state and federal laws.
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder
may be assigned by either party without the prior written approval of the other
party.
8.10 No provisions of this Agreement may be amended or modified in
any manner except by a written agreement properly authorized and executed by
both parties.
13
<PAGE>
IN WITNESS WHEREOF, the parties have caused their duly authorized
officers to execute this Fund Participation Agreement as of the date and year
first above written.
PFL LIFE INSURANCE COMPANY
By: /s/ William L. Busler
Name: William L. Busler
Title: President
MERRILL LYNCH VARIABLE SERIES FUNDS, INC.
By: /s/ Arthur Zeikel
Name: Arthur Zeikel
Title: President
14
<PAGE>
Schedule A
Segregated Accounts of PFL Life Insurance Company
Participating in Portfolios of Merrill Lynch Variable Series Funds, Inc.
<TABLE>
<CAPTION>
Name of Separate Account Date Established
- ------------------------ ----------------
<S> <C>
PFL Endeavor Variable Annuity Account 1/19/90
PFL Endeavor Platinum Variable Annuity Account 1/19/90
</TABLE>
1
<PAGE>
Schedule B
Share Classes and Portfolios of Merrill Lynch Variable Series Funds, Inc.
Offered to Segregated Accounts of PFL Life Insurance Company
<TABLE>
<CAPTION>
Portfolios Share Class(es)
- ---------- ----------------
<S> <C>
Basic Value Focus Fund Class A Shares
Developing Capital Markets Focus Fund Class A Shares
High Current Income Fund Class A Shares
</TABLE>
1
<PAGE>
EXHIBIT (8) (H)
---------------
AMENDMENT TO PARTICIPATION AGREEMENT BY AND BETWEEN
PFL LIFE INSURANCE COMPANY AND ENDEAVOR SERIES TRUST.
<PAGE>
AMENDED
SCHEDULE A
EFFECTIVE MARCH 13, 1997
ACCOUNT(S), POLICY(IES) AND PORTFOLIO(S)
SUBJECT TO THE PARTICIPATION AGREEMENT
-----------------------------------------
Account PFL Endeavor Variable Annuity Account
- ------- AUSA Endeavor Variable Annuity Account
PFL Life Variable Annuity Account A
Policies The Endeavor Variable Annuity
- -------- The Endeavor Platinum Variable Annuity
The AUSA Endeavor Variable Annuity
The Atlas Portfolio Builder Variable Annuity
Portfolios TCW Managed Asset Allocation
- ---------- TCW Money Market
T. Rowe Price International Stock
Value Equity
Dreyfus Small Cap Value
Dreyfus U.S. Government Securities
T. Rowe Price Equity Income
T. Rowe Price Growth Stock
Opportunity Value
Enhanced Index
Approved:
ENDEAVOR MANAGEMENT CO. PFL LIFE INSURANCE COMPANY
By: /s/ Vincent J. McGuinness, Sr. By: /s/ William L. Busler
------------------------------- ----------------------------
Vincent J. McGuinness, Sr. William L. Busler
Title: CEO Title: President
---------------------------- -------------------------
Date: March 13, 1997 Date: March 13, 1997
----------------------------- --------------------------
AUSA LIFE INSURANCE COMPANY ENDEAVOR SERIES TRUST
By: /s/ William L. Busler By: /s/ James R. McInnis
------------------------------- ---------------------------
William L. Busler James R. McInnis
Title: Vice President Title: President
---------------------------- -------------------------
Date: March 13, 1997 Date: March 13, 1997
----------------------------- --------------------------
<PAGE>
EXHIBIT (10)(a)
---------------
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
[LETTERHEAD OF ERNST & YOUNG APPEARS HERE]
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the use of our report dated January 31, 1997 with
respect to the financial statements of The PFL Endeavor Variable Annuity
Account, and to the use of our report dated February 21, 1997 with respect to
the statutory-basis financial statements and schedules of PFL Life Insurance
Company, included in Post-Effective Amendment No. 13 to the Registration
Statement (Form N-4 No.33-33085) and related Prospectus of the PFL Endeavor VA
Separate Account.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Des Moines, Iowa
April 25, 1997
