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PROSPECTUS
MINNESOTA MUTUAL VARIABLE
UNIVERSAL LIFE ACCOUNT
LOGO
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 25 of this prospectus. The policy also contains a
cancellation right which is fully described under the heading "Free Look" on
page 24 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 sixteen 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 Maturing
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Government Bond Portfolio with a target maturity of 2010, the Value Stock
Portfolio, the Small Company Value Portfolio, the Global Bond Portfolio, the
Index 400 Mid-Cap Portfolio, the Macro-Cap Value Portfolio, and the Micro-Cap
Growth Portfolio. Although the Maturing Government Bond Portfolio with a target
maturity of 2002 is included in this prospectus, it is 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; after September 1, 1998, (651) 665-3500
http://www.minnesotamutual.com
Dated: May 1, 1998
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TABLE OF CONTENTS
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Page
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Special Terms.............................................................. 2
Summary.................................................................... 3
Condensed Financial Information............................................ 10
General Descriptions....................................................... 12
The Minnesota Mutual Life Insurance Company.............................. 12
Variable Universal Life Account.......................................... 12
Advantus Series Fund, Inc................................................ 13
Fidelity Variable Insurance Products Funds............................... 13
Additions, Deletions or Substitutions.................................... 14
The Guaranteed Account................................................... 14
General Description.................................................... 15
Guaranteed Account Value............................................... 15
Information About the Policy............................................... 15
Applications and Policy Issue............................................ 15
Policy Premiums.......................................................... 16
Death Benefit............................................................ 17
Change in Face Amount.................................................... 18
Payment of Death Benefit Proceeds........................................ 19
Account Values........................................................... 19
Policy Loans............................................................. 21
Surrender and Partial Surrender.......................................... 22
Transfers................................................................ 23
Dollar Cost Averaging.................................................... 24
Free Look................................................................ 24
Conversion Right to an Individual Policy................................. 25
Continuation of Group Coverage........................................... 25
Charges.................................................................. 25
Premium Expense Charges................................................ 25
Account Value Charges.................................................... 26
Monthly Deduction...................................................... 26
Partial Surrender Transaction Charge................................... 27
Transfer Charge........................................................ 27
Separate Account Charges................................................. 27
Fund Charges............................................................. 28
Guarantee of Certain Charges............................................. 30
Additional Benefits...................................................... 30
General Matters Relating to the Policy................................... 31
General Provisions of the Group Contract................................. 33
Other Matters.............................................................. 34
Federal Tax Status....................................................... 34
Year 2000 Computer Problem............................................... 37
Trustees and Principal Officers of Minnesota Mutual...................... 38
Voting Rights............................................................ 39
Distribution of Policies................................................. 39
Legal Matters............................................................ 40
Legal Proceedings........................................................ 40
Experts.................................................................. 40
Registration Statement................................................... 40
Financial Statements of Minnesota Mutual Variable Universal Life Account... 41
Financial Statements of The Minnesota Mutual Life Insurance Company and
Subsidiaries.............................................................. 78
Appendix I-Illustrations of Account Values and Death Benefits.............. 102
Appendix II-Policy Loan Example............................................ 111
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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."
WHAT VARIABLE INVESTMENT OPTIONS ARE AVAILABLE?
The separate account currently invests in twenty Portfolios of the Funds.
Not all of the Portfolios of the Funds may be made available for investment by
the separate account. Although the Maturing Government Bond Portfolio with a
maturity of 2002 is included in this prospectus, it is not available for
premium allocations or transfers effective May 1, 1997. These Portfolios 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,
Asset Allocation, Mortgage Securities, Index 500, Capital Appreciation,
International Stock, Small Company, Maturing Government Bond--2010, Value
Stock, Small Company Value, Global Bond, Index 400 Mid-Cap, 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.
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.
The MONEY MARKET PORTFOLIO seeks maximum current income to the extent
consistent with liquidity and the
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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, both of the 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. The current target dates for the maturities of these Portfolios are
2002 and 2010, respectively. Beginning on May 1, 1997, no
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premium allocations or transfers may be made to the Maturing Government Bond
Portfolio with a target date of maturity of 2002. 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 GLOBAL BOND PORTFOLIO seeks, as its investment objective, to maximize
current income, consistent with the protection of principal. The Portfolio
pursues its objective by investing primarily in debt securities issued by
issuers located anywhere in the world. Prior to May 1, 1998, the Global Bond
Portfolio was known as the International Bond Portfolio and pursued 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 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
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
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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.
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
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"Account Values" of this prospectus and certain transactions may have tax
consequences, as described under the heading "Federal Tax Status."
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" 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."
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."
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."
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."
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 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. For more information about the Series Fund, see the
prospectus of Advantus
8
<PAGE>
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."
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."
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."
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."
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 where the
mortality and expense risk charge amounts to .50 percent on an annual basis for
the years ended December 31, 1997 and 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 (where the mortality and
expense risk charge amounts to .50 percent on an annual basis) included in this
prospectus.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -----
<S> <C> <C> <C>
Growth Sub-Account:
Unit value at beginning of period ....................... $ 1.29 $ 1.10 $1.00
Unit value at end of
period ................................................. $ 1.71 $ 1.29 $1.10
Number of units outstanding at end of period ............ 297,099 10,583 5,717
Bond Sub-Account:
Unit value at beginning of period ....................... $ 1.09 $ 1.07 $1.00
Unit value at end of
period ................................................. $ 1.19 $ 1.09 $1.07
Number of units outstanding at end of period ............ 3,719 2,462 1,708
Money Market Sub-Account:
Unit value at beginning of period ....................... $ 1.07 $ 1.03 $1.00
Unit value at end of
period ................................................. $ 1.12 $ 1.07 $1.03
Number of units outstanding at end of period ............ 4,453 2,822 1,163
Asset Allocation Sub-Account:
Unit value at beginning of period ....................... $ 1.24 $ 1.11 $1.00
Unit value at end of
period ................................................. $ 1.47 $ 1.24 $1.11
Number of units outstanding at end of period ............ 187,443 5,376 2,487
Mortgage Securities Sub-Account:
Unit value at beginning of period ....................... $ 1.10 $ 1.05 $1.00
Unit value at end of
period ................................................. $ 1.20 $ 1.10 $1.05
Number of units outstanding at end of period ............ 1,743 1,353 1,116
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Index 500 Sub-Account:
Unit value at beginning of period ................. $ 1.41 $ 1.16 $1.00
Unit value at end of period ....................... $ 1.86 $ 1.41 $1.16
Number of units outstanding at end of period ...... 1,231,985 902,194 457,639
Capital Appreciation Sub-Account:
Unit value at beginning of period ................. $ 1.32 $ 1.13 $1.00
Unit value at end of period ....................... $ 1.68 $ 1.32 $1.13
Number of units outstanding at end of period ...... 11,926 8,725 5,583
International Stock Sub-Account:
Unit value at beginning of period.................. $ 1.25 $ 1.05 $1.00
Unit value at end of period ....................... $ 1.39 $ 1.25 $1.05
Number of units outstanding at end of period ...... 7,857 4,601 3,688
Small Company Sub-Account:
Unit value at beginning of period.................. $ 1.28 $ 1.21 $1.00
Unit value at end of period ....................... $ 1.37 $ 1.28 $1.21
Number of units outstanding at end of period ...... 64,545 41,743 34,825
Value Stock Sub-Account:
Unit value at beginning of period.................. $ 1.51 $ 1.16 $1.00
Unit value at end of period ....................... $ 1.83 $ 1.51 $1.16
Number of units outstanding at end of period ...... 10,536 5,585 4,016
<CAPTION>
1997 1996
------- -------
<S> <C> <C> <C>
Maturing Government Bond 1998 Sub-Account:
Unit value at beginning of period.................. $ 1.04 $ 1.00*
Unit value at end of period........................ $ 1.10 $ 1.04
Number of units outstanding at end of period....... 1,000 1,000
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C> <C>
Maturing Government Bond 2002 Sub-Account:
Unit value at beginning of period....................... $ 1.06 $ 1.00*
Unit value at end of period............................. $ 1.14 $ 1.06
Number of units outstanding at end of period............ 1,000 1,000
Maturing Government Bond 2006 Sub-Account:
Unit value at beginning of period....................... $ 1.08 $ 1.00*
Unit value at end of period............................. $ 1.21 $ 1.08
Number of units outstanding at end of period............ 1,000 1,000
Maturing Government Bond 2010 Sub-Account:
Unit value at beginning of period....................... $ 1.10 $ 1.00*
Unit value at end of period............................. $ 1.29 $ 1.10
Number of units outstanding at end of period............ 1,000 1,000
Contrafund Sub-Account:
Unit value at beginning of period....................... $ 1.11 $ 1.00*
Unit value at end of period............................. $ 1.38 $ 1.11
Number of units outstanding at end of period............ 31,208 30,361
High Income Sub-Account:
Unit value at beginning of period....................... $ 1.07 $ 1.00*
Unit value at end of period............................. $ 1.25 $ 1.07
Number of units outstanding at end of period............ 31,854 29,956
Equity-Income Sub-Account:
Unit value at beginning of period....................... $ 1.06 $ 1.00*
Unit value at end of period............................. $ 1.36 $ 1.06
Number of units outstanding at end of period............ 33,024 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.
The table below gives per unit information about each sub-account where the
mortality and expense risk charge is zero on an annual basis for the period
from June 24, 1997 (commencement of operations) to December 31, 1997. This
information should be read in conjunction with the financial statements and
related notes of Minnesota Mutual Variable Universal Life Account (where the
mortality and expense risk charge is zero on an annual basis) included in this
prospectus.
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Index 500 Sub-Account:
Unit value at beginning of period.................................. $ 1.00
Unit value at end of period........................................ $ 1.17
Number of units outstanding at end of period....................... 27,829,987
</TABLE>
The table below gives per unit information about each sub-account where the
mortality and expense risk charge amounts to .25 percent on an annual basis
for the period ended December 31, 1997. This information should be read in
conjunction with the financial statements and related notes of Minnesota
Mutual Variable Universal Life Account (where the mortality and expense risk
charge amounts to .25 percent on an annual basis) included in this prospectus.
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Growth Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.31
Number of units outstanding at end of period....................... 92,564
Bond Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.10
Number of units outstanding at end of period....................... 48,295
Money Market Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.05
Number of units outstanding at end of period....................... 95,600
Asset Allocation Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.18
Number of units outstanding at end of period....................... 52,163
Mortgage Securities Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.09
Number of units outstanding at end of period....................... 10,899
Index 500 Sub-Account:
Unit value at beginning of period.................................. $ 1.00(a)
Unit value at end of period........................................ $ 1.27
Number of units outstanding at end of period....................... 236,786
Capital Appreciation Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.27
Number of units outstanding at end of period....................... 73,554
</TABLE>
11
<PAGE>
GENERAL DESCRIPTIONS
<TABLE>
<CAPTION>
1997
------
<S> <C>
International Stock Sub-Account:
Unit value at beginning of period................................... $ 1.00(b)
Unit value at end of period......................................... $ 1.11
Number of units outstanding at end of period........................ 55,984
Small Company Sub-Account:
Unit value at beginning of period................................... $ 1.00(a)
Unit value at end of period......................................... $ 1.09
Number of units outstanding at end of period........................ 91,750
Maturing Government Bond 2002 Sub-Account:
Unit value at beginning of period................................... $ 1.00(c)
Unit value at end of period......................................... $ 1.10
Number of units outstanding at end of period........................ 19,858
Value Sub-Account:
Unit value at beginning of period................................... $ 1.00(a)
Unit value at end of period......................................... $ 1.16
Number of units outstanding at end of period........................ 43,594
</TABLE>
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Contrafund Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.21
Number of units outstanding at end of period....................... 81,894
High Income Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.16
Number of units outstanding at end of period....................... 23,732
Equity-Income Sub-Account:
Unit value at beginning of period.................................. $ 1.00(b)
Unit value at end of period........................................ $ 1.25
Number of units outstanding at end of period....................... 156,865
</TABLE>
- -------
(a) For the period from January 24, 1997, commencement of operations, to De-
cember 31, 1997.
(b) For the period from January 29, 1997, commencement of operations, to De-
cember 31, 1997.
(c) For the period from April 2, 1997, commencement of operations, to December
31, 1997.
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, after September 1, 1998, (651) 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 sub-accounts. Each sub-account invests in
shares of a corresponding Portfolio of the Funds. Not all of the Portfolios of
the Funds may be available for investment by the separate account. Although
the Maturing Government Bond Portfolio with a maturity of 2002 is included in
this prospectus, it is not available for premium allocations or transfers
effective May 1, 1997.
12
<PAGE>
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." 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 (except for Global Bond
Portfolio which is operated as a non-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 Management which, prior to May 1, 1997, served as
investment adviser to the Fund. MIMLIC Management is a wholly-owned subsidiary
of Minnesota Mutual.
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 Global Bond
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, sixteen 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.
13
<PAGE>
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.
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.
14
<PAGE>
INFORMATION ABOUT THE POLICY
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 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. 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
15
<PAGE>
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 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.")
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.")
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.") 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
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<PAGE>
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 allocation of net premiums to the Guaranteed Account will range
from 0 percent to 50 percent.
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.
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
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<PAGE>
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.
The Cash Value Accumulation Test requires that the death benefit must be
greater than the account value times a specified percentage. The Guideline
Premium/Cash Value Corridor Test limits the amount of premiums which may be
paid given the current death benefit of the policy in addition to requiring
that the death benefit must be greater than the account value times a specified
percentage. Each policy will be tested at the end of each month for compliance
to the test chosen for that policy. Under either test, if the death benefit is
not greater than the applicable percentage of the account value, or for the
Guideline Premium/Cash Value Corridor Test, the premiums paid exceed the limit
for the current death benefit, we will increase the face amount or return
premium with interest to maintain compliance with IRC Section 7702.
For the Cash Value Accumulation Test, the applicable percentage by which to
multiply the account value to determine the minimum death benefit requirement
varies by the age and underwriting class of the insured. The following table
contains illustrative applicable percentages for this test for the non-tobacco
underwriting class:
<TABLE>
<CAPTION>
ATTAINED APPLICABLE
AGE PERCENTAGE
-------- ----------
<S> <C>
35 441%
45 316
55 231
65 175
75 140
</TABLE>
For the Guideline Premium/Cash Value Corridor Test, the applicable percentage
by which to multiply the account value to determine the minimum death benefit
requirement varies only by the age of the insured. The following table contains
the applicable percentages for the account value portion of this test:
<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 premium limit under the Guideline Premium/Cash Value Corridor Test varies
by the amount of the death benefit, the policy year, age and underwriting class
of the insured as well as the charges under policy. You may call us at (800)
843-8358, during our normal business hours of 8:00 a.m. to 4:45 p.m., Central
Time, if you would like us to calculate the maximum premium you may pay under
your policy for this test. If you pay up to the maximum premium amount your
policy may be qualified as a modified endowment contract. (See "Federal Tax
Status.")
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.") 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."
INCREASES If an increase in the current face amount is applied for, we reserve
the right to require evidence of insurability from the
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<PAGE>
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.")
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"),
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 of the insured and may be less than otherwise would be paid
upon death of the insured. (See "Additional Benefits.")
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.") 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.")
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
19
<PAGE>
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.")
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 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
20
<PAGE>
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, Martin Luther King Jr. 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 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."
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.") 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."
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
21
<PAGE>
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 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."
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.")
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
22
<PAGE>
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 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; after September 1, 1998, (651)
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.
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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 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
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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.
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
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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 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
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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. 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.
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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. 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, 1997.
The advisory fees for the Series Fund are made pursuant to a contractual
agreement between the Series Fund and Advantus Capital Management, Inc. The
advisory fees for VIP and VIP II are made pursuant to 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 Global Bond Portfolios, which are 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 expected to 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% 0.05% 0.55%
Bond 0.50% 0.07% 0.57%
Money Market 0.50% 0.09% 0.59%
Asset Allocation 0.50% 0.05% 0.55%
Mortgage Securities 0.50% 0.09% 0.59%
Index 500 0.40% 0.05% 0.45%
Capital Appreciation 0.75% 0.05% 0.80%
International Stock 0.71%* 0.26% 0.97%
Small Company 0.75% 0.07% 0.82%
Maturing Government Bond 2010 0.25% 0.15% 0.40%
Value Stock 0.75% 0.05% 0.80%
Small Company Value 0.75% 0.15% 0.90%
Global Bond 0.60% 1.00% 1.60%
Index 400 Mid-Cap 0.40% 0.15% 0.55%
Macro-Cap Value 0.70% 0.15% 0.85%
Micro-Cap Growth 1.10% 0.15% 1.25%
VIP
VIP High Income 0.59%** 0.12% 0.71%
VIP Equity-Income 0.50%** 0.08% 0.58%
VIP II
VIP II Contrafund 0.60%** 0.11% 0.71%
AVERAGE 0.60% 0.15% 0.75%
</TABLE>
* The advisory fee for this portfolio is a variable fee decreasing with
increased asset size. This figure represents the actual 1997 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
1997 averages.
The Maturing Government Bond Portfolio with a maturity date of 2002 is not
available for premium allocations or transfers effective May 1, 1997. The
investment advisory fee for this portfolio is .25 percent (effective April 1,
1998) and the portfolio expense fee is .15 percent.
Although the Maturing Government Bond Portfolio with a target maturity of
2002 is included in this prospectus, it is 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 affecting the account
value which may accumulate due to employee-paid net
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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 for a policy with an Option B death benefit, for
which the account value portion of the death benefit is determined as of the
date of payment, 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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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.
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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."
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.
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 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
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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.
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. 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 15 years after the policy is issued
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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 characterized 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. Certain reductions in
benefits may also cause a policy to become a modified endowment contract.
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
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competent tax adviser before deducting any loan interest.
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. Moreover, in recent years, Congress has adopted new rules
relating to corporate owned life insurance. Any business contemplating the
purchase of a new life insurance contract or a change in an existing contract
should consult a tax adviser.
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.
YEAR 2000 COMPUTER PROBLEM
The services provided by Minnesota Mutual to the Separate Account and its
policy owners depend on the smooth functioning of its computer systems. Many
computer software systems in use today cannot distinguish the year 2000 from
the year 1900 because of the way that dates are encoded, stored and
calculated. That failure could have a negative impact on the ability of
Advantus Capital and Minnesota Mutual to provide services to contract owners.
Minnesota Mutual has been actively working on necessary changes to its
computer systems to deal with the year 2000. Although there can be no
assurance of complete success, Minnesota Mutual believes that it will be able
to resolve these issues on a timely basis and that there will be no material
adverse impact on its ability to provide services to the Separate Account.
In addition, Minnesota Mutual's operations could be impacted by its service
providers' or suppliers' year 2000 efforts. Minnesota Mutual has undertaken an
initiative to assess the efforts of organizations where there is a significant
business relationship; however there is no assurance that Minnesota Mutual
will not be affected by year 2000 problems of other organizations.
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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
Leslie S. Biller President and Chief Operating Officer, Norwest
Corporation, Minneapolis, Minnesota (Banking)
John F. Grundhofer President and Chief Executive Officer, U.S.
Bancorp, 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 (Develops
and Markets Cleaning and Sanitizing Products)
Frederick T. Weyerhaeuser Retired since April 1998, prior thereto Chairman
and Treasurer, Clearwater Investment Trust since
May 1996, prior thereto for more than five years,
Chairman, Clearwater Management Company, St. Paul,
Minnesota (Financial Management)
Principal Officers (other than Trustees)
Name Position
---- --------
John F. Bruder Senior Vice President
Keith M. Campbell Senior Vice President
Frederick P. Feuerherm Vice President
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
Michael T. Kellett Vice President
Richard D. Lee Vice President
Robert M. Olafson Vice President
Dennis E. Prohofsky Senior Vice President, General Counsel and
Secretary
Gregory S. Strong Senior Vice President and Chief Financial Officer
Terrence M. Sullivan Senior Vice President
Randy F. Wallake Senior Vice President
William N. Westhoff Senior Vice President and Treasurer
</TABLE>
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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 with the exception of Mr. Westhoff. Mr. Westhoff has been employed by
Minnesota Mutual since April 1998. Prior thereto, Mr. Westhoff was employed by
American Express Financial Corporation, Minneapolis, Minnesota, from August
1994 to October 1997 as Senior Vice President, Global Investments and from
November 1989 to July 1994 as Senior Vice President, Fixed Income Management.
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 Ascend Financial Services, Inc. ("Ascend
Financial") or of other broker-dealers who have entered into selling agreements
with Ascend Financial. Ascend Financial acts as principal underwriter for the
policies. Ascend Financial 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.
Ascend Financial Services, Inc., 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.
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<PAGE>
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.
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, Ascend Financial 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, Assistant General 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 the consolidated financial statements of 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., 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.
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INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Companyand Policy
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, 1997 and the related statements of operations,
statements of changes in net assets for the each of the years in the two-year
period ended December 31, 1997 and the period from March 8, 1995 to December
31, 1995 (the year ended December 31, 1997 and the 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) and the financial highlights for the periods presented 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, 1997 were confirmed to us by the
respective Sub-Account mutual fund group, or, for Advantus Series Fund, Inc.
(formerly 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,
1997 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 20, 1998
41
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
----------------------------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX CAPITAL INTERNATIONAL SMALL
ASSETS GROWTH BOND MARKET ALLOCATION SECURITIES 500 APPRECIATION STOCK COMPANY
------ -------- ----- ------ ---------- ---------- --------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in shares of
Advantus Series Fund,
Inc.:
Growth Portfolio,
211,296 shares at net
asset value of $2.40
per share (cost
$468,410) $507,068 -- -- -- -- -- -- -- --
Bond Portfolio, 3,336
shares at net asset
value of $1.33 per
share (cost $4,206) -- 4,423 -- -- -- -- -- -- --
Money Market Portfolio,
4,996 shares at net as-
set value of $1.00 per
share (cost $4,996) -- -- 4,996 -- -- -- -- -- --
Asset Allocation Port-
folio, 135,636 shares
at net asset value of
$2.03 per share (cost
$259,559) -- -- -- 275,133 -- -- -- -- --
Mortgage Securities
Portfolio, 1,725 shares
at net asset value of
$1.21 per share (cost
$1,994) -- -- -- -- 2,089 -- -- -- --
Index 500 Portfolio,
737,466 shares at net
asset value of $3.10
per share (cost
$1,728,209) -- -- -- -- -- 2,288,863 -- -- --
Capital Appreciation
Portfolio, 7,039 shares
at net asset value of
$2.85 per share (cost
$16,485) -- -- -- -- -- -- 20,074 -- --
International Stock
Portfolio, 6,398 shares
at net asset value of
$1.71 per share (cost
$9,904) -- -- -- -- -- -- -- 10,912 --
Small Company Portfo-
lio, 53,624 shares at
net asset value of
$1.65 per share (cost
$83,283) -- -- -- -- -- -- -- -- 88,724
-------- ----- ----- ------- ----- --------- ------ ------ ------
507,068 4,423 4,996 275,133 2,089 2,288,863 20,074 10,912 88,724
Receivable from Minne-
sota Mutual for policy
purchase payments 82 -- -- -- -- -- -- 82 82
Receivable for invest-
ments sold 2,825 24 4 2,914 28 10,244 102 118 1,099
-------- ----- ----- ------- ----- --------- ------ ------ ------
Total assets 509,975 4,447 5,000 278,047 2,117 2,299,107 20,176 11,112 89,905
-------- ----- ----- ------- ----- --------- ------ ------ ------
<CAPTION>
LIABILITIES
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payable for investments
purchased 82 -- -- -- -- -- -- 82 82
Payable to Minnesota
Mutual for policy
terminations and
mortality and expense
charges 2,825 24 4 2,914 28 10,244 102 118 1,099
-------- ----- ----- ------- ----- --------- ------ ------ ------
Total liabilities 2,907 24 4 2,914 28 10,244 102 200 1,181
-------- ----- ----- ------- ----- --------- ------ ------ ------
NET ASSETS APPLICABLE TO
POLICY OWNERS $507,068 4,423 4,996 275,133 2,089 2,288,863 20,074 10,912 88,724
======== ===== ===== ======= ===== ========= ====== ====== ======
UNITS OUTSTANDING 297,099 3,719 4,453 187,443 1,743 1,231,985 11,926 7,857 64,545
======== ===== ===== ======= ===== ========= ====== ====== ======
NET ASSET VALUE PER UNIT $ 1.71 1.19 1.12 1.47 1.20 1.86 1.68 1.39 1.37
======== ===== ===== ======= ===== ========= ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<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 Advantus Series
Fund, Inc.:
Maturing Government
Bond 1998 Portfolio,
1,018 shares at net
asset value of $1.08
per share (cost
$1,050) $1,102 -- -- -- -- -- -- --
Maturing Government
Bond 2002 Portfolio,
1,065 shares at net
asset value of $1.07
per share (cost
$1,114) -- 1,143 -- -- -- -- -- --
Maturing Government
Bond 2006 Portfolio,
1,044 shares at net
asset value of $1.16
per share (cost
$1,122) -- 1,209 -- -- -- -- --
Maturing Government
Bond 2010 Portfolio,
1,001 shares at net
asset value of $1.29
per share (cost
$1,068) -- -- -- 1,294 -- -- -- --
Value Stock Portfolio,
11,103 shares at net
asset value of $1.73
per share (cost
$17,796) -- -- -- -- 19,225 -- -- --
Investments in shares
of Fidelity Variable
Insurance
Products Fund II:
Contrafund Portfolio,
2,154 shares at net
asset value of $19.94
per share (cost
$32,284) -- -- -- -- -- 42,954 -- --
Investments in shares
of Fidelity Variable
Insurance
Products Fund:
High Income Portfolio,
2,930 shares at net
asset value of $13.58
per share (cost
$34,414) -- -- -- -- -- -- 39,796 --
Equity-Income
Portfolio, 1,844
shares at net asset
value of $24.28 per
share (cost $36,773) -- -- -- -- -- -- -- 44,768
------ ----- ----- ----- ------ ------ ------ ------
1,102 1,143 1,209 1,294 19,225 42,954 39,796 44,768
Receivable for
investments sold -- -- -- -- 157 7 11 51
------ ----- ----- ----- ------ ------ ------ ------
Total assets 1,102 1,143 1,209 1,294 19,382 42,961 39,807 44,819
------ ----- ----- ----- ------ ------ ------ ------
LIABILITIES
-----------
Payable to Minnesota
Mutual for policy
terminations and
mortality and expense
charges -- -- -- -- 157 7 11 51
------ ----- ----- ----- ------ ------ ------ ------
NET ASSETS APPLICABLE
TO POLICY OWNERS $1,102 1,143 1,209 1,294 19,225 42,954 39,796 44,768
====== ===== ===== ===== ====== ====== ====== ======
UNITS OUTSTANDING 1,000 1,000 1,000 1,012 10,536 31,208 31,854 33,024
====== ===== ===== ===== ====== ====== ====== ======
NET ASSET VALUE PER
UNIT $ 1.10 1.14 1.21 1.29 1.83 1.38 1.25 1.36
====== ===== ===== ===== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<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
distributions from
underlying mutual
fund
(note 4) $ 153 167 202 451 106 18,065 -- 238 1
Mortality and expense
charges (note 3) (418) (18) (20) (314) (9) (8,779) (77) (45) (357)
-------- ---- ---- -------- ---- -------- ------ ------ -------
Investment income
(loss)--net (265) 149 182 137 97 9,286 (77) 193 (356)
-------- ---- ---- -------- ---- -------- ------ ------ -------
Realized and unrealized
gains on investments--
net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 3,958 -- -- 937 -- 22,823 1,258 119 --
-------- ---- ---- -------- ---- -------- ------ ------ -------
Realized gains on
sales of investments:
Proceeds from sales 11,361 280 446 176,413 330 158,947 2,216 1,160 12,328
Cost of investments
sold (11,165) (275) (446) (171,954) (323) (125,353) (2,045) (1,041) (11,965)
-------- ---- ---- -------- ---- -------- ------ ------ -------
196 5 -- 4,459 7 33,594 171 119 363
-------- ---- ---- -------- ---- -------- ------ ------ -------
Net realized gains
on investments 4,154 5 -- 5,396 7 56,417 1,429 238 363
-------- ---- ---- -------- ---- -------- ------ ------ -------
Net change in
unrealized
appreciation or
depreciation of
investments 37,650 153 -- 15,221 46 395,787 2,498 350 5,653
-------- ---- ---- -------- ---- -------- ------ ------ -------
Net gains on in-
vestments 41,804 158 -- 20,617 53 452,204 3,927 588 6,016
-------- ---- ---- -------- ---- -------- ------ ------ -------
Net increase (decrease)
in net assets resulting
from operations $ 41,539 307 182 20,754 150 461,490 3,850 781 5,660
======== ==== ==== ======== ==== ======== ====== ====== =======
</TABLE>
See accompanying notes to financial statements.
44
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<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:
Investment income
distributions from
underlying mutual fund
(note 4) $56 56 55 51 211 286 2,338 569
Mortality and expense
charges (note 3) (5) (5) (6) (6) (78) (192) (181) (169)
--- --- --- --- ------ ----- ----- -----
Investment income--
net 51 51 49 45 133 94 2,157 400
--- --- --- --- ------ ----- ----- -----
Realized and unrealized
gains on investments--
net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 2 8 16 10 1,700 757 289 2,859
--- --- --- --- ------ ----- ----- -----
Realized gains on
sales of investments:
Proceeds from sales 5 5 5 6 1,803 344 299 747
Cost of investments
sold (5) (5) (5) (6) (1,534) (275) (277) (666)
--- --- --- --- ------ ----- ----- -----
-- -- -- -- 269 69 22 81
--- --- --- --- ------ ----- ----- -----
Net realized gains on
investments 2 8 16 10 1,969 826 311 2,940
--- --- --- --- ------ ----- ----- -----
Net change in
unrealized
appreciation or
depreciation of
investments 5 25 65 125 386 7,142 3,238 6,007
--- --- --- --- ------ ----- ----- -----
Net gains on invest-
ments 7 33 81 135 2,355 7,968 3,549 8,947
--- --- --- --- ------ ----- ----- -----
Net increase in net as-
sets resulting from op-
erations $58 84 130 180 2,488 8,062 5,706 9,347
=== === === === ====== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
45
<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 INTERNATION 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 in-
vestments--net:
Realized gain distri-
butions from under-
lying 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.
46
<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>
Investment income
(loss):
Investment income dis-
tributions from under-
lying 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 2
---- --- --- --- ------ ----- ----- -----
Net change in
unrealized apprecia-
tion or depreciation
of investments 47 4 22 101 1,007 3,528 2,144 1,988
---- --- --- --- ------ ----- ----- -----
Net gains on invest-
ments 47 4 22 101 1,863 3,531 2,147 1,990
---- --- --- --- ------ ----- ----- -----
Net increase in net as-
sets resulting from op-
erations $ 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.
47
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF OPERATIONS
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
distributions from
underlying 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
distributions from
underlying 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
investments 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.
48
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
<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>
Operations:
Investment income
(loss)--net $ (265) 149 182 137 97 9,286 (77) 193 (356)
Net realized gains on
investments 4,154 5 -- 5,396 7 56,417 1,429 238 363
Net change in
unrealized appreciation
or depreciation of
investments 37,650 153 -- 15,221 46 395,787 2,498 350 5,653
-------- ----- ----- -------- ----- --------- ------ ------ -------
Net increase (decrease)
in net assets resulting
from operations 41,539 307 182 20,754 150 461,490 3,850 781 5,660
-------- ----- ----- -------- ----- --------- ------ ------ -------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 462,867 1,683 2,214 423,813 767 706,336 6,855 5,510 41,540
Policy withdrawals and
charges (10,943) (260) (426) (176,099) (321) (150,168) (2,139) (1,115) (11,971)
-------- ----- ----- -------- ----- --------- ------ ------ -------
Increase in net assets
from policy transactions 451,924 1,423 1,788 247,714 446 556,168 4,716 4,395 29,569
-------- ----- ----- -------- ----- --------- ------ ------ -------
Increase in net assets 493,463 1,730 1,970 268,468 596 1,017,658 8,566 5,176 35,229
Net assets at the begin-
ning of year 13,605 2,693 3,026 6,665 1,493 1,271,205 11,508 5,736 53,495
-------- ----- ----- -------- ----- --------- ------ ------ -------
Net assets at the end of
year $507,068 4,423 4,996 275,133 2,089 2,288,863 20,074 10,912 88,724
======== ===== ===== ======== ===== ========= ====== ====== =======
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
<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--net $ 51 51 49 45 133 94 2,157 400
Net realized gains on
investments 2 8 16 10 1,969 826 311 2,940
Net change in
unrealized appreciation
or depreciation of
investments 5 25 65 125 386 7,142 3,238 6,007
------ ----- ----- ----- ------ ------ ------ ------
Net increase in net as-
sets resulting from op-
erations 58 84 130 180 2,488 8,062 5,706 9,347
------ ----- ----- ----- ------ ------ ------ ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments -- -- -- 16 10,010 1,127 2,245 3,715
Policy withdrawals and
charges -- -- -- -- (1,724) (66) (120) (523)
------ ----- ----- ----- ------ ------ ------ ------
Increase in net assets
from policy transactions -- -- -- 16 8,286 1,061 2,125 3,192
------ ----- ----- ----- ------ ------ ------ ------
Increase in net assets 58 84 130 196 10,774 9,123 7,831 12,539
Net assets at the begin-
ning of year 1,044 1,059 1,079 1,098 8,451 33,831 31,965 32,229
------ ----- ----- ----- ------ ------ ------ ------
Net assets at the end of
year $1,102 1,143 1,209 1,294 19,225 42,954 39,796 44,768
====== ===== ===== ===== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
50
<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 INDEX CAPITAL INTERNATIONAL SMALL
GROWTH BOND MARKET ALLOCATION SECURITIES 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
assets resulting from
operations 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
beginning 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.
51
<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
investments 47 4 22 101 1,007 3,528 2,144 1,988
------ ----- ----- ----- ------ ------ ------ ------
Net increase in net
assets resulting from
operations 44 59 79 98 1,895 3,444 2,060 1,905
------ ----- ----- ----- ------ ------ ------ ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase
payments 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
beginning 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.
52
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
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.
53
<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. The Account charges a mortality and expense
risk charge which varies based on the group-sponsored insurance program under
which the policy is issued. The financial statements presented herein include
only the segregated sub-accounts where the mortality and expense risk charge
amounts to .50 percent on an annual basis.
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 Advantus Series
Fund, Inc., (formerly 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 Advantus 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.
Ascend Financial Services, Inc. (formerly MIMLIC Sales Corporation) acts as
the underwriter for the Account. Advantus Capital Management, Inc. acts as the
investment adviser for the Advantus Series Fund, Inc. Ascend Financial
Services, Inc. and Advantus Capital Management, Inc. are wholly-owned
subsidiaries 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.
54
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(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 years ended
December 31, 1997 and 1996 and the period from March 8, 1995 to December
31, 1995 amounted to $59,103, $27,054 and $311, respectively.
A premium tax charge in the amount of .75 to 3.50 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 years ended December 31, 1997 and 1996 and the period from March 8,
1995 to December 31, 1995 amounted to $40,561, $8,636 and $827,
respectively.
A federal tax charge of up to .25 percent for group-sponsored policies and
up to 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 years ended
December 31, 1997 and 1996 and the period from March 8, 1995 to December
31, 1995 amounted to $13,345, $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.
55
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) MORTALITY AND EXPENSE AND OTHER POLICY CHARGES (CONTINUED)
The total of cash value charges for the years ended December 31, 1997 and
1996 and the period from March 8, 1995 to December 31, 1995 for each segregated
sub-account (the year ended December 31, 1997 and period from May 1, 1996,
commencement of operations, Maturing Government Bond 1998, Maturing Government
Bond 2002, Maturing Government Bond 2006, Maturing Government Bond 2010,
Contrafund, High Income and Equity-Income) are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Growth $ 10,042 $ 1,811 $ 516
Bond 262 145 53
Money Market 426 847 7
Asset Allocation 16,920 418 151
Mortgage Securities 321 235 108
Index 500 123,551 105,767 47,802
Capital Appreciation 1,238 866 253
International Stock 957 375 68
Small Company 11,647 4,492 2,093
Maturing Government Bond 1998 -- -- --
Maturing Government Bond 2002 -- -- --
Maturing Government Bond 2006 -- -- --
Maturing Government Bond 2010 1 -- --
Value Stock 1,724 584 157
Contrafund 66 14 --
High Income 116 1 --
Equity--Income 523 18 --
</TABLE>
(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, 1997
and 1996 and period from March 8, 1995 to December 31, 1995 (the year ended
December 31, 1997 and period from May 1, 1996, commencement of operations,
Maturing Government Bond 1998, Maturing Government Bond 2002, Maturing
Government Bond 2006, Maturing Government Bond 2010, Contrafund, High Income
and Equity-Income):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Growth $466,978 $ 8,337 $ 6,640
Bond 1,852 1,400 1,773
Money Market 2,416 2,691 1,204
Asset Allocation 425,201 4,105 3,619
Mortgage Securities 873 565 1,226
Index 500 747,224 712,449 552,219
Capital Appreciation 8,113 6,368 7,913
International Stock 5,867 3,407 3,858
Small Company 41,541 19,149 43,115
Maturing Government Bond 1998 58 1,000 --
Maturing Government Bond 2002 64 1,058 --
Maturing Government Bond 2006 70 1,060 --
Maturing Government Bond 2010 76 1,000 --
Value Stock 11,921 4,750 6,196
Contrafund 2,256 30,393 --
High Income 4,870 29,905 --
Equity--Income 7,198 30,336 --
</TABLE>
56
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) UNIT ACTIVITY FROM POLICY TRANSACTIONS
Transactions in units for each segregated sub-account for the years ended
December 31, 1997 and 1996 and period from March 8, 1995 to December 31, 1995
(the year ended December 31, 1997 and the period from May 1, 1996, commencement
of operations, 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) were as follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------------------------
MONEY ASSET MORTGAGE
GROWTH BOND MARKET ALLOCATION SECURITIES INDEX 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
Policy purchase pay-
ments 335,871 1,499 2,028 309,527 673 435,584
Deductions for policy
withdrawals and
charges (49,355) (242) (397) (127,460) (283) (105,793)
------- ----- ----- -------- ----- ---------
Units outstanding at
December 31, 1997 297,099 3,719 4,453 187,443 1,743 1,231,985
======= ===== ===== ======== ===== =========
</TABLE>
<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 -- -- --
Deductions 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
Policy purchase pay-
ments 4,705 4,088 32,876 -- -- --
Deductions for policy
withdrawals and
charges (1,504) (832) (10,074) -- -- --
------ ------ ------- ----- ----- -----
Units outstanding at
December 31, 1997 11,926 7,857 64,545 1,000 1,000 1,000
====== ====== ======= ===== ===== =====
</TABLE>
57
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) UNIT ACTIVITY FROM POLICY TRANSACTIONS (CONTINUED)
<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 -- -- --
Deductions for policy
withdrawals and charges -- (1,483) -- -- --
----- ------ ------ ------ ------
Units outstanding at
December 31, 1995 -- 4,016 -- -- --
Policy purchase payments 1,000 3,817 30,375 29,957 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 29,956 30,306
Policy purchase payments 12 5,958 899 2,002 3,161
Deductions for policy with-
drawals and charges -- (1,007) (52) (124) (443)
----- ------ ------ ------ ------
Units outstanding at December
31, 1997 1,012 10,536 31,208 31,854 33,024
===== ====== ====== ====== ======
</TABLE>
(6) FINANCIAL HIGHLIGHTS
The following tables for each segregated sub-account show certain data for an
accumulation unit outstanding during the years ended December 31, 1997 and 1996
and the period from March 8, 1995, commencement of operations, to December 31,
1995 (year ended December and the 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
---------------- ------------------
1997 1996 1995 1997 1996 1995
----- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.29 1.10 1.00 1.09 1.07 1.00
Income from investment operations:
Net investment income (loss) (.01) -- (.01) .05 .05 --
Net gains or losses on securities (both
realized and unrealized) .43 .19 .11 .05 (.03) .07
----- ---- ---- ----- ----- -----
Total from investment operations .42 .19 .10 .10 .02 .07
----- ---- ---- ----- ----- -----
Unit value, end of period $1.71 1.29 1.10 1.19 1.09 1.07
===== ==== ==== ===== ===== =====
<CAPTION>
MONEY MARKET ASSET ALLOCATION
---------------- ------------------
1997 1996 1995 1997 1996 1995
----- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.07 1.03 1.00 1.24 1.11 1.00
Income from investment operations:
Net investment income (loss) .05 .04 .03 -- .02 --
Net gains or losses on securities (both
realized and unrealized) -- -- -- .23 .11 .11
----- ---- ---- ----- ----- -----
Total from investment operations .05 .04 .03 .23 .13 .11
----- ---- ---- ----- ----- -----
Unit value, end of period $1.12 1.07 1.03 1.47 1.24 1.11
===== ==== ==== ===== ===== =====
</TABLE>
58
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
MORTGAGE SECURITIES INDEX 500
---------------------- --------------
1997 1996 1995 1997 1996 1995
------- ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $ 1.10 1.05 1.00 1.41 1.16 1.00
Income from investment operations:
Net investment income (loss) .06 .06 (.01) .01 .01 (.01)
Net gains or losses on securities
(both realized and unrealized) .04 (.01) .06 .44 .24 .17
------- ------ ------ ---- ---- ----
Total from investment operations .10 .05 .05 .45 .25 .16
------- ------ ------ ---- ---- ----
Unit value, end of period $ 1.20 1.10 1.05 1.86 1.41 1.16
======= ====== ====== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
CAPITAL INTERNATIONAL
APPRECIATION STOCK
----------------- --------------
1997 1996 1995 1997 1996 1995
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.32 1.13 1.00 1.25 1.05 1.00
----- ---- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) (.01) (.01) -- .03 .02 --
Net gains or losses on securities
(both realized and unrealized) .37 .20 .13 .11 .18 .05
----- ---- ---- ---- ---- ----
Total from investment operations .36 .19 .13 .14 .20 .05
----- ---- ---- ---- ---- ----
Unit value, end of period $1.68 1.32 1.13 1.39 1.25 1.05
===== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
MATURING MATURING
GOVERNMENT GOVERNMENT
SMALL COMPANY BOND 1998 BOND 2002
----------------- ----------- -----------
1997 1996 1995 1997 1996 1997 1996
----- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.28 1.21 1.00 1.04 1.00 1.06 1.00
----- ---- ---- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) (.01) (.01) -- .05 (.01) .05 .06
Net gains or losses on securities
(both realized and unrealized) .10 .08 .21 .01 .05 .03 --
----- ---- ---- ----- ----- ----- -----
Total from investment operations .09 .07 .21 .06 .04 .08 .06
----- ---- ---- ----- ----- ----- -----
Unit value, end of period $1.37 1.28 1.21 1.10 1.04 1.14 1.06
===== ==== ==== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
MATURING MATURING
GOVERNMENT GOVERNMENT
BOND 2006 BOND 2010 VALUE STOCK
---------- ----------- --------------
1997 1996 1997 1996 1997 1996 1995
----- ---- ----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.08 1.00 1.10 1.00 1.51 1.16 1.00
----- ---- ----- ----- ---- ---- ----
Income from investment operations:
Net investment income (loss) .05 .06 .05 -- .02 .01 .01
Net gains or losses on securities
(both realized and unrealized) .08 .02 .14 .10 .30 .34 .15
----- ---- ----- ----- ---- ---- ----
Total from investment operations .13 .08 .19 .10 .32 .35 .16
----- ---- ----- ----- ---- ---- ----
Unit value, end of period $1.21 1.08 1.29 1.10 1.83 1.51 1.16
===== ==== ===== ===== ==== ==== ====
</TABLE>
59
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
HIGH EQUITY-
CONTRAFUND INCOME INCOME
---------- --------- ---------
1997 1996 1997 1996 1997 1996
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.11 1.00 1.07 1.00 1.06 1.00
----- ---- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) -- (.01) .07 -- .01 --
Net gains or losses on securities
(both realized and unrealized) .26 .12 .11 .07 .29 .06
----- ---- ---- ---- ---- ----
Total from investment operations .26 .11 .18 .07 .30 .06
----- ---- ---- ---- ---- ----
Unit value, end of period $1.38 1.11 1.25 1.07 1.36 1.06
===== ==== ==== ==== ==== ====
</TABLE>
60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Company
and Policy Owners of Minnesota Mutual Variable Universal Life Account:
We have audited the accompanying statement of assets and liabilities of the
Index 500 Segregated Sub-Account of Minnesota Mutual Variable Universal Life
Account as of December 31, 1997 and the related statement of operations,
statement of changes in net assets and the financial highlights for the period
from June 24, 1997, commencement of operations, to December 31, 1997. 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 audit.
We conducted our audit 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, 1997 were verified by examination
of the underlying portfolios of the Advantus Series Fund, Inc. (formerly MIMLIC
Series Fund, Inc.). 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 audit provides 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 Index 500 Segregated Sub-
Account of Minnesota Mutual Variable Universal Life Account at December 31,
1997 and the results of their operations, changes in their net assets and the
financial highlights for the period stated in the first paragraph above, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 20, 1998
61
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Investments in shares of Advantus Series Fund, Inc.:
Index 500 Portfolio, 10,519,980 shares at net asset value of $3.10
per share (cost $29,759,804) $32,650,726
Receivable for investments sold 12,680
-----------
Total assets 32,663,406
LIABILITIES
Payable to Minnesota Mutual for policy terminations and charges 12,680
-----------
Total liabilities 12,680
-----------
NET ASSETS APPLICABLE TO POLICY OWNERS $32,650,726
===========
UNITS OUTSTANDING 27,829,987
===========
NET ASSET VALUE PER UNIT $ 1.17
===========
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
Statement of Operations
Period from June 24, 1997, commencement of operations, to December 31, 1997
<TABLE>
<S> <C>
Realized and unrealized gains on investments--net:
Realized gains on sales of investments:
Proceeds from sales $ 86,205
Cost of investments sold (81,970)
----------
Net realized gains on investments 4,235
----------
Net change in unrealized appreciation or depreciation of in-
vestments 2,890,922
----------
Net gains on investments 2,895,157
----------
Net increase in net assets resulting from operations $2,895,157
==========
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
Statement of Changes in Net Assets
Period from June 24, 1997, commencement of operations, to December 31, 1997
<TABLE>
<S> <C>
Operations:
Net realized gains on investments $ 4,235
Net change in unrealized appreciation or depreciation of invest-
ments 2,890,922
-----------
Net increase in net assets resulting from operations 2,895,157
-----------
Policy transactions (notes 3, 4 and 5):
Policy purchase payments 29,841,774
Policy withdrawals and charges (86,205)
-----------
Increase in net assets from policy transactions 29,755,569
-----------
Increase in net assets 32,650,726
Net assets at the beginning of period --
-----------
Net assets at the end of period $32,650,726
===========
</TABLE>
See accompanying notes to financial statements.
64
<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, however, no
purchase payments were allocated to the segregated sub-accounts presented in
these financial statements until the current year. The Account currently has
seventeen segregated sub-accounts to which policy owners may allocate their
purchase payments. The Account charges a mortality and expense risk charge
which varies based on the group-sponsored insurance program under which the
policy is issued. The financial statements presented herein include only the
segregated sub-accounts where there is no mortality and expense risk charge.
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 Advantus Series
Fund, Inc. (formerly 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 Advantus 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. As
of December 31, 1997, no policy purchase payments have been allocated to the
Growth, Bond, Money Market, Asset Allocation, Mortgage Securities, 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.
Ascend Financial Services, Inc. (formerly MIMLIC Sales Corporation) acts as
the underwriter for the Account. Advantus Capital Management, Inc. acts as the
investment adviser for the Advantus Series Fund, Inc. Ascend Financial
Services, Inc. and Advantus Capital Management, Inc. are wholly-owned
subsidiaries 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.
65
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(3) POLICY CHARGES
Policy purchase payments are reflected net of the following charges paid to
Minnesota Mutual:
A premium tax charge in the amount of .75 to 3.50 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 period from June 24, 1997, commencement of operations, to December 31,
1997 amounted to $612,208.
A federal tax charge of up to .25 percent for group-sponsored policies and
up to 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 period from
June 24, 1997, commencement of operations, to December 31, 1997 amounted to
$382,630.
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 period from June 24, 1997,
commencement of operations, to December 31, 1997 for the Index 500 segregated
sub-account amounted to $86,194.
(4) INVESTMENT TRANSACTIONS
The Account's purchases of Underlying Fund shares, including reinvestment of
dividend distributions, during the period from June 24, 1997, commencement of
operations, to December 31, 1997 amounted to $29,841,774.
(5) UNIT ACTIVITY FROM POLICY TRANSACTIONS
Transactions in units for the Index 500 segregated sub-account for the period
from June 24, 1997, commencement of operations, to December 31, 1997 were as
follows:
<TABLE>
<S> <C>
Units outstanding December 31, 1996 --
Policy purchase payments 29,932,879
Deductions for policy withdrawals and charges (2,102,892)
----------
Units outstanding December 31, 1997 27,829,987
==========
</TABLE>
(6) FINANCIAL HIGHLIGHTS
The following table for the Index 500 sub-account shows certain data for an
accumulation unit outstanding for the period from June 24, 1997, commencement
of operations, to December 31, 1997.
<TABLE>
<S> <C>
Unit value, beginning of period $1.00
Net gains or losses on securities (both realized and unrealized) .17
-----
Total from investment operations .17
-----
Unit value, end of period $1.17
=====
</TABLE>
66
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees of The Minnesota Mutual Life Insurance Company and Policy
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 2002, Value Stock, Contrafund, High Income and Equity-Income Segregated
Sub-Accounts of Minnesota Mutual Variable Universal Life Account as of December
31, 1997 and the related statements of operations, statements of changes in net
assets and financial highlights for the period from January 24, 1997,
commencement of operations, to December 31, 1997 for Index 500, Small Company
and Value Stock Segregated Sub-Accounts, for the period from January 29, 1997,
commencement of operations, to December 31, 1997 for Growth, Bond, Money
Market, Asset Allocation, Mortgage Securities, Capital Appreciation,
International Stock, Contrafund, High Income and Equity-Income Segregated Sub-
Accounts and for the period from April 2, 1997, commencement of operations, to
December 31, 1997 for Maturing Government Bond 2002 Segregated Sub-Account.
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 audit.
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 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, 1997 were confirmed
to us by the respective Sub-Account mutual fund group, or, for Advantus Series
Fund, Inc. (formerly 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 2002, Value Stock,
Contrafund, High Income and Equity-Income Segregated Sub-Accounts of Minnesota
Mutual Variable Universal Life Account at December 31, 1997 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 20, 1998
67
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX CAPITAL
ASSETS GROWTH BOND MARKET ALLOCATION SECURITIES 500 APPRECIATION
------ -------- ------ ------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments in shares of
Advantus Series Fund,
Inc.:
Growth Portfolio,
50,670 shares at net
asset value of $2.40
per share (cost
$112,881) $121,597 -- -- -- -- -- --
Bond Portfolio, 39,861
shares at net asset
value of $1.33 per
share (cost $50,920) -- 52,839 -- -- -- -- --
Money Market
Portfolio, 99,898
shares at net asset
value of $1.00 per
share (cost $99,898) -- -- 99,898 -- -- -- --
Asset Allocation
Portfolio, 30,223
shares at net asset
value of $2.03 per
share (cost $56,860) -- -- -- 61,306 -- -- --
Mortgage Securities
Portfolio, 9,811
shares at net asset
value of $1.21 per
share (cost $11,571) -- -- -- -- 11,883 -- --
Index 500 Portfolio,
96,976 shares at net
asset value of $3.10
per share (cost
$252,854) -- -- -- -- -- 300,984 --
Capital Appreciation
Portfolio, 32,742
shares at net asset
value of $2.85 per
share (cost $82,662) -- -- -- -- -- -- 93,376
-------- ------ ------- ------ ------ ------- ------
121,597 52,839 99,898 61,306 11,883 300,984 93,376
Receivable from
Minnesota Mutual for
policy purchase
payments -- -- -- -- -- -- 4,000
Receivable for
investments sold 245 48 8,079 2,380 8 823 175
-------- ------ ------- ------ ------ ------- ------
Total assets 121,842 52,887 107,977 63,686 11,891 301,807 97,551
-------- ------ ------- ------ ------ ------- ------
LIABILITIES
-----------
Payable for investments
purchased -- -- -- -- -- -- 4,000
Payable to Minnesota
Mutual for policy
terminations and
mortality and expense
charges 245 48 8,079 2,380 8 823 175
-------- ------ ------- ------ ------ ------- ------
Total liabilities 245 48 8,079 2,380 8 823 4,175
-------- ------ ------- ------ ------ ------- ------
NET ASSETS APPLICABLE TO
POLICY OWNERS $121,597 52,839 99,898 61,306 11,883 300,984 93,376
======== ====== ======= ====== ====== ======= ======
UNITS OUTSTANDING 92,564 48,295 95,600 52,163 10,899 236,786 73,554
======== ====== ======= ====== ====== ======= ======
NET ASSET VALUE PER UNIT $ 1.31 1.10 1.05 1.18 1.09 1.27 1.27
======== ====== ======= ====== ====== ======= ======
</TABLE>
See accompanying notes to financial statements.
68
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------------------
MATURING
INTERNATIONAL SMALL GOVERNMENT VALUE HIGH EQUITY-
ASSETS STOCK COMPANY BOND 2002 STOCK CONTRAFUND INCOME INCOME
------ ------------- ------- ---------- ------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments in shares of
Advantus Series Fund,
Inc.:
International Stock
Portfolio, 36,365
shares at net asset
value of $1.71 per
share (cost $59,492) $62,020 -- -- -- -- -- --
Small Company Portfo-
lio, 60,226 shares at
net asset value of
$1.65 per share (cost
$89,644) -- 99,647 -- -- -- -- --
Maturing Government
Bond 2002 Portfolio,
20,285 shares at net
asset value of $1.07
per share (cost
$20,880) -- -- 21,780 -- -- -- --
Value Stock Portfolio,
29,312 shares at net
asset value of $1.73
per share (cost
$54,010) -- -- -- 50,755 -- -- --
Investments in shares of
Fidelity Variable Insur-
ance Products Fund II:
Contrafund Portfolio,
4,976 shares at net as-
set value of $19.94 per
share (cost $85,191) -- -- -- -- 99,214 -- --
Investments in shares of
Fidelity Variable
Insurance Products Fund:
High Income Portfolio,
2,029 shares at net as-
set value of $13.58 per
share (cost $25,515) -- -- -- -- -- 27,553 --
Equity-Income Portfo-
lio, 8,073 shares at
net asset value of
$24.28 per share (cost
$176,842) -- -- -- -- -- -- 196,018
------- ------ ------ ------ ------ ------ -------
62,020 99,647 21,780 50,755 99,214 27,553 196,018
Receivables from Minne-
sota Mutual for policy
purchase payments -- -- -- -- -- -- 4,000
Receivable for invest-
ments sold 103 221 39 389 394 76 543
------- ------ ------ ------ ------ ------ -------
Total assets 62,123 99,868 21,819 51,144 99,608 27,629 200,561
------- ------ ------ ------ ------ ------ -------
<CAPTION>
LIABILITIES
-----------
<S> <C> <C> <C> <C> <C> <C> <C>
Payable for investments
purchased -- -- -- -- -- -- 4,000
Payable to Minnesota Mu-
tual for policy termina-
tions and mortality
and expense charges 103 221 39 389 394 76 543
------- ------ ------ ------ ------ ------ -------
Total liabilities 103 221 39 389 394 76 4,543
NET ASSETS APPLICABLE TO
POLICY OWNERS $62,020 99,647 21,780 50,755 99,214 27,553 198,018
======= ====== ====== ====== ====== ====== =======
UNITS OUTSTANDING 55,984 91,750 19,858 43,594 81,894 23,732 156,865
======= ====== ====== ====== ====== ====== =======
NET ASSET VALUE PER UNIT $1.11 1.09 1.10 1.16 1.21 1.16 1.25
======= ====== ====== ====== ====== ====== =======
</TABLE>
See accompanying notes to financial statements.
69
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF OPERATIONS
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX CAPITAL
GROWTH (B) BOND (B) MARKET (B) ALLOCATION (B) SECURITIES (B) 500 (A) APPRECIATION (B)
---------- -------- ---------- -------------- -------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual
fund (note 4) $ 641 3,520 5,045 1,264 615 2,241 --
Mortality and expense
charges (note 3) (217) (105) (249) (122) (24) (541) (165)
------- ------- ------- ------- --- ------- -------
Investment income
(loss)--net 424 3,415 4,796 1,142 591 1,700 (165)
------- ------- ------- ------- --- ------- -------
Realized and unrealized
gains (losses) on in-
vestments--net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 16,569 -- -- 2,622 -- 2,831 9,729
------- ------- ------- ------- --- ------- -------
Realized gains on
sales of investments:
Proceeds from sales 3,027 20,607 52,114 28,259 90 37,041 63,193
Cost of investments
sold (3,104) (21,699) (52,114) (28,030) (90) (32,428) (71,362)
------- ------- ------- ------- --- ------- -------
(77) (1,092) -- 229 -- 4,613 (8,169)
------- ------- ------- ------- --- ------- -------
Net realized gains
(losses) on invest-
ments 16,492 (1,092) -- 2,851 -- 7,444 1,560
------- ------- ------- ------- --- ------- -------
Net change in
unrealized apprecia-
tion or depreciation
of investments 8,716 1,919 -- 4,446 312 48,130 10,714
------- ------- ------- ------- --- ------- -------
Net gains on invest-
ments 25,208 827 -- 7,297 312 55,574 12,274
------- ------- ------- ------- --- ------- -------
Net increase in net as-
sets resulting from op-
erations $25,632 4,242 4,796 8,439 903 57,274 12,109
======= ======= ======= ======= === ======= =======
</TABLE>
- -----
(a) For the period from January 24, 1997, commencement of operations, to
December 31, 1997.
(b) For the period from January 29, 1997, commencement of operations, to
December 31, 1997.
See accompanying notes to financial statements.
70
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF OPERATIONS
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------------------------------
MATURING
GOVERNMENT
INTERNATIONAL SMALL BOND VALUE CONTRA- HIGH EQUITY-
STOCK (B) COMPANY (A) 2002 (C) STOCK (A) FUND (B) INCOME (B) INCOME (B)
------------- ----------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual fund
(note 4) $1,275 1 1,061 555 461 1,273 2,347
Mortality and expense
charges (note 3) (118) (194) (40) (58) (149) (54) (274)
------ ------ ----- ------ ------ ------ -------
Investment income
(loss)--net 1,157 (193) 1,021 497 312 1,219 2,073
------ ------ ----- ------ ------ ------ -------
Realized and unrealized
gains on investments--
net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 636 -- -- 4,168 1,217 157 11,800
------ ------ ----- ------ ------ ------ -------
Realized gains on
sales of investments:
Proceeds from sales 1,675 3,096 427 2,447 5,550 3,148 68,707
Cost of investments
sold (1,613) (2,901) (407) (2,360) (4,970) (3,070) (74,803)
------ ------ ----- ------ ------ ------ -------
62 195 20 87 580 78 (6,096)
------ ------ ----- ------ ------ ------ -------
Net realized gains on
investments 698 195 20 4,255 1,797 235 5,704
------ ------ ----- ------ ------ ------ -------
Net change in
unrealized
appreciation or
depreciation of
investments 2,528 10,003 900 (3,255) 14,023 2,038 19,176
------ ------ ----- ------ ------ ------ -------
Net gains on invest-
ments 3,226 10,198 920 1,000 15,820 2,273 24,880
------ ------ ----- ------ ------ ------ -------
Net increase in net
assets resulting from
operations $4,383 10,005 1,941 1,497 16,132 3,492 26,953
====== ====== ===== ====== ====== ====== =======
</TABLE>
- -----
(a) For the period from January 24, 1997, commencement of operations, to
December 31, 1997.
(b) For the period from January 29, 1997, commencement of operations, to
December 31, 1997.
(c) For the period from April 2, 1997, commencement of operations, to December
31, 1997.
See accompanying notes to financial statements.
71
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
---------------------------------------------------------------------------------------
MONEY ASSET MORTGAGE INDEX CAPITAL
GROWTH (B) BOND (B) MARKET (B) ALLOCATION (B) SECURITIES (B) 500 (A) APPRECIATION (B)
---------- -------- ---------- -------------- -------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 424 3,415 4,796 1,142 591 1,700 (165)
Net realized gains on
investments 16,492 (1,092) -- 2,851 -- 7,444 1,560
Net change in
unrealized
appreciation or
depreciation of
investments 8,716 1,919 -- 4,446 312 48,130 10,714
-------- ------- ------- ------- ------ ------- -------
Net increase in net as-
sets resulting from op-
erations 25,632 4,242 4,796 8,439 903 57,274 12,109
-------- ------- ------- ------- ------ ------- -------
Policy transactions
(notes 3, 4 and 5):
Policy purchase
payments 98,775 69,099 146,967 81,004 11,046 280,210 144,295
Policy withdrawals and
charges (2,810) (20,502) (51,865) (28,137) (66) (36,500) (63,028)
-------- ------- ------- ------- ------ ------- -------
Increase in net assets
from policy transac-
tions 95,965 48,597 95,102 52,867 10,980 243,710 81,267
-------- ------- ------- ------- ------ ------- -------
Increase in net assets 121,597 52,839 99,898 61,306 11,883 300,984 93,376
Net assets at the begin-
ning of period -- -- -- -- -- -- --
-------- ------- ------- ------- ------ ------- -------
Net assets at the end of
period $121,597 52,839 99,898 61,306 11,883 300,984 93,376
======== ======= ======= ======= ====== ======= =======
</TABLE>
- -----
(a) For the period from January 24, 1997, commencement of operations, to
December 31, 1997.
(b) For the period from January 29, 1997, commencement of operations, to
December 31, 1997.
See accompanying notes to financial statements.
72
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
STATEMENTS OF CHANGES IN NET ASSETS
PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------------------------------------
MATURING
GOVERNMENT
INTERNATIONAL SMALL BOND VALUE CONTRA- HIGH EQUITY-
STOCK (B) COMPANY (A) 2002 (C) STOCK (A) FUND (B) INCOME (B) INCOME (B)
------------- ----------- ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 1,157 (193) 1,021 497 312 1,219 2,073
Net realized gains on
investments 698 195 20 4,255 1,797 235 5,704
Net change in
unrealized appreciation
or depreciation of
investments 2,528 10,003 900 (3,255) 14,023 2,038 19,176
------- ------ ------ ------ ------ ------ -------
Net increase in net as-
sets resulting from op-
erations 4,383 10,005 1,941 1,497 16,132 3,492 26,953
------- ------ ------ ------ ------ ------ -------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 59,194 92,544 20,226 51,647 87,544 26,845 238,885
Policy withdrawals and
charges (1,557) (2,902) (387) (2,389) (4,462) (2,784) (69,820)
------- ------ ------ ------ ------ ------ -------
Increase in net assets
from policy transactions 57,637 89,642 19,839 49,258 83,082 24,061 169,065
------- ------ ------ ------ ------ ------ -------
Increase in net assets 62,020 99,647 21,780 50,755 99,214 27,553 196,018
Net assets at the begin-
ning of period -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ -------
Net assets at the end of
period $62,020 99,647 21,780 50,755 99,214 27,553 196,018
======= ====== ====== ====== ====== ====== =======
</TABLE>
- -----
(a) For the period from January 24, 1997, commencement of operations, to
December 31, 1997.
(b) For the period from January 29, 1997, commencement of operations, to
December 31, 1997.
(c) For the period from April 2, 1997, commencement of operations, to December
31, 1997.
See accompanying notes to financial statements.
73
<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; however, no
purchase payments were allocated to the segregated sub-accounts presented in
these financial statements until the current year. The Account currently has
seventeen segregated sub-accounts to which policy owners may allocate their
purchase payments. The Account charges a mortality and expense risk charge
which varies based on the group-sponsored insurance program under which the
policy is issued. The financial statements presented herein include only the
segregated sub-accounts where the mortality and expense risk charge amounts to
.25 percent on an annual basis.
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 Advantus Series
Fund, Inc. (formerly 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 Advantus 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. As
of December 31, 1997, no policy purchase payments have been allocated to the
Maturing Government Bond 1998, Maturing Government Bond 2006 and Maturing
Government Bond 2010 segregated sub-accounts.
Ascend Financial Services, Inc. (formerly MIMLIC Sales Corporation) acts as
the underwriter for the Account. Advantus Capital Management, Inc. acts as the
investment adviser for the Advantus Series Fund, Inc. Ascend Financial
Services, Inc. and Advantus Capital Management, Inc. are wholly-owned
subsidiaries 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.
74
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(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 .25 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 premium tax charge ranging in the amount of .75 to 3.50 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 period from January 24, 1997, commencement of operations, to
December 31, 1997 amounted to $7,439.
A federal tax charge of up to .25 percent for group-sponsored policies and
up to 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 period from
January 24, 1997, commencement of operations, to December 31, 1997 amounted
to $931.
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 each segregated sub-account for the
periods ended December 31, 1997 are as follows:
<TABLE>
<S> <C>
Growth $2,078
Bond 614
Money Market 864
Asset Allocation 3,121
Mortgage Securities 66
Index 500 9,012
Capital Appreciation 1,713
International Stock 932
Small Company 2,293
Maturing Government Bond 2002 387
Value Stock 1,744
Contrafund 3,024
High Income 590
Equity-Income 5,217
</TABLE>
75
<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 periods ended December 31,
1997:
<TABLE>
<S> <C>
Growth Portfolio $115,985
Bond Portfolio 72,619
Money Market Portfolio 152,012
Asset Allocation Portfolio 84,890
Mortgage Securities Portfolio 11,661
Index 500 Portfolio 285,282
Capital Appreciation Portfolio 154,024
International Stock Portfolio 61,105
Small Company Portfolio 92,545
Maturing Government Bond 2002 Portfolio 21,287
Value Stock Portfolio 56,370
Contrafund Portfolio 90,161
High Income Portfolio 28,586
Equity-Income Portfolio 251,645
</TABLE>
(5) UNIT ACTIVITY FROM POLICY TRANSACTIONS
Transactions in units for each segregated sub-account for the periods ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-----------------------------------------------
MONEY ASSET MORTGAGE
GROWTH BOND MARKET ALLOCATION SECURITIES
------ ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at December
31, 1996 -- -- -- -- --
Policy purchase payments 95,561 98,245 145,825 79,600 11,046
Deductions for policy with-
drawals and charges (2,997) (49,950) (50,225) (27,437) (147)
------ ------- ------- ------- ------
Units outstanding at December
31, 1997 92,564 48,295 95,600 52,163 10,899
====== ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNTS
-------------------------------------------------------
MATURING
INDEX CAPITAL INTERNATIONAL SMALL GOVERNMENT
500 APPRECIATION STOCK COMPANY BOND 2002
------- ------------ ------------- ------- ----------
<S> <C> <C> <C> <C> <C>
Units outstanding at
December 31, 1996 -- -- -- -- --
Policy purchase pay-
ments 327,703 140,211 87,295 124,772 20,227
Deductions for policy
withdrawals and
charges (90,917) (66,657) (31,311) (33,022) (369)
------- ------- ------- ------- ------
Units outstanding at
December 31, 1997 236,786 73,554 55,984 91,750 19,858
======= ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
SEGREGATED SUB-ACCOUNT
--------------------------------
VALUE CONTRA- HIGH EQUITY-
STOCK FUND INCOME INCOME
------ ------- ------ -------
<S> <C> <C> <C> <C>
Units outstanding at December 31, 1996 -- -- -- --
Policy purchase payments 46,627 86,803 26,593 228,062
Deductions for policy withdrawals and
charges (3,033) (4,909) (2,861) (71,197)
------ ------ ------ -------
Units outstanding at December 31, 1997 43,594 81,894 23,732 156,865
====== ====== ====== =======
</TABLE>
76
<PAGE>
MINNESOTA MUTUAL VARIABLE UNIVERSAL LIFE ACCOUNT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCIAL HIGHLIGHTS
The following tables for each segregated sub-account show certain data for an
accumulation unit outstanding during the period January 24, 1997, commencement
of operations, to December 31, 1997 for Index 500, Small Company and Value
Stock segregated sub-accounts, the period from January 29, 1997, commencement
of operations, to December 31, 1997 for Growth, Bond, Money Market, Asset
Allocation, Mortgage Securities, Capital Appreciation, International Stock,
Contrafund, High Income and Equity-Income segregated sub-accounts and for the
period from April 2, 1997, commencement of operations, to December 31, 1997 for
Maturing Government Bond 2002 segregated sub-accounts:
<TABLE>
<CAPTION>
MONEY ASSET MORTGAGE
GROWTH BOND MARKET ALLOCATION SECURITIES
------ ---- ------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.00 1.00 1.00 1.00 1.00
----- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) .01 .08 .05 .02 .06
Net gains or losses on securities
(both realized and unrealized) .30 .02 -- .16 .03
----- ---- ---- ---- ----
Total from investment operations .31 .10 .05 .18 .09
----- ---- ---- ---- ----
Unit value, end of period $1.31 1.10 1.05 1.18 1.09
===== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
MATURING
INDEX CAPITAL INTERNATIONAL SMALL GOVERNMENT
500 APPRECIATION STOCK COMPANY BOND 2002
----- ------------ ------------- ------- ----------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of pe-
riod $1.00 1.00 1.00 1.00 1.00
----- ---- ---- ---- ----
Income from investment opera-
tions:
Net investment income
(loss) .01 -- .03 -- .05
Net gains or losses on se-
curities (both realized
and unrealized) .26 .27 .08 .09 .05
----- ---- ---- ---- ----
Total from investment op-
erations .27 .27 .11 .09 .10
----- ---- ---- ---- ----
Unit value, end of period $1.27 1.27 1.11 1.09 1.10
===== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
VALUE HIGH EQUITY-
STOCK CONTRAFUND INCOME INCOME
----- ---------- ------ -------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.00 1.00 1.00 1.00
----- ---- ---- ----
Income from investment operations:
Net investment income (loss) .02 -- .06 .02
Net gains or losses on securities (both real-
ized and unrealized) .14 .21 .10 .23
----- ---- ---- ----
Total from investment operations .16 .21 .16 .25
----- ---- ---- ----
Unit value, end of period $1.16 1.21 1.16 1.25
===== ==== ==== ====
</TABLE>
77
<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, 1997 and
1996, 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, 1997. 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,
1997 and 1996, and the results of their operations and their cash flows for
each of the years in the three-year period ending December 31, 1997 in
conformity with generally accepted accounting principles.
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 purpose 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 9, 1998
78
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,518,807 and $4,558,975) $ 4,719,801 $ 4,674,082
Held-to-maturity, at amortized cost (fair value
$1,158,227 and $1,179,112) 1,088,312 1,125,638
Equity securities, at fair value (cost $537,441 and
$429,509) 686,638 549,797
Mortgage loans, net 661,337 608,808
Real estate, net 39,964 43,082
Policy loans 213,488 204,178
Short-term investments 112,352 126,372
Other invested assets 216,838 94,647
----------- -----------
Total investments 7,738,730 7,426,604
Cash 96,179 57,140
Finance receivables, net 211,794 259,192
Deferred policy acquisition costs 576,030 589,517
Accrued investment income 83,439 90,996
Premiums receivable 68,030 77,140
Property and equipment, net 58,123 55,050
Reinsurance recoverables 150,126 126,629
Other assets 52,852 54,798
Separate account assets 5,366,810 3,706,256
----------- -----------
Total assets $14,402,113 $12,443,322
=========== ===========
LIABILITIES AND POLICYOWNERS' SURPLUS
Liabilities:
Policy and contract account balances $ 4,275,221 $ 4,310,015
Future policy and contract benefits 1,687,529 1,638,720
Pending policy and contract claims 64,356 70,577
Other policyowner funds 416,752 396,848
Policyowner dividends payable 55,321 49,899
Unearned premiums and fees 202,070 207,111
Federal income tax liability:
Current 45,300 25,643
Deferred 166,057 149,665
Other liabilities 334,305 286,042
Notes payable 298,000 319,000
Separate account liabilities 5,320,517 3,691,374
----------- -----------
Total liabilities $12,865,428 $11,144,894
=========== ===========
Policyowners' surplus:
Unassigned surplus 1,380,012 1,190,116
Net unrealized investment gains 156,673 108,312
----------- -----------
Total policyowners' surplus 1,536,685 1,298,428
----------- -----------
Total liabilities and policyowners' surplus $14,402,113 $12,443,322
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
79
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND POLICYOWNERS' SURPLUS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Premiums $ 615,253 $ 612,359 $ 603,770
Policy and contract fees 272,037 245,966 214,203
Net investment income 553,773 530,987 515,047
Net realized investment gains 114,367 55,574 62,292
Finance charge income 43,650 46,932 39,937
Other income 71,707 51,630 40,250
---------- ---------- ----------
Total revenues 1,670,787 1,543,448 1,475,499
---------- ---------- ----------
Benefits and expenses:
Policyowner benefits 515,873 541,520 517,771
Interest credited to policies and con-
tracts 298,033 288,967 297,145
General operating expenses 369,961 302,618 273,425
Commissions 114,404 103,370 93,465
Administrative and sponsorship fees 81,750 79,360 76,223
Dividends to policyowners 26,776 24,804 27,282
Interest on notes payable 24,192 22,798 11,128
Increase in deferred policy acquisi-
tion costs (26,878) (19,284) (34,173)
---------- ---------- ----------
Total benefits and expenses 1,404,111 1,344,153 1,262,266
---------- ---------- ----------
Income from operations before taxes 266,676 199,295 213,233
Federal income tax expense (benefit):
Current 84,612 68,033 71,379
Deferred (7,832) 744 11,995
---------- ---------- ----------
Total federal income tax expense 76,780 68,777 83,374
Net income $ 189,896 $ 130,518 $ 129,859
========== ========== ==========
STATEMENTS OF POLICYOWNERS' SURPLUS
Policyowners' surplus, beginning of year $1,298,428 $1,212,850 $ 874,577
Net income 189,896 130,518 129,859
Change in net unrealized investment
gains and losses 48,361 (44,940) 208,414
---------- ---------- ----------
Policyowners' surplus, end of year $1,536,685 $1,298,428 $1,212,850
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
80
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 189,896 $ 130,518 $ 129,859
Adjustments to reconcile net income to
net cash provided by operating activi-
ties:
Interest credited to annuity and in-
surance contracts 276,719 275,968 288,218
Fees deducted from policy and con-
tract balances (214,803) (206,780) (201,575)
Change in future policy benefits 76,358 84,389 100,025
Change in other policyowner liabili-
ties 7,597 16,099 (4,762)
Change in deferred policy acquisition
costs (19,430) (15,312) (29,822)
Change in premiums due and other re-
ceivables (9,280) (26,142) (18,039)
Change in federal income tax liabili-
ties 5,277 (12,055) 18,376
Net realized investment gains (123,016) (59,546) (66,643)
Other, net 8,760 29,987 36,561
----------- ----------- -----------
Net cash provided by operating ac-
tivities 198,078 217,126 252,198
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 1,099,114 877,682 1,349,348
Equity securities 601,936 352,901 203,493
Mortgage loans -- 15,567 4,315
Real estate 9,279 11,678 15,948
Other invested assets 26,877 12,280 10,775
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 403,829 329,550 253,576
Fixed maturity securities, held-to-
maturity 139,394 114,222 127,617
Mortgage loans 109,246 94,703 104,730
Purchases of:
Fixed maturity securities, available-
for-sale (1,498,048) (1,228,048) (1,975,130)
Fixed maturity securities, held-to-
maturity (82,835) (60,612) (140,763)
Equity securities (585,349) (446,599) (212,142)
Mortgage loans (157,247) (108,691) (209,399)
Real estate (3,908) (3,786) (16,554)
Other invested assets (55,988) (29,271) (20,517)
Finance receivable originations or pur-
chases (115,248) (175,876) (167,298)
Finance receivable principal payments 133,762 142,723 123,515
Other, net (88,626) (40,062) (19,292)
----------- ----------- -----------
Net cash used for investing activi-
ties (63,812) (141,639) (567,778)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits credited to annuity and insur-
ance contracts 928,696 657,405 710,525
Withdrawals from annuity and insurance
contracts (1,013,588) (702,681) (563,569)
Proceeds from issuance of surplus notes -- -- 124,967
Proceeds from issuance of debt by sub-
sidiary -- 60,000 50,000
Payments on debt by subsidiary (21,000) (21,000) (10,000)
Other, net (3,355) (6,898) (3,801)
----------- ----------- -----------
Net cash provided by (used for) fi-
nancing activities (109,247) (13,174) 308,122
----------- ----------- -----------
Net increase (decrease) in cash and
short-term investments 25,019 62,313 (7,458)
Cash and short-term investments, begin-
ning of year 183,512 121,199 128,657
----------- ----------- -----------
Cash and short-term investments, end of
year $ 208,531 $ 183,512 $ 121,199
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
81
<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 in 1997 for these business units were $854,192,000,
$284,222,000, $232,619,000 and $114,324,000, respectively. Additional revenues
of $185,430,000, were reported by the Company's subsidiaries.
At December 31, 1997, the Company was one of the 12 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. Future events, including
changes in mortality, morbidity, interest rates, and asset valuations, could
cause actual results to differ from the estimates used in the financial
statements.
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 estimated gross profits or 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
82
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $128,176,000, $125,978,000 and
$104,940,000 for the years ended December 31, 1997, 1996 and 1995,
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 on the smaller balance homogeneous finance receivables 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. Finance charges and interest is
suspended when a loan is considered by management to be impaired. Loan
impairment is measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a practical expedient,
at the observable market price of the loan or the fair value of the collateral
if the loan is collateral dependent. When a loan is identified as impaired,
interest previously accrued in the current year is reversed. Interest payments
received on impaired loans are generally applied to principal unless the
remaining principal balance has been determined to be fully collectible. 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 are carried at fair value.
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,
1997 and 1996, was $6,269,000 and $5,968,000, respectively.
Policy loans are carried at the unpaid principal balance.
83
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps were used to hedge exposure to market risk on
$400,000,000 of the Company's common stock portfolio. The swaps were based upon
certain stock indices. If, at the time of settlement for a particular swap, the
designated stock index had fallen below a specified level, the counterparty
would 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 had risen, the Company would pay the counterparty an
amount based upon the increase in the index and 25% of the stock portfolio
value protected by the swap. The equity swaps were settled with the
counterparties in August of 1997.
The swaps were carried at fair value, which were based upon dealer quotes.
Changes in fair value were recorded directly in policyowners' surplus. Upon
settlement of the swaps, gains or losses were recognized in income. The Company
realized a loss of approximately $31 million in 1997, upon settlement of these
equity swaps.
The Company began investing in international bonds denominated in foreign
currencies in 1997. The Company uses forward foreign exchange currency
contracts as part of its risk management strategy for international
investments. The forward foreign exchange currency contracts are used to reduce
market risks from changes in foreign exchange rates. These forward foreign
exchange currency contracts are agreements to purchase a specified amount of
one currency in exchange for a specified amount of another currency at a future
point in time at a foreign exchange currency rate agreed upon on the contract
open date. No cash is exchanged at the outset of the contract and no payments
are made by either party until the contract close date. On the contract close
date the contracted amount of the purchased currency is received from the
counterparty and the contracted amount of the sold currency is sent to the
counterparty. These contracts are generally short-term in nature and there is
no material exposure to the Company at December 31, 1997.
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
$90,926,000 and $81,962,000 at December 31, 1997 and 1996, respectively.
Buildings are depreciated over 40 years and equipment is generally depreciated
over 5 to 10 years. Depreciation expenses for the years ended December 31,
1997, 1996 and 1995, were $8,965,000, $6,454,000 and $5,941,000, respectively.
Separate Accounts
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the exclusive benefit of pension, variable
annuity and variable life insurance policyowners and contractholders. Assets
consist principally of marketable securities and both assets and liabilities
are reported at fair value, based upon the market value of the investments held
in the segregated funds. The Company receives administrative and investment
advisory fees for services rendered on behalf of these accounts.
The Company periodically invests money in its separate accounts. The market
value of such investments is included with separate account assets and amounted
to $46,293,000 and $14,882,000 as of December 31, 1997 and 1996, respectively.
84
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Reclassifications
Certain 1996 and 1995 financial statement balances have been reclassified to
conform with the 1997 presentation.
(3) INVESTMENTS
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $457,391 $433,985 $426,114
Equity securities 16,182 14,275 8,883
Mortgage loans 55,929 63,865 58,943
Real estate (407) (475) 497
Policy loans 15,231 13,828 12,821
Short-term investments 6,995 6,535 6,716
Other invested assets 3,871 4,901 5,168
-------- -------- --------
Gross investment income 555,192 536,914 519,142
Investment expenses (1,419) (5,927) (4,095)
-------- -------- --------
Total $553,773 $530,987 $515,047
======== ======== ========
</TABLE>
85
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INVESTMENTS (CONTINUED)
Net realized capital gains (losses) for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities $ 3,711 $(6,536) $24,025
Equity securities 92,765 57,770 36,374
Mortgage loans 2,011 (721) (207)
Real estate 1,598 7,088 2,436
Other invested assets 14,282 (2,027) (336)
-------- ------- -------
Total $114,367 $55,574 $62,292
======== ======= =======
</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>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 18,804 $ 19,750 $ 34,898
Gross realized losses (15,093) (26,286) (10,873)
Equity securities:
Gross realized gains 151,200 79,982 52,670
Gross realized losses (27,672) (22,212) (16,296)
</TABLE>
Net unrealized gains (losses) included in policyowners' surplus at December
31 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains $ 472,671 $314,576
Gross unrealized losses (118,863) (77,337)
Adjustment to deferred acquisition costs (100,299) (65,260)
Adjustment to unearned policy and contract fees (13,087) (8,192)
Deferred federal income taxes (83,749) (55,475)
--------- --------
Net unrealized gains $ 156,673 $108,312
========= ========
</TABLE>
86
<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, 1997
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 239,613 $ 18,627 $ -- $ 258,240
Foreign governments 1,044 -- 29 1,015
Corporate securities 2,273,474 216,056 70,484 2,419,046
International bond securities 150,157 2,565 23,530 129,192
Mortgage-backed securities 1,854,519 66,934 9,145 1,912,308
---------- -------- -------- ----------
Total fixed maturities 4,518,807 304,182 103,188 4,719,801
Equity securities--unaffiliated 421,672 134,558 14,575 541,655
Equity securities--affiliated 115,769 29,214 -- 144,983
---------- -------- -------- ----------
Total equity securities 537,441 163,772 14,575 686,638
---------- -------- -------- ----------
Total available-for-sale 5,056,248 467,954 117,763 5,406,439
Held-to maturity:
Corporate securities 893,407 59,850 752 952,505
Mortgage-backed securities 194,905 10,817 -- 205,722
---------- -------- -------- ----------
Total held-to-maturity 1,088,312 70,667 752 1,158,227
---------- -------- -------- ----------
Total $6,144,560 $538,621 $118,515 $6,564,666
========== ======== ======== ==========
DECEMBER 31, 1996
Available-for-sale:
United States government and gov-
ernment agencies and authorities $ 302,820 $ 2,397 $ 6,756 $ 298,461
State, 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
========== ======== ======== ==========
</TABLE>
87
<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, 1997 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 $ 47,387 $ 44,198 $ 2,982 $ 3,004
Due after one year through five
years 335,383 354,936 120,846 124,461
Due after five years through ten
years 1,355,665 1,416,149 317,689 337,322
Due after ten years 925,853 992,210 451,890 487,718
---------- ---------- ---------- ----------
2,664,288 2,807,493 893,407 952,505
Mortgage-backed securities 1,854,519 1,912,308 194,905 205,722
---------- ---------- ---------- ----------
Total $4,518,807 $4,719,801 $1,088,312 $1,158,227
========== ========== ========== ==========
</TABLE>
At December 31, 1997 and 1996, bonds and certificates of deposit with a
carrying value of $8,000,000 and $12,934,000, respectively, were on deposit
with various regulatory authorities as required by law.
Allowances for credit losses on investment are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans $ 1,500 $ 1,895
Foreclosed real estate -- 535
Investment real estate 2,248 2,529
------- -------
Total $ 3,748 $ 4,959
======= =======
</TABLE>
At December 31, 1997, the recorded investment in mortgage loans that were
considered to be impaired was $18,400 before allowance for credit losses. These
impaired loans, due to adequate fair market value of underlying collateral, do
not have an allowance for credit losses.
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.
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, 1997 and 1996.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $1,895 $1,711 $2,449
Provision for credit losses -- 381 127
Charge-offs (395) (197) (865)
------ ------ ------
Balance at end of year $1,500 $1,895 $1,711
====== ====== ======
</TABLE>
88
<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>
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Average impaired mortgage loans $3,268 $9,375 $15,845
Interest income on impaired mortgage loans--contractual 556 1,796 1,590
Interest income on impaired mortgage loans--collected 554 1,742 1,515
</TABLE>
(4) NOTES RECEIVABLE
In connection with the Company's planned construction of an additional home
office facility in St. Paul, the Company entered into a loan contingency
agreement with the Housing and Redevelopment Authority of the City of Saint
Paul, Minnesota (HRA) in November, 1997. A maximum of $15 million in funds is
available under this loan for condemnation and demolition of the Company's
proposed building site. The note bears interest at a rate of 8.625%, with
principal payments commencing February 2004 and a maturity date of August 2025.
Interest payments are accrued and are payable February and August of each year
commencing February 2001. All principal and interest payments are due only to
the extent of available tax increments. As of December 31, 1997 HRA has drawn
$286,775 on this loan contingency agreement and accrued interest of $1,374.
(5) NET FINANCE RECEIVABLES
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct installment loans $183,424 $204,038
Retail installment notes 20,373 30,843
Retail revolving credit 25,426 24,863
Credit card receivables -- 3,541
Accrued interest 3,116 3,404
-------- --------
Gross receivables $232,339 $266,689
Allowance for uncollectible amounts (20,545) (7,497)
-------- --------
Finance receivables, net $211,794 $259,192
======== ========
</TABLE>
Direct installment loans at December 31, 1997 consisted of $83,836,000 of
discount basis loans (net of unearned finance charges) and $99,588,00 of
interest-bearing loans. As of December 31, 1996, discount basis loans amounted
to $93,127,000 and interest-bearing loans amounted to $110,911,000. 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. Direct installment loans included approximately $65
million and $69 million of real estate secured loans at December 31, 1997 and
1996, respectively. Revolving credit loans included approximately $24 million
and $23 million of real estate secured loans at December 31, 1997 and 1996,
respectively. 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
$90,940,000, $92,438,000 and $75,865,000 and the percentage of these cash
collections to the average net balances were 47%, 48%, and 47% for the years
ended December 31, 1997, 1996 and 1995, respectively.
89
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) NET FINANCE RECEIVABLES (CONTINUED)
Changes in the allowance for uncollectible amounts for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year $ 7,497 $ 6,377 $ 5,360
Provision for credit losses 28,206 10,086 6,140
Charge-offs (17,869) (11,036) (6,585)
Recoveries 2,711 2,070 1,462
-------- -------- -------
Balance at end of year $ 20,545 $ 7,497 $ 6,377
======== ======== =======
</TABLE>
At December 31, 1997, the recorded investment in certain direct installment
loans and direct revolving credit loans were considered to be impaired. The
balances of such loans at December 31, 1997 and the related allowance for
credit losses was as follows:
<TABLE>
<CAPTION>
INSTALLMENT REVOLVING
LOANS CREDIT TOTAL
----------- --------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances at December 31, 1997 $7,723 14,492 22,215
Related allowance for credit losses $4,200 7,772 11,972
</TABLE>
All loans deemed to be impaired are placed on a non-accrual status. No
accrued or unpaid interest was recognized on impaired loans during 1997. The
average balances of impaired loans during the year ended December 31, 1997 was
$7,397,000 and $12,793,000, respectively, for installment basis and revolving
credit direct loans.
There were no material commitments to lend additional funds to customers
whose loans were classified as non-accrual at December 31, 1997.
(6) 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>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed tax expense $93,337 $69,753 $74,631
Difference between computed and actual tax ex-
pense:
Dividends received deduction (5,573) (2,534) (1,710)
Special tax on mutual life insurance companies 3,341 2,760 10,134
MF&C sale (4,408) -- --
Foundation gain (4,042) (1,260) (540)
Tax credits (3,600) (3,475) (1,840)
Expense adjustments and other (2,275) 3,533 2,699
------- ------- -------
Total tax expense $76,780 $68,777 $83,374
======= ======= =======
</TABLE>
90
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to the Company's net
deferred federal tax liability were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Policyowner liabilities $ 14,374 $ 15,854
Unearned fee income 49,274 43,232
Pension and post-retirement benefits 23,434 21,815
Tax deferred policy acquisition costs 73,134 58,732
Net realized capital losses 9,609 8,275
Other 20,524 19,229
-------- --------
Gross deferred tax assets 190,349 167,137
Deferred tax liabilities:
Deferred policy acquisition costs 201,611 206,331
Real estate and property and equipment depreciation 11,165 10,089
Basis difference on investments 11,061 8,605
Net unrealized capital gains 122,876 81,339
Other 9,693 10,438
-------- --------
Gross deferred tax liabilities 356,406 316,802
-------- --------
Net deferred tax liability $166,057 $149,665
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1997 and 1996, 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, 1997, 1996 and 1995, were
$97,721,000, $79,026,000 and $64,390,000, respectively.
91
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) 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>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1 $416,910 $377,302 $349,311
Less: reinsurance recoverable 102,161 80,333 61,624
-------- -------- --------
Net balance at January 1 314,749 296,969 287,687
-------- -------- --------
Incurred related to:
Current year 121,153 134,727 129,896
Prior years 7,809 4,821 (4,014)
-------- -------- --------
Total incurred 128,962 139,548 125,882
-------- -------- --------
Paid related to:
Current year 51,275 51,695 47,620
Prior years 57,475 70,073 68,980
-------- -------- --------
Total paid 108,750 121,768 116,600
-------- -------- --------
Net balance at December 31 334,961 314,749 296,969
Plus: reinsurance recoverable 104,716 102,161 80,333
-------- -------- --------
Balance at December 31 $439,677 $416,910 $377,302
======== ======== ========
</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.
As a result of changes in estimates of claims incurred in prior years, the
accident and health claims and claim adjustment expenses incurred increased
(decreased) by $7,809, $4,821 and ($4,014) in 1997, 1996 and 1995,
respectively. These amounts are the result of normal reserve development
inherent in the uncertainty of establishing the liability for unpaid accident
and health claims and claim adjustment expenses.
(8) 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>
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 6,462 $ 6,019 $ 5,294
Interest accrued on projected benefit obligation 9,640 8,541 7,935
Actual return on plan assets (9,575) (12,619) (18,061)
Net amortization and deferral 656 4,698 11,811
------- -------- --------
Net periodic pension cost $ 7,183 $ 6,639 $ 6,979
======= ======== ========
</TABLE>
92
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) 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 PLANS
------------------ ----------------
1997 1996 1997 1996
-------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit ob-
ligations:
Vested benefit obligation $ 70,638 $ 61,328 $ -- $ --
Non-vested benefit obligation 21,252 19,119 8,017 5,912
-------- -------- ------- -------
Accumulated benefit obligation $ 91,890 $ 80,447 $ 8,017 $ 5,912
======== ======== ======= =======
Pension liability included in other li-
abilities:
Projected benefit obligation $130,144 $117,836 $15,744 $12,576
Plan assets at fair value 128,970 115,107 -- --
-------- -------- ------- -------
Plan assets less then projected bene-
fit obligation 1,174 2,729 15,744 12,576
Unrecognized net gain (loss) 6,061 3,633 (4,229) (2,332)
Unrecognized prior service cost (334) (364) -- --
Unamortized transition asset (obliga-
tion) 2,202 2,422 (7,682) (8,451)
Additional minimum liability -- -- 4,184 4,119
-------- -------- ------- -------
Net pension liability $ 9,103 $ 8,420 $ 8,017 $ 5,912
======== ======== ======= =======
</TABLE>
A weighted average discount rate of 7.5% and a weighted average rate of
increase in future compensation levels of 5.3% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
1997 and 1996. The assumed long-term rate of return on plan assets was either
8.5% or 7.5%, 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
1997, 1996 and 1995 of $7,173,000, $6,092,000 and $6,595,000, 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>
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period $1,008 $1,011 $1,276
Interest accrued on projected benefit obligation 1,826 2,041 2,452
Amortization of prior service cost (526) (513) (513)
Amortization of net gain (480) (177) --
------ ------ ------
Net periodic postretirement benefit cost $1,828 $2,362 $3,215
====== ====== ======
</TABLE>
93
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) 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>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ 9,333 $10,238
Other fully eligible plan participants 4,861 4,594
Other active plan participants 9,738 9,514
------- -------
Total accumulated postretirement benefit obligation 23,932 24,346
Unrecognized prior service cost 3,680 4,107
Unrecognized net gain 11,290 9,880
------- -------
Accrued postretirement benefit liability $38,902 $38,333
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation for 1997 and 1996 was 7.5%. The 1997 net health care cost trend rate
was 8.5%, graded to 5.5% over 6 years, and the 1996 rate was 9.0%, graded to
5.5% over 7 years.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1997 and 1996. 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 31,1997 by
$4,323,000 and the estimated eligibility cost and interest cost components of
net periodic postretirement benefit costs for 1997 by $588,000.
(9) SALE OF SUBSIDIARY
On October 1, 1997, the Company sold Minnesota Fire and Casualty Company (MFC),
a wholly owned subsidiary to Harleysville Group, Inc. The Company received net
cash proceeds of approximately $33.5 million from the sale, and realized a gain
of approximately $14.5 million. HomePlus Insurance Company (HomePlus), a
previously wholly owned subsidiary of MFC, was excluded from the sale of
assets. In accordance with the agreement, prior to September 30, 1997, MFC made
a distribution of private placement bonds to the Company with an amortized cost
of approximately $4.3 million and transferred all issued and outstanding shares
of HomePlus to the Company. The carrying value of the transferred shares was
approximately $5.8 million. Under an administrative services agreement with
MFC, the Company has retained MFC to provide financial and other services for
HomePlus.
(10) 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 obligation 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. Allowances are established for
amounts deemed to be uncollectible.
Reinsurance is accounted for over the life of the underlying reinsured
policies using assumptions consistent with those used to account for the
underlying policies.
94
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) REINSURANCE (CONTINUED)
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Direct premiums $595,686 $615,098 $600,841
Reinsurance assumed 78,097 64,489 64,792
Reinsurance ceded (58,530) (67,228) (61,863)
-------- -------- --------
Net premiums $615,253 $612,359 $603,770
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $58,072,000,
$72,330,000 and $58,338,000 during 1997, 1996 and 1995 respectively.
(11) 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, 1997 and 1996.
Although management is not aware of any factors that would significantly affect
the estimated fair value, 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 judgement 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,
1997 and 1996, 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,
1997 and 1996, 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, 1997 and 1996
as those investments contracts have no defined maturity and are similar to a
deposit liability. 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.
95
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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>
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,719,801 $4,719,801 $4,674,082 $4,674,082
Held-to-maturity 1,088,312 1,158,227 1,125,638 1,179,112
Equity securities 686,638 686,638 549,797 549,797
Mortgage loans:
Commercial 506,860 527,994 432,198 445,976
Residential 154,477 158,334 176,610 180,736
Policy loans 213,488 213,488 204,178 204,178
Short-term investments 112,352 112,352 126,372 126,372
Cash 96,179 96,179 57,140 57,140
Finance receivables, net 211,794 211,794 259,192 259,192
Derivatives 1,457 1,457 1,197 1,197
---------- ---------- ---------- ----------
Total financial assets $7,791,358 $7,886,264 $7,606,404 $7,677,782
========== ========== ========== ==========
</TABLE>
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>
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred annuities $2,131,806 $2,112,301 $2,178,355 $2,152,636
Annuity certain contracts 55,431 57,017 52,636 53,962
Other fund deposits 754,960 753,905 808,592 805,709
Guaranteed investment contracts 8,188 8,187 18,770 18,866
Supplementary contracts without
life contingencies 46,700 45,223 47,966 47,536
Notes payable 298,000 302,000 319,000 325,974
---------- ---------- ---------- ----------
Total financial liabilities $3,295,085 $3,278,633 $3,425,319 $3,404,683
========== ========== ========== ==========
</TABLE>
(12) 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 of the State of Minnesota. The
approved accrued interest was $3,008,000 as of December 31, 1997 and 1996. The
issuance costs of $1,357,000 are deferred and amortized over 30 years on
straight-line basis.
96
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) NOTES PAYABLE (CONTINUED)
Notes payable as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Corporate-surplus notes, 8.25%, 2025 $125,000 $125,000
Consumer finance subsidiary-senior, 6.53%-8.77%, through
2003 173,000 194,000
-------- --------
Total notes payable $298,000 $319,000
======== ========
</TABLE>
At December 31, 1997, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1998, $31,000,000; 1999, $49,000,000;
2000, $33,000,000; 2001, $26,000,000; 2002, $22,000,000.
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
of $41,354,000. The consumer finance subsidiary was in compliance with all such
provisions at December 31, 1997.
Interest paid on debt for the years ended December 31, 1997, 1996 and 1995,
was $18,197,000, $21,849,000 and $6,504,000, respectively.
(13) 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.
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. Allowances are established for
amounts deemed uncollectible.
The Company has issued certain participating group annuity and group life
insurance contracts jointly with another life insurance company. The joint
contract issuer has liabilities related to these contracts of $279,978,000 as
of December 31, 1997. 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 $139,774,000 as of December 31, 1997. The Company
estimates that $51,300,000 of these commitments will be invested in 1998, with
the remaining $88,474,000 invested over the next four years.
As of December 31, 1997, the Company had committed to purchase bonds and
mortgage loans totaling $109,362,000 but had not completed the purchase
transactions.
At December 31, 1997, the Company had guaranteed the payment of $73,100,000
in policyowner dividends and discretionary amounts payable in 1998. The Company
has pledged bonds, valued at $75,774,000 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
Association. An asset is recorded for the amount of guaranty fund assessments
paid which can be recovered through future premium tax credits.
97
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) STATUTORY FINANCIAL DATA
The Company also prepares 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. Statutory accounting practices focus primarily 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
---------------------- ----------------------------
1997 1996 1997 1996 1995
---------- ---------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Statutory basis $ 870,688 $ 682,886 $167,078 $115,797 $ 88,706
Adjustments:
Deferred policy acquisi-
tion costs 576,030 589,517 19,430 15,312 29,822
Net unrealized invest-
ment gains 199,637 111,575 -- -- --
Statutory asset valua-
tion reserve 242,100 240,474 -- -- --
Statutory interest main-
tenance reserve 24,169 24,707 (538) (8,192) 12,976
Premiums and fees de-
ferred or receivable (74,025) (75,716) 2,175 1,587 497
Change in reserve basis 108,105 98,406 9,699 20,114 12,382
Separate accounts (51,172) (40,755) (6,272) (6,304) (854)
Unearned policy and con-
tract fees (126,477) (121,843) (12,825) (2,530) (4,410)
Surplus notes (125,000) (125,000) -- -- --
Net deferred taxes (166,057) (149,665) 7,832 (744) (11,995)
Nonadmitted assets 32,611 31,531 -- -- --
Policyowner dividends 60,036 57,765 2,708 502 4,660
Other (33,960) (25,454) 609 (5,024) (1,925)
---------- ---------- -------- -------- --------
As reported in the
accompanying
consolidated
financial statements $1,536,685 $1,298,428 $189,896 $130,518 $129,859
========== ========== ======== ======== ========
</TABLE>
98
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<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 $ 239,613 $ 258,240 $ 258,240
Foreign governments 1,044 1,015 1,015
Public utilities 385,228 406,920 398,887
Mortgage-backed securities 2,049,424 2,118,030 2,107,213
All other corporate bonds 2,931,810 3,093,823 3,042,758
---------- ---------- ----------
Total bonds 5,607,119 5,878,028 5,808,113
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 7,732 10,090 10,090
Banks, trusts and insurance companies 37,217 47,120 47,120
Industrial, miscellaneous and all
other 354,317 460,170 460,170
Nonredeemable preferred stocks 22,406 24,275 24,275
---------- ---------- ----------
Total equity securities 421,672 541,655 541,655
---------- ---------- ----------
Mortgage loans on real estate 661,337 xxxxxx 661,337
Real estate(2) 39,964 xxxxxx 39,964
Policy loans 213,488 xxxxxx 213,488
Other long-term investments 216,838 xxxxxx 216,838
Short-term investments 112,352 xxxxxx 112,352
---------- ---------- ----------
Total 1,243,979 -- $1,243,979
---------- ---------- ----------
Total investments $7,272,770 $6,419,683 $7,593,747
========== ========== ==========
</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 $-0-.
(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.
99
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------- -----------------------------------------------------------
FUTURE POLICY AMORTIZATION
DEFERRED BENEFITS OTHER POLICY BENEFITS, OF DEFERRED
POLICY LOSSES, CLAIMS CLAIMS AND NET CLAIMS, LOSSES POLICY OTHER
ACQUISITION AND SETTLEMENT UNEARNED BENEFITS PREMIUM INVESTMENT AND SETTLEMENT ACQUISITION OPERATING
SEGMENT COSTS EXPENSES(1) PREMIUMS(2) PAYABLE REVENUE(3) INCOME EXPENSES COSTS EXPENSES
- ------- ----------- -------------- ----------- ------------ ---------- ---------- -------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997:
Life insurance $434,012 $2,229,396 $166,704 $42,627 $576,468 $247,267 $476,747 $102,473 $345,938
Accident and
health insurance 70,593 466,109 34,250 17,153 205,869 40,343 87,424 9,451 101,960
Annuity 71,425 3,266,965 -- 4,576 64,637 261,768 242,738 16,252 129,263
Property and
liability
insurance -- 280 1,116 -- 40,316 4,395 33,773 -- 13,146
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$576,030 $5,962,750 $202,070 $64,356 $887,290 $553,773 $840,682 $128,176 $590,307
======== ========== ======== ======= ======== ======== ======== ======== ========
1996:
Life insurance $456,461 $2,123,148 $149,152 $51,772 $568,874 $223,762 $478,228 $ 97,386 $290,525
Accident and
health insurance 62,407 437,118 33,770 18,774 160,097 34,202 96,743 14,017 87,222
Annuity 70,649 3,360,614 -- 31 79,245 267,473 243,387 14,575 111,366
Property and
liability
insurance -- 27,855 24,189 -- 50,109 5,550 36,933 -- 19,033
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$589,517 $5,948,735 $207,111 $70,577 $858,325 $530,987 $855,291 $125,978 $508,146
======== ========== ======== ======= ======== ======== ======== ======== ========
1995:
Life insurance $430,829 $2,009,154 $151,864 $41,212 $540,353 $203,487 $454,299 $ 80,896 $266,090
Accident and
health insurance 55,888 400,950 34,847 14,567 153,505 33,358 93,482 11,448 83,345
Annuity 53,015 3,401,760 -- 33 74,899 272,499 260,854 12,596 86,716
Property and
liability
insurance -- 30,117 23,783 -- 49,216 5,703 33,563 -- 18,090
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$539,732 $5,841,981 $210,494 $55,812 $817,973 $515,047 $842,198 $104,940 $454,241
======== ========== ======== ======= ======== ======== ======== ======== ========
<CAPTION>
PREMIUMS
SEGMENT WRITTEN(4)
- ------- ----------
<S> <C>
1997:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 43,376
----------
$43,376
==========
1996:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 50,515
----------
$50,515
==========
1995:
Life insurance
Accident and
health insurance
Annuity
Property and
liability
insurance 51,133
----------
$51,133
==========
</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
100
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<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>
1997:
Life insurance in force $118,345,796 $14,813,351 $29,341,332 $132,873,777 22.1%
============ =========== =========== ============
Premiums:
Life insurance $ 340,984 $ 30,547 $ 63,815 $ 374,252 17.1%
Accident and health
insurance 175,647 16,332 1,310 160,625 0.8%
Annuity 40,060 -- -- 40,060 --
Property and liability
insurance 38,995 11,651 12,972 40,316 32.2%
------------ ----------- ----------- ------------
Total premiums $ 595,686 $ 58,530 $ 78,097 $ 615,253 12.7%
============ =========== =========== ============
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%
============ =========== =========== ============
</TABLE>
101
<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 group-sponsored program issued a group contract. This
assumes a $4.00 monthly administration charge, a 3 percent sales load charge, a
2 percent premium tax charge, and a .25 percent federal tax charge. Cost of
insurance charges used in the tables are either the guaranteed maximums or
assumed levels as described in the following paragraph. If a particular policy
has different administration, sales, tax, or cost of insurance charges, the
account values and death benefits would vary from those shown in the tables.
The illustrations of death benefits also vary between tables depending upon
whether the level or variable type death benefits are illustrated.
The account value column in the tables with the heading "Using Maximum
Mortality Charges" shows the accumulated value of 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 monthly charges for the cost of insurance at an assumed
level which is substantially less than the guaranteed rate. Actual cost of
insurance charges for a policy depend on a variety of factors as described in
"Account Value Charges."
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 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 -1.25 percent, 4.75 percent and 10.75 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.
102
<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 ASSUMED MORTALITY CHARGES*
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.25% NET) (4.75% NET) (10.75% 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 2,758 100,000 2,935 100,000 3,115 100,000
3 48 1,800 4,082 100,000 4,478 100,000 4,898 100,000
4 49 1,800 5,371 100,000 6,076 100,000 6,855 100,000
5 50 1,800 6,614 100,000 7,721 100,000 8,994 100,000
6 51 1,800 7,824 100,000 9,427 100,000 11,348 100,000
7 52 1,800 8,980 100,000 11,177 100,000 13,921 100,000
8 53 1,800 10,094 100,000 12,986 100,000 16,751 100,000
9 54 1,800 11,156 100,000 14,847 100,000 19,858 100,000
10 55 1,800 12,157 100,000 16,755 100,000 23,267 100,000
15 60 1,800 16,258 100,000 27,127 100,000 46,347 100,000
20 65 1,800 18,303 100,000 38,900 100,000 85,180 102,900
25 70 1,800 16,568 100,000 51,831 100,000 149,977 172,474
30 75 1,800 7,132 100,000 65,867 100,000 255,574 271,074
</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.
* This illustration uses assumed mortality charges for a group-sponsored
program issued a group contract. Actual cost of insurance charges for a
policy depend on a variety of factors as described in "Account Value
Charges."
103
<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)
(-1.25% NET) (4.75% NET) (10.75% 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 $1,059 $100,000 $ 1,094 $100,000 $ 1,128 $100,000
2 47 1,800 2,068 100,000 2,201 100,000 2,338 100,000
3 48 1,800 3,024 100,000 3,322 100,000 3,637 100,000
4 49 1,800 3,927 100,000 4,453 100,000 5,035 100,000
5 50 1,800 4,771 100,000 5,592 100,000 6,539 100,000
6 51 1,800 5,553 100,000 6,734 100,000 8,156 100,000
7 52 1,800 6,265 100,000 7,874 100,000 9,893 100,000
8 53 1,800 6,901 100,000 9,004 100,000 11,760 100,000
9 54 1,800 7,453 100,000 10,116 100,000 13,765 100,000
10 55 1,800 7,915 100,000 11,204 100,000 15,921 100,000
15 60 1,800 8,685 100,000 16,095 100,000 29,683 100,000
20 65 1,800 5,813 100,000 19,007 100,000 51,215 100,000
25 70 1,800 0 0 16,819 100,000 88,449 101,716
30 75 1,800 0 0 2,110 100,000 153,481 162,753
</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.
104
<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 ASSUMED MORTALITY CHARGES*
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.25% NET) (4.75% NET) (10.75% 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 3,011 53,011 3,203 53,203 3,400 53,400
3 48 1,800 4,471 54,471 4,902 54,902 5,359 55,359
4 49 1,800 5,900 55,900 6,668 56,668 7,516 57,516
5 50 1,800 7,294 57,294 8,500 58,500 9,887 59,887
6 51 1,800 8,658 58,658 10,407 60,407 12,499 62,499
7 52 1,800 9,982 59,982 12,379 62,379 15,366 65,366
8 53 1,800 11,271 61,271 14,427 64,427 18,523 68,523
9 54 1,800 12,520 62,520 16,547 66,547 21,994 71,994
10 55 1,800 13,723 63,723 18,738 68,738 25,807 75,807
15 60 1,800 19,050 69,050 30,830 80,830 51,388 101,388
20 65 1,800 22,886 72,886 44,744 94,744 92,482 142,482
25 70 1,800 24,261 74,261 59,737 109,737 158,025 208,025
30 75 1,800 21,445 71,445 73,918 123,918 261,794 311,794
</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.
* This illustration uses assumed mortality charges for a group-sponsored
program issued a group contract. Actual cost of insurance charges for a
policy depend on a variety of factors as described in "Account Value
Charges."
105
<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)
(-1.25% NET) (4.75% NET) (10.75% 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 $ 1,419 $ 51,419
2 47 1,800 2,628 52,628 2,796 52,796 2,968 52,968
3 48 1,800 3,883 53,883 4,259 54,259 4,658 54,658
4 49 1,800 5,098 55,098 5,765 55,765 6,503 56,503
5 50 1,800 6,269 56,269 7,315 57,315 8,518 58,518
6 51 1,800 7,396 57,396 8,906 58,906 10,716 60,716
7 52 1,800 8,473 58,473 10,537 60,537 13,113 63,113
8 53 1,800 9,498 59,498 12,205 62,205 15,727 65,727
9 54 1,800 10,466 60,466 13,907 63,907 18,574 68,574
10 55 1,800 11,374 61,374 15,640 65,640 21,676 71,676
15 60 1,800 14,925 64,925 24,705 74,705 41,947 91,947
20 65 1,800 16,356 66,356 33,951 83,951 73,212 123,212
25 70 1,800 14,552 64,552 41,980 91,980 121,121 171,121
30 75 1,800 7,783 57,783 46,284 96,284 194,273 244,273
</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.
106
<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 ASSUMED MORTALITY CHARGES*
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.25% NET) (4.75% NET) (10.75% 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 4,231 100,000 4,503 100,000 4,781 100,000
3 58 3,000 6,243 100,000 6,852 100,000 7,500 100,000
4 59 3,000 8,167 100,000 9,252 100,000 10,452 100,000
5 60 3,000 10,018 100,000 11,720 100,000 13,682 100,000
6 61 3,000 11,787 100,000 14,254 100,000 17,217 100,000
7 62 3,000 13,458 100,000 16,841 100,000 21,078 100,000
8 63 3,000 15,014 100,000 19,470 100,000 25,293 100,000
9 64 3,000 16,458 100,000 22,150 100,000 29,918 100,000
10 65 3,000 17,764 100,000 24,863 100,000 34,989 100,000
15 70 3,000 21,852 100,000 38,928 100,000 69,800 100,000
20 75 3,000 19,280 100,000 53,295 100,000 131,160 138,940
25 80 3,000 5,859 100,000 69,670 100,000 233,439 245,111
30 85 3,000 0 0 94,547 100,000 398,807 418,747
</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.
* This illustration uses assumed mortality charges for a group-sponsored
program issued a group contract. Actual cost of insurance charges for a
policy depend on a variety of factors as described in "Account Value
Charges."
107
<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)
(-1.25% NET) (4.75% NET) (10.75% 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 2,849 100,000 3,035 100,000 3,225 100,000
3 58 3,000 4,111 100,000 4,523 100,000 4,961 100,000
4 59 3,000 5,261 100,000 5,987 100,000 6,793 100,000
5 60 3,000 6,290 100,000 7,418 100,000 8,724 100,000
6 61 3,000 7,185 100,000 8,802 100,000 10,756 100,000
7 62 3,000 7,929 100,000 10,120 100,000 12,891 100,000
8 63 3,000 8,500 100,000 11,350 100,000 15,125 100,000
9 64 3,000 8,874 100,000 12,465 100,000 17,457 100,000
10 65 3,000 9,028 100,000 13,441 100,000 19,891 100,000
15 70 3,000 5,758 100,000 15,373 100,000 34,159 100,000
20 75 3,000 0 0 7,084 100,000 54,222 100,000
25 80 3,000 0 0 0 0 90,153 100,000
30 85 3,000 0 0 0 0 162,337 170,454
</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.
108
<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 ASSUMED MORTALITY CHARGES*
<TABLE>
<CAPTION>
-ASSUMING HYPOTHETICAL INVESTMENT RETURNS OF-
0% GROSS(2) 6% GROSS(2) 12% GROSS(2)
(-1.25% NET) (4.75% NET) (10.75% 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 $ 2,618 $ 52,618
2 57 3,000 4,859 54,859 5,169 55,169 5,487 55,487
3 58 3,000 7,198 57,198 7,893 57,893 8,631 58,631
4 59 3,000 9,466 59,466 10,703 60,703 12,070 62,070
5 60 3,000 11,671 61,671 13,610 63,610 15,840 65,840
6 61 3,000 13,806 63,806 16,611 66,611 19,971 69,971
7 62 3,000 15,860 65,860 19,700 69,700 24,488 74,488
8 63 3,000 17,824 67,824 22,868 72,868 29,422 79,422
9 64 3,000 19,697 69,697 26,118 76,118 34,816 84,816
10 65 3,000 21,463 71,463 29,437 79,437 40,702 90,702
15 70 3,000 28,432 78,432 46,844 96,844 79,200 129,200
20 75 3,000 30,868 80,868 64,069 114,069 137,909 187,909
25 80 3,000 27,697 77,697 79,444 129,444 228,361 278,361
30 85 3,000 18,619 68,619 91,815 141,815 371,001 421,001
</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.
* This illustration uses assumed mortality charges for a group-sponsored
program issued a group contract. Actual cost of insurance charges for a
policy depend on a variety of factors as described in "Account Value
Charges."
109
<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)
(-1.25% NET) (4.75% NET) (10.75% 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 4,367 54,367 4,636 54,636
3 58 3,000 6,033 56,033 6,619 56,619 7,242 57,242
4 59 3,000 7,878 57,878 8,917 58,917 10,066 60,066
5 60 3,000 9,635 59,635 11,256 61,256 13,123 63,123
6 61 3,000 11,296 61,296 13,630 63,630 16,430 66,430
7 62 3,000 12,852 62,852 16,031 66,031 20,003 70,003
8 63 3,000 14,293 64,293 18,445 68,445 23,858 73,858
9 64 3,000 15,605 65,605 20,861 70,861 28,010 78,010
10 65 3,000 16,780 66,780 23,266 73,266 32,479 82,479
15 70 3,000 20,340 70,340 34,780 84,780 60,546 110,546
20 75 3,000 18,610 68,610 43,479 93,479 100,636 150,636
25 80 3,000 8,484 58,484 44,637 94,637 156,122 206,122
30 85 3,000 0 0 31,629 81,629 231,942 281,942
</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.
110
<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 assumed mortality
charges. This situation is shown in Appendix I, "Illustrations of Account
Values and Death Benefits."
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>
$9,647 $9,887 $59,647 $59,887
</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." 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>
$8,754 $8,994 $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 credited. 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.
111
