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Variable Universal Life Insurance Policy
This prospectus describes Variable Universal Life Insurance Policies issued by
The Minnesota Mutual Life Insurance Company ("Minnesota Mutual") which are
designed for use in group-sponsored insurance programs. In circumstances where
a group contract is issued, certificates setting forth or summarizing the
rights of the owners and/or insureds will be issued under the group contract.
Individual policies can also be issued in connection with group-sponsored
insurance programs in circumstances where a group contract is not issued. The
terms of the certificate issued under a group contract and the individual
policy are substantially the same and are collectively referred to in this
prospectus as "policy" or "policies." If rights of an owner of an individual
policy differ from those of an owner of a certificate issued under a group
contract, those rights will be disclosed separately.
The policies are designed to provide life insurance protection and at the same
time provide flexibility to vary premium payments under the policies. This
flexibility allows the owner to provide for changing insurance needs under a
single insurance policy. An owner also has the opportunity to allocate net
premiums among several investment portfolios with different investment
objectives.
The policy provides for (1) a net cash value that can be obtained by
surrendering the policy; (2) policy loans; and (3) a death benefit payable at
the insured's death. As long as a policy remains in force and there are no
outstanding policy loans, the death benefit payable on the insured's death
will not be less than the current face amount of the policy. The insurance
under a policy will remain in force so long as its net cash value is
sufficient to pay certain monthly charges imposed in connection with the
policy. All charges assessed under the policy are fully described under the
heading "Charges" on page 24 of this prospectus. The policy also contains a
cancellation right which is fully described under the heading "Free Look" on
page 23 of this prospectus.
The owner may allocate net premiums to one or more of the sub-accounts of a
separate account of Minnesota Mutual called the Variable Universal Life
Account (herein "separate account"). Net premiums may also be allocated to a
guaranteed account of Minnesota Mutual. To the extent of the investment of a
policy in the separate account, the account value will vary with the
investment experience of the sub-accounts of the separate account. There is no
guaranteed minimum value associated with the separate account and its sub-
accounts.
The separate account, through its sub-accounts, invests its assets in shares
of Advantus Series Fund, Inc., Fidelity's Variable Insurance Products Fund,
and Fidelity's Variable Insurance Products Fund II (the "Funds"). The Advantus
Series Fund, Inc. has seventeen Portfolios which are available to policy
owners for the allocation of premiums or for transfers. They are: the Growth
Portfolio, the Bond Portfolio, the Money Market Portfolio, the Asset
Allocation Portfolio, the Mortgage Securities Portfolio, the Index 500
Portfolio, the Capital Appreciation Portfolio, the International Stock
Portfolio, the Small Company Portfolio, the Value Stock Portfolio, the
Maturing Government Bond Portfolio with
PROSPECTUS
MINNESOTA MUTUAL
VARIABLE UNIVERSAL
LIFE ACCOUNT
[LOGO OF MINNESOTA MUTUAL]
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a target maturity of 2010, the Value Stock Portfolio, the Small Company Value
Portfolio, the International Bond Portfolio, the Index 400 Mid-Cap Portfolio,
the Micro-Cap Value Portfolio, the Macro-Cap Value Portfolio, and the Micro-
Cap Growth Portfolio. Although the Small Company Value, the International
Bond, the Index 400 Mid-Cap, the Micro-Cap Value, the Macro-Cap Value and the
Micro-Cap Growth Portfolios are included in this prospectus, they will not be
available until October 1, 1997. Although the Maturing Government Bond
Portfolios with target maturities of 1998, 2002, and 2006 are included in this
prospectus, they are not available for premium allocations or transfers
effective May 1, 1997.
Fidelity's Variable Insurance Products Fund has two Portfolios which are
available to the Variable Universal Life Account. They are the High Income
Portfolio and the Equity-Income Portfolio. Fidelity's Variable Insurance
Products Fund II has one Portfolio which is available to the Variable
Universal Life Account. It is the Contrafund Portfolio. There is no guaranteed
minimum value associated with the separate account and its sub-accounts.
It may not be advantageous to purchase a policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
THIS PROSPECTUS IS NOT VALID UNLESS ATTACHED TO A CURRENT PROSPECTUS OF
ADVANTUS SERIES FUND, INC., AND UNLESS ATTACHED TO A CURRENT PROSPECTUS FOR
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUNDS. THIS PROSPECTUS SHOULD BE READ
CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The Minnesota Mutual Life Insurance Company
400 Robert Street North
St. Paul, MN 55101-2098
Ph 612/665-3500
http://www.minnesotamutual.com
Dated: May 1, 1997
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TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
Special Terms.............................................................. 2
Summary.................................................................... 3
Condensed Financial Information............................................ 10
General Descriptions....................................................... 11
The Minnesota Mutual Life Insurance Company.............................. 11
Variable Universal Life Account.......................................... 11
Advantus Series Fund, Inc................................................ 11
Fidelity Variable Insurance Products Funds............................... 12
Additions, Deletions or Substitutions.................................... 13
The Guaranteed Account................................................... 13
General Description.................................................... 13
Guaranteed Account Value............................................... 14
Information About the Policy............................................... 14
Applications and Policy Issue............................................ 14
Policy Premiums.......................................................... 14
Death Benefit............................................................ 16
Change in Face Amount.................................................... 17
Payment of Death Benefit Proceeds........................................ 17
Account Values........................................................... 18
Policy Loans............................................................. 20
Surrender and Partial Surrender.......................................... 21
Transfers................................................................ 22
Dollar Cost Averaging.................................................... 22
Free Look................................................................ 23
Conversion Right to an Individual Policy................................. 23
Continuation of Group Coverage........................................... 24
Charges.................................................................. 24
Premium Expense Charges................................................ 24
Account Value Charges.................................................... 25
Monthly Deduction...................................................... 25
Partial Surrender Transaction Charge................................... 26
Transfer Charge........................................................ 26
Separate Account Charges................................................. 26
Fund Charges............................................................. 26
Guarantee of Certain Charges............................................. 28
Additional Benefits...................................................... 28
General Matters Relating to the Policy................................... 29
General Provisions of the Group Contract................................. 31
Other Matters.............................................................. 32
Federal Tax Status....................................................... 32
Trustees and Principal Officers of Minnesota Mutual...................... 36
Voting Rights............................................................ 37
Distribution of Policies................................................. 37
Legal Matters............................................................ 38
Legal Proceedings........................................................ 38
Experts.................................................................. 38
Registration Statement................................................... 38
Financial Statements of Minnesota Mutual Variable Universal Life Account... 39
Financial Statements of The Minnesota Mutual Life Insurance Company and
Subsidiaries.............................................................. 54
Appendix I-Illustrations of Account Values and Death Benefits.............. 76
Appendix II-Policy Loan Example............................................ 85
</TABLE>
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SPECIAL TERMS
As used in this prospectus, the following terms have the indicated meanings:
ACCOUNT VALUE: The sum of the separate account value, guaranteed account value
and loan account value.
ATTAINED AGE: The issue age of the insured plus the number of completed policy
years.
BENEFICIARY: The person(s) named in an application for insurance or by later
designation to receive policy proceeds in the event of the insured's death. A
beneficiary may be changed as set forth in the policy and this prospectus.
CERTIFICATE: A document issued to the owner of a policy issued under a group
contract setting forth or summarizing the owner's rights and benefits.
CODE: The Internal Revenue Code of 1986, as amended.
CONTRACTHOLDER: The entity that is issued a group contract.
ELIGIBLE MEMBER: A member of the group seeking insurance who meets the
requirements stated on the specification pages of the group contract or policy
to be an owner and/or insured of a policy under the group-sponsored program.
FACE AMOUNT: The minimum amount of death benefit proceeds paid upon the death
of the insured, so long as the policy remains in force and there are no
outstanding policy loans. The face amount is shown on the specifications page
attached to the policy.
FUNDS: The mutual fund or separate investment portfolio within a series mutual
fund which we have designated as an eligible investment for the Variable
Universal Life Account, currently, Advantus Series Fund, Inc. and its
Portfolios, Fidelity's Variable Insurance Products Fund and its Portfolios,
and Fidelity's Variable Insurance Products Fund II and its Portfolio.
GENERAL ACCOUNT: All of our assets other than those in the Variable Universal
Life Account or in other separate accounts established by us.
GROUP CONTRACT: A Variable Universal Life Insurance Policy issued to the
contractholder.
GROUP SPONSOR: The employer, association or organization that is sponsoring a
program of insurance for the group members.
GUARANTEED ACCOUNT: Assets other than the loan account value that are
attributable to a policy and held in our general account.
GUARANTEED ACCOUNT VALUE: The sum of all net premiums and transfers allocated
to the guaranteed account and interest and dividends declared thereon, minus
amounts transferred to the separate account or removed in connection with a
partial surrender or policy loan and minus charges assessed against the
guaranteed account value.
INDIVIDUAL INSURANCE: Insurance provided under a group contract or under an
individual policy issued in connection with a group-sponsored insurance
program on a group member or a member's spouse.
INSURED: The person whose life is covered by life insurance under a policy.
This term may include a group member and a member's spouse.
ISSUE AGE: The insured's age at his or her last birthday as of the issue date.
ISSUE DATE: The effective date of an insured's coverage under a policy.
LOAN ACCOUNT: The portion of the general account attributable to policy loans
under policies of this type.
LOAN ACCOUNT VALUE: Assets held in our general account as collateral for
outstanding policy loans under a policy, together with accrued interest.
MATURITY DATE: The 95th birthday of the insured or a later birthday which is
established for policies issued under the group-sponsored insurance program.
MEMBER: An individual belonging to the group seeking insurance.
MONTHLY ANNIVERSARY: The first day of each calendar month on, or following,
the issue date.
NET CASH VALUE: The account value of a policy less any outstanding policy
loans and accrued policy loan interest charged and less any charges due. It is
the amount an owner may obtain through surrender of the policy.
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SUMMARY
OWNER: The owner of a policy, as designated in the application or as
subsequently changed. An owner may be changed as set forth in the policy and
this prospectus.
POLICY: Either the certificate or the individual policy offered by us and
described in this prospectus.
POLICY ANNIVERSARY: The same day and month in each succeeding year as the
policy date, or the same day and month in each succeeding year as the date
agreed to between the contractholder and us. The policy anniversary is shown on
the specifications page attached to the policy.
POLICY DATE: The first day of the calendar month on, or following, the issue
date. This is the date from which policy years and policy months are measured.
POLICY MONTH: A calendar month.
POLICY YEAR: A period of one year measured from the policy date and from each
successive policy anniversary.
SEPARATE ACCOUNT: The Minnesota Mutual Variable Universal Life Account, a
separate investment account with twenty-three "sub-accounts" (each investing in
a different Portfolio of the Funds), the investment experience of each of which
is separate from that of our general account and our other assets.
SEPARATE ACCOUNT VALUE: The sum of all sub-account values.
SERIES FUND: The Advantus Series Fund, Inc., a mutual fund of the series type
which is an investment alternative for the Variable Universal Life Account.
SUB-ACCOUNT VALUE: The number of units of a sub-account credited to a policy
times the current unit value for that sub-account.
UNIT: An accounting device used to determine the interest of a policy in a sub-
account of the Variable Universal Life Account.
VALUATION DATE: Each date on which a Fund Portfolio is valued.
VALUATION PERIOD: The period between successive valuation dates measured from
the time of one determination to the next.
VIP: Fidelity's Variable Insurance Products Fund, a mutual fund of the series
type which is an investment alternative of the Variable Universal Life Account.
VIP II: Fidelity's Variable Insurance Products Fund II, a mutual fund of the
series type which is an investment alternative of the Variable Universal Life
Account.
WE, OUR, US: The Minnesota Mutual Life Insurance Company.
The following summary is designed to answer certain general questions
concerning the policy and to give a brief overview of the more significant
policy features. This summary is not comprehensive and is qualified in its
entirety by the more specific information contained elsewhere in this
prospectus. Definitions of unfamiliar terms are provided on the preceding pages
under the heading "Special Terms".
WHAT IS A UNIVERSAL LIFE INSURANCE POLICY?
A universal life insurance policy is an adjustable benefit life insurance
policy which allows for the accumulation of cash values while the policy's life
insurance coverage remains in force and which permits the flexible payment of
premiums. An adjustable benefit policy has a stated face amount of insurance
payable in the event of the death of the insured, which is supported by the
deduction of specified monthly charges from the cash values. However, this
amount of insurance may be increased or decreased by the owner of the policy,
without the necessity of issuing a new policy for that owner. There are
limitations to these changes and we may require evidence of insurability before
requested increases go into effect. In addition, the coverage for an insured is
provided without specifying the frequency and amount of each premium payment
(as is the practice for scheduled premium life insurance policies). The time
and amount of the payment of premium may be determined by the owner and the
life insurance coverage will remain in force for an insured so long as monthly
charges may be deducted from the existing balance in the policy's net cash
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values. Subject to restrictions described herein, an owner may also make
payments in excess of that minimum amount required to keep a policy in force.
If cash values are insufficient for the payment of the required monthly
charges, then a premium payment is required or the life insurance coverage
provided to the owner by the policy will lapse.
A universal life insurance policy is intended for the use of persons who
wish to combine both life insurance and the accumulation of cash values. Such
a policy may be inappropriate for individuals seeking life insurance
protection which is the equivalent of term-type coverage.
WHAT MAKES THE POLICY "VARIABLE"?
The policy is termed "variable" because unlike a universal life policy which
provides for the accumulation of policy values at fixed rates determined by
the insurance company, variable universal life insurance policy values may be
invested in a separate account of ours called the Minnesota Mutual Variable
Universal Life Account ("separate account"), the sub-accounts of which invest
in corresponding Portfolios of the Funds. Thus, the owner's account value, to
the extent invested in the sub-account of the separate account, will vary with
the positive or negative investment experience of the corresponding Portfolios
of the Funds.
The account values of the policies, to the extent invested in sub-accounts
of the separate account, have no guaranteed minimum account value. Therefore,
the owner bears the risk that adverse investment performance may depreciate
the owner's investment in the policy. At the same time, the policy offers the
owner the opportunity to have the account value appreciate more rapidly than
it would under comparable fixed benefit policies by virtue of favorable
investment performance. In addition, under some policies, the death benefit
will also increase and decrease (but not below the guaranteed amount) with
investment experience.
Owners seeking the traditional insurance protections of a guaranteed account
value may allocate net premiums to the policy's guaranteed account option
which provides for guaranteed accumulation at a fixed rate of interest.
Additional information on this option may be found under the heading "The
Guaranteed Account" on page 13 of this prospectus.
WHAT VARIABLE INVESTMENT OPTIONS ARE AVAILABLE?
The separate account currently invests in twenty-three Portfolios of the
Funds. Although the Maturing Government Bond Portfolios with maturities of
1998, 2002, and 2006 are included in this prospectus, they are not available
for premium allocations or transfers effective May 1, 1997. These offer owners
the opportunity to invest in stocks, bonds, mortgage securities and money
market instruments. Owners who wish to actively manage the investment of their
account values may direct their funds to the Growth, Bond, Money Market,
Mortgage Securities, Index 500, Capital Appreciation, International Stock,
Small Company, Maturing Government Bond--2010, Value Stock, Small Company
Value, International Bond, Index 400 Mid-Cap, Micro-Cap Value, Macro-Cap Value
and Micro-Cap Growth Portfolios of the Series Fund, the High Income and
Equity-Income Portfolios of VIP, and the Contrafund Portfolio of VIP II. The
Asset Allocation Portfolio of the Series Fund offers owners the opportunity to
have the Series Fund's investment adviser make all decisions concerning the
percentages of assets that should be invested in different types of securities
at any given time. Although the Small Company Value, the International Bond,
the Index 400 Mid-Cap, the Micro-Cap Value, the Macro-Cap Value and the Micro-
Cap Growth Portfolios are included in this prospectus, they will not be
available until October 1, 1997.
The investment objectives and certain policies of the Portfolios of the
Series Fund are as follows:
The GROWTH PORTFOLIO seeks the long-term accumulation of capital. Current
income, while a factor in Portfolio selection, is a secondary objective. The
Growth Portfolio will invest primarily in common stocks and other equity
securities. Common stocks are more volatile than debt securities and involve
greater investment risk.
The BOND PORTFOLIO seeks as high a level of long-term total rate of return
as is consistent with prudent investment risk. A secondary objective is to
seek preservation of capital. The Bond Portfolio will invest primarily in
long-term, fixed-income, high-quality debt instruments. The value of debt
securities will tend to rise and fall inversely with the rise and fall of
interest rates.
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The MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with liquidity and the preservation of capital. The Money Market
Portfolio will invest in money market instruments and other debt securities
with maturities not exceeding one year. The return produced by these
securities will reflect fluctuations in short-term interest rates.
The ASSET ALLOCATION PORTFOLIO seeks as high a level of long-term total
rate of return as is consistent with prudent investment risk. The Asset
Allocation Portfolio will invest in common stocks and other equity
securities, bonds and money market instruments. The Asset Allocation
Portfolio involves the risks inherent in stocks and debt securities of
varying maturities and the risk that the Portfolio may invest too much or too
little of its assets in each type of security at any particular time.
The MORTGAGE SECURITIES PORTFOLIO seeks a high level of current income
consistent with prudent investment risk. In pursuit of this objective the
Mortgage Securities Portfolio will follow a policy of investment primarily in
mortgage-related securities. Prices of mortgage-related securities will tend
to rise and fall inversely with the rise and fall of the general level of
interest rates.
The INDEX 500 PORTFOLIO seeks investment results that correspond generally
to the price and yield performance of the common stocks included in the
Standard & Poor's Corporation 500 Composite Stock Price Index (the "Index").
It is designed to provide an economical and convenient means of maintaining a
broad position in the equity market as part of an overall investment
strategy. All common stocks, including those in the Index, involve greater
investment risk than debt securities. The fact that a stock has been included
in the Index affords no assurance against declines in the price or yield
performance of that stock.
The CAPITAL APPRECIATION PORTFOLIO seeks growth of capital. The Portfolio
will invest principally in equity securities (common stocks, securities
convertible into common stocks or rights or warrants to subscribe for or
purchase common stocks). Investments will be made based upon their potential
for capital appreciation. Therefore, current income will be incidental to the
objective of capital growth. Because of the market risks inherent in any
equity investment, the selection of securities on the basis of their
appreciation possibilities cannot ensure against possible loss in value.
The INTERNATIONAL STOCK PORTFOLIO seeks long-term capital growth. In
pursuit of this objective the International Stock Portfolio will follow a
policy of investing in stocks issued by companies, large and small, and debt
obligations of companies and governments outside the United States. Current
income will be incidental to the objective of capital growth. The Portfolio
is designed for persons seeking international diversification. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are
in addition to the usual risks inherent in domestic investments.
The SMALL COMPANY PORTFOLIO seeks long-term accumulation of capital. In
pursuit of this objective, the Small Company Portfolio will follow a policy
of investing primarily in common and preferred stocks issued by small
companies, defined in terms of either market capitalization or gross
revenues. Investments in small companies usually involve greater investment
risks than fixed income securities or corporate equity securities generally.
Small companies will typically have a market capitalization of less than $1.5
billion or annual gross revenues of less than $1.5 billion.
The MATURING GOVERNMENT BOND PORTFOLIOS seek to provide as high an
investment return as is consistent with prudent investment risk for a
specified period of time ending on a specified liquidation date. In pursuit
of this objective, each of the four Maturing Government Bond Portfolios seek
to return a reasonably assured targeted dollar amount, predicable at the time
of investment, on a specific target date in the future through investment in
a Portfolio composed primarily of zero coupon securities. These are
securities that pay no cash income and are sold at a discount from their par
value at maturity.
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The current target dates for the maturities of these Portfolios are 1998,
2002, 2006, and 2010, respectively. Beginning on May 1, 1997, no premium
allocations or transfers may be made to the Maturing Government Bond
Portfolios with target dates of maturity of 1998, 2002, or 2006. On maturity
the Portfolio will be converted to cash and reinvested at the direction of
the contractholder. In the absence of instructions, liquidation proceeds will
be allocated to the Money Market Portfolio.
The VALUE STOCK PORTFOLIO seeks the long-term accumulation of capital. The
production of income through the holding of dividend paying stocks will be a
secondary objective of the Portfolio. The Value Stock Portfolio will invest
primarily in equity securities of companies which, in the opinion of the
Portfolio's investment adviser, have market values which appear low relative
to their underlying value or future earnings and growth potential.
The SMALL COMPANY VALUE PORTFOLIO seeks the long-term accumulation of
capital. The Portfolio will follow a policy of investing primarily in the
equity securities of small companies, defined in terms of market
capitalization and which appear to have market values which are low relative
to their underlying value or future earnings and growth potential. Dividend
income will be incidental to the investment objective for this Portfolio.
The INTERNATIONAL BOND PORTFOLIO seeks to maximize current income
consistent with protection of principal. The Portfolio pursues its objective
by investing primarily in a managed portfolio of non-U.S. dollar debt
securities issued by foreign governments, companies and supranational
entities.
The INDEX 400 MID-CAP PORTFOLIO seeks to provide investment results
generally corresponding to the aggregate price and dividend performance of
publicly traded common stocks that comprise the Standard & Poor's 400 MidCap
Index. The Portfolio pursues its investment objective by investing primarily
in the 400 common stocks that comprise the Index, issued by medium-sized
domestic companies with market capitalizations that generally range from $200
million to $5 billion. It is designed to provide an economical and convenient
means of maintaining a diversified portfolio in this equity security area as
part of an over-all investment strategy. The inclusion of a stock in the
Index in no way implies an opinion by Standard & Poor's as to its
attractiveness as an investment, nor is it a sponsor or in any way affiliated
with the Portfolio.
The MICRO-CAP VALUE PORTFOLIO seeks capital appreciation. The Portfolio
will pursue its objective by investing in a diversified portfolio of
securities that the adviser believes to be undervalued. It will invest
primarily in common stocks and stock equivalents of micro-cap companies, that
is, companies with a market capitalization of less than $300 million.
The MACRO-CAP VALUE PORTFOLIO seeks to provide high total return. It
pursues this objective by investing in equity securities that the sub-adviser
believes, through the use of dividend discount models, to be undervalued
relative to their long-term earnings power, creating a diversified portfolio
of equity securities which typically will have a price/earnings ratio and a
price to book ratio that reflects a value orientation. The Portfolio seeks to
enhance its total return relative to that of the universe of large-sized U.S.
companies.
The MICRO-CAP GROWTH PORTFOLIO seeks long-term capital appreciation. It
pursues this objective by investing primarily in equity securities of smaller
companies which the sub-adviser believes are in an early stage or
transitional point in their development and have demonstrated or have the
potential for above average revenue growth. It will invest primarily in
common stocks and stock equivalents of micro-cap companies, that is,
companies with a market capitalization of less than $300 million.
The investment objectives and certain policies of the Portfolios available
under VIP are as follows:
The VIP HIGH INCOME PORTFOLIO seeks a high level of current income by
investing primarily in high yielding, lower-quality, fixed-income securities,
while also considering growth of capital. Normally at least 65 percent of the
Portfolio's total assets will be in these securities. The Portfolio may also
invest up to 20 percent in common stocks and other equity securities
consistent with the Portfolio's primary objective, or when acquired as part
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of a unit combining fixed-income and equity securities.
The VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing
primarily in income-producing equity securities. Normally at least 65 percent
of the Portfolio's total assets are in these securities. The remainder of the
Portfolio's assets will tend to be invested in debt obligations, many of
which are expected to be convertible into common stock. The Portfolio seeks
to achieve a yield that beats the Standard & Poor's Corporation 500 Composite
Stock Price Index (the "Index"). The adviser of the Portfolio may also
consider the potential for capital appreciation when choosing the Portfolio's
investments.
The investment objectives and certain policies of the Portfolio available
under VIP II are as follows:
The VIP II CONTRAFUND PORTFOLIO seeks capital appreciation by investing
mainly in equity securities of companies that the adviser believes to be
under-valued due to overly pessimistic appraisal by the public. In pursuit of
the Portfolio's goal the adviser looks for companies with the following
characteristics: unpopular currently, but improvement seems possible due to
developments such as a change in management, product line or balance sheet
improvements; recently popular, but temporarily out of favor companies due to
short-term or one-time factors; or companies which are undervalued compared
to other investments in the same industry. This strategy can lead to
investments in domestic or foreign companies, many of which may not be well
known.
There is no assurance that any Portfolio will meet its objectives.
Additional information
concerning the investment objectives, policies and risks of the Portfolios can
be found in the current prospectus for the Advantus Series Fund, Inc., which
is attached to this prospectus, and in the Prospectus for Fidelity's Variable
Insurance Products Fund and Variable Insurance Products Fund II, which is
attached to this Prospectus.
HOW CAN NET PREMIUMS BE ALLOCATED?
In the initial application for life insurance, the owner may indicate the
desired allocation of net premiums among the guaranteed account and the
available sub-accounts of the separate account. All future net premiums will
be allocated in the same proportion until the owner sends us a written request
to change the allocation. Similarly, the owner may transfer amounts from one
sub-account to another by sending us a written request or by calling us.
WHAT DEATH BENEFIT OPTIONS ARE OFFERED UNDER THE POLICY?
We offer two death benefit options under the policy. Under "Option A", a
level death benefit, the death benefit is the face amount of the policy. Under
"Option B", a variable death benefit, the death benefit is the face amount of
the policy plus the net cash value. So long as a policy remains in force and
there are no policy loans, the minimum death benefit under either option will
be at least equal to the current face amount. The death benefit proceeds will
be adjusted by the amount of any charges due or overpaid and any outstanding
policy loans and accrued policy loan interest charged determined as of the
date of death. The group sponsor will select one death benefit option of the
two we offer for all policies in a single group-sponsored program. Once
selected, a death benefit option under a policy shall remain unchanged.
There is a minimum initial face amount for the policy which is stated on the
specification pages of the policy. The owner may generally change the face
amount, but evidence of insurability of the insured may be required for
certain face amount increases.
TO WHOM DO WE PAY DEATH BENEFITS?
Death benefit proceeds are payable to the named beneficiary when the insured
under a policy dies. Benefits under the policy may be paid in a single sum or
under an elected settlement option.
DOES THE OWNER HAVE ACCESS TO THE ACCOUNT VALUES?
Yes. The net cash value, subject to the limitations in the policy, is
available to the owner during the insured's lifetime. The net cash value may
be used to provide retirement income, as collateral for a policy loan, to
continue some amount of insurance protection without payment of premiums or to
obtain cash by surrendering the policy in full or in part.
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The owner may borrow, as a policy loan, an amount up to 90 percent of the
owner's account value less any loan account value. Each alternative for
accessing the owner's account value may be subject to conditions described in
the policy or under the heading "Account Values" on page 18 of this prospectus
and certain transactions may have tax consequences, as described under the
heading "Federal Tax Status" on page 32.
WHAT CHARGES ARE ASSOCIATED WITH THE POLICY?
We assess certain charges against each premium payment and the account
values under each policy and against the asset value of the separate account.
These charges, which are largely designed to cover our expenses in providing
insurance protection and in distributing and administering the policies are
fully described under the heading "Charges" on page 24 of this prospectus and
the specific charges are shown on the specifications page of the policy. There
are also advisory fees and expenses which are assessed against the asset value
of each of the portfolios of the Funds. These fees and expenses are fully
described under the heading "Fund Charges" on page 26 of this prospectus.
PREMIUM EXPENSE CHARGES Premium expense charges vary based on the group-
sponsored insurance program under which the policy is issued. Against premiums
paid, we may deduct a percentage of premium for a SALES CHARGE, not to exceed
5 percent, and a percentage of premium for a PREMIUM TAX CHARGE, not to exceed
4 percent. We will also deduct a percentage of premium as a FEDERAL TAX CHARGE
to recover a portion of our estimated cost for the federal income tax
treatment of deferred acquisition costs. If a policy is considered an
individual policy under the Omnibus Budget Reconciliation Act, as amended,
("OBRA") the charge will not exceed 1.25 percent of premium, and if a policy
is considered to be a group policy under OBRA, the charge will not exceed .25
percent of premium. Additional information is provided under the heading
"Premium Expense Charges" on page 24 of this prospectus.
ACCOUNT VALUE CHARGES The charges deducted as part of the MONTHLY DEDUCTION
vary based on the group-sponsored insurance
program under which the policy is issued. Each month, we may deduct from a
policy's account value the sum of the following applicable items: (1) an
administration charge; (2) a cost of insurance charge; and (3) the cost of any
additional insurance benefits provided by rider. The administration charge
will never exceed $4 per month. Additional information is provided under the
heading "Monthly Deduction" on page 25 of this prospectus.
For policies under some group-sponsored insurance programs, a PARTIAL
SURRENDER TRANSACTION CHARGE will be assessed against the net cash value to
cover administrative processing costs. The charge will not exceed the lesser
of $25 or 2 percent of the amount withdrawn.
There is currently no TRANSFER CHARGE assessed on transfers of net cash
value between the guaranteed account and the separate account or among the
sub-accounts of the separate account. A charge, not to exceed $10 per
transfer, may be imposed in the future.
SEPARATE ACCOUNT CHARGES We assess a MORTALITY AND EXPENSE RISK CHARGE
against the separate account assets. This charge will vary based on the group-
sponsored insurance program under which the policy is issued. The annual rate
will not exceed .50 percent of the average daily assets of the separate
account. This annual rate is based on the actuarial risk associated with the
group that the cost of insurance and other charges will be insufficient to
cover the actual mortality experience and other costs in connection with the
policies. Additional information is provided under the heading "Separate
Account Charges" on page 26 of this prospectus.
We reserve the right to deduct a charge against the separate account assets,
or make other provisions, for any additional tax liability we may incur with
respect to the separate account or the policies, to the extent that those
liabilities exceed the amounts recovered through the deduction from premiums
for state premium taxes and federal taxes. No such charge or provision is made
at the present time.
FUND CHARGES
Shares of the Funds are purchased for the separate account at their net
asset value, which reflects ADVISORY FEES AND EXPENSES
8
<PAGE>
which are assessed against the net asset value of each of the Portfolios of
the Funds. Advantus Capital Management, Inc. ("Advantus Capital") acts as the
investment adviser to the Series Fund.
Advantus Capital is a wholly-owned subsidiary of MIMLIC Asset Management
Company ("MIMLIC Management") which, prior to May 1, 1997, served as
investment adviser to the Fund. MIMLIC Management is a wholly-owned subsidiary
of Minnesota Mutual. The same portfolio managers and other personnel who
previously provided investment advisory services to the Fund through MIMLIC
Management continue to provide the same services through Advantus Capital. For
more information about the Series Fund, see the prospectus of Advantus Series
Fund, Inc. which is attached to this prospectus.
The Fidelity VIP Funds' High Income Portfolio, Equity-Income Portfolio and
Contrafund Portfolio each has as its adviser Fidelity Management & Research
Company ("FMR"), a subsidiary of FMR Corp. For more information about the VIP
and the VIP II, see the prospectus of the Variable Insurance Products Funds
which is attached to this prospectus.
In addition to the investment advisory fees, other direct expenses are
charged against the assets of the Funds.
Additional information is provided under the heading "Fund Charges" on page
26 of this prospectus.
ARE THE BENEFITS UNDER A POLICY SUBJECT TO FEDERAL INCOME TAX?
We believe that the owner's policy should qualify as a life insurance
contract for federal income tax purposes. Assuming that a policy qualifies as
a life insurance contract for federal income tax purposes, the benefits under
policies described in this prospectus should receive the same tax treatment
under the Code as benefits under traditional fixed benefit life insurance
policies. Thus, death proceeds payable under variable life insurance policies
should be excludable from the beneficiary's gross income for federal income
tax purposes. The owner should not be in constructive receipt of the net cash
values of the policy until actual distribution. Additional information is
provided under the heading "Federal Tax Status" on page 32 of this prospectus.
It should be noted, however, that under recent legislation the tax treatment
described above relating to distributions is available only for policies not
described as "modified endowment contracts." Policies described as modified
endowment contracts are treated as life insurance with respect to the tax
treatment of death proceeds and the tax-free inside buildup of yearly account
value increases. However, any amounts received by the owner, such as
dividends, loans and amounts received from partial or total surrender of the
policy will be subject to the same tax treatment as amounts received under an
annuity during the accumulation period. Annuity tax treatment includes the 10
percent additional income tax imposed on the portion of any distribution that
is included in income, except where the distribution or loan is made on or
after the owner attains age 59 1/2, is attributable to the owner becoming
disabled, or is part of a series of substantially equal periodic payments for
the life of the owner or the joint lives of the owner and beneficiary.
A determination as to whether a policy is a modified endowment contract and
subject to this special tax treatment will require an examination of the
premium paid in relation to the death benefit of the policy. A policy would be
a modified endowment contract if the cumulative premiums during the first
seven contract years exceed the sum of the net level premiums which would be
paid under a seven-pay life policy. In addition, a policy which is subject to
a material change will be treated as a new policy on the date that such a
material change takes effect. A determination must be made at that time to
test whether such a policy meets the seven-pay standard by taking into account
the previously existing account value. Additional information on this subject
is provided under the heading "Federal Tax Status" on page 32 of this
prospectus.
CAN THE OWNER RETURN THE POLICY?
For a limited time after the application for the policy and its delivery,
the policy may be returned for a refund of all premium payments within the
terms of its "free look" or right of cancellation provision. See the heading
"Free Look" in this prospectus on page 23.
9
<PAGE>
CONDENSED FINANCIAL INFORMATION
The financial statements of The Minnesota Mutual Life Insurance Company and
Minnesota Mutual Variable Universal Life Account may be found in this
prospectus.
The table below gives per unit information about each sub-account for the
year ended December 31, 1996 and the period from March 8, 1995, commencement
of operations, to December 31, 1995. This information should be read in
conjunction with the financial statements and related notes of Minnesota
Mutual Variable Universal Life Account included in this prospectus.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Growth Sub-Account:
Unit value at beginning of period ............................ $ 1.103 $1.000
Unit value at end of period .................................. $ 1.286 $1.103
Number of units outstanding at end of period ................. 10,583 5,717
Bond Sub-Account:
Unit value at beginning of period ............................ $ 1.067 $1.000
Unit value at end of period .................................. $ 1.093 $1.067
Number of units outstanding at end of period ................. 2,462 1,708
Money Market Sub-Account:
Unit value at beginning of period ............................ $ 1.027 $1.000
Unit value at end of period .................................. $ 1.072 $1.027
Number of units outstanding at end of period ................. 2,822 1,163
Asset Allocation Sub-Account:
Unit value at beginning of period ............................ $ 1.107 $1.000
Unit value at end of period .................................. $ 1.240 $1.107
Number of units outstanding at end of period ................. 5,376 2,487
Mortgage Securities Sub-Account:
Unit value at beginning of period ............................ $ 1.053 $1.000
Unit value at end of period .................................. $ 1.103 $1.053
Number of units outstanding at end of period ................. 1,353 1,116
Index 500 Sub-Account:
Unit value at beginning of period ............................ $ 1.164 $1.000
Unit value at end of period .................................. $ 1.409 $1.164
Number of units outstanding at end of period ................. 902,194 457,639
Capital Appreciation Sub-Account:
Unit value at beginning of period ............................ $ 1.127 $1.000
Unit value at end of period .................................. $ 1.319 $1.127
Number of units outstanding at end of period ................. 8,725 5,583
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
International Stock Sub-Account:
Unit value at beginning of period.............................. $1.046 $1.000
Unit value at end of period ................................... $1.247 $1.046
Number of units outstanding at end of period .................. 4,601 3,688
Small Company Sub-Account:
Unit value at beginning of period.............................. $1.210 $1.000
Unit value at end of period ................................... $1.282 $1.210
Number of units outstanding at end of period .................. 41,743 34,825
Value Stock Sub-Account:
Unit value at beginning of period.............................. $1.161 $1.000
Unit value at end of period ................................... $1.513 $1.161
Number of units outstanding at end of period .................. 5,585 4,016
<CAPTION>
1996
------
<S> <C> <C>
Maturing Government Bond 1998 Sub-Account:
Unit value at beginning of period.............................. $1.000*
Unit value at end of period.................................... $1.044
Number of units outstanding at end of period................... 1,000
Maturing Government Bond 2002 Sub-Account:
Unit value at beginning of period.............................. $1.000*
Unit value at end of period.................................... $1.059
Number of units outstanding at end of period................... 1,000
Maturing Government Bond 2006 Sub-Account:
Unit value at beginning of period.............................. $1.000*
Unit value at end of period.................................... $1.079
Number of units outstanding at end of period................... 1,000
Maturing Government Bond 2010 Sub-Account:
Unit value at beginning of period.............................. $1.000*
Unit value at end of period.................................... $1.098
Number of units outstanding at end of period................... 1,000
Contrafund Sub-Account:
Unit value at beginning of period.............................. $1.000*
Unit value at end of period.................................... $1.114
Number of units outstanding at end of period................... 30,361
High Income Sub-Account:
Unit value at beginning of period.............................. $1.000*
Unit value at end of period.................................... $1.067
Number of units outstanding at end of period................... 29,956
Equity-Income Sub-Account:
Unit value at beginning of period.............................. $1.000*
Unit value at end of period.................................... $1.063
Number of units outstanding at end of period................... 30,306
</TABLE>
* The information for the sub-account is shown for the period from May 1, 1996
to December 31, 1996. May 1, 1996 was the effective date of the 1933 Act
Registration.
10
<PAGE>
GENERAL DESCRIPTIONS
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY
We are a mutual life insurance company organized in 1880 under the laws of
Minnesota. Our home office is at 400 Robert Street North, St. Paul, Minnesota
55101-2098, telephone: (612) 665-3500. We are licensed to do a life insurance
business in all states of the United States (except New York where we are an
authorized reinsurer), the District of Columbia, Canada, Puerto Rico, and Guam.
VARIABLE UNIVERSAL LIFE ACCOUNT
The separate account was established on August 8, 1994, by our Board of
Trustees in accordance with certain provisions of the Minnesota insurance law.
The separate account is registered as a "unit investment trust" with the
Securities and Exchange Commission under the Investment Company Act of 1940,
but such registration does not signify that the Securities and Exchange
Commission supervises the management, or the investment practices or policies,
of the separate account. The separate account meets the definition of a
"separate account" under the federal securities laws.
We are the legal owner of the assets in the separate account. The obligations
to policy owners and beneficiaries arising under the policies are general
corporate obligations of Minnesota Mutual and thus our general assets back the
policies. The Minnesota law under which the separate account was established
provides that the assets of the separate account shall not be chargeable with
liabilities arising out of any other business which we may conduct, but shall
be held and applied exclusively to the benefit of the holders of those variable
life insurance policies for which the separate account was established. The
investment performance of the separate account is entirely independent of both
the investment performance of our guaranteed account and of any other separate
account which we may have established or may later establish.
The separate account has twenty-three sub-accounts. Each sub-account invests
in shares of a corresponding Portfolio of the Funds. Although the Small Company
Value, the International Bond, the Index 400 Mid-Cap, the Micro-Cap Value, the
Macro-Cap Value and the Micro-Cap Growth
Portfolios are included in this prospectus, they will not be available until
October 1, 1997. Although the Maturing Government Bond Portfolios with
maturities of 1998, 2002, and 2006 are included in this prospectus, they are
not available for premium allocations or transfers effective May 1, 1997.
ADVANTUS SERIES FUND, INC.
The separate account currently invests in the Advantus Series Fund, Inc.,
Fidelity's Variable Insurance Products Fund, and Fidelity's Variable Insurance
Products Fund II. Prior to May 1, 1997, the name of the Series Fund was "MIMLIC
Series Fund, Inc." On January 14, 1997, the Series Fund's Board of Directors
approved an amendment of the Series Fund's Articles of Incorporation for the
purpose of changing the name of the Series Fund to "Advantus Series Fund, Inc."
effective May 1, 1997. The purpose of the name change is to provide the Series
Fund with a more distinctive name which may provide greater visibility and name
recognition, which reflects the name of its adviser, and which may provide
additional marketing opportunities for variable contracts investing in shares
of the Series Fund. The change in the Series Fund's name will not result in any
change in investment objectives, policies or practices for the Series Fund or
any of its Portfolios. Currently, the Series Fund is a mutual fund of the
series type which is registered with the Securities and Exchange Commission as
a diversified, open-end management investment company. Such registration does
not signify that the Commission supervises the management, or the investment
practices or policies, of the Series Fund. Currently, the Series Fund issues
its shares, continually and without sales charge, only to us and certain of our
separate accounts, including the Variable Universal Life Account. The Series
Fund may be used in the future as the underlying investment medium for separate
accounts of the Northstar Life Insurance Company, our wholly-owned life
insurance subsidiary domiciled in the state of New York. Shares of the Series
Fund are sold and redeemed at net asset value.
The Series Fund's investment adviser is Advantus Capital Management, Inc.
("Advantus Capital"). It acts as an investment adviser to the Series Fund
pursuant to an advisory agreement. Advantus Capital is a wholly-owned
subsidiary of MIMLIC
11
<PAGE>
Management which, prior to May 1, 1997, served as investment adviser to the
Fund. MIMLIC Management is a wholly-owned subsidiary of Minnesota Mutual. The
same portfolio managers and other personnel who previously provided investment
advisory services to the Fund through MIMLIC Management continue to provide
the same services through Advantus Capital.
While Advantus Capital acts as investment adviser for the Series Fund and
its Portfolios, Winslow Capital Management, Inc., a Minnesota corporation with
principal offices in Minneapolis, Minnesota, has been retained under an
investment sub-advisory agreement to provide investment advice to the Capital
Appreciation Portfolio. Similarly, Templeton Investment Counsel, Inc., a
Florida corporation with principal offices in Fort Lauderdale, Florida, has
been retained under an investment sub-advisory agreement to provide investment
advice to the International Stock Portfolio. Advantus Capital has entered into
a sub-advisory agreement with Julius Baer Investment Management Inc. ("Julius
Baer"), a Delaware corporation with primary offices in New York, New York,
under which Julius Baer provides advisory services to the International Bond
Portfolio. Advantus Capital has entered into a sub-advisory agreement with
Keystone Investment Management Company ("Keystone Management"), a Delaware
corporation with primary offices in Boston, Massachusetts, under which
Keystone provides advisory services to the Micro-Cap Value Portfolio. Advantus
Capital has entered into a sub-advisory agreement with J.P. Morgan Investment
Management Inc. ("Morgan Investment"), a Delaware corporation with primary
offices in New York, New York, under which Morgan Investment provides advisory
services to the Macro-Cap Value Portfolio. Advantus Capital has entered into a
sub-advisory agreement with Wall Street Associates ("Wall Street"), a
California corporation with primary offices in La Jolla, California, under
which Wall Street provides advisory services to the Micro-Cap Growth
Portfolio.
The Series Fund currently has twenty investment Portfolios, seventeen of
which are available to policy owners for the allocation of premiums or for
transfers. A series of the Series Fund's common stock is issued for each
Portfolio. The assets of each Portfolio are separate from the others and each
has different investment objectives and policies. Therefore, each Portfolio
operates as a separate investment fund and the investment performance of one
has no affect on the investment performance of any other Portfolio.
All dividends and capital gains distributions from each Portfolio are
automatically reinvested in shares of that Portfolio at net asset value.
For more information about the Series Fund and its Portfolios, see the
"Summary" sections in this prospectus and the prospectus of the Advantus
Series Fund, Inc., which is attached to this prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUNDS
The policy also provides for sub-accounts of the Variable Universal Life
Account which invests in shares of other registered investment companies. VIP
has two Portfolios which are available to the Variable Universal Life Account.
They are the High Income Portfolio and the Equity-Income Portfolio. VIP II has
one Portfolio which is available to the Variable Universal Life Account. It is
the Contrafund Portfolio. There is no guaranteed minimum value associated with
the separate account and its sub-accounts. Both VIP and VIP II issue their
shares, continually and without sales charge, only to us and to separate
accounts of other insurance companies, both affiliated and unaffiliated with
the investment adviser of VIP and VIP II.
The investment adviser of VIP and VIP II is Fidelity Management & Research
Company ("FMR"), 82 Devonshire Street, Boston, Massachusetts. FMR handles the
business affairs and, with the assistance of affiliates for certain
Portfolios, chooses the investments for VIP and VIP II. Fidelity Management &
Research (U.K.) Inc., in London, England, and Fidelity Management & Research
(Far East) Inc., in Tokyo, Japan, both serve as sub-advisers for the High
Income and Contrafund Portfolios. The ultimate parent company of all of these
entities is FMR Corp.
The assets of each Portfolio are separate from the others and each has
different investment objectives and policies. Therefore, each Portfolio
operates as a separate investment fund and the investment performance of one
has no affect on the investment performance of any other Portfolio. All
dividends and capital gains distributions from each Portfolio are
automatically reinvested in shares of that Portfolio at net asset value.
12
<PAGE>
For more information about VIP and VIP II and the Portfolios, see the
"Summary" section in this prospectus, and the prospectus for Fidelity's
Variable Insurance Products Fund and Variable Insurance Products Fund II.
ADDITIONS, DELETIONS OR SUBSTITUTIONS
We reserve the right to add, combine or remove any sub-accounts of the
Variable Universal Life Account when permitted by law. Each additional sub-
account will purchase shares in a new portfolio or mutual fund. New sub-
accounts may be established when, in our sole discretion, marketing, tax,
investment or other conditions warrant such action. We will use similar
considerations should there be a determination to eliminate one or more of the
sub-accounts of the separate account. Any new investment option will be made
available to existing owners on whatever basis we may determine.
We retain the right, subject to any applicable law, to make substitutions
with respect to the investments of the sub-accounts of the separate account.
If investment in a Portfolio of the Funds should no longer be possible or if
we determine it becomes inappropriate for policies of this class, we may
substitute another mutual fund or portfolio for a sub-account. Substitution
may be made with respect to existing account values and future premium
payments. A substitution may be made only with any necessary approval of the
Securities and Exchange Commission.
We reserve the right to transfer assets of the separate account as
determined by us to be associated with the policies to another separate
account. A transfer of this kind may require the approval of state regulatory
authorities and of the Securities and Exchange Commission.
We also reserve the right, when permitted by law, to restrict or eliminate
any voting right of owners or other persons who have voting rights as to the
separate account, and to combine the separate account with one or more other
separate accounts, and to de-register the separate account under the
Investment Company Act of 1940.
Shares of the Portfolios of the Series Fund are also sold to other of our
separate accounts, which are used to receive and invest premiums paid under
other variable annuity contracts and variable life policies issued by us.
Shares of VIP and VIP II are sold to other life insurance companies' separate
accounts for the purpose of funding other variable annuity and variable life
insurance contracts. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously.
THE GUARANTEED ACCOUNT
The owner may allocate net premiums and may transfer net cash values in the
policy, subject to policy limitations, to our guaranteed account.
Because of exemptive and exclusionary provisions, interests in Minnesota
Mutual's guaranteed account have not been registered under the Securities Act
of 1933, and the guaranteed account has not been registered as an investment
company under the Investment Company Act of 1940. Therefore, neither the
guaranteed account nor any interest therein is subject to the provisions of
these Acts, and Minnesota Mutual has been advised that the staff of the SEC
does not review disclosures relating to it. Disclosures regarding the
guaranteed account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
This prospectus describes a Variable Universal Life Insurance Policy and is
generally intended to serve as a disclosure document only for the aspects of
the policy relating to the sub-accounts of the separate account. For more
information about the guaranteed account, please see the policy and the
summary information provided immediately below.
GENERAL DESCRIPTION Minnesota Mutual's general account consists of all assets
owned by Minnesota Mutual other than those in the separate account and any
other separate accounts which we may establish. The guaranteed account is that
portion of the general assets of Minnesota Mutual, exclusive of policy loans,
which is attributable to the policy described herein and others of its class.
The description is for accounting purposes only and does not represent a
division of the general account assets for the specific benefit of policies of
this class. Allocations to the guaranteed account
13
<PAGE>
INFORMATION ABOUT THE POLICY
become part of the general assets of Minnesota Mutual and are used to support
insurance and annuity obligations and are subject to the claims of our
creditors. Subject to applicable law, we have sole discretion over the
investment of assets of the guaranteed account. Owners do not share in the
actual investment experience of the assets in the guaranteed account.
A portion or all the net premiums may be allocated or transferred to
accumulate at a fixed rate of interest in the guaranteed account, though we
reserve the right to restrict the allocation of premium into the guaranteed
account. If we do so, no more than 50 percent of the net premium may be
allocated to the guaranteed account. Such amounts are guaranteed by us as to
principal and a minimum rate of interest. Transfers from the guaranteed
account to the sub-accounts of the separate account may be subject to certain
limitations with respect to timing and amount. Currently, no such restrictions
are in effect.
GUARANTEED ACCOUNT VALUE Minnesota Mutual bears the full investment risk for
amounts allocated to the guaranteed account and guarantees that interest
credited to each owner's account value in the guaranteed account will not be
less than an annual rate of 4 percent without regard to the actual investment
experience of the guaranteed account. We may, at our sole discretion, credit a
higher rate of interest ("excess interest") although we are not obligated to
do so. Any interest credited on the policy's account value in the guaranteed
account in excess of the guaranteed minimum rate per year will be determined
at our sole discretion. The owner assumes the risk that interest credited may
not exceed the guaranteed minimum rate.
Even if excess interest is credited to the guaranteed account value, no
excess interest will be credited to the loan account value in the guaranteed
account. However, the loan account value will be credited interest at a rate
which is not less than 6 percent per annum.
APPLICATIONS AND POLICY ISSUE
We will generally issue a group contract to a group, as defined and
permitted by state law. For example, a group contract may be issued to an
employer, whose employees and/or their spouses may become insured thereunder
so long as the person is within a class of members eligible to be included in
the group contract. The class(es) of members eligible to be insured by a
policy under the group contract are set forth in that group contract's
specification pages. The group contract will be issued upon receipt of an
application for the group contract signed by a duly authorized officer of the
group wishing to enter into a group contract and the acceptance of that
application by a duly authorized officer of Minnesota Mutual at its home
office. Individuals wishing to purchase a policy insuring an eligible member
under a group-sponsored program must complete the appropriate application for
life insurance and submit it to our home office. If the policy is approved, we
will issue to the group sponsor either a certificate or an individual policy
to give to the owner. The issue of a group contract or individual policy and
their associated forms is always subject to the approval of those documents
for use by state insurance regulatory authorities.
Individuals who satisfy the eligibility requirements under a particular
group contract may be required to submit to a simplified underwriting
procedure which requires satisfactory responses to certain health questions in
the application and to provide, in some cases, medical information. Acceptance
of an application is subject to our underwriting rules, and we reserve the
right to reject an application for any reason.
A policy will not take effect until the owner signs the appropriate
application for insurance, the initial premium has been paid prior to the
insured's death, the insured is eligible, and we approve the completed
application. The date on which the last event occurs shall be the effective
date of coverage ("issue date").
POLICY PREMIUMS
A premium must be paid to put a policy in force, and may be remitted to us
by the group sponsor on behalf of the owner. The initial premium for a policy
must cover the premium expense charges and the first month's deductions. A
premium must also be paid when there is insufficient net cash value
14
<PAGE>
to pay the monthly deduction necessary to keep the policy in force.
When the policy is established, the policy's specification pages may show
premium payments scheduled and the amounts of those payments. However, under
the policy, the owner may elect to omit making those premium payments. Failure
to pay one or more premium payments will not cause the policy to lapse until
such time as the net cash value is insufficient to cover the next monthly
deduction. Moreover, as mentioned above, the owner may also skip premium
payments scheduled. Therefore, unlike traditional insurance policies, a policy
does not obligate the owner to pay premiums in accordance with a rigid and
inflexible premium schedule.
Failure of a group sponsor to remit the authorized premium payments may
cause the group contract to terminate. Nonetheless, provided that there is
sufficient net cash value to prevent the certificate from lapsing, the owner's
insurance can be converted to an individual policy of life insurance in the
event of such termination. (See "Conversion Right to an Individual Policy,"
page 23.) The owner's insurance can also continue if the insured's eligibility
under the group-sponsored insurance program terminates because the insured is
no longer a part of the group or otherwise fails to satisfy the eligibility
requirements set forth in the specifications page to the group contract or
individual policy. (See "Continuation of Group Coverage," page 24.)
PREMIUM LIMITATIONS After the payment of the initial premium, premiums may be
paid at any time in any amount while the insurance is in force under the
policy. Since the policy permits flexible premium payments, it may become a
modified endowment contract (See "Federal Tax Status" on page 32). When we
receive the application, our systems will test the owner's elected premium
schedule to determine, if it is paid as scheduled and if there is no change
made to the owner's policy, whether it will result in the owner's policy being
classified as a modified endowment contract for federal income tax purposes.
Our systems will continue to test the owner's policy with each premium payment
to determine whether the policy has attained this tax status. If we determine
that the policy has attained the status of a modified endowment contract, we
will mail the owner a notice. The owner will be given a limited amount of
time, subject to the restrictions under the Code, to request that the policy
maintain the modified endowment contract status. If the owner does not request
to have this tax status maintained, the excess premium amounts paid that
caused this tax status will be returned with interest at the end of the policy
year to avoid the policy being classified as a modified endowment contract.
The owner may request an immediate refund if it is desired earlier.
ALLOCATION OF NET PREMIUMS AND ACCOUNT VALUE Net premiums, which are premiums
after the deduction of the charges assessed against premiums, are allocated to
the guaranteed account or sub-accounts of the separate account which, in turn,
invest in shares of the Funds.
The owner makes the selection of the sub-accounts and/or the guaranteed
account on the application for the policy. The owner may change the allocation
instructions for future premiums by giving us a written request. The
allocation to the guaranteed account or to any sub-account of the separate
account must be at least 10 percent of the net premium. We reserve the right
to delay the allocation of net premiums to named sub-accounts for a period of
10 days after policy issue or policy change. This right, which has not been
implemented to date, will be exercised by us only when we believe economic
conditions make such an allocation necessary to reduce market risk during the
"free look" period. If we exercise this right, net premiums will be allocated
to the Money Market Sub-Account until the end of that period.
We reserve the right to restrict the allocation of net premiums to the
guaranteed account for policies under some group-sponsored programs. For these
policies, the limit on allocation of net premiums to the Guaranteed Account
will never be lower than 20 percent. Currently, no such restriction applies.
LAPSE Unlike traditional life insurance policies, the failure to make a
premium payment following the payment of the premium which puts the policy
into force will not itself cause a policy to lapse. Lapse will occur only when
the net cash value is insufficient to cover the monthly deduction, and the
subsequent grace period expires without sufficient payment being made.
15
<PAGE>
The grace period is 61 days. The grace period will start on the day we mail
the owner a notice that the policy will lapse if the premium amount specified
in the notice is not paid by the end of the grace period. We will mail this
notice on any policy's monthly anniversary when the net cash value is
insufficient to pay for the monthly deduction for the insured. The notice will
specify the amount of premium required to keep the policy in force and the
date the premium is due. If we do not receive the required amount within the
grace period, the policy will lapse and terminate. The grace period does not
apply to the first premium payment.
REINSTATEMENT A lapsed policy may be reinstated, any time within three years
from the date of lapse, provided the insured is living and subject to the
limitations described below. Reinstatement is made by payment of an amount
that, after the deduction of premium expense charges, is large enough to cover
all monthly deductions which have accrued on the policy up to the effective
date of reinstatement, plus the monthly deductions for the two months
following the effective date of reinstatement. If any policy loans and policy
loan interest charged is not repaid, this indebtedness will be reinstated
along with the insurance. No evidence of the insured's insurability will be
required during the first 31 days following lapse, but will be required from
the 32nd day to three years from the date of lapse.
The amount of account value on the date of reinstatement will be equal to
the amount of any policy loans and policy loan interest charged reinstated
increased by the net premiums paid at the time of reinstatement.
The effective date of reinstatement will be the date we approve the
application for reinstatement. There will be a full monthly deduction for the
policy month that includes that date.
DEATH BENEFIT
If the policy is in force at the time of the insured's death, upon receipt
of due proof of death, we will pay the death benefit proceeds of the policy
based on the death benefit option elected by the contractholder.
The group sponsor may choose one of two death benefit options for all
participants under the group-sponsored program. Once elected, the death
benefit option under a policy shall remain unchanged. There is a level death
benefit ("Option A") and a variable death benefit ("Option B"). The death
benefit under either option will never be less than the current face amount of
the policy as long as the policy remains in force and there are no policy
loans. The face amount elected must be at least the minimum stated on the
specification pages of the policy.
OPTION A Under Option A, the death benefit will be determined as follows:
(1) The face amount of insurance on the insured's date of death while the
policy is in force; plus
(2) the amount of the cost of insurance for the portion of the policy month
from the date of death to the end of the policy month; less
(3) any outstanding policy loans and accrued policy loan interest charged;
less
(4) any unpaid monthly deductions determined as of the date of the insured's
death.
OPTION B Under Option B, the death benefit will be determined as follows:
(1) The face amount of insurance on the insured's date of death while the
policy is in force; plus
(2) the amount of the owner's account value as of the date we receive due
proof of death satisfactory to us; plus
(3) the amount of the cost of insurance for the portion of the policy month
from the date of death to the end of the policy month; plus
(4) any monthly deductions taken under the certificate since the date of
death; less
(5) any outstanding policy loans and accrued policy loan interest charged;
less
(6) any unpaid monthly deductions determined as of the date of the insured's
death.
At issue, the group sponsor may choose between two tests that may be used to
determine if a policy qualifies as life insurance as defined by Section 7702
of the Code. Once a test is selected for a policy, it shall remain unchanged
for that policy. The two tests are the Guideline Premium Test and the Cash
Value Accumulation Test. The test selected will determine how the death
benefit is calculated in the event the account value or the premiums paid
exceed certain limits established under Section 7702.
Under either test, the death benefit at any point must be greater than the
account
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<PAGE>
value times a specified percentage. Under the Guideline Premium Test those
percentages are prescribed and vary only by the age of the insured. Under the
Cash Value Accumulation Test, the percentages vary by the age and underwriting
class of the insured. If at any point the death benefit is not greater than
the applicable percentage, the death benefit will be increased to the amount
necessary to satisfy the test.
The prescribed percentages for the Guideline Premium Test are indicated in
the following table:
<TABLE>
<CAPTION>
APPLI- APPLI- APPLI-
CABLE CABLE CABLE
ATTAINED PERCENT- ATTAINED PERCENT- ATTAINED PERCENT-
AGE AGE AGE AGE AGE AGE
- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
40 & below 250% 54 157% 68 117%
41 243 55 150 69 116
42 236 56 146 70 115
43 229 57 142 71 113
44 222 58 138 72 111
45 215 59 134 73 109
46 209 60 130 74 107
47 203 61 128 75-90 105
48 197 62 126 91 104
49 191 63 124 92 103
50 185 64 122 93 102
51 178 65 120 94 101
52 171 66 119 95 0
53 164 67 118
</TABLE>
The following table contains illustrative applicable percentages under the
Cash Value Accumulation Test for an insured classified as a non-smoker:
<TABLE>
<CAPTION>
ATTAINED APPLICABLE
AGE PERCENTAGE
-------- ----------
<S> <C>
35 441%
45 316
55 231
65 175
75 140
</TABLE>
The Guideline Premium Test also limits the amount of premium that may be
paid into the policy. If premiums paid exceed the limits for the current death
benefit amount, the death benefit will be automatically increased to an amount
for which the prescribed premium limits exceed the premiums paid.
CHANGE IN FACE AMOUNT
Subject to certain limitations set forth below, an owner may increase or
decrease the face amount of a policy. A written request must be sent directly
to us for a change in the face amount. A change in the face amount will affect
the net amount at risk which affects the cost of insurance charge. (See
"Charges," page 24.) In addition, a change in the face amount of a policy may
result in a material change in the policy that may cause it to become a
modified endowment contract. More information on this subject and possible
federal income tax consequences of this result is provided under the heading
"Federal Tax Status" on page 32 of this prospectus.
INCREASES If an increase in the current face amount is applied for, we reserve
the right to require evidence of insurability from the insured. The increase
will become effective on the monthly anniversary on or following approval of
the change or on any other date mutually agreed upon between the owner and us.
Although an increase need not necessarily be accompanied by an additional
premium (unless it is required to meet the next monthly deduction), the net
cash value in effect immediately after the increase must be sufficient to
cover the next monthly deduction.
With respect to premiums allocated to an increase, the owner will have the
same "free look," conversion, and refund rights with respect to an increase as
with the initial purchase of the owner's policy. (See "Free Look," page 23.)
DECREASES Any decrease in the face amount will become effective on the monthly
anniversary on or following our receipt of the written request. However, the
amount of insurance on any insured may not be reduced to less than the minimum
face amount indicated on the specification page which is attached to the
owner's policy. Generally, this amount will be at least $10,000. If, following
a decrease in face amount, the policy would not comply with the maximum
premium limitations required by federal tax law (see "Federal Tax Status,"
page 32), the decrease may be limited or the account value may be returned to
the owner (at the owner's election), to the extent necessary to meet these
requirements.
PAYMENT OF DEATH BENEFIT PROCEEDS
The amount payable as death proceeds upon the insured's death will be the
death benefit under the option elected by the group sponsor. The death benefit
proceeds will also include any amounts payable under any riders.
If a rider permitting the accelerated payment of death benefit proceeds has
been added to the policy, the death benefit may be paid in a single lump sum
prior to the death
17
<PAGE>
of the insured and may be less than otherwise would be paid upon death of the
insured. (See "Additional Benefits," page 28.)
Death benefit proceeds will ordinarily be paid within seven days after we
receive all information required for such payment, including due proof of the
insured's death. Payment may, however, be postponed in certain circumstances.
(See "Postponement of Payments," page 29.) Under Option A death benefit,
interest will be paid on the death benefit from the date of the insured's
death until the date of payment. Under Option B death benefit, interest will
be paid on the face amount of insurance from the date of the insured's death
until the date of payment. The account value will remain as invested in the
guaranteed account and/or separate account until the date of payment;
therefore, the account value may increase or decrease in value from the date
of the insured's death to the date of the payment of death benefit proceeds.
Interest will also be paid on any charges taken under the policy since the
date of death, from the date the charge was taken until the date of payment.
Interest will be at an annual rate determined by us but never less than 4
percent per year, compounded annually, or the minimum required by state law.
Death benefit proceeds will be paid to the surviving beneficiary specified
on the application or as subsequently changed. The owner may arrange for death
benefit proceeds to be paid in a single lump sum or under one of the optional
methods of settlement described below.
When no election for an optional method of settlement is in force at the
death of the insured, the beneficiary may select one or more of the optional
methods of settlement at any time before death benefit proceeds are paid. (See
"Settlement Options," page 30.)
An election or change of method of settlement must be in writing. A change
in beneficiary revokes any previous settlement election.
ACCOUNT VALUES
The policy provides the owner certain account value benefits. Subject to
certain limitations, the owner may obtain access to the net cash value portion
of the account value of the policy. The owner may borrow against the policy's
loan value and may surrender the policy in whole or in part. The owner may
also transfer the net cash value between the guaranteed account and the sub-
accounts of the separate account or among the sub-accounts of the separate
account.
We will send the owner a report each year as of the policy anniversary
advising the owner of the policy's account values, the face amount and the
death benefit as of the date of the report. It will also summarize policy
transactions during the year, including premiums paid and their allocation,
policy charges, policy loan activity and the net cash value. It will be as of
a date within two months of its mailing. We will also, upon the owner's
request, send the owner an additional statement of past transactions at any
time for a $15 fee, which will be deducted from the portion of account value
that the owner specifies.
Also, upon request made to us at our home office, we will provide
information on the account value of a policy to the owner. Such requests may
be in writing, by telephone or by facsimile transmission, using the numbers
and procedures for providing telephone or facsimile transfer instructions.
(See "Transfers," page 22.)
DETERMINATION OF THE GUARANTEED ACCOUNT VALUE The guaranteed account value is
the sum of all net premium payments allocated to the guaranteed account. This
amount will be increased by any interest, dividends, loan repayments, policy
loan interest credits and transfers into the guaranteed account. This amount
will be reduced by any policy loans, loan interest charged, partial
surrenders, transfers into the sub-accounts of the separate account and
charges assessed against the owner's guaranteed account value. Interest is
credited on the guaranteed account value of the policy at a rate of not less
than 4 percent per year, compounded annually. We guarantee this minimum rate
for the life of the policy without regard to the actual experience of the
guaranteed account. As conditions permit, we may credit additional amounts of
interest to the guaranteed account value. The owner's guaranteed account value
is guaranteed by us. It cannot be reduced by any investment experience of the
guaranteed account.
DETERMINATION OF THE SEPARATE ACCOUNT VALUE The policy's separate account
value is determined separately. The separate account value is not guaranteed.
The determination of the separate account value
18
<PAGE>
is made by multiplying the current number of sub-account units credited to a
policy by the current sub-account unit value. A unit is a measure of a
policy's interest in a sub-account. The number of units credited with respect
to each net premium payment is determined by dividing the portion of the net
premium payment allocated to each sub-account by the then current unit value
for that sub-account. The number of units so credited is determined as of the
end of the valuation period during which we receive the owner's premium at our
home office.
Once determined, the number of units credited to the owner's policy will not
be affected by changes in the unit value. However, the number of units will be
increased by the allocation of subsequent net premiums, lump sum net premiums,
dividends and transfers to that sub-account. The number of additional units
credited is determined by dividing the net premiums, policy dividends and
transfers to that sub-account by the then current unit value for that sub-
account. The number of units of each sub-account credited to the owner's
policy will be decreased by policy charges to the sub-account, policy loans
and loan interest charged, transfers from that sub-account and partial
surrenders from that sub-account. The reduction in the number of units
credited is determined by dividing the deductions to that sub-account, policy
loans and loan interest charged, transfers from that sub-account and partial
surrenders from that sub-account by the then current unit value for that sub-
account. The number of sub-account units will decrease to zero on a policy
surrender.
UNIT VALUE The unit value of a sub-account will be determined on each
valuation date. The amount of any increase or decrease will depend on the net
investment experience of that sub-account. The value of a unit for each sub-
account was originally set at $1.00 on the first valuation date. For any
subsequent valuation date, its value is equal to its value on the preceding
valuation date multiplied by the net investment factor for that sub-account
for the valuation period ending on the subsequent valuation date.
NET INVESTMENT FACTOR The net investment factor for a valuation period is the
gross investment rate for such valuation period, less a deduction for the
mortality and expense risk charge under this policy which is assessed at the
annual rate stated on the specification pages of the policy against the
average daily net assets of each sub-account of the separate account. The
gross investment rate is equal to:
(1) the net asset value per share of a share held by the Funds in the sub-
account of the separate account determined at the end of the current
valuation period; plus
(2) the per share amount of any dividend or capital gains distribution by the
Funds if the "ex-dividend" date occurs during the current valuation
period; with the sum divided by
(3) the net asset value per share of the share of the Funds held in the sub-
account determined at the end of the preceding valuation period.
DAILY VALUES We determine the value of the units in each sub-account on each
day on which the Portfolios of the Funds are valued. The net asset value of
the Funds' shares is computed once daily, and, in the case of the Money Market
Portfolio, after the declaration of the daily dividend, as of the primary
closing time for business on the New York Stock Exchange (as of the date
hereof the primary close of trading is 3:00 p.m. Central Time, but this time
may be changed) on each day, Monday through Friday, except (i) days on which
changes in the value of a Fund's Portfolio securities will not materially
affect the current net asset value of such Fund's shares, (ii) days during
which no shares of a Fund are tendered for redemption and no order to purchase
or sell such Fund's shares is received by such Fund and (iii) customary
national business holidays on which the New York Stock Exchange is closed for
trading (as of the date hereof, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day).
Although the account value for each policy is determinable on a daily basis,
we update our records to reflect that value on each monthly anniversary. We
also make policy value determinations as of the date of the insured's death
and on a policy adjustment, surrender, and lapse. When the policy value is
determined, we will assess and update to the date of the transaction those
charges made against the owner's account value, namely the administration
charge and the cost of insurance charge. Increases or decreases in policy
values will not be uniform for all policies but will be
19
<PAGE>
affected by policy transaction activity, cost of insurance charges and the
existence of policy loans.
To illustrate the operation of the policy under various assumptions, we have
prepared several tables, along with additional explanatory text, that may be
of assistance. For these tables, please see Appendix I, "Illustrations of
Account Values and Death Benefits," page 76 of this prospectus.
POLICY LOANS
The owner may borrow from us using only the policy as the security for the
loan. The owner may borrow up to an amount equal to (a) less (b), where (a) is
90 percent of the owner's account value and (b) is any outstanding policy
loans plus accrued policy loan interest charged. A loan taken from, or secured
by a policy, may have federal income tax consequences. (See "Federal Tax
Status," page 32.) The maximum loan amount is determined as of the date we
receive the owner's request for a loan.
Any policy loan paid to the owner in cash must be in an amount of at least
$100. We will charge interest on the loan in arrears. At the owner's request,
we will send the owner a loan request form for his or her signature. The owner
may also obtain a policy loan by calling us during our normal business hours
of 8:00 a.m. to 4:45 p.m., Central Time. Should the owner make a telephone
call to us, he or she will be asked for personal identification and policy
number. More information on the procedures to make telephone calls to us is
provided under the heading "Transfers" on page 22 of this prospectus.
When the owner takes a loan, we will reduce the net cash value by the amount
borrowed. This determination will be made as of the end of the valuation
period during which the loan request is received at our home office. Unless
the owner directs us otherwise, the policy loan will be taken from the
guaranteed account value and separate account value in the same proportion
that those values bear to each other and, as to the separate account value,
from each sub-account in the proportion that the sub-account value of each
such sub-account bears to the owner's separate account value. The number of
units to be canceled will be based upon the value of the units as of the end
of the valuation period during which we receive the owner's loan request at
our home office. The amount borrowed continues to be part of the account
value, as the amount borrowed becomes part of the loan account value where it
will accrue loan interest credits and will be held in our general account. A
policy loan has no immediate effect on the owner's account value since at the
time of the loan the account value is the sum of the guaranteed account value,
separate account value and the loan account value. When a loan is to come from
the guaranteed account value, we have the right to postpone a loan payment for
up to six months.
If a policy enters a grace period when there is an outstanding loan balance,
the owner will have to make a loan repayment to keep the policy in force. We
will give the owner notice of our intent to terminate the policy and the loan
repayment required to keep it in force. The time for repayment will be within
31 days after our mailing of the notice.
POLICY LOAN INTEREST The interest rate on a policy loan will be 8 percent per
year. Interest charged will be based on a daily rate, which if compounded for
the number of calendar days in the year will equal 8 percent annually, and
compounded for the number of days since loan interest charges were last
updated.
The outstanding loan balance will increase as the interest charged on the
policy loan accrues. The net cash value will decrease as the outstanding loan
balance increases. Interest is due at the end of the policy month. If the
owner does not pay in cash the interest accrued at the end of the policy
month, this unpaid interest will be added to the amount of the policy loan.
The new loan will be subject to the same rate of interest as the loan in
effect.
Interest is also credited to the amount of the policy loan in the loan
account value. Interest credits on a policy loan shall be at a rate which is
not less than 6 percent per year. Interest credited will be based on a daily
rate, which if compounded for the number of calendar days in the year will be
at least 6 percent annually, and compounded for the number of days since loan
interest charges were last updated.
POLICY LOAN REPAYMENTS If the owner's policy is in force, the owner's loan can
be repaid in part or in full at any time before the insured's death. The
owner's loan may also be repaid within 60 days after the date of the insured's
death, if we have not paid any of
20
<PAGE>
the benefits under the policy. Any loan repayment must be at least $100 unless
the balance due is less than $100.
Loan repayments may only be allocated to the guaranteed account. The owner
may reallocate amounts in the guaranteed account among the sub-accounts of the
separate accounts, subject to the limitations in this prospectus and the
policy on such transfers. Loan repayments reduce the owner's outstanding loan
balance by the amount of the loan repayment. Loan repayments will be applied
first to interest accrued since the end of the prior policy month. Any
remaining portion of the repayment will then reduce the loan. The net cash
value will increase by the amount of the loan repayment.
A policy loan, whether or not it is repaid, will have a permanent effect on
the account value because the investment results of the sub-accounts will
apply only to the amount remaining in the sub-accounts. The effect could be
either positive or negative. If net investment results of the sub-accounts are
greater than the rate credited on the loan, the account value will not
increase as rapidly as it would have if no loan had been made. If investment
results of the sub-accounts are less than the rate credited on the loan, the
account value will be greater than if no loan had been made. For an example of
the effect of a policy loan on a policy and its death benefit, please see
Appendix II, "Policy Loan Example" on page 85 of this prospectus.
SURRENDER AND PARTIAL SURRENDER
The owner may also request a surrender or a partial surrender of the policy
at any time while the insured is living. To make a surrender, the owner sends
us a written request for its surrender. The owner is then paid the net cash
value of the policy, computed as of the end of the valuation period during
which we receive the surrender request at our home office. That payment can be
in cash or, at the option of the owner, can be applied on a settlement option.
A surrender or partial surrender may have federal income tax consequences.
(See "Federal Tax Status," page 32.)
A partial surrender of the net cash value of the policy is also permitted in
any amount equal to at least the minimum established for policies under the
group-sponsored insurance program. The minimum will never exceed $500. The
maximum partial surrender is equal to an amount that would cause the net cash
value after the partial surrender to be 10 percent of the account value
immediately prior to the partial surrender. We reserve the right to limit the
number of partial surrenders to one per policy month. A partial surrender will
cause a decrease in the face amount equal to the amount surrendered if the
policy has a level death benefit (Option A). A partial surrender has no effect
on the face amount of an Option B death benefit. However, since the account
value is reduced by the amount of the partial surrender, the death benefit is
reduced by the same amount, as the account value represents a portion of the
death benefit proceeds.
On a partial surrender, the owner may designate the sub-accounts of the
separate account from which a partial surrender is to be taken or whether it
is to be taken in whole or in part from the guaranteed account. Otherwise,
partial surrenders will be deducted from the guaranteed account value and
separate account value in the same proportion that those values bear to each
other and, as to the separate account value, from each sub-account in the
proportion that the sub-account value of each such sub-account bears to the
separate account value. We will tell the owner, on request, what amounts are
available for a partial surrender under the policy.
A transaction charge will be assessed against the net cash value in
connection with a partial surrender for policies under some group-sponsored
insurance programs. The amount of the charge will never exceed the lesser of
$25 or 2 percent of the amount withdrawn. The charge will be allocated to the
guaranteed account value and the separate account value in the same proportion
as those values bear to each other and, as to the separate account value, from
each sub-account in the same proportion that the sub-account value of each
such sub-account bears to the separate account value.
Payment of a surrender or partial surrender will be made as soon as
possible, but not later than seven days after our receipt of the owner's
written request for surrender. However, if any portion of the net cash value
to be surrendered is attributable to a premium payment made by non-guaranteed
funds such as a personal check, we will delay mailing that portion of the
surrender proceeds until we have reasonable assurance that the
21
<PAGE>
payment has cleared and that good payment has been collected. The amount the
owner receives on surrender may be more or less than the total premiums paid
under the policy.
TRANSFERS
The policy allows for transfers, a reallocation of the net cash value
between the guaranteed account and the separate account or among the available
sub-accounts of the separate account.
There are restrictions to such transfers. The amount to be transferred to or
from a sub-account or the guaranteed account must be at least $250. If the
balance is less than $250, the entire sub-account value or the guaranteed
account value must be transferred. If a transfer would reduce the sub-account
value from which the transfer is to be made to less than $250, we reserve the
right to include that remaining sub-account value in the amount transferred.
We also reserve the right to limit the number of transfers to one per policy
month.
For transfers from the sub-accounts of the separate account, we will credit
and cancel units on the basis of sub-account unit values as of the end of the
valuation period during which the owner's written or telephone request is
received at our home office. Transfers from the guaranteed account will be
dollar amounts deducted at the end of the day on which the transfer request is
received at our home office. A transfer is subject to a transaction charge.
Currently, no such charge is imposed on a transfer, but a charge, up to a
maximum of $10, may be imposed in the future.
The owner's instructions for transfer may be made in writing or the owner,
or a person authorized by the owner, may make such changes by telephone. To do
so, the owner may call us at (800) 843-8358 during our normal business hours
of 8:00 a.m. to 4:45 p.m., Central Time. Owners may also submit their requests
for transfer, surrender or other transactions to us by facsimile (FAX)
transmission. Our FAX number is (612) 665-4827.
Transfers made pursuant to a telephone call are subject to the same
conditions and procedures as would apply to written transfer requests. During
periods of marked economic or market changes, owners may experience difficulty
in implementing a telephone transfer due to a heavy volume of telephone calls.
In such a circumstance, owners should consider submitting a written transfer
request while continuing to attempt a telephone redemption. We reserve the
right to restrict the frequency of--or otherwise modify, condition, terminate
or impose charges upon--telephone transfer privileges. For more information on
telephone transfers, contact us.
We will make this telephone transfer service available to all policy owners.
We will employ reasonable procedures to satisfy ourselves that instructions
received from policy owners are genuine and, to the extent that we do not, we
may be liable for any losses due to unauthorized or fraudulent instructions.
We require policy owners to identify themselves in those telephone
conversations through policy numbers and such other information as we may deem
to be reasonable. We record telephone transfer instruction conversations and
we provide the policy owners with a written confirmation of the telephone
transfers.
The maximum amount of net cash value to be transferred out of the guaranteed
account to the sub-accounts of the separate account may be limited for
policies under some group-sponsored insurance programs. For these policies,
the limit on the amount to be transferred will never be lower than 20 percent
(or $250 if greater) of the guaranteed account balance. Transfers to or from
the guaranteed account may be limited to one such transfer per policy year. We
may further restrict transfers from the guaranteed account by requiring that
the request is received by us postmarked in the 30-day period before or after
the last day of the policy anniversary. Requests for such transfers which meet
these conditions would be effective after we approve them at our home office.
Currently, no such restrictions are imposed.
Although we currently intend to continue to permit transfers in the
foreseeable future, the policy provides that we may modify the transfer
privilege, by changing the minimum amount transferable, by altering the
frequency of transfers, by imposing a transfer charge, by prohibiting
transfers, or in such other manner as we may determine at our discretion.
DOLLAR COST AVERAGING
We currently offer a dollar cost averaging option enabling the owner to
preauthorize automatic monthly or quarterly transfers from the Money Market
Sub-Account to any of the other sub-accounts. The transfers will occur
22
<PAGE>
on monthly anniversaries. Dollar cost averaging is a systematic method of
investing in which securities are purchased at regular intervals in fixed
dollar amounts so that the cost of the securities is averaged over time and
possibly over various market values. Since the value of the units will vary
over time, the amounts allocated to a sub-account will result in the crediting
of a greater number of units when the unit value is low and a lesser number of
units when the unit value is high. Dollar cost averaging does not guarantee
profits, nor does it assure that a policy will not have losses.
To elect dollar cost averaging the owner must have at least $3,000 in the
Money Market Sub-Account. The automatic transfer amount from the Money Market
Sub-Account must be at least $250. The minimum amount that may be transferred
to any one of the other sub-accounts is $50. Currently, there is no charge for
this service. We reserve the right to discontinue, modify or suspend the
dollar cost averaging program at any time.
A dollar cost averaging request form is available to the owner upon request.
On the form the owner will designate the specific dollar amount to be
transferred, the sub-accounts to which the transfer is to be made, the desired
frequency of the transfer and the total number of transfers to be made. If at
any time while the dollar cost averaging option is in effect, the amount in
the Money Market Sub-Account is insufficient to cover the amount designated to
be transferred the current election in effect will terminate.
An owner may instruct us at any time to terminate the dollar cost averaging
election by a written or telephone request to our home office. The amount from
which transfers were being made will remain in the Money Market Sub-Account
unless a transfer request is made.
FREE LOOK
It is important to us that the owner is satisfied with the policy after it
is issued. If the owner is not satisfied with it, the owner may return the
policy to us within 10 days after the owner receives it. If the policy is
returned, the owner will receive within seven days of the date we receive the
notice of cancellation a full refund of the premiums paid.
A request for an increase in face amount also may be canceled. The request
for cancellation must be made within the 10 days, or that period required by
applicable state law, after the owner receives the new policy specification
pages for the increase.
Upon cancellation of an increase, the owner may request that we refund the
amount of the additional charges deducted in connection with the increase.
This will equal the amount by which the monthly deductions since the increase
went into effect exceeded the monthly deductions which would have been made
without the increase. If no request is made, we will increase the policy's
account value by the amount of these additional charges. This amount will be
allocated among the sub-accounts of the separate account and guaranteed
account in the same manner as it was deducted.
CONVERSION RIGHT TO AN INDIVIDUAL POLICY
If life insurance provided under the group contract is not continued upon
termination of the insured's eligibility under the group contract, or if the
group contract terminates or is amended so as to terminate the insurance, the
owner may convert the insurance under the group contract to an individual
policy of life insurance with us subject to the following:
(1) The owner's written application to convert to an individual policy and the
first premium for the individual policy must be received in our home
office within 31 days of the date the owner's insurance terminates under
the group contract.
(2) The owner may convert all or a part of the group insurance in effect on
the date that the owner's coverage terminated to any individual life
insurance policy we offer, except a policy of term insurance. We will
issue the individual policy on the policy forms we then use for the plan
of insurance the owner has requested. The premium charge for this
insurance will be based upon the insured's age as of his or her nearest
birthday.
(3) If the insured should die within 31 days of the date that the group
contract terminates, the full amount of insurance that could have been
converted under this policy will be paid.
In the case of the termination of the group contract, we may require that an
insured under a certificate issued under the group contract be so insured for
at least five years prior to the termination date in order to qualify for the
above conversion privilege.
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CONTINUATION OF GROUP COVERAGE
If the insured's eligibility under a group contract ends, the owner's
current group
coverage may continue unless the certificate is no longer in force or the
limitations below are true as of the date eligibility ends:
(1) The group contract has terminated; or
(2) The owner has less than $10 in his or her net cash value after deduction
of charges for the month in which eligibility ends.
The insurance amount will not change unless the owner requests a change. We
reserve the right to alter all charges not to exceed the maximums. These
charges may be higher than those applicable to policies under the group
contract that have not been continued under this provision.
Termination of the group contract by the contractholder or us will not
terminate the insurance then in force under the terms of the continuation
provision. The group contract will be deemed to remain in force solely for the
purpose of continuing such insurance, but without further obligation of the
contractholder.
CHARGES
Charges will be deducted in connection with the policies to compensate us
for providing the insurance benefits set forth in the policies, administering
the policies, incurring expenses in distributing the policies and assuming
certain risks in connection with the policies. Charges will vary based on the
group-sponsored insurance program under which the policy is issued. We will
determine charges pursuant to our established actuarial procedures, and in
doing so we will not discriminate unreasonably or unfairly against any person
or class of persons. These charges for policies under a group-sponsored
insurance program are shown on the specifications page of the policy. There
are also advisory fees and expenses which are assessed against the asset value
of each of the portfolios of the Funds.
PREMIUM EXPENSE CHARGES
SALES CHARGE We may deduct a sales charge from each premium paid under the
policy. Sales charges vary based on the group-sponsored insurance program
under which the policy is issued. The charge will never exceed 5 percent of
each premium paid. The sales charge will be determined based on a variety of
factors, including enrollment procedures, the size and type of the group, the
total amount of premium payments to be received, any prior existing
relationship with the group sponsor, the level of commissions paid to agents
and brokers and their affiliated broker-dealers, and other circumstances of
which we are not presently aware. We may waive the sales charge for premiums
received as a result of Internal Revenue Code section 1035 exchanges from
another policy. In addition, we may waive the sales charge for premiums paid
by designated payors under a group-sponsored insurance program (for example,
insureds versus the group sponsor).
The amount of the sales charge in any policy year cannot be specifically
related to sales expenses for that year. To the extent that sales expenses are
not recovered from the sales charge, we will recover them from our other
assets or surplus, which may include profits from the mortality and expense
risk charge or the cost of insurance charge.
PREMIUM TAX CHARGE We will deduct a percentage of premium charge, not to
exceed 4 percent of each premium received for premium taxes. Premium tax
charges vary based on the group-sponsored insurance program under which the
policy is issued. This charge is to compensate us for our payment of premium
taxes that are imposed by various states and local jurisdictions. Currently,
the range of premium taxes imposed by the states varies from 0.75 percent to
3.5 percent. A state in which a policy is issued may impose a tax that is
higher or lower than the charge deducted under the policy. Accordingly, the
charge for the policy may be higher or lower than the premium tax actually
imposed on the policy. We may waive the premium tax charge for premiums
received as a result of Internal Revenue Code section 1035 exchanges from
another policy.
FEDERAL TAX CHARGE Due to a 1990 federal tax law change under the Omnibus
Budget Reconciliation Act of 1990 ("OBRA"), as amended, insurance companies
are generally required to capitalize and amortize certain policy acquisition
expenses rather than currently deducting such expenses. This has resulted in
an additional corporate income tax liability for insurance companies. For
policies deemed to be group policies for purposes of
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OBRA, we make a charge of up to 0.25 percent of each premium payment to
compensate us for the additional corporate taxes we pay for these policies.
OBRA imposes a higher policy acquisition expense to be capitalized on policies
deemed to be individual contracts under OBRA which results in significantly
higher corporate income tax liability for those deemed individual contracts.
Thus, under policies deemed to be individual contracts under OBRA, we make a
charge of up to 1.25 percent of each premium payment. This additional charge
is treated as a sales load for purposes of determining compliance with the
limitations on sales loads imposed by the Investment Company Act of 1940 and
applicable regulations thereunder. We may waive the federal tax charge for
premiums received as a result of Internal Revenue Code section 1035 exchanges
from another policy.
ACCOUNT VALUE CHARGES
MONTHLY DEDUCTION The charges deducted as part of the monthly deduction vary
based on the group-sponsored insurance program under which the policy is
issued. As of the policy date and each subsequent monthly anniversary, we will
deduct an amount from the net cash value of the owner's policy to cover
certain charges and expenses incurred in connection with the policy. The
monthly deduction will be the sum of the applicable items: (1) an
administration charge; (2) a cost of insurance charge; and (3) the cost of any
additional insurance benefits provided by rider. The monthly deduction will be
assessed against the guaranteed account value and the separate account value
in the same proportion that those values bear to each other and, as to the
separate account, from each sub-account in the proportion that the sub-account
value in such sub-account bears to the separate account value of the policy.
We may deduct an ADMINISTRATION CHARGE from the net cash value of the policy
each month. The administration charge will never exceed $4 per month. This
charge is to compensate us for expenses incurred in the administration of the
policies. These expenses include the costs of processing enrollments,
determining insurability, and establishing and maintaining policy records.
Differences in the administration charge applicable to specific group-
sponsored insurance programs will be determined based on expected differences
in the administrative costs for the policies or in the amount of revenues that
we expect to derive from the charge. Such differences may result, for example,
from the number of eligible members in the group, the type and scope of
administrative support provided by the group sponsor, the expected average
policy size, and the features to be included in policies under the group-
sponsored insurance program. This charge is not designed to produce a profit.
The monthly COST OF INSURANCE will be calculated by multiplying the
applicable cost of insurance rate based on the insured's attained age and rate
class by the net amount at risk for each policy month. The net amount at risk
for a policy month is the difference between the death benefit and the account
value. The net amount at risk may be affected by changes in the face amount of
the policy or by changes in the account value.
The cost of insurance rates are generally determined at the beginning of
each policy year, although changes may be made at other times if warranted due
to a change in the underlying characteristics of the group, changes in
benefits included in policies under the group-sponsored insurance program,
experience of the group, changes in the expense structure, or a combination of
these factors.
Cost of insurance rates for each group-sponsored insurance program are
determined based on a variety of factors related to group mortality including
gender mix, average amount of insurance, age distribution, occupations,
industry, geographic location, participation, level of medical underwriting
required, degree of stability in the charges sought by the group sponsor,
prior mortality experience of the group, number of actual or anticipated
owners electing the continuation option, and other factors which may affect
expected mortality experience. In addition, cost of insurance rates may be
intended to cover expenses to the extent they are not covered by the other
policy charges. Changes in the current cost of insurance rates may be made
based on any factor which affects the actual or expected mortality or expenses
of the group.
Any changes in the current cost of insurance rates will apply to all persons
of the same attained age and rate class under the group-sponsored insurance
program. We and the group sponsor will agree to the number of classes and
characteristics of each rate class.
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The classes may vary by tobacco users and non-tobacco users, active and
retired status, owners of coverage continued under the continuation provision
and other owners, and/or any other nondiscriminatory classes agreed to by the
group sponsor.
The current cost of insurance rates will not be greater than the guaranteed
cost of insurance rates set forth in the policy. These guaranteed rates are
125 percent of the maximum rates that could be charged based on 1980
Commissioners Standard Ordinary Mortality Tables ("1980 CSO Table"). The
guaranteed rates are higher than 100 percent of the 1980 CSO Table because we
use a simplified underwriting approach and may issue policies that do not
require medical evidence of insurability. The current cost of insurance rates
are generally lower than 100 percent of the 1980 CSO Table. (For purposes of
premiums under Section 7702 of the Internal Revenue Code of 1986, as amended,
we will use 100 percent of the 1980 CSO Table.)
PARTIAL SURRENDER TRANSACTION CHARGE For policies under some group-sponsored
insurance programs, a transaction charge will be assessed against the net cash
value for each partial surrender to cover the administrative costs incurred in
processing the partial surrender. The charge will not exceed the lesser of $25
or 2 percent of the amount withdrawn. This charge will be assessed in the same
manner as the monthly deduction. This charge is not designed to produce a
profit.
TRANSFER CHARGE There is currently no charge assessed on transfers of net
cash value between the guaranteed account and the separate account or among
the sub-accounts of the separate account. A charge, not to exceed $10 per
transfer, may be imposed in the future.
SEPARATE ACCOUNT CHARGES
We assess a mortality and expense risk charge directly against the separate
account assets. This charge will vary based on the group-sponsored insurance
program under which the policy is issued. The annual rate will not exceed .50
percent of the average daily assets of the separate account. The mortality and
expense risk charge compensates us for assuming the risk that the cost of
insurance and other charges will be insufficient to cover the actual mortality
experience and other costs in connection with the policies.
Differences in the mortality and expense risk charge rates applicable to
different group-sponsored insurance programs will be determined by us based on
differences in the levels of mortality and expense risk under those contracts.
Differences in mortality and expense risk arise principally from the fact
that: (1) the factors used to determine cost of insurance and administration
charges are more uncertain for some group-sponsored insurance programs than
for others; and (2) our ability to recover any unexpected mortality and
administration costs will also vary from group-sponsored insurance program to
group-sponsored insurance program, depending on the charges established for
policies issued under the group-sponsored insurance program, and on other
financial factors.
We reserve the right to deduct a charge against the separate account assets,
or make other provisions for, any additional tax liability we may incur with
respect to the separate account or the polices, to the extent that those
liabilities exceed the amounts recovered through the deduction from premiums
for state premium taxes and federal taxes. No such charge or provision is made
at the present time.
FUND CHARGES
Advantus Capital Management, Inc. ("Advantus Capital"), acts as the
investment adviser to the Series Fund. Advantus Capital is a wholly-owned
subsidiary of MIMLIC Management which, prior to May 1, 1997, served as
investment adviser to the Fund. The same portfolio managers and other
personnel who previously provided investment advisory services to the Fund
through MIMLIC Management continue to provide the same services through
Advantus Capital. For more information about the Series Fund, see the
prospectus of Advantus Series Fund, Inc. which is attached to this prospectus.
The Fidelity High Income Portfolio, Equity-Income Portfolio and Contrafund
Portfolio each has as its adviser Fidelity Management & Research Company
("FMR"), a subsidiary of FMR Corp. For more information about the VIP and the
VIP II, see the prospectus of the Variable Insurance Products Funds which is
attached to this prospectus.
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The chart below shows the advisory fees and portfolio expense fees for the
Funds as of December 31, 1996.
The advisory fees for the Series Fund are a contractual agreement between
the Series Fund and Advantus Capital Management, Inc. The advisory fees for
VIP and VIP II are a contractual agreement between VIP and VIP II and Fidelity
Management & Research Company ("FMR").
The Series Fund portfolio expense fees reflect the actual expenses incurred
by each portfolio unless the actual expenses exceed the cap. The portfolio
expense fee is capped at 0.15 percent for all Series Fund portfolios except
the International Stock and International Bond Portfolios, which is capped at
1.00 percent. Any Series Fund portfolio expenses incurred in excess of the cap
are voluntarily absorbed by Minnesota Mutual. For a description of the
arrangement whereby Minnesota Mutual voluntarily absorbs certain expenses of
the Series Fund, see "Investment Adviser" in the attached prospectus for
Advantus Series Fund, Inc. The portfolio expense fees shown are not expected
to increase but rather decrease as the amount of assets in the portfolios
increases.
The portfolio expense fees for the VIP Equity Income Portfolio and the VIP
II Contrafund Portfolio reflect reductions based on arrangements FMR or the
funds have entered into with third parties who either paid or reduced a
portion of the portfolio expenses.
<TABLE>
<CAPTION>
Investment Portfolio Expense
Fund / Portfolio Name Advisory Fee Actual or Cap Total
- --------------------- ------------ ----------------- -----
<S> <C> <C> <C>
SERIES FUND
Growth 0.50% 0.09% 0.59%
Bond 0.50% 0.06% 0.56%
Money Market 0.50% 0.10% 0.60%
Asset Allocation 0.50% 0.04% 0.54%
Mortgage Securities 0.50% 0.08% 0.58%
Index 500 0.40% 0.05% 0.45%
Capital Appreciation 0.75% 0.10% 0.85%
International Stock 0.74%* 0.32% 1.06%
Small Company 0.75% 0.06% 0.81%
Maturing Government Bond 1998 0.05% 0.15% 0.20%
Maturing Government Bond 2002 0.05% 0.15% 0.20%
Maturing Government Bond 2006 0.25% 0.15% 0.40%
Maturing Government Bond 2010 0.25% 0.15% 0.40%
Value Stock 0.75% 0.08% 0.83%
Small Company Value 0.75% 0.15% 0.90%
International Bond 0.60% 1.00% 1.60%
Index 400 Mid-Cap 0.40% 0.15% 0.55%
Micro-Cap Value 1.25% 0.15% 1.40%
Macro-Cap Value 0.70% 0.15% 0.85%
Micro-Cap Growth 1.10% 0.15% 1.25%
VIP
High Income 0.59%** 0.12% 0.71%
Equity-Income 0.51%** 0.05% 0.56%
VIP II
Contrafund 0.61%** 0.10% 0.71%
AVERAGE 0.57% 0.16% 0.72%
</TABLE>
* The advisory fee for this portfolio is a variable fee based upon a
decreasing fee with increased asset size. This figure represents the actual
1996 average.
** The advisory fee for each of these portfolios is calculated by adding a
group fee to an individual fund fee rate and multiplying the result by each
fund's or portfolio's average net assets. These figures represent the actual
1996 averages.
Although the Small Company Value, the International Bond, the Index 400 Mid-
Cap, the Micro-Cap Value, the Macro-Cap Value and the Micro-Cap Growth
Portfolios are included in this prospectus, they will not be available until
October 1, 1997. Although the Maturing Government Bond Portfolios with
maturities of 1998, 2002, and 2006 are included in this prospectus, they are
not available for premium allocations or transfers effective May 1, 1997.
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GUARANTEE OF CERTAIN CHARGES
We guarantee and will not increase the following charges for policies under
a group-sponsored insurance program: (1) the sales charge; (2) the federal tax
charge (unless there is a change in the law regarding the federal income tax
treatment of deferred acquisition cost); (3) the maximum cost of insurance
charge; (4) the maximum administration charge; (5) the maximum partial
surrender transaction charge; (6) the maximum transfer charge; and (7) the
maximum separate account charge for mortality and expense risk.
ADDITIONAL BENEFITS
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to the policy by rider. However, some group
contracts may not offer each of the additional benefits described below.
Certain riders may not be available in all states. The descriptions below are
intended to be general; the terms of the policy riders providing the
additional benefits may vary from state to state, and the policy should be
consulted. The cost of any additional insurance benefits will be deducted as
part of the monthly deduction.
ACCELERATED BENEFITS AGREEMENT All policies, where allowed by state law, will
be issued with the Accelerated Benefits Agreement. Eligibility requirements
and conditions for payment of accelerated benefits are described in the
agreement. The agreement provides for an accelerated payment of all or a
portion of the death benefit proceeds in a single sum or any other mutually
acceptable manner if the insured is terminally ill as defined in the
agreement, provided the policy has not been assigned and it does not have an
irrevocable beneficiary. All accelerated benefits will be paid to the insured
unless the insured validly assigns them otherwise. If the insured dies before
all payments have been made, we will pay the remainder to the beneficiary
under the policy in one lump sum.
The amount of accelerated benefit available will be the death benefit
multiplied by the accelerated benefit factor. The accelerated benefit factor
will be calculated using the following considerations: the insured's age,
gender, and option applied for; and certain assumptions including, but not
limited to, expected future premiums, future dividends at the scale in effect
when making the calculation, and the insured's life expectancy. We will
subtract a processing charge of up to $150 before paying the benefit. This
charge is not designed to produce a profit.
The addition of an Accelerated Benefits Agreement and/or the receipt of
amounts under such an Agreement may have tax consequences. The insured should
seek assistance from a personal tax adviser.
WAIVER AGREEMENT Provides for the waiver of the monthly deductions while the
insured is totally disabled, subject to certain limitations described in the
rider agreement. The insured must have become disabled before the age of 60.
ACCIDENTAL DEATH AND DISMEMBERMENT Provides additional insurance if the
insured dies or becomes dismembered as a result of an accidental bodily
injury, as defined in the rider. Under the terms of the rider, the additional
benefits provided in the policy will be paid upon receipt of proof by us that
the death or dismemberment resulted directly from accidental injury and
independently of all other causes. The death or dismemberment must occur
within 180 days after the date of the injury and before the insured's 70th
birthday.
CHILDREN'S RIDER Provides for term insurance on the insured's children, as
specified in the rider. To be eligible for the insurance, the child must be of
eligible age as indicated in the rider and be dependent upon the insured for
financial support. Under terms of the rider, the death benefit will be payable
to the person insured by the policy to which the rider is attached.
SPOUSE AND CHILD RIDER Provides for term insurance on the insured's spouse and
children, as specified in the rider. To be eligible for the insurance, spouse
and children must meet the eligibility requirements indicated in the rider.
Under terms of the rider, the death benefit will be payable to the person
insured by the policy to which the rider is attached.
POLICYHOLDER CONTRIBUTION RIDER Allows the contractholder to pay for all or a
portion of the monthly charges under the policy without
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<PAGE>
affecting the account value which may accumulate due to employee-paid net
premiums. The portion of the net premium paid by the contractholder will be
allocated to the guaranteed account. On the same day such premium is
allocated, the charges the contractholder intends to cover will be deducted
from the guaranteed account value.
GENERAL MATTERS RELATING TO THE POLICY
POSTPONEMENT OF PAYMENTS Normally, we will pay any policy proceeds within
seven days after our receipt of all the documents required for such a payment.
Other than the death proceeds, which are determined as of the date of death of
the insured, the amount of payment will be determined as of the end of the
valuation period during which a request is received at our home office.
However, we reserve the right to defer policy payments, including policy
loans, for up to six months from the date of the owner's request, if such
payments are based upon policy values which do not depend on the investment
performance of the separate account. In that case, if we postpone a payment
other than a policy loan payment for more than 31 days, we will pay the owner
interest at the greater of 4 percent per year or the minimum rate required by
state law for the period beyond that time that payment is postponed. For
payments based on policy values which do depend on the investment performance
of the separate account, we may defer payment only: (a) for any period during
which the New York Stock Exchange is closed for trading (except for normal
holiday closing); or (b) when the Securities and Exchange Commission has
determined that a state of emergency exists which may make such payment
impractical.
THE POLICY The policy, the attached application, endorsements, any application
for an increase in face amount and any application for reinstatement
constitute the entire contract between the owner and us. Apart from the rights
and benefits described in the policy and incorporated by reference into the
group contract, the owner has no rights under the group contract. All
statements made by the owner or insured in the application are considered
representations and not warranties, except in the case of fraud. Only
statements in the application and any supplemental applications can be used to
contest a claim or the validity of the policy. Any change to the policy must
be approved in writing by the President, a Vice President or Secretary of
Minnesota Mutual. No agent has the authority to alter or modify any of the
terms, conditions or agreements of the policy or to waive any of its
provisions.
CONTROL OF POLICY The insured will be considered the owner of the policy
unless another person is shown as the owner in the application. Ownership may
be changed, however, by assigning the policy as described below. The owner is
entitled to all rights provided by the policy, prior to its maturity date.
After the maturity date, the owner cannot change the payee nor the mode of
payment, unless otherwise provided in the policy. Any person whose rights of
ownership depend upon some future event will not possess any present rights of
ownership. If there is more than one owner at a given time, all must exercise
the rights of ownership. If the owner should die, and the owner is not the
insured, the owner's interest will go to his or her estate unless otherwise
provided.
BENEFICIARY The owner may name one or more beneficiaries on the application to
receive the death benefit. The owner may choose to name a beneficiary that the
owner cannot change without the beneficiary's consent. This is called an
irrevocable beneficiary. If the owner has not named an irrevocable
beneficiary, the owner has reserved the right to change the beneficiary by
filing a subsequent written request with us. In that event, we will pay the
death benefit to the beneficiary named in the most recent change of
beneficiary request as provided for in the policy.
If a beneficiary dies before the insured, that beneficiary's interest in the
policy ends with that beneficiary's death. Only those beneficiaries who
survive the insured will be eligible to share in the proceeds. If no
beneficiary survives the insured we will pay the proceeds according to the
following order of priority:
(1) The insured's lawful spouse, if living; otherwise
(2) The personal representative of the insured's estate.
CHANGE OF BENEFICIARY If the owner has reserved the right to change the
beneficiary, the owner can file a written request with us to
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<PAGE>
change the beneficiary. If the owner has named an irrevocable beneficiary, the
written consent of the irrevocable beneficiary will be required. The owner's
written request will not be effective until it is recorded in our home office
records. After it has been so recorded, it will take effect as of the date the
owner signed the request.
However, if the insured dies before the request has been so recorded, the
request will not be effective as to those proceeds we have paid before the
owner's request was so recorded.
SETTLEMENT OPTIONS The death benefit proceeds of a policy will be payable if
we receive due proof satisfactory to us of the insured's death while it is in
force. The proceeds will be paid from our home office and in a single sum
unless a settlement option has been selected.
We will pay interest on the face amount of single sum death proceeds from
the date of the insured's death until the date of payment at any annual rate
to be determined by us, but never less than 4 percent per year, compounded
annually, or the minimum rate required by state law. Death benefits proceeds
arising from the account value, as under Option B, will continue to reflect
the separate account experience until the time of payment of those amounts.
The proceeds of a policy may be paid in other than a single sum and the
owner may, during the lifetime of the insured, request that we pay the
proceeds under one of the policy's settlement options. We may also use any
other method of payment acceptable to both the owner and us. Unless the owner
elects otherwise, a beneficiary may select a settlement option after the
insured's death. A settlement option may be selected only if the payments are
to be made to a natural person in that person's own right.
Each settlement option is payable in fixed amounts as described below. A
person electing a settlement option will be asked to sign an agreement
covering the election which will state the terms and conditions of the
payments. The payments do not vary with the investment performance of the
separate account.
(1) INTEREST PAYMENTS This option will provide payment of interest on the
proceeds at such times and for a period that is agreeable to the person
electing the settlement option and us. Withdrawal of proceeds may be made
in amounts of at least $500. At the end of the period, any remaining
proceeds will be paid in either a single sum or under any other method we
approve.
(2) FIXED PERIOD ANNUITY This is an annuity payable in monthly installments
for a specified number of years, from one to twenty years. The amount of
guaranteed payments for each $1,000 of proceeds applied would be shown on
the settlement option agreement.
(3) LIFE ANNUITY This is an annuity payable monthly during the lifetime of the
person who is to receive the income and terminating with the last monthly
payment immediately preceding that person's death. We may require proof of
the age and gender of the annuitant. The amount of guaranteed payments for
each $1,000 of proceeds applied would be shown in the settlement option
agreement. It would be possible under this option for the annuitant to
receive only one annuity payment if he or she died prior to the due date
of the second annuity payment, two if he or she died before the due date
of the third annuity payment, etc.
(4) PAYMENTS OF A SPECIFIED AMOUNT This is an annuity payable in a specified
amount until the proceeds and interest are fully paid.
The minimum amount of interest we will pay under any settlement option is 4
percent per year, compounded annually, or the minimum rate required by state
law. Additional interest earnings, if any, on deposits under a settlement
option will be payable as determined by us.
POLICY CHANGES We reserve the right to limit the number of policy changes to
one per policy year and to restrict such changes in the first policy year. For
this purpose, changes include increases or decreases in face amount. No change
will be permitted that would result in the death benefit under a policy being
included in gross income due to not satisfying the requirements of Section
7702 of the Internal Revenue Code or any applicable successor provision.
CONFORMITY WITH STATUTES If any provision in a policy is in conflict with the
laws of the state governing the policy, the provision will be deemed to be
amended to conform to such laws.
CLAIMS OF CREDITORS To the extent permitted by law, neither the policy nor any
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<PAGE>
payment thereunder will be subject to the claims of creditors or to any legal
process.
INCONTESTABILITY After a policy has been in force during the insured's
lifetime for two years from the policy date, we cannot contest the insurance
for any loss that is incurred more than two years after the policy date,
unless the net cash value has dropped below the amount necessary to pay the
insured's cost of insurance on the insured's life. However, if there has been
an increase in the amount of insurance for which we required evidence of
insurability, then, to the extent of the increase, any loss which occurs
within two years of the effective date of the increase will be contestable. We
may elect to waive our right to contest the insurance for any loss that is
incurred within two years after the policy issue date where the policy
replaces existing coverage.
ASSIGNMENT The policy may be assigned. However, we will not be bound by any
assignment unless it is in writing and filed at our home office in St. Paul,
Minnesota, and we send the owner an acknowledged copy. We assume no
responsibility for the validity or effect of any assignment of the policy or
of any interest in it. Any claim made by an assignee will be subject to proof
of the assignee's interest and the extent of the assignment. A valid
assignment will take precedence over any claim of a beneficiary.
SUICIDE If the insured, whether sane or insane, dies by suicide, within two
years of the original policy date, our liability will be limited to an amount
equal to the premiums paid for the policy. If there has been a face amount
increase for which we required evidence of insurability, and if the insured
dies by suicide within two years from the effective date of the increase, our
liability with respect to the increase will be limited to an amount equal to
the premiums paid for that increase.
If the insured is a Missouri citizen when the policy is issued, this
provision does not apply on the issue date of the policy, or on the effective
date of any increase in face amount, unless the insured intended suicide when
the policy, or any increase in face amount, was applied for.
If the insured is a citizen of Colorado or North Dakota, the duration of
this suicide provision is for one year instead of two.
MISSTATEMENT OF AGE If the age of the insured has been misstated, the death
benefit and account value will be adjusted. The adjustment will be the
difference between two amounts accumulated with interest. These two amounts
are:
(1) the monthly cost of insurance charges that were paid; and
(2) the monthly cost of insurance charges that should have been paid based on
the insured's correct age.
The interest rates used are the rates that were used in accumulating
guaranteed account values for that time period.
DIVIDENDS The policies are participating policies. Each year we will determine
if this class of policies and this policy will share in our divisible surplus.
We call a share of this participation a dividend. We do not anticipate that
dividends will be declared with respect to these policies.
Dividends, if received, may be added to the owner's account value or, if the
owner elects, they may be paid in cash.
A dividend applied to account value will be allocated to the guaranteed
account or to the sub-accounts of the separate account in accordance with the
owner's current instructions for the allocation of net premiums. In the
absence of instruction, dividends will be allocated to the guaranteed account
value and separate account value in the same proportion that those account
values bear to each other and, as to the account value in the separate
account, to each sub-account in the proportion that the sub-account value
bears to the separate account value.
REPORTS Each year we will send the owner a report. This report will show the
policy's status on the policy anniversary. It will include the account value,
the face amount and the death benefit as of the date of the report. It will
also show the premiums paid during the year, policy loan activity and the
policy value. The report will be sent to the owner without cost. The report
will be as of a date within two months of its mailing.
GENERAL PROVISIONS OF THE GROUP CONTRACT
ISSUANCE The group contract will be issued upon receipt of an application for
group insurance signed by a duly authorized officer of the group sponsor and
acceptance by a duly authorized officer of Minnesota Mutual at our home
office.
31
<PAGE>
OTHER MATTERS
TERMINATION The contractholder may terminate a group contract by giving us 31
days prior written notice of the intent to terminate. In addition, we may
terminate a group contract or any of its provisions on 61 days' notice. We may
elect to limit the situations in which we may exercise our right to terminate
the group contract to situations where, in the absence of fraud or the non-
payment of premiums, during any twelve month period, the aggregate specified
face amount for all policies under the group contract or the number of
policies under a group contract decrease by certain amounts or below the
minimum permissible levels we establish for the group contract. No individual
may become insured under the group contract after the effective date of a
notice of termination. However, if the group contract terminates, policies may
be allowed to convert to individual coverage as described under the heading
"Conversion Right to an Individual Policy" on page 23.
Termination of the group contract by the contractholder or us will not
terminate the insurance then in force under the terms of the continuation
provision. The group contract will be deemed to remain in force solely for the
purpose of continuing such insurance, but without further obligation of the
contractholder.
RIGHT TO EXAMINE GROUP CONTRACT The contractholder may terminate the group
contract within 10 days, or that period required by law, after receiving it.
To cancel the group contract, the contractholder should mail or deliver the
group contract to us.
ENTIRE GROUP CONTRACT The group contract, the attached copy of the
contractholder's application and any additional agreements constitute the
entire contract between the contractholder and us. All statements made by the
contractholder, any owner or any insured will be deemed representations and
not warranties. A misstatement will not be used in any contest or to reduce
claim under the group contract, unless it is in writing. A copy of the
application containing such misstatement must have been given to the
contractholder or to the insured or to his or her beneficiary, if any.
OWNERSHIP OF GROUP CONTRACT The contractholder owns the group contract. The
group contract may be changed or amended by agreement between us and the
contractholder without the consent of, or notice to, any person claiming
rights or benefits under the group contract. However, unless the
contractholder owns all of the certificates issued under the group contract,
the contractholder does not have any ownership interest in the certificates
issued under the group contract. The rights and benefits under the
certificates of the owners, insureds and beneficiaries are as set forth in
this prospectus and in the certificates.
FEDERAL TAX STATUS
The discussion contained herein is general in nature and is not intended as
tax advice. Each person concerned should consult a competent tax adviser. No
attempt is made to consider any applicable state or other tax laws. In
addition, this discussion is based on our understanding of federal income tax
laws as they are currently interpreted. No representation is made regarding
the likelihood of continuation of current income tax laws or the current
interpretations of the Internal Revenue Service.
We are taxed as a "life insurance company" under the Internal Revenue Code.
The operations of the separate account form a part of, and are taxed with, our
other business activities. Currently, no federal income tax is payable by us
on income dividends received by the separate account or on capital gains
arising from the separate account's activities. The separate account is not
taxed as a "regulated investment company" under the Code and it does not
anticipate any change in that tax status.
On the death of the insured, the death benefit provided by the policies will
be excludable from the gross income of the beneficiary under Section 101(a) of
the Internal Revenue Code. Under Section 7702 of the Code, life insurance
contracts such as the policies will be treated as life insurance under the
Code if certain tests are met. Guidance on how these tests are to be applied
is limited.
However, the Internal Revenue Service has issued proposed regulations that
would
32
<PAGE>
specify what will be considered reasonable mortality charges under Section
7702. In light of these proposed regulations and the other available guidance
on the application of the tests under Section 7702, we generally believe that
a policy issued in respect of a standard risk should meet the statutory
definition of a life insurance contract under Section 7702. With respect to a
policy issued on a substandard basis (i.e., a premium class involving higher
than standard mortality risk), there is insufficient guidance to determine if
such a policy would satisfy the Section 7702 definition of a life insurance
contract. If it is subsequently determined that a policy does not satisfy
Section 7702, we may take whatever steps are appropriate and necessary to
attempt to cause such a policy to comply with Section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the separate account to be
"adequately diversified" in order for the policy to be treated as a life
insurance contract for federal tax purposes. The separate account, through the
Funds, intends to comply with the diversification requirements prescribed in
Regulations Section 1.817-5, which affect how the Funds' assets may be
invested. Although the investment adviser of the Series Fund is an affiliate
of Minnesota Mutual, Minnesota Mutual does not have control over the Fund or
its investments. Nonetheless, Minnesota Mutual believes that each Portfolio of
the Series Fund in which the separate account owns shares will be operated in
compliance with the requirements prescribed by the Treasury.
In certain circumstances, owners of variable life policies may be considered
the owners, for federal income tax purposes, of the assets of a separate
account used to support their policies. In those circumstances, income and
gains from the separate account assets would be includable in the variable
life owner's gross income. The IRS has stated in published rulings that a
variable policy owner will be considered the owner of separate account assets
if the policy owner possesses incidents of ownership in those assets, such as
the ability to exercise the investment control over the assets. The Treasury
Department has also 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 (i.e., the
contract owner), rather than the insurance company, to be treated as the owner
of the assets in the account." This announcement also states 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 policy owners were not owners of separate account assets. For
example, the owner of a policy has the choice of one or more sub-accounts in
which to allocate net purchase payments and policy values, and may be able to
transfer among sub-accounts more frequently than in such rulings. These
differences could result in a policy owner being treated as the owner of the
assets of the separate account. In addition, Minnesota Mutual 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. Minnesota Mutual
therefore reserves the right to modify the policy as necessary to attempt to
prevent a policy owner from being considered the owner of a pro rata share of
the assets of the separate account.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
The owner is not currently taxed on any part of his or her interest until
the owner actually receives cash from the policy. However, taxability may also
be determined by the individual's contributions to the policy and prior policy
activity. We also believe that policy loans will be treated as indebtedness
and will not be currently taxable as income to the policy owner. However, a
surrender or partial surrender may have tax consequences. On surrender, an
owner will generally not be taxed on values received except to the extent that
they exceed the gross premiums paid under the policy. An exception to this
general rule occurs in the case of a partial surrender, a decrease in the face
amount, or any other change that reduces benefits under the policy in the
first
33
<PAGE>
15 years after the policy is issued and that results in a cash distribution to
the owner in order for the policy to continue complying with the Section 7702
definitional limits. In that case, such distribution may be taxed in whole or
in part as ordinary income (to the extent of any gain in the policy) under
rules prescribed in Section 7702. Premiums for additional benefits are not
used in the calculation for computing the tax on account values.
It should be noted, however, that the tax treatment described above is
available only for policies not described as a modified endowment contract. In
general, the tests to make such a determination will have an impact on
policies which have a high premium in relation to the death benefit. Thus,
under these tests, generally the cumulative premiums paid on a life insurance
policy during the first seven contract years cannot exceed the sum of the net
level premiums which would be paid under a seven-pay life policy. If the
cumulative premiums during the first seven contract years exceed the seven-pay
life premiums, the policy is a modified endowment contract.
Modified endowment contracts would still be treated as life insurance with
respect to the tax treatment of death proceeds and to the extent that the
inside build-up of account value would not be taxed on a yearly basis.
However, any amounts received by the owner, such as loans and amounts received
from partial or total surrender of the contract would be subject to the same
tax treatment as the same amounts received under an annuity (i.e., such
distributions are generally treated as taxable income to the extent that the
account value immediately before the distribution exceeds the investment in
the policy). This annuity tax treatment includes the 10 percent additional
income tax which would be imposed on the portion of any distribution that is
included in income except where the distribution or loan is made on or after
the owner attains age 59 1/2, or is attributable to the policy owner becoming
disabled, or as part of a series of substantially equal periodic payments for
the life of the policy owner or the joint lives of the policy owner and
beneficiary.
The modified endowment contract rules apply to all policies entered into on
or after June 21, 1988. It should be noted, in addition, that a policy which
is subject to a "material change" shall be treated as newly entered into on
the date on which such material change takes effect. Appropriate adjustment
shall be made in determining whether such a policy meets the seven-pay test by
taking into account the previously existing cash surrender value. While
certain adjustments described herein may result in a material change, the law
provides that any cost of living increase described in the regulations and
based upon an established broad-based index will not be treated as a material
change if any increase is funded ratably over the remaining period during
which premiums are required to be paid under the policy. To date, no
regulations under this provision have been issued.
Due to the policy's flexibility, classification of a policy as a modified
endowment contract will depend upon the circumstances of each policy.
Accordingly, a prospective policy owner should contact a competent tax adviser
before purchasing a policy to determine the circumstances under which the
policy would be a modified endowment contract. In addition, an owner should
contact a competent tax adviser before paying any lump sum premiums or making
any other change to, including an exchange of, a policy to determine whether
that premium or change would cause the policy (or the new policy in the case
of an exchange) to be treated as a modified endowment contract.
All modified endowment contracts issued by us (or an affiliated company) to
the same owner during any calendar year will be treated as one modified
endowment contract for purposes of determining the amount includable in gross
income under Section 72(e) of the Code. Additional rules may be promulgated
under this provision to prevent avoidance of its effects through serial
contracts or otherwise. For further information on current aggregation rules
under this provision, see your own tax adviser. A life insurance policy
received in exchange for a modified endowment contract will also be treated as
a modified endowment contract. Accordingly, an owner should consult a tax
adviser before effecting an exchange of any life insurance policy.
Generally, interest paid on any loan under a life insurance contract is not
deductible. An owner should consult a competent tax adviser before deducting
any loan interest.
34
<PAGE>
The policy may be used in various arrangements, including non-qualified
deferred compensation or salary continuance plans, split dollar insurance
plans, executive bonus plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of a policy in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax adviser regarding the tax attributes of the particular
arrangement.
Federal estate and state and local estate, inheritance, and other tax
consequences of ownership or receipt of policy proceeds depend upon the
circumstances of each policy owner or beneficiary. A competent tax adviser
should be consulted for further information.
It should be understood that the foregoing description of the federal income
tax consequences under the policies is not exhaustive and that special rules
are provided with respect to situations not discussed. Statutory changes in
the Internal Revenue Code, with varying effective dates, and regulations
adopted thereunder may also alter the tax consequences of specific factual
situations. Due to the complexity of the applicable laws, tax advice may be
needed by a person contemplating the purchase of a variable life insurance
policy or exercising elections under such a policy. For further information, a
qualified tax adviser should be consulted.
At the present time, we make no charge to the separate account or from
premium payments for any federal, state or local taxes (other than state
premium taxes and federal taxes under OBRA) that we incur that may be
attributable to such account or to the policies. We, however, reserve the
right in the future to make a charge for any such tax or other economic burden
resulting from the application of the tax laws that we determine to be
properly attributable to the separate account or the policies.
35
<PAGE>
TRUSTEES AND PRINCIPAL OFFICERS OF MINNESOTA MUTUAL
<TABLE>
<CAPTION>
Trustees Principal Occupation
-------- --------------------
<C> <S>
Giulio Agostini Senior Vice President, Finance and Administrative
Services, Minnesota Mining and Manufacturing
Company, Maplewood, Minnesota
Anthony L. Andersen Chair-Board of Directors, H. B. Fuller Company, St.
Paul, Minnesota (Adhesive Products) since June
1995, prior thereto for more than five years
President and Chief Executive Officer, H. B. Fuller
Company
John F. Grundhofer Chairman of the Board, President and Chief
Executive Officer, First Bank System, Inc.,
Minneapolis, Minnesota (Banking)
Harold V. Haverty Retired since May 1995, prior thereto, for more
than five years Chairman of the Board, President
and Chief Executive Officer, Deluxe Corporation,
Shoreview, Minnesota (Check Printing)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L.
Carlson School of Management, University of
Minnesota
Reatha C. King, Ph.D. President and Executive Director, General Mills
Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Member, Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Terry Tinson Saario, Ph.D. Prior to March 1996, and for more than five years,
President, Northwest Area Foundation, St. Paul,
Minnesota (Private Regional Foundation)
Robert L. Senkler Chairman of the Board, President and Chief
Executive Officer, The Minnesota Mutual Life
Insurance Company since August 1995; prior thereto
for more than five years Vice President and
Actuary, The Minnesota Mutual Life Insurance
Company
Michael E. Shannon Chairman, Chief Financial and Administrative
Officer, Ecolab Inc., St. Paul, Minnesota, since
August 1992, prior thereto President, Residential
Services Group, Ecolab Inc., St. Paul, Minnesota
from October 1990 to July 1992 (Develops and
Markets Cleaning and Sanitizing Products)
Frederick T. Weyerhaeuser Chairman, Clearwater Investment Trust since May
1996, prior thereto for more than five years,
Chairman, Clearwater Investment Trust, St. Paul,
Minnesota (Financial Management)
Principal Officers (other than Trustees)
Name Position
---- --------
John F. Bruder Senior Vice President
Keith M. Campbell Vice President
Paul H. Gooding Vice President and Treasurer
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
Richard D. Lee Vice President
Joel W. Mahle Vice President
Dennis E. Prohofsky Senior Vice President, General Counsel and
Secretary
Gregory S. Strong Vice President and Actuary
Terrence M. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
</TABLE>
36
<PAGE>
All Trustees who are not also officers of Minnesota Mutual have had the
principal occupation (or employers) shown for at least five years. All officers
of Minnesota Mutual have been employed by Minnesota Mutual for at least five
years.
VOTING RIGHTS
We will vote the shares of the Funds held in the various sub-accounts of the
Variable Universal Life Account at regular and special shareholder meetings of
the Funds in accordance with the owner's instructions. If, however, the
Investment Company Act of 1940, as amended, or any regulation thereunder should
change and we determine that it is permissible to vote the shares of the Funds
in our own right, we may elect to do so. The number of votes as to which the
owner has the right to instruct will be determined by dividing his or her sub-
account value by the net asset value per share of the corresponding Portfolio
of the Funds. Fractional shares will be counted. The number of votes as to
which the owner has the right to instruct will be determined as of the date
coincident with the date established by the Funds for determining shareholders
eligible to vote at the meeting of the Funds. Voting instructions will be
solicited in writing prior to the meeting in accordance with procedures
established by the Funds. We will vote shares of the Funds held by the separate
account as to which no instructions are received in proportion to the voting
instructions which are received from policy owners with respect to all policies
participating in the separate account. Each owner having a voting interest will
receive proxy material, reports and other material relating to the Funds.
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that shares be voted so as to
cause a change in sub-classification or investment policies of the Funds or
approve or disapprove an investment advisory contract of the Funds. In
addition, we may disregard voting instructions in favor of changes in the
investment policies or the investment adviser of one or more of the Funds if we
reasonably disapprove of such changes. A change would be disapproved only if
the proposed change is contrary to state law or disapproved by state regulatory
authorities on a determination that the change would be detrimental to the
interests of policy owners or if we determine that the change would be
inconsistent with the investment objectives of the Funds or would result in the
purchase of securities for the Funds which vary from the general quality and
nature of investments and investment techniques utilized by other separate
accounts created by us or any of our affiliates which have similar investment
objectives. In the event that we disregard voting instructions, a summary of
that action and the reason for such action will be included in the owner's next
semi-annual report.
DISTRIBUTION OF POLICIES
The policies will be sold by state licensed life insurance producers who are
also registered representatives of MIMLIC Sales Corporation ("MIMLIC Sales") or
of other broker-dealers who have entered into selling agreements with MIMLIC
Sales. MIMLIC Sales acts as principal underwriter for the policies. MIMLIC
Sales is a wholly-owned subsidiary of MIMLIC Asset Management Company, which in
turn is a wholly-owned subsidiary of Minnesota Mutual. MIMLIC Asset Management
Company is a registered investment adviser.
MIMLIC Sales Corporation, whose address is 400 Robert Street North, St. Paul,
Minnesota 55101-2098, is a registered broker-dealer under the Securities
Exchange Act of 1934 and a member of the National Association of Securities
Dealers, Inc. The policies are sold in the states where their sale is lawful.
The insurance underwriting and the determination of a proposed insured's risk
classification and whether to accept or reject an application for a policy is
done in accordance with our rules and standards.
Commissions to registered representatives on the sale of policies will be
premium-based, asset-based or a fixed amount. Commissions for policies under a
group-sponsored insurance program will not exceed the equivalent of 50 percent
of the portion of all premiums paid in the initial year to cover the cost of
insurance, 7 percent of all premiums paid in the initial year in excess of the
amount to cover the cost of insurance, and 7 percent of all premiums paid after
the initial year.
37
<PAGE>
The commission schedule for a group-sponsored insurance program will be
determined based on a variety of factors, including enrollment procedures, the
size and type of the group, the total amount of premium payments to be
received, any prior existing relationship with the group sponsor, the
sophistication of the group sponsor, and other circumstances of which we are
not presently aware.
In addition, MIMLIC Sales or Minnesota Mutual will pay, based uniformly on
the sales of the policies by registered representatives, credits which allow
registered representatives (agents) who are responsible for sales of the
policies to attend conventions and other meetings sponsored by Minnesota
Mutual or its affiliates for the purpose of promoting the sale of insurance
and/or investment products offered by Minnesota Mutual and its affiliates.
Such credits may cover the registered representatives' transportation, hotel
accommodations, meals, registration fees, etc.
LEGAL MATTERS
Legal matters in connection with federal securities laws applicable to the
issue and sale of the policies have been passed upon by Jones & Blouch L.L.P.,
1025 Thomas Jefferson Street, N.W., Suite 405 West, Washington, D.C. 20007.
All other legal matters, including the right to issue such policies under
Minnesota law and applicable regulations thereunder, have been passed upon by
Donald F. Gruber, Senior Counsel of Minnesota Mutual.
LEGAL PROCEEDINGS
As an insurance company, we are ordinarily involved in litigation. Minnesota
Mutual is of the opinion that such litigation is not material with respect to
the policies or the separate account.
EXPERTS
The separate financial statements of Minnesota Mutual Variable Universal
Life Account and Minnesota Mutual included in this prospectus have been
audited by KPMG Peat Marwick LLP, independent auditors, 4200 Norwest Center,
90 South Seventh Street, Minneapolis, Minnesota 55402, whose reports thereon
appear elsewhere herein, and have been so included in reliance upon the
authority of said firm as experts in accounting and auditing.
Actuarial matters included in this prospectus have been examined by Robert
M. Olafson, F.S.A., Second Vice President and Actuary of Minnesota Mutual, as
stated in his opinion filed as an exhibit to the Registration Statement.
REGISTRATION STATEMENT
We have filed a Registration Statement under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission with respect to the
policies offered hereby. This prospectus does not contain all the information
set forth in the registration statement and amendments thereto and the
exhibits filed as a part thereof, to all of which reference is hereby made for
further information concerning the separate account, Minnesota Mutual, and the
policies. Statements contained in this prospectus as to the contents of
policies and other legal instruments are summaries, and reference is made to
such instruments as filed.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Company and
Contract Owners of Minnesota Mutual Variable Universal Life Account:
We have audited the accompanying statements of assets and liabilities of the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, Index 500,
Capital Appreciation, International Stock, Small Company, Maturing Government
Bond 1998, Maturing Government Bond 2002, Maturing Government Bond 2006,
Maturing Government Bond 2010, Value Stock, Contrafund, High Income and Equity-
Income Segregated Sub-Accounts of Minnesota Mutual Variable Universal Life
Account as of December 31, 1996 and the related statements of operations,
statements of changes in net assets for the year ended December 31, 1996 and
the period from March 8, 1995 to December 31, 1995 and financial highlights for
the periods in footnote (6). These financial statements and the financial
highlights are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights 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 and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Investments owned at December 31, 1996 were confirmed to us by the
respective Sub-Account mutual fund group, or, for MIMLIC Series Fund, Inc.,
verified by examination of the underlying portfolios. 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 the Growth, Bond, Money
Market, Asset Allocation, Mortgage Securities, Index 500, Capital Appreciation,
International Stock, Small Company, Maturing Government Bond 1998, Maturing
Government Bond 2002, Maturing Government Bond 2006, Maturing Government Bond
2010, Value Stock, Contrafund, High Income and Equity-Income Segregated Sub-
Accounts of Minnesota Mutual Variable Universal Life Account at December 31,
1996 and the results of their operations, changes in their net assets and the
financial highlights for the periods stated in the first paragraph above, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 14, 1997
39
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------------------
MONEY ASSET MORTGAGE CAPITAL INTERNATIONAL SMALL
ASSETS GROWTH BOND MARKET ALLOCATION SECURITIES INDEX 500 APPRECIATION STOCK COMPANY
------ ------- ----- ------ ---------- ---------- --------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in shares of
MIMLIC Series Fund,
Inc.:
Growth Portfolio, 5,806
shares at net asset
value of $2.343 per
share (cost $12,597) $13,605 -- -- -- -- -- -- -- --
Bond Portfolio, 2,099
shares at net asset
value of
$1.283 per share (cost
$2,629) -- 2,693 -- -- -- -- -- -- --
Money Market Portfolio,
3,026 shares at net as-
set value of $1.000 per
share (cost $3,026) -- -- 3,026 -- -- -- -- -- --
Asset Allocation Port-
folio, 3,574 shares at
net asset value of
$1.865 per share (cost
$6,312) -- -- -- 6,665 -- -- -- -- --
Mortgage Securities
Portfolio, 1,258 shares
at net asset value of
$1.187 per share (cost
$1,444) -- -- -- -- 1,493 -- -- -- --
Index 500 Portfolio,
527,753 shares at net
asset value of $2.409
per share (cost
$1,106,338) -- -- -- -- -- 1,271,205 -- -- --
Capital Appreciation
Portfolio, 4,656 shares
at net asset value of
$2.471 per share (cost
$10,417) -- -- -- -- -- -- 11,508 -- --
International Stock
Portfolio, 3,591 shares
at net asset value of
$1.597 per share (cost
$5,078) -- -- -- -- -- -- -- 5,736 --
Small Company Portfo-
lio, 34,854 shares at
net asset value of
$1.535 per share (cost
$53,707) -- -- -- -- -- -- -- -- 53,495
------- ----- ----- ----- ----- --------- ------ ----- ------
13,605 2,693 3,026 6,665 1,493 1,271,205 11,508 5,736 53,495
Receivable from Minne-
sota Mutual for policy
purchase payments -- -- 123 -- -- -- -- -- --
Receivable for invest-
ments sold 150 16 155 26 24 5,341 33 53 279
------- ----- ----- ----- ----- --------- ------ ----- ------
Total assets 13,755 2,709 3,304 6,691 1,517 1,276,546 11,541 5,789 53,774
------- ----- ----- ----- ----- --------- ------ ----- ------
<CAPTION>
LIABILITIES
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payable for investments
purchased -- -- 123 -- -- -- -- -- --
Payable to Minnesota Mu-
tual for policy termina-
tions and mortality and
expense charges 150 16 155 26 24 5,341 33 53 279
------- ----- ----- ----- ----- --------- ------ ----- ------
Total liabilities 150 16 278 26 24 5,341 33 53 279
------- ----- ----- ----- ----- --------- ------ ----- ------
NET ASSETS APPLICABLE TO
POLICY OWNERS $13,605 2,693 3,026 6,665 1,493 1,271,205 11,508 5,736 53,495
======= ===== ===== ===== ===== ========= ====== ===== ======
UNITS OUTSTANDING 10,583 2,462 2,822 5,376 1,353 902,194 8,725 4,601 41,743
======= ===== ===== ===== ===== ========= ====== ===== ======
NET ASSET VALUE PER UNIT $1.286 1.093 1.072 1.240 1.103 1.409 1.319 1.247 1.282
======= ===== ===== ===== ===== ========= ====== ===== ======
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------
MATURING MATURING MATURING MATURING
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT VALUE HIGH EQUITY-
ASSETS BOND 1998 BOND 2002 BOND 2006 BOND 2010 STOCK CONTRAFUND INCOME INCOME
------ ---------- ---------- ---------- ---------- ----- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in shares of
MIMLIC Series Fund,
Inc.:
Maturing Government
Bond 1998 Portfolio,
967 shares at net asset
value of $1.080 per
share (cost $997)...... $1,044 -- -- -- -- -- -- --
Maturing Government
Bond 2002 Portfolio,
1,009 shares at net as-
set value of $1.049 per
share (cost $1,055).... -- 1,059 -- -- -- -- -- --
Maturing Government
Bond 2006 Portfolio,
986 shares at net asset
value of $1.094 per
share (cost $1,057).... -- -- 1,079 -- -- -- -- --
Maturing Government
Bond 2010 Portfolio,
937 shares at net asset
value of $1.172 per
share (cost $997)...... -- -- -- 1,098 -- -- -- --
Value Stock Portfolio,
5,313 shares at net as-
set value of $1.591
per share (cost $7,408) -- -- -- -- 8,451 -- -- --
Investments in shares of
Fidelity Variable Insur-
ance
Products Fund II:
Contrafund Portfolio,
2,043 shares at net as-
set value of $16.56 per
share (cost $30,303)... -- -- -- -- -- 33,831 -- --
Investments in shares of
Fidelity Variable
Insurance
Products Fund:
High Income Portfolio,
2,553 shares at net as-
set value of $12.52 per
share (cost $29,821)... -- -- -- -- -- -- 31,965 --
Equity-Income Portfo-
lio, 1,533 shares at
net asset value of
$21.03 per share (cost
$30,241)............... -- -- -- -- -- -- -- 32,229
------ ----- ----- ----- ----- ------ ------ ------
1,044 1,059 1,079 1,098 8,451 33,831 31,965 32,229
Receivable for invest-
ments sold -- -- -- -- 34 3 1 5
------ ----- ----- ----- ----- ------ ------ ------
Total assets 1,044 1,059 1,079 1,098 8,485 33,834 31,966 32,234
------ ----- ----- ----- ----- ------ ------ ------
<CAPTION>
LIABILITIES
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Payable to Minnesota Mu-
tual for policy termina-
tions and mortality
and expense charges -- -- -- -- 34 3 1 5
------ ----- ----- ----- ----- ------ ------ ------
NET ASSETS APPLICABLE TO
POLICY OWNERS $1,044 1,059 1,079 1,098 8,451 33,831 31,965 32,229
====== ===== ===== ===== ===== ====== ====== ======
UNITS OUTSTANDING 1,000 1,000 1,000 1,000 5,585 30,361 29,956 30,306
====== ===== ===== ===== ===== ====== ====== ======
NET ASSET VALUE PER UNIT $1.044 1.059 1.079 1.098 1.513 1.114 1.067 1.063
====== ===== ===== ===== ===== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX CAPITAL INTERNATIONAL SMALL
GROWTH BOND MARKET ALLOCATION SECURITIES 500 APPRECIATION STOCK COMPANY
------ ---- ------ ---------- ---------- -------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income (loss):
Investment income dis-
tributions from under-
lying mutual fund (note
4) $ 73 111 108 117 80 9,083 -- 127 113
Mortality and expense
charges (note 3) (51) (12) (11) (23) (7) (4,074) (49) (27) (245)
------ ---- ---- ---- ---- -------- ------ ------ ------
Investment income
(loss)--net 22 99 97 94 73 5,009 (49) 100 (132)
------ ---- ---- ---- ---- -------- ------ ------ ------
Realized and unrealized
gains (losses) on invest-
ments--net:
Realized gain distribu-
tions from underlying
mutual fund (note 4) 689 20 -- 214 -- 4,702 221 139 5,128
------ ---- ---- ---- ---- -------- ------ ------ ------
Realized gains on sales
of investments:
Proceeds from sales 1,863 498 859 441 241 122,254 2,445 2,242 5,459
Cost of investments
sold (1,769) (489) (859) (430) (238) (111,122) (2,219) (2,082) (5,051)
------ ---- ---- ---- ---- -------- ------ ------ ------
94 9 -- 11 3 11,132 226 160 408
------ ---- ---- ---- ---- -------- ------ ------ ------
Net realized gains on
investments 783 29 -- 225 3 15,834 447 299 5,536
------ ---- ---- ---- ---- -------- ------ ------ ------
Net change in unrealized
appreciation or
depreciation of
investments 729 (40) -- 236 (9) 137,153 1,067 553 (2,764)
------ ---- ---- ---- ---- -------- ------ ------ ------
Net gains (losses) on
investments 1,512 (11) -- 461 (6) 152,987 1,514 852 2,772
------ ---- ---- ---- ---- -------- ------ ------ ------
Net increase in net
assets resulting from
operations $1,534 88 97 555 67 157,996 1,465 952 2,640
====== ==== ==== ==== ==== ======== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996*
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------------------------------------
MATURING MATURING MATURING MATURING
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT
BOND BOND BOND BOND VALUE CONTRA- HIGH EQUITY-
1998 2002 2006 2010 STOCK FUND INCOME INCOME
---------- ---------- ---------- ---------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual fund
(note 4) $-- 58 60 -- 67 -- -- --
Mortality and expense
charges (note 3) (3) (3) (3) (3) (35) (87) (87) (85)
---- --- --- --- ------ ----- ----- -----
Investment income
(loss)--net (3) 55 57 (3) 32 (87) (87) (85)
---- --- --- --- ------ ----- ----- -----
Realized and unrealized
gains on investments--
net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) -- -- -- -- 540 -- -- --
---- --- --- --- ------ ----- ----- -----
Realized gains on
sales of investments:
Proceeds from sales 3 3 3 3 2,286 93 87 97
Cost of investments
sold (3) (3) (3) (3) (1,970) (90) (84) (95)
---- --- --- --- ------ ----- ----- -----
-- -- -- -- 316 3 3 2
---- --- --- --- ------ ----- ----- -----
Net realized gains
on investments -- -- -- -- 856 3 3 3
---- --- --- --- ------ ----- ----- -----
Net change in
unrealized
appreciation or
depreciation of
investments 47 4 22 101 1,007 3,528 2,144 1,988
---- --- --- --- ------ ----- ----- -----
Net gains on in-
vestments 47 4 22 101 1,863 3,531 2,147 1,990
---- --- --- --- ------ ----- ----- -----
Net increase in net
assets resulting
from operations $ 44 59 79 98 1,895 3,444 2,060 1,905
==== === === === ====== ===== ===== =====
</TABLE>
* Period from May 1, 1996, commencement of operations, to December 31, 1996
for Maturing Government Bond 1998, Maturing Government Bond 2002, Maturing
Government Bond 2006, Maturing Government Bond 2010, Contrafund, High Income
and Equity-Income Segregated Sub-Accounts.
See accompanying notes to financial statements.
43
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1995, COMMENCEMENT OF OPERATIONS, TO DECEMBER 31,
1995
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX CAPITAL INTERNATIONAL SMALL VALUE
GROWTH BOND MARKET ALLOCATION SECURITIES 500 APPRECIATION STOCK COMPANY STOCK
------ ---- ------ ---------- ---------- ------- ------------ ------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income dis-
tributions from under-
lying mutual fund
(note 4) $ -- -- 31 -- -- -- -- -- 48 32
Mortality and expense
charges (note 3) (9) (4) (3) (5) (3) (599) (10) (6) (74) (7)
----- --- --- ----- ---- ------- ------ ---- ------ ------
Investment income
(loss)--net (9) (4) 28 (5) (3) (599) (10) (6) (26) 25
----- --- --- ----- ---- ------- ------ ---- ------ ------
Realized and unrealized
gains on investments--
net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) -- -- -- -- -- -- -- -- 417 174
----- --- --- ----- ---- ------- ------ ---- ------ ------
Realized gains on
sales of investments:
Proceeds from sales 630 57 10 1,041 111 48,401 1,760 107 3,715 1,706
Cost of investments
sold (611) (55) (10) (982) (109) (47,208) (1,645) (105) (3,506) (1,568)
----- --- --- ----- ---- ------- ------ ---- ------ ------
19 2 -- 59 2 1,193 115 2 209 138
----- --- --- ----- ---- ------- ------ ---- ------ ------
Net realized gains
on investments 19 2 -- 59 2 1,193 115 2 626 312
----- --- --- ----- ---- ------- ------ ---- ------ ------
Net change in
unrealized
appreciation or
depreciation of
investments 279 104 -- 117 58 27,714 24 105 2,552 36
----- --- --- ----- ---- ------- ------ ---- ------ ------
Net gains on in-
vestments 298 106 -- 176 60 28,907 139 107 3,178 348
----- --- --- ----- ---- ------- ------ ---- ------ ------
Net increase in net
assets resulting
from operations $ 289 102 28 171 57 28,308 129 101 3,152 373
===== === === ===== ==== ======= ====== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
44
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------------------------------------------------------------
MONEY ASSET MORTGAGE CAPITAL INTERNATIONAL SMALL
GROWTH BOND MARKET ALLOCATION SECURITIES INDEX 500 APPRECIATION STOCK COMPANY
------- ----- ------ ---------- ---------- --------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 22 99 97 94 73 5,009 (49) 100 (132)
Net realized gains on
investments 783 29 -- 225 3 15,834 447 299 5,536
Net change in
unrealized appreciation
or depreciation of
investments 729 (40) -- 236 (9) 137,153 1,067 553 (2,764)
------- ----- ----- ----- ----- --------- ------ ------ ------
Net increase in net as-
sets resulting from op-
erations 1,534 88 97 555 67 157,996 1,465 952 2,640
------- ----- ----- ----- ----- --------- ------ ------ ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 7,575 1,269 2,582 3,774 485 698,664 6,147 3,141 13,908
Policy withdrawals and
charges (1,812) (486) (848) (418) (234) (118,180) (2,396) (2,215) (5,214)
------- ----- ----- ----- ----- --------- ------ ------ ------
Increase in net assets
from policy transactions 5,763 783 1,734 3,356 251 580,484 3,751 926 8,694
------- ----- ----- ----- ----- --------- ------ ------ ------
Increase in net assets 7,297 871 1,831 3,911 318 738,480 5,216 1,878 11,334
Net assets at the begin-
ning of year 6,308 1,822 1,195 2,754 1,175 532,725 6,292 3,858 42,161
------- ----- ----- ----- ----- --------- ------ ------ ------
Net assets at the end of
year $13,605 2,693 3,026 6,665 1,493 1,271,205 11,508 5,736 53,495
======= ===== ===== ===== ===== ========= ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996*
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------------------------------
MATURING MATURING MATURING MATURING
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT
BOND BOND BOND BOND VALUE CONTRA- HIGH EQUITY-
1998 2002 2006 2010 STOCK FUND INCOME INCOME
---------- ---------- ---------- ---------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ (3) 55 57 (3) 32 (87) (87) (85)
Net realized gains on
investments -- -- -- -- 856 3 3 2
Net change in
unrealized appreciation
or depreciation of in-
vestments 47 4 22 101 1,007 3,528 2,144 1,988
------ ----- ----- ----- ------ ------ ------ ------
Net increase in net as-
sets resulting from op-
erations 44 59 79 98 1,895 3,444 2,060 1,905
------ ----- ----- ----- ------ ------ ------ ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 1,000 1,000 1,000 1,000 4,143 30,393 29,905 30,336
Policy withdrawals and
charges -- -- -- -- (2,251) (6) -- (12)
------ ----- ----- ----- ------ ------ ------ ------
Increase in net assets
from policy transactions 1,000 1,000 1,000 1,000 1,892 30,387 29,905 30,324
------ ----- ----- ----- ------ ------ ------ ------
Increase in net assets 1,044 1,059 1,079 1,098 3,787 33,831 31,965 32,229
Net assets at the begin-
ning of period -- -- -- -- 4,664 -- -- --
------ ----- ----- ----- ------ ------ ------ ------
Net assets at the end of
period $1,044 1,059 1,079 1,098 8,451 33,831 31,965 32,229
====== ===== ===== ===== ====== ====== ====== ======
</TABLE>
* Period from May 1, 1996, commencement of operations, to December 31, 1996
for Maturing Government Bond 1998, Maturing Government Bond 2002, Maturing
Government Bond 2006, Maturing Government Bond 2010, Contrafund, High Income
and Equity-Income Segregated Sub-Accounts.
See accompanying notes to financial statements.
46
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1995, COMMENCEMENT OF OPERATIONS, TO DECEMBER 31,
1995
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX CAPITAL INTERNATIONAL SMALL VALUE
GROWTH BOND MARKET ALLOCATION SECURITIES 500 APPRECIATION STOCK COMPANY STOCK
------ ----- ------ ---------- ---------- ------- ------------ ------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ (9) (4) 28 (5) (3) (599) (10) (6) (26) 25
Net realized gains on
investments 19 2 -- 59 2 1,193 115 2 626 312
Net change in
unrealized apprecia-
tion or depreciation
of investments 279 104 -- 117 58 27,714 24 105 2,552 36
------ ----- ----- ------ ----- ------- ------ ----- ------ ------
Net increase in net as-
sets resulting from op-
erations 289 102 28 171 57 28,308 129 101 3,152 373
------ ----- ----- ------ ----- ------- ------ ----- ------ ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 6,640 1,773 1,174 3,619 1,226 552,219 7,913 3,858 42,650 5,990
Policy withdrawals and
charges (621) (53) (7) (1,036) (108) (47,802) (1,750) (101) (3,641) (1,699)
------ ----- ----- ------ ----- ------- ------ ----- ------ ------
Increase in net assets
from policy transac-
tions 6,019 1,720 1,167 2,583 1,118 504,417 6,163 3,757 39,009 4,291
------ ----- ----- ------ ----- ------- ------ ----- ------ ------
Increase in net assets 6,308 1,822 1,195 2,754 1,175 532,725 6,292 3,858 42,161 4,664
Net assets at the be-
ginning of period -- -- -- -- -- -- -- -- -- --
------ ----- ----- ------ ----- ------- ------ ----- ------ ------
Net assets at the end
of period $6,308 1,822 1,195 2,754 1,175 532,725 6,292 3,858 42,161 4,664
====== ===== ===== ====== ===== ======= ====== ===== ====== ======
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
The Minnesota Mutual Variable Universal Life Account (the Account) was
established on August 8, 1994 as a segregated asset account of The Minnesota
Mutual Life Insurance Company (Minnesota Mutual) under Minnesota law and is
registered as a unit investment trust under the Investment Company Act of 1940
(as amended). The Account commenced operations on March 8, 1995. The Account
currently has seventeen segregated sub-accounts to which policy owners may
allocate their purchase payments. On May 1, 1996, seven additional segregated
sub-accounts, Maturing Government Bond 1998, Maturing Government Bond 2002,
Maturing Government Bond 2006, Maturing Government Bond 2010, Contrafund, High
Income and Equity-Income, were added to the Account.
The assets of each segregated sub-account are held for the exclusive benefit
of the group-sponsored variable universal life insurance policy owners and are
not chargeable with liabilities arising out of the business conducted by any
other account or by Minnesota Mutual. Variable universal life policy owners
allocate their purchase payments to one or more of the seventeen segregated
sub-accounts. Such payments are then invested in shares of MIMLIC Series Fund,
Inc., Fidelity Variable Insurance Products Fund II or Fidelity Variable
Insurance Products Fund (the Underlying Funds). Each of the Underlying Funds is
registered under the Investment Company Act of 1940 (as amended) as a
diversified, open-end management investment company. Payments allocated to the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, Index 500,
Capital Appreciation, International Stock, Small Company, Maturing Government
Bond 1998, Maturing Government Bond 2002, Maturing Government Bond 2006,
Maturing Government Bond 2010, Value Stock, Contrafund, High Income and Equity
Income segregated sub-accounts are invested in shares of the Growth, Bond,
Money Market, Asset Allocation, Mortgage Securities, Index 500, Capital
Appreciation, International Stock, Small Company, Maturing Government Bond
1998, Maturing Government Bond 2002, Maturing Government Bond 2006, Maturing
Government Bond 2010 and Value Stock Portfolios of the MIMLIC Series Fund,
Inc., Contrafund Portfolio of the Fidelity Variable Insurance Products Fund II
and High Income and Equity Income Portfolios of the Fidelity Variable Insurance
Products Fund, respectively.
MIMLIC Sales Corporation acts as the underwriter for the Account. MIMLIC
Asset Management Company acts as the investment adviser for the Fund. MIMLIC
Sales Corporation is a wholly-owned subsidiary of MIMLIC Asset Management
Company. MIMLIC Asset Management Company is a wholly-owned subsidiary of
Minnesota Mutual.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets resulting from
operations during the period. Actual results could differ from those estimates.
Investments in Underlying Funds
Investments in shares of the Underlying Funds are stated at market value which
is the net asset value per share as determined daily by each of the Underlying
Funds. Investment transactions are accounted for on the date the shares are
purchased or sold. The cost of investments sold is determined on the average
cost method. All dividend distributions received from the Underlying Funds are
reinvested in additional shares of the Underlying Funds and are recorded by the
sub-accounts on the ex-dividend date.
Federal Income Taxes
The Account is treated as part of Minnesota Mutual for federal income tax
purposes. Under current interpretations of existing federal income tax law, no
income taxes are payable on investment income or capital gain distributions
received by the Account from the Underlying Funds.
48
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) MORTALITY AND EXPENSE AND OTHER POLICY CHARGES
The mortality and expense charge paid to Minnesota Mutual is computed daily and
is equal, on an annual basis, to .50 percent of the average daily net assets of
the Account. This charge is an expense of the Account
and is deducted daily from net assets of the Account.
Policy purchase payments are reflected net of the following charges paid to
Minnesota Mutual:
A sales load of up to 5 percent is deducted from each premium payment.
Total sales charges deducted from premium payments for the year ended
December 31, 1996 and the period from March 8, 1995 to December 31, 1995
amounted to $27,054 and $311, respectively.
A premium tax charge in the amount of 2 percent is deducted from each
premium payment. Premium taxes are paid to state and local governments.
Total premium tax charges deducted from premium payments for the year ended
December 31, 1996 and the period from March 8, 1995 to December 31, 1995
amounted to $18,636 and $827, respectively.
A federal tax charge of .25 percent for group-sponsored policies and 1.25
percent for an individual policy is deducted from each premium payment. The
federal tax charge is paid to offset additional corporate federal income
taxes incurred by Minnesota Mutual under the Omnibus Budget Reconciliation
Act of 1990. Total federal tax charges for the year ended December 31, 1996
and the period from March 8, 1995 to December 31, 1995 amounted to $2,330
and $103, respectively.
In addition to deductions from premium payments, an administration charge, a
partial surrender charge, a cost of insurance charge and a charge for
additional benefits provided by rider, if any, are assessed from the actual
cash value of each policy. These charges are paid by redeeming units of the
Account held by the policy owner. The administration charge varies based upon
the number of eligible members in a group -sponsored program and ranges from $1
to $4 per month. The partial surrender charge is to cover administrative costs
incurred by Minnesota Mutual. The amount of the partial surrender charge is the
lesser of $25 or 2 percent of the amount withdrawn.
The cost of insurance charge varies with the amount of insurance, the
insured's age, rate class of the insured and gender mix of the group-sponsored
contract.
The total of cash value charges for the year ended December 31, 1996 and the
period from March 8, 1995 to December 31, 1995 for each segregated sub-account
are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Growth $ 1,811 $ 516
Bond 145 53
Money Market 847 7
Asset Allocation 418 151
Mortgage Securities 235 108
Index 500 105,767 47,802
Capital Appreciation 866 253
International Stock 375 68
Small Company 4,492 2,093
Maturing Government Bond 1998 -- --
Maturing Government Bond 2002 -- --
Maturing Government Bond 2006 -- --
Maturing Government Bond 2010 -- --
Value Stock 584 157
Contrafund 14 --
High Income 1 --
Equity-Income 18 --
</TABLE>
49
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(4) INVESTMENT TRANSACTIONS
The Account's purchases of Underlying Fund shares, including reinvestment of
dividend distributions, were as follows during the year ended December 31, 1996
and period from March 8, 1995 to December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Growth Portfolio $ 8,337 $ 6,640
Bond Portfolio 1,400 1,773
Money Market Portfolio 2,691 1,204
Asset Allocation Portfolio 4,105 3,619
Mortgage Securities Portfolio 565 1,226
Index 500 Portfolio 712,449 552,219
Capital Appreciation Portfolio 6,368 7,913
International Stock Portfolio 3,407 3,858
Small Company Portfolio 19,149 43,115
Maturing Government Bond 1998 Portfolio 1,000 --
Maturing Government Bond 2002 Portfolio 1,058 --
Maturing Government Bond 2006 Portfolio 1,060 --
Maturing Government Bond 2010 Portfolio 1,000 --
Value Stock Portfolio 4,750 6,196
Contrafund Portfolio 30,393 --
High Income Portfolio 29,905 --
Equity-Income Portfolio 30,336 --
</TABLE>
(5) UNIT ACTIVITY FROM CONTRACT TRANSACTIONS
Transactions in units for each segregated sub-account for the year ended
December 31, 1996 and period from March 8, 1995 to December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------
MONEY ASSET MORTGAGE INDEX
GROWTH BOND MARKET ALLOCATION SECURITIES 500
------ ----- ------ ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1994 -- -- -- -- -- --
Policy purchase pay-
ments 6,300 1,759 1,170 3,444 1,222 500,879
Deductions for policy
withdrawals and
charges (583) (51) (7) (957) (106) (43,240)
------ ----- ----- ----- ----- -------
Units outstanding at
December 31, 1995 5,717 1,708 1,163 2,487 1,116 457,639
Policy purchase pay-
ments 6,491 1,528 2,587 3,275 474 544,469
Deductions for policy
withdrawals and
charges (1,625) (774) (928) (386) (237) (99,914)
------ ----- ----- ----- ----- -------
Units outstanding at
December 31, 1996 10,583 2,462 2,822 5,376 1,353 902,194
====== ===== ===== ===== ===== =======
</TABLE>
50
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) UNIT ACTIVITY FROM CONTRACT TRANSACTION (CONTINUED)
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
--------------------------------------------------------------------
MATURING MATURING MATURING
CAPITAL INTERNATIONAL SMALL GOVERNMENT GOVERNMENT GOVERNMENT
APPRECIATION STOCK COMPANY BOND 1998 BOND 2002 BOND 2006
------------ ------------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1994 -- -- -- -- -- --
Policy purchase pay-
ments 7,072 3,786 37,910 -- -- --
Deduction for policy
withdrawals and
charges (1,489) (98) (3,085) -- -- --
------ ------ ------ ----- ----- -----
Units outstanding at
December 31, 1995 5,583 3,688 34,825 -- -- --
Policy purchase pay-
ments 5,652 3,760 11,903 1,000 1,000 1,000
Deductions for policy
withdrawals and
charges (2,510) (2,847) (4,985) -- -- --
------ ------ ------ ----- ----- -----
Units outstanding at
December 31, 1996 8,725 4,601 41,743 1,000 1,000 1,000
====== ====== ====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
SEGREGATED SUB--ACCOUNTS
-------------------------------------------
MATURING
GOVERNMENT VALUE CONTRA- HIGH EQUITY-
BOND 2010 STOCK FUND INCOME INCOME
---------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Units outstanding at December 31,
1994 -- -- -- -- --
Policy purchase payments -- 5,499 -- -- --
Deduction for policy withdrawals
and charges -- (1,483) -- -- --
----- ------ ------ ------ ------
Units outstanding at December 31,
1995 -- 4,016 -- -- --
Policy purchase payments 1,000 3,817 30,375 29,956 30,325
Deductions for policy withdrawals
and charges -- (2,248) (14) (1) (19)
----- ------ ------ ------ ------
Units outstanding at December 31,
1996 1,000 5,585 30,361 29,955 30,306
===== ====== ====== ====== ======
</TABLE>
51
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCIAL HIGHLIGHTS
The following table for each segregated sub-account show certain data for an
accumulation unit outstanding during the year ended December 31, 1996 and the
period from March 8, 1995, commencement of operations, to December 31, 1995
(period from May 1, 1996, commencement of operations, to December 31, 1996 for
Maturing Government Bond 1998, Maturing Government Bond 2002, Maturing
Government Bond 2006, Maturing Government Bond 2010, Contrafund, High Income
and Equity-Income segregated sub-accounts):
<TABLE>
<CAPTION>
GROWTH BOND MONEY MARKET
------------- --------------- --------------
1996 1995 1996 1995 1996 1995
------ ----- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of
period $1.103 1.000 1.067 1.000 1.027 1.000
------ ----- ------- ------ ------ ------
Income from investment
operations:
Net investment income (loss) .003 (.003) .045 (.003) .045 .027
Net gains or losses on
securities
(both realized and
unrealized) .180 .106 (.019) .070 -- --
------ ----- ------- ------ ------ ------
Total from investment
operations .183 .103 .026 .067 .045 .027
------ ----- ------- ------ ------ ------
Unit value, end of period $1.286 1.103 1.093 1.067 1.072 1.027
====== ===== ======= ====== ====== ======
<CAPTION>
ASSET MORTGAGE
ALLOCATION SECURITIES INDEX 500
------------- --------------- --------------
1996 1995 1996 1995 1996 1995
------ ----- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of
period $1.107 1.000 1.053 1.000 1.164 1.000
------ ----- ------- ------ ------ ------
Income from investment
operations:
Net investment income (loss) .023 (.003) .059 (.003) .008 (.003)
Net gains or losses on
securities
(both realized and
unrealized) .110 .110 (.009) .056 .237 .167
------ ----- ------- ------ ------ ------
Total from investment
operations .133 .107 .050 .053 .245 .164
------ ----- ------- ------ ------ ------
Unit value, end of period $1.240 1.107 1.103 1.053 1.409 1.164
====== ===== ======= ====== ====== ======
<CAPTION>
CAPITAL INTERNATIONAL SMALL
APPRECIATION STOCK COMPANY
------------- --------------- --------------
1996 1995 1996 1995 1996 1995
------ ----- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of
period $1.127 1.000 1.046 1.000 1.210 1.000
------ ----- ------- ------ ------ ------
Income from investment
operations:
Net investment income (loss) (.006) (.003) .021 (.003) (.003) (.001)
Net gains or losses on
securities
(both realized and
unrealized) .198 .130 .180 .049 .075 .211
------ ----- ------- ------ ------ ------
Total from investment
operations .192 .127 .201 .046 .072 .210
------ ----- ------- ------ ------ ------
Unit value, end of period $1.319 1.127 1.247 1.046 1.282 1.210
====== ===== ======= ====== ====== ======
</TABLE>
52
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
MATURING MATURING MATURING MATURING
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT
BOND 1998 BOND 2002 BOND 2006 BOND 2010
---------- ---------- ---------- ----------
1996 1996 1996 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Unit value, beginning of
period $1.000 1.000 1.000 1.000
------ ----- ----- -----
Income from investment
operations:
Net investment income
(loss) (.003) .055 .057 (.003)
Net gains or losses on
securities
(both realized and
unrealized) .047 .004 .022 .101
------ ----- ----- -----
Total from investment
operations .044 .059 .079 .098
------ ----- ----- -----
Unit value, end of period $1.044 1.059 1.079 1.098
====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
HIGH EQUITY-
VALUE STOCK CONTRAFUND INCOME INCOME
------------ ---------- ------ -------
1996 1995 1996 1996 1996
------ ----- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.161 1.000 1.000 1.000 1.000
------ ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) .006 .012 (.003) (.003) (.003)
Net gains or losses on securities
(both realized and unrealized) .346 .149 .117 .070 .066
------ ----- ----- ----- -----
Total from investment operations .352 .161 .114 .067 .063
------ ----- ----- ----- -----
Unit value, end of period $1.513 1.161 1.114 1.067 1.063
====== ===== ===== ===== =====
</TABLE>
53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
The Minnesota Mutual Life Insurance Company
We have audited the accompanying consolidated balance sheets of The Minnesota
Mutual Life Insurance Company and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations and policyowners'
surplus and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Minnesota Mutual Life Insurance Company and subsidiaries as of December 31,
1996 and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles. As discussed in Note
2 to the consolidated financial statements, the Company adopted Statement of
Financial Accounting Standards No. 120, "Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain Long-
Duration Participating Contracts," in 1996.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information included
in the accompanying schedules is presented for purposes of additional analysis
and is not a required part of the basic financial statements. Such information
has been subjected to the auditing procedures applied in the audits of the
basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 10, 1997
54
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,558,975 and $4,525,352) $ 4,674,082 $ 4,761,561
Held-to-maturity, at amortized cost (fair value
$1,179,112 and $1,281,523) 1,125,638 1,180,654
Equity securities, at fair value (cost $429,509 and
$277,554) 549,797 384,882
Mortgage loans, net 608,808 608,537
Real estate, net 43,082 47,256
Policy loans 204,178 198,716
Short-term investments 122,772 72,841
Other invested assets 98,247 91,530
----------- -----------
Total investments 7,426,604 7,345,977
Cash 57,140 48,358
Finance receivables, net 259,192 226,720
Deferred policy acquisition costs 589,517 539,732
Accrued investment income 90,996 98,373
Premiums receivable 77,140 85,247
Property and equipment, net 55,050 50,809
Reinsurance recoverables 126,629 102,198
Other assets 54,798 46,530
Separate account assets 3,706,256 2,609,460
----------- -----------
Total assets $12,443,322 $11,153,404
=========== ===========
LIABILITIES AND POLICYOWNERS' SURPLUS
Liabilities:
Policy and contract account balances $ 4,310,015 $ 4,287,083
Future policy and contract benefits 1,638,720 1,554,898
Pending policy and contract claims 70,577 55,812
Other policyowner funds 396,848 371,537
Policyowner dividends payable 49,899 50,450
Unearned premiums and fees 207,111 210,494
Federal income tax liability:
Current 25,643 39,516
Deferred 149,665 173,905
Other liabilities 286,042 320,607
Notes payable 319,000 279,967
Separate account liabilities 3,691,374 2,596,285
----------- -----------
Total liabilities 11,144,894 9,940,554
Policyowners' surplus:
Unassigned surplus 1,190,116 1,059,598
Net unrealized investment gains 108,312 153,252
----------- -----------
Total policyowners' surplus 1,298,428 1,212,850
----------- -----------
Total liabilities and policyowners' surplus $12,443,322 $11,153,404
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
55
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND POLICYOWNERS' SURPLUS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Premiums $ 612,359 $ 603,770 $ 562,018
Policy and contract fees 245,966 214,203 188,115
Net investment income 530,987 515,047 486,101
Net realized investment gains 59,546 66,643 25,769
Finance charge income 46,932 39,937 34,258
Other income 51,630 40,250 30,106
---------- ---------- ---------
Total revenues 1,547,420 1,479,850 1,326,367
---------- ---------- ---------
Benefits and expenses:
Policyowner benefits 541,520 517,771 498,424
Interest credited to policies and con-
tracts 288,967 297,145 283,626
General operating expenses 302,618 273,425 253,317
Commissions 103,370 93,465 87,631
Administrative and sponsorship fees 79,360 76,223 71,143
Dividends to policyowners 24,804 27,282 26,672
Interest on notes payable 22,798 11,128 7,295
Increase in deferred policy acquisition
costs (15,312) (29,822) (43,974)
---------- ---------- ---------
Total benefits and expenses 1,348,125 1,266,617 1,184,134
---------- ---------- ---------
Income from operations before taxes 199,295 213,233 142,233
Federal income tax expense:
Current 68,033 71,379 63,641
Deferred 744 11,995 (1,511)
---------- ---------- ---------
Total federal income tax expense 68,777 83,374 62,130
Net income $ 130,518 $ 129,859 $ 80,103
========== ========== =========
STATEMENTS OF POLICYOWNERS' SURPLUS
Policyowners' surplus, beginning of year $1,212,850 $ 874,577 $ 892,510
Net income 130,518 129,859 80,103
Change in net unrealized investment
gains and losses (44,940) 208,414 (98,036)
---------- ---------- ---------
Policyowners' surplus, end of year $1,298,428 $1,212,850 $ 874,577
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
56
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 130,518 $ 129,859 $ 80,103
Adjustments to reconcile net income to net
cash provided by operating activities:
Interest credited to annuity and insur-
ance contracts 275,968 288,218 277,863
Fees deducted from policy and contract
balances (206,780) (201,575) (188,226)
Change in future policy benefits 84,389 100,025 63,328
Change in other policyowner liabilities 16,099 (4,762) (16,794)
Change in deferred policy acquisition
costs (15,312) (29,822) (43,974)
Change in premiums due and other receiv-
ables (26,142) (18,039) 38,166
Change in federal income tax liabilities (12,055) 18,376 17,854
Net realized investment gains (59,546) (66,643) (25,769)
Other, net 29,987 36,561 28,958
---------- ---------- ----------
Net cash provided by operating activi-
ties 217,126 252,198 231,509
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 877,682 1,349,348 653,498
Equity securities 352,901 203,493 88,645
Mortgage loans 15,567 4,315 20,912
Real estate 11,678 15,948 17,571
Other invested assets 12,280 10,775 28,305
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 329,550 253,576 327,337
Fixed maturity securities, held-to-matu-
rity 114,222 127,617 75,648
Mortgage loans 94,703 104,730 126,134
Cost of purchases of:
Fixed maturity securities, available-
for-sale (1,228,048) (1,975,130) (1,123,125)
Fixed maturity securities, held-to-matu-
rity (60,612) (140,763) (131,820)
Equity securities (446,599) (212,142) (131,483)
Mortgage loans (108,691) (209,399) (145,964)
Real estate (3,786) (16,554) (10,985)
Other invested assets (29,271) (20,517) (12,732)
Finance receivable originations or pur-
chases (175,876) (167,298) (134,867)
Finance receivable principal payments 142,723 123,515 104,539
Other, net (43,662) (19,292) 15,309
---------- ---------- ----------
Net cash used for investing activities (145,239) (567,778) (233,078)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits credited to annuity and insurance
contracts 657,405 710,525 647,237
Withdrawals from annuity and insurance
contracts (702,681) (563,569) (645,969)
Proceeds from issuance of surplus notes -- 124,967 --
Proceeds from issuance of debt by subsidi-
ary 60,000 50,000 30,000
Payments on debt by subsidiary (21,000) (10,000) (9,100)
Other, net (6,898) (3,801) (5,940)
---------- ---------- ----------
Net cash provided by (used for) fi-
nancing activities (13,174) 308,122 16,228
---------- ---------- ----------
Net increase (decrease) in cash and short-
term investments 58,713 (7,458) 14,659
Cash and short-term investments, beginning
of year 121,199 128,657 113,998
---------- ---------- ----------
Cash and short-term investments, end of
year $ 179,912 $ 121,199 $ 128,657
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
The Minnesota Mutual Life Insurance Company (the Company), both directly and
through its subsidiaries, provides a diversified array of insurance and
financial products and services designed principally to protect and enhance the
long-term financial well-being of individuals and families.
The Company's strategy is to be successful in carefully selected niche
markets, primarily in the United States, while focusing on the retention of
existing business and the maintenance of profitability. To achieve this
objective, the Company has divided its businesses into four strategic business
units which focus on various markets: Individual, Financial Services, Group,
and Pension. Revenues reported in 1996 by these business units were
$780,250,000, $279,554,000, $213,461,000 and $104,059,000, respectively.
Additional revenues of $170,096,000 were reported by the Company's
subsidiaries.
At December 31, 1996, the Company was one of the 11 largest mutual life
insurance company groups in the United States, as measured by total assets. The
Company serves nearly seven million people through more than 4,000 associates
located at its St. Paul headquarters and in 81 general agencies and 43 regional
offices throughout the United States.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP), which vary in
certain respects from accounting practices prescribed or permitted by state
insurance regulatory authorities. The consolidated financial statements include
the accounts of The Minnesota Mutual Life Insurance Company and its
subsidiaries (collectively, "the Company"). All material intercompany
transactions and balances have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates and assumptions that affect reported
assets and liabilities, including reporting or disclosure of contingent assets
and liabilities as of the balance sheet date and the reported amounts of
revenues and expenses during the reporting period. Actual results could vary
from management's estimates.
New Accounting Principles
In 1995 and prior years, the Company prepared its financial statements
according to statutory accounting practices prescribed or permitted by the
Commerce Department of the State of Minnesota (Department of Commerce), and
these accounting practices were considered GAAP for mutual life insurance
companies.
In April 1993, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 40 (the Interpretation), "Applicability of Generally
Accepted Accounting Principles to Mutual Life Insurance and Other Enterprises."
The Interpretation was supposed to become effective for fiscal years beginning
after December 15, 1994 and stated that financial statements prepared in
accordance with statutory accounting practices would no longer be considered to
be in conformity with GAAP. The Interpretation requires all mutual life
insurance companies that report their financial statements in conformity with
GAAP to apply all applicable authoritative GAAP pronouncements, with the
exception of Statements of Financial Accounting Standards (SFAS) No. 60,
"Accounting and Reporting by Insurance Enterprises," No. 97, "Accounting and
Reporting by Insurance Enterprises for Certain Long Duration Contracts and
Realized Gains and Losses from the Sale of Investments," and No. 113,
"Accounting for Reinsurance of Short-Duration and Long-Duration Contracts."
In January 1995, the FASB issued SFAS 120, "Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long
Duration Participating Contracts." This statement deferred the implementation
of the Interpretation to fiscal years beginning after December 15, 1995 and
extended the requirements of SFAS Nos. 60, 97 and 113 to mutual life insurance
enterprises.
SFAS No. 120 also requires mutual life insurance enterprises to adopt
Statement of Position 95-1, "Accounting for Certain Insurance Activities of
Mutual Life Insurance Enterprises," which was issued by the American Institute
of Certified Public Accountants.
58
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company adopted SFAS No. 120 on January 1, 1996, and the accompanying
1994 and 1995 financial statements and related notes have been restated to
conform with the presentation of the 1996 GAAP financial statements.
The Company will continue to prepare financial statements according to
statutory accounting practices prescribed or permitted by the Department of
Commerce for purposes of filing with the Department of Commerce, the National
Association of Insurance Commissioners and states in which the Company is
licensed to do business. The significant differences between statutory and GAAP
financial results are presented in Note 12.
Insurance Revenues and Expenses
Premiums on traditional life products, which include individual whole life and
term insurance and immediate annuities, are credited to revenue when due. For
accident and health and group life products, premiums are credited to revenue
over the contract period as earned. Benefits and expenses are recognized in
relation to premiums over the contract period via a provision for future policy
benefits and the amortization of deferred policy acquisition costs.
Nontraditional life products include individual adjustable and variable life
insurance and group universal and variable life insurance. Revenue from
nontraditional life products and deferred annuities is comprised of policy and
contract fees charged for the cost of insurance, policy administration and
surrenders. Expenses include the portion of claims not covered by and interest
credited to the related policy and contract account balances. Policy
acquisition costs are amortized relative to gross margins.
Deferred Policy Acquisition Costs
The costs of acquiring new and renewal business, which vary with and are
primarily related to the production of new and renewal business, are generally
deferred to the extent recoverable from future premiums or expected gross
profits. Deferrable costs include commissions, underwriting expenses and
certain other selling and issue costs.
For traditional life, accident and health and group life products, deferred
acquisition costs are amortized over the premium paying period in proportion to
the ratio of annual premium revenues to ultimate anticipated premium revenues.
The ultimate premium revenues are estimated based upon the same assumptions
used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred acquisition
costs are amortized over the estimated lives of the contracts in relation to
the present value of estimated gross profits from surrender charges and
investment, mortality and expense margins.
Deferred acquisition costs amortized were $125,978,000, $104,940,000 and
$86,477,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Finance Charge Income and Receivables
Finance charge income represents fees and interest charged on consumer loans.
The Company uses the interest (actuarial) method of accounting for finance
charges and interest on finance receivables. Accrual of finance charges and
interest is suspended when a loan is contractually delinquent for more than 60
days and is subsequently recognized when received. Accrual is resumed when the
loan is contractually less than 60 days past due. An allowance for
uncollectible amounts is maintained by direct charges to operations at an
amount which management believes, based upon historical losses and economic
conditions, is adequate to absorb probable losses on existing receivables that
may become uncollectible. The reported receivables are net of this allowance.
Valuation of Investments
Fixed maturity securities (bonds) which the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are carried
at amortized cost, net of write-downs for other than temporary declines in
value. Premiums and discounts are amortized or accreted over the estimated
lives of the securities based on the interest yield method. Fixed maturity
securities which may be sold prior to maturity are classified as available-for-
sale and carried at fair value.
59
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity securities (common stocks and preferred stocks) are carried at fair
value. Equity securities also include initial contributions to affiliated
registered investment funds that are managed by a subsidiary of the Company.
These contributions are carried at the market value of the underlying net
assets of the funds.
Mortgage loans are carried at amortized cost less an allowance for
uncollectible amounts. Premiums and discounts are amortized or accreted over
the terms of the mortgage loans based on the interest yield method. A mortgage
loan is considered impaired if it is probable that contractual amounts due will
not be collected. Impaired mortgage loans are valued at the fair value of the
underlying collateral. Interest income on impaired mortgage loans is recorded
on an accrual basis. However, when the likelihood of collection is doubtful,
interest income is recognized when received.
Fair values of fixed maturity securities and equity securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using values obtained from independent
pricing services which specialize in matrix pricing and modeling techniques for
estimating fair values. Fair values of mortgage loans are based upon discounted
cash flows, quoted market prices and matrix pricing.
Real estate is carried at cost less accumulated depreciation and an allowance
for estimated losses. Accumulated depreciation on real estate at December 31,
1996 and 1995, was $5,968,000 and $8,342,000, respectively.
Policy loans are carried at the unpaid principal balance.
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps are used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps are based upon
certain stock indices, and settlement with the counterparties will take place
in January 1998. If, at the time of settlement for a particular swap, the
designated stock index has fallen below a specified level, the counterparty
will pay the Company an amount based upon the decline in the index and the
stock portfolio value protected by the swap. If, at the time of settlement, the
designated stock index has risen, the Company will pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap.
The basic types of risks associated with derivatives are market risk (that
the value of the derivative will be adversely affected by changes in the
market) and credit risk (that the counterparty will not perform according to
the contract terms). To reduce credit risk, the swap contracts require that the
counterparties maintain sufficient credit ratings and provide collateral under
certain circumstances.
The swaps are carried at fair value, which is based upon dealer quotes.
Changes in fair value are recorded directly in policyowners' surplus. Upon
settlement of the swaps, gains or losses are recognized in income.
Capital Gains and Losses
Realized and unrealized capital gains and losses are determined on the specific
identification method. Write-downs of held-to-maturity securities and the
provision for credit losses on mortgage loans and real estate are recorded as
realized losses.
Changes in the fair value of fixed maturity securities available-for-sale and
equity securities are recorded as a separate component of policyowners'
surplus, net of taxes and related adjustments to deferred policy acquisition
costs and unearned policy and contract fees.
Property and Equipment
Property and equipment are carried at cost, net of accumulated depreciation of
$81,962,000 and $75,507,000 at December 31, 1996 and 1995, respectively.
Buildings are depreciated over 40 years and equipment is generally depreciated
over 5 to 10 years. Depreciation expense for the years ended December 31, 1996,
1995 and 1994, was $6,454,000, $5,941,000 and $8,136,000, respectively.
60
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of certain policyowners
and contractholders. The Company receives administrative and investment
advisory fees for services rendered on behalf of these funds. Separate account
assets and liabilities are carried at fair value, based upon the market value
of the investments held in the segregated funds.
The Company periodically invests money in its separate accounts. The market
value of such investments is included with separate account assets and amounted
to $14,882,000 and $13,175,000 as of December 31, 1996 and 1995, respectively.
Policyowner Liabilities
Policy and contract account balances represent the net accumulation of funds
associated with nontraditional life products and deferred annuities. Additions
to the account balances include premiums, deposits and interest credited by the
Company. Decreases in the account balances include surrenders, withdrawals,
benefit payments, and charges assessed for the cost of insurance, policy
administration and surrenders.
Future policy and contract benefits are comprised of reserves for traditional
life, group life, and accident and health products. The reserves were
calculated using the net level premium method based upon assumptions regarding
investment yield, mortality, morbidity, and withdrawal rates determined at the
date of issue, commensurate with the Company's experience. Provision has been
made in certain cases for adverse deviations from these assumptions.
Other policyowner funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Substantially all of the Company's premium revenues are derived from
participating policies. Dividends and other discretionary payments are declared
by the Board of Trustees based upon actuarial determinations which take into
consideration current mortality, interest earnings, expense factors and federal
income taxes. Dividends are recognized as expenses consistent with the
recognition of premiums.
Income Taxes
Current income taxes are charged to operations based upon amounts estimated to
be payable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between financial statement
carrying amounts and income tax bases of assets and liabilities.
Reinsurance Recoverables
Insurance liabilities are reported before the effects of ceded reinsurance.
Reinsurance recoverables represent amounts due from reinsurers for paid and
unpaid benefits, expense reimbursements, prepaid premiums and future policy
benefits.
61
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $433,985 $426,114 $417,698
Equity securities 14,275 8,883 4,485
Mortgage loans 63,865 58,943 49,676
Real estate (475) 497 648
Policy loans 13,828 12,821 11,800
Short-term investments 6,535 6,716 4,262
Other invested assets 4,901 5,168 3,212
-------- -------- --------
Gross investment income 536,914 519,142 491,781
Investment expenses (5,927) (4,095) (5,680)
-------- -------- --------
Total $530,987 $515,047 $486,101
======== ======== ========
</TABLE>
Net realized capital gains (losses) for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $(6,536) $24,025 $(2,528)
Equity securities 57,770 36,374 11,268
Mortgage loans (721) (207) (82)
Real estate 7,088 2,436 3,915
Other invested assets 1,945 4,015 13,196
------- ------- -------
Total $59,546 $66,643 $25,769
======= ======= =======
</TABLE>
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 19,750 $ 34,898 $ 13,375
Gross realized losses (26,286) (10,873) (15,903)
Equity securities:
Gross realized gains 79,982 52,670 21,538
Gross realized losses (22,212) (16,296) (10,270)
</TABLE>
Net unrealized gains (losses) included in policyowners' surplus at December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains $314,576 $358,877
Gross unrealized losses (77,337) (13,713)
Adjustment to deferred policy acquisition costs (65,260) (99,732)
Adjustment to unearned policy and contract fees (8,192) (11,665)
Deferred federal income taxes (55,475) (80,515)
-------- --------
Net unrealized gains $108,312 $153,252
======== ========
</TABLE>
62
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and fair value of investments in marketable securities by
type of investment were as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ---------------- FAIR
COST GAINS LOSSES VALUE
---------- -------- ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 302,820 $ 2,397 $ 6,756 $ 298,461
States, municipalities, and polit-
ical subdivisions 11,296 759 -- 12,055
Foreign governments 1,926 -- 54 1,872
Corporate securities 2,450,126 115,846 19,554 2,546,418
Mortgage-backed securities 1,792,807 64,834 42,365 1,815,276
---------- -------- ------- ----------
Total fixed maturities 4,558,975 183,836 68,729 4,674,082
Equity securities--unaffiliated 353,983 107,172 5,168 455,987
Equity securities--affiliated 75,526 18,284 -- 93,810
---------- -------- ------- ----------
Total equity securities 429,509 125,456 5,168 549,797
---------- -------- ------- ----------
Total available-for-sale 4,988,484 309,292 73,897 5,223,879
Held-to-maturity:
Corporate securities 904,994 50,187 3,130 952,051
Mortgage-backed securities 220,644 7,833 1,416 227,061
---------- -------- ------- ----------
Total held-to-maturity 1,125,638 58,020 4,546 1,179,112
---------- -------- ------- ----------
Total $6,114,122 $367,312 $78,443 $6,402,991
========== ======== ======= ==========
DECEMBER 31, 1995
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 261,669 $ 10,911 $ 440 $ 272,140
States, municipalities, and polit-
ical subdivisions 26,317 3,262 -- 29,579
Foreign governments 1,704 223 -- 1,927
Corporate securities 2,523,889 169,329 6,098 2,687,120
Mortgage-backed securities 1,711,773 62,510 3,488 1,770,795
---------- -------- ------- ----------
Total fixed maturities 4,525,352 246,235 10,026 4,761,561
Equity securities--unaffiliated 196,355 91,269 1,590 286,034
Equity securities--affiliated 81,199 17,649 -- 98,848
---------- -------- ------- ----------
Total equity securities 277,554 108,918 1,590 384,882
---------- -------- ------- ----------
Total available-for-sale 4,802,906 355,153 11,616 5,146,443
Held-to-maturity:
United States government and gov-
ernment agencies and authorities 250 3 -- 253
States, municipalities, and polit-
ical subdivisions 525 6 -- 531
Corporate securities 953,511 89,962 525 1,042,948
Mortgage-backed securities 226,368 11,540 117 237,791
---------- -------- ------- ----------
Total held-to-maturity 1,180,654 101,511 642 1,281,523
---------- -------- ------- ----------
Total $5,983,560 $456,664 $12,258 $6,427,966
========== ======== ======= ==========
</TABLE>
63
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less $ 33,390 $ 33,429 $ 4,889 $ 4,948
Due after one year through five
years 435,040 459,870 163,206 168,527
Due after five years through ten
years 1,383,954 1,429,460 223,848 235,754
Due after ten years 913,784 936,047 513,051 542,822
---------- ---------- ---------- ----------
2,766,168 2,858,806 904,994 952,051
Mortgage-backed securities 1,792,807 1,815,276 220,644 227,061
---------- ---------- ---------- ----------
Total $4,558,975 $4,674,082 $1,125,638 $1,179,112
========== ========== ========== ==========
</TABLE>
At December 31, 1996 and 1995, bonds and certificates of deposit with a
carrying value of $12,934,000 and $15,296,000, respectively, were on deposit
with various regulatory authorities as required by law.
Allowances for credit losses on investments are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans $ 1,895 $ 1,711
Foreclosed real estate 535 400
Investment real estate 2,529 2,565
------- -------
Total $ 4,959 $ 4,676
======= =======
</TABLE>
At December 31, 1996, the recorded investment in mortgage loans that were
considered to be impaired was $6,518,000 before allowance for credit losses.
Included in this amount is $2,225,000 of impaired loans, for which the related
allowance for credit losses is $395,000, and $4,293,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
At December 31, 1995, the recorded investment in mortgage loans that were
considered to be impaired was $12,232,000 before allowance for credit losses.
Included in this amount is $3,256,000 of impaired loans, for which the related
allowance for credit losses is $211,000, and $8,976,000 of impaired loans that,
as a result of adequate fair market value of underlying collateral, do not have
an allowance for credit losses.
In addition to the allowance for credit losses on impaired mortgage loans, a
general allowance for credit losses was established for potential impairments
in the remainder of the mortgage loan portfolio. The general allowance was
$1,500,000 at December 31, 1996, 1995 and 1994.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $1,711 $2,449 $2,412
Provision for credit losses 381 127 622
Charge-offs (197) (865) (585)
------ ------ ------
Balance at end of year $1,895 $1,711 $2,449
====== ====== ======
</TABLE>
64
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENTS (CONTINUED)
Below is a summary of interest income on impaired mortgage loans.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired mortgage loans $9,375 $15,845 $20,236
Interest income on impaired mortgage loans--contractual 1,796 1,590 2,103
Interest income on impaired mortgage loans--collected 1,742 1,515 1,963
</TABLE>
(4) NET FINANCE RECEIVABLES
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct installment loans $204,038 $178,262
Retail installment notes 30,843 32,345
Retail revolving credit 24,863 14,864
Credit card receivables 3,541 4,479
Accrued interest 3,404 3,147
-------- --------
Gross receivables 266,689 233,097
Allowance for uncollectible amounts (7,497) (6,377)
-------- --------
Finance receivables, net $259,192 $226,720
======== ========
</TABLE>
Direct installment loans at December 31, 1996 consisted of $93,127,000 of
discount basis loans (net of unearned finance charges) and $110,911,000 of
interest-bearing loans. As of December 31, 1995, discount basis loans amounted
to $92,351,000 and interest-bearing loans amounted to $85,911,000. Direct
installment loans generally have a maximum term of 84 months. Retail
installment notes are principally discount basis, arise from the sale of
household appliances, furniture, and sundry services, and generally have a
maximum term of 48 months. Experience has shown that a substantial portion of
finance receivables will be renewed, converted or paid in full prior to
maturity.
Principal cash collections of direct installment loans amounted to
$92,438,000, $75,865,000 and $70,941,000, and the percentage of these cash
collections to average net balances was 48%, 47% and 55% for the years ended
December 31, 1996, 1995 and 1994, respectively.
Changes in the allowance for uncollectible amounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 6,377 $5,360 $4,801
Provision for credit losses 10,086 6,140 4,652
Charge-offs (11,036) (6,585) (5,305)
Recoveries 2,070 1,462 1,212
------- ------ ------
Balance at end of year $ 7,497 $6,377 $5,360
======= ====== ======
</TABLE>
65
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
Income tax expense varies from the amount computed by applying the federal
income tax rate of 35% to income from operations before taxes. The significant
components of this difference were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed tax expense $69,753 $74,631 $49,781
Differences between
computed and actual tax
expense:
Dividends received
deduction (2,534) (1,710) (1,293)
Special tax on mutual
life insurance
companies 2,760 10,134 9,880
Tax credits (3,475) (1,840) (1,150)
Expense adjustments and
other 2,273 2,159 4,912
------- ------- -------
Total tax expense $68,777 $83,374 $62,130
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Policyowner liabilities $ 15,854 $ 22,151
Unearned fee income 43,232 43,576
Pension and post-retirement benefits 21,815 20,187
Tax deferred policy acquisition costs 58,732 47,228
Net realized capital losses 8,275 7,881
Other 19,229 17,997
-------- --------
Gross deferred tax assets 167,137 159,020
Deferred tax liabilities:
Deferred policy acquisition costs 206,331 188,906
Real estate and property and equipment depreciation 10,089 9,049
Basis difference on investments 8,605 7,402
Net unrealized capital gains 81,339 119,604
Other 10,438 7,964
-------- --------
Gross deferred tax liabilities 316,802 332,925
-------- --------
Net deferred tax liability $149,665 $173,905
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1996 and 1995, because the Company believes that it is more
likely than not that the deferred tax assets will be realized through future
reversals of existing taxable temporary differences and future taxable income.
Income taxes paid for the years ended December 31, 1996, 1995 and 1994, were
$79,026,000, $64,390,000 and $45,268,000, respectively.
66
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LIABILITY FOR UNPAID ACCIDENT AND HEALTH CLAIMS AND CLAIM ADJUSTMENT
EXPENSES
Activity in the liability for unpaid accident and health claims and claim
adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1 $377,302 $349,311 $323,304
Less: reinsurance recoverable 80,333 61,624 51,549
-------- -------- --------
Net balance at January 1 296,969 287,687 271,755
-------- -------- --------
Incurred related to:
Current year 134,727 129,896 129,028
Prior years 4,821 (4,014) 860
-------- -------- --------
Total incurred 139,548 125,882 129,888
-------- -------- --------
Paid related to:
Current year 51,695 47,620 46,270
Prior years 70,073 68,980 67,686
-------- -------- --------
Total paid 121,768 116,600 113,956
-------- -------- --------
Net balance at December 31 314,749 296,969 287,687
Plus: reinsurance recoverable 102,161 80,333 61,624
-------- -------- --------
Balance at December 31 $416,910 $377,302 $349,311
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims and claim adjustment
expenses is included in future policy and contract benefits and pending policy
and contract claims on the consolidated balance sheets.
Incurred claims related to prior years are due to the differences between
actual and estimated claims incurred as of the end of the prior year and
interest credited to future policy and contract benefits.
(7) EMPLOYEE BENEFIT PLANS
Pension Plans
The Company has noncontributory defined benefit retirement plans covering
substantially all employees and certain agents. Benefits are based upon years
of participation and the employee's average monthly compensation or the agent's
adjusted annual compensation. Plan assets are comprised of mostly stocks and
bonds which are held in the general and separate accounts of the Company and
administered under group annuity contracts issued by the Company. The Company's
funding policy is to contribute annually the minimum amount required by
applicable regulations. The Company also has an unfunded noncontributory
defined benefit retirement plan which provides certain employees with benefits
in excess of limits for qualified retirement plans.
Net periodic pension cost for the years ended December 31 included the
following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 6,019 $ 5,294 $ 4,880
Interest accrued on projected benefit obligation 8,541 7,935 7,382
Actual return on plan assets (12,619) (18,061) (1,331)
Net amortization and deferral 4,698 11,811 (5,094)
-------- -------- -------
Net periodic pension cost $ 6,639 $ 6,979 $ 5,837
======== ======== =======
</TABLE>
67
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status for the Company's plans as of December 31 was calculated as
follows:
<TABLE>
<CAPTION>
FUNDED PLANS UNFUNDED PLAN
------------------ ----------------
1996 1995 1996 1995
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit ob-
ligations:
Vested benefit obligation $ 61,328 $ 56,428 $ -- $ --
Non-vested benefit obligation 19,119 16,599 5,912 4,539
-------- -------- ------- -------
Accumulated benefit obligation $ 80,447 $ 73,027 $ 5,912 $ 4,539
======== ======== ======= =======
Pension liability included in other li-
abilities:
Projected benefit obligation $117,836 $105,180 $12,576 $10,430
Plan assets at fair value 115,107 102,594 -- --
-------- -------- ------- -------
Plan assets less than projected bene-
fit obligation 2,729 2,586 12,576 10,430
Unrecognized net gain (loss) 3,633 2,095 (2,332) (1,187)
Unrecognized prior service cost (364) (213) -- --
Unamortized transition asset (obliga-
tion) 2,422 2,643 (8,451) (9,219)
Additional minimum liability -- -- 4,119 4,515
-------- -------- ------- -------
Net pension liability $ 8,420 $ 7,111 $ 5,912 $ 4,539
======== ======== ======= =======
</TABLE>
A weighted average discount rate of 7.5% and a weighted average rate of
increase in future compensation levels of 5.8% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
1996 and 1995. The assumed long-term rate of return on plan assets was either
7.5% or 8.5%, depending on the plan.
Profit Sharing Plans
The Company also has profit sharing plans covering substantially all employees
and agents. The Company's contribution rate to the employee plan is determined
annually by the trustees of the Company and is applied to each participant's
prior year earnings. The Company's contribution to the agent plan is made as a
certain percentage, based upon years of service, applied to each agent's total
annual compensation. The Company recognized contributions to the plans during
1996, 1995 and 1994 of $6,092,000, $6,595,000 and $6,866,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
Postretirement Benefits Other than Pensions
The Company also has unfunded postretirement plans that provide certain health
care and life insurance benefits to substantially all retired employees and
agents. Eligibility is determined by age at retirement and years of service
after age 30. Health care premiums are shared with retirees, and other cost-
sharing features include deductibles and co-payments.
Components of net periodic postretirement benefit cost for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period $1,011 $1,276 $1,760
Interest accrued on projected benefit obligation 2,041 2,452 2,298
Amortization of prior service cost (513) (513) (223)
Amortization of net gain (177) -- --
------ ------ ------
Net periodic postretirement benefit cost $2,362 $3,215 $3,835
====== ====== ======
</TABLE>
68
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
The accumulated postretirement benefit obligation and the accrued
postretirement benefit liability for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $10,238 $11,875
Other fully eligible plan participants 4,594 5,535
Other active plan participants 9,514 9,809
------- -------
Total accumulated postretirement benefit obligation 24,346 27,219
Unrecognized prior service cost 4,107 4,620
Unrecognized net gain 9,880 4,743
------- -------
Accrued postretirement benefit liability $38,333 $36,582
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation for 1996 and 1995 was 7.5%. The 1996 net health care cost trend rate
was 9.0%, graded to 5.5% over 7 years, and the 1995 rate was 11.0%, graded to
5.5% over 11 years.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1996 and 1995. Actual results could differ
from those estimates and assumptions. For example, increasing the assumed
health care cost trend rates by one percentage point in each year would
increase the postretirement benefit obligation as of December 31, 1996 by
$4,262,000 and the estimated eligibility cost and interest cost components of
net periodic postretirement benefit costs for 1996 by $583,000.
(8) REINSURANCE
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance companies. To the extent that a reinsurer is
unable to meet its obligations under the reinsurance agreement, the Company
remains liable. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies.
Reinsurance is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums $615,098 $600,841 $558,066
Reinsurance assumed 64,489 64,792 60,939
Reinsurance ceded (67,228) (61,863) (56,987)
-------- -------- --------
Net premiums $612,359 $603,770 $562,018
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $72,330,000,
$58,338,000 and $60,970,000 during 1996, 1995 and 1994, respectively.
69
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments has been
determined using available market information as of December 31, 1996 and 1995.
Although management is not aware of any factors that would significantly affect
the estimated fair values, such amounts have not been comprehensively revalued
since those dates. Therefore, estimates of fair value subsequent to the
valuation dates may differ significantly from the amounts presented herein.
Considerable judgment is required to interpret market data to develop the
estimates of fair value. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Please refer to Note 2 for additional fair value disclosures concerning fixed
maturity securities, equity securities, mortgages and derivatives. The carrying
amounts for policy loans, cash, short term investments and finance receivables
approximate the assets' fair values.
The interest rates on the finance receivables outstanding as of December 31,
1996 and 1995, are consistent with the rates at which loans would currently be
made to borrowers of similar credit quality and for the same maturity; as such,
the carrying value of the finance receivables outstanding as of December 31,
1996 and 1995, approximate the fair value for those respective dates.
The fair values of deferred annuities, annuity certain contracts, and other
fund deposits, which have guaranteed interest rates and surrender charges, are
estimated to be the amount payable on demand as of December 31, 1996 and 1995.
The amount payable on demand equates to the account balance less applicable
surrender charges. Contracts without guaranteed interest rates and surrender
charges have fair values equal to their accumulation values plus applicable
market value adjustments. The fair values of guaranteed investment contracts
and supplementary contracts without life contingencies are calculated using
discounted cash flows, based on interest rates currently offered for similar
products with maturities consistent with those remaining for the contracts
being valued.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of notes payable.
The carrying amounts and fair values of the Company's financial instruments
which were classified as assets as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,674,082 $4,674,082 $4,761,561 $4,761,561
Held-to-maturity 1,125,638 1,179,112 1,180,654 1,281,523
Equity securities 549,797 549,797 384,882 384,882
Mortgage loans:
Commercial 432,198 445,976 373,897 391,089
Residential 176,610 180,736 234,640 239,723
Policy loans 204,178 204,178 198,716 198,716
Short-term investments 122,772 122,772 72,841 72,841
Cash 57,140 57,140 48,358 48,358
Finance receivables, net 259,192 259,192 226,720 226,720
Derivatives 1,197 1,197 -- --
---------- ---------- ---------- ----------
Total financial assets $7,602,804 $7,674,182 $7,482,269 $7,605,413
========== ========== ========== ==========
</TABLE>
70
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments
which were classified as liabilities as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred annuities $2,178,355 $2,152,636 $2,178,223 $2,156,886
Annuity certain contracts 52,636 53,962 48,492 50,732
Other fund deposits 808,592 805,709 856,535 847,975
Guaranteed investment contracts 18,770 18,866 47,426 47,987
Supplementary contracts without
life contingencies 47,966 47,536 41,431 39,962
Notes payable 319,000 325,974 279,967 294,103
---------- ---------- ---------- ----------
Total financial liabilities $3,425,319 $3,404,683 $3,452,074 $3,437,645
========== ========== ========== ==========
</TABLE>
(10) NOTES PAYABLE
In September 1995, the Company issued surplus notes with a face value of
$125,000,000, at 8.25%, due in 2025. The surplus notes are subordinate to all
current and future policyowners' interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce. The approved accrued interest
was $3,008,000 as of December 31, 1996 and 1995. The issuance costs of
$1,403,000 are deferred and amortized over 30 years on a straight-line basis.
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Corporate--surplus notes, 8.25%, 2025 $125,000 $124,967
Consumer finance subsidiary--senior, 6.53%--8.77%, through
2003 194,000 155,000
-------- --------
Total notes payable $319,000 $279,967
======== ========
</TABLE>
At December 31, 1996, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1997, $21,000,000; 1998, $31,000,000;
1999, $49,000,000; 2000, $33,000,000; 2001, $26,000,000.
Long-term borrowing agreements involving the consumer finance subsidiary
include provisions with respect to borrowing limitations, payment of cash
dividends on or purchases of common stock, and maintenance of liquid net worth.
As of December 31, 1996, the consumer finance subsidiary was required to have a
minimum liquid net worth of $41,354,000. Liquid net worth at that date was
$51,803,000.
Interest paid on debt for the years ended December 31, 1996, 1995 and 1994,
was $21,849,000, $6,504,000 and $5,378,000, respectively.
(11) COMMITMENTS AND CONTINGENCIES
The Company is involved in various pending or threatened legal proceedings
arising out of the normal course of business. In the opinion of management, the
ultimate resolution of such litigation will not have a material adverse effect
on operations or the financial position of the Company.
The Company has issued certain participating group annuity and life insurance
contracts jointly with another life insurance company. The joint contract
issuer has liabilities related to these contracts of
71
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)
$328,346,000 as of December 31, 1996. To the extent the joint contract issuer
is unable to meet its obligation under the agreement, the Company remains
liable.
The Company has long-term commitments to fund venture capital and real estate
investments totaling $142,469,000 as of December 31, 1996. The Company
estimates that $35,000,000 of these commitments will be invested in 1997, with
the remaining $107,469,000 invested over the next four years.
As of December 31, 1996, the Company had committed to purchase bonds and
mortgage loans totaling $74,123,000 but had not completed the purchase
transactions.
At December 31, 1996, the Company had guaranteed the payment of $68,700,000
in policyowner dividends and discretionary amounts payable in 1997. The Company
has pledged bonds, valued at $70,336,000, to secure this guarantee.
The Company is contingently liable under state regulatory requirements for
possible assessments pertaining to future insolvencies and impairments of
unaffiliated insurance companies. The Company records a liability for future
guaranty fund assessments based upon known insolvencies, according to data
received from the National Organization of Life and Health Insurance Guaranty
Associations. An asset is held for the amount of guaranty fund assessments paid
which can be recovered through future premium tax credits.
(12) STATUTORY FINANCIAL DATA
Statutory accounting is primarily focused on solvency and surplus adequacy.
Therefore, fundamental differences exist between statutory and GAAP accounting,
and their effects on income and policyowners' surplus are illustrated below:
<TABLE>
<CAPTION>
POLICYOWNERS' SURPLUS NET INCOME
---------------------- ----------------------------
1996 1995 1996 1995 1994
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory basis $ 682,886 $ 601,565 $115,797 $ 88,706 $ 65,123
Adjustments:
Deferred policy acquisi-
tion costs 589,517 539,732 15,312 29,822 43,974
Net unrealized invest-
ment gains 111,575 235,143 -- -- --
Statutory asset valua-
tion reserve 240,474 201,721 -- -- --
Statutory interest main-
tenance reserve 24,707 32,899 (8,192) 12,976 (4,426)
Premiums and fees de-
ferred or receivable (75,716) (77,444) 1,587 497 (2,310)
Change in reserve basis 98,406 77,464 20,114 12,382 (1,444)
Separate accounts (40,755) (36,010) (6,304) (854) (5,837)
Unearned policy and con-
tract fees (121,843) (122,786) (2,530) (4,410) (10,406)
Surplus notes (125,000) (124,967) -- -- --
Net deferred taxes (149,665) (173,905) 744 (11,995) 1,511
Nonadmitted assets 31,531 28,211 -- -- --
Policyowner dividends 57,765 57,263 502 4,660 2,446
Other (25,454) (26,036) (6,512) (1,925) (8,528)
---------- ---------- -------- -------- --------
As reported in the
accompanying
consolidated
financial statements $1,298,428 $1,212,850 $130,518 $129,859 $ 80,103
========== ========== ======== ======== ========
</TABLE>
72
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AS SHOWN
MARKET ON THE BALANCE
TYPE OF INVESTMENT COST(3) VALUE SHEET(1)
- ------------------ ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Bonds:
United States government and government
agencies and authorities $ 302,820 $ 298,461 $ 298,461
States, municipalities and political
subdivisions 11,296 12,055 12,055
Foreign governments 1,926 1,872 1,872
Public utilities 547,228 590,445 573,030
Mortgage-backed securities 2,013,451 2,042,337 2,035,920
All other corporate bonds 2,807,892 2,908,024 2,878,382
---------- ---------- ----------
Total bonds 5,684,613 5,853,194 5,799,720
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 510 611 611
Banks, trusts and insurance companies 12,824 21,484 21,484
Industrial, miscellaneous and all
other 329,792 422,401 422,401
Nonredeemable preferred stocks 10,857 11,491 11,491
---------- ---------- ----------
Total equity securities 353,983 455,987 455,987
---------- ---------- ----------
Mortgage loans on real estate 608,808 xxxxxx 608,808
Real estate (2) 43,082 xxxxxx 43,082
Policy loans 204,178 xxxxxx 204,178
Other long-term investments 98,247 xxxxxx 98,247
Short-term investments 122,772 xxxxxx 122,772
---------- ----------
Total $1,077,087 xxxxxx $1,077,087
---------- ----------
Total investments $7,115,683 xxxxxx $7,332,794
========== ==========
</TABLE>
- -------
(1) Amortized cost for bonds classified as held-to-maturity and fair value for
common stocks and bonds classified as available-for-sale.
(2) The carrying value of real estate acquired in satisfaction of indebtedness
is $1,810,000.
(3) Original cost for equity securities and original cost reduced by repayments
and adjusted for amortization of premiums or accrual of discounts for bonds
and other investments.
73
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
FUTURE POLICY
DEFERRED BENEFITS OTHER POLICY
POLICY LOSSES, CLAIMS CLAIMS AND
ACQUISITION AND SETTLEMENT UNEARNED BENEFITS
SEGMENT COSTS EXPENSES(1) PREMIUMS(2) PAYABLE
- ------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772
Accident and
health insurance 62,407 437,118 33,770 18,774
Annuity 70,649 3,360,614 -- 31
Property and
liability
insurance -- 27,855 24,189 --
-------- ---------- -------- -------
$589,517 $5,948,735 $207,111 $70,577
======== ========== ======== =======
1995:
Life insurance $430,829 $2,009,154 $151,864 $41,212
Accident and
health insurance 55,888 400,950 34,847 14,567
Annuity 53,015 3,401,760 -- 33
Property and
liability
insurance -- 30,117 23,783 --
-------- ---------- -------- -------
$539,732 $5,841,981 $210,494 $55,812
======== ========== ======== =======
1994:
Life insurance $510,117 $1,867,170 $133,221 $47,099
Accident and
health insurance 46,506 352,955 36,529 17,142
Annuity 92,664 3,263,042 -- 12
Property and
liability
insurance -- 32,807 21,865 --
-------- ---------- -------- -------
$649,287 $5,515,974 $191,615 $64,253
======== ========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
AMORTIZATION
BENEFITS, OF DEFERRED
NET CLAIMS, LOSSES POLICY OTHER
PREMIUM INVESTMENT AND SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT REVENUE(3) INCOME EXPENSES COSTS EXPENSES WRITTEN(4)
- ------- ---------- ---------- -------------- ------------ --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996:
Life insurance $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 160,097 34,202 96,743 14,017 87,222
Annuity 79,245 267,473 243,387 14,575 111,366
Property and
liability
insurance 50,109 5,550 36,933 -- 19,033 50,515
-------- -------- -------- -------- -------- -------
$858,325 $530,987 $855,291 $125,978 $508,146 $50,515
======== ======== ======== ======== ======== =======
1995:
Life insurance $540,353 $203,487 $454,299 $ 80,896 $266,090
Accident and
health insurance 153,505 33,358 93,482 11,448 83,345
Annuity 74,899 272,499 260,854 12,596 86,716
Property and
liability
insurance 49,216 5,703 33,563 -- 18,090 51,133
-------- -------- -------- -------- -------- -------
$817,973 $515,047 $842,198 $104,940 $454,241 $51,133
======== ======== ======== ======== ======== =======
1994:
Life insurance $505,300 $192,141 $443,233 $ 59,351 $245,791
Accident and
health insurance 136,619 30,119 93,359 12,401 75,380
Annuity 60,479 258,196 238,301 14,725 79,498
Property and
liability
insurance 47,735 5,645 33,829 -- 18,717 47,073
-------- -------- -------- -------- -------- -------
$750,133 $486,101 $808,722 $ 86,477 $419,386 $47,073
======== ======== ======== ======== ======== =======
</TABLE>
- -----
(1) Includes policy and contract account balances
(2) Includes unearned policy and contract fees
(3) Includes policy and contract fees
(4) Applies only to property and liability insurance
74
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
OTHER FROM OTHER NET ASSUMED TO
GROSS AMOUNT COMPANIES COMPANIES AMOUNT NET
------------ ----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996:
Life insurance in force $116,445,975 $15,164,764 $22,957,287 $124,238,498 18.5%
============ =========== =========== ============
Premiums:
Life insurance $ 347,056 $ 45,988 $ 63,044 $ 364,112 17.3%
Accident and health
insurance 174,219 15,511 1,389 160,097 0.9%
Annuity 38,041 -- -- 38,041 --
Property and liability
insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
1995:
Life insurance in force $106,228,277 $15,620,303 $24,289,241 $114,897,215 21.1%
============ =========== =========== ============
Premiums:
Life insurance $ 342,433 $ 44,778 $ 62,169 $ 359,824 17.3%
Accident and health
insurance 163,412 12,296 2,389 153,505 1.6%
Annuity 41,225 -- -- 41,225 --
Property and liability
insurance 53,771 4,789 234 49,216 0.5%
------------ ----------- ----------- ------------
Total premiums $ 600,841 $ 61,863 $ 64,792 $ 603,770 10.7%
============ =========== =========== ============
1994:
Life insurance in force $ 99,220,067 $13,570,369 $23,520,616 $109,170,314 21.5%
============ =========== =========== ============
Premiums:
Life insurance $ 322,799 $ 38,088 $ 59,064 $ 343,775 17.2%
Accident and health
insurance 145,333 10,007 1,293 136,619 0.9%
Annuity 33,889 -- -- 33,889 --
Property and liability
insurance 56,045 8,892 582 47,735 1.2%
------------ ----------- ----------- ------------
Total premiums $ 558,066 $ 56,987 $ 60,939 $ 562,018 10.8%
============ =========== =========== ============
</TABLE>
75
<PAGE>
APPENDIX I
ILLUSTRATIONS OF ACCOUNT VALUES AND DEATH BENEFITS
The following tables illustrate how the account value and death benefit of a
policy change with the investment experience of the sub-accounts of the
separate account. The tables show how the account values and death benefit of a
policy issued to an insured of a given age and at a given premium would vary
over time if the investment return on the assets held in each sub-account of
the separate account were a uniform, gross, after-tax rate of 0 percent, 6
percent or 12 percent. In addition, the account values and death benefits would
be different from those shown if the gross annual investment rates of return
averaged 0 percent, 6 percent and 12 percent over a period of years, but
fluctuated above and below those averages for individual policy years.
The tables illustrate both a policy issued to an insured, age 45, and to an
insured, age 55, in a small group-sponsored program issued a group contract.
This assumes a $4.00 monthly administration charge and a 3 percent sales load
charge. If a particular policy has different sales or administration charges or
if a particular group is larger or smaller or has a different gender mix, the
account values and death benefits would vary from those shown in the tables.
The account value column in the tables with the heading "Using Maximum
Mortality Charges" shows the accumulated value of the premiums paid reflecting
deduction of the charges described above and monthly charges for the cost of
insurance based on the guaranteed maximum rate when there has been simplified
underwriting, which is 125 percent of the maximum allowed under the 1980
Commissioners Standard Ordinary ("CSO") Mortality Table. The account value
column in the table with the heading "Using Current Mortality Charges" shows
the accumulated value of premiums paid reflecting deduction of the charges
described above and the monthly charges for the cost of insurance at the
current level which is substantially less than the guaranteed rate. The
illustrations of the death benefits also vary between tables depending upon
whether the level or variable type death benefits are illustrated.
The amounts shown for the hypothetical account value and death benefit as of
each policy year reflect the fact that the net investment return on the assets
held in the sub-accounts is lower than the gross, after-tax return. This is
because expenses of the Fund and a daily mortality and expense risk charge
assessed against the net assets of the Variable Universal Life Account are
deducted from the gross return. The mortality and expense risk charge reflected
in the illustrations is at an annual rate of .50 percent. The investment
expenses illustrated represent an average of the investment advisory fee
charged for all twenty-three Portfolios of the Funds. The investment advisory
fee for each Portfolio for the last fiscal year is shown under the heading
"Fund Charges" in this prospectus. In addition to the deduction for the
investment advisory fee, the illustrations also reflect a deduction for
Portfolio costs and expenses for the last fiscal year, as illustrated under the
heading "Fund Charges" in this prospectus. Therefore, gross annual rates of
return of 0 percent, 6 percent and 12 percent correspond to approximate net
annual rates of return of -1.23 percent, 4.77 percent and 10.77 percent.
The tables reflect the fact that no charges for federal, state or local
income taxes are currently made against the Variable Universal Life Account. If
such a charge is made in the future, it will take a higher gross rate of return
to produce after-tax returns of 0 percent, 6 percent and 12 percent than it
does now which produce the account values and death benefits illustrated.
Additionally, the hypothetical values shown in the tables assume that the
policy for which values are illustrated is not deemed an individual policy
under OBRA, and therefore the values do not reflect the additional 1 percent of
premium expense charge to cover Minnesota Mutual's increased federal tax
expense in that situation.
The tables illustrate the policy values that would result based upon the
investment rates of return if the premiums are paid on a monthly basis, and if
no policy loans have been made. The tables are also based on the assumptions
that no partial surrenders have been made, that no transfer charges were
incurred and that no optional riders have been requested. The policy values in
the tables also may reflect an increase in the face amount of insurance to the
minimum amount necessary to maintain the policy's qualification as life
insurance under Section 7702 of the Code. Further, the tables may show a
decrease in the face amount to a level that the account value immediately prior
to the decrease plus the additional illustrated premiums with interest can
provide.
Upon request, we will provide a comparable illustration based on the proposed
insured's age, the face amount of insurance, premium amount and frequency of
payment, the group size and gender mix among other characteristics of the group
and the insurance program.
76
<PAGE>
VARIABLE UNIVERSAL LIFE
DEATH BENEFIT OPTION A
ISSUE AGE 45
FACE AMOUNT OF INSURANCE--$100,000
ANNUAL PREMIUM--$1,800
(MONTHLY PREMIUM--$150)(1)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.23% NET) (4.77% NET) (10.77% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 46 $1,800 $ 1,398 $100,000 $ 1,443 $100,000 $ 1,488 $100,000
2 47 1,800 2,759 100,000 2,936 100,000 3,116 100,000
3 48 1,800 4,084 100,000 4,479 100,000 4,900 100,000
4 49 1,800 5,373 100,000 6,078 100,000 6,858 100,000
5 50 1,800 6,618 100,000 7,725 100,000 8,998 100,000
6 51 1,800 7,829 100,000 9,433 100,000 11,355 100,000
7 52 1,800 8,986 100,000 11,186 100,000 13,931 100,000
8 53 1,800 10,102 100,000 12,997 100,000 16,765 100,000
9 54 1,800 11,166 100,000 14,862 100,000 19,877 100,000
10 55 1,800 12,170 100,000 16,773 100,000 23,292 100,000
15 60 1,800 16,285 100,000 27,174 100,000 46,431 100,000
20 65 1,800 18,348 100,000 39,000 100,000 85,404 103,169
25 70 1,800 16,633 100,000 52,023 100,000 150,474 173,046
30 75 1,800 7,221 100,000 66,230 100,000 256,613 272,172
</TABLE>
(1)A premium payment of $150 is assumed to be paid monthly at the beginning of
each policy month.
(2)Assumes no policy loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, AND PREVAILING INTEREST RATES. THE
DEATH BENEFITS AND ACCOUNT VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATIONS CAN BE MADE BY MINNESOTA MUTUAL OR THE FUND THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
77
<PAGE>
VARIABLE UNIVERSAL LIFE (CONTINUED)
DEATH BENEFIT OPTION A
ISSUE AGE 45
FACE AMOUNT OF INSURANCE--$100,000
ANNUAL PREMIUM--$1,800
(MONTHLY PREMIUM--$150)(1)
USING MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.23% NET) (4.77% NET) (10.77% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 46 $1,800 $1,060 $100,000 $ 1,094 $100,000 $ 1,128 $100,000
2 47 1,800 2,068 100,000 2,202 100,000 2,338 100,000
3 48 1,800 3,025 100,000 3,323 100,000 3,639 100,000
4 49 1,800 3,928 100,000 4,455 100,000 5,037 100,000
5 50 1,800 4,774 100,000 5,595 100,000 6,542 100,000
6 51 1,800 5,556 100,000 6,739 100,000 8,161 100,000
7 52 1,800 6,270 100,000 7,880 100,000 9,901 100,000
8 53 1,800 6,908 100,000 9,012 100,000 11,770 100,000
9 54 1,800 7,461 100,000 10,127 100,000 13,779 100,000
10 55 1,800 7,924 100,000 11,217 100,000 15,940 100,000
15 60 1,800 8,703 100,000 16,129 100,000 29,743 100,000
20 65 1,800 5,840 100,000 19,074 100,000 51,376 100,000
25 70 1,800 0 0 16,942 100,000 88,852 102,180
30 75 1,800 0 0 2,331 100,000 154,267 163,585
</TABLE>
(1) A premium payment of $150 is assumed to be paid monthly at the beginning of
each policy month.
(2) Assumes no policy loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, AND PREVAILING INTEREST RATES. THE
DEATH BENEFITS AND ACCOUNT VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATIONS CAN BE MADE BY MINNESOTA MUTUAL OR THE FUND THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
78
<PAGE>
VARIABLE UNIVERSAL LIFE (CONTINUED)
DEATH BENEFIT OPTION B
ISSUE AGE 45
FACE AMOUNT OF INSURANCE--$50,000
ANNUAL PREMIUM--$1,800
(MONTHLY PREMIUM--$150)(1)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.23% NET) (4.77% NET) (10.77% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 46 $1,800 $ 1,521 $51,521 $ 1,571 $ 51,571 $ 1,619 $ 51,619
2 47 1,800 3,012 53,012 3,204 53,204 3,401 53,401
3 48 1,800 4,472 54,472 4,903 54,903 5,361 55,361
4 49 1,800 5,903 55,903 6,671 56,671 7,519 57,519
5 50 1,800 7,298 57,298 8,504 58,504 9,892 59,892
6 51 1,800 8,663 58,663 10,413 60,413 12,506 62,506
7 52 1,800 9,989 59,989 12,388 62,388 15,378 65,378
8 53 1,800 11,280 61,280 14,439 64,439 18,539 68,539
9 54 1,800 12,531 62,531 16,563 66,563 22,015 72,015
10 55 1,800 13,737 63,737 18,758 68,758 25,835 75,835
15 60 1,800 19,080 69,080 30,881 80,881 51,478 101,478
20 65 1,800 22,935 72,935 44,848 94,848 92,712 142,712
25 70 1,800 24,330 74,330 59,925 109,925 158,550 208,550
30 75 1,800 21,532 71,532 74,227 124,227 262,908 312,908
</TABLE>
(1) A premium payment of $150 is assumed to be paid monthly at the beginning of
each policy month.
(2) Assumes no policy loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, AND PREVAILING INTEREST RATES. THE
DEATH BENEFITS AND ACCOUNT VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATIONS CAN BE MADE BY MINNESOTA MUTUAL OR THE FUND THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
79
<PAGE>
VARIABLE UNIVERSAL LIFE (CONTINUED)
DEATH BENEFIT OPTION B
ISSUE AGE 45
FACE AMOUNT OF INSURANCE--$50,000
ANNUAL PREMIUM--$1,800
(MONTHLY PREMIUM--$150)(1)
USING MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.23% NET) (4.77% NET) (10.77% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 46 $1,800 $ 1,333 $51,333 $ 1,377 $51,377 $ 1,420 $ 51,420
2 47 1,800 2,629 52,629 2,797 52,797 2,968 52,968
3 48 1,800 3,884 53,884 4,260 54,260 4,659 54,659
4 49 1,800 5,100 55,100 5,768 55,768 6,506 56,506
5 50 1,800 6,273 56,273 7,319 57,319 8,522 58,522
6 51 1,800 7,400 57,400 8,912 58,912 10,722 60,722
7 52 1,800 8,479 58,479 10,545 60,545 13,123 63,123
8 53 1,800 9,506 59,506 12,216 62,216 15,740 65,740
9 54 1,800 10,476 60,476 13,921 63,921 18,592 68,592
10 55 1,800 11,385 61,385 15,657 65,657 21,700 71,700
15 60 1,800 14,949 64,949 24,748 74,748 42,022 92,022
20 65 1,800 16,395 66,395 34,037 84,037 73,403 123,403
25 70 1,800 14,603 64,603 42,129 92,129 121,549 171,549
30 75 1,800 7,843 57,843 46,520 96,520 195,165 245,165
</TABLE>
(1) A premium payment of $150 is assumed to be paid monthly at the beginning of
each policy month.
(2) Assumes no policy loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, AND PREVAILING INTEREST RATES. THE
DEATH BENEFITS AND ACCOUNT VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATIONS CAN BE MADE BY MINNESOTA MUTUAL OR THE FUND THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
80
<PAGE>
VARIABLE UNIVERSAL LIFE (CONTINUED)
DEATH BENEFIT OPTION A
ISSUE AGE 55
FACE AMOUNT OF INSURANCE--$100,000
ANNUAL PREMIUM--$3,000
(MONTHLY PREMIUM--$250)(1)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.23% NET) (4.77% NET) (10.77% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 56 $3,000 $ 2,151 $100,000 $2,221 $100,000 $ 2,290 $100,000
2 57 3,000 4,232 100,000 4,504 100,000 4,782 100,000
3 58 3,000 6,245 100,000 6,854 100,000 7,502 100,000
4 59 3,000 8,170 100,000 9,256 100,000 10,456 100,000
5 60 3,000 10,023 100,000 11,726 100,000 13,689 100,000
6 61 3,000 11,795 100,000 14,263 100,000 17,228 100,000
7 62 3,000 13,468 100,000 16,854 100,000 21,093 100,000
8 63 3,000 15,027 100,000 19,487 100,000 25,315 100,000
9 64 3,000 16,474 100,000 22,172 100,000 29,948 100,000
10 65 3,000 17,784 100,000 24,891 100,000 35,029 100,000
15 70 3,000 21,893 100,000 39,003 100,000 69,936 100,000
20 75 3,000 19,351 100,000 53,465 100,000 131,511 139,310
25 80 3,000 5,965 100,000 70,039 100,000 234,218 245,929
30 85 3,000 0 0 95,374 100,143 400,431 420,453
</TABLE>
(1) A premium payment of $250 is assumed to be paid monthly at the beginning of
each policy month.
(2) Assumes no policy loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, AND PREVAILING INTEREST RATES. THE
DEATH BENEFITS AND ACCOUNT VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATIONS CAN BE MADE BY MINNESOTA MUTUAL OR THE FUND THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
81
<PAGE>
VARIABLE UNIVERSAL LIFE (CONTINUED)
DEATH BENEFIT OPTION A
ISSUE AGE 55
FACE AMOUNT OF INSURANCE--$100,000
ANNUAL PREMIUM--$3,000
(MONTHLY PREMIUM--$250)(1)
USING MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.23% NET) (4.77% NET) (10.77% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 56 $3,000 $1,478 $100,000 $ 1,526 $100,000 $ 1,574 $100,000
2 57 3,000 2,850 100,000 3,036 100,000 3,226 100,000
3 58 3,000 4,112 100,000 4,524 100,000 4,963 100,000
4 59 3,000 5,263 100,000 5,990 100,000 6,795 100,000
5 60 3,000 6,294 100,000 7,422 100,000 8,728 100,000
6 61 3,000 7,190 100,000 8,808 100,000 10,763 100,000
7 62 3,000 8,936 100,000 10,128 100,000 12,901 100,000
8 63 3,000 8,508 100,000 11,361 100,000 15,139 100,000
9 64 3,000 8,884 100,000 12,479 100,000 17,476 100,000
10 65 3,000 9,040 100,000 13,459 100,000 19,916 100,000
15 70 3,000 5,780 100,000 15,418 100,000 34,244 100,000
20 75 3,000 0 0 7,175 100,000 54,468 100,000
25 80 3,000 0 0 0 0 90,908 100,000
30 85 3,000 0 0 0 0 163,762 171,950
</TABLE>
(1) A premium payment of $250 is assumed to be paid monthly at the beginning of
each policy month.
(2) Assumes no policy loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, AND PREVAILING INTEREST RATES. THE
DEATH BENEFITS AND ACCOUNT VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATIONS CAN BE MADE BY MINNESOTA MUTUAL OR THE FUND THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
82
<PAGE>
VARIABLE UNIVERSAL LIFE (CONTINUED)
DEATH BENEFIT OPTION B
ISSUE AGE 55
FACE AMOUNT OF INSURANCE--$50,000
ANNUAL PREMIUM--$3,000
(MONTHLY PREMIUM--$250)(1)
USING CURRENT MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.23% NET) (4.77% NET) (10.77% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 56 $3,000 $ 2,460 $52,460 $ 2,540 $ 52,540 $ 2,619 $ 52,619
2 57 3,000 4,860 54,860 5,170 55,170 5,488 55,488
3 58 3,000 7,200 57,200 7,895 57,895 8,634 58,634
4 59 3,000 9,470 59,470 10,707 60,707 12,075 62,075
5 60 3,000 11,677 61,677 13,617 63,617 15,848 65,848
6 61 3,000 13,814 63,814 16,621 66,621 19,983 69,983
7 62 3,000 15,872 65,872 19,714 69,714 24,506 74,506
8 63 3,000 17,838 67,838 22,887 72,887 29,447 79,447
9 64 3,000 19,715 69,715 26,143 76,143 34,850 84,850
10 65 3,000 21,486 71,486 29,469 79,469 40,746 90,746
15 70 3,000 28,478 78,478 46,924 96,924 79,341 129,341
20 75 3,000 30,941 80,941 64,230 114,230 138,267 188,267
25 80 3,000 27,795 77,795 79,724 129,724 229,166 279,166
30 85 3,000 18,734 68,734 92,261 142,261 372,682 422,682
</TABLE>
(1) A premium payment of $250 is assumed to be paid monthly at the beginning of
each policy month.
(2) Assumes no policy loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, AND PREVAILING INTEREST RATES. THE
DEATH BENEFITS AND ACCOUNT VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATIONS CAN BE MADE BY MINNESOTA MUTUAL OR THE FUND THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
83
<PAGE>
VARIABLE UNIVERSAL LIFE (CONTINUED)
DEATH BENEFIT OPTION B
ISSUE AGE 55
FACE AMOUNT OF INSURANCE--$50,000
ANNUAL PREMIUM--$3,000
(MONTHLY PREMIUM--$250)(1)
USING MAXIMUM MORTALITY CHARGES
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.23% NET) (4.77% NET) (10.77% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 56 $3,000 $ 2,092 $52,092 $ 2,160 $52,160 $ 2,227 $ 52,227
2 57 3,000 4,104 54,104 4,368 54,368 4,637 54,637
3 58 3,000 6,035 56,035 6,621 56,621 7,244 57,244
4 59 3,000 7,882 57,882 8,921 58,921 10,070 60,070
5 60 3,000 9,640 59,640 11,262 61,262 13,130 63,130
6 61 3,000 11,303 61,303 13,639 63,639 16,440 66,440
7 62 3,000 12,862 62,862 16,042 66,042 20,018 70,018
8 63 3,000 14,305 64,305 18,461 68,461 23,878 73,878
9 64 3,000 15,620 65,620 20,881 70,881 28,038 78,038
10 65 3,000 16,798 66,798 23,292 73,292 32,516 82,516
15 70 3,000 20,376 70,376 34,844 84,844 60,659 110,659
20 75 3,000 18,663 68,663 43,602 93,602 100,916 150,916
25 80 3,000 8,548 58,548 44,840 94,840 156,736 206,736
30 85 3,000 0 0 31,928 81,928 233,188 283,188
</TABLE>
(1) A premium payment of $250 is assumed to be paid monthly at the beginning of
each policy month.
(2) Assumes no policy loan has been made.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE
OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE
INVESTMENT ALLOCATIONS MADE BY AN OWNER, AND PREVAILING INTEREST RATES. THE
DEATH BENEFITS AND ACCOUNT VALUES FOR A POLICY WOULD BE DIFFERENT FROM THOSE
SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF
YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY
YEARS. NO REPRESENTATIONS CAN BE MADE BY MINNESOTA MUTUAL OR THE FUND THAT
THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR
SUSTAINED OVER ANY PERIOD OF TIME.
84
<PAGE>
APPENDIX II
POLICY LOAN EXAMPLE
As an example of the effect of a policy loan upon the policy account value and
the death benefit, assume a policy of an insured age 45 with the following
characteristics: The Variable Universal Life Policy has an Option B death
benefit with a level face amount of $50,000. Further, assume that 100 percent
of net premiums are invested in the sub-accounts of the Variable Universal Life
Account, that the gross investment rate in the Variable Universal Life Account
was 12 percent each year and that Minnesota Mutual deducted current mortality
charges. This situation is shown in Appendix I, "Illustrations of Account
Values and Death Benefits" on page 76 of this prospectus.
Now assume that the insured, who is also the owner of the policy, takes a
policy loan in the amount of $5,000 at the end of the fourth policy year.
When a policy loan is taken, the net cash value is reduced by the amount
borrowed and any accrued interest subsequently charged. The amount borrowed
continues to be a part of the account value, as the amount borrowed becomes
part of the loan account value where it will accrue loan interest credits and
will be held in our general account. Interest is charged on the policy loan at
a policy loan interest rate of 8 percent per year. Interest is also credited to
a policy when there is a policy loan. Interest credits on the policy loan are
at a rate which is not less than the policy loan interest rate less 2 percent
per year. Assume the interest credits in this example will be at 6 percent per
year.
The following table shows the effect on the end of fifth year account value
and death benefit, if a policy loan of $5,000 is made at the end of the fourth
year.
<TABLE>
<CAPTION>
End of Year End of Year
Account Value Death Benefit
With Loan Without Loan With Loan Without Loan
--------- ------------ --------- ------------
<S> <C> <C> <C>
$9,437 $9,673 $59,437 $59,673
</TABLE>
Note that the difference in the account values here represents the difference
between the actual policy performance in the sub-accounts of the Variable
Universal Life Account and the interest credited on the principal amount of the
policy loan. If interest credited on a policy loan exceeds the policy
performance, then a policy with a loan will have a greater value than a policy
with no loan activity. Where policy performance exceeds the interest credited
on a policy loan, the resulting policy value will be lower than it would have
been if the loan were not made.
Now consider an identical situation to that above except that the death
benefit is under Option A with a face amount of insurance of $100,000. This
situation is also shown in Appendix I, "Illustrations of Account Values and
Death Benefits" on page 76 of this prospectus. The following table shows the
effect on the same fifth year values if a policy loan of $5,000 is made at the
end of the fourth year.
<TABLE>
<CAPTION>
End of Year End of Year
Account Value Death Benefit
With Loan Without Loan With Loan Without Loan
--------- ------------ --------- ------------
<S> <C> <C> <C>
$8,569 $8,806 $100,000 $100,000
</TABLE>
The account values above under the "With Loan" headings include the loan
account value, that is, the amount of the loan plus accrued interest
subsequently charged. If the insured were to surrender the policy at the end of
the fifth year, he or she would receive only the net cash value in the sub-
accounts of the Variable Universal Life Account. The net cash value equals the
account value less the loan account value since there are no charges due.
Similarly, if the insured were to die at the end of the fifth year we would
pay out the death benefit listed under the "With Loan" heading less the loan
account value.
85
