<PAGE>
Prospectus
Minnesota Life Variable
Universal Life Account
Variable Universal Life Insurance Policy
This prospectus describes Variable Universal Life Insurance Policies issued by
Minnesota Life Insurance Company ("Minnesota Life"). The policies are designed
for use in group-sponsored insurance programs to provide life insurance
protection and the flexibility to vary premium payments. 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 owner may allocate net premiums to one or more of the sub-accounts of a
separate account of Minnesota Life called the Minnesota Life Variable
Universal Life Account (herein "separate account"). Net premiums may also be
allocated to a guaranteed account of Minnesota Life. 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 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 Funds have nineteen Portfolio s
which are available. They are:
. Growth Portfolio . Value Stock Portfolio
. Bond Portfolio . Small Company Value
. Money Market Portfolio
Portfolio . Global Bond Portfolio
. Asset Allocation . Index 400 Mid-Cap
Portfolio Portfolio
. Mortgage Securities . Macro-Cap Value
Portfolio Portfolio
. Index 500 Portfolio . Micro-Cap Growth
. Capital Appreciation Portfolio
Portfolio . Fidelity VIP--High
. International Stock Income Portfolio
Portfolio . Fidelity VIP--Equity-
. Small Company Growth Income Portfolio
Portfolio . Fidelity VIP II--
. Maturing Government Contrafund Portfolio
Bond
Portfolio (target
maturity of 2010)
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.
This prospectus must be accompanied by the current prospectuses of the Funds.
This prospectus should be read carefully and retained for future reference.
The policies have not been approved or disapproved by the Securities and
Exchange Commission ("SEC"). Neither the SEC nor any state has determined
whether this prospectus is truthful or complete. Any representations to the
contrary is a criminal offense.
Minnesota Life Insurance Company
400 Robert Street North
St. Paul, MN 55101-2098
651.665.3500 Tel
www.minnesotamutual.com
Dated: May 3, 1999
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Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Special Terms.............................................................. 1
Summary.................................................................... 2
Condensed Financial Information............................................ 7
General Descriptions....................................................... 10
Minnesota Life Insurance Company......................................... 10
Variable Universal Life Account.......................................... 10
Advantus Series Fund, Inc................................................ 11
Fidelity Variable Insurance Products Funds............................... 12
Additions, Deletions or Substitutions.................................... 12
The Guaranteed Account................................................... 13
General Description.................................................... 13
Guaranteed Account Value............................................... 13
Information About the Policy............................................... 14
Applications and Policy Issue............................................ 14
Policy Premiums.......................................................... 14
Death Benefit............................................................ 15
Change in Face Amount.................................................... 17
Payment of Death Benefit Proceeds........................................ 17
Account Values........................................................... 18
Policy Loans............................................................. 20
Surrender and Partial Surrender.......................................... 21
Transfers................................................................ 21
Dollar Cost Averaging.................................................... 23
Free Look................................................................ 23
Conversion Right to an Individual Policy................................. 24
Continuation of Group Coverage........................................... 24
Charges.................................................................. 24
Premium Expense Charges................................................ 25
Account Value Charges.................................................. 25
Separate Account Charges............................................... 27
Fund Charges........................................................... 27
Guarantee of Certain Charges............................................. 28
Additional Benefits...................................................... 28
General Matters Relating to the Policy................................... 29
General Provisions of the Group Contract................................. 32
Other Matters.............................................................. 32
Federal Tax Status....................................................... 32
Year 2000 Computer Problem............................................... 35
Directors and Principal Officers of Minnesota Life....................... 36
Voting Rights............................................................ 37
Distribution of Policies................................................. 37
Legal Matters............................................................ 38
Legal Proceedings........................................................ 38
Experts.................................................................. 38
Registration Statement................................................... 38
Financial Statements of Minnesota Life Variable Universal Life Account..... 39
Financial Statements of Minnesota Life Insurance Company and
Subsidiaries.............................................................. 95
Appendix I-Illustrations of Account Values and Death Benefits.............. 122
Appendix II-Policy Loan Example............................................ 131
</TABLE>
i
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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 declared thereon and experience credits,
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
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Summary
any charges due. It is the amount an owner may obtain through surrender of the
policy.
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: Minnesota Life Variable Universal Life Account, a separate
investment account with nineteen "sub-accounts" or "Variable Universal Life
Account" (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: Minnesota 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. You should review the
information contained elsewhere in this prospectus.
What is a universal life insurance policy?
A universal life insurance policy is an adjustable benefit life insurance
policy. Itallows 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. 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. 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 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
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insufficient for the payment of the required monthly charges, then a premium
payment is required or the life insurance coverage provided to the owner 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 Life Variable
Universal Life Account ("separate account"). The sub-accounts of the separate
account 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. The policy also 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 nineteen Portfolios of the Funds.
Not all of the Portfolios of the Funds may be made available for investment by
the separate account. The Maturing Government Bond Portfolio with a maturity
of 2002 is included in this prospectus, but it is not available for premium
allocations or transfers effective May 1, 1997. Owners may direct their funds
to the following Series Fund Portfolios:
<TABLE>
<S> <C>
Growth Portfolio
Bond Portfolio
Money Market Portfolio
Asset Allocation Portfolio
Mortgage Securities Portfolio
Index 500 Portfolio
Capital Appreciation Portfolio
International Stock Portfolio
Small Company Growth Portfolio
Maturing Government Bond Portfolio--2010
Value Stock Portfolio
Small Company Value Portfolio
Global Bond Portfolio
Index 400 Mid-Cap Portfolio
Macro-Cap Value Portfolio
Micro-Cap Growth Portfolio
</TABLE>
Owners may also direct their funds to the following additional Portfolios:
Fidelity Variable Insurance Products Fund--High Income Portfolio
Fidelity Variable Insurance Products Fund--Equity-Income Portfolio
Fidelity Variable Insurance Products Fund II--Contrafund Portfolio
There is no assurance that any Portfolio will meet its objectives. Additional
information concerning investment objectives may be found in the attached Fund
prospectuses.
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
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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 will be paid 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 "Account Values" of this prospectus.
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. 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.
Premium Expense Charges
Premium expense charges vary based on the group-sponsored insurance program
under which the policy is issued. We may deduct from premium paid, 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. If a policy is considered to be a group policy
under OBRA, the charge will not exceed .25 percent of premium.
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:
. an administration charge;
. a cost of insurance charge; and
. 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.
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Separate Account Charges
We assess a mortality and expense risk charge against the separate account
assets on a daily basis. 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.
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 Minnesota Life. For more
information about the Series Fund, see the prospectus of Advantus Series Fund,
Inc. which is attached to this prospectus.
The Fidelity Management and Research Company (FMR), a subsidiary of FMR
Corp., is adviser to each of VIP High Income Portfolio, VIP Equity-Income
Portfolio and VIP II Contrafund Portfolio. For more information about the
Funds, 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.
The chart below shows the advisory fees and other expense fees as a percent
of average daily net assets for the Funds as of December 31, 1998.
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 other expense fees reflect the actual expenses incurred by
each portfolio unless the actual expenses exceed the cap. The other 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 other expenses incurred in excess of the cap are
voluntarily absorbed by Minnesota Life. For a description of the arrangement
whereby Minnesota Life voluntarily absorbs certain expenses of the Series
Fund, see "Investment Adviser" in the attached prospectus for Advantus Series
Fund, Inc. The other expense fees shown are expected to decrease as the amount
of assets in the portfolios increases.
The other 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 other expenses.
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<TABLE>
<CAPTION>
Other Expense
Investment (after expense
Fund/Portfolio Name Advisory Fee reimbursements) Total
- ------------------- ------------ --------------- -----
<S> <C> <C> <C>
SERIES FUND
Growth 0.50% 0.03% 0.53%
Bond 0.50% 0.05% 0.55%
Money Market 0.50% 0.08% 0.58%
Asset Allocation 0.50% 0.03% 0.53%
Mortgage Securities 0.50% 0.07% 0.57%
Index 500 0.40% 0.04% 0.44%
Capital Appreciation 0.75% 0.03% 0.78%
International Stock(2) 0.70% 0.24% 0.94%
Small Company Growth 0.75% 0.04% 0.79%
Maturing Government Bond 2010(1) 0.25% 0.15% 0.40%
Value Stock 0.75% 0.04% 0.79%
Small Company Value(1) 0.75% 0.15% 0.90%
Global Bond 0.60% 0.53% 1.13%
Index 400 Mid-Cap(1) 0.40% 0.15% 0.55%
Macro-Cap Value(1) 0.70% 0.15% 0.85%
Micro-Cap Growth(1) 1.10% 0.15% 1.25%
VIP
VIP High Income(3) 0.58% 0.12% 0.70%
VIP Equity-Income(3) 0.49% 0.09% 0.58%
VIP II
VIP II Contrafund(3) 0.59% 0.11% 0.70%
AVERAGE 0.60% 0.12% 0.71%
</TABLE>
(1)Minnesota Life voluntarily absorbed certain expenses of the Maturing
Government Bond 2010, Small Company Value, Index 400 Mid-Cap, Macro-Cap Value
and Micro-Cap Growth Portfolios for the period ended December 31, 1998. If
these Portfolios had been charged for expenses, the ratio of expenses to
average daily net assets would have been 1.33%, 1.83%, 1.36%, 2.53% and 2.10%,
respectively. For these Portfolios, it is Minnesota Life's intention to waive
other fund expenses during the current fiscal year which exceed, as a
percentage of average daily net assets, .15%. Minnesota Life also reserves the
option to reduce the level of other expenses which it will voluntarily absorb.
(2)The advisory fee for this portfolio is a variable fee decreasing with
increased asset size. This figure represents the actual 1998 average.
(3)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
1998 averages.
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. The investment advisory fee
for this portfolio is .25 percent and the other expense fee is .15 percent.
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. Therefore, 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.
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
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Condensed Financial Information
the tax treatment of death proceeds and the tax-free inside buildup of yearly
account value increases. Any amounts received by the owner, such as experience
credits, 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.
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.
The financial statements of Minnesota Life Insurance Company and Minnesota
Life 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, 1998, 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 Life 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>
1998 1997 1996 1995
------- ------- ------ -----
<S> <C> <C> <C> <C>
Growth Sub-Account:
Unit value at beginning of period................ $1.71 $1.29 $1.10 $1.00
Unit value at end of period ..................... $2.29 $1.71 $1.29 $1.10
Number of units outstanding at end of period .... 366,983 297,099 10,583 5,717
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995
------- ------- ----- -----
<S> <C> <C> <C> <C>
Bond Sub-Account:
Unit value at beginning of period................. $1.19 $1.09 $1.07 $1.00
Unit value at end of period....................... $1.26 $1.19 $1.09 $1.07
Number of units outstanding at end of period...... 27,533 3,719 2,462 1,708
Money Market Sub-Account:
Unit value at beginning of period................. $1.12 $1.07 $1.03 $1.00
Unit value at end of
period .......................................... $1.17 $1.12 $1.07 $1.03
Number of units outstanding at end of period...... 6,909 4,453 2,822 1,163
Asset Allocation Sub-Account:
Unit value at beginning of period................. $1.47 $1.24 $1.11 $1.00
Unit value at end of
period .......................................... $1.81 $1.47 $1.24 $1.11
Number of units outstanding at end of period...... 192,826 187,443 5,376 2,487
</TABLE>
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<TABLE>
<CAPTION>
1998 1997 1996 1995
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Mortgage Securities Sub-Account:
Unit value at beginning of period ........ $1.20 $1.10 $1.05 $1.00
Unit value at end of period............... $1.27 $1.20 $1.10 $1.05
Number of units outstanding at end of
period................................... 44,278 1,743 1,353 1,116
Index 500 Sub-Account:
Unit value at beginning of period ........ $1.86 $1.41 $1.16 $1.00
Unit value at end of period............... $2.36 $1.86 $1.41 $1.16
Number of units outstanding at end of
period................................... 1,538,294 1,231,985 902,194 457,639
Capital Appreciation Sub-Account:
Unit value at beginning of period......... $1.68 $1.32 $1.13 $1.00
Unit value at end of period............... $2.19 $1.68 $1.32 $1.13
Number of units outstanding at end of
period................................... 20,065 11,926 8,725 5,583
International Stock Sub-Account:
Unit value at beginning of period......... $1.39 $1.25 $1.05 $1.00
Unit value at end of period............... $1.47 $1.39 $1.25 $1.05
Number of units outstanding at end of
period................................... 43,902 7,857 4,601 3,688
Small Company Growth Sub-Account:
Unit value at beginning of period......... $1.37 $1.28 $1.21 $1.00
Unit value at end of period............... $1.38 $1.37 $1.28 $1.21
Number of units outstanding at end of
period................................... 61,821 64,545 41,743 34,825
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996 1995
------ ------ ----- -----
<S> <C> <C> <C> <C>
Maturing Government Bond 2002 Sub-Account:
Unit value at beginning of period............. $1.14 $1.06 $1.00(a)
Unit value at end of period................... $1.25 $1.14 $1.06
Number of units outstanding at end of period.. 1,000 1,000 1,000
Maturing Government Bond 2006 Sub-Account:
Unit value at beginning of period............. $1.21 $1.08 $1.00(a)
Unit value at end of period................... $1.38 $1.21 $1.08
Number of units outstanding at end of period.. 1,000 1,000 1,000
Maturing Government Bond 2010 Sub-Account:
Unit value at beginning of period............. $1.29 $1.10 $1.00(a)
Unit value at end of period................... $1.46 $1.29 $1.10
Number of units outstanding at end of period.. 1,317 1,000 1,000
Value Stock Sub-Account:
Unit value at beginning of period............. $1.83 $1.51 $1.16 $1.00
Unit value at end of period .................. $1.85 $1.83 $1.51 $1.16
Number of units outstanding at end of period . 37,797 10,536 5,585 4,016
Small Company Value Sub-Account:
Unit value at beginning of period............. $1.00(b)
Unit value at end of period .................. $0.90
Number of units outstanding at end of period . 16,611
Global Bond 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 . 1,536
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Index 400 Mid-Cap 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 ...... 41,729
Macro-Cap Value 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 ...... 3,110
Macro-Cap Growth Sub-Account:
Unit value at beginning of period.................. $1.00(b)
Unit value at end of period ....................... $1.02
Number of units outstanding at end of period ...... 12,020
Contrafund Sub-Account:
Unit value at beginning of period.................. $1.38 $1.11 $1.00(a)
Unit value at end of period........................ $1.78 $1.38 $1.11
Number of units outstanding at end of period....... 45,878 31,208 30,361
High Income Sub-Account:
Unit value at beginning of period.................. $1.25 $1.07 $1.00(a)
Unit value at end of period........................ $1.19 $1.25 $1.07
Number of units outstanding at end of period....... 39,421 31,854 29,956
Equity-Income Sub-Account:
Unit value at beginning of period.................. $1.36 $1.06 $1.00(a)
Unit value at end of period........................ $1.51 $1.36 $1.06
Number of units outstanding at end of period....... 43,536 33,024 30,306
</TABLE>
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 year
ended December 31, 1998 and 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 Life
Variable Universal Life Account (where the mortality and expense risk charge
is zero on an annual basis) included in this prospectus.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Money Market Sub-Account:
Unit value at beginning
of period.............. $1.00(c)
Unit value at end of
period................. $1.03
Number of units
outstanding at end of
period................. 41,948,958
Index 500 Sub-Account:
Unit value at beginning
of period.............. $1.17 $1.00(h)
Unit value at end of
period................. $1.50 $1.17
Number of units
outstanding at end of
period................. 1,029,398 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 years ended December 31, 1998 and 1997. This information should be
read in conjunction with the financial statements and related notes of
Minnesota Life 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>
1998 1997
------- -------
<S> <C> <C>
Growth Sub-Account:
Unit value at beginning of period........................... $1.31 $1.00(e)
Unit value at end of period................................. $1.77 $1.31
Number of units outstanding at end of period................ 130,186 92,564
Bond Sub-Account:
Unit value at beginning of period........................... $1.10 $1.00(e)
Unit value at end of period................................. $1.16 $1.10
Number of units outstanding at end of period................ 72,918 48,295
Money Market Sub-Account:
Unit value at beginning of period........................... $1.05 $1.00(e)
Unit value at end of period................................. $1.09 $1.05
Number of units outstanding at end of period................ 257,062 95,600
Asset Allocation Sub-Account:
Unit value at beginning of period........................... $1.18 $1.00(e)
Unit value at end of period................................. $1.45 $1.18
Number of units outstanding at end of period................ 114,829 52,163
Mortgage Securities Sub-Account:
Unit value at beginning of period........................... $1.09 $1.00(e)
Unit value at end of period................................. $1.16 $1.09
Number of units outstanding at end of period................ 2,405 10,899
Index 500 Sub-Account:
Unit value at beginning of period........................... $1.27 $1.00(d)
Unit value at end of period................................. $1.62 $1.27
Number of units outstanding at end of period................ 375,754 236,786
</TABLE>
9
<PAGE>
General Descriptions
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Capital Appreciation Sub-
Account:
Unit value at beginning
of period.............. $1.27 $1.00(e)
Unit value at end of
period................. $1.66 $1.27
Number of units
outstanding at end of
period................. 76,078 73,554
International Stock Sub-
Account:
Unit value at beginning
of period.............. $1.11 $1.00(e)
Unit value at end of
period................. $1.18 $1.11
Number of units
outstanding at end of
period................. 98,077 55,984
Small Company Growth Sub-
Account:
Unit value at beginning
of period.............. $1.09 $1.00(d)
Unit value at end of
period................. $1.10 $1.09
Number of units
outstanding at end of
period................. 134,879 91,750
Maturing Government Bond
2002 Sub-Account:
Unit value at beginning
of period.............. $1.10 $1.00(f)
Unit value at end of
period................. $1.20 $1.10
Number of units
outstanding at end of
period................. 5 19,858
Maturing Government Bond
2010 Sub-Account:
Unit value at beginning
of period.............. $1.00(g)
Unit value at end of
period................. $1.12
Number of units
outstanding at end of
period................. 1,433
Value Stock Sub-Account:
Unit value at beginning
of period.............. $1.16 $1.00(d)
Unit value at end of
period................. $1.18 $1.16
Number of units
outstanding at end of
period................. 57,226 43,594
Small Company Value Sub-
Account:
Unit value at beginning
of period.............. $1.00(g)
Unit value at end of
period................. $0.96
Number of units
outstanding at end of
period................. 6,152
Global Bond Sub-Account:
Unit value at beginning
of period.............. $1.00(g)
Unit value at end of
period................. $1.14
Number of units
outstanding at end of
period................. 201
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Index 400 Mid-Cap Sub-
Account:
Unit value at beginning
of period.............. $1.00(g)
Unit value at end of
period................. $1.19
Number of units
outstanding at end of
period................. 20,595
Micro-Cap Growth Sub-
Account:
Unit value at beginning
of period.............. $1.00(g)
Unit value at end of
period................. $1.07
Number of units
outstanding at end of
period................. 22,912
Contrafund Sub-Account:
Unit value at beginning
of period.............. $1.21 $1.00(e)
Unit value at end of
period................. $1.57 $1.21
Number of units
outstanding at end of
period................. 121,035 81,894
High Income Sub-Account:
Unit value at beginning
of period.............. $1.16 $1.00(e)
Unit value at end of
period................. $1.11 $1.16
Number of units
outstanding at end of
period................. 30,421 23,732
Equity-Income Sub-
Account:
Unit value at beginning
of period.............. $1.25 $1.00(e)
Unit value at end of
period................. $1.39 $1.25
Number of units
outstanding at end of
period................. 188,227 156,865
</TABLE>
- -------
(a) 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.
(b) For the period from May 1, 1998, commencement of operations, to December
31, 1998.
(c) The information for the sub-account is shown for the period from May 28,
1998, commencement of operations, to December 31, 1998.
(d) For the period from January 24, 1997, commencement of operations, to De-
cember 31, 1997.
(e) For the period from January 29, 1997, commencement of operations, to De-
cember 31, 1997.
(f) For the period from April 2, 1997, commencement of operations, to December
31, 1997.
(g) For the period from January 22, 1998, commencement of operations, to De-
cember 31, 1998.
(h) For the period from June 24, 1997, commencement of operations, to Decem-
ber 31, 1997.
MINNESOTA LIFE INSURANCE COMPANY
We are Minnesota Life Insurance Company ("Minnesota Life"), a life insurance
company organized under the laws of Minnesota. Minnesota Life was formerly
known as The Minnesota Mutual Life Insurance Company ("Minnesota Mutual"), a
mutual life insurance company organized in 1880 under the laws of Minnesota.
On October 1, 1998, a plan of reorganization created a mutual insurance
holding company named Minnesota Mutual Companies, Inc. Minnesota Mutual
reorganized as a stock insurance company subsidiary of the new holding company
and took the new name Minnesota Life. Our home office is at 400 Robert Street
North, St. Paul, Minnesota 55101-2098, telephone: (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
On August 8, 1994, the separate account was established in accordance with
10
<PAGE>
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. 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 Life 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 nineteen 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.
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.
ADVANTUS SERIES FUND, INC.
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 Minnesota Life.
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 nineteen 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
11
<PAGE>
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
attached Advantus Series Fund, Inc. prospectus.
FIDELITY VARIABLE INSURANCE PRODUCTS FUNDS
The policy also provides for sub-accounts of the Variable Universal Life
Account which invests in shares of other registered investment companies. VIP
has two Portfolios which are available to the Variable Universal Life Account.
They are the High Income Portfolio and the Equity-Income Portfolio. VIP II has
one Portfolio which is available to the Variable Universal Life Account. It is
the Contrafund Portfolio. There is no guaranteed minimum value associated with
the separate account and its sub-accounts. Both VIP and VIP II issue their
shares, continually and without sales charge, only to us and to separate
accounts of other insurance companies, both affiliated and unaffiliated with
the investment adviser of VIP and VIP II.
The investment adviser of VIP and VIP II is Fidelity Management & Research
Company ("FMR"), 82 Devonshire Street, Boston, Massachusetts. FMR handles the
business affairs and, with the assistance of affiliates for certain
Portfolios, chooses the investments for VIP and VIP II. Fidelity Management &
Research (U.K.) Inc., in London, England, and Fidelity Management & Research
(Far East) Inc., in Tokyo, Japan, both serve as sub-advisers for the VIP High
Income and VIP II Contrafund Portfolios. The parent company 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
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'
12
<PAGE>
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
Life'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 Life has been advised that the staff of the SEC does
not review disclosures relating to it. Disclosures regarding the guaranteed
account may, however, be subject to certain generally applicable provisions of
the federal securities laws relating to the accuracy and completeness of
statements made in prospectuses.
This prospectus describes a Variable Universal Life Insurance Policy and is
generally intended to serve as a disclosure document only for the aspects of
the policy relating to the sub-accounts of the separate account. For more
information about the guaranteed account, please see the policy and the
summary information provided immediately below.
General Description Minnesota Life's general account consists of all assets
owned by Minnesota Life 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 Life, 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 Life 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 are subject to certain limitations with respect to timing and
amount. These restrictions are described under the heading "Transfers."
Guaranteed Account Value Minnesota Life 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 the minimum guaranteed annual rate without regard to the actual
investment experience of the guaranteed account. For group-sponsored programs
implemented prior to May 3, 1999, the minimum guaranteed annual rate is 4
percent. For group-sponsored programs implemented on or after May 3, 1999, the
minimum guaranteed annual rate is 3 percent.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.
13
<PAGE>
Information About the Policy
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 Life at its home office.
Individuals wishing to purchase a policy insuring an eligible member under a
group-sponsored program must complete the appropriate application for life
insurance and submit it to our home office. If the policy is approved, we will
issue to the group sponsor either a certificate or an individual policy to
give to the owner. The issue of a group contract or individual policy and
their associated forms is always subject to the approval of those documents
for use by state insurance regulatory authorities.
Individuals who satisfy the eligibility requirements under a particular
group contract may be required to submit to a simplified underwriting
procedure which requires satisfactory responses to certain health questions in
the application and to provide, in some cases, medical information. Acceptance
of an application is subject to our underwriting rules, and we reserve the
right to reject an application for any reason.
A policy will not take effect until the owner signs the appropriate
application for insurance, the initial premium has been paid prior to the
insured's death, the insured is eligible, and we approve the completed
application. The date on which the last event occurs shall be the effective
date of coverage ("issue date").
POLICY PREMIUMS
A premium must be paid to put a policy in force, and may be remitted to us
by the group sponsor on behalf of the owner. The initial premium for a policy
must cover the premium expense charges and the first month's deductions. A
premium must also be paid when there is insufficient net cash value 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
14
<PAGE>
classified as a modified endowment contract for federal income tax purposes.
Our systems will continue to test the owner's policy with each premium payment
to determine whether the policy has attained this tax status. If we determine
that the policy has attained the status of a modified endowment contract, we
will mail the owner a notice. The owner will be given a limited amount of
time, subject to the restrictions under the Code, to request that the policy
maintain the modified endowment contract status. If the owner does not request
to have this tax status maintained, the excess premium amounts paid that
caused this tax status will be returned with interest at the end of the policy
year to avoid the policy being classified as a modified endowment contract.
The owner may request an immediate refund if it is desired earlier.
Allocation of Net Premiums and Account Value Net premiums, which are premiums
after the deduction of the charges assessed against premiums, are allocated to
the guaranteed account or sub-accounts of the separate account which, in turn,
invest in shares of the Funds.
The owner makes the selection of the sub-accounts and/or the guaranteed
account on the application for the policy. The owner may change the allocation
instructions for future premiums by giving us a written request. The
allocation to the guaranteed account or to any sub-account of the separate
account must be at least 10 percent of the net premium. We reserve the right
to delay the allocation of net premiums to named sub-accounts for a period of
10 days after policy issue or policy change. This right, which has not been
implemented to date, will be exercised by us only when we believe economic
conditions make such an allocation necessary to reduce market risk during the
"free look" period. If we exercise this right, net premiums will be allocated
to the Money Market Sub-Account until the end of that period.
We reserve the right to restrict the allocation of net premiums to the
guaranteed account for policies under some group-sponsored programs. For these
policies, the 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
15
<PAGE>
of the policy based on the death benefit option elected by the contractholder.
The group sponsor may choose one of two death benefit options for all
participants under the group-sponsored program. Once elected, the death
benefit option under a policy shall remain unchanged. There is a level death
benefit ("Option A") and a variable death benefit ("Option B"). The death
benefit under either option will never be less than the current face amount of
the policy as long as the policy remains in force and there are no policy
loans. The face amount elected must be at least the minimum stated on the
specification pages of the policy.
Option A Under Option A, the death benefit will be determined as follows:
(1) The face amount of insurance on the insured's date of death while the
policy is in force; plus
(2) the amount of the cost of insurance for the portion of the policy month
from the date of death to the end of the policy month; less
(3) any outstanding policy loans and accrued policy loan interest charged;
less
(4) any unpaid monthly deductions determined as of the date of the insured's
death.
Option B Under Option B, the death benefit will be determined as follows:
(1) The face amount of insurance on the insured's date of death while the
policy is in force; plus
(2) the amount of the owner's account value as of the date we receive due
proof of death satisfactory to us; plus
(3) the amount of the cost of insurance for the portion of the policy month
from the date of death to the end of the policy month; plus
(4) any monthly deductions taken under the certificate since the date of
death; less
(5) any outstanding policy loans and accrued policy loan interest charged;
less
(6) any unpaid monthly deductions determined as of the date of the insured's
death.
At issue, the group sponsor may choose between two tests that may be used to
determine if a policy qualifies as life insurance as defined by Section 7702
of the Code. Once a test is selected for a policy, it shall remain unchanged
for that policy. The two tests are the Guideline Premium Test and the Cash
Value Accumulation Test. The test selected will determine how the death
benefit is calculated in the event the account value or the premiums paid
exceed certain limits established under Section 7702.
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:
16
<PAGE>
<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 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
17
<PAGE>
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 the minimum guaranteed rate,annually, or the
minimum rate required by state law. For group-sponsored programs implemented
prior to May 3, 1999, the minimum guaranteed annual rate is 4 percent. For
group-sponsored programs implemented on or after May 3, 1999, the minimum
guaranteed annual rate is 3 percent.
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 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, experience credits (see "General
Matters Relating to the Policy" for a detailed discussion), 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 the minimum guaranteed annual rate, compounded annually. For group-
sponsored programs implemented prior to May 3, 1999, the minimum guaranteed
annual rate is 4 percent. For group-sponsored programs implemented on or after
May 3, 1999, the minimum guaranteed annual rate is 3 percent. We guarantee the
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 separate 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
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<PAGE>
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,
experience credits and transfers to that sub-account. The number of additional
units credited is determined by dividing the net premiums, policy experience
credits and transfers to that sub-account by the then current unit value for
that sub-account. The number of units of each sub-account credited to the
owner's policy will be decreased by policy charges to the sub-account, policy
loans and loan interest charged, transfers from that sub-account and partial
surrenders from that sub-account. The reduction in the number of units
credited is determined by dividing the deductions to that sub-account, policy
loans and loan interest charged, transfers from that sub-account and partial
surrenders from that sub-account by the then current unit value for that sub-
account. The number of sub-account units will decrease to zero on a policy
surrender.
Unit Value The unit value of a sub-account will be determined on each
valuation date. The amount of any increase or decrease will depend on the net
investment experience of that sub-account. The value of a unit for each sub-
account was originally set at $1.00 on the first valuation date. For any
subsequent valuation date, its value is equal to its value on the preceding
valuation date multiplied by the net investment factor for that sub-account
for the valuation period ending on the subsequent valuation date.
Net Investment Factor The net investment factor for a valuation period is the
gross investment rate for such valuation period, less a deduction for the
mortality and expense risk charge under this policy which is assessed at the
annual rate stated on the specification pages of the policy against the
average daily net assets of each sub-account of the separate account. The
gross investment rate is equal to:
(1) the net asset value per share of a share held by the Funds in the sub-
account of the separate account determined at the end of the current
valuation period; plus
(2) the per share amount of any dividend or capital gains distribution by the
Funds if the "ex-dividend" date occurs during the current valuation
period; with the sum divided by
(3) the net asset value per share of the share of the Funds held in the sub-
account determined at the end of the preceding valuation period.
Daily Values We determine the value of the units in each sub-account on each
day on which the Portfolios of the Funds are valued. The net asset value of
the Funds' shares is computed once daily, and, in the case of the Money Market
Portfolio, after the declaration of the daily dividend, as of the primary
closing time for business on the New York Stock Exchange (as of the date
hereof the primary close of trading is 3:00 p.m. Central time, but this time
may be changed) on each day, Monday through Friday, except (i) days on which
changes in the value of a Fund's Portfolio securities will not materially
affect the current net asset value of such Fund's shares, (ii) days during
which no shares of a Fund are tendered for redemption and no order to purchase
or sell such Fund's shares is received by such Fund and (iii) customary
national business holidays on which the New York Stock Exchange is closed for
trading.
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,
19
<PAGE>
"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 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 and if the net cash value is insufficient
to cover the monthly deduction and the loan repayment, 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
20
<PAGE>
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 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
21
<PAGE>
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.
From time to time the separate account may receive a transfer request that
Minnesota Life regards as disruptive to the efficient management of the sub-
accounts of the separate account. This could be because of the timing of the
request and the availability of settlement proceeds in federal funds in the
underlying portfolio of the fund, the size of the transfer amount involved or
the trading history of the investor.
A transfer or exchange from one sub-account to another is generally treated
as a simultaneous sale of units currently held and the purchase of units where
a new investment is desired. In the event that cumulative redemptions from a
sub-account on a given day equal or exceed $5,000,000, and if the investment
adviser of the underlying portfolio of the fund determines that selling
securities to satisfy the redemptions could be harmful to the fund, some
requested transfers or exchanges may be denied. In addition, any transfer
request or requests affecting a particular sub-account which, individually or
collectively with other transfer requests submitted by the owner of multiple
individual policies or by the owners of certificates under a single group
contract for that sub-account on a given day, equal or exceed $5,000,000 may
be denied unless all such transfer requests are received by 12:00 p.m. Central
time. In these events, the order of such redemptions from the fund will be as
follows: all automatic exchanges (for example, dollar cost averaging), written
transfer or exchange requests, faxed transfer and exchange requests, and
telephone transfer and exchange requests. Transfer and exchange requests will
be processed in the order of receipt within their respective category. In no
event will there be any limitation on redemptions in connection with
surrenders, partial surrenders or loans. The owner will be notified when these
limitations are imposed on a transfer request.
In the event of disruptive circumstances which don't result in the denial of
a request as outlined above, the size or timing of the transfer may make it
impossible for the exchange to occur on the same day. In that event, the
request for exchange will be treated as a request for a transfer of units on
the date of the receipt of the request. The price of the new units will also
be calculated on that day and that determination will be used as the basis for
determining the number of units outstanding in the sub-account. However, the
transfer of the redemption proceeds and the purchase of units, and shares in
the new portfolio, will be accomplished only when federal funds are received
from the sale to allow the purchase and sale without disruption. Should the
transfer not be completed because of non-payment, Minnesota Life will
reimburse the separate account for any decline in the price of the units to
the time of the cancellation. Similarly, any fees or disbursements resulting
from any legal action because of the non-payment will similarly be the
liability of Minnesota Life. The owner will be notified when this limitation
is imposed on a transfer request.
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)
22
<PAGE>
transmission. Our FAX number is (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.
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 is limited to 20 percent
(or $250 if greater) of the guaranteed account balance. Transfers to or from
the guaranteed account are 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.
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. There is no charge for this
option. 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
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may return the policy to us within 10 days after the owner receives it. If the
policy is returned, the owner will receive within seven days of the date we
receive the notice of cancellation a full refund of the premiums paid.
A request for an increase in face amount also may be canceled. The request
for cancellation must be made within the 10 days, or that period required by
applicable state law, after the owner receives the new policy specification
pages for the increase.
Upon cancellation of an increase, the owner may request that we refund the
amount of the additional charges deducted in connection with the increase.
This will equal the amount by which the monthly deductions since the increase
went into effect exceeded the monthly deductions which would have been made
without the increase. If no request is made, we will increase the policy's
account value by the amount of these additional charges. This amount will be
allocated among the sub-accounts of the separate account and guaranteed
account in the same manner as it was deducted.
CONVERSION RIGHT TO AN INDIVIDUAL POLICY
If life insurance provided under the group contract is not continued upon
termination of the insured's eligibility under the group contract, or if the
group contract terminates or is amended so as to terminate the insurance, the
owner may convert the insurance under the group contract to an individual
policy of life insurance with us subject to the following:
(1) The owner's written application to convert to an individual policy and the
first premium for the individual policy must be received in our home
office within 31 days of the date the owner's insurance terminates under
the group contract.
(2) The owner may convert all or a part of the group insurance in effect on
the date that the owner's coverage terminated to any individual life
insurance policy we offer, except a policy of term insurance. We will
issue the individual policy on the policy forms we then use for the plan
of insurance the owner has requested. The premium charge for this
insurance will be based upon the insured's age as of his or her nearest
birthday.
(3) If the insured should die within 31 days of the date that the group
contract terminates, the full amount of insurance that could have been
converted under this policy will be paid.
In the case of the termination of the group contract, we may require that an
insured under a certificate issued under the group contract be so insured for
at least five years prior to the termination date in order to qualify for the
above conversion privilege.
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 the required minimum in his or her net cash value
after deduction of charges for the month in which eligibility ends. The
required minimum will vary based on the group-sponsored program under
which the policy is issued. The minimum will never be higher than $250.
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
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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
The premium expense charges described below will be deducted from each premium
payment we receive. The remaining amount, or net premium, will be allocated to
the guaranteed account and/or sub-accounts of the separate account, as
directed by the owner, and become part of the policy's net cash value.
Sales Charge We may deduct a sales charge from each premium paid under the
policy. Sales charges vary based on the group-sponsored insurance program
under which the policy is issued. The charge will never exceed 5 percent of
each premium paid. The sales charge will be determined based on a variety of
factors, including enrollment procedures, the size and type of the group, the
total amount of premium payments to be received, any prior existing
relationship with the group sponsor, the level of commissions paid to agents
and brokers and their affiliated broker-dealers, and other circumstances of
which we are not presently aware. We may waive the sales charge for premiums
received as a result of Internal Revenue Code section 1035 exchanges from
another policy. In addition, we may waive the sales charge for premiums paid
by designated payors under a group-sponsored insurance program (for example,
insureds versus the group sponsor).
The amount of the sales charge in any policy year cannot be specifically
related to sales expenses for that year. To the extent that sales expenses are
not recovered from the sales charge, we will recover them from our other
assets or surplus, which may include profits from the mortality and expense
risk charge or the cost of insurance charge.
Premium Tax Charge We will deduct a percentage of premium charge, not to
exceed 4 percent of each premium received for premium taxes. Premium tax
charges vary based on the group-sponsored insurance program under which the
policy is issued. This charge is to compensate us for our payment of premium
taxes that are imposed by various states and local jurisdictions. Currently,
the 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
The premium expense charges described above will be deducted form each premium
payment we receive. The remaining amount, or net premium, will be allocated to
the guaranteed account and/or sub-accounts of the separate account, as
directed by the owner, and become part of the policy's net cash value. The
account value charges described below will be deducted from the net cash
value. If the net cash value is
insufficient to cover the account value
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charges, the policy will lapse unless sufficient payment is received within
the grace period.
Monthly Deduction The charges deducted as part of the monthly deduction vary
based on the group-sponsored insurance program under which the policy is
issued. As of the policy date and each subsequent monthly anniversary, we will
deduct an amount from the net cash value of the owner's policy to cover
certain charges and expenses incurred in connection with the policy. The
monthly deduction will be the sum of the applicable items: (1) an
administration charge; (2) a cost of insurance charge; and (3) the cost of any
additional insurance benefits provided by rider. The monthly deduction will be
assessed against the guaranteed account value and the separate account value
in the same proportion that those values bear to each other and, as to the
separate account, from each sub-account in the proportion that the sub-account
value in such sub-account bears to the separate account value of the policy.
We may deduct an administration charge from the net cash value of the policy
each month. The administration charge will never exceed $4 per month. This
charge is to compensate us for expenses incurred in the administration of the
policies. These expenses include the costs of processing enrollments,
determining insurability, and establishing and maintaining policy records.
Differences in the administration charge applicable to specific group-
sponsored insurance programs will be determined based on expected differences
in the administrative costs for the policies or in the amount of revenues that
we expect to derive from the charge. Such differences may result, for example,
from the number of eligible members in the group, the type and scope of
administrative support provided by the group sponsor, the expected average
policy size, and the features to be included in policies under the group-
sponsored insurance program. This charge is not designed to produce a profit.
The monthly cost of insurance will be calculated by multiplying the
applicable cost of insurance rate based on the insured's attained age and rate
class by the net amount at risk for each policy month. The net amount at risk
for a policy month is the difference between the death benefit and the account
value. The net amount at risk may be affected by changes in the face amount of
the policy or by changes in the account value.
The cost of insurance rates are generally determined at the beginning of
each policy year, although changes may be made at other times if warranted due
to a change in the underlying characteristics of the group, changes in
benefits included in policies under the group-sponsored insurance program,
experience of the group, changes in the expense structure, or a combination of
these factors.
Cost of insurance rates for each group-sponsored insurance program are
determined based on a variety of factors related to group mortality including
gender mix, average amount of insurance, age distribution, occupations,
industry, geographic location, participation, level of medical underwriting
required, degree of stability in the charges sought by the group sponsor,
prior mortality experience of the group, number of actual or anticipated
owners electing the continuation option, and other factors which may affect
expected mortality experience. In addition, cost of insurance rates may be
intended to cover expenses to the extent they are not covered by the other
policy charges. Changes in the current cost of insurance rates may be made
based on any factor which affects the actual or expected mortality or expenses
of the group.
Any changes in the current cost of insurance rates will apply to all persons
of the same attained age and rate class under the group-sponsored insurance
program. We and the group sponsor will agree to the number of classes and
characteristics of each rate class. 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
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insurance rates are generally lower than 100 percent of the 1980 CSO Table.
(For purposes of premiums under Section 7702 of the Internal Revenue Code of
1986, as amended, we will use 100 percent of the 1980 CSO Table.)
Partial Surrender Transaction Charge For policies under some group-sponsored
insurance programs, a transaction charge will be assessed against the net cash
value for each partial surrender to cover the administrative costs incurred in
processing the partial surrender. The charge will not exceed the lesser of $25
or 2 percent of the amount withdrawn. This charge will be assessed in the same
manner as the monthly deduction. This charge is not designed to produce a
profit.
Transfer Charge There is currently no charge assessed on transfers of net cash
value between the guaranteed account and the separate account or among the
sub-accounts of the separate account. A charge, not to exceed $10 per
transfer, may be imposed in the future.
Separate Account Charges
We assess a mortality and expense risk charge directly against the separate
account assets. This charge will vary based on the group-sponsored insurance
program under which the policy is issued. The annual rate will not exceed .50
percent of the average daily assets of the separate account. The mortality and
expense risk charge compensates us for assuming the risk that the cost of
insurance and other charges will be insufficient to cover the actual mortality
experience and other costs in connection with the policies.
Differences in the mortality and expense risk charge rates applicable to
different group-sponsored insurance programs will be determined by us based on
differences in the levels of mortality and expense risk under those contracts.
Differences in mortality and expense risk arise principally from the fact
that: (1) the factors used to determine cost of insurance and administration
charges are more uncertain for some group-sponsored insurance programs than
for others; and (2) our ability to recover any unexpected mortality and
administration costs will also vary from group-sponsored insurance program to
group-sponsored insurance program, depending on the charges established for
policies issued under the group-sponsored insurance program, and on other
financial factors.
We reserve the right to deduct a charge against the separate account assets,
or make other provisions for, any additional tax liability we may incur with
respect to the separate account or the polices, to the extent that those
liabilities exceed the amounts recovered through the deduction from premiums
for state premium taxes and federal taxes. No such charge or provision is made
at the present time.
Fund Charges
Advantus Capital Management, Inc. ("Advantus Capital"), acts as the
investment adviser to the Series Fund. Advantus Capital is a wholly-owned
subsidiary of Minnesota Life. For more information about the Series Fund, see
the prospectus of Advantus Series Fund, Inc. which is attached to this
prospectus.
The Fidelity Management and Research Company (FMR), a subsidiary of FMR
Corp., is adviser to each of VIP High Income Portfolio, VIP Equity-Income
Portfolio and VIP II Contrafund Portfolio. For more information about the
Funds, see the prospectus of the Variable Insurance Products Funds which is
attached to this prospectus.
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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. New benefit riders which are subsequently developed may be offered
under some group-sponsored programs, and the terms of the riders will be
identified in the policy. 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, 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
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accumulate due to employee-paid net premiums. The portion of the net premium
paid by the contractholder will be allocated to the guaranteed account. On the
same day such premium is allocated, the charges the contractholder intends to
cover will be deducted from the guaranteed account value.
GENERAL MATTERS RELATING TO THE POLICY
Postponement of Payments Normally, we will pay any policy proceeds within
seven days after our receipt of all the documents required for such a payment.
Other than the death proceeds 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 Life. 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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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 the minimum guaranteed rate,
compounded annually, or the minimum rate required by state law. For group-
sponsored programs implemented prior to May 3, 1999, the minimum guaranteed
annual rate is 4 percent. For group-sponsored programs implemented on or after
May 3, 1999, the minimum guaranteed annual rate is 3 percent. 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 will
never be less than the minimum guaranteed annual rate, compounded annually, or
the minimum rate required by state law. For group-sponsored programs
implemented prior to May 3, 1999, the minimum guaranteed annual rate is 4
percent. For group-sponsored programs implemented on or after May 3, 1999, the
minimum guaranteed annual rate is 3 percent. 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
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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
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.
Experience Credits Each year we will determine if this policy will receive an
experience credit. Experience credits, if received, may be added to the
owner's account value or, if the owner elects, they may be paid in cash.
Experience credits will vary based on the group-sponsored insurance program
under which the policy is issued. We will determine experience credits
pursuant to our established actuarial procedures. We do not expect any
experience credits will be declared.
An experience credit applied to the 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 such instructions, experience credits 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
31
<PAGE>
Other Matters
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 Life at our home office.
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
32
<PAGE>
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
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 Life, Minnesota Life does not have control over the Fund or its
investments. Nonetheless, Minnesota Life 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. Minnesota
Life does not believe that the ownership rights of an owner of a policy would
result in any contract owner being treated as the owner of the assets of the
separate account. However, Minnesota Life does not know what standards would
be applied if the Treasury Department should proceed to issue regulations or
rulings on this issue. Minnesota Life 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
33
<PAGE>
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 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
34
<PAGE>
promulgated under this provision to prevent avoidance of its effects through
serial contracts or otherwise. A life insurance policy received in exchange
for a modified endowment contract will also be treated as a modified endowment
contract.
Generally, interest paid on any loan under a life insurance contract is not
deductible. An owner should consult a competent tax adviser before deducting
any loan interest. In addition, default of any loan under the policy may
result in taxable income and/or tax penalties.
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, any person
contemplating the purchase of a variable life insurance policy or exercising
elections under such a policy may want to consult a tax adviser. 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 Life 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 Life to provide services to contract owners.
Minnesota Life 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 Life 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 Life's operations could be impacted by its service
providers' or suppliers' year 2000 efforts. Minnesota Life has undertaken an
initiative to assess the efforts of organizations where there is a significant
business relationship; however there is no assurance that Minnesota Life will
not be affected by year 2000 problems of other organizations.
35
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS OF MINNESOTA LIFE
<TABLE>
<CAPTION>
Directors Principal Occupation
--------- --------------------
<C> <S>
Giulio Agostini Senior Vice President, Finance and Administrative
Services, 3M, St. Paul, 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 Vice Chairmanand Chief Operating Officer, Wells
Fargo & Company, San Francisco, California (Banking)
John F. Grundhofer President, Chairman and Chief Executive Officer,
U.S. Bancorp, Minneapolis, Minnesota (Banking)
David S. Kidwell, Ph.D. Dean and Professor of Finance, The Curtis L. Carlson
School of Management, University of Minnesota,
Minneapolis, Minnesota
Reatha C. King, Ph.D. President and Executive Director, General Mills
Foundation, Minneapolis, Minnesota
Thomas E. Rohricht Of Counsel,Doherty, Rumble & Butler Professional
Association, St. Paul, Minnesota (Attorneys)
Robert L. Senkler Chairman of the Board, President and Chief Executive
Officer, Minnesota Life Insurance Company since
August 1995; prior thereto for more than five years
Vice President and Actuary, Minnesota 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 Directors)
Name Position
---- --------
John F. Bruder Senior Vice President
Keith M. Campbell Senior Vice President
Robert E. Hunstad Executive Vice President
James E. Johnson Senior Vice President and Actuary
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>
36
<PAGE>
All Directors who are not also officers of Minnesota Life have had the
principal occupation (or employers) shown for at least five years. All officers
of Minnesota Life have been employed by Minnesota Life for at least five years
with the exception of Mr. Westhoff. Mr. Westhoff has been employed by Minnesota
Life 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 Advantus Capital
Management, Inc. Advantus Capital Management, Inc. 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. Ascend Financial was incorporated in 1984 under the
laws of the State of Minnesota. The policies are sold in the states where their
sale is lawful. The insurance underwriting and the determination of a proposed
insured's risk classification and whether to accept or reject an application
for a policy is done in accordance with our rules and standards.
Commissions to registered representatives on the sale of policies will be
premium-based, asset-based or a fixed amount. Commissions for policies under a
group-sponsored insurance program will not exceed the equivalent of 50 percent
of the portion of all premiums paid in the initial year to cover the cost of
insurance, 7 percent of all
37
<PAGE>
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 Life 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 Life
or its affiliates for the purpose of promoting the sale of insurance and/or
investment products offered by Minnesota Life 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 Life.
LEGAL PROCEEDINGS
As an insurance company, we are ordinarily involved in litigation. Minnesota
Life 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 Life Variable Universal Life
Account and the consolidated financial statements of Minnesota Life 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 Life, 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 Life, and the
policies. Statements contained in this prospectus as to the contents of
policies and other legal instruments are summaries, and reference is made to
such instruments as filed.
38
<PAGE>
Independent Auditors' Report
The Board of Trustees of Minnesota Life Insurance Companyand Policy Owners of
Minnesota Life 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, Small Company Value, Global Bond
(formerly International Bond), Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap
Growth, Contrafund, High Income and Equity-Income Segregated Sub-Accounts of
Minnesota Life Variable Universal Life Account (formerly Minnesota Mutual
Variable Universal Life Account) as of December 31, 1998 and the related
statements of operations, statements of changes in net assets and the financial
highlights for the periods presented. 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, 1998 were confirmed to us by the
respective Sub-Account mutual fund group, or, for Advantus 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, Small Company Value, Global Bond, Index 400 Mid-Cap, Macro-
Cap Value, Micro-Cap Growth, Contrafund, High Income and Equity-Income
Segregated Sub-Accounts of Minnesota Life Variable Universal Life Account at
December 31, 1998 and the results of their operations, changes in their net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 26, 1999
39
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Assets and Liabilities
December 31, 1998
<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> <C> <C>
Investments in shares of
Advantus Series Fund,
Inc.:
Growth Portfolio,
306,774 shares at net
asset value of $2.74
per share (cost
$687,520) $839,917 -- -- -- -- -- --
Bond Portfolio, 26,455
shares at net asset
value of $1.31 per
share (cost $34,433) -- 34,598 -- -- -- -- --
Money Market Portfolio,
8,096 shares at net
asset value of $1.00
per share (cost
$8,096) -- -- 8,096 -- -- -- --
Asset Allocation Port-
folio, 152,786 shares
at net asset value of
$2.28 per share (cost
$301,131) -- -- -- 348,176 -- -- --
Mortgage Securities
Portfolio, 46,200
shares at net asset
value of $1.22 per
share (cost $55,835) -- -- -- -- 56,258 -- --
Index 500 Portfolio,
929,143 shares at net
asset value of $3.91
per share (cost
$2,503,401) -- -- -- -- -- 3,632,882 --
Capital Appreciation
Portfolio, 12,421
shares at net asset
value of $3.54 per
share (cost $33,788) -- -- -- -- -- -- 43,926
-------- ------ ----- ------- ------ --------- ------
839,917 34,598 8,096 348,176 56,258 3,632,882 43,926
Receivable from Minne-
sota Life for policy
purchase payments 59 101 48 17 -- 281,383 261
Receivable for invest-
ments sold 3,881 1,103 16 4,063 1,915 21,251 638
-------- ------ ----- ------- ------ --------- ------
Total assets 843,857 35,802 8,160 352,256 58,173 3,935,516 44,825
-------- ------ ----- ------- ------ --------- ------
<CAPTION>
Liabilities
-----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payable to Minnesota
Life for policy
terminations and
mortality and expense
charges 3,881 1,103 16 4,063 1,915 21,251 638
Payable for investments
purchased 59 101 48 17 -- 281,383 261
-------- ------ ----- ------- ------ --------- ------
Total liabilities 3,940 1,204 64 4,080 1,915 302,634 899
-------- ------ ----- ------- ------ --------- ------
NET ASSETS APPLICABLE TO
POLICY OWNERS $839,917 34,598 8,096 348,176 56,258 3,632,882 43,926
======== ====== ===== ======= ====== ========= ======
UNITS OUTSTANDING 366,983 27,533 6,909 192,826 44,278 1,538,294 20,065
======== ====== ===== ======= ====== ========= ======
NET ASSET VALUE PER UNIT $ 2.29 1.26 1.17 1.81 1.27 2.36 2.19
======== ====== ===== ======= ====== ========= ======
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
------------------------------------------------------------------------
Maturing Maturing Maturing Maturing
International Small Government Government Government Government Value
Assets Stock Company Bond 1998 Bond 2002 Bond 2006 Bond 2010 Stock
------ ------------- ------- ---------- ---------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments in shares of
Advantus Series Fund,
Inc.:
International Stock
Portfolio, 37,408
shares at net asset
value of $1.73 per
share (cost $59,659) $ 64,706 -- -- -- -- -- --
Small Company
Portfolio, 51,105
shares at net asset
value of $1.68 per
share (cost $79,644) -- 85,616 -- -- -- -- --
Maturing Government
Bond 1998 Portfolio, 0
shares at net asset
value of $0.00 per
share (cost $0) -- -- -- -- -- -- --
Maturing Government
Bond 2002 Portfolio,
1,128 shares at net
asset value of $1.11
per share (cost
$1,183) -- -- -- 1,247 -- -- --
Maturing Government
Bond 2006 Portfolio,
1,098 shares at net
asset value of $1.25
per share (cost
$1,190) -- -- -- -- 1,376 -- --
Maturing Government
Bond 2010 Portfolio,
1,368 shares at net
asset value of $1.41
per share (cost
$1,594) -- -- -- -- -- 1,929 --
Value Stock Portfolio,
39,689 shares at net
asset value of $1.76
per share (cost
$63,941) -- -- -- -- -- -- 69,834
-------- ------ ---- ----- ----- ----- ------
64,706 85,616 -- 1,247 1,376 1,929 69,834
Receivable from
Minnesota Life for
policy purchase
payments 77 58 -- -- -- 12 83
Receivable for
investments sold 1,844 1,116 -- -- -- 31 1,683
-------- ------ ---- ----- ----- ----- ------
Total assets 66,627 86,790 -- 1,247 1,376 1,972 71,600
-------- ------ ---- ----- ----- ----- ------
Liabilities
-----------
Payable to Minnesota
Life for policy
terminations and
mortality and expense
charges 1,844 1,116 -- -- -- 31 1,683
Payable for investments
purchased 77 58 -- -- -- 12 83
-------- ------ ---- ----- ----- ----- ------
Total liabilities 1,921 1,174 -- -- -- 43 1,766
-------- ------ ---- ----- ----- ----- ------
NET ASSETS APPLICABLE TO
POLICY OWNERS $ 64,706 85,616 -- 1,247 1,376 1,929 69,834
======== ====== ==== ===== ===== ===== ======
UNITS OUTSTANDING 43,902 61,821 -- 1,000 1,000 1,317 37,797
======== ====== ==== ===== ===== ===== ======
NET ASSET VALUE PER UNIT $ 1.47 1.38 0.00 1.25 1.38 1.46 1.85
======== ====== ==== ===== ===== ===== ======
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------------------------
Small Company Global Index 400 Macro-Cap Micro-Cap Contra- High Equity-
Assets Value Bond Mid-Cap Value Growth fund Income Income
------ ------------- ------ --------- --------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments in shares
of Advantus Series
Fund, Inc.:
Small Company Value
Portfolio, 15,711
shares at net asset
value of $.95 per
share (cost $15,328) $14,899 -- -- -- -- -- -- --
Global Bond Portfolio,
1,623 shares at net
asset value of $1.05
per share (cost
$1,780) -- 1,702 -- -- -- -- -- --
Index 400 Mid-Cap
Portfolio, 38,017
shares at net asset
value of $1.15 per
share (cost $34,053) -- -- 43,698 -- -- -- -- --
Macro-Cap Value
Portfolio, 2,994
shares at net asset
value of $1.14 per
share (cost $3,139) -- -- -- 3,412 -- -- -- --
Micro-cap Growth
Portfolio, 12,166
shares at net asset
value of $1.01 per
share (cost $10,872) -- -- -- -- 12,271 -- -- --
Investments in shares
of Fidelity Variable
Insurance
Products Fund II:
Contrafund Portfolio,
3,342 shares at net
asset value of $24.44
per share (cost
$58,197) -- -- -- -- -- 81,667 -- --
Investments in shares
of Fidelity Variable
Insurance
Products Fund:
High Income Portfolio,
4,066 shares at net
asset value of $11.53
per share (cost
$47,956) -- -- -- -- -- -- 46,883 --
Equity-Income
Portfolio, 2,579
shares at net asset
value of $25.42 per
share (cost $55,732) -- -- -- -- -- -- -- 65,549
------- ----- ------ ----- ------ ------ ------ ------
14,899 1,702 43,698 3,412 12,271 81,667 46,883 65,549
Receivable from
Minnesota Life for
policy purchase
payments 2 -- 1 8 -- -- -- --
Receivable for
investments sold 499 107 1,610 115 208 708 353 4886
------- ----- ------ ----- ------ ------ ------ ------
Total assets 15,400 1,809 45,309 3,535 12,479 82,375 47,236 66,035
------- ----- ------ ----- ------ ------ ------ ------
Liabilities
-----------
Payable to Minnesota
Life for policy
terminations and
mortality and expense
charges 499 107 1,610 115 208 708 353 486
Payable for investments
purchased 2 -- 1 8 -- -- -- --
------- ----- ------ ----- ------ ------ ------ ------
Total liabilities 501 107 1,611 123 208 708 353 486
------- ----- ------ ----- ------ ------ ------ ------
NET ASSETS APPLICABLE
TO POLICY OWNERS $14,899 1,702 43,698 3,412 12,271 81,667 46,883 65,549
======= ===== ====== ===== ====== ====== ====== ======
UNITS OUTSTANDING 16,611 1,536 41,729 3,110 12,020 45,878 39,421 43,536
======= ===== ====== ===== ====== ====== ====== ======
NET ASSET VALUE PER
UNIT $ 0.90 1.11 1.05 1.10 1.02 1.78 1.19 1.51
======= ===== ====== ===== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
---------------------------------------------------------------------
Money Asset Mortgage Index Capital
Growth Bond Market Allocation Securities 500 Appreciation
-------- ------ ------ ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income (loss):
Investment income dis-
tributions from under-
lying mutual fund (note
4) $ 5,665 302 318 6,348 129 21,908 --
Mortality and expense
charges (note 3) (3,239) (65) (33) (1,922) (81) (13,580) (154)
-------- ------ ---- -------- ------ -------- ------
Investment income
(loss)--net (2,426) 237 285 4,426 48 8,328 (154)
-------- ------ ---- -------- ------ -------- ------
Realized and unrealized
gains (losses) on invest-
ments--net:
Realized gain distribu-
tions from underlying
mutual fund (note 4) 90,098 64 -- 16,131 -- 13,732 1,213
-------- ------ ---- -------- ------ -------- ------
Realized gains on sales
of investments:
Proceeds from sales 55,329 5,653 257 371,678 7,311 292,166 7,215
Cost of investments
sold (51,929) (5,629) (257) (378,213) (7,264) (211,229) (6,362)
-------- ------ ---- -------- ------ -------- ------
3,400 24 -- (6,535) 47 80,937 853
-------- ------ ---- -------- ------ -------- ------
Net realized gains on
investments 93,498 88 -- 9,596 47 94,669 2,066
-------- ------ ---- -------- ------ -------- ------
Net change in unrealized
appreciation or
depreciation of
investments 113,739 (52) (1) 31,471 328 568,827 6,549
-------- ------ ---- -------- ------ -------- ------
Net gains (losses) on
investments 207,237 36 (1) 41,067 375 663,496 8,615
-------- ------ ---- -------- ------ -------- ------
Net increase in net assets
resulting from operations $209,663 273 284 45,493 423 671,824 8,461
======== ====== ==== ======== ====== ======== ======
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------------------
Maturing Maturing Maturing Maturing
Government Government Government Government
International Small Bond Bond Bond Bond Value
Stock Company 1998(a) 2002 2006 2010 Stock
------------- ------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual
fund (note 4) $ 335 -- 77 62 68 68 --
Mortality and expense
charges (note 3) (155) (490) (4) (6) (6) (8) (178)
-------- ------- ------ --- --- ---- -------
Investment income
(loss)--net 180 (490) 73 56 62 60 (178)
-------- ------- ------ --- --- ---- -------
Realized and unrealized
gains on investments--
net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 330 -- -- 13 5 1 33
-------- ------- ------ --- --- ---- -------
Realized gains (loss-
es) on sales of in-
vestments:
Proceeds from sales 12,481 48,307 1,145 6 6 225 13,797
Cost of investments
sold (11,992) (50,055) (1,127) (6) (6) (186) (13,529)
-------- ------- ------ --- --- ---- -------
489 (1,748) 18 -- -- 39 268
-------- ------- ------ --- --- ---- -------
Net realized gains
(losses) on invest-
ments 819 (1,748) 18 13 5 40 301
-------- ------- ------ --- --- ---- -------
Net change in
unrealized
appreciation or
depreciation of
investments 4,039 531 (52) 35 99 109 4,464
-------- ------- ------ --- --- ---- -------
Net gains (losses) on
investments 4,858 (1,217) (34) 48 104 149 4,765
-------- ------- ------ --- --- ---- -------
Net increase (decrease)
in net assets resulting
from operations $ 5,038 (1,707) 39 104 166 209 4,587
======== ======= ====== === === ==== =======
</TABLE>
- ------
(a) For the period from January 1, 1998 to September 18, 1998, termination of
the sub-account.
See accompanying notes to financial statements.
44
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
----------------------------------------------------------------------------
Small
Company Global Index 400 Macro-Cap Micro-Cap Contra- High Equity-
Value (a) Bond (a) Mid-Cap (a) Value (a) Growth (a) fund Income Income
--------- -------- ----------- --------- ---------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual
fund (note 4) $ 175 91 229 14 -- 302 2,809 629
Mortality and expense
charges (note 3) (40) (2) (56) (8) (28) (296) (207) (281)
------- ---- ------ ------ ------ ------ ------ ------
Investment income
(loss)--net 135 89 173 5 (28) 6 2,602 348
------- ---- ------ ------ ------ ------ ------ ------
Realized and unrealized
gains (losses) on in-
vestments--net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) -- 47 799 139 -- 2,216 1,796 2,230
------- ---- ------ ------ ------ ------ ------ ------
Realized gains (loss-
es) on sales of in-
vestments:
Proceeds from sales 7,942 772 8,479 1,904 3,948 6,132 6,425 8,598
Cost of investments
sold (8,471) (768) (7,680) (1,862) (4,075) (4,893) (6,477) (7,650)
------- ---- ------ ------ ------ ------ ------ ------
(529) 4 799 42 (127) 1,239 (52) 948
------- ---- ------ ------ ------ ------ ------ ------
Net realized gains
(losses) on invest-
ments (529) 51 1,598 181 (127) 3,455 1,744 3,178
------- ---- ------ ------ ------ ------ ------ ------
Net change in
unrealized
appreciation or
depreciation of
investments (429) (78) 9,645 273 1,399 12,800 (6,455) 1,822
------- ---- ------ ------ ------ ------ ------ ------
Net gains (losses) on
investments (958) (27) 11,243 454 1,272 16,255 (4,711) 5,000
------- ---- ------ ------ ------ ------ ------ ------
Net increase (decrease)
in net assets resulting
from operations $ (823) 62 11,416 460 1,244 16,261 (2,109) 5,348
======= ==== ====== ====== ====== ====== ====== ======
</TABLE>
- ------
(a) For the period from May 1, 1998, commencement of operations, to December
31, 1998.
See accompanying notes to financial statements.
45
<PAGE>
Minnesota Life 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 dis-
tributions from un-
derlying 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 invest-
ments 41,804 158 -- 20,617 53 452,204 3,927 588 6,016
-------- ---- ---- -------- ---- -------- ------ ------ -------
Net increase 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.
46
<PAGE>
Minnesota Life 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>
Investment income:
Investment income dis-
tributions from un-
derlying 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 apprecia-
tion 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.
47
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------------------------------------
Money Asset Mortgage Index Capital International Small
Growth Bond Market Allocation Securities 500 Appreciation Stock Company
------ ---- ------ ---------- ---------- -------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying 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
investments--net:
Realized gain
distributions from
underlying mutual
fund (note 4) 689 20 -- 214 -- 4,702 221 139 5,128
------ ---- ---- ---- ---- -------- ------ ------ ------
Realized gains on
sales of investments:
Proceeds from sales 1,863 498 859 441 241 122,254 2,445 2,242 5,459
Cost of investments
sold (1,769) (489) (859) (430) (238) (111,122) (2,219) (2,082) (5,051)
------ ---- ---- ---- ---- -------- ------ ------ ------
94 9 -- 11 3 11,132 226 160 408
------ ---- ---- ---- ---- -------- ------ ------ ------
Net realized gains on
investments 783 29 -- 225 3 15,834 447 299 5,536
------ ---- ---- ---- ---- -------- ------ ------ ------
Net change in
unrealized
appreciation or
depreciation of
investments 729 (40) -- 236 (9) 137,153 1,067 553 (2,764)
------ ---- ---- ---- ---- -------- ------ ------ ------
Net gains (losses) on
investments 1,512 (11) -- 461 (6) 152,987 1,514 852 2,772
------ ---- ---- ---- ---- -------- ------ ------ ------
Net increase in net
assets resulting from
operations $1,534 88 97 555 67 157,996 1,465 952 2,640
====== ==== ==== ==== ==== ======== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
Minnesota Life 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 (a) 2002 (a) 2006 (a) 2010 (a) Stock fund (a) Income (a) Income (a)
---------- ---------- ---------- ---------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual
fund (note 4) $-- 58 60 -- 67 -- -- --
Mortality and expense
charges (note 3) (3) (3) (3) (3) (35) (87) (87) (85)
---- --- --- --- ------ ----- ----- -----
Investment income
(loss)--net (3) 55 57 (3) 32 (87) (87) (85)
---- --- --- --- ------ ----- ----- -----
Realized and unrealized
gains on investments--
net:
Realized gain
distributions from
underlying 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
appreciation or
depreciation of
investments 47 4 22 101 1,007 3,528 2,144 1,988
---- --- --- --- ------ ----- ----- -----
Net gains on
investments 47 4 22 101 1,863 3,531 2,147 1,990
---- --- --- --- ------ ----- ----- -----
Net increase in net
assets resulting from
operations $ 44 59 79 98 1,895 3,444 2,060 1,905
==== === === === ====== ===== ===== =====
</TABLE>
- ------
(a) Period from May 1, 1996, commencement of operations, to December 31, 1996.
See accompanying notes to financial statements.
49
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-----------------------------------------------------------------------
Money Asset Mortgage Index Capital
Growth Bond Market Allocation Securities 500 Appreciation
-------- ------ ------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 2,426 237 285 4,426 48 8,328 (154)
Net realized gains on
investments 93,498 88 -- 9,596 47 94,669 2,066
Net change in
unrealized
appreciation or
depreciation of
investments 113,739 (52) (1) 31,471 328 568,827 6,549
-------- ------ ----- -------- ------ --------- ------
Net increase (decrease)
in net assets result-
ing from operations 209,663 273 284 45,493 423 671,824 8,461
-------- ------ ----- -------- ------ --------- ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 175,276 35,490 3,040 397,306 60,977 950,781 22,452
Policy withdrawals and
charges (52,090) (5,588) (224) (369,756) (7,231) (278,586) (7,061)
-------- ------ ----- -------- ------ --------- ------
Increase in net assets
from policy transac-
tions 123,186 29,902 2,816 27,550 53,746 672,195 15,391
-------- ------ ----- -------- ------ --------- ------
Increase in net assets 332,849 30,175 3,100 73,043 54,169 1,344,019 23,852
Net assets at the be-
ginning of year 507,068 4,423 4,996 275,133 2,089 2,288,863 20,074
-------- ------ ----- -------- ------ --------- ------
Net assets at the end
of year $839,917 34,598 8,096 348,176 56,258 3,632,882 43,926
======== ====== ===== ======== ====== ========= ======
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------------------
Maturing Maturing Maturing Maturing
Government Government Government Government
International Small Bond Bond Bond Bond Value
Stock Company 1998 (a) 2002 2006 2010 Stock
------------- ------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 180 (490) 73 56 62 60 (178)
Net realized gains
(losses) on invest-
ments 819 (1,748) 18 13 5 40 301
Net change in
unrealized
appreciation or
depreciation of
investments 4,039 531 (52) 35 99 109 4,464
-------- ------- ------ ----- ----- ----- -------
Net increase (decrease)
in net assets result-
ing from operations 5,038 (1,707) 39 104 166 209 4,587
-------- ------- ------ ----- ----- ----- -------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 61,082 46,415 -- -- 1 644 59,641
Policy withdrawals and
charges (12,326) (47,816) (1,141) -- -- (218) (13,619)
-------- ------- ------ ----- ----- ----- -------
Increase (decrease) in
net assets from policy
transactions 48,756 (1,401) (1,141) -- 1 426 46,022
-------- ------- ------ ----- ----- ----- -------
Increase (decrease) in
net assets 53,794 (3,108) (1,102) 104 167 635 50,609
Net assets at the be-
ginning of year 10,912 88,724 1,102 1,143 1,209 1,294 19,225
-------- ------- ------ ----- ----- ----- -------
Net assets at the end
of year $ 64,706 85,616 -- 1,247 1,376 1,929 69,834
======== ======= ====== ===== ===== ===== =======
</TABLE>
- ------
(a) For the period from January 1, 1998 to September 18, 1998, termination of
the sub-account.
See accompanying notes to financial statements.
51
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------------------------
Small Company Global Index 400 Macro-Cap Micro-Cap Contra- High Equity-
Value (a) Bond (a) Mid-Cap (a) Value (a) Growth (a) fund Income Income
------------- -------- ----------- --------- ---------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 135 89 173 6 (28) 6 2,602 348
Net realized gains
(losses) on invest-
ments (529) 51 1,598 181 (127) 3,455 1,744 3,178
Net change in
unrealized
appreciation or
depreciation of
investments (429) (78) 9,645 273 1,399 12,800 (6,455) 1,822
------- ----- ------ ------ ------ ------ ------ ------
Net increase (decrease)
in net assets result-
ing from operations (823) 62 11,416 460 1,244 16,261 (2,109) 5,348
------- ----- ------ ------ ------ ------ ------ ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 23,624 2,410 40,705 4,847 14,947 29,131 14,676 22,562
Policy withdrawals and
charges (7,902) (770) (8,423) (1,895) (3,920) (6,679) (5,480) (7,129)
------- ----- ------ ------ ------ ------ ------ ------
Increase (decrease) in
net assets from policy
transactions 15,722 1,640 32,282 2,952 11,027 22,452 9,196 15,433
------- ----- ------ ------ ------ ------ ------ ------
Increase (decrease) in
net assets 14,899 1,702 43,698 3,412 12,271 38,713 7,087 20,781
Net assets at the be-
ginning of year -- -- -- -- -- 42,954 39,796 44,768
------- ----- ------ ------ ------ ------ ------ ------
Net assets at the end
of year $14,899 1,702 43,698 3,412 12,271 81,667 46,883 65,549
======= ===== ====== ====== ====== ====== ====== ======
</TABLE>
- ------
(a) For the period from May 1, 1998, commencement of operations, to December
31, 1998.
See accompanying notes to financial statements.
52
<PAGE>
Minnesota Life 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
beginning 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.
53
<PAGE>
Minnesota Life 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
assets resulting from
operations 58 84 130 180 2,488 8,062 5,706 9,347
------ ----- ----- ----- ------ ------ ------ ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase
payments -- -- -- 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
beginning of year 1,044 1,059 1,079 1,098 8,451 33,831 31,965 32,229
------ ----- ----- ----- ------ ------ ------ ------
Net assets at the end
of period $1,102 1,143 1,209 1,294 19,225 42,954 39,796 44,768
====== ===== ===== ===== ====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------------------------------------------
Money Asset Mortgage Capital International Small
Growth Bond Market Allocation Securities Index 500 Appreciation Stock Company
------- ----- ------ ---------- ---------- --------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 22 99 97 94 73 5,009 (49) 100 (132)
Net realized gains on
investments 783 29 -- 225 3 15,834 447 299 5,536
Net change in
unrealized
appreciation or
depreciation of
investments 729 (40) -- 236 (9) 137,153 1,067 553 (2,764)
------- ----- ----- ----- ----- --------- ------ ------ ------
Net increase in net as-
sets resulting from
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 transac-
tions 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 be-
ginning 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.
55
<PAGE>
Minnesota Life 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 (a) 2002 (a) 2006 (a) 2010 (a) Stock fund (a) Income (a) Income (a)
---------- ---------- ---------- ---------- ------ -------- ---------- ----------
<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 apprecia-
tion or depreciation
of investments 47 4 22 101 1,007 3,528 2,144 1,988
------ ----- ----- ----- ------ ------ ------ ------
Net increase in net as-
sets resulting from
operations 44 59 79 98 1,895 3,444 2,060 1,905
------ ----- ----- ----- ------ ------ ------ ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 1,000 1,000 1,000 1,000 4,143 30,393 29,905 30,336
Policy withdrawals and
charges -- -- -- -- (2,251) (6) -- (12)
------ ----- ----- ----- ------ ------ ------ ------
Increase in net assets
from policy transac-
tions 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 be-
ginning 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>
- ------
(a) Period from May 1, 1996, commencement of operations, to December 31, 1996.
See accompanying notes to financial statements.
56
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements
(1) Organization
The Minnesota Life Variable Universal Life Account (the Account), formerly
Minnesota Mutual Variable Universal Life Account, was established on August 8,
1994 as a segregated asset account of Minnesota Life Insurance Company
(Minnesota Life), formerly The Minnesota Mutual Life Insurance Company, 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 twenty-one 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 Life. Variable universal life policy owners
allocate their purchase payments to one or more of the twenty-one segregated
sub-accounts. Such payments are then invested in shares of Advantus 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 2002, Maturing Government Bond 2006,
Maturing Government Bond 2010, Value Stock, Small Company Value, Global Bond,
Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth, 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
2002, Maturing Government Bond 2006, 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 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. The Maturing Government Bond 1998 Portfolio matured on September
18, 1998. Liquidation proceeds from the Maturing Government Bond 1998 sub-
account were reinvested in another sub-account at the direction of the contract
owner. If the contract owner did not direct the reinvestment, the proceeds were
automatically reinvested in the Money Market sub-account.
Ascend Financial Services, Inc. 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. is a wholly-owned
subsidiary of Advantus Capital Management, Inc. and Advantus Capital
Management, Inc. is a wholly-owned subsidiary of Minnesota Life.
(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 in the financial statements. 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.
57
<PAGE>
Minnesota Life 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 Life 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 Life 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 Life:
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, 1998, 1997 and 1996 amounted to $62,873, $59,103 and $27,054,
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, 1998, 1997 and 1996 amounted to $46,958,
$40,561 and $8,636, 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 Life under the Omnibus Budget
Reconciliation Act of 1990. Total federal tax charges for the years ended
December 31, 1998, 1997 and 1996 amounted to $11,463, $13,345 and $2,330,
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 Life. The amount of the partial surrender charge is the
lesser of $25 or two 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.
58
<PAGE>
Minnesota Life 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, 1998, 1997 and
1996 for each segregated sub-account (the years ended December 31, 1998 and
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 and the period from May 1, 1998, commencement of
operations, to December 31, 1998 for Small Company Value, Global Bond, Index
400 Mid-Cap, Macro-Cap Value and Micro-Cap Growth) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Growth $ 40,949 $ 10,042 $ 1,811
Bond 4,248 262 145
Money Market 137 426 847
Asset Allocation 71,457 16,920 418
Mortgage Securities 6,313 321 235
Index 500 216,911 123,551 105,767
Capital Appreciation 4,161 1,238 866
International Stock 9,357 957 375
Small Company 15,317 11,647 4,492
Maturing Government Bond 1998 -- -- --
Maturing Government Bond 2002 -- -- --
Maturing Government Bond 2006 -- -- --
Maturing Government Bond 2010 218 1 --
Value Stock 10,797 1,724 584
Small Company Value 4,286 -- --
Global Bond 769 -- --
Index 400 Mid-Cap 5,847 -- --
Macro-Cap Value 975 -- --
Micro-Cap Growth 1,705 -- --
Contrafund 5,031 66 14
High Income 2,774 116 1
Equity-Income 5,003 523 18
</TABLE>
59
<PAGE>
Minnesota Life 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 years ended December 31,
1998, 1997 and 1996 (the years ended December 31, 1998 and 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
and the period from May 1, 1998, commencement of operations, to December 31,
1998 for Small Company Value, Global Bond, Index 400 Mid-Cap, Micro-Cap Value
and Macro-Cap Growth):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Growth $271,039 $466,978 $ 8,337
Bond 35,856 1,852 1,400
Money Market 3,358 2,416 2,691
Asset Allocation 419,785 425,201 4,105
Mortgage Securities 61,106 873 565
Index 500 986,421 747,224 712,449
Capital Appreciation 23,665 8,113 6,368
International Stock 61,747 5,867 3,407
Small Company 46,415 41,541 19,149
Maturing Government Bond 1998 77 58 1,000
Maturing Government Bond 2002 75 64 1,058
Maturing Government Bond 2006 74 70 1,060
Maturing Government Bond 2010 713 76 1,000
Value Stock 59,674 11,921 4,750
Small Company Value 23,799 -- --
Global Bond 2,548 -- --
Index 400 Mid-Cap 41,733 -- --
Macro-Cap Value 5,000 -- --
Micro-Cap Growth 14,947 -- --
Contrafund 30,805 2,256 30,393
High Income 20,019 4,870 29,905
Equity-Income 26,609 7,198 30,336
</TABLE>
60
<PAGE>
Minnesota Life 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, 1998, 1997 and 1996 (the years ended December 31, 1998 and 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 and the period from May 1, 1998, commencement of operations,
to December 31, 1998 for Small Company Value, Global Bond, Index 400 Mid-Cap,
Macro-Cap Value and Micro-Cap Growth) 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, 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
Policy purchase pay-
ments 96,463 28,311 2,651 250,311 48,273 441,674
Deductions for policy
withdrawals and
charges (26,579) (4,497) (195) (244,928) (5,738) (135,365)
------- ------ ----- -------- ------ ---------
Units outstanding at
December 31, 1998 366,983 27,533 6,909 192,826 44,278 1,538,294
======= ====== ===== ======== ====== =========
</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, 1995 5,583 3,688 34,825 -- -- --
Policy purchase
payments 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
Policy purchase pay-
ments 12,007 44,437 35,516 -- -- --
Deductions for policy
withdrawals and
charges (3,869) (8,392) (38,240) (1,000) -- --
------ ------ ------- ------ ----- -----
Units outstanding at
December 31, 1998 20,065 43,902 61,821 -- 1,000 1,000
====== ====== ======= ====== ===== =====
</TABLE>
61
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements (continued)
(5) Unit Activity from Policy Transactions (continued)
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------
Maturing Small Index
Government Value Company Global 400
Bond 2010 Stock Value Bond Mid-Cap
---------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at De-
cember 31, 1995 -- 4,016 -- -- --
Policy purchase payments 1,000 3,817 -- -- --
Deductions for policy
withdrawals and charges -- (2,248) -- -- --
------ ------ ------ ------ ------
Units outstanding at
December 31, 1996 1,000 5,585 -- -- --
Policy purchase payments 12 5,958 -- -- --
Deductions for policy
withdrawals and charges -- (1,007) -- -- --
------ ------ ------ ------ ------
Units outstanding at
December 31, 1997 1,012 10,536 -- -- --
Policy purchase payments 458 34,961 25,192 2,266 50,672
Deductions for policy
withdrawals and charges (153) (7,700) (8,581) (730) (8,943)
------ ------ ------ ------ ------
Units outstanding at
December 31, 1998 1,317 37,797 16,611 1,536 41,729
====== ====== ====== ====== ======
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------
Macro-Cap Micro-Cap Contra- High Equity
Value Growth fund Income Income
---------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at De-
cember 31, 1995 -- -- -- -- --
Policy purchase payments -- -- 30,375 29,957 30,325
Deductions for policy
withdrawals and charges -- -- (14) (1) (19)
------ ------ ------ ------ ------
Units outstanding at
December 31, 1996 -- -- 30,361 29,956 30,306
Policy purchase payments -- -- 899 2,022 3,161
Deductions for policy
withdrawals and charges -- -- (52) (124) (443)
------ ------ ------ ------ ------
Units outstanding at
December 31, 1997 -- -- 31,208 31,854 33,024
Policy purchase payments 5,016 16,249 19,012 12,031 15,666
Deductions for policy
withdrawals and charges (1,906) (4,229) (4,342) (4,464) (5,154)
------ ------ ------ ------ ------
Units outstanding at
December 31, 1998 3,110 12,020 45,878 39,421 43,536
====== ====== ====== ====== ======
</TABLE>
62
<PAGE>
Minnesota Life 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 years ended December 31, 1998, 1997
and 1996 and the period from March 8, 1995, commencement of operations, to
December 31, 1995 (the years ended December 31, 1998 and 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
and the period from May 1, 1998, commencement of operations, to December 31,
1998 for Small Company Value, Global Bond, Index 400 Mid-Cap, Micro-Cap Value
and Micro-Cap Growth):
<TABLE>
<CAPTION>
Growth Bond
---------------------- --------------------
1998 1997 1996 1995 1998 1997 1996 1995
----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.71 1.29 1.10 1.00 1.19 1.09 1.07 1.00
----- ---- ---- ---- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) .01 (.01) -- (.01) .02 .05 .05 --
Net gains or losses on securities
(both realized and unrealized) .57 .43 .19 .11 .05 .05 (.03) .07
----- ---- ---- ---- ---- ---- ---- ----
Total from investment operations .58 .42 .19 .10 .07 .10 .02 .07
----- ---- ---- ---- ---- ---- ---- ----
Unit value, end of period $2.29 1.71 1.29 1.10 1.26 1.19 1.09 1.07
===== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
Money Market Asset Allocation
---------------------- --------------------
1998 1997 1996 1995 1998 1997 1996 1995
----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.12 1.07 1.03 1.00 1.47 1.24 1.11 1.00
----- ---- ---- ---- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) .05 .05 .04 .03 .02 -- .02 --
Net gains or losses on securities
(both realized and unrealized) .00 -- -- -- .32 .23 .11 .11
----- ---- ---- ---- ---- ---- ---- ----
Total from investment operations .05 .05 .04 .03 .34 .23 .13 .11
----- ---- ---- ---- ---- ---- ---- ----
Unit value, end of period $1.17 1.12 1.07 1.03 1.81 1.47 1.24 1.11
===== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
Mortgage Securities Index 500
---------------------- --------------------
1998 1997 1996 1995 1998 1997 1996 1995
----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.20 1.10 1.05 1.00 1.86 1.41 1.16 1.00
----- ---- ---- ---- ---- ---- ---- ----
Income from investment operations:
Net investment income (loss) -- .06 .06 (.01) .01 .01 .01 (.01)
Net gains or losses on securities
(both realized and unrealized) .07 .04 (.01) .06 .49 .44 .24 .17
----- ---- ---- ---- ---- ---- ---- ----
Total from investment operations .07 .10 .05 .05 .50 .45 .25 .16
----- ---- ---- ---- ---- ---- ---- ----
Unit value, end of period $1.27 1.20 1.10 1.05 2.36 1.86 1.41 1.16
===== ==== ==== ==== ==== ==== ==== ====
</TABLE>
63
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
<TABLE>
<CAPTION>
Capital Appreciation International Stock
----------------------- -----------------------------
1998 1997 1996 1995 1998 1997 1996 1995
----- ---- ---- ---- ---- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of
period $1.68 1.32 1.13 1.00 1.39 1.25 1.05 1.00
----- ---- ---- ---- ---- ------- ------ ------
Income from investment
operations:
Net investment income
(loss) (.01) (.01) (.01) -- -- .03 .02 --
Net gains or losses on
securities (both real-
ized and unrealized) .52 .37 .20 .13 .08 .11 .18 .05
----- ---- ---- ---- ---- ------- ------ ------
Total from investment
operations .51 .36 .19 .13 .08 .14 .20 .05
----- ---- ---- ---- ---- ------- ------ ------
Unit value, end of pe-
riod $2.19 1.68 1.32 1.13 1.47 1.39 1.25 1.05
===== ==== ==== ==== ==== ======= ====== ======
<CAPTION>
Maturing Government
Small Company Bond 1998
----------------------- ------------------------
1998 1997 1996 1995 1998 (a) 1997 1996
----- ---- ---- ---- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of
period $1.37 1.28 1.21 1.00 1.10 1.04 1.00
----- ---- ---- ---- ------- ------ ------
Income from investment
operations:
Net investment income
(loss) -- (.01) (.01) -- (.07) .05 (.01)
Net gains or losses on
securities (both real-
ized and unrealized) .01 .10 .08 .21 (.01) .01 .05
----- ---- ---- ---- ------- ------ ------
Total from investment
operations .01 .09 .07 .21 (.08) .06 .04
----- ---- ---- ---- ------- ------ ------
Transfer to other sub-
account due to liqui-
dation -- -- -- -- (1.02) -- --
----- ---- ---- ---- ------- ------ ------
Unit value, end of pe-
riod $1.38 1.37 1.28 1.21 -- 1.10 1.04
===== ==== ==== ==== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
Maturing Government Maturing Government Maturing Government
Bond 2002 Bond 2006 Bond 2010
--------------------- -------------------- --------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of
period $ 1.14 1.06 1.00 1.21 1.08 1.00 1.29 1.10 1.00
------- ------ ------ ------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income
(loss) .06 .05 .06 .06 .05 .06 .05 .05 --
Net gains or losses on
securities (both real-
ized and unrealized) .05 .03 -- .11 .08 .02 .12 .14 .10
------- ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .11 .08 .06 .17 .13 .08 .17 .19 .10
------- ------ ------ ------ ------ ------ ------ ------ ------
Unit value, end of pe-
riod $ 1.25 1.14 1.06 1.38 1.21 1.08 1.46 1.29 1.10
======= ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Small
Company Global Index 400 Macro-Cap Micro-Cap
Value Stock Value Bond Mid-Cap Value Growth
-------------------- -------- -------- --------- --------- ---------
1998 1997 1996 1995 1998 (b) 1998 (b) 1998 (b) 1998 (b) 1998 (b)
----- ---- ---- ---- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of
period $1.83 1.51 1.16 1.00 1.00 1.00 1.00 1.00 1.00
----- ---- ---- ---- ---- ---- ---- ---- ----
Income from investment
operations:
Net investment income
(loss) -- .02 .01 .01 -- -- .01 -- --
Net gains or losses on
securities (both real-
ized and unrealized) .02 .30 .34 .15 (.09) .11 .04 .10 .02
----- ---- ---- ---- ---- ---- ---- ---- ----
Total from investment
operations .02 .32 .35 .16 (.10) .11 .05 .10 .02
----- ---- ---- ---- ---- ---- ---- ---- ----
Unit value, end of pe-
riod $1.85 1.83 1.51 1.16 .90 1.11 1.05 1.10 1.02
===== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Contrafund High Income Equity-Income
--------------- --------------- --------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unit value, beginning of period $1.38 1.11 1.00 1.25 1.07 1.00 1.36 1.06 1.00
----- ---- ---- ---- ---- ---- ---- ---- ----
Income from investment opera-
tions:
Net investment income (loss) -- -- (.01) -- .07 -- -- .01 --
Net gains or losses on securi-
ties (both realized and
unrealized) .40 .26 .12 (.05) .11 .07 .15 .29 .06
----- ---- ---- ---- ---- ---- ---- ---- ----
Total from investment opera-
tions .40 .26 .11 (.06) .18 .07 .15 .30 .06
----- ---- ---- ---- ---- ---- ---- ---- ----
Unit value, end of period $1.78 1.38 1.11 1.19 1.25 1.07 1.51 1.36 1.06
===== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- -------
(a) For the period from January 1, 1998, to September 18, 1998, termination of
the sub-account.
(b)For the period from May 1, 1998, commencement of operations, to December 31,
1998.
64
<PAGE>
Independent Auditors' Report
The Board of Trustees of Minnesota Life Insurance Company
and Policy Owners of Minnesota Life Variable Universal Life Account:
We have audited the accompanying statements of assets and liabilities of the
Money Market and Index 500 Segregated Sub-Accounts of Minnesota Life Variable
Universal Life Account (the Account), formerly Minnesota Mutual Variable
Universal Life Account, as of December 31, 1998 and the related statements of
operations, statements of changes in net assets and the financial highlights
for the periods presented. 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 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, 1998 were verified by examination
of the underlying portfolios of the Advantus 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 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 Money Market and Index 500
Segregated Sub-Accounts of Minnesota Life Variable Universal Life Account at
December 31, 1998 and the results of their operations, changes in their net
assets and the financial highlights for the periods presented, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 26, 1999
65
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-
Accounts
---------------------
Money Index
Market 500
----------- ---------
<S> <C> <C>
Assets
Investments in shares of Advantus Series Fund, Inc.:
Money Market Portfolio, 43,160,311 shares at net asset
value of
$1.00 per share (cost $43,160,311) $43,160,311 --
Index 500 Portfolio, 394,994 shares at net asset value
of
$3.91 per share (cost $1,131,630) -- 1,544,399
----------- ---------
43,160,311 1,544,399
Receivable from Minnesota Life for policy purchase pay-
ments 4,882 --
Receivable from Advantus Series Funds, Inc. for invest-
ments sold 27,521 4,687
----------- ---------
Total assets 43,192,714 1,549,086
----------- ---------
Liabilities
Payable to Advantus Series Funds, Inc. for investments
purchased 4,882 --
Payable to Minnesota Life for policy terminations and
mortality and expense charges 27,521 4,687
----------- ---------
Total liabilities 32,403 4,687
----------- ---------
NET ASSETS APPLICABLE TO POLICY HOLDERS $43,160,311 1,544,399
=========== =========
UNITS OUTSTANDING 41,948,958 1,029,398
=========== =========
NET ASSET VALUE PER UNIT $ 1.03 1.50
=========== =========
</TABLE>
See accompanying notes to financial statements.
66
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-
Accounts
----------------------
Money
Market (a) Index 500
---------- -----------
<S> <C> <C>
Investment income:
Investment income distributions from underlying mu-
tual fund (note 4) $244,027 316,285
Mortality and expense charges (note 3) -- --
-------- -----------
Investment income--net 244,027 316,285
-------- -----------
Realized and unrealized gains on investments--net:
Realized gain distributions from underlying mutual
fund (note 4) -- 198,252
-------- -----------
Realized gains on sales of investments:
Proceeds from sales 129,618 39,015,646
Cost of investments sold (129,618) (30,557,278)
-------- -----------
-- 8,458,368
-------- -----------
Net realized gains on investments -- 8,656,620
-------- -----------
Net change in unrealized appreciation or deprecia-
tion of investments -- (2,478,153)
-------- -----------
Net gains on investments -- 6,178,467
-------- -----------
Net increase in net assets resulting from operations $244,027 6,494,752
======== ===========
</TABLE>
- -------
(a) For the period from May 28, 1998, commencement of operations, to December
31, 1998.
See accompanying notes to financial statements.
67
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Period from June 24, 1997, commencement of operations, to December 31, 1997
<TABLE>
<CAPTION>
Segregated
Sub-
Account
----------
Index 500
----------
<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.
68
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
------------------------
Money
Market (a) Index 500
----------- -----------
<S> <C> <C>
Operations:
Investment income--net $ 244,027 316,285
Net realized gains on investments -- 8,656,620
Net change in unrealized appreciation or deprecia-
tion of investments -- (2,478,153)
----------- -----------
Net increase in net assets resulting from operations 244,027 6,494,752
----------- -----------
Policy transactions (notes 3, 4 and 5):
Policy purchase payments 43,045,902 1,414,567
Policy withdrawals and charges (129,618) (39,015,646)
----------- -----------
Increase in net assets from policy transactions 42,916,284 (37,601,079)
----------- -----------
Increase in net assets 43,160,311 (31,106,327)
Net assets at the beginning of the year -- 32,650,726
----------- -----------
Net assets at the end of year $43,160,311 1,544,399
=========== ===========
</TABLE>
- -------
(a) For the period from May 28, 1998, commencement of operations, to December
31, 1998.
See accompanying notes to financial statements.
69
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Period from June 24, 1997, commencement of operations, to December 31, 1997
<TABLE>
<CAPTION>
Segregated
Sub-Account
-----------
Index 500
-----------
<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.
70
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements
(1) Organization
Minnesota Life Variable Universal Life Account (the Account), formerly the
Minnesota Mutual Variable Universal Life Account, was established on August 8,
1994 as a segregated asset account of Minnesota Life Insurance Company
(Minnesota Life), formerly The Minnesota Life Insurance Company, 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 1997. The Account
currently has twenty-one 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 Life. 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., 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 2002, Maturing Government Bond 2006,
Maturing Government Bond 2010, Value Stock, Small Company Value, Global Bond,
Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth, 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
2002, Maturing Government Bond 2006, 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 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, 1998, no policy purchase payments have been
allocated to the Growth, Bond, Asset Allocation, Mortgage Securities, Capital
Appreciation, International Stock, Small Company, Maturing Government Bond
2002, Maturing Government Bond 2006, Maturing Government Bond 2010, Value
Stock, Small Company Value, Global Bond, Index 400 Mid-Cap, Macro-Cap Value,
Macro-Cap Growth, Contrafund, High Income and Equity-Income segregated sub-
accounts.
Ascend Financial Services, Inc. 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. is a wholly-owned
subsidiary of Advantus Capital Management, Inc. and Advantus Capital
Management, Inc. is a wholly-owned subsidiary of Minnesota Life.
(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 the financial statements.
Actual results could differ from those estimates.
71
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements (continued)
(2) Summary of Significant Accounting Policies--Continued
Investments in Underlying Funds
Investments in shares of the Underlying Funds are stated at market value which
is the net asset value per share as determined daily by each of the Underlying
Funds. Investment transactions are accounted for on the date the shares are
purchased or sold. The cost of investments sold is determined on the average
cost method. All dividend distributions received from the Underlying Funds are
reinvested in additional shares of the Underlying Funds and are recorded by the
sub-accounts on the ex-dividend date.
Federal Income Taxes
The Account is treated as part of Minnesota Life 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 Life:
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 year ended December 31, 1998 and for the period from June 24, 1997,
commencement of operations, to December 31, 1997 amounted to $116,661 and
$612,208, 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 Life under the Omnibus Budget
Reconciliation Act of 1990. Total federal tax charges for the year ended
December 31, 1998 and for the period from June 24, 1997, commencement of
operations, to December 31, 1997 amounted to $72,913 and $382,630,
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 Life. The amount of the partial surrender charge is the
lesser of $25 or 2 percent of the amount withdrawn.
The cost of insurance charge varies with the amount of insurance, the
insured's age, rate class of the insured and gender mix of the group-sponsored
contract.
The total of cash value charges for the year ended December 31, 1998 and for
the period from June 24, 1997, commencement of operations, to December 31, 1997
for the segregated sub-accounts amounted to $322,974 and $86,194, respectively.
(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,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Index 500 Portfolio $ 1,929,104 29,841,774
Money Market Portfolio 43,289,929 --
</TABLE>
72
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements (continued)
(5) Unit Activity from Policy Transactions
Transactions in units for the Money Market and Index 500 segregated sub-
accounts for the periods ended December 31, 1998 and for the period from June
24, 1997, commencement of operations, to December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Money
Market Index 500
---------- -----------
<S> <C> <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
Policy purchase payments 42,064,010 1,011,961
Deductions for policy withdrawals and charges (115,052) (27,812,550)
---------- -----------
Units outstanding December 31, 1998 41,948,958 1,029,398
========== ===========
</TABLE>
(6) Financial Highlights
The following table for each segregated sub-account show certain data for an
accumulation unit outstanding.
<TABLE>
<CAPTION>
Money Market Index 500
------------ -------------
1998 (a) 1998 1997 (b)
------------ ---- --------
<S> <C> <C> <C>
Unit value, beginning of period $1.00 1.17 1.00
----- ---- ----
Income from investment operations:
Net investment income (loss) .03 .01 --
Net gains or losses on securities (both realized
and unrealized) -- .32 .17
----- ---- ----
Total from investment operations .03 .33 .17
----- ---- ----
Unit value, end of period $1.03 1.50 1.17
===== ==== ====
</TABLE>
- -------
(a) For the period from May 28, 1998, commencement of operations, to December
31, 1998.
(b) For the period from June 24, 1997, commencement of operations, to December
31, 1997.
73
<PAGE>
Independent Auditors' Report
The Board of Trustees of Minnesota Life Insurance Company
and Policy Owners of Minnesota Life 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, Maturing Government Bond 2010, Value Stock, Small Company Value,
Global Bond, Index 400 Mid-Cap, Micro-Cap Growth, Contrafund, High Income and
Equity-Income Segregated Sub-Accounts of Minnesota Life Variable Universal Life
Account (the Account), formerly Minnesota Mutual Variable Universal Life
Account, as of December 31, 1998 and the related statements of operations,
statements of changes in net assets and financial highlights for the periods
presented. 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 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, 1998 were confirmed to us by the
respective Sub-Account mutual fund group, or, for Advantus 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, Maturing
Government Bond 2010, Value Stock, Small Company Value, Global Bond, Index 400
Mid-Cap, Micro-Cap Growth, Contrafund, High Income and Equity-Income Segregated
Sub-Accounts of Minnesota Life Variable Universal Life Account at December 31,
1998 and the results of their operations, changes in their net assets and the
financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 26, 1999
74
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Assets and Liabilities
December 31, 1998
<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,
83,975 shares at net
asset value of $2.74
per share (cost
$191,898) $229,916 -- -- -- -- -- --
Bond Portfolio, 64,615
shares at net asset
value of $1.31 per
share (cost $83,251) -- 84,504 -- -- -- -- --
Money Market Portfolio,
281,289 shares at net
asset value of $1.00
per share (cost
$281,289) -- -- 281,289 -- -- -- --
Asset Allocation Port-
folio, 73,013 shares
at net asset value of
$2.28 per share (cost
$144,772) -- -- -- 166,386 -- -- --
Mortgage Securities
Portfolio, 2,289
shares at net asset
value of $1.22 per
share (cost $2,741) -- -- -- -- 2,787 -- --
Index 500 Portfolio,
155,669 shares at net
asset value of $3.91
per share (cost
$462,574) -- -- -- -- -- 608,655 --
Capital Appreciation
Portfolio, 35,609
shares at net asset
value of $3.54 per
share (cost $98,863) -- -- -- -- -- -- 125,925
-------- ------ ------- ------- ----- ------- -------
229,916 84,504 281,289 166,386 2,787 608,655 125,925
Receivable from Minne-
sota Life for policy
purchase payments 1,751 790 302 1,665 567 14,755 1,007
Receivable for invest-
ments sold 1,156 194 2,677 453 41 2,547 767
-------- ------ ------- ------- ----- ------- -------
Total assets 232,823 85,488 284,268 168,504 3,395 625,957 127,699
-------- ------ ------- ------- ----- ------- -------
Liabilities
-----------
Payable for investments
purchased 1,751 790 302 1,665 567 14,755 1,007
Payable to Minnesota
Life for policy termi-
nations and mortality
and expense charges 1,156 194 2,677 453 41 2,547 767
-------- ------ ------- ------- ----- ------- -------
Total liabilities 2,907 984 2,979 2,118 608 17,302 1,774
-------- ------ ------- ------- ----- ------- -------
NET ASSETS APPLICABLE TO
POLICY OWNERS $229,916 84,504 281,289 166,386 2,787 608,655 125,925
======== ====== ======= ======= ===== ======= =======
UNITS OUTSTANDING 130,186 72,918 257,062 114,829 2,405 375,754 76,078
======== ====== ======= ======= ===== ======= =======
NET ASSET VALUE PER UNIT $ 1.77 1.16 1.09 1.45 1.16 1.62 1.66
======== ====== ======= ======= ===== ======= =======
</TABLE>
See accompanying notes to financial statements.
75
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
----------------------------------------------------------
Maturing Maturing Small
International Small Government Government Value Company
Assets Stock Company Bond 2002 Bond 2010 Stock Value
------ ------------- ------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Investments in shares of
Advantus Series Fund,
Inc.:
International Stock
Portfolio, 66,833
shares at net asset
value of $1.73 per
share (cost $114,142) $115,606 -- -- -- -- --
Small Company Portfo-
lio, 88,316 shares at
net asset value of
$1.68 per share (cost
$137,391) -- 147,955 -- -- -- --
Maturing Government
Bond 2002 Portfolio, 6
shares at net asset
value of $1.11 per
share (cost $6) -- -- 6 -- -- --
Maturing Government
Bond 2010 Portfolio,
1,133 shares at net
asset value of $1.41
per share (cost
$1,508) -- -- -- 1,598 -- --
Value Stock Portfolio,
38,439 shares at net
asset value of $1.76
per share (cost
$67,747) -- -- -- -- 67,635 --
Small Company Value
Portfolio, 6,213
shares at net asset
value of $0.95 per
share (cost $6,241) -- -- -- -- -- 5,892
-------- ------- ---- ----- ------ -----
115,606 147,955 6 1,598 67,635 5,892
Receivable from Minne-
sota Life for policy
purchase payments 1,357 1,374 -- 7 1,204 112
Receivable for invest-
ments sold 315 452 -- 3 695 31
-------- ------- ---- ----- ------ -----
Total assets 117,278 149,781 6 1,608 69,534 6,035
-------- ------- ---- ----- ------ -----
<CAPTION>
Liabilities
-----------
<S> <C> <C> <C> <C> <C> <C>
Payable for investments
purchased 1,357 1,374 -- 7 1,204 112
Payable to Minnesota
Life for policy termi-
nations and mortality
and expense charges 315 452 -- 3 695 31
-------- ------- ---- ----- ------ -----
Total liabilities 1,672 1,826 -- 10 1,899 143
-------- ------- ---- ----- ------ -----
NET ASSETS APPLICABLE TO
POLICY OWNERS $115,606 147,955 6 1,598 67,635 5,892
======== ======= ==== ===== ====== =====
UNITS OUTSTANDING 98,078 134,879 5 1,433 57,226 6,152
======== ======= ==== ===== ====== =====
NET ASSET VALUE PER UNIT $ 1.18 1.10 1.20 1.12 1.18 0.96
======== ======= ==== ===== ====== =====
</TABLE>
See accompanying notes to financial statements.
76
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Assets and Liabilities
December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------
Index-
400 Micro-
Global Mid- Cap Contra- High Equity-
Assets Bond Cap Growth fund Income Income
------ ------ ------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Investments in shares of Advantus
Series Fund, Inc.:
Global Bond Portfolio, 219 shares
at net asset value of $1.05 per
share (cost $230) $230 -- -- -- -- --
Index--400 Mid-Cap Portfolio,
21,380 shares at net asset value
of $1.15 per share (cost
$22,560) -- 24,574 -- -- -- --
Micro-Cap Growth Portfolio,
24,303 shares at net asset value
of $1.01 per share (cost
$22,739) -- -- 24,513 -- -- --
Investments in shares of Fidelity
Variable Insurance Products Fund
II:
Contrafund Portfolio, 7,779
shares at net asset value of
$24.44 per share (cost $145,260) -- -- -- 190,116 -- --
Investments in shares of Fidelity
Variable Insurance Products Fund:
High Income Portfolio, 2,923
shares at net asset value of
$11.53 per share (cost $36,376) -- -- -- -- 33,705 --
Equity-Income Portfolio, 10,280
shares at net asset value of
$25.42 per share ($236,347) -- -- -- -- -- 261,333
----- ------ ------ ------- ------ -------
230 24,574 24,513 190,116 33,705 261,333
Receivable from Minnesota Life for
policy purchase payments 37 219 388 2,273 522 2,967
Receivable for investments sold 34 159 123 557 387 1,003
----- ------ ------ ------- ------ -------
Total assets 301 24,952 25,024 192,946 34,614 265,303
----- ------ ------ ------- ------ -------
<CAPTION>
Liabilities
-----------
<S> <C> <C> <C> <C> <C> <C>
Payable for investments purchased 37 219 388 2,283 522 2,967
Payable to Minnesota Life for pol-
icy terminations and mortality
and expense charges 34 159 123 557 387 1,003
----- ------ ------ ------- ------ -------
Total liabilities 71 378 511 2,830 909 3,970
----- ------ ------ ------- ------ -------
NET ASSETS APPLICABLE TO POLICY
OWNERS $ 230 24,574 24,513 190,116 33,705 261,133
===== ====== ====== ======= ====== =======
UNITS OUTSTANDING 201 20,595 22,912 121,035 30,421 188,227
===== ====== ====== ======= ====== =======
NET ASSET VALUE PER UNIT $1.14 1.19 1.07 1.57 1.11 1.39
===== ====== ====== ======= ====== =======
</TABLE>
See accompanying notes to financial statements.
77
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------------------------------
Money Asset Mortgage Index Capital
Growth Bond Market Allocation Securities 500 Appreciation
------- ------- -------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income dis-
tributions from un-
derlying mutual fund
(note 4) $ 1,479 4,548 10,185 2,999 713 3,620 --
Mortality and expense
charges (note 3) (471) (209) (530) (377) (27) (1,252) (392)
------- ------- -------- ------- ------- ------- -------
Investment income
(loss)--net 1,008 4,339 9,655 2,622 686 2,368 (392)
------- ------- -------- ------- ------- ------- -------
Realized and unrealized
gains (losses) on in-
vestments--net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 23,525 958 -- 7,621 -- 2,269 7,915
------- ------- -------- ------- ------- ------- -------
Realized gains on
sales of investments:
Proceeds from sales 34,433 17,105 102,881 32,223 14,569 79,368 82,966
Cost of investments
sold (32,367) (17,107) (102,881) (30,792) (14,150) (64,334) (86,999)
------- ------- -------- ------- ------- ------- -------
2,066 (2) -- 1,431 419 15,034 (4,033)
------- ------- -------- ------- ------- ------- -------
Net realized gains on
investments 25,591 956 -- 9,052 419 17,303 3,882
------- ------- -------- ------- ------- ------- -------
Net change in
unrealized apprecia-
tion or depreciation
of investments 29,302 (666) -- 17,168 (266) 97,951 16,348
------- ------- -------- ------- ------- ------- -------
Net gains on invest-
ments 54,893 290 -- 26,220 153 115,254 20,230
------- ------- -------- ------- ------- ------- -------
Net increase in net as-
sets resulting from op-
erations $55,901 4,629 9,655 28,842 839 117,622 19,838
======= ======= ======== ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
78
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
---------------------------------------------------------------
Maturing Maturing
Government Government Small
International Small Bond Bond Value Company
Stock Company 2002 2010 (a) Stock Value (a)
------------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investment income
(loss):
Investment income
distributions from
underlying mutual
fund (note 4) $2,046 -- 152 68 -- 77
Mortality and expense
charges (note 3) (211) (307) (54) (3) (144) (11)
------ ------ ------- --- ------- ------
Investment income
(loss)--net 1,835 (307) 98 65 (144) 66
------ ------ ------- --- ------- ------
Realized and unrealized
gains (losses) on in-
vestments--net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 2,015 -- 65 1 106 --
------ ------ ------- --- ------- ------
Realized gains (loss-
es) on sales of in-
vestments:
Proceeds from sales 9,873 8,013 24,529 44 36,105 1,465
Cost of investments
sold (9,353) (7,461) (21,604) (43) (36,216) (1,451)
------ ------ ------- --- ------- ------
520 552 2,925 1 (111) 14
------ ------ ------- --- ------- ------
Net realized gains
(losses) on invest-
ments 2,535 552 2,990 2 (5) 14
------ ------ ------- --- ------- ------
Net change in
unrealized
appreciation or
depreciation of
investments (1,064) 561 (900) 90 3,143 (349)
------ ------ ------- --- ------- ------
Net gains (losses) on
investments 1,471 1,113 2,090 92 3,138 (335)
------ ------ ------- --- ------- ------
Net increase (decrease)
in net assets resulting
from operations $3,306 806 2,188 157 2,994 (269)
====== ====== ======= === ======= ======
</TABLE>
- ------
(a) Period from January 22, 1998, commencement of operations, to December 31,
1998.
See accompanying notes to financial statements.
79
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Operations
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
-------------------------------------------------------
Index-
400
Global Mid- Micro-Cap Contra- High Equity-
Bond (a) Cap (a) Growth (a) fund Income Income
-------- ------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Investment income:
Investment income
distributions from
underlying mutual
fund (note 4) $ 54 159 -- 753 2,086 3,232
Mortality and expense
charges (note 3) (13) (47) -- (474) (22) (1,272)
------ ------- ------ ------- ------- --------
Investment income--
net 41 112 -- 279 2,064 1,960
------ ------- ------ ------- ------- --------
Realized and unrealized
gains (losses) on in-
vestments--net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 6 433 -- 5,519 1,334 11,459
------ ------- ------ ------- ------- --------
Realized gains (loss-
es) on sales of in-
vestments:
Proceeds from sales 6,712 11,681 1,236 20,232 15,635 95,808
Cost of investments
sold (6,107) (10,381) (1,282) (17,309) (17,727) (101,707)
------ ------- ------ ------- ------- --------
605 1,300 (46) 2,923 (2,092) (5,899)
------ ------- ------ ------- ------- --------
Net realized gains
(losses) on invest-
ments 611 1,733 (46) 8,442 (758) 5,560
------ ------- ------ ------- ------- --------
Net change in
unrealized
appreciation or
depreciation of
investments -- 2,014 1,774 30,833 (4,708) 5,810
------ ------- ------ ------- ------- --------
Net gains (losses) on
investments 611 3,747 1,728 39,275 (5,466) 11,370
------ ------- ------ ------- ------- --------
Net increase (decrease)
in net assets resulting
from operations $ 652 3,859 1,728 39,554 (3,402) 13,330
====== ======= ====== ======= ======= ========
</TABLE>
- ------
(a) Period from January 22, 1998, commencement of operations, to December 31,
1998.
See accompanying notes to financial statements.
80
<PAGE>
Minnesota Life 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 0
Mortality and expense
charges (note 3) (217) (105) (249) (122) (24) (541 (165)
------- ------- ------- ------- --- ------- -------
Investment income
(loss)--net 424 3,415 4,796 1,142 391 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 invest-
ments:
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
appreciation 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 55,374 12,274
------- ------- ------- ------- --- ------- -------
Net increase in net
assets resulting from
operations $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.
81
<PAGE>
Minnesota Life 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 (losses) on in-
vestments--net:
Realized gain distri-
butions from under-
lying mutual fund
(note 4) 636 -- -- 4,168 1,217 157 11,800
------ ------ ----- ------ ------ ------ -------
Realized gains (loss-
es) on sales of in-
vestments:
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.
82
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
------------------------------------------------------------------------
Money Asset Mortgage Index Capital
Growth Bond Market Allocation Securities 500 Appreciation
-------- ------- -------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 1,008 4,339 9,655 2,622 686 2,368 (392)
Net realized gains on
investments 25,591 956 -- 9,052 419 17,303 3,882
Net change in
unrealized
appreciation or
depreciation of
investments 29,302 (666) -- 17,168 (266) 97,951 16,348
-------- ------- -------- ------- ------- ------- -------
Net increase in net as-
sets resulting from op-
erations 55,901 4,629 9,655 28,842 839 117,622 19,838
-------- ------- -------- ------- ------- ------- -------
Policy transactions
(notes 3, 4 and 5):
Policy purchase
payments 86,380 43,931 274,087 108,084 4,607 268,165 95,285
Policy withdrawals and
charges (33,962) (16,895) (102,351) (31,846) (14,542) (78,116) (82,574)
-------- ------- -------- ------- ------- ------- -------
Increase in net assets
from policy transac-
tions 52,418 27,036 171,736 76,238 (9,935) 190,049 12,711
-------- ------- -------- ------- ------- ------- -------
Increase in net assets 108,319 31,665 181,391 105,080 (9,096) 307,671 32,549
Net assets at the begin-
ning of year 121,597 52,839 99,898 61,306 11,883 300,984 93,376
-------- ------- -------- ------- ------- ------- -------
Net assets at the end of
year $229,916 84,504 281,289 166,386 2,787 608,655 125,925
======== ======= ======== ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
83
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
---------------------------------------------------------------
Maturing Maturing
Government Government Small
International Small Bond Bond Value Company
Stock Company 2002 2010 (a) Stock Value (a)
------------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Investment income
(loss)--net $ 1,835 (307) 98 65 (144) 66
Net realized gains
(losses) on invest-
ments 2,535 552 2,990 2 (5) 14
Net change in
unrealized
appreciation or
depreciation of
investments (1,064) 561 (900) 90 3,143 (349)
-------- ------- ------- ----- ------- ------
Net increase (decrease)
in net assets result-
ing from operations 3,306 806 2,188 157 2,994 (269)
-------- ------- ------- ----- ------- ------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 59,942 55,208 514 1,481 49,847 7,615
Policy withdrawals and
charges (9,662) (7,706) (24,476) (40) (35,961) (1,454)
-------- ------- ------- ----- ------- ------
Increase (decrease) in
net assets from policy
transactions 50,280 47,502 (23,962) 1,441 13,886 6,161
-------- ------- ------- ----- ------- ------
Increase (decrease) in
net assets 53,586 48,308 (21,774) 1,598 16,880 5,892
Net assets at the be-
ginning of year 62,020 99,647 21,780 -- 50,755 --
-------- ------- ------- ----- ------- ------
Net assets at the end
of year $115,606 147,955 6 1,598 67,635 5,892
======== ======= ======= ===== ======= ======
</TABLE>
- ------
(a) Period from January 22, 1998, commencement of operations, to December 31,
1998.
See accompanying notes to financial statements.
84
<PAGE>
Minnesota Life Variable Universal Life Account
Statements of Changes in Net Assets
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Segregated Sub-Accounts
---------------------------------------------------------
Index-400
Global Mid- Micro-Cap Contra- High Equity-
Bond (a) Cap (a) Growth (a) fund Income Income
-------- --------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Investment income--net $ 41 112 -- 279 2,064 1,960
Net realized gains
(losses) on invest-
ments 611 1,733 (46) 8,442 (758) 5,560
Net change in
unrealized
appreciation or
depreciation of
investments -- 2,014 1,774 30,833 (4,708) 5,810
------- ------- ------ ------- ------- --------
Net increase (decrease)
in net assets result-
ing from operations 652 3,859 1,728 39,554 (3,402) 13,330
------- ------- ------ ------- ------- --------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 6,278 32,349 24,021 64,191 24,541 154,931
Policy withdrawals and
charges (6,700) (11,634) (1,236) (12,843) (14,987) (102,946)
------- ------- ------ ------- ------- --------
Increase (decrease) in
net assets from policy
transactions (422) 20,715 22,785 51,348 9,554 51,895
------- ------- ------ ------- ------- --------
Increase in net assets 230 24,574 24,513 90,902 6,152 65,315
Net assets at the be-
ginning of year -- -- -- 99,214 27,553 196,018
------- ------- ------ ------- ------- --------
Net assets at the end
of year $ 230 24,574 24,513 190,116 33,705 261,133
======= ======= ====== ======= ======= ========
</TABLE>
- ------
(a) Period from January 22, 1998, commencement of operations, to December 31,
1998.
See accompanying notes to financial statements.
85
<PAGE>
Minnesota Life 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
(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 increase in net as-
sets resulting from
operations 25,632 4,242 4,796 8,439 903 57,274 12,109
-------- ------- ------- ------- ------ ------- -------
Policy transactions
(notes 3, 4 and 5):
Policy purchase pay-
ments 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 be-
ginning 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.
86
<PAGE>
Minnesota Life 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 apprecia-
tion 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
operations 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 transac-
tions 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 be-
ginning 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.
87
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements
(1) Organization
The Minnesota Life Variable Universal Life Account (the Account), formerly
Minnesota Mutual Variable Universal Life Account, was established on August 8,
1994 as a segregated asset account of Minnesota Life Insurance Company
(Minnesota Life), formerly The Minnesota Mutual Life Insurance Company, 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 1997. The Account
currently has twenty-one 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 Life. Variable universal life policy owners
allocate their purchase payments to one or more of the twenty-one segregated
sub-accounts. Such payments are then invested in shares of Advantus 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 2002, Maturing Government Bond 2006,
Maturing Government Bond 2010, Value Stock, Small Company Value, Global Bond,
Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth, 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
2002, Maturing Government Bond 2006, 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 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, 1998, no policy purchase payments have been
allocated to the Maturing Government Bond 2006 and Macro-Cap Value segregated
sub-accounts.
Ascend Financial Services, Inc. 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. is a wholly-owned
subsidiary of Advantus Capital Management, Inc. and Advantus Capital
Management, Inc. is a wholly-owned subsidiary of Minnesota Life.
(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 in the financial statements. Actual results
could differ from those estimates.
88
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
Investments in Underlying Funds
Investments in shares of the Underlying Funds are stated at market value which
is the net asset value per share as determined daily by each of the Underlying
Funds. Investment transactions are accounted for on the date the shares are
purchased or sold. The cost of investments sold is determined on the average
cost method. All dividend distributions received from the Underlying Funds are
reinvested in additional shares of the Underlying Funds and are recorded by the
sub-accounts on the ex-dividend date.
Federal Income Taxes
The Account is treated as part of Minnesota Life 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 Life 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 Life:
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 year ended December 31, 1998 and for the period from January 24,
1997, commencement of operations, to December 31, 1997 amounted to $13,119
and $7,439, 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 Life under the Omnibus Budget
Reconciliation Act of 1990. Total federal tax charges for the year ended
December 31, 1998 and for the period from January 24, 1997, commencement of
operations, to December 31, 1997 amounted to $1,640 and $931, 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 Life. 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.
89
<PAGE>
Minnesota Life 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 each segregated sub-account for the
periods ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Growth 7,085 2,078
Bond 2,156 614
Money Market 2,792 864
Asset Allocation 5,964 3,121
Mortgage Securities 268 66
Index 500 19,388 9,012
Capital Appreciation 4,813 1,713
International Stock 3,007 932
Small Company 3,685 2,293
Maturing Government Bond 2002 367 387
Maturing Government Bond 2010 40 --
Value Stock 4,673 1,744
Small Company Value 408 --
Global Bond 246 --
Index 400 Mid-Cap 1,705 --
Micro-Cap Growth 1,054 --
Contrafund 6,440 3,024
High Income 1,358 590
Equity-Income 10,365 5,217
</TABLE>
(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,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Growth Portfolio 111,384 115,985
Bond Portfolio 49,437 72,619
Money Market Portfolio 284,272 152,012
Asset Allocation Portfolio 118,704 84,890
Mortgage Securities Portfolio 5,320 11,661
Index 500 Portfolio 274,054 285,282
Capital Appreciation Portfolio 103,200 154,024
International Stock Portfolio 64,002 61,105
Small Company Portfolio 55,208 92,545
Maturing Government Bond 2002 730 21,287
Maturing Government Bond 2010 1,551 --
Value Stock Portfolio 49,953 56,370
Small Company Value 7,693 --
Global Bond 6,337 --
Index 400 Mid-Cap 32,940 --
Micro-Cap Growth 24,021 --
Contrafund Portfolio 77,379 90,161
High Income Portfolio 30,879 28,586
Equity-Income Portfolio 161,214 251,645
</TABLE>
90
<PAGE>
Minnesota Life 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 periods ended
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Segregated Sub-Accounts
----------------------------------------------------------------------
Money Asset Mortgage Index Capital
Growth Bond Market Allocation Securities 500 Appreciation
------- ------- ------- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at Decem-
ber 31, 1996 -- -- -- -- -- -- --
Policy purchase payments 95,561 98,245 145,825 79,600 11,046 327,703 140,211
Deductions for policy
withdrawals and charges (2,997) (49,950) (50,225) (27,437) (147) (90,917) (66,657)
------- ------- ------- ------- ------- ------- -------
Units outstanding at Decem-
ber 31, 1997 92,564 48,295 95,600 52,163 10,899 236,786 73,554
Policy purchase payments 59,637 39,490 257,171 87,742 4,053 192,364 69,526
Deductions for policy
withdrawals and charges (22,015) (14,867) (95,709) (25,076) (12,547) (53,396) (67,002)
------- ------- ------- ------- ------- ------- -------
Units outstanding at Decem-
ber 31, 1998 130,186 72,918 257,062 114,829 2,405 375,754 76,078
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Segregated Sub-Accounts
--------------------------------------------------------------
Maturing Maturing Small
International Small Government Government Value Company
Stock Company Bond 2002 Bond 2010 Stock Value
------------- --------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at Decem-
ber 31, 1996 -- -- -- -- -- --
Policy purchase payments 87,295 124,772 20,227 46,627
Deductions for policy
withdrawals and charges (31,311) (33,022) (369) -- (3,033) --
------- ------- ------- ------- ------- -------
Units outstanding at Decem-
ber 31, 1997 55,984 91,750 19,858 -- 43,594 --
Policy purchase payments 49,950 50,188 457 1,471 43,327 7,544
Deductions for policy
withdrawals and charges (7,857) (7,059) (20,310) (38) (29,695) (1,392)
------- ------- ------- ------- ------- -------
Units outstanding at Decem-
ber 31, 1998 98,077 134,879 5 1,433 57,226 6,152
======= ======= ======= ======= ======= =======
<CAPTION>
Segregated Sub-Account
--------------------------------------------------------------
Index 400 Micro-Cap Contra- High Equity-
Global Bond Mid-Cap Growth fund Income Income
------------- --------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Units outstanding at Decem-
ber 31, 1996 -- -- -- -- -- --
Policy purchase payments -- -- -- 86,803 26,593 228,062
Deductions for policy
withdrawals and charges -- -- -- (4,909) (2,861) (71,197)
------- ------- ------- ------- ------- -------
Units outstanding at Decem-
ber 31, 1997 -- -- -- 81,894 23,732 156,865
Policy purchase payments 6,237 30,899 24,167 48,607 20,833 117,650
Deductions for policy
withdrawals and charges (6,036) (10,304) (1,255) (9,466) (14,144) (86,288)
------- ------- ------- ------- ------- -------
Units outstanding at Decem-
ber 31, 1998 201 20,595 22,912 121,035 30,421 188,227
======= ======= ======= ======= ======= =======
</TABLE>
91
<PAGE>
Minnesota Life 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 periods indicated:
<TABLE>
<CAPTION>
Growth Bond
-------------- -------------
1998 1997 (b) 1998 1997 (b)
----- -------- ---- --------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.31 1.00 1.10 1.00
----- ---- ---- ----
Income from investment operations:
Net investment income 0.01 0.01 0.06 0.08
Net gains or losses on securities (both realized
and unrealized) 0.45 0.30 -- 0.02
----- ---- ---- ----
Total from investment operations 0.46 0.31 0.06 0.10
----- ---- ---- ----
Unit value, end of period $1.77 1.31 1.16 1.10
===== ==== ==== ====
<CAPTION>
Money Asset
Market Allocation
-------------- -------------
1998 1997 (b) 1998 1997 (b)
----- -------- ---- --------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.05 1.00 1.18 1.00
----- ---- ---- ----
Income from investment operations:
Net investment income 0.04 0.05 0.03 0.02
Net gains or losses on securities (both realized
and unrealized) -- -- 0.24 0.16
----- ---- ---- ----
Total from investment operations 0.04 0.05 0.27 0.18
----- ---- ---- ----
Unit value, end of period $1.09 1.05 1.45 1.18
===== ==== ==== ====
<CAPTION>
Mortgage
Securities Index 500
-------------- -------------
1998 1997 (b) 1998 1997(a)
----- -------- ---- --------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.09 1.00 1.27 1.00
----- ---- ---- ----
Income from investment operations:
Net investment income 0.07 0.06 0.01 0.01
Net gains or losses on securities (both realized
and unrealized) -- 0.03 0.34 0.26
----- ---- ---- ----
Total from investment operations 0.07 0.09 0.35 0.27
----- ---- ---- ----
Unit value, end of period $1.16 1.09 1.62 1.27
===== ==== ==== ====
</TABLE>
- -------
(a) Period from January 24, 1997, commencement of operations, to December 31,
1997.
(b) Period from January 29, 1997, commencement of operations, to December 31,
1997.
92
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
<TABLE>
<CAPTION>
Capital International
Appreciation Stock
------------------- -------------
1998 1997 (b) 1998 1997 (b)
---------- -------- ---- --------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.27 1.00 1.11 1.00
----- ---- ---- ----
Income from investment operations:
Net investment income -- -- 0.02 0.03
Net gains or losses on securities (both re-
alized and unrealized) 0.39 0.27 0.05 0.08
----- ---- ---- ----
Total from investment operations 0.39 0.27 0.07 0.11
----- ---- ---- ----
Unit value, end of period $1.66 1.27 1.18 1.11
===== ==== ==== ====
<CAPTION>
Maturing
Small Government
Company Bond 2002
------------------- -------------
1998 1997 (a) 1998 1997 (c)
---------- -------- ---- --------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.09 1.00 1.10 1.00
----- ---- ---- ----
Income from investment operations:
Net investment income -- -- -- 0.05
Net gains or losses on securities (both re-
alized and unrealized) 0.01 0.09 0.10 0.05
----- ---- ---- ----
Total from investment operations 0.01 0.09 0.10 0.10
----- ---- ---- ----
Unit value, end of period $1.10 1.09 1.20 1.10
===== ==== ==== ====
<CAPTION>
Maturing
Government
Bond 2010 Value Stock
---------- -------------
1998 (d) 1998 1997 (a)
---------- ---- --------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.00 1.16 1.00
----- ---- ----
Income from investment operations:
Net investment income 0.01 -- 0.02
Net gains or losses on securities (both re-
alized and unrealized) 0.11 0.02 0.14
----- ---- ----
Total from investment operations 0.12 0.02 0.16
----- ---- ----
Unit value, end of period $1.12 1.18 1.16
===== ==== ====
</TABLE>
- -------
(a) Period from January 24, 1997, commencement of operations, to December 31,
1997.
(b) Period from January 29, 1997, commencement of operations, to December 31,
1997.
(c) Period from April 2, 1997, commencement of operations, to December 31,
1997.
(d) Period from January 22, 1998, commencement of operations, to December 31,
1998.
93
<PAGE>
Minnesota Life Variable Universal Life Account
Notes to Financial Statements (continued)
(6) Financial Highlights (continued)
<TABLE>
<CAPTION>
Small
Company Global Index 400 Micro-Cap
Value Bond Mid-Cap Growth
-------- -------- --------- ---------
1998 (b) 1998 (b) 1998 (b) 1998(b)
-------- -------- --------- ---------
<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 0.01 0.01 0.01 --
Net gains or losses on securities (both
realized and unrealized) (0.05) 0.13 0.18 0.07
----- ---- ----- ----
Total from investment operations (0.04) 0.14 0.19 0.07
----- ---- ----- ----
Unit value, end of period $0.96 1.14 1.19 1.07
===== ==== ===== ====
<CAPTION>
Contrafund High Income
----------------- -------------------
1998 1997 (a) 1998 1997 (a)
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.21 1.00 1.16 1.00
----- ---- ----- ----
Income from investment operations:
Net investment income -- -- 0.06 0.06
Net gains or losses on securities (both
realized and unrealized) 0.36 0.21 (0.11) 0.10
----- ---- ----- ----
Total from investment operations 0.36 0.21 (0.05) 0.16
----- ---- ----- ----
Unit value, end of period $1.57 1.21 1.11 1.16
===== ==== ===== ====
<CAPTION>
Equity-Income
-----------------
1998 1997 (a)
-------- --------
<S> <C> <C> <C> <C>
Unit value, beginning of period $1.25 1.00
----- ----
Income from investment operations:
Net investment income 0.01 0.02
Net gains or losses on securities (both
realized and unrealized) 0.13 0.23
----- ----
Total from investment operations 0.14 0.25
----- ----
Unit value, end of period $1.39 1.25
===== ====
</TABLE>
- -------
(a) Period from January 29, 1997, commencement of operations, to December 31,
1997.
(a) Period from January 22, 1998, commencement of operations, to December 31,
1998.
94
<PAGE>
Independent Auditors' Report
The Board of Directors
Minnesota Life Insurance Company
We have audited the accompanying consolidated balance sheets of the Minnesota
Life Insurance Company and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive income,
changes in stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1998. 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 audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Minnesota Life Insurance Company and subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated 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 consolidated
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.
Minneapolis, Minnesota
February 8, 1999
66
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(In thousands)
<S> <C> <C>
Fixed maturity securities:
Available-for-sale, at fair value (amortized cost
$4,667,688 and $4,518,807) $ 4,914,012 $ 4,719,801
Held-to-maturity, at amortized cost (fair value
$1,161,784 and $1,158,227) 1,086,548 1,088,312
Equity securities, at fair value (cost $579,546 and
$537,441) 749,800 686,638
Mortgage loans, net 681,219 661,337
Real estate, net 38,530 39,964
Policy loans 226,409 213,488
Short-term investments 136,435 112,352
Other invested assets 261,625 216,838
----------- -----------
Total investments 8,094,578 7,738,730
Cash 175,660 96,179
Finance receivables, net 163,411 211,794
Deferred policy acquisition costs 564,382 576,030
Accrued investment income 86,974 83,439
Premiums receivable, net 62,609 68,030
Property and equipment, net 67,448 58,123
Reinsurance recoverables 162,553 150,126
Other assets 61,183 52,852
Separate account assets 6,994,752 5,366,810
----------- -----------
Total assets $16,433,550 $14,402,113
=========== ===========
Liabilities and Stockholder's Equity
Liabilities:
Policy and contract account balances $ 4,242,802 $ 4,275,221
Future policy and contract benefits 1,744,245 1,687,529
Pending policy and contract claims 70,564 64,356
Other policyholders' funds 438,595 416,752
Policyholders' dividends payable 53,957 55,321
Stockholder dividend payable 24,700 --
Unearned premiums and fees 180,191 202,070
Federal income tax liability:
Current 53,039 45,300
Deferred 173,907 166,057
Other liabilities 514,468 334,305
Notes payable 267,000 298,000
Separate account liabilities 6,947,806 5,320,517
----------- -----------
Total liabilities 14,711,274 12,865,428
----------- -----------
Stockholder's equity:
Common stock, $1 par value, 5,000,000 shares
authorized, issued and outstanding 5,000 --
Retained earnings 1,513,661 1,380,012
Accumulated other comprehensive income 203,615 156,673
----------- -----------
Total stockholder's equity 1,722,276 1,536,685
----------- -----------
Total liabilities and stockholder's equity $16,433,550 $14,402,113
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
67
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
Years ended December 31, 1998, 1997, and 1996
Statements of Operations
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Revenues:
Premiums $ 577,693 $ 615,253 $ 612,359
Policy and contract fees 300,361 272,037 245,966
Net investment income 531,081 553,773 530,987
Net realized investment gains 114,652 114,367 55,574
Finance charge income 35,880 43,650 46,932
Other income 73,498 71,707 51,630
---------- ---------- ----------
Total revenues 1,633,165 1,670,787 1,543,448
---------- ---------- ----------
Benefits and expenses:
Policyholders' benefits 519,926 515,873 541,520
Interest credited to policies and con-
tracts 290,870 298,033 288,967
General operating expenses 360,916 369,961 302,618
Commissions 110,211 114,404 103,370
Administrative and sponsorship fees 80,183 81,750 79,360
Dividends to policyholders 25,159 26,776 24,804
Interest on notes payable 22,360 24,192 22,798
Increase in deferred policy acquisition
costs (18,042) (26,878) (19,284)
---------- ---------- ----------
Total benefits and expenses 1,391,583 1,404,111 1,344,153
---------- ---------- ----------
Income from operations before taxes 241,582 266,676 199,295
Federal income tax expense (benefit):
Current 93,584 84,612 68,033
Deferred (15,351) (7,832) 744
---------- ---------- ----------
Total federal income tax expense 78,233 76,780 68,777
---------- ---------- ----------
Net income $ 163,349 $ 189,896 $ 130,518
========== ========== ==========
Other comprehensive income, after tax:
Foreign currency translation adjust-
ments $ (947) $ 947 $ --
Unrealized gains (losses) on securities 47,889 47,414 (44,940)
---------- ---------- ----------
Other comprehensive income, net of tax 46,942 48,361 (44,940)
---------- ---------- ----------
Comprehensive income $ 210,291 $ 238,257 $ 85,578
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
68
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Changes in Stockholder's Equity
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Common stock:
Issued during the year $ 5,000 $ -- $ --
---------- ---------- ----------
Total common stock $ 5,000 $ -- $ --
========== ========== ==========
Retained earnings:
Beginning balance $1,380,012 $1,190,116 $1,059,598
Net income 163,349 189,896 130,518
Retained earnings transfer for common
stock issued (5,000) -- --
Dividends to stockholder (24,700) -- --
---------- ---------- ----------
Total retained earnings $1,513,661 $1,380,012 $1,190,116
========== ========== ==========
Accumulated other comprehensive income:
Beginning balance $ 156,673 $ 108,312 $ 153,252
Change in unrealized appreciation (de-
preciation) of investments 47,889 47,414 (44,940)
Change in unrealized gain on foreign
currency translation (947) 947 --
---------- ---------- ----------
Total accumulated other comprehensive
income $ 203,615 $ 156,673 $ 108,312
========== ========== ==========
Total stockholder's equity $1,722,276 $1,536,685 $1,298,428
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
69
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 163,349 $ 189,896 $ 130,518
Adjustments to reconcile net income to
net cash provided by operating activi-
ties:
Interest credited to annuity and in-
surance contracts 265,841 276,719 275,968
Fees deducted from policy and con-
tract balances (212,901) (214,803) (206,780)
Change in future policy benefits 56,716 76,358 84,389
Change in other policyholders' lia-
bilities (20,802) 7,597 16,099
Change in deferred policy acquisition
costs (18,042) (26,878) (19,284)
Change in premiums due and other re-
ceivables 5,421 (9,280) (26,142)
Change in federal income tax liabili-
ties 15,589 36,049 (38,113)
Net realized investment gains (114,652) (114,367) (55,574)
Other, net 32,380 (23,213) 56,045
----------- ----------- -----------
Net cash provided by operating ac-
tivities 172,899 198,078 217,126
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from sales of:
Fixed maturity securities, available-
for-sale 1,835,726 1,099,114 877,682
Equity securities 523,617 601,936 352,901
Mortgage loans -- -- 15,567
Real estate 7,800 9,279 11,678
Other invested assets 21,682 26,877 12,280
Proceeds from maturities and repayments
of:
Fixed maturity securities, available-
for-sale 414,726 403,829 329,550
Fixed maturity securities, held-to-
maturity 148,848 139,394 114,222
Mortgage loans 126,066 109,246 94,703
Purchases of:
Fixed maturity securities, available-
for-sale (2,384,720) (1,498,048) (1,228,048)
Fixed maturity securities, held-to-
maturity (99,530) (82,835) (60,612)
Equity securities (516,907) (585,349) (446,599)
Mortgage loans (141,008) (157,247) (108,691)
Real estate (5,612) (3,908) (3,786)
Other invested assets (75,682) (55,988) (29,271)
Finance receivable originations or pur-
chases (77,141) (115,248) (175,876)
Finance receivable principal payments 109,277 133,762 142,723
Other, net 141,768 (88,626) (40,062)
----------- ----------- -----------
Net cash provided by (used for) in-
vesting activities 28,910 (63,812) (141,639)
----------- ----------- -----------
Cash Flows from Financing Activities
Deposits credited to annuity and insur-
ance contracts 952,622 928,696 657,405
Withdrawals from annuity and insurance
contracts (1,053,844) (1,013,588) (702,681)
Proceeds from issuance of debt 40,000 -- 60,000
Payments on debt (31,000) (21,000) (21,000)
Other, net (6,023) (3,355) (6,898)
----------- ----------- -----------
Net cash used for financing activi-
ties (98,245) (109,247) (13,174)
----------- ----------- -----------
Net increase in cash and short-term in-
vestments 103,564 25,019 62,313
Cash and short-term investments, begin-
ning of year 208,531 183,512 121,199
----------- ----------- -----------
Cash and short-term investments, end of
year $ 312,095 $ 208,531 $ 183,512
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
70
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
(1) Nature of Operations
Conversion to a Mutual Holding Company Structure
Consent was given from the Minnesota Department of Commerce (Department of
Commerce) allowing The Minnesota Mutual Life Insurance Company to implement a
conversion to a mutual holding company. The Minnesota Mutual Life Insurance
Company enacted this privilege effective October 1, 1998. The conversion
created Minnesota Mutual Companies, Inc., a mutual holding company, Securian
Holding Company and Securian Financial Group, Inc., which are intermediate
stock holding companies. The Minnesota Mutual Life Insurance Company was
converted into a stock life insurance company and renamed Minnesota Life
Insurance Company. Minnesota Mutual Companies, Inc. will at all times, in
accordance with the conversion plan and as required by the Mutual Insurance
Holding Company Act, directly or indirectly control Minnesota Life Insurance
Company through the ownership of at least a majority of the voting power of the
voting shares of the capital stock of Minnesota Life Insurance Company. Annuity
contract and life insurance policyholders of Minnesota Life Insurance Company
have certain membership interests consisting primarily of the right to vote on
certain matters involving Minnesota Mutual Companies, Inc. and the right to
receive distributions of surplus in the event of demutualization, dissolution
or liquidation of Minnesota Mutual Companies, Inc.
Description of Business
Minnesota Life Insurance Company, both directly and through its subsidiaries
(collectively, the Company), 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 five strategic business
units which focus on various markets: Individual Insurance, Financial Services,
Group Insurance, Pension and Asset Management. Revenues in 1998 for these
business units were $862,240,000, $273,511,000, $258,928,000, $102,061,000 and
$20,723,000, respectively. Additional revenues of $115,702,000 were reported by
the Company's subsidiaries.
The Company serves over six million people through more than 4,000 associates
located at its St. Paul, Minnesota headquarters and in 75 general agencies and
45 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 Life Insurance Company and its subsidiaries. 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.
71
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
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
policy acquisition costs are amortized over the premium paying period in
proportion to the ratio of annual premium revenues to ultimate anticipated
premium revenues. The ultimate premium revenues are estimated based upon the
same assumptions used to calculate the future policy benefits.
For nontraditional life products and deferred annuities, deferred policy
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 policy acquisition costs amortized were $148,098,000, $128,176,000
and $125,978,000 for the years ended December 31, 1998, 1997 and 1996,
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
72
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
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.
Venture capital limited partnerships are carried at cost, net of write-downs
for other than temporary declines in value and allowances for temporary
declines in value. Cash distributions are recorded as a return of capital
and/or income as appropriate. In-kind distributions are recorded as a return of
capital for the cost basis of the stock received.
Real estate is carried at cost less accumulated depreciation and an allowance
for estimated losses. Accumulated depreciation on real estate at December 31,
1998 and 1997, was $6,713,000 and $6,269,000, respectively.
Policy loans are carried at the unpaid principal balance.
Derivative Financial Instruments
The Company entered into equity swaps in 1996 as part of an overall risk
management strategy. The swaps 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 1997. The swaps were carried at fair value, which were
based upon dealer quotes. Changes in fair value were recorded directly in
stockholder's equity. Upon settlement of the swaps, gains or losses were
recognized in income, and the Company realized a loss of approximately
$31,000,000 in 1997, upon settlement of these equity swaps.
The Company began investing in international bonds denominated in foreign
currencies in 1997. Unrealized gains or losses are recorded on foreign
denominated securities due to the fluctuation in foreign currency exchange
rates and/or related payables and receivables and interest on foreign
securities. 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.
Realized and unrealized gains and losses on these forward foreign exchange
contracts are recorded in income as incurred. In addition, these contracts are
generally short-term in nature and there is no material exposure to the Company
at December 31, 1998. Notional amounts for the years ended December 31, 1998
and 1997, were $115,194,000 and $80,997,000, respectively.
73
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Accounting Policies (continued)
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 stockholder's equity,
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
$101,692,000 and $90,926,000 at December 31, 1998 and 1997, 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,
1998, 1997 and 1996, were $10,765,000, $8,965,000 and $6,454,000, 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 policyholders 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, included with separate account assets, amounted to
$46,945,000 and $46,293,000 at December 31, 1998 and 1997, respectively.
Policyholders' 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 policyholders' funds are comprised of dividend accumulations, premium
deposit funds and supplementary contracts without life contingencies.
Participating Business
Dividends on participating policies and other discretionary payments are
declared by the Board of Directors 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.
74
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(2) Summary of Significant Account Policies (continued)
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 1997 and 1996 consolidated financial statement balances have been
reclassified to conform to the 1998 presentation.
(3) Investments
Net investment income for the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $445,220 $457,391 $433,985
Equity securities 12,183 16,182 14,275
Mortgage loans 54,785 55,929 63,865
Real estate (236) (407) (475)
Policy loans 15,502 15,231 13,828
Short-term investments 6,147 6,995 6,535
Other invested assets 3,826 3,871 4,901
-------- -------- --------
Gross investment income 537,427 555,192 536,914
Investment expenses (6,346) (1,419) (5,927)
-------- -------- --------
Total $531,081 $553,773 $530,987
======== ======== ========
Net realized investment gains (losses) for the years ended December 31 were
as follows:
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities $ 43,244 $ 3,711 $ (6,536)
Equity securities 47,526 92,765 57,770
Mortgage loans 3,399 2,011 (721)
Real estate 7,809 1,598 7,088
Other invested assets 12,674 14,282 (2,027)
-------- -------- --------
Total $114,652 $114,367 $ 55,574
======== ======== ========
Gross realized gains (losses) on the sales of fixed maturity securities and
equity securities for the years ended December 31 were as follows:
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Gross realized gains $ 56,428 $ 18,804 $ 19,750
Gross realized losses (13,184) (15,093) (26,286)
Equity securities:
Gross realized gains 107,342 120,437 79,982
Gross realized losses (59,816) (27,672) (22,212)
</TABLE>
75
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(3)Investments (continued)
Net unrealized gains (losses) included in stockholder's equity at December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
Gross unrealized gains $ 487,479 $ 472,671
Gross unrealized losses (73,440) (118,863)
Adjustment to deferred acquisition costs (119,542) (100,299)
Adjustment to unearned policy and contract fees 15,912 (13,087)
Deferred federal income taxes (106,794) (83,749)
--------- ---------
Net unrealized gains $ 203,615 $ 156,673
========= =========
</TABLE>
76
<PAGE>
Minnesota 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, 1998
Available-for-sale:
United States government and
government agencies and
authorities $ 195,650 $ 17,389 $ 201 $ 212,838
Foreign governments 784 -- 311 473
Corporate securities 2,357,861 204,277 30,648 2,531,490
International bond securities 188,448 22,636 1,298 209,786
Mortgage-backed securities 1,924,945 52,580 18,100 1,959,425
---------- -------- -------- ----------
Total fixed maturities 4,667,688 296,882 50,558 4,914,012
Equity securities-unaffiliated 463,777 157,585 15,057 606,305
Equity securities-affiliated
mutual funds 115,769 27,726 -- 143,495
---------- -------- -------- ----------
Total equity securities 579,546 185,311 15,057 749,800
---------- -------- -------- ----------
Total available-for-sale 5,247,234 482,193 65,615 5,663,812
Held-to maturity:
Corporate securities 894,064 67,496 235 961,325
Mortgage-backed securities 192,484 9,030 1,055 200,459
---------- -------- -------- ----------
Total held-to-maturity 1,086,548 76,526 1,290 1,161,784
---------- -------- -------- ----------
Total $6,333,782 $558,719 $ 66,905 $6,825,596
========== ======== ======== ==========
<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
government agencies and authori-
ties $ 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 mu-
tual funds 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
========== ======== ======== ==========
</TABLE>
77
<PAGE>
Minnesota 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, 1998, 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 $ 38,375 $ 35,299 $ 11,109 $ 11,346
Due after one year through five
years 529,019 616,064 128,658 133,657
Due after five years through ten
years 1,251,763 1,316,512 373,294 403,159
Due after ten years 923,586 986,712 381,003 413,163
---------- ---------- ---------- ----------
2,742,743 2,954,587 894,064 961,325
Mortgage-backed securities 1,924,945 1,959,425 192,484 200,459
---------- ---------- ---------- ----------
Total $4,667,688 $4,914,012 $1,086,548 $1,161,784
========== ========== ========== ==========
</TABLE>
At December 31, 1998 and 1997, fixed maturity securities and short-term
investments with a carrying value of $6,361,000 and $8,000,000, respectively,
were on deposit with various regulatory authorities as required by law.
Allowances for credit losses on investments are reflected on the consolidated
balance sheets as a reduction of the related assets and were as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Mortgage loans $ 1,500 $ 1,500
Investment real estate 841 2,248
------- -------
Total $ 2,341 $ 3,748
======= =======
</TABLE>
At December 31, 1998, the recorded investment in mortgage loans that were
considered to be impaired was $8,798 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, 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.
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, 1998 and 1997.
Changes in the allowance for credit losses on mortgage loans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,500 $1,895 $1,711
Provision for credit losses -- -- 381
Charge-offs -- (395) (197)
------ ------ ------
Balance at end of year $1,500 $1,500 $1,895
====== ====== ======
</TABLE>
78
<PAGE>
Minnesota 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>
1998 1997 1996
---- ------ ------
(In thousands)
<S> <C> <C> <C>
Average impaired mortgage loans $14 $3,268 $9,375
Interest income on impaired mortgage loans--contractual 18 556 1,796
Interest income on impaired mortgage loans--collected 17 554 1,742
</TABLE>
(4) Notes Receivable
In connection with the Company's planned construction of an additional home
office facility in St. Paul, Minnesota, the Company entered into a loan
contingency agreement with the Housing and Redevelopment Authority of the City
of St. 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, 1998, HRA has
drawn $9,669,128 on this loan contingency agreement and accrued interest of
$673,435.
(5) Net Finance Receivables
Finance receivables as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Direct installment loans $147,425 $183,424
Retail installment notes 12,209 20,373
Retail revolving credit 17,170 25,426
Accrued interest 2,683 3,116
-------- --------
Gross receivables 179,487 232,339
Allowance for uncollectible amounts (16,076) (20,545)
-------- --------
Finance receivables, net $163,411 $211,794
======== ========
</TABLE>
Direct installment loans at December 31, 1998, consisted of $81,066,000 of
discount basis loans (net of unearned finance charges) and $66,359,000 of
interest-bearing loans. Direct installment loans at December 31, 1997,
consisted of $83,836,000 of discount basis loans (net of unearned finance
charges) and $99,588,000 of interest-bearing loans. 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 $44,000,000 and $65,000,000 of
real estate secured loans at December 31, 1998 and 1997, respectively.
Revolving credit loans included approximately $16,000,000 and $24,000,000 of
real estate secured loans at December 31, 1998 and 1997, 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
$75,011,000, $90,940,000 and $92,438,000 and the percentage of these cash
collections to the average net balances were 47%, 47% and 48% for the years
ended December 31, 1998, 1997 and 1996, respectively.
79
<PAGE>
Minnesota 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>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $20,545 $ 7,497 $ 6,377
Provision for credit losses 10,712 28,206 10,086
Charge-offs (18,440) (17,869) (11,036)
Recoveries 3,259 2,711 2,070
------- ------- -------
Balance at end of year $16,076 $20,545 $ 7,497
======= ======= =======
</TABLE>
At December 31, 1998, 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, 1998 and the related allowance for
credit losses were as follows:
<TABLE>
<CAPTION>
Installment Revolving
Loans Credit Total
----------- --------- -------
(In thousands)
<S> <C> <C> <C>
Balances at December 31, 1998 $7,546 11,190 $18,736
Related allowance for credit losses $3,033 5,486 $ 8,519
</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 1998. The
average quarterly balances of impaired loans during the year ended December 31,
1998 and 1997, was $6,354,000 and $7,397,000, respectively, for installment
basis loans and $12,471,000 and $12,793,000, respectively for 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, 1998.
(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>
1998 1997 1996
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Computed tax expense $84,553 $93,337 $69,753
Difference between computed and actual tax ex-
pense:
Dividends received deduction (1,730) (5,573) (2,534)
Special tax on mutual life insurance companies (3,455) 3,341 2,760
Sale of subsidiary -- (4,408) --
Foundation gain -- (4,042) (1,260)
Tax credits (4,416) (3,600) (3,475)
Expense adjustments and other 3,281 (2,275) 3,533
------- ------- -------
Total tax expense $78,233 $76,780 $68,777
======= ======= =======
</TABLE>
80
<PAGE>
Minnesota 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>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Policyholders' liabilities $ 16,999 $ 14,374
Pension and post retirement benefits 27,003 23,434
Tax deferred policy acquisition costs 82,940 73,134
Net realized capital losses 8,221 9,609
Other 18,487 20,524
-------- --------
Gross deferred tax assets 153,650 141,075
-------- --------
Deferred tax liabilities:
Deferred policy acquisition costs 155,655 152,337
Real estate and property and equipment depreciation 10,275 11,165
Basis difference on investments 10,798 11,061
Net unrealized capital gains 143,354 122,876
Other 7,475 9,693
-------- --------
Gross deferred tax liabilities 327,557 307,132
-------- --------
Net deferred tax liability $173,907 $166,057
======== ========
</TABLE>
A valuation allowance for deferred tax assets was not considered necessary as
of December 31, 1998 and 1997, 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, 1998, 1997 and 1996, were
$91,259,000, $71,108,000 and $79,026,000, respectively.
The Company's tax returns for 1997, 1996 and 1995 are under examination by
the Internal Revenue Service. The Company believes additional taxes, if any,
assessed as a result of these examinations, will not have a material effect on
its financial position.
81
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(7) Liability for Unpaid Accident and Health Claims, Reserve for Losses, and
Claim and Loss Adjustment Expenses
Activity in the liability for unpaid accident and health claims, reserve for
losses and claim and loss adjustment expenses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at January 1 $409,249 $416,910 $377,302
Less: reinsurance recoverable 104,741 102,161 80,333
-------- -------- --------
Net balance at January 1 304,508 314,749 296,969
-------- -------- --------
Incurred related to:
Current year 92,793 121,153 134,727
Prior years 14,644 7,809 4,821
-------- -------- --------
Total incurred 107,437 128,962 139,548
-------- -------- --------
Paid related to:
Current year 27,660 51,275 51,695
Prior years 58,124 57,475 70,073
-------- -------- --------
Total paid 85,784 108,750 121,768
-------- -------- --------
Decrease in liabilities due to sale of subsidiary -- 30,453 --
-------- -------- --------
Net balance at December 31 326,161 304,508 314,749
Plus: reinsurance recoverable 108,918 104,741 102,161
-------- -------- --------
Balance at December 31 $435,079 $409,249 $416,910
======== ======== ========
</TABLE>
The liability for unpaid accident and health claims, reserve for losses and
claim and loss 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, reserve for losses and claim and loss adjustment
expenses incurred increased by $14,644,000, $7,809,000 and $4,821,000 in 1998,
1997 and 1996, respectively. These amounts are the result of normal reserve
development inherent in the uncertainty of establishing the liability for
unpaid accident and health claims, reserve for losses and claim and loss
adjustment expenses.
(8) Employee Benefit Plans
Pension Plans and Post Retirement Plans Other than Pensions
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.
The Company also has unfunded post retirement 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.
82
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
The change in the benefit obligation and plan assets for the Company's plans
as of December 31 was calculated as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of
year $151,509 $134,959 $ 24,467 $ 24,836
Service cost 8,402 6,847 1,375 1,047
Interest cost 10,436 9,956 1,713 1,872
Amendments 6 -- -- (99)
Actuarial gain 16,298 3,816 4,542 (1,930)
Benefits paid (5,212) (4,069) (861) (1,259)
-------- -------- -------- --------
Benefit obligation at end of year $181,439 $151,509 $ 31,236 $ 24,467
======== ======== ======== ========
Change in plan assets:
Fair value of plan assets at the
beginning of the year $133,505 $118,963 $ -- $ --
Actual return on plan assets 13,068 13,670 -- --
Employer contribution 5,349 4,940 861 1,259
Benefits paid (5,212) (4,069) (861) (1,259)
-------- -------- -------- --------
Fair value of plan assets at the
end of year $146,710 $133,504 $ -- $ --
======== ======== ======== ========
Funded status $(34,729) $(18,005) $(31,236) $(24,467)
Unrecognized net actuarial loss
(gain) 12,283 (1,735) (6,251) (11,353)
Unrecognized prior service cost
(benefit) 5,293 5,865 (2,986) (3,499)
-------- -------- -------- --------
Net amount recognized $(17,153) $(13,875) $(40,473) $(39,319)
======== ======== ======== ========
Amounts recognized in the balance
sheet statement consist of:
Accrued benefit cost $(23,242) $(18,059) $(40,473) $(39,319)
Intangible asset 6,089 4,184 -- --
-------- -------- -------- --------
Net amount recognized $(17,153) $(13,875) $(40,473) $(39,319)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Pension Other
Benefits Benefits
----------- -----------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average assumptions as of December 31
Discount rate 7.00% 7.48% 7.00% 7.50%
Expected return on plan assets 8.27% 8.32% -- --
Rate of compensation increase 5.32% 5.29% -- --
</TABLE>
83
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(8) Employee Benefit Plans (continued)
For measurement purposes, an 8 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5.5 percent for 2003 and remain at that level
thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------- ----------------------
1998 1997 1996 1998 1997 1996
------- ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost
Service cost $ 8,402 $6,847 $6,315 $1,375 $1,047 $1,041
Interest cost 10,436 9,956 8,852 1,713 1,872 2,074
Expected return on plan as-
sets (10,978) (9,859) (8,751) -- -- --
Amortization of prior serv-
ice cost (benefits) 578 578 578 (513) (510) (501)
Recognized net actuarial
loss (gain) 190 77 10 (559) (480) (177)
------- ------ ------ ------ ------ ------
Net periodic benefit cost $ 8,628 $7,599 $7,004 $2,016 $1,929 $2,437
======= ====== ====== ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
vale of plan assets for the pension plan with accumulated benefit obligations
in excess of plan assets were $39,470,000, $31,546,000 and $17,334,000 as of
December 31, 1998, respectively, and $32,622,000, $24,894,000 and $16,703,000
respectively, as of December 31, 1997.
The assumptions presented herein are based on pertinent information available
to management as of December 31, 1998 and 1997. 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 post retirement benefit obligation as of December 31, 1998 by
$5,875,000 and the estimated eligibility cost and interest cost components of
net periodic benefit costs for 1998 by $788,000. Decreasing the assumed health
care cost trend rates by one percentage point in each year would decrease the
post retirement benefit obligation as of December 31, 1998 by $4,618,000 and
the estimated eligibility cost and interest cost components of net periodic
post retirement benefit costs for 1998 by $598,000.
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 directors 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
1998, 1997 and 1996 of $8,395,000, $7,173,000 and $6,092,000, respectively.
Participants may elect to receive a portion of their contributions in cash.
(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.
84
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(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.
The effect of reinsurance on premiums for the years ended December 31 was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Direct premiums $553,408 $595,686 $615,098
Reinsurance assumed 91,548 78,097 64,489
Reinsurance ceded (67,263) (58,530) (67,228)
-------- -------- --------
Net premiums $577,693 $615,253 $612,359
======== ======== ========
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $54,174,000,
$58,072,000 and $72,330,000 during 1998, 1997 and 1996, 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, 1998 and 1997.
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,
1998 and 1997, 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,
1998 and 1997, 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, 1998 and 1997
as those investment 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.
85
<PAGE>
Minnesota 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>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Available-for-sale $4,914,012 $4,914,012 $4,719,801 $4,719,801
Held-to-maturity 1,086,548 1,161,784 1,088,312 1,158,227
Equity securities 749,800 749,800 686,638 686,638
Mortgage loans:
Commercial 579,890 603,173 506,860 527,994
Residential 101,329 104,315 154,477 158,334
Policy loans 226,409 226,409 213,488 213,488
Short-term investments 136,435 136,435 112,352 112,352
Cash 175,660 175,660 96,179 96,179
Finance receivables, net 163,411 163,411 211,794 211,794
Venture capital 160,958 164,332 115,856 122,742
Foreign currency exchange con-
tract 1,594 1,594 1,457 1,457
---------- ---------- ---------- ----------
Total financial assets $8,296,046 $8,400,925 $7,907,214 $8,009,006
========== ========== ========== ==========
</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>
1998 1997
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Deferred annuities $2,085,408 $2,075,738 $2,131,806 $2,112,301
Annuity certain contracts 57,528 60,766 55,431 57,017
Other fund deposits 722,321 731,122 754,960 753,905
Guaranteed investment contracts 862 862 8,188 8,187
Supplementary contracts without
life contingencies 44,696 44,251 46,700 45,223
Notes payable 267,000 272,834 298,000 302,000
---------- ---------- ---------- ----------
Total financial liabilities $3,177,815 $3,185,573 $3,295,085 $3,278,633
========== ========== ========== ==========
</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 policyholders' interests, including claims, and indebtedness
of the Company. All payments of interest and principal on the notes are subject
to the approval of the Department of Commerce. The approved accrued interest
was $3,008,000 as of December 31, 1998 and 1997. The issuance costs of
$1,421,000 are deferred and amortized over 30 years on straight-line basis.
86
<PAGE>
Minnesota 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>
1998 1997
-------- --------
(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 142,000 173,000
-------- --------
Total notes payable $267,000 $298,000
======== ========
</TABLE>
At December 31, 1998, the aggregate minimum annual notes payable maturities
for the next five years were as follows: 1999, $49,000,000; 2000, $33,000,000;
2001, $26,000,000; 2002, $22,000,000; 2003, $12,000,000; thereafter
$125,000,000.
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 $44,070,000. The consumer finance subsidiary was in compliance with all such
provisions at December 31, 1998.
Interest paid on debt for the years ended December 31, 1998, 1997 and 1996,
was $25,008,000, $18,197,000 and $21,849,000, respectively.
(13) Other Comprehensive Income
Effective December 31, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income is defined as any
change in stockholder's equity originating from non-owner transactions. The
Company had identified those changes as being comprised of net income,
unrealized appreciation (depreciation) on securities, and unrealized foreign
currency translation adjustments. The components of comprehensive income, other
than net income are illustrated below:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Other comprehensive income, before tax:
Foreign currency translation adjustment $ -- $ 1,457 $ --
Less: reclassification adjustment for gains in-
cluded in net income (1,457) -- --
------- ------- --------
(1,457) 1,457 --
Unrealized gains (loss) on securities 162,214 171,654 (18,746)
Less: reclassification adjustment for gains in-
cluded in net income (90,770) (96,476) (51,234)
------- ------- --------
71,444 75,178 (69,980)
Income tax expense related to items of other com-
prehensive income (23,045) (28,274) 25,040
------- ------- --------
Other comprehensive income, net of tax $46,942 $48,361 $(44,940)
======= ======= ========
</TABLE>
(14) Stock Dividends
On December 14, 1998, the Company declared and accrued a dividend to Securian
Financial Group, Inc. in the amount of $24,700,000 to be paid in 1999.
Dividend payments by Minnesota Life Insurance Company to its parent cannot
exceed the greater of 10% of statutory capital and surplus as of the preceding
year end or the statutory net gain from operations for the current calendar
year, without prior approval from the Department of Commerce. Based on this
limitation and 1997 statutory results, Minnesota Life Insurance Company could
have paid $87,069,000 in dividends in 1998 without prior approval.
87
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(15) Year 2000 (Unaudited)
The Company's business units utilize products and systems in the normal course
of business. Some of the Company's products and systems will have been replaced
or modified in order to process dates including the year 2000 and beyond.
The Company began preparing for the new millennium in the early 1980s by
designing systems with the year 2000 in mind. The Company began a comprehensive
Year 2000 project in 1995 to prepare all components of its business to function
properly before, during and after the year 2000.
The Company's goal is to have all computer systems and data prepared for the
year 2000. While the Company has taken extensive steps to renovate, upgrade and
replace applications, it is impossible to guarantee there will be no problems
associated with the year 2000 date change. The Company is currently developing
contingency and continuity plans to help minimize any impact of problems that
do arise.
(16) 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 $41,010,000 as of
December 31, 1998. 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 $165,191,000 as of December 31, 1998. The Company
estimates that $60,000,000 of these commitments will be invested in 1999, with
the remaining $105,191,000 invested over the next four years.
As of December 31, 1998, the Company had committed to purchase bonds and
mortgage loans totaling $198,907,000 but had not completed the purchase
transactions.
At December 31, 1998, the Company had guaranteed the payment of $75,100,000
in policyholders' dividends and discretionary amounts payable in 1999. The
Company has pledged bonds, valued at $76,596,000 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.
88
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(17) 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. The significant differences that exist between statutory and
GAAP accounting, and their effects are illustrated below:
<TABLE>
<CAPTION>
Year ended December
----------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Statutory capital and surplus $ 947,885 $ 870,688
Adjustments:
Deferred policy acquisition costs 564,382 576,030
Net unrealized investment gains 281,226 213,026
Statutory asset valuation reserve 239,455 242,100
Statutory interest maintenance reserve 49,915 24,169
Premiums and fees deferred or receivable (73,312) (74,025)
Change in reserve basis 117,806 101,415
Separate accounts (56,816) (51,172)
Unearned policy and contract fees (134,373) (126,477)
Surplus notes (125,000) (125,000)
Net deferred income taxes (173,907) (166,057)
Non-admitted assets 36,764 32,611
Policyholders' dividends 60,648 60,036
Other (12,397) (40,659)
---------- ----------
Stockholder's equity as reported in the accompanying
consolidated financial statements $1,722,276 $1,536,685
========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31
----------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Statutory net income $104,609 $167,078 $115,797
Adjustments:
Deferred policy acquisition costs 18,042 26,878 19,284
Statutory interest maintenance reserve 25,746 (538) (8,192)
Premiums and fees deferred or receivable 708 2,175 1,587
Change in reserve basis 3,011 9,699 20,114
Separate accounts (5,644) (6,272) (6,304)
Unearned policy and contract fees (7,896) (12,825) (2,530)
Net deferred income taxes 15,351 7,832 (744)
Policyholders' dividends 1,194 2,708 502
Other 8,228 (6,839) (8,996)
-------- -------- --------
Net income as reported in the accompanying
consolidated financial statements $163,349 $189,896 $130,518
======== ======== ========
</TABLE>
89
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule I
Summary of Investments--Other than Investments in Related Parties
December 31, 1998
<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 $ 195,650 $ 212,838 $ 212,838
Foreign governments 784 473 473
Public utilities 343,230 368,246 357,795
Mortgage-backed securities 2,117,429 2,159,884 2,151,909
All other corporate bonds 3,097,143 3,334,355 3,277,545
---------- ---------- ----------
Total bonds 5,754,236 6,075,796 6,000,560
---------- ---------- ----------
Equity securities:
Common stocks:
Public utilities 14,403 18,472 18,472
Banks, trusts and insurance companies 42,538 43,615 43,615
Industrial, miscellaneous and all
other 495,635 659,177 659,177
Nonredeemable preferred stocks 26,970 28,536 28,536
---------- ---------- ----------
Total equity securities 579,546 749,800 749,800
---------- ---------- ----------
Mortgage loans on real estate 681,219 XXXXXX 681,219
Real estate (2) 38,530 XXXXXX 38,530
Policy loans 226,409 XXXXXX 226,409
Other long-term investments 261,625 XXXXXX 261,625
Short-term investments 136,435 XXXXXX 136,435
---------- ---------- ----------
Total 1,344,218 -- 1,344,218
---------- ---------- ----------
Total investments $7,678,000 $6,825,596 $8,094,578
========== ========== ==========
</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
See independent auditors' report.
90
<PAGE>
Minnesota 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>
1998:
Life insurance $421,057 $2,303,580 $146,042 $51,798 $615,856 $246,303 $502,767 $114,589 $342,080
Accident and
health insurance 74,606 496,839 33,568 18,342 167,544 35,822 105,336 12,261 93,876
Annuity 68,719 3,186,148 25 424 93,992 247,970 225,004 21,248 136,527
Property and li-
ability insur-
ance -- 480 556 -- 662 986 2,848 -- 1,187
-------- ---------- -------- ------- -------- -------- -------- -------- --------
$564,382 $5,987,047 $180,191 $70,564 $878,054 $531,081 $835,955 $148,098 $573,670
======== ========== ======== ======= ======== ======== ======== ======== ========
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 li-
ability insur-
ance -- 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 li-
ability insur-
ance -- 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
======== ========== ======== ======= ======== ======== ======== ======== ========
<CAPTION>
Premiums
Segment written(4)
- ------- ----------
<S> <C>
1998:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 103
----------
$ 103
==========
1997:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 43,376
----------
$43,376
==========
1996:
Life insurance
Accident and
health insurance
Annuity
Property and li-
ability insur-
ance 50,515
----------
$50,515
==========
</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
See independent auditors' report.
91
<PAGE>
Minnesota Life Insurance Company and Subsidiaries
Schedule IV
Reinsurance
For the years ended December 31, 1998, 1997 and 1996
<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>
1998:
Life insurance in
force $158,229,143 $18,656,917 $28,559,482 $168,131,708 17.0%
============ =========== =========== ============
Premiums:
Life insurance $ 338,909 $ 30,532 $ 71,198 $ 379,575 18.8%
Accident and health
insurance 180,081 17,894 1,432 163,619 0.9%
Annuity 33,837 -- -- 33,837 --
Property and liabil-
ity insurance 581 18,837 18,918 662 2857.7%
------------ ----------- ----------- ------------
Total premiums $ 553,408 $ 67,263 $ 91,548 $ 577,693 15.8%
============ =========== =========== ============
1997:
Life insurance in
force $122,120,394 $14,813,351 $25,566,734 $132,873,777 19.2%
============ =========== =========== ============
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 liabil-
ity 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 liabil-
ity insurance 55,782 5,729 56 50,109 0.1%
------------ ----------- ----------- ------------
Total premiums $ 615,098 $ 67,228 $ 64,489 $ 612,359 10.5%
============ =========== =========== ============
</TABLE>
See independent auditors' report.
92
<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 nineteen 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 "What
charges are associated with the policy?--Fund Charges" in this prospectus. The
illustration reflects certain fees and expenses that were waived or voluntarily
absorbed, as detailed in the footnote to the expense table. We do not expect
any changes to the voluntary absorption of expenses policy in the current year.
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 Life'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.
122
<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)
(-1.21% NET) (4.79% NET) (10.79% 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 $ 1,457 $100,000 $ 1,505 $100,000 $ 1,551 $100,000
2 47 1,800 2,888 100,000 3,073 100,000 3,261 100,000
3 48 1,800 4,282 100,000 4,695 100,000 5,135 100,000
4 49 1,800 5,650 100,000 6,388 100,000 7,203 100,000
5 50 1,800 7,005 100,000 8,166 100,000 9,501 100,000
6 51 1,800 8,325 100,000 10,011 100,000 12,030 100,000
7 52 1,800 9,599 100,000 11,917 100,000 14,805 100,000
8 53 1,800 10,841 100,000 13,898 100,000 17,869 100,000
9 54 1,800 12,029 100,000 15,940 100,000 21,233 100,000
10 55 1,800 13,166 100,000 18,046 100,000 24,935 100,000
15 60 1,800 17,805 100,000 29,439 100,000 49,890 100,000
20 65 1,800 20,468 100,000 42,604 100,000 91,841 110,952
25 70 1,800 20,774 100,000 58,479 100,000 161,789 186,057
30 75 1,800 13,741 100,000 77,180 100,000 276,030 292,773
</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 Life 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."
123
<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)
(-1.21% NET) (4.79% NET) (10.79% NET)
END OF
POL ATT ANNUAL ACCOUNT DEATH ACCOUNT DEATH ACCOUNT DEATH
YR AGE PREMIUM VALUE BENEFIT VALUE BENEFIT VALUE BENEFIT
- ------ --- ------- ------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 46 $1,800 $1,060 $100,000 $ 1,094 $100,000 $ 1,128 $100,000
2 47 1,800 2,069 100,000 2,202 100,000 2,339 100,000
3 48 1,800 3,026 100,000 3,324 100,000 3,640 100,000
4 49 1,800 3,930 100,000 4,456 100,000 5,039 100,000
5 50 1,800 4,776 100,000 5,598 100,000 6,546 100,000
6 51 1,800 5,560 100,000 6,743 100,000 8,166 100,000
7 52 1,800 6,275 100,000 7,886 100,000 9,908 100,000
8 53 1,800 6,914 100,000 9,020 100,000 11,781 100,000
9 54 1,800 7,469 100,000 10,137 100,000 13,793 100,000
10 55 1,800 7,933 100,000 11,230 100,000 15,958 100,000
15 60 1,800 8,721 100,000 16,162 100,000 29,803 100,000
20 65 1,800 5,867 100,000 19,141 100,000 51,538 100,000
25 70 1,800 0 0 17,066 100,000 89,256 102,644
30 75 1,800 0 0 2,553 100,000 155,056 164,420
</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 Life or the Fund that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
124
<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)
(-1.21% NET) (4.79% NET) (10.79% 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 $ 1,551 $51,551 $ 1,602 $ 51,602 $ 1,651 $ 51,651
2 47 1,800 3,078 53,078 3,274 53,274 3,474 53,474
3 48 1,800 4,574 54,574 5,014 55,014 5,482 55,482
4 49 1,800 6,046 56,046 6,831 56,831 7,699 57,699
5 50 1,800 7,500 57,500 8,735 58,735 10,155 60,155
6 51 1,800 8,925 58,925 10,719 60,719 12,864 62,864
7 52 1,800 10,314 60,314 12,778 62,778 15,847 65,847
8 53 1,800 11,675 61,675 14,924 64,924 19,138 69,138
9 54 1,800 12,995 62,995 17,148 67,148 22,759 72,759
10 55 1,800 14,276 64,276 19,455 69,455 26,746 76,746
15 60 1,800 19,911 69,911 32,150 82,150 53,466 103,466
20 65 1,800 24,089 74,089 46,891 96,891 96,564 146,564
25 70 1,800 26,580 76,580 63,855 113,855 166,586 216,586
30 75 1,800 24,633 74,633 80,442 130,442 277,992 327,992
</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 Life 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."
125
<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)
(-1.21% NET) (4.79% NET) (10.79% 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 $ 1,334 $51,334 $ 1,377 $51,377 $ 1,420 $ 51,420
2 47 1,800 2,629 52,629 2,797 52,797 2,969 52,969
3 48 1,800 3,886 53,886 4,261 54,261 4,661 54,661
4 49 1,800 5,102 55,102 5,770 55,770 6,509 56,509
5 50 1,800 6,276 56,276 7,322 57,322 8,526 58,526
6 51 1,800 7,405 57,405 8,917 58,917 10,729 60,729
7 52 1,800 8,486 58,486 10,553 60,553 13,133 63,133
8 53 1,800 9,514 59,514 12,226 62,226 15,754 65,754
9 54 1,800 10,486 60,486 13,934 63,934 18,610 68,610
10 55 1,800 11,397 61,397 15,674 65,674 21,724 71,724
15 60 1,800 14,973 64,973 24,791 74,791 42,098 92,098
20 65 1,800 16,433 66,433 34,122 84,122 73,594 123,594
25 70 1,800 14,655 64,655 42,278 92,278 121,979 171,979
30 75 1,800 7,903 57,903 46,756 96,756 196,063 246,063
</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 Life or the Fund that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
126
<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)
(-1.21% NET) (4.79% NET) (10.79% 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 $ 2,305 $100,000 $ 2,380 $100,000 $ 2,454 $100,000
2 57 3,000 4,513 100,000 4,803 100,000 5,100 100,000
3 58 3,000 6,638 100,000 7,287 100,000 7,977 100,000
4 59 3,000 8,674 100,000 9,828 100,000 11,104 100,000
5 60 3,000 10,624 100,000 12,432 100,000 14,516 100,000
6 61 3,000 12,482 100,000 15,099 100,000 18,241 100,000
7 62 3,000 14,251 100,000 17,835 100,000 22,324 100,000
8 63 3,000 15,924 100,000 20,641 100,000 26,807 100,000
9 64 3,000 17,516 100,000 23,538 100,000 31,755 100,000
10 65 3,000 19,009 100,000 26,516 100,000 37,220 100,000
15 70 3,000 25,050 100,000 43,084 100,000 75,436 100,000
20 75 3,000 24,619 100,000 61,174 100,000 141,570 149,983
25 80 3,000 10,570 100,000 82,648 100,000 250,670 263,204
30 85 3,000 0 0 115,193 120,952 424,132 445,339
</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 Life 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."
127
<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)
(-1.21% NET) (4.79% NET) (10.79% 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 $ 1,527 $100,000 $ 1,574 $100,000
2 57 3,000 2,851 100,000 3,036 100,000 3,226 100,000
3 58 3,000 4,113 100,000 4,526 100,000 4,964 100,000
4 59 3,000 5,265 100,000 5,992 100,000 6,798 100,000
5 60 3,000 6,297 100,000 7,426 100,000 8,733 100,000
6 61 3,000 7,195 100,000 8,814 100,000 10,771 100,000
7 62 3,000 7,942 100,000 10,136 100,000 12,911 100,000
8 63 3,000 8,516 100,000 11,371 100,000 15,153 100,000
9 64 3,000 8,894 100,000 12,493 100,000 17,496 100,000
10 65 3,000 9,052 100,000 13,476 100,000 19,942 100,000
15 70 3,000 5,803 100,000 15,462 100,000 34,330 100,000
20 75 3,000 0 0 7,265 100,000 54,717 100,000
25 80 3,000 0 0 0 0 91,670 100,000
30 85 3,000 0 0 0 0 165,190 173,449
</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 Life or the Fund that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
128
<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)
(-1.21% NET) (4.79% NET) (10.79% 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 $ 2,538 $52,538 $ 2,620 $ 52,620 $ 2,701 $ 52,701
2 57 3,000 5,003 55,003 5,323 55,323 5,650 55,650
3 58 3,000 7,403 57,403 8,118 58,118 8,878 58,878
4 59 3,000 9,731 59,731 11,004 61,004 12,411 62,411
5 60 3,000 11,990 61,990 13,985 63,985 16,280 66,280
6 61 3,000 14,174 64,174 17,060 67,060 20,516 70,516
7 62 3,000 16,284 66,284 20,233 70,233 25,158 75,158
8 63 3,000 18,315 68,315 23,502 73,502 30,244 80,244
9 64 3,000 20,273 70,273 26,879 76,879 35,828 85,828
10 65 3,000 22,148 72,148 30,356 80,356 41,951 91,951
15 70 3,000 30,267 80,267 49,379 99,379 82,885 132,885
20 75 3,000 33,615 83,615 68,568 118,568 145,737 195,737
25 80 3,000 29,185 79,185 84,021 134,021 240,463 290,463
30 85 3,000 11,904 61,904 88,505 138,505 381,343 431,343
</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 Life 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."
129
<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)
(-1.21% NET) (4.79% NET) (10.79% 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 $ 2,161 $52,161 $ 2,227 $ 52,227
2 57 3,000 4,105 54,105 4,368 54,368 4,637 54,637
3 58 3,000 6,037 56,037 6,623 56,623 7,247 57,247
4 59 3,000 7,885 57,885 8,924 58,924 10,074 60,074
5 60 3,000 9,645 59,645 11,268 61,268 13,136 63,136
6 61 3,000 11,310 61,310 13,647 63,647 16,450 66,450
7 62 3,000 12,871 62,871 16,054 66,054 20,033 70,033
8 63 3,000 14,317 64,317 18,477 68,477 23,899 73,899
9 64 3,000 15,635 65,635 20,902 70,902 28,065 78,065
10 65 3,000 16,816 66,816 23,318 73,318 32,552 82,552
15 70 3,000 20,412 70,412 34,907 84,907 60,772 110,772
20 75 3,000 18,716 68,716 43,725 93,725 101,197 151,197
25 80 3,000 8,612 58,612 45,043 95,043 157,352 207,352
30 85 3,000 0 0 32,228 82,228 234,440 284,440
</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 Life or the Fund that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
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<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 Life 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>
$9,914 $10,155 $59,914 $60,155
</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>
$9,259 $9,501 $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.
131
