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Pacific
PORTFOLIOS
Prospectuses For:
Pacific Portfolios
Variable Annuity
Pacific Select Fund
Dated May 1, 1998
Underwritten by:
[LOGO OF PACIFIC LIFE]
Pacific Life Insurance Company
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PACIFIC PORTFOLIOS
[LOGO OF PACIFIC PORTFOLIOS] AN INDIVIDUAL FLEXIBLE PREMIUM DEFERRED
VARIABLE ANNUITY CONTRACT
ISSUED BY PACIFIC LIFE INSURANCE COMPANY
MAILING ADDRESS: P.O. BOX 7187
PASADENA, CALIFORNIA 91109-7187
1-800-722-2333
This Prospectus describes Pacific Portfolios (the "Contract") offered by
Pacific Life Insurance Company ("Pacific Life," "we," "us," or "our" formerly
known as Pacific Mutual Life Insurance Company). The Contracts provide
Policyholders (Contract Owners," "Owners," "you" or "your") with flexibility
in long-term financial planning, including planning for retirement, and are
designed to meet the insurance needs and financial objectives of
policyholders. Contracts are available both to individuals and under certain
tax-qualified retirement plans. Payout options under the Contracts include
variable annuities funded through our Separate Account A (the "Separate
Account") and fixed annuities funded through our General Account.
Thirteen Variable Investment Options are currently available; each is a
subaccount of the Separate Account, and provides variable returns by investing
in shares of a corresponding Portfolio of Pacific Select Fund:
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Money Market Portfolio Multi-Strategy Portfolio
High Yield Bond Portfolio Equity Portfolio
Managed Bond Portfolio Bond and Income Portfolio
Government Securities Portfolio Equity Index Portfolio
Aggressive Equity Portfolio International Portfolio
Growth LT Portfolio Emerging Markets Portfolio
Equity Income Portfolio
</TABLE>
In addition, the following Options each provide a fixed rate of return and
are funded through our General Account:
Fixed Option
DCA Plus Fixed Option (subject to availability in your state
of issue)
Guaranteed Interest Options with the following Guarantee
Terms:
Three-Year
Six-Year
Ten-Year
THIS PROSPECTUS PROVIDES INFORMATION THAT YOU SHOULD KNOW BEFORE PURCHASING
A CONTRACT. IN ADDITION, THIS PROSPECTUS IS ACCOMPANIED BY A CURRENT
PROSPECTUS FOR THE PACIFIC SELECT FUND. YOU SHOULD READ BOTH OF THESE
PROSPECTUSES CAREFULLY AND RETAIN THEM FOR YOUR FUTURE REFERENCE.
Additional information about the Contract and the Separate Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information ("SAI"), dated May 1, 1998. You may obtain a free copy of the SAI
by writing or calling Pacific Life. The information contained in the SAI is
incorporated by reference into this Prospectus. The table of contents for the
SAI appears on page 49 of this Prospectus. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI material incorporated by reference
and other information regarding registrants that file electronically with the
SEC.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK. IT IS NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN A CONTRACT INVOLVES RISK, INCLUDING
POSSIBLE LOSS OF PRINCIPAL.
---------------
THE CONTRACT IS NOT AVAILABLE IN ALL STATES AND THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER IN ANY JURISDICTION IN WHICH SUCH AN OFFER MAY NOT BE
MADE LAWFULLY. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE RELATED SAI (OR
ANY SALES LITERATURE APPROVED BY PACIFIC LIFE), AND ANY SUCH
UNAUTHORIZED INFORMATION OR REPRESENTATION IS, IF GIVEN OR MADE, NOT
TO BE RELIED UPON.
DATED: MAY 1, 1998
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TABLE OF CONTENTS
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SPECIAL DEFINITIONS....................................................... 4
SUMMARY................................................................... 7
FEE TABLE................................................................. 8
WHY BUY A CONTRACT........................................................ 12
YOUR INVESTMENT OPTIONS................................................... 12
Your Variable Investment Options........................................ 12
Variable Investment Option Performance.................................. 14
Your Fixed Option, DCA Plus Fixed Option and GIOs....................... 14
PURCHASING YOUR CONTRACT.................................................. 14
How to Apply for Your Contract.......................................... 14
Purchasing the Enhanced Guaranteed Minimum Death Benefit Rider (Option-
al).................................................................... 15
Making Your Purchase Payments........................................... 15
HOW YOUR PAYMENTS ARE ALLOCATED........................................... 16
Choosing Your Investment Options........................................ 16
Investing in Variable Investment Options................................ 16
When Your Investment is Effective....................................... 16
Transfers............................................................... 17
CHARGES, FEES AND DEDUCTIONS.............................................. 19
Withdrawal Charge....................................................... 19
Premium Taxes........................................................... 20
Annual Fee.............................................................. 21
Waivers and Reduced Charges............................................. 21
Mortality and Expense Risk Charge....................................... 22
Administrative Fee...................................................... 22
Annual Enhanced Guaranteed Minimum Death Benefit Rider Charge (Option-
al).................................................................... 22
Expenses of the Fund.................................................... 22
RETIREMENT BENEFITS AND OTHER PAYOUTS..................................... 22
Selecting Your Annuitant................................................ 22
Annuitization........................................................... 23
Choosing Your Annuity Date ("Annuity Start Date")....................... 23
Default Annuity Date and Options........................................ 24
Choosing Your Annuity Option............................................ 24
Your Annuity Payments................................................... 25
Death Benefits.......................................................... 26
WITHDRAWALS............................................................... 30
Optional Withdrawals.................................................... 30
Tax Consequences of Withdrawals......................................... 31
Short-Term Cancellation Right ("Free Look")............................. 31
PACIFIC LIFE AND THE SEPARATE ACCOUNT..................................... 32
Pacific Life............................................................ 32
Separate Account A...................................................... 32
FEDERAL TAX STATUS........................................................ 33
Taxes Payable by Contract Owners: General Rules......................... 33
Qualified Contracts..................................................... 35
</TABLE>
2
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<TABLE>
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Loans.................................................................... 37
Withholding.............................................................. 39
Impact of Federal Income Taxes........................................... 39
Taxes on Pacific Life.................................................... 39
ADDITIONAL INFORMATION..................................................... 40
Voting Rights............................................................ 40
Changes to Your Contract................................................. 40
Changes to ALL Contracts................................................. 41
Inquiries and Submitting Forms and Requests.............................. 41
Telephone Transactions................................................... 42
Timing of Payments and Transactions...................................... 43
Confirmations, Statements and Other Reports to Contract Owners........... 43
Replacement of Life Insurance or Annuities............................... 43
Financial Statements..................................................... 44
Preparation for the Year 2000............................................ 44
THE GENERAL ACCOUNT........................................................ 45
General Information...................................................... 45
Guarantee Terms.......................................................... 45
Withdrawals and Transfers................................................ 47
CONTENTS OF THE SAI........................................................ 49
APPENDIX A: STATE LAW VARIATIONS........................................... 50
APPENDIX B: MARKET VALUE ADJUSTMENT........................................ 51
</TABLE>
3
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SPECIAL DEFINITIONS
In this Prospectus, "we," "our" and "us" refer to Pacific Life Insurance
Company ("Pacific Life"); "you" and "your" refer to the Contract Owner.
Account Value--The amount of your Contract Value allocated to a specified
Variable Investment Option, the Fixed Option or to a GIO.
Annual Fee--A $40 fee charged each year on your Contract Anniversary and at
the time of a full withdrawal, if your Net Contract Value is less than $50,000
on that date.
Annuitant--A person on whose life annuity payments may be determined. An
Annuitant's life may also be used to determine certain increases in death
benefits, and to determine the Annuity Date. A Contract may name a single
("sole") Annuitant or two ("Joint") Annuitants, and may also name a
"Contingent" Annuitant. If you name Joint Annuitants or a Contingent
Annuitant, "the Annuitant" means the sole surviving Annuitant, unless
otherwise stated.
Annuity Date ("Annuity Start Date")--The date specified in your Contract, or
the date you later elect, if any, for the start of annuity payments if the
Annuitant (or Joint Annuitants) is (or are) still living and your Contract is
in force; or if earlier, the date that annuity payments actually begin.
Annuity Option--Any one of the income options available for a series of
payments after your Annuity Date.
Beneficiary--A person who may have a right to receive the death benefit
payable upon the death of the Annuitant or a Contract Owner prior to the
Annuity Date, or has a right to receive remaining guaranteed annuity payments,
if any, if the Annuitant dies after the Annuity Date.
Business Day--Any day on which the value of an amount invested in a Variable
Investment Option is determined, which currently includes each day that the
New York Stock Exchange is open for trading and on which our administrative
offices are open. The New York Stock Exchange is closed on weekends and on the
following holidays: New Year's Day, President's Day, Good Friday, Memorial
Day, July Fourth, Labor Day, Thanksgiving Day and Christmas Day. We may choose
to close on other holidays, a day immediately preceding or following a
national holiday, or in emergency situations. In this Prospectus, "day" or
"date" means Business Day unless otherwise specified. If any transaction or
event called for under a Contract is scheduled to occur on a day that is not a
Business Day, such transaction or event will be deemed to occur on the next
following Business Day unless otherwise specified. Special circumstances such
as leap years and months with fewer than 31 days are discussed in the SAI.
Each Business Day ends at 4:00 p.m. Eastern time.
Code--The Internal Revenue Code of 1986, as amended.
Contingent Annuitant--A person, named in your Contract, who will become your
sole surviving Annuitant if your existing sole Annuitant (or both Joint
Annuitants) should die.
Contingent Owner--A person, named in your Contract, who will succeed to the
rights as a Contract Owner of your Contract if all named Contract Owners die
before your Annuity Date.
Contract Anniversary--The same date, in each subsequent year, as your Contract
Date.
Contract Date--The date we issue your Contract.
Contract Debt--As of the end of any given Business Day, the principal amount
you have outstanding on any loan under your Contract, plus any accrued and
unpaid interest. Loans are available only on certain Qualified Contracts.
4
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Contract Owner, Owner, Policyholder, you, or your--Generally, a person who
purchases a Contract and makes the Purchase Payments. A Contract Owner has all
rights in the Contract, including the right to make withdrawals, designate and
change beneficiaries, transfer amounts among Investment Options, and designate
an Annuity Option. If your Contract names Joint Owners, both Joint Owners are
Contract Owners and share all such rights.
Contract Value--As of the end of any Business Day, the sum of your Variable
Account Value, Fixed Option Value, DCA Plus Fixed Option Value, GIO Value and
the Loan Account Value.
Contract Year--A year that starts on the Contract Date or on a Contract
Anniversary.
DCA Plus Fixed Option--If you allocate all or part of your Purchase Payments
to the DCA Plus Fixed Option, such amounts are held in our General Account and
receive interest at rates declared periodically (the "Guaranteed Interest
Rate"), but not less than an annual rate of 3%.
DCA Plus Fixed Option Value--The aggregate of your Contract Value allocated to
the DCA Plus Fixed Option.
Earnings--As of the end of any Business Day, your Earnings equal your Contract
Value less your aggregate Purchase Payments which are reduced by withdrawals
of prior Purchase Payments.
Fixed Option--If you allocate all or a part of your Purchase Payments or
Contract Value to the Fixed Option, such amounts are held in our General
Account and receive interest at rates declared periodically, but not less than
an annual rate of 3%.
Fixed Option Value--The aggregate amount of your Contract Value allocated to
the Fixed Option.
Fund--Pacific Select Fund.
General Account--Our General Account consists of all of our assets other than
those assets allocated to Separate Account A or to any of our other separate
accounts.
Guaranteed Interest Rate--The interest rate guaranteed at the time of
allocation (or rollover) for the Guarantee Term on amounts allocated to the
Fixed Option, DCA Plus Fixed Option or a Guaranteed Interest Option. All
Guaranteed Interest Rates are expressed as annual rates and interest is
accrued daily. The rate will not be less than an annual rate of 3%.
Guaranteed Interest Option ("GIO")--If you allocate all or part of your
Purchase Payments or Contract Value to one or more GIOs, such amounts are
subject to a particular Guaranteed Interest Rate for the Guarantee Term
selected. GIO amounts are held in our General Account and are subject to a
Market Value Adjustment if annuitized, withdrawn or transferred prior to the
end of the Guarantee Term. Each new allocation will receive the Guaranteed
Interest Rate then applicable to new allocations for the selected Guarantee
Term.
GIO Value--The aggregate amount of your Contract Value allocated to all GIOs.
Guarantee Term--The period during which an amount you allocate to the Fixed
Option or to a GIO earns a Guaranteed Interest Rate. These terms are up to
one-year for the Fixed Option, one year for the DCA Plus Fixed Option and
three-, six- and ten-years for the GIOs.
GIO Term Value--The aggregate amount under your Contract allocated to all GIOs
that have the same length Guarantee Term. The GIO Term Value is based on the
original Guarantee Term, not the time remaining in the Guarantee Term. The GIO
Term Value is used in determining which GIOs will be accessed when you make a
withdrawal or transfer.
Investment Option--A Variable Account, the Fixed Option, the DCA Plus Fixed
Option or a GIO offered under the Contract.
Joint Annuitant--If your Contract is a Non-Qualified Contract, you may name
two Annuitants, called "Joint Annuitants," in your application for your
Contract. Special restrictions apply for Qualified Contracts.
Loan Account Value--The amount transferred from your Investment Options to the
General Account to secure a Contract Loan, increased by interest earned and
decreased by any principal repayments and/or withdrawals or transfers of
interest earned.
Market Value Adjustment ("MVA")--The adjustment made to any amount annuitized,
transferred or withdrawn from a GIO prior to the end of its Guarantee Term.
This adjustment reflects the impact of changes in applicable interest rates
between the time the Purchase Payment(s) and/or Contract Value is allocated to
a specific GIO and the time of the annuitization, withdrawal or transfer.
5
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Net Contract Value--Your Contract Value less Contract Debt.
Non-Qualified Contract--A Contract other than a Qualified Contract.
Portfolio--A separate portfolio of the Fund.
Primary Annuitant--The individual that is named in your Contract, the events
in the life of whom are of primary importance in affecting the timing or
amount of the payout under the Contract.
Purchase Payment--An amount paid to us by or on behalf of a Contract Owner, as
consideration for the benefits provided under the Contract.
Qualified Contract--A Contract that qualifies under the Code as an individual
retirement annuity ("IRA"), or a Contract purchased by a Qualified Plan,
qualifying for special tax treatment under the Code.
Qualified Plan--A retirement plan that receives favorable tax treatment under
Section 401, 403, 408, 408A or 457 of the Code.
Policyholder--The Contract Owner.
SEC--Securities and Exchange Commission.
Separate Account A (the "Separate Account")--A separate account of ours
registered as a unit investment trust under the Investment Company Act of
1940.
Subaccount--An investment division of the Separate Account. Each Subaccount
invests its assets in shares of a corresponding Portfolio.
Subaccount Annuity Unit--Subaccount Annuity Units (or "Annuity Units") are
used to measure variation in variable annuity payments. To the extent you
elect to convert all or some of your Contract Value into variable annuity
payments, the amount of each annuity payment (after the first payment) will
vary with the value and number of Annuity Units in each Subaccount attributed
to any variable annuity payments. At annuitization (after any applicable
premium taxes and/or other taxes are paid), the amount annuitized to a
variable annuity determines the amount of your first variable annuity payment
and the number of Annuity Units credited to your annuity in each Subaccount.
The value of Subaccount Annuity Units, like the value of Subaccount Units, is
expected to fluctuate daily, as described in the definition of "Unit Value."
Subaccount Unit--Before your Annuity Date, each time you allocate an amount to
a Subaccount, your Contract is credited with a number of Subaccount Units in
that Subaccount; these Units are used, for accounting purposes, to measure
your Account Value in that Subaccount. The value of Subaccount Units is
expected to fluctuate daily, as described in the definition of Unit Value.
Unit Value--The value of a Subaccount Unit ("Subaccount Unit Value") or
Subaccount Annuity Unit ("Subaccount Annuity Unit Value"). Unit Value of any
Subaccount is subject to change on any Business Day in much the same way that
the value of a mutual fund share changes each day; the fluctuations in value
reflect the investment results, expenses of and charges against the Portfolio
in which the Subaccount invests its assets, and also reflect charges against
the Separate Account. Changes in Subaccount Annuity Unit Values also reflect
an additional factor that adjusts Subaccount Annuity Unit Values to offset our
Annuity Option Table's implicit assumption of an annual investment return of
5%; the effect of this assumed investment return is explained in detail in the
SAI. Unit Value of a Subaccount Unit or Subaccount Annuity Unit on any
Business Day is measured at or about 4:00 p.m., Eastern time, on that Business
Day.
Variable Account Value--The aggregate amount of your Contract Value allocated
to all Subaccounts.
Variable Investment Option--A Subaccount.
6
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SUMMARY
This brief description is only an overview of the more significant features of
your Contract. More detailed information may be found in subsequent sections of
this Prospectus, in the SAI, and in the Contract itself. Endorsements to your
Contract may contain variations from the standardized information in this
Prospectus. In addition, certain variations due to requirements particular to
the issue state or jurisdiction are set forth in supplements attached to or
accompanying this Prospectus. IF ANY CONTRACT ENDORSEMENTS OR SUPPLEMENTAL
VARIATIONS TO THIS PROSPECTUS CONFLICT WITH OTHER INFORMATION IN THE CONTRACT
FORM OR IN THIS PROSPECTUS, THE ENDORSEMENTS AND SUPPLEMENTS CONTROL YOUR
CONTRACT.
WHAT IS THE CONTRACT? Pacific Portfolios (the "Contract") is an annuity
contract designed to be a long-term financial planning device, permitting you
to invest on a tax-deferred basis for retirement or other long-range goals, and
to receive a series of regular payments for life or a period of years. See
FEDERAL TAX STATUS.
HOW DO I PURCHASE A CONTRACT? Your initial purchase payment must be at least
$5,000 to buy a Non-Qualified Contract ($2,000 for a Qualified Contract). After
this initial payment you may make additional payments but you are not required
to do so. Your initial payment may be payable in automatic installments over
your first Contract Year. See PURCHASING YOUR CONTRACT.
WHAT ARE MY INVESTMENT OPTIONS? You select your own Investment Options.
Thirteen of the Investment Options are Variable Investment Options available
through Separate Account A. Each Variable Investment Option invests in a
corresponding Portfolio of the Fund. We are the investment adviser to the Fund,
and we and the Fund have retained other portfolio managers for eleven of the
Portfolios. You bear the investment risk associated with the Variable
Investment Options, and you should expect your Contract Value allocated to
these Variable Investment Options and the value of any Subaccount Annuity Units
attributed to any variable annuity payments to fluctuate. See HOW YOUR PAYMENTS
ARE ALLOCATED.
Also available are the Fixed Option, the DCA Plus Fixed Option (subject to
availability in your state of issue) and the Guaranteed Interest Option with
Guarantee Terms of three-, six- and ten-years. Each of these options provides a
fixed annual interest rate of at least 3%; the portion of your Purchase
Payments or Contract Value allocated to the Fixed Option, the DCA Plus Fixed
Option or the GIOs is held in our General Account. You may select as many
Investment Options as you wish up to the Annuity Date. After the Annuity Date,
the Variable Investment Options may be selected if you choose variable annuity
payments.
CAN I CHANGE MY INVESTMENT OPTIONS? You may transfer amounts from any
Investment Option to another on or prior to your Annuity Date; after your
Annuity Date, up to four exchanges of Subaccount Annuity Units may be made in
any twelve-month period. Certain restrictions apply to the Fixed Option, the
DCA Plus Fixed Option and GIOs. You may transfer amounts automatically using
dollar cost averaging, automatic portfolio rebalancing, or an earnings sweep.
Transaction fees may be imposed in the future for excessive transfers. See HOW
YOUR PAYMENTS ARE ALLOCATED--TRANSFERS and THE GENERAL ACCOUNT--WITHDRAWALS AND
TRANSFERS in this Prospectus and THE CONTRACTS AND THE SEPARATE ACCOUNT--
SYSTEMATIC TRANSFER PROGRAMS in the SAI.
WHAT CHARGES WILL I PAY? An Administrative Fee equal to an annual factor
expressed as a decimal (where 1.00 is equal to 100%) of 0.0015, and a mortality
and expense risk charge ("Risk Charge") equal to an annual factor of 0.0125,
are charged against assets held in the Variable Investment Options. Amounts
invested in the Variable Investment Options are also subject to the operating
expenses imposed on the corresponding Portfolio of the Fund. Before you
annuitize, an Annual Fee of $40 is charged each year and at the time of a full
withdrawal if your Net Contract Value is less than $50,000. When you withdraw
amounts attributed to Purchase Payments from your Contract Value, you may be
subject to a contingent deferred sales charge (or "withdrawal charge") of up to
7%, which is determined by the amount of your withdrawal and the length of time
you held the Purchase Payment considered withdrawn under your Contract. If you
purchase the optional Enhanced Guaranteed Minimum Death Benefit Rider (the
"EGMDBR") (subject to state availability) at the time your application is
completed, an annual charge is assessed against assets held in your Investment
Options. The annual charge is equal to (a) 0.10% of your Contract Value if the
youngest Annuitant's age is 65 or younger on the Contract Date, and (b) 0.30%
of your Contract Value if the youngest Annuitant's age is 66 through 75 on the
Contract
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Date. You may also be subject to other fees. See PURCHASING YOUR CONTRACT--
PURCHASING THE ENHANCED MINIMUM DEATH BENEFIT RIDER (OPTIONAL) AND CHARGES,
FEES AND DEDUCTIONS.
CAN I WITHDRAW MY CONTRACT VALUE? Generally, you may withdraw all or part of
your Contract Value at any time on or prior to your Annuity Date. Certain
restrictions are imposed on withdrawals from the Fixed Option, the GIOs and
certain Qualified Contracts. In addition, amounts you withdraw from a GIO are
subject to the Market Value Adjustment ("MVA"). Withdrawals may be subject to
fees and charges, taxation and, in certain circumstances, a tax penalty. See
WITHDRAWALS, FEDERAL TAX STATUS and THE GENERAL ACCOUNT--WITHDRAWALS AND
TRANSFERS.
CAN I RETURN MY CONTRACT? For a limited time, usually 10 days after you receive
it, you may return your Contract for a refund in accordance with the terms of
its "free look" provision. See WITHDRAWALS-- SHORT-TERM CANCELLATION RIGHT
("FREE LOOK").
HOW DO I REACH PACIFIC LIFE? You can reach our service representatives between
6:00 a.m. and 5:00 p.m., Pacific time, at 1-800-722-2333. To send payments,
forms, or requests, see ADDITIONAL INFORMATION--INQUIRIES AND SUBMITTING FORMS
AND REQUESTS.
FEE TABLE
The purpose of this fee table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly under your
Contract. The table reflects expenses of the Separate Account as well as
expenses of the Fund. Expenses shown under "Contract Expenses" and "Separate
Account Annual Expenses" are specified under the terms of the Contract and are
fixed. Expenses shown under "Fund Annual Expenses After Expense Limitation" are
estimated expenses of the Fund; Fund expenses are not specified under the terms
of the Contract and may vary from year to year. In addition to the charges and
expenses described below, a charge for premium taxes and/or other taxes may
apply. See CHARGES, FEES AND DEDUCTIONS--PREMIUM TAXES in this Prospectus, the
discussion under ORGANIZATION AND MANAGEMENT OF THE FUND in the Fund's
Prospectus, and INVESTMENT ADVISER and PORTFOLIO MANAGEMENT AGREEMENTS in the
Fund's SAI.
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CONTRACT EXPENSES
Sales Charge Imposed on Purchase Payments.................... None
Maximum Withdrawal Charge/1/ ................................ 7.0%
(computed as a percentage of Purchase Payments)
Withdrawal Transaction Fee/2/................................ None
Transfer Fee/3/.............................................. None
Annual Fee/4/................................................ $40.00
Enhanced Death Benefit Charge (per year)/5/--Optional
(computed as a percentage of Contract Value)
If age of youngest Annuitant on Contract Date is 0-65....... 0.10%
If age of youngest Annuitant on Contract Date is 66-75...... 0.30%
SEPARATE ACCOUNT A ANNUAL EXPENSES
(as a percentage of average daily account value)
Mortality and Expense Risk Charge............................ 1.25%
Administrative Fee........................................... 0.15%
</TABLE>
- - ----
/1/The withdrawal charge, also called a "contingent deferred sales charge," may
not apply or may be reduced under certain circumstances. See CHARGES, FEES
AND DEDUCTIONS.
/2/We reserve the right to impose a transaction fee in the future of up to $15
per withdrawal on partial withdrawals in excess of 15 in any Contract Year.
See WITHDRAWALS--OPTIONAL WITHDRAWALS.
/3/We reserve the right to impose a transaction fee in the future of up to $15
per transfer on transfers in excess of 15 in any Contract Year. See HOW YOUR
PAYMENTS ARE ALLOCATED--TRANSFERS.
/4/This fee will be charged on each Contract Anniversary prior to your Annuity
Date and at the time of a full withdrawal of any Contract Value unless your
Net Contract Value is at least $50,000 on that date.
/5/If the Enhanced Guaranteed Minimum Death Benefit Rider ("EGMDBR") (subject to
state availability) is purchased, this charge will be deducted from your
Contract Value on each Contract Anniversary that the EGMDBR is in effect and
at the time you make a full withdrawal of your Net Contract Value. See
CHARGES, FEES AND DEDUCTIONS.
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FUND ANNUAL EXPENSES AFTER EXPENSE LIMITATION*
(AS A PERCENTAGE OF PORTFOLIO AVERAGE DAILY NET ASSETS)
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ADVISORY OTHER TOTAL
FEE EXPENSES EXPENSES
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Money Market......................................... .38% .06% .44%
High Yield Bond...................................... .60% .05% .65%
Managed Bond......................................... .60% .06% .66%
Government Securities................................ .60% .06% .66%
Aggressive Equity.................................... .80% .06% .86%
Growth LT............................................ .75% .07% .82%
Equity Income........................................ .65% .05% .70%
Multi-Strategy....................................... .65% .06% .71%
Equity............................................... .65% .05% .70%
Bond and Income...................................... .60% .06% .66%
Equity Index......................................... .17% .06% .23%
International........................................ .85%* .19% 1.04%
Emerging Markets..................................... 1.10% .36% 1.46%
</TABLE>
*The expenses listed for the Fund Portfolios reflect current expenses for the
year ending December 31, 1997, except that the Advisory Fee for the
International Portfolio has been adjusted to reflect the Advisory Fee without
any waiver. The Actual Advisory Fee paid by the International Portfolio in
1997 was 0.83% of the Portfolio's average daily net assets. This reflects the
Advisory Fee waived by Pacific Life in connection with the change in the
Portfolio Manager to Morgan Stanley that occurred on June 1, 1997. Pacific
Life, as Investment Adviser to the Fund, adopted the policy to waive our fees
or otherwise reimburse expenses so that operating expenses (exclusive of
advisory fees, additional custodial fees associated with holding foreign
securities, foreign taxes on dividends, interest or capital gains, and
extraordinary expenses) are not greater than 0.25% of the average daily net
assets per year. We began the policy in 1989 and intend to continue this
policy until at least December 31, 1999. No reimbursement to the Portfolios
was necessary for the fiscal year 1997. There can be no assurance that the
expense reimbursement arrangement will continue after December 31, 1999, and
any unreimbursed expenses would be reflected in the Policy Owner's Accumulated
Value and in some instances, the death benefit.
Example: If, at the end of the indicated time period, you annuitize your
Contract Value, you surrender your Contract and withdraw your Contract
Value, or you neither annuitize nor surrender your Contract, you would pay
the following cumulative expenses on each $1,000 invested, assuming 5%
annual return on assets:
<TABLE>
<CAPTION>
NEITHER ANNUITIZED
ANNUITIZED SURRENDERED NOR SURRENDERED
---------------------- --------------------- ---------------------
W/ EGMDBR * W/ EGMDBR * W/ EGMDBR *
------------- ------------ ------------
W/O AGE AGE W/O AGE AGE W/O AGE AGE
VARIABLE ACCOUNT EGMDBR * 0-65 66-75 EGMDBR * 0-65 66-75 EGMDBR * 0-65 66-75
- - ---------------- -------- ------ ------ -------- ----- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market
1 Year.................. $ 83 $ 84 $ 86 $ 83 $ 84 $ 86 $ 20 $ 21 $ 23
3 Year.................. 60 64 70 114 118 124 60 64 70
5 Year.................. 104 109 119 131 136 146 104 109 119
10 Year................. 224 234 255 224 234 255 224 234 255
High Yield Bond
1 Year.................. 85 86 88 85 86 88 22 23 25
3 Year.................. 67 70 76 121 124 130 67 70 76
5 Year.................. 114 120 130 141 147 157 114 120 130
10 Year................. 245 256 276 245 256 276 245 256 276
Managed Bond
1 Year.................. 85 86 88 85 86 88 22 23 25
3 Year.................. 67 70 76 121 124 130 67 70 76
5 Year.................. 115 120 130 142 147 157 115 120 130
10 Year................. 247 257 277 247 257 277 247 257 277
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NEITHER ANNUITIZED
ANNUITIZED SURRENDERED NOR SURRENDERED
--------------------- --------------------- ---------------------
W/EGMDBR * W/EGMDBR * W/EGMDBR *
----------- ------------ ------------
W/O AGE AGE W/O AGE AGE W/O AGE AGE
VARIABLE ACCOUNT EGMDBR * 0-65 66-75 EGMDBR * 0-65 66-75 EGMDBR * 0-65 66-75
- - ---------------- -------- ----- ------ -------- ----- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Government Securities
1 Year.................. $ 85 $ 86 $ 88 $ 85 $ 86 $ 88 $ 22 $ 23 $ 25
3 Year.................. 67 70 76 121 124 130 67 70 76
5 Year.................. 115 120 130 142 147 157 115 120 130
10 Year................. 247 257 277 247 257 277 247 257 277
Aggressive Equity
1 Year.................. 87 88 90 87 88 90 24 25 27
3 Year.................. 73 76 82 127 130 136 73 76 82
5 Year.................. 125 130 140 152 157 167 125 130 140
10 Year................. 267 277 297 267 277 297 267 277 297
Growth LT
1 Year.................. 86 87 89 86 87 89 23 24 26
3 Year.................. 72 75 81 126 129 135 72 75 81
5 Year.................. 123 128 138 150 155 165 123 128 138
10 Year................. 263 273 293 263 273 293 263 273 293
Equity Income
1 Year.................. 85 86 88 85 86 88 22 23 25
3 Year.................. 68 71 77 122 125 131 68 71 77
5 Year.................. 117 122 132 144 149 159 117 122 132
10 Year................. 251 261 281 251 261 281 251 261 281
Multi-Strategy
1 Year.................. 85 86 88 85 86 88 22 23 25
3 Year.................. 69 72 78 123 126 132 69 72 78
5 Year.................. 118 123 133 145 150 160 118 123 133
10 Year................. 252 262 282 252 262 282 252 262 282
Equity
1 Year.................. 85 86 88 85 86 88 22 23 25
3 Year.................. 68 71 77 122 125 131 68 71 77
5 Year.................. 117 122 132 144 149 159 117 122 132
10 Year................. 251 261 281 251 261 281 251 261 281
Bond and Income
1 Year.................. 85 86 88 85 86 88 22 23 25
3 Year.................. 67 70 76 121 124 130 67 70 76
5 Year.................. 115 120 130 142 147 157 115 120 130
10 Year................. 247 257 277 247 257 277 247 257 277
Equity Index
1 Year.................. 80 81 84 80 81 84 17 18 21
3 Year.................. 54 57 63 108 111 117 54 57 63
5 Year.................. 93 98 108 120 125 135 93 98 108
10 Year................. 201 212 233 201 212 233 201 212 233
International
1 Year.................. 89 90 92 89 90 92 26 27 29
3 Year.................. 79 82 88 133 136 142 79 82 88
5 Year.................. 134 139 149 161 166 176 134 139 149
10 Year................. 285 295 315 285 295 315 285 295 315
Emerging Markets
1 Year.................. 93 94 96 93 94 96 30 31 33
3 Year.................. 91 94 100 145 148 154 91 94 100
5 Year.................. 155 160 170 182 187 197 155 160 170
10 Year................. 326 335 354 326 335 354 326 335 354
</TABLE>
*"W/O EGMDBR" means without the Enhanced Guaranteed Minimum Death Benefit
Rider (the "EGMDBR") and reflects expenses for an Owner who has not purchased
the EGMDBR. "W/ EGMDBR" means with the Enhanced Guaranteed Minimum Death
Benefit Rider and reflects expenses for an Owner who has purchased the EGMDBR
where the age of the Youngest Annuitant on the Contract Date is shown as
above. Purchase of the EGMDBR is totally optional.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES; ACTUAL EXPENSES INCURRED IN ANY GIVEN YEAR MAY BE MORE OR LESS THAN
THOSE SHOWN IN THE EXAMPLES.
The examples use an assumed Contract Value of $45,000, and reflect the
deduction of the Annual Fee amount without regard to the waiver for Contract
Values over $50,000.
10
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables present financial highlights with respect to each
Variable Account of the Separate Account. The information in the tables for
the periods ended December 31, 1996 and 1997 is included in the Separate
Account's financial statements for the respective years that have been audited
by Deloitte & Touche LLP, independent auditors. The tables should be read in
conjunction with the Separate Account's financial statements, which are in the
Separate Account's Annual Report dated as of December 31, 1997.
SELECTED ACCUMULATION UNIT* INFORMATION
Selected accumulation unit information as of the year ended December 31st for
the period:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ACCUMULATION UNIT VALUE AT BEGINNING OF PERIOD:
Money Market Variable Account(a)....................... $10.36 $10.00
High Yield Bond Variable Account(a).................... 10.96 10.00
Managed Bond Variable Account(a)....................... 10.27 10.00
Government Securities Variable Account(a).............. 10.14 10.00
Aggressive Equity Variable Account(b).................. 10.67 10.00
Growth LT Variable Account(a).......................... 11.61 10.00
Equity Income Variable Account(a)...................... 11.66 10.00
Multi-Strategy Variable Account(a)..................... 11.03 10.00
Equity Variable Account(a)............................. 12.59 10.00
Bond and Income Variable Account(a).................... 9.79 10.00
Equity Index Variable Account(a)....................... 11.97 10.00
International Variable Account(a)...................... 11.84 10.00
Emerging Markets Variable Account(b)................... 9.57 10.00
- - ------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE AT END OF PERIOD:
Money Market Variable Account.......................... $10.75 $10.36
High Yield Bond Variable Account....................... 11.83 10.96
Managed Bond Variable Account.......................... 11.14 10.27
Government Securities Variable Account................. 10.95 10.14
Aggressive Equity Variable Account..................... 10.92 10.67
Growth LT Variable Account............................. 12.71 11.61
Equity Income Variable Account......................... 14.78 11.66
Multi-Strategy Variable Account........................ 13.01 11.03
Equity Variable Account................................ 14.68 12.59
Bond and Income Variable Account....................... 11.23 9.79
Equity Index Variable Account.......................... 15.69 11.97
International Variable Account......................... 12.76 11.84
Emerging Markets Variable Accounts..................... 9.28 9.57
- - ------------------------------------------------------------------------------
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF
PERIOD:
Money Market Variable Account.......................... 3,041,495 1,478,808
High Yield Bond Variable Account....................... 2,702,260 630,637
Managed Bond Variable Account.......................... 4,434,069 742,041
Government Securities Variable Account................. 1,506,839 673,682
Aggressive Equity Variable Account..................... 1,711,363 387,987
Growth LT Variable Account............................. 3,826,332 950,317
Equity Income Variable Account......................... 4,189,318 743,123
Multi-Strategy Variable Account........................ 1,830,504 294,936
Equity Variable Account................................ 1,983,738 453,223
Bond and Income Variable Account....................... 975,740 154,590
Equity Index Variable Account.......................... 4,460,482 757,175
International Variable Account......................... 5,292,436 1,312,817
Emerging Markets Variable Account...................... 1,342,086 240,607
</TABLE>
* Accumulation Unit: unit of measure used to calculate the value of a Contract
Owner's interest in a Variable Account during the Accumulation Period.
Date Variable Accounts began operations: (a) January 2, 1996 (b) April 17,
1996
11
<PAGE>
WHY BUY A CONTRACT
Your Pacific Portfolios Contract (your "Contract") is an annuity contract that
provides you with flexibility in tax-deferred retirement planning or other
long-term financial planning. You may select among thirteen Variable
Investment Options, the Fixed Option, and the Guaranteed Interest Option with
three different Guarantee Terms. Subject to availability in your state of
issue, the DCA Plus Fixed Option is also available when you elect DCA Plus.
You may choose to add to your Contract Value at any time before the Annuity
Date, and your additional Purchase Payments may be in any amount you choose
(subject to certain limitations). When you annuitize, we will send the payee a
series of variable and/or fixed payments for life or for a specified number of
years.
If you purchase a Contract with after-tax dollars ("Non-Qualified Contract")
or if your Contract is purchased through a Qualified Plan or IRA ("Qualified
Contract"), your earnings on the Contract are not subject to tax until amounts
are withdrawn or distributed (including annuity payments). See FEDERAL TAX
STATUS.
YOUR INVESTMENT OPTIONS
You may choose among thirteen different Variable Investment Options, the Fixed
Option, the DCA Plus Fixed Option and among the three Guarantee Terms under
the Guaranteed Interest Option.
YOUR VARIABLE INVESTMENT OPTIONS
Separate Account A, a separate account of ours, currently offers you thirteen
"Variable Investment Options" (also called "Subaccounts"). Each Variable
Investment Option invests in a separate Portfolio of the Fund. Your Variable
Investment Options are:
. Money Market Subaccount
. High Yield Bond Subaccount
. Managed Bond Subaccount
. Government Securities Subaccount
. Aggressive Equity Subaccount
. Growth LT Subaccount
. Equity Income Subaccount
. Multi-Strategy Subaccount
. Equity Subaccount
. Bond and Income Subaccount
. Equity Index Subaccount
. International Subaccount
. Emerging Markets Subaccount
12
<PAGE>
What Are Each of These Options?
For your convenience, the following chart summarizes some basic data about
each Portfolio. THIS CHART IS ONLY A SUMMARY. FOR MORE COMPLETE INFORMATION ON
EACH PORTFOLIO, INCLUDING A DISCUSSION OF THE PORTFOLIO'S INVESTMENT
TECHNIQUES AND THE RISKS ASSOCIATED WITH ITS INVESTMENTS, SEE THE ACCOMPANYING
FUND PROSPECTUS. NO ASSURANCE CAN BE GIVEN THAT A PORTFOLIO WILL ACHIEVE ITS
INVESTMENT OBJECTIVE. YOU SHOULD READ THE FUND PROSPECTUS CAREFULLY BEFORE
INVESTING.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
(UNDER NORMAL
PORTFOLIO INVESTMENT OBJECTIVE CONDITIONS) PORTFOLIO MANAGER
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market Current income Highest quality money Pacific Life
consistent with market securities.
preservation of
capital.
- - -------------------------------------------------------------------------------
High Yield Bond High level of current Intermediate- and Pacific Life
income. long-term high-
yielding lower and
medium quality ("high
risk")
fixed income
securities.
- - -------------------------------------------------------------------------------------------
Managed Bond Maximize total return Investment grade Pacific Investment
consistent with marketable debt Management Company
prudent investment securities. Will
management. normally maintain an
average portfolio
duration of 3-7 years.
- - ------------------------------------------------------------------------------------------
Government Securi- Maximize total return Securities that are Pacific Investment
ties consistent with obligations of or Management Company
prudent investment guaranteed by the U.S.
management. Government, its
agencies or
instrumentalities
(including futures
contracts and options
thereon). Will
normally maintain an
average portfolio
duration of 3-7 years.
- - -------------------------------------------------------------------------------------------
Aggressive Equity Capital appreciation. Common stocks of small Alliance Capital
emerging growth and Management L.P.
medium capitalization
companies.
------------------------------------------------------------------------------------------
Growth LT Long-term growth of Equity securities. Janus Capital
capital consistent Corporation
with preservation of
capital.
- - ------------------------------------------------------------------------------------------
Equity Income Long-term growth of Dividend-paying common J.P. Morgan Investment
capital and income. stock. Management Inc.
- - ------------------------------------------------------------------------------------------
Multi-Strategy High total return. Equity and fixed J.P. Morgan Investment
income securities. Management Inc.
- - ------------------------------------------------------------------------------------------
Equity Capital appreciation. Common stocks and Goldman Sachs
securities convertible Asset Management
into or exchangeable
for common stocks.
- - -----------------------------------------------------------------------------------------
Bond and Income Provide total return Investment grade debt Goldman Sachs
and income consistent securities. Will Asset Management
with prudent normally maintain an
investment management. average portfolio
duration within one-
half year of a long-
term bond index.
- - -------------------------------------------------------------------------------------------
Equity Index Investment results Stocks included in the Bankers Trust Company
that correspond to the Standard & Poor's 500
total return Composite Stock Price
performance of common Index (the "S&P 500").
stocks publicly traded
in the U.S.
- - -------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley Asset
appreciation. corporations domiciled Management Inc.
outside the U.S.
- - --------------------------------------------------------------------------------------------
Emerging Markets Long-term growth of Common stocks of Blairlogie Capital
capital. companies domiciled in Management
emerging market
countries.
</TABLE>
- - --------------------------------------------------------------------------------
13
<PAGE>
The Investment Adviser
We are the investment adviser for the Fund. We and the Fund have retained
other portfolio managers, supervised by us, for eleven of the Portfolios.
VARIABLE INVESTMENT OPTION PERFORMANCE
Historical performance information can help you understand how investment
performance can affect your investment in the Variable Investment Options.
Although the Subaccounts were established January 2, 1996 and have no
historical performance prior to that date, each Subaccount will be investing
in shares of a Portfolio of the Fund, and the majority of these Portfolios do
have historical performance data which covers a longer period. Performance
data include total returns for each Subaccount, current and effective yields
for the Money Market Subaccount, and yields for the other fixed income
Subaccounts. Calculations are in accordance with standard formulas prescribed
by the SEC which are described in the SAI. Yields do not reflect any charge
for premium taxes and/or other taxes; this exclusion may cause yields to show
more favorable performance. Total returns may or may not reflect withdrawal
charges, Annual Fees or any charge for premium and/or other taxes; data that
do not reflect these charges may show more favorable performance.
The SAI presents some hypothetical performance data. The SAI also presents
some performance benchmarks, based on unmanaged market indices, such as the
S&P 500, and on "peer groups," which use other managed funds with similar
investment objectives. These benchmarks may give you a broader perspective
when you examine hypothetical or actual Subaccount performance.
In addition, we may provide you with reports both as an insurance company and
as to our claims paying ability that are produced by rating agencies and
organizations.
YOUR FIXED OPTION, DCA PLUS FIXED OPTION AND GIOS
The Fixed Option, the DCA Plus Fixed Option and the GIOs each offer you a
guaranteed minimum interest rate on the amounts you allocate to these Options.
Amounts you allocate to these Options, and your earnings credited are held in
our General Account. The GIOs are available in three-, six-, and ten-year
terms. If you annuitize, transfer or withdraw amounts allocated to a GIO
before its Guarantee Term has expired, these amounts are adjusted by the MVA.
For more detailed information about these Options, see THE GENERAL ACCOUNT
section in this Prospectus.
PURCHASING YOUR CONTRACT
HOW TO APPLY FOR YOUR CONTRACT
To purchase a Contract, fill out an application and submit it along with your
initial Purchase Payment to Pacific Life Insurance Company at P.O. Box 100060,
Pasadena, California 91189-0060. If your application and payment are complete
when received, or once they have become complete, we will issue your Contract
within two Business Days. If some information is missing from your
application, we may delay issuing your Contract while we obtain the missing
information; however, we will not hold your initial Purchase Payment for more
than five Business Days without your permission.
You may also purchase a Contract by exchanging your existing contract. You
must submit all contracts to be exchanged when you submit your application.
Call your representative, or call us at 1-800-722-2333, if you are interested
in this option.
We reserve the right to reject any application or Purchase Payment for any
reason, subject to any applicable nondiscrimination laws and to our own
standards and guidelines. The maximum age of a Contract Owner, including Joint
and Contingent Owners, for which a Contract will be issued is 85. The Contract
Owner's age is
14
<PAGE>
calculated as of his or her age last birthday. If the sole Contract Owner or
sole annuitant named in the application for a Contract dies prior to our
issuance of a Contract, then the application for the Contract and/or any
Contract issued shall be deemed null and void; and any premiums we receive,
including any proceeds received in connection with an exchange or transfer,
will be returned to the applicant/Owner or the applicant/Owner's estate.
PURCHASING THE ENHANCED GUARANTEED MINIMUM DEATH BENEFIT RIDER (OPTIONAL)
If you purchase the Enhanced Guaranteed Minimum Death Benefit Rider (the
"EGMDBR") (subject to state availability) at the time your application is
completed, we charge an annual Enhanced Death Benefit Charge on each Contract
Anniversary prior to the Annuity Date that the EGMDBR remains in effect. The
Charge will be equal to the pertinent percentage, as described below,
multiplied by the Contract Value on the day the charge is deducted. The Charge
percentage is equal to 0.10% if the youngest Annuitant's age is 65 or younger
on the Contract Date and 0.30% if the youngest Annuitant's age is 66 through
75 on the Contract Date. We deduct this Charge from your Contract Value
allocated to your Investment Options on a pro-rata basis. However, any portion
of the Charge we deduct from the Fixed Option, the DCA Plus Fixed Option, and
the GIOs will not be greater than the interest credited to each of these
Options, respectively, in excess of the annual rate of 3%. If you make a full
withdrawal of your Net Contract Value during a Contract Year, we will deduct
the entire Charge for that Contract Year from the final payment made to you.
The EGMDBR may only be purchased on the Contract Date and will remain in
effect until the earlier of (a) the full withdrawal of the amount available
for withdrawal under the Contract, (b) a death benefit becomes payable under
the Contract, (c) any termination of the Contract in accordance with the
provisions of the Contract, or (d) the Annuity Date. The EGMDBR may not
otherwise be cancelled. The EGMDBR may only be purchased if the age of each
Annuitant is 75 or younger on the Contract Date.
MAKING YOUR PURCHASE PAYMENTS
Making Your Initial Payment
Your initial Purchase Payment must be at least $5,000 if you are buying a Non-
Qualified Contract, and at least $2,000 if you are buying a Qualified
Contract. You may pay this entire amount when you submit your application, or
you may choose our pre-authorized checking plan ("PAC"), which allows you to
pay in equal monthly installments over one year (at least $400 per month for
Non-Qualified Contracts, and at least $150 per month for Qualified Contracts).
If you choose PAC, you must make your first installment payment when you
submit your application. Further requirements for PAC are discussed in the PAC
form.
You must obtain our consent before making an initial or additional Purchase
Payment that will bring your aggregate Purchase Payments over $1,000,000.
Making Additional Payments
You may choose to invest additional amounts in your Contract at any time. Each
additional Purchase Payment must be at least $250 for Non-Qualified Contracts
and $50 for Qualified Contracts.
Forms of Payment
Your initial and additional Purchase Payments may be sent by personal or bank
check or by wire transfer. You may also make additional PAC Purchase Payments
via electronic funds transfer. All checks must be drawn on U.S. funds. If you
make Purchase Payments by check other than a cashier's check, your payment of
any withdrawal proceeds and any refund during your "free look" period may be
delayed until your check has cleared.
15
<PAGE>
HOW YOUR PAYMENTS ARE ALLOCATED
CHOOSING YOUR INVESTMENT OPTIONS
You may allocate your Purchase Payments among the thirteen Subaccounts, the
GIOs, the Fixed Option and, if available in your state of issue, if you elect
DCA Plus, the DCA Plus Fixed Option. Allocations of your initial Purchase
Payment to the Investment Options you selected will be effective either on
your Contract Date or on your Free Look Transfer Date. See WITHDRAWALS--SHORT-
TERM CANCELLATION RIGHT ("FREE LOOK"). Each additional Purchase Payment will
be allocated to the Investment Options according to your allocation
instructions in your application, or most recent instructions, if any, subject
to the terms described in the WITHDRAWALS--SHORT-TERM CANCELLATION RIGHT
("FREE LOOK") section. We reserve the right, in the future, to require that
your allocation to any particular Investment Option meet a certain minimum
amount. If your Contract is issued in exchange for another annuity contract or
a life insurance contract, our administrative procedures may vary depending on
the state in which your Contract is issued.
INVESTING IN VARIABLE INVESTMENT OPTIONS
Each time you allocate your investment to a Variable Investment Option, your
Contract is credited with a number of "Subaccount Units" in that Subaccount.
The number of Subaccount Units credited is equal to the amount you have
allocated to that Subaccount, divided by the "Unit Value" of one Unit of that
Subaccount.
Example: You allocate $600 to the Government Securities Subaccount. At the
end of the Business Day on which your allocation is effective, the value of
one Unit in the Government Securities Subaccount is $15. As a result, 40
Subaccount Units are credited to your Contract for your $600.
Your Variable Account Value Will Change
After we credit your Contract with Subaccount Units, the value of those Units
will usually fluctuate. This means that, from time to time, your investment
allocated to the Variable Investment Options may be worth more or less than
the original Purchase Payments to which those amounts can be attributed.
Fluctuations in Subaccount Unit Value will not change the number of Units
credited to your Contract.
Subaccount Unit Values will vary in accordance with the investment performance
of the corresponding Portfolio. For example, the value of Units in the Managed
Bond Subaccount will change to reflect the performance of the Managed Bond
Portfolio (including that Portfolio's investment income, its capital gains and
losses, and its expenses). Subaccount Unit Values are also adjusted to reflect
the Administrative Fee and Risk Charge imposed on the Separate Account.
We calculate the value of all Subaccount Units at or about 4:00 p.m., Eastern
time on each Business Day. The SAI contains a detailed discussion of these
calculations.
WHEN YOUR INVESTMENT IS EFFECTIVE
The day your allocation is effective determines the Unit Value at which
Subaccount Units are attributed to your Contract. In the case of transfers or
withdrawals, the effective day determines the Unit Value at which affected
Subaccount Units are debited and/or credited under your Contract. That Value
is the value of the Subaccount Units next calculated after your transaction is
effective. Your Variable Account Value begins to reflect the investment
performance results of your new allocations on the day after your transaction
is effective.
Your initial Purchase Payment is ordinarily effective on the day we issue your
Contract. Any additional allocation is effective on the day we receive your
Purchase Payment in proper form.
16
<PAGE>
TRANSFERS
Once your Payments are allocated to the Investment Options you selected, you
may transfer your Contract Value less Loan Account Value from any Investment
Option to any other Investment Option, except the DCA Plus Fixed Option.
Certain restrictions apply to the Fixed Option, the DCA Plus Fixed Option and
GIOs. See THE GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS. Transfer requests
are normally effective on the Business Day we receive them in proper form. If
your Contract was issued in a state that requires refund of Purchase Payments
under your Free Look Right, transfers may only be made after your Free Look
Transfer Date. See WITHDRAWALS--SHORT-TERM CANCELLATION RIGHT ("FREE LOOK").
No transfer fee is currently imposed for transfers among the Investment
Options, but we reserve the right to impose a transaction fee for transfers in
the future; a fee of up to $15 per transfer may apply to transfers in excess
of 15 in any Contract Year. Transfers under the dollar cost averaging and
earnings sweep options are counted toward your total transfers in a Contract
Year. Any such fee would be charged against your Investment Options
proportionately, based on your relative Account Value in each immediately
after the transfer.
We have the right, at our option (unless otherwise required by law), to
require certain minimums in the future in connection with transfers; these may
include a minimum transfer amount and a minimum Account Value, if any, for the
Investment Option from which the transfer is made or to which the transfer is
made. If your transfer request results in your having a remaining Account
Value in an Investment Option that is less than the minimum amount, we may
transfer that remaining amount to your other Investment Options in the
proportions specified in your current allocation instructions. Any such DCA
Plus Fixed Option balance or any amount that would otherwise be allocated to
the DCA Plus Fixed Option will be allocated to the Variable Investment Options
according to your most recent DCA Plus transfer instructions. We also reserve
the right (unless otherwise required by law) to limit the size of transfers,
to limit the number and frequency of transfers, to restrict transfers, and to
suspend transfers. We reserve the right to reject any transfer request.
Exchanges of Annuity Units in any Subaccount(s) to any other Subaccount(s)
after annuitization are limited to four in any twelve-month period. See THE
GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS in the Prospectus and THE CONTRACTS
AND THE SEPARATE ACCOUNT in the SAI.
DCA Plus
DCA Plus provides a way for you to transfer amounts monthly from the DCA Plus
Fixed Option to one or more Variable Investment Option(s) over a period of up
to one year. This allows you to average the Unit Values of the Variable
Investment Option(s) over time, and may permit a "smoothing" of abrupt peaks
and drops in Unit Values.
Prior to the Annuity Date, you may allocate all or a portion of your Purchase
Payment(s) to the DCA Plus Fixed Option. The initial minimum amount that you
may allocate to the DCA Plus Fixed Option is $5,000. You may not transfer any
amounts to the DCA Plus Fixed Option from any other Investment Option. All
Purchase Payments allocated to the DCA Plus Fixed Option will earn interest at
the then current Guaranteed Interest Rate declared by us.
The day that the first Purchase Payment allocation is made to the DCA Plus
Fixed Option will begin a Guaranteed Term of 12 months and a period of 12
monthly transfers. On the same day of each month thereafter, we will transfer
to the Variable Investment Options you selected an amount equal to your DCA
Plus Fixed Option Value on that day divided by the remaining number of monthly
transfers in the Guaranteed Term.
Example: On May 1, you submit a $10,000 Purchase Payment entirely to the
DCA Plus Fixed Option at a then current Guaranteed Interest Rate of 5.00%.
On June 1, the value of the DCA Plus Fixed Option is $10,040.75. On June 1,
a transfer equal to $836.73 ($10,040.75/12) will be made according to your
DCA Plus transfer instructions. Your remaining DCA Plus Fixed Option Value
after the transfer is therefore $9,204.02.
17
<PAGE>
On July 1, your DCA Plus Fixed Option Value has now increased to $9,241.52.
We will transfer $840.14 ($9,241.52/11) to the Variable Investment Options,
leaving a remaining value of $8,401.38 in the DCA Plus Fixed Option.
During the Guarantee Term, you may allocate all or a part of additional
Purchase Payments to the DCA Plus Fixed Option, provided such allocations are
at least $250. Each such allocation will be transferred to the Variable
Investment Options you selected over the remaining Guarantee Term. Transfers
will be made proportionately from the DCA Plus Fixed Option Value attributed
to each Purchase Payment allocation.
Example: (Using the previous example): On July 15, you allocate an
additional $5,000 to the DCA Plus Option at a Guaranteed Interest Rate of
4.00%. On August 1, your DCA Plus Fixed Option Value has increased to
$13,443.79. An amount equal to $1,344.38 ($13,443.79/10) is transferred
from the DCA Plus Fixed Option to the Variable Investment Options. The
remaining DCA Plus Fixed Option Value is $12,099.41.
The minimum amount for the DCA Plus monthly transfer is $250. If a monthly DCA
Plus transfer amount is less than $250, we may transfer your entire DCA Plus
Fixed Option Value to the Variable Investment Options according to your most
recent DCA Plus transfer instructions and automatically terminate your DCA
Plus. DCA Plus transfers must be made on a monthly basis to the Variable
Investment Options; you may not choose to transfer other than monthly nor may
you transfer to either the Fixed Option or any of the GIOs under DCA Plus.
Unless otherwise instructed, any additional Purchase Payment we receive during
a Guarantee Term will be allocated to the Investment Options, including the
DCA Plus Fixed Option if so indicated, according to your most recent Purchase
Payment allocation instructions. If we receive any additional Purchase
Payments after your DCA Plus ends and you have not changed your Purchase
Payment allocation instructions, the portion of additional Purchase Payments
that you had instructed us to allocate to the DCA Plus Fixed Option under DCA
Plus will be allocated to the Variable Investment Options in the same
proportion you had elected under DCA Plus.
When your DCA Plus program ends you may request, in a form satisfactory to us,
to establish a new DCA Plus program subject to our minimum allocation
requirements.
Your DCA Plus program automatically ends at the end of your DCA Plus Guarantee
Term. If we do not receive completed DCA Plus transfer instructions in proper
order by the time your first DCA Plus transfer is due, your DCA Plus will be
automatically terminated at the time and your DCA Plus Fixed Account Value
will be transferred to the Fixed Option at the Fixed Option's then current
Guaranteed Interest Rate, unless you provide us with other transfer
instructions. You may request, in a form satisfactory to us, termination of
your DCA Plus program at any time. Upon our receipt of such request, or when
death benefit proceeds become payable, any remaining balance in your DCA Plus
Fixed Option will be transferred to the Fixed Option at the Fixed Option's
then current Guaranteed Interest Rate, unless you instruct us to transfer such
amounts to other Investment Options. On your Annuity Date any net amount
converted to an annuity from your DCA Plus Fixed Option will be applied to a
fixed annuity and will be held in our General Account, unless you instruct us
otherwise.
You may have only one DCA Plus program in effect at any given time. DCA Plus
may not be used concurrently with our dollar cost averaging program. Further,
the DCA Plus Fixed Option is not available to for use with any of our other
systematic transfer programs; i.e., dollar cost averaging, portfolio
rebalancing or earnings sweep.
We reserve the right to change the terms and conditions of DCA Plus, but not a
DCA Plus you already have in effect.
Dollar Cost Averaging
Dollar cost averaging is a method in which you buy securities in a series of
regular purchases instead of in a single purchase. This allows you to average
the securities' prices over time, and may permit a "smoothing" of
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abrupt peaks and drops in price. Prior to your Annuity Date, you may use
dollar cost averaging to transfer amounts, over time, from any Variable
Investment Option with an Account Value of at least $5,000 to one or more
other Variable Investment Options. Each transfer must be for at least $250.
The Fixed Option, DCA Plus Fixed Option and GIOs are not available for dollar
cost averaging. Detailed information appears in the SAI.
Portfolio Rebalancing
You may instruct us to maintain a specific balance of Variable Investment
Options under your Contract (e.g., 30% in the Equity Index Subaccount, 40% in
the Managed Bond Subaccount, and 30% in the Growth LT Subaccount) prior to
your Annuity Date. Periodically, we will "rebalance" your values in the
elected Subaccounts to the percentages you have specified. Rebalancing may
result in transferring amounts from a Subaccount earning a relatively higher
return to one earning a relatively lower return. The Fixed Option, DCA Plus
Fixed Option and GIOs are not available for rebalancing. Detailed information
appears in the SAI.
Earnings Sweep
You may instruct us to make automatic periodic transfers of your earnings from
the Money Market Subaccount or from the Fixed Option to one or more Variable
Investment Options (other than the Money Market Subaccount). Detailed
information appears in the SAI.
CHARGES, FEES AND DEDUCTIONS
WITHDRAWAL CHARGE
No sales charge is imposed on any Purchase Payment. Your Purchase Payments
may, however, be subject to a withdrawal charge; this charge may apply to
amounts you withdraw under your Contract, depending on the length of time each
Purchase Payment has been invested and on the amount you withdraw. No
withdrawal charge is imposed on (i) amounts annuitized after the first
Contract Year, (ii) payments of death benefits, (iii) withdrawals by Contract
Owners to meet the minimum distribution rules for Qualified Contracts as they
apply to amounts held under the Contract, or, (iv) subject to medical evidence
satisfactory to us, after the first Contract Anniversary, full or partial
withdrawals if the Annuitant has been diagnosed with a medically determinable
condition that results in a life expectancy of twelve (12) months or less.
Free Withdrawals
We will not impose a withdrawal charge on withdrawals of your Earnings, or on
withdrawals of amounts held under your Contract for at least six Contract
Years. In addition, during each Contract Year we will not impose a withdrawal
charge on your withdrawal of up to 10% of your remaining Purchase Payments at
the beginning of the Contract Year that would otherwise be subject to the
withdrawal charge plus up to 10% of any additional Purchase Payments received
during the Contract Year. Our calculations of the withdrawal charge deduct
this "free 10%" from your "oldest" Purchase Payment that is still otherwise
subject to the charge.
Example: You make an initial Purchase Payment of $10,000 in Contract Year
1, and make additional Purchase Payments of $1,000 and $6,000 in Contract
Year 2. With Earnings, your Contract Value in Contract Year 3 is $19,000.
In Contract Year 3, you may withdraw $3,700 free of the withdrawal charges
(your total Purchase Payments were $17,000, so 10% of that total equals
$1,700, plus you had $2,000 of Earnings). After this withdrawal, your
Contract Value is $15,300 (all attributable to Purchase Payments). In
Contract Year 4, your Contract Value falls to $12,500; you may withdraw
$1,530 (10% of $15,300) free of any withdrawal charges.
How the Charge is Determined
The amount of the charge depends on how long each Purchase Payment was held
under your Contract. Each Purchase Payment you make is considered to have a
certain "age," depending on the length of time since that
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payment was effective. A payment is "one year old" or has an "age of one" from
the day it is effective until your next Contract Anniversary; beginning on
that Contract Anniversary, your payment will have an "age of two" for a full
Contract Year. When you withdraw an amount subject to the withdrawal charge,
the "age" of the Purchase Payment you withdraw determines the level of
withdrawal charge as follows:
<TABLE>
<CAPTION>
"AGE" OF PAYMENT WITHDRAWAL
IN YEARS CHARGE
---------------- ----------
<S> <C>
1........................................................ 7%
2........................................................ 7%
3........................................................ 6%
4........................................................ 5%
5........................................................ 3%
6........................................................ 1%
7 or more................................................ 0%
</TABLE>
We calculate your withdrawal charge by assuming that your Earnings are
withdrawn first, followed by amounts attributed to Purchase Payments with the
"oldest" Payment withdrawn first. The withdrawal charge will be deducted
proportionally among all Investment Options from which the withdrawal occurs.
Any applicable Annual Fee will be deducted after the withdrawal charge is
calculated. In addition, amounts you withdraw from your GIO(s) will be subject
to the MVA. See THE GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS.
We pay sales commissions and other expenses associated with promotion and
sales of the Contracts to broker-dealers. The withdrawal charge is designed to
reimburse us for these costs, although we expect that our actual expenses will
be greater than the amount of the withdrawal charge. Broker-dealers may
receive aggregate commissions of up to 6.75% of your aggregate Purchase
Payments.
Under certain circumstances and in exchange for lower initial commissions,
certain sellers of Contracts may be paid a persistency trail commission which
will take into account, among other things, the length of time Purchase
Payments have been held under a Contract, and Account Values. A trail
commission is not anticipated to exceed 1.00%, on an annual basis, of the
Account Values considered in connection with the trail commission. We may also
pay override payments, expense allowances, bonuses, wholesaler fees and
training allowances. Registered representatives earn commissions from the
broker-dealers with which they are affiliated and such arrangements may vary.
In addition, registered representatives who meet specified production levels
may qualify, under sales incentive programs adopted by us, to receive non-cash
compensation such as expense-paid trips, expense-paid educational seminars,
and merchandise.
Transfers
Transfers of all or part of your Account Value from one Investment Option to
another is not considered a withdrawal of an amount from your Contract, so no
withdrawal charge is imposed at the time of transfer. See HOW YOUR PAYMENTS
ARE ALLOCATED--TRANSFERS. However, amounts transferred from a GIO before its
Guarantee Term has expired are subject to the MVA. See THE GENERAL ACCOUNT--
WITHDRAWALS AND TRANSFERS and GIOS.
PREMIUM TAXES
Depending on (among other factors) your state of residence, a tax may be
imposed on your Purchase Payments at the time your payment is made, at the
time of a partial or full withdrawal, at the time any death benefit proceeds
are paid, at annuitization or at such other time as taxes may be imposed. Tax
rates ranging from 0% to 3.5% are currently in effect, but may change in the
future. Some local jurisdictions also impose a tax.
If we pay any taxes attributable to Purchase Payments ("premium taxes") on
your behalf, we will impose a similar charge against your Contract Value. We
normally will charge you when you annuitize some or all of
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your Contract Value. We reserve the right to impose this charge for applicable
premium taxes when you make a full or partial withdrawal, at the time any
death benefit proceeds are paid, or when those taxes are incurred. For these
purposes, "premium taxes" include any state or local premium taxes and, where
approval has been obtained, federal premium taxes and any federal, state or
local income, excise, business or any other type of tax (or component thereof)
measured by or based upon, directly or indirectly, the amount of payments we
have received. We will base this charge on the Contract Value, the amount of
the transaction, the aggregate amount of Purchase Payments we receive under
your Contract, or any other amount, that in our sole discretion we deem
appropriate.
We may also charge the Separate Account or your Contract Value for taxes
attributable to the Separate Account or the Contract, including income taxes
attributable to the Separate Account or to our operations with respect to the
Contract, or taxes attributable, directly or indirectly, to Purchase Payments.
Currently, we do not impose any such charges.
ANNUAL FEE
We will charge you an Annual Fee of $40 on each Contract Anniversary prior to
the Annuity Date, and at the time you withdraw your entire Net Contract Value,
if your Net Contract Value is less than $50,000 on that date. The fee is not
imposed on amounts you annuitize or on payment of death benefit proceeds. The
fee reimburses certain of our costs in administering the Contracts and the
Separate Account; we do not intend to realize a profit from this fee or the
Administrative Fee. This fee is guaranteed not to increase for the life of
your Contract.
Your Annual Fee will be charged proportionately against your Investment
Options. Assessments against your Variable Investment Options are made by
debiting some of the Subaccount Units previously credited to your Contract;
that is, assessment of the Annual Fee does not change the Unit Value for those
Subaccounts.
WAIVERS AND REDUCED CHARGES
We may agree to reduce or waive the withdrawal charge or the Annual Fee, or
credit additional amounts under our Contracts, in situations where selling
and/or maintenance costs associated with the Contracts are reduced, such as
the sale of several Contracts to the same Contract Owner(s), sales of large
Contracts, sales of Contracts in connection with a group or sponsored
arrangement or mass transactions over multiple Contracts.
In addition, we may agree to reduce or waive some or all of such charges
and/or credit additional amounts under our Contracts, for those Contracts sold
to persons who meet criteria established by us, who may include current and
retired officers, directors and employees of us and our affiliates, trustees
of the Pacific Select Fund, registered representatives and employees of
broker/dealers with a current selling agreement with us and their affiliates,
employees of affiliated asset management firms and certain other service
providers, and immediate family members of such persons ("Eligible Persons").
We will credit additional amounts to Contracts owned by Eligible Persons if
such Contracts are purchased directly through Pacific Mutual Distributors,
Inc. Under such circumstances, Eligible Persons will not be afforded the
benefit of services of any other broker/dealer nor will commissions be payable
to any broker/dealer in connection with such purchases. Eligible Persons must
contact us directly with servicing questions, Contract changes and other
matters relating to their Contracts. The amount credited to Contracts owned by
Eligible Persons will equal the reduction in expenses we enjoy by not
incurring brokerage commissions in selling such Contracts, with the
determination of the expense reduction and of such crediting being made in
accordance with our administrative procedures. We may also agree to waive
minimum Purchase Payment requirements for Eligible Persons.
We will only reduce or waive such charges or credit additional amounts on any
Contract where expenses associated with the sale of the Contract and/or costs
associated with administering and maintaining the Contract are reduced. We
reserve the right to terminate waiver, reduced charge and crediting programs
at any time, including for issued Contracts.
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MORTALITY AND EXPENSE RISK CHARGE
We assess a charge against the assets of each Subaccount to compensate for
certain mortality and expense risks that we assume under the Contracts (the
"Risk Charge"). The risk that an Annuitant will live longer (and therefore
receive more annuity payments) than we predict through our actuarial
calculations at the time the Contract is issued is "mortality risk." We also
bear mortality risk in connection with death benefits payable under the
Contracts. The risk that the expense charges and fees under the Contracts and
Separate Account are less than our actual administrative and operating
expenses is called "expense risk."
This Risk Charge is assessed daily at an annual factor expressed as a decimal
(where 1.00 is equal to 100%) of 0.0125 of each Subaccount's assets; this
charge may not be increased for the duration of your Contract.
The Risk Charge will stop at annuitization if you select a fixed annuity; the
Risk Charge will continue after annuitization if you choose any variable
annuity, even though we do not bear mortality risk if your Annuity Option is
Period Certain Only.
We will realize a gain if the Risk Charge exceeds our actual cost of expenses
and benefits, and will suffer a loss if such actual costs exceed the Risk
Charge. Any gain will become part of our General Account; we may use it for
any reason, including covering sales expenses on the Contracts.
ADMINISTRATIVE FEE
We charge an Administrative Fee as compensation for costs we incur in
operating the Separate Account and issuing and administering the Contracts,
including processing applications and payments, and issuing reports to you and
to regulatory authorities.
The Administrative Fee is assessed daily at an annual factor expressed as a
decimal (where 1.00 is equal to 100%) of 0.0015 of the assets of each
Subaccount. This fee is guaranteed not to increase for the life of your
Contract. A relationship will not necessarily exist between the actual
administrative expenses attributable to a particular Contract and the
Administrative Fee paid in respect of that particular Contract. The
Administrative Fee will continue after annuitization if you choose any
variable annuity.
ANNUAL ENHANCED GUARANTEED MINIMUM DEATH BENEFIT RIDER CHARGE (OPTIONAL)
If you purchase the Enhanced Guaranteed Minimum Death Benefit Rider, we charge
an annual Enhanced Death Benefit Charge which is described under PURCHASING
YOUR CONTRACT--PURCHASING THE ENHANCED GUARANTEED MINIMUM DEATH BENEFIT RIDER
(OPTIONAL).
EXPENSES OF THE FUND
Your Variable Account Value reflects advisory fees and other expenses incurred
by the various Portfolios of the Fund, net of any applicable reimbursements.
These fees and expenses may vary. The Fund is governed by its own Board of
Trustees, and your Contract does not fix or specify the level of expenses of
any Portfolio. The Fund's fees and expenses are described in detail in the
Fund's Prospectus and in its SAI.
RETIREMENT BENEFITS AND OTHER PAYOUTS
SELECTING YOUR ANNUITANT
When you submit the application for your Contract, you must choose a sole
Annuitant or two Joint Annuitants. We will send the annuity payments to the
payee that you designate. If you are buying a Qualified Contract, you must be
the sole Annuitant; if you are buying a Non-Qualified Contract you may choose
yourself and/or another
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person. Whether you choose to have a sole or two Joint Annuitants, you may
choose a Contingent Annuitant; more information on these options is provided
in the SAI. You will not be able to add or change a sole or Joint Annuitant
after your Contract is issued; however, if you are buying a Qualified
Contract, you may add a Joint Annuitant at the time of annuitization. You will
be able to add or change a Contingent Annuitant until your Annuity Date or the
death of your sole Annuitant or both Joint Annuitants, whichever occurs first;
however, once your Contingent Annuitant has become the Annuitant under your
Contract, no additional Contingent Annuitant may be named. No Annuitant
(primary, joint or contingent) may be named upon or after reaching his or her
86th birthday. We reserve the right to require proof of age or survival of the
Annuitant(s).
ANNUITIZATION
You may choose both your Annuity Date (or "Annuity Start Date") and your
Annuity Option. At the Annuity Date, you may elect to annuitize some or all of
your Net Contract Value, less any applicable MVAs, any transaction fee, and
any applicable charge for premium taxes and/or other taxes, (the "Conversion
Amount"), as long as such Conversion Amount annuitized is at least $10,000,
subject to any state exceptions. (See APPENDIX A: STATE LAW VARIATIONS). If
you annuitize only a portion of this available Contract Value, you may have
the remainder distributed, less any applicable charge for premium taxes and/or
other taxes, any transaction fee, any applicable withdrawal charge, any
applicable MVA, any Annual Fee and any Enhanced Death Benefit Charge. Any such
distribution will be made to you in a single sum if the remaining Conversion
Amount is less than $10,000 on your Annuity Date. Distributions under your
Contract may have tax consequences. You should consult a qualified tax adviser
for information on annuitization.
CHOOSING YOUR ANNUITY DATE ("ANNUITY START DATE")
You should choose your Annuity Date when you submit your application or we
will apply a default Annuity Date to your Contract.
You may change your Annuity Date by notifying us, in proper form, at least ten
Business Days prior to the earlier of your old Annuity Date or your new
Annuity Date.
Your Annuity Date cannot be earlier than your first Contract Anniversary and
must occur on or before a certain date: If you have a sole Annuitant, your
Annuity Date cannot be later than his or her 95th birthday however, to meet
IRS minimum distribution rules, your Annuity Date may need to be earlier; if
you have Joint Annuitants and a Non-Qualified Contract, your Annuity Date
cannot be later than your younger Joint Annuitant's 95th birthday; if you have
Joint Annuitants and a Qualified Contract, your Annuity Date cannot be later
than your own 95th birthday. Different requirements may apply in some states.
If your Contract is a Qualified Contract, you may also be subject to
additional restrictions. Adverse federal tax consequences may result if you
choose an Annuity Date that is prior to an Annuitant's attained age 59 1/2.
See FEDERAL TAX STATUS.
You should carefully review the Annuity Options with your financial tax
adviser, and, for Contracts used in connection with a Qualified Plan,
reference should be made to the terms of the particular plan and the
requirements of the Code for pertinent limitations respecting annuity payments
and other matters. For instance, under requirements for retirement plans that
qualify under Section 401 or 408 of the Code, annuity payments generally must
begin no later than April 1 of the calendar year following the year in which
the Annuitant reaches age 70 1/2. However, if a plan qualified under Section
401(a) of the Code or a 403(b) contract so provides, no distributions are
required for individuals who are employed after age 70 1/2 (other than 5%
owners) until they retire.
For retirement plans that qualify under Section 401 or 408 of the Code, the
period elected for receipt of annuity payments under Annuity Options 1 and 4
generally may be no longer than the joint life expectancy of the Annuitant and
Beneficiary in the year that the Annuitant reaches age 70 1/2, and must be
shorter than such joint life expectancy if the Beneficiary is not the
Annuitant's spouse and is more than 10 years younger than the Annuitant. Under
Options 2 and 3, if the secondary or other Annuitant is not the Annuitant's
spouse and is more
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than 10 years younger than the Annuitant, the 66 2/3% and 100% elections
specified above may not be available. The restrictions on options for
retirement plans that qualify under Sections 401 and 408 also apply to a
retirement plan that qualifies under Section 403(b) with respect to amounts
that accrued after December 31, 1986.
If you annuitize only a portion of your Net Contract Value on your Annuity
Date, you may, at that time, have the option to elect not to have the
remainder of your Contract Value distributed, but instead to continue your
Contract with that remaining Contract Value (a "continuing Contract"). If this
option is available, you would then choose a second Annuity Date for your
continuing Contract, and all references in this Prospectus to your "Annuity
Date" would, in connection with your continuing Contract, be deemed to refer
to that second Annuity Date. This option may not be available, or may be
available only for certain types of Contracts. You should be aware that some
or all of the payments received before the second Annuity Date may be fully
taxable. We recommend that you call your tax adviser for more information if
you are interested in this option.
DEFAULT ANNUITY DATE AND OPTIONS
If you have a Non-Qualified Contract and you do not choose an Annuity Date
when you submit your application, your Annuity Date will be your Annuitant's
95th birthday or your younger Joint Annuitant's 95th birthday, whichever
applies; however some states' laws may require a different Annuity Date.
Certain Qualified Plans may require annuitization to occur at an earlier age.
If you have not specified an Annuity Option or do not instruct us otherwise,
at your Annuity Date your Net Contract Value, less any applicable MVA,
transaction fees and/or charges for premium taxes and/or other taxes, will be
annuitized (if this net amount is at least $10,000) as follows: the net amount
from your Fixed Option, DCA Plus Fixed Option Value and GIO Value will be
converted into a fixed-dollar annuity and the net amount from your Variable
Account Value will be converted into a variable-dollar annuity directed to the
Subaccounts proportionate to your Account Value in each. If you have a Non-
Qualified Contract, or if you have a Qualified Contract and are not married,
your default Annuity Option will be Life with ten year Period Certain. If you
have a Qualified Contract and you are married, your default Annuity Option
will be Joint and Survivor Life with survivor payments of 50% and your spouse
will automatically be named your Joint Annuitant.
CHOOSING YOUR ANNUITY OPTION
You may make three basic decisions about your annuity payments. First, you may
choose whether you want those payments to be a fixed-dollar amount and/or a
variable-dollar amount. Second, you may choose the form of annuity payments
(see ANNUITY OPTIONS). Third, you may decide how often you want annuity
payments to be made (the "frequency" of the payments). You may not change
these selections after annuitization.
Fixed and Variable Annuities
You may choose a fixed annuity (i.e., with fixed-dollar amounts), a variable
annuity (i.e., with variable-dollar amounts), or you may choose both,
converting one portion of the net amount you annuitize into a fixed annuity
and another portion into a variable annuity.
If you select a fixed annuity, each periodic annuity payment received will be
equal to the initial annuity payment, unless you select a joint and survivor
life annuity with reduced survivor payments and the Primary Annuitant dies.
Any net amount you convert to a fixed annuity will be held in our General
Account, (but not under the Fixed Option, DCA Plus Fixed Option or GIOs).
If you select a variable annuity, you may choose as many Variable Investment
Options as you wish; the amount of the periodic annuity payments will vary
with the investment results of the Variable Investment Options selected. After
the Annuity Date, Annuity Units may be exchanged among available Variable
Investment Options up to four times in any twelve-month period. How your
Contract converts into a variable annuity is explained in more detail in THE
CONTRACTS AND THE SEPARATE ACCOUNT in the SAI.
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Annuity Options
Four Annuity Options are currently available under the Contracts, although
additional options may become available in the future.
. Life Only. Periodic payments are made to the designated payee during his
or her lifetime. Payments stop when the designated payee dies.
. Life with Period Certain. Periodic payments are made to the designated
payee during his or her lifetime, with payments guaranteed for a
specified period. You may choose to have payments guaranteed for
anywhere from 5 through 30 years (in full years only). If the designated
payee dies before the guaranteed payments are completed, the Beneficiary
receives the remainder of the guaranteed payments, if living; otherwise
the Owner, if living; otherwise the Owner's estate.
. Joint and Survivor Life. Periodic payments are made to the Primary
Annuitant during the lifetime of the Primary Annuitant. After the death
of the Primary Annuitant, periodic payments are made to the secondary
Annuitant named in the election if and so long as such secondary
Annuitant lives. You may choose to have the payments to the surviving
secondary Annuitant equal 50%, 66 2/3% or 100% of the payments made
during the lifetime of the Primary Annuitant (you must make this
election when you choose your Annuity Option). Payments stop when both
Annuitants have died.
. Period Certain Only. Periodic payments are made to the designated payee
over a specified period. You may choose to have payments continue for
anywhere from 5 through 30 years (in full years only). If the designated
payee dies before the guaranteed payments are completed, the Beneficiary
receives the remainder of the guaranteed payments, if living; otherwise
the Owner, if living; otherwise the Owner's estate.
If your Contract was issued in connection with a Qualified Plan subject to
Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), your
spouse's consent may be required when you seek any distribution under your
Contract, unless your Annuity Option is Joint and Survivor Life with survivor
payments of at least 50%, and your spouse is your Joint Annuitant.
Frequency of Payments
You may choose to have annuity payments made monthly, quarterly, semiannually,
or annually. The amount of a variable payment will be determined in each
period on the date corresponding to your Annuity Date, and payment will be
made on the next succeeding day.
Your initial annuity payment must be at least $250. Depending on the net
amount you annuitize, this requirement may limit your options regarding the
period and/or frequency of annuity payments.
YOUR ANNUITY PAYMENTS
Amount of the First Payment
Your Contract contains tables that we use to determine the amount of the first
annuity payment under your Contract, taking into consideration the annuitized
portion of your Net Contract Value at the Annuity Date. This amount will vary,
depending on the annuity period and payment frequency you select; this amount
will be larger in the case of shorter Period Certain annuities and smaller for
longer Period Certain annuities. Similarly, this amount will be greater for a
Life Only annuity than for a Joint and Survivor Life annuity, because we will
expect to make payments for a shorter period of time on a Life Only annuity.
If you do not choose the Period Certain Only annuity, this amount will also
vary depending on the age of the Annuitant(s) on the Annuity Date and, for
some Contracts in some states, the sex of the Annuitant(s).
For fixed annuity payments, the guaranteed income factors in our tables are
based on an annual interest rate of 3% and the 1983a Annuity Mortality Table
with the ages set back 10 years. If you elect a fixed annuity, fixed
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annuity payments will be based on the periodic income factors in effect for
your Contract on the Annuity Date which are at least the guaranteed income
factors under the Contract.
For variable annuity payments, the tables are based on an assumed annual
investment return of 5% and the 1983a Annuity Mortality Table with the ages
set back 10 years. If you elect a variable annuity, your initial variable
annuity payment will be based on the applicable variable annuity income
factors in our table. A higher assumed investment return would mean a larger
first variable annuity payment, but subsequent payments would increase only
when actual net investment performance exceeds the higher assumed rate and
would fall when actual net investment performance is less than the higher
assumed rate. A lower assumed rate would mean a smaller first payment and a
more favorable threshold for increases and decreases. If the actual net
investment performance is a constant 5% annually, annuity payments will be
level. The assumed investment return is explained in more detail in the SAI
under THE CONTRACTS AND THE SEPARATE ACCOUNT.
DEATH BENEFITS
A death benefit may be payable on proof of death before the Annuity Date of
the Annuitant or of any Contract Owner while the Contract is in force. The
amount of the death benefit will be paid according to the DEATH BENEFIT
PROCEEDS section.
Death Benefit Proceeds
The proceeds of any death benefit payable will be payable upon receipt, in
proper form, of proof of death and instructions regarding payment of death
proceeds. Such proceeds will equal the amount of the death benefit reduced by
any charge for premium taxes and/or other taxes and any Contract Debt. The
death benefit proceeds will be payable in a single sum, as an annuity, or in
accordance with IRS regulations (see DEATH OF OWNER DISTRIBUTION RULES). Any
such annuity is subject to all restrictions (including minimum amount
requirements) as are other annuities under this Contract; in addition, there
may be legal requirements that limit the recipient's Annuity Options and the
timing of any payments. A recipient should consult a qualified tax adviser
before electing to receive an annuity.
Additional provisions apply if your Contract names a Joint or Contingent Owner
or Annuitant, or if the Beneficiary, Joint Owner, or Contingent Owner is your
spouse. Further information about these provisions is contained in the SAI.
Death of Owner Distribution Rules
If a Contract Owner of a Non-Qualified Contract dies before the Annuity Date,
any death benefit proceeds under this Contract must begin distribution within
five years after the Owner's death. In order to satisfy this requirement, the
designated recipient must receive a lump sum payment or elect to receive an
annuity for life or over a period that does not exceed the life expectancy of
the designated recipient with annuity payments that start within one year
after the Owner's death. If an election to receive an annuity is not made
within 60 days of our receipt of proof in proper form of the Owner's death or,
if earlier, 60 days (or shorter period as we permit) prior to the first
anniversary of the Owner's death, the lump sum option will be deemed elected,
unless otherwise required by law. If the lump sum option is deemed elected, we
will consider that deemed election as receipt of instructions regarding
payment of death benefit proceeds. If a Non-Qualified Contract has Joint
Owners, this requirement applies to the first Contract Owner to die.
If the Contract Owner was not an Annuitant but was a Joint Owner and there is
a surviving Joint Owner, that surviving Joint Owner is the designated
recipient; if no Joint Owner survives but a Contingent Owner is named in the
Contract and is living, he or she is the designated recipient, otherwise the
designated recipient is the Beneficiary; if no Beneficiary is living, the
designated recipient is the Owner's estate.
If the Contract Owner was an Annuitant, the designated recipient is the
Beneficiary; if no Beneficiary is living, the designated recipient is the
Owner's estate. A sole designated recipient who is the Contract Owner's spouse
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may elect to become the Contract Owner (and sole Annuitant if the deceased
Contract Owner had been the Annuitant) and continue the Contract until the
earliest of the spouse's death, the death of the Annuitant, or the Annuity
Date. A Joint or Contingent Owner who is the designated recipient but not the
Contract Owner's spouse may not continue the Contract, but may purchase a new
Contract.
If you are a non-individual Owner of a Contract other than a Contract issued
under a Qualified Plan as defined in Section 401 or 403 of the Code, the
Primary Annuitant will be treated as the Owner of the Contract for purposes of
these Distribution Rules. If there is a change in the Primary Annuitant prior
to the Annuity Date, such change will be treated as the death of the Owner.
The amount of the death benefit in this situation will be (a) the Contract
Value if the non-individual Owner elects to maintain the Contract and reinvest
the Contract Value into the Contract in the same amount as immediately prior
to the distribution, or (b) the Contract Value less any Annual Fee, any
Enhanced Death Benefit Charge, and any withdrawal and/or transaction fee, any
charges for withdrawals, and/or premium taxes and/or other taxes, if the non-
individual Owner elects a cash distribution. The amount of the death benefit
will be determined as of the Business Day we receive, in proper form, the
request to change the Primary Annuitant and instructions regarding maintaining
the Contract or cash distribution.
Qualified Plan Death of Annuitant Distribution Rules
Under Internal Revenue Service regulations, if the Contract is owned under a
Qualified Plan as defined in Section 401, 403, 408, 408A, or 457 of the Code
and the Annuitant dies before the commencement of distributions, the payment
of any death benefit must be made to the designated recipient no later than
December 31 of the calendar year in which the fifth anniversary of the
Annuitant's death falls. In order to satisfy this requirement, the designated
recipient must receive a lump sum payment or elect to receive the Annuitant's
interest in the Contract in equal or substantially equal installments over a
period not exceeding the lifetime or life expectancy of the designated
recipient. If the designated recipient elects the installment payment option,
the Internal Revenue Service regulations provide that payments must begin no
later than December 31 of the calendar year which follows the calendar year in
which the Annuitant died. However, (except in the case of a Roth IRA) if the
designated recipient is the spouse of the Annuitant at the time of the
Annuitant's death ("surviving spouse"), then, under the regulations, payments
under the installment payment option must begin no later than December 31 of
the calendar year in which the Annuitant would have reached age 70 1/2.
Under our administrative procedures, payments must commence no later than the
first anniversary of the death of the Annuitant; however, if the designated
recipient is the surviving spouse and if the surviving spouse elects to defer
the commencement of installment payments beyond the first anniversary of the
Annuitant's death, the surviving spouse will be deemed to continue the
contract as the sole Annuitant and will not be entitled to death benefit
proceeds as a result of the death of the Annuitant; instead the Guaranteed
Minimum Death Benefit Amount (defined below) and payment of any death benefit
proceeds will be determined upon our receipt of proof of death and
instructions regarding payment of the surviving spouse as sole Annuitant.
Further, under our administrative procedures, if the installment payment
(annuity) option election is not received by us in good order within 60 days
of (or shorter period as we permit) our receipt of proof in proper form of the
Annuitant's death or, if earlier, before the sixtieth day preceding (1) the
first anniversary of the Annuitant's death or (2) the date on which the
Annuitant would have attained age 70 1/2, the lump sum option will be deemed
by us to have been elected, unless otherwise required by law. If the lump sum
option is deemed elected, we will treat that deemed election as receipt of
instructions regarding payment of death benefit proceeds.
If the Annuitant dies after the commencement of distributions but before the
Annuitant's entire interest in the Contract (other than a Roth IRA) has been
distributed, the remaining interest in the Contract must be distributed to the
designated recipient at least as rapidly as under the distribution method in
effect at the time of the Annuitant's death.
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Death Benefit Amounts
The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to
the greater of (a) your Contract Value as of that day, or (b) your aggregate
Purchase Payments, reduced by any applicable charges, fees and/or MVAs and
further reduced by an amount for each withdrawal that is calculated by
multiplying the aggregate Purchase Payments received prior to each withdrawal
by the ratio of the amount of each withdrawal, including applicable withdrawal
charges, to the Contract Value immediately prior to each withdrawal.
The Guaranteed Minimum Death Benefit Amount is calculated only when death
benefit proceeds become payable as a result of the death of the sole Annuitant
prior to the Annuity Date, and is determined as follows: First, we calculate
what the Death Benefit Amount would have been as of your sixth Contract
Anniversary and each Subsequent Contract Anniversary that occurs while the
Annuitant is living and before the Annuitant reaches his or her 76th birthday
(each of these Contract Anniversaries is a "Milestone Date"). Subject to
approval of insurance authorities in your state of issue, if your Contract is
issued before the Annuitant's 75th birthday, we will calculate what the Death
Benefit Amount would have been as of the Contract Anniversary immediately
following the Annuitant's 75th birthday while the Annuitant is living (also a
Milestone Date) even if such Milestone Date occurs before your sixth Contract
Anniversary. This added feature will benefit Contracts where the Annuitant is
from age 69 through 74 at the time the Contract is issued.
We then adjust the Death Benefit Amount for each Milestone Date by: (i) adding
the aggregate amount of any Purchase Payments received by us since the
Milestone Date; and (ii) subtracting an amount for each withdrawal that has
occurred since that Milestone Date, which is calculated by multiplying the
Death benefit Amount by the ratio of the amount of each withdrawal that has
occurred since that Milestone Date, including any withdrawal charge, to the
Contract Value immediately prior to the withdrawal.
The highest of these adjusted Death Benefit Amounts for each Milestone Date,
as of the Notice Date, is your Guaranteed Minimum Death Benefit Amount.
CALCULATIONS OF ANY GUARANTEED MINIMUM DEATH BENEFIT ARE ONLY MADE ONCE DEATH
BENEFIT PROCEEDS BECOME PAYABLE UNDER YOUR CONTRACT.
The Notice Date is the day on which we receive proof (in proper form) of death
and instructions regarding payment of death benefit proceeds.
Optional Enhanced Guaranteed Minimum Death Benefit Rider
If at the time your application is completed, you purchase the Enhanced
Guaranteed Minimum Death Benefit Rider (the "EGMDBR") (subject to state
availability), the Death Benefit Amounts stated above are replaced with the
following:
The Death Benefit Amount as of any day (prior to the Annuity Date) is equal to
the greater of (a) your Contract Value as of that day, or (b) your Purchase
Payments less any withdrawals, including withdrawal charges and MVAs,
increased at an effective annual rate of 6% (and subject to a maximum of two
times the aggregate Purchase Payments less any withdrawals, including
withdrawal charges and MVAs). The 6% effective annual rate of growth will take
into account the timing of when each Purchase Payment and withdrawal occurred
by applying a daily factor of 1.000159654 to each day's balance. The 6%
effective annual rate of growth will stop accruing as of the earlier of: (i)
the Contract Anniversary following the date the Annuitant reaches his or her
80th birthday; (ii) the date of death of the sole Annuitant; or (iii) the
Annuity Date.
The Guaranteed Minimum Death Benefit Amount is calculated only when death
benefit proceeds become payable as a result of the death of the sole Annuitant
prior to the Annuity Date, and is determined as follows:
First, we calculate what the Death Benefit Amount would have been as of the
quarterly anniversary following the Contract Date and as of each subsequent
quarterly anniversary that occurs while the Annuitant is living and up to and
including the Contract Anniversary following the Annuitant's 65th birthday.
Quarterly
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anniversaries are measured from the Contract Date. After the Contract
Anniversary following the Annuitant's 65th birthday, we calculate what the
Death Benefit Amount would have been as of each Contract Anniversary that
occurs while the Annuitant is living and before the Annuitant reaches his or
her 81st birthday. Each quarterly anniversary and each Contract Anniversary in
which a Death Benefit Amount is calculated is referred to as a "Milestone
Date." We then adjust the Death Benefit Amount for each Milestone Date by: (i)
adding the aggregate amount of any Purchase Payments received by us since that
Milestone Date; and (ii) subtracting an amount for each withdrawal that has
occurred since that Milestone Date, which is calculated by Multiplying the
Death Benefit Amount by the ratio of the amount of each withdrawal that has
occurred since that Milestone Date, including any withdrawal charge and MVA,
to the Contract Value immediately prior to the withdrawal.
The highest of these adjusted Death Benefit Amounts as of the Notice Date is
your Guaranteed Minimum Death Benefit if the EGMDBR is purchased. CALCULATIONS
OF ANY GUARANTEED MINIMUM DEATH BENEFIT ARE MADE ONLY ONCE DEATH BENEFIT
PROCEEDS BECOME PAYABLE UNDER YOUR CONTRACT.
The Notice Date is the day on which we receive, in proper form, proof of death
and instructions satisfactory to us regarding payment of death benefit
proceeds.
The Amount of the Death Benefit: Death of Annuitant
If the sole Annuitant dies prior to the Annuity Date, the death benefit will
be equal to (a) the Death Benefit Amount as of the Notice Date; or if
applicable (b) the "Guaranteed Minimum Death Benefit Amount" as of the Notice
Date, if greater.
The following procedures apply in the event of death of an Annuitant who is
not also a Contract Owner: If your Contract names Joint Annuitants and only
one Joint Annuitant dies, the surviving Joint Annuitant becomes your sole
Annuitant and the death benefit is not yet payable. If your sole Annuitant
dies (or if no Joint Annuitant survives) and your Contract names a surviving
Contingent Annuitant, he or she becomes the sole Annuitant and the death
benefit is not yet payable. If there is no surviving Joint or Contingent
Annuitant, the death benefit is payable to your Beneficiary, if living. To
avoid the possibility of an adverse gift tax situation upon the death of a
sole Annuitant with no living Beneficiary, the death benefit will be paid to
the Owner or the Owner's estate.
If both the Owner and Annuitant die simultaneously, the death benefit proceeds
will be paid to the Beneficiary, if living; if not, to the Owner's estate.
The Amount of the Death Benefit: Death of a Contract Owner
If a Contract Owner who is not the Annuitant dies before the Annuity Date, the
amount of the death benefit will be equal to your Contract Value as of the
Notice Date and will be paid in accordance with the DEATH BENEFIT PROCEEDS
section above. The death benefit proceeds will be paid to the Joint Owner, if
living; if not, to the Contingent Owner, if living; if not, to the
Beneficiary, if living; if not, to the Owner's estate. See THE GENERAL
ACCOUNT--WITHDRAWALS AND TRANSFERS.
If a Contract Owner who is the Annuitant dies before the Annuity Date, the
amount of the death benefit will be equal to (a) your Death Benefit Amount, or
if applicable, (b) the Guaranteed Minimum Death Benefit Amount as of the
Notice Date, if greater, and will be paid in accordance with the Death Benefit
Proceeds section above. The death benefit proceeds will be paid to the
Beneficiary if living; if not, to the Owner's estate. Joint and/or Contingent
Owners and/or Annuitants will not be considered in determining the recipient
of death benefit proceeds.
If both you and the Annuitant(s) are non-individual persons, no death benefit
will be payable, and any distribution will be treated as a withdrawal and
subject to any applicable annual fee, withdrawal fee, withdrawal charge,
charge for premium taxes and/or other taxes, and MVAs.
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WITHDRAWALS
OPTIONAL WITHDRAWALS
You may, on or prior to your Annuity Date, withdraw all or a portion of the
amount available under your Contract. You may surrender your Contract and make
a full withdrawal at any time. Except as provided below, beginning 30 days
after your Contract Date, you also may make partial withdrawals from your
Investment Options at any time. You may request to withdraw a specific dollar
amount or a specific percentage of an Account Value or your Net Contract
Value. You may choose to make your withdrawal from specified Investment
Options; if you do not specify Investment Options, your withdrawal will be
made from all of your Investment Options proportionately. Each partial
withdrawal must be for $500 or more, except pre-authorized withdrawals, which
must be at least $250. If your partial withdrawal from an Investment Option
would leave a remaining Account Value in that Investment Option of less than
any minimum Account Value we may require in the future, we have the right, at
our option, to transfer that remaining amount to your other Investment Options
on a proportionate basis relative to your most recent allocation instructions.
Any such DCA Plus Fixed Option balance or any amount that would otherwise be
allocated to the DCA Plus Fixed Option will be allocated to the Variable
Investment Options according to your most recent DCA Plus transfer
instructions. If your partial withdrawal leaves you with a Net Contract Value
of less than $1,000 ($500 in Maryland, New Jersey and Texas), we have the
right, at our option, to terminate your Contract and send you the withdrawal
proceeds described in the next section. Partial withdrawals from the Fixed
Option in any Contract Year are subject to restrictions. See GENERAL ACCOUNT--
WITHDRAWALS AND TRANSFERS.
Amount Available for Withdrawal
The amount available for withdrawal is your Net Contract Value at the end of
the Business Day on which your withdrawal request is effective, less any
applicable Annual Fee, any Enhanced Death Benefit Charge, any withdrawal
charge, any withdrawal transaction fee, and any charge for premium taxes
and/or other taxes, and after application of the MVA, if appropriate. The
amount we send to you (your "withdrawal proceeds") will also reflect any
required or requested federal and state income tax withholding. See FEDERAL
TAX STATUS and THE GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS.
You assume investment risk on investments in the Subaccounts; as a result, the
amount available to you for withdrawal from any Subaccount may be more or less
than the total Purchase Payments you have allocated to that Subaccount.
Withdrawal Transaction Fees
There is currently no transaction fee for partial withdrawals. However, we
reserve the right to impose a withdrawal transaction fee in the future of up
to $15 for each partial withdrawal (including pre-authorized partial
withdrawals) in excess of 15 in any Contract Year. Any such fee would be
charged against your Investment Options proportionately based on your Account
Value in each immediately after the withdrawal.
Pre-Authorized Withdrawals
If your Contract Value is at least $5,000, you may select the pre-authorized
withdrawal option, and you may choose monthly, quarterly, semiannual or annual
withdrawals. Each withdrawal must be for at least $250. Each pre-authorized
withdrawal is subject to federal income tax on its taxable portion and may be
subject to a 10% penalty tax if you have not reached age 59 1/2. The GIOs are
not available for pre-authorized withdrawals. See FEDERAL TAX STATUS and THE
GENERAL ACCOUNT--WITHDRAWALS AND TRANSFERS. Additional information and options
are set forth in the SAI and in the Pre-Authorized Withdrawal section of your
application.
Special Requirements for Full Withdrawals
If you wish to withdraw the entire amount available under your Contract, you
must either return your Contract to us or sign and submit to us a "lost
Contract affidavit."
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Special Restrictions Under Qualified Plans
Individual Qualified Plans may have additional rules regarding withdrawals
from a Contract purchased under such a Plan. In general, if your Contract was
issued under certain Qualified Plans, you may not withdraw amounts
attributable to contributions made pursuant to a salary reduction agreement
(as defined in Section 402(g)(3)(A) of the Code) or to transfers from a
custodial account (as defined in Section 403(b)(7) of the Code) except in
cases of your (a) separation from service, (b) death, (c) disability as
defined in Section 72(m)(7) of the Code, (d) reaching age 59 1/2, or (e)
hardship as defined for purposes of Section 401(k) of the Code.
These limitations do not affect certain rollovers or exchanges between
Qualified Plans, and do not apply to rollovers from these Qualified Plans to
an individual retirement account or individual retirement annuity. In the case
of tax sheltered annuities, these limitations do not apply to certain salary
reduction contributions made, and investment results earned, prior to dates
specified in the Code.
Hardship withdrawals under the exception provided above are restricted to
amounts attributable to salary reduction contributions, and do not include
investment results; this additional restriction does not apply to salary
reduction contributions made, and investment results earned, prior to dates
specified in the Code.
Certain distributions, including rollovers, may be subject to mandatory
withholding of 20% for federal income tax and to a 10% penalty tax if the
distribution is not transferred directly to the trustee of another Qualified
Plan, or to the custodian of an individual retirement account or issuer of an
individual retirement annuity. See FEDERAL TAX STATUS. Distributions may also
trigger withholding for state income taxes. The tax and ERISA rules relating
to Contract withdrawals are complex. We are not the administrator of any
Qualified Plan. You should consult your tax adviser and/or your plan
administrator before you withdraw any portion of your Contract Value.
Effective Date of Withdrawal Requests
Withdrawal requests are normally effective on the Business Day we receive them
in proper form. If you make Purchase Payments by check and submit a withdrawal
request immediately afterwards, payment of your withdrawal proceeds may be
delayed until your check clears.
TAX CONSEQUENCES OF WITHDRAWALS
Withdrawals, including pre-authorized withdrawals, will generally have federal
income tax consequences, which could include tax penalties. YOU SHOULD CONSULT
WITH A TAX ADVISER BEFORE MAKING ANY WITHDRAWAL OR SELECTING THE PRE-
AUTHORIZED WITHDRAWAL OPTION. See FEDERAL TAX STATUS.
SHORT-TERM CANCELLATION RIGHT ("FREE LOOK")
You may return your Contract for cancellation and a full refund during your
"free look period." Your free look period is usually the 10-day period
beginning on the day you receive your Contract, but may vary if required by
state law. For more information, see APPENDIX A: STATE LAW VARIATIONS. If you
return your Contract, it will be canceled and treated as void from your
Contract Date. You will then receive a refund of your Contract Value as of the
end of the Business Day on which we receive your Contract for cancellation,
plus a refund of any amounts that may have been deducted as Contract fees and
charges. Thus, an Owner who returns a Contract within the Free-Look Period
bears only the investment risk (i.e., the Owner's Accumulated Value allocated
to the Variable Accounts may increase or decrease based on investment
performance), but the Owner will not be subject to any Contract charges and
fees which would otherwise be deducted from Accumulated Values. Any amounts
credited to your Variable Account as a result of any variation of charges, as
described in WAIVERS AND REDUCED CHARGES, and any earnings on such amounts,
will not be included in the amount refunded to you.
Some states' laws require us to refund your Purchase Payments instead of your
Contract Value. If your Contract is issued in one of these states (the "issue
state"), the Purchase Payments you have allocated to any Subaccount will
usually be allocated to the Money Market Subaccount during your free look
period. In such cases, we will
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transfer your Contract Value in the Money Market Subaccount to your chosen
Variable Investment Options at the end of the 15th calendar day after your
Contract Date (your "Free Look Transfer Date"). We reserve the right to extend
your Free Look Transfer Date by the number of days in excess of ten days that
the issue state allows you to return your Contract to us pursuant to your
"free look" right.
If your Contract is issued in exchange for another annuity contract or a life
insurance policy, our administrative procedures may vary, depending on the
state in which your contract is issued.
PACIFIC LIFE AND THE SEPARATE ACCOUNT
PACIFIC LIFE
Pacific Life is a life insurance company that is domiciled in California.
Pacific Life's operations include both life insurance and annuity products as
well as financial and retirement services. As of the end of 1997, Pacific Life
had over $80.0 billion of individual life insurance in force and total
admitted assets of approximately $31.8 billion. Pacific Life has been ranked
according to admitted assets as the 20th largest life insurance carrier in the
nation for 1997. The Pacific Life family of companies has total assets and
funds under management of over $236 billion. Pacific Life is authorized to
conduct life insurance and annuity business in the District of Columbia and
all states except New York. Its principal offices are located at 700 Newport
Center Drive, Newport Beach, California 92660.
Pacific Life was originally organized on January 2, 1868, under the name
"Pacific Mutual Life Insurance Company of California" and reincorporated as
"Pacific Mutual Life Insurance Company" on July 22, 1936. On September 1,
1997, Pacific Life converted from a mutual life insurance company to a stock
life insurance company ultimately controlled by a mutual holding company.
Pacific Life is a subsidiary of Pacific LifeCorp, a holding company, which, in
turn, is a subsidiary of Pacific Mutual Holding Company, a mutual holding
company. Under their respective charters, Pacific Mutual Holding Company must
always hold at least 51% of the outstanding voting stock of Pacific LifeCorp,
and Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of Pacific Life's annuity contracts and life insurance policies have
certain membership interests in Pacific Mutual Holding Company, consisting
principally of the right to vote on the election of the Board of Directors of
the mutual holding company and on other matters, and certain rights upon
liquidation or dissolutions of the mutual holding company.
Our wholly-owned subsidiary, Pacific Mutual Distributors, Inc. ("PMD"), serves
as the principal underwriter (distributor) for the Contracts. PMD is located
at 700 Newport Center Drive, Newport Beach, California 92660. We and PMD enter
into selling agreements with broker-dealers, under which such broker-dealers
act as agents of us and PMD in the sale of the Contracts.
We may provide you with reports of our ratings both as an insurance company
and as to our claims-paying ability with respect to our General Account
assets. The SAI presents more details about these ratings.
SEPARATE ACCOUNT A
Separate Account A was established on September 7, 1994 as a separate account
of ours, and is registered with the SEC under the Investment Company Act of
1940 (the "1940 Act"), as a type of investment company called a "unit
investment trust."
Obligations arising under your Contract are our general corporate obligations.
We are also the legal owner of the assets in the Separate Account. Assets of
the Separate Account attributed to the reserves and other liabilities under
the Contract and other contracts issued by us that are supported by the
Separate Account may not be charged with liabilities arising from any of our
other business; any income, gain or loss (whether or not realized) from the
assets of the Separate Account are credited to or charged against the Separate
Account without regard to our other income, gain or loss.
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We may invest money in the Separate Account in order to commence its
operations and for other purposes, but not to support contracts other than
variable annuity contracts. A portion of the Separate Account's assets may
include accumulations of charges we make against the Separate Account and
investment results of assets so accumulated. These additional assets are ours
and we may transfer them to our General Account at any time; however, before
making any such transfer, we will consider any possible adverse impact the
transfer might have on the Separate Account. Subject to applicable law, we
reserve the right to transfer our assets in the Separate Account to our
General Account.
The Separate Account is not the sole investor in the Fund. Investment in the
Fund by other separate accounts in connection with variable annuity and
variable life insurance contracts may create conflicts. See MORE ON THE FUND'S
SHARES in the accompanying Prospectus for the Fund.
FEDERAL TAX STATUS
The following summary of federal income tax consequences is based on current
tax laws and regulations, which may be changed by legislative, judicial or
administrative action. The summary is general in nature, and does not consider
any applicable state or local tax laws. We do not make any guarantee regarding
the tax status, federal, state or local, of any Contract or any transaction
involving the Contracts. Accordingly, you should consult a qualified tax
adviser for complete information and advice before purchasing a Contract.
The following rules generally do not apply to variable annuity contracts held
by or for non-natural persons (e.g., corporations) unless such an entity holds
the contract as nominee for a natural person. If a contract is not owned or
held by a natural person or a nominee for a natural person, the contract
generally will not be treated as an "annuity" for tax purposes, meaning that
the contract owner will be taxed currently on annual increases in Contract
Value at ordinary income rates unless some other exception applies.
Section 72 of the Code governs the taxation of annuities in general, and we
designed the Contracts to meet the requirements of Section 72 of the Code. We
believe that, under current law, the Contract will be treated as an annuity
for federal income tax purposes if the Contract Owner is a natural person or a
nominee for a natural person, and that we (as the issuing insurance company),
and not the Contract Owner(s), will be treated as the owner of the investments
underlying the Contract. Accordingly, no tax should be payable by you as a
Contract Owner as a result of any increase in Contract Value until you receive
money under your Contract. You should, however, consider how amounts will be
taxed when you do receive them. The following discussion assumes that your
Contract will be treated as an annuity for federal income tax purposes.
Section 817(h) of the Code provides that the investments underlying a variable
annuity must satisfy certain diversification requirements. Details on these
diversification requirements appear under OTHER INFORMATION ABOUT THE FUND in
the Fund's Prospectus. We believe the underlying Variable Investment Options
for the Contract meet these requirements. In connection with the issuance of
temporary regulations relating to diversification requirements under Section
817(h), the Treasury Department announced that such regulations do not provide
guidance concerning the extent to which you may direct your investments to
particular divisions of a separate account. Such guidance may be included in
regulations or revenue rulings under Section 817(d) relating to the definition
of a variable contract. Because of this uncertainty, we reserve the right to
make such changes as we deem necessary or appropriate to ensure that your
Contract continues to qualify as an annuity for tax purposes. Any such changes
will apply uniformly to affected Contract Owners and will be made with such
notice to affected Contract Owners as is feasible under the circumstances.
TAXES PAYABLE BY CONTRACT OWNERS: GENERAL RULES
THESE GENERAL RULES APPLY TO NON-QUALIFIED CONTRACTS. AS DISCUSSED BELOW,
HOWEVER, TAX RULES MAY DIFFER FOR QUALIFIED CONTRACTS AND YOU SHOULD CONSULT A
QUALIFIED TAX ADVISER IF YOU ARE PURCHASING A QUALIFIED CONTRACT.
Distributions of net investment income or capital gains that each Subaccount
receives from its corresponding Portfolio are automatically reinvested in such
Portfolio unless we, on behalf of the Separate Account, elect
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otherwise. As noted above, you will be subject to federal income taxes on the
investment income from your Contract only when it is distributed to you.
Taxes Payable on Withdrawals
Amounts you withdraw before annuitization, including amounts withdrawn from
your Contract Value in connection with partial withdrawals for payment of any
charges and fees, will be treated first as taxable income to the extent that
your Contract Value exceeds the aggregate of your Purchase Payments (reduced
by non-taxable amounts previously received), and then as non-taxable recovery
of your Purchase Payments.
The assignment or pledge of (or agreement to assign or pledge) the value of
the Contract for a loan will be treated as a withdrawal subject to these
rules. Moreover, all annuity contracts issued to you in any given calendar
year by us and any of our affiliates are treated as a single annuity contract
for purposes of determining whether an amount is subject to tax under these
rules. The Code further provides that the taxable portion of a withdrawal may
be subject to a penalty tax equal to 10% of that taxable portion unless the
withdrawal is: (1) made on or after the date you reach age 59 1/2, (2) made by
a Beneficiary after your death, (3) attributable to your becoming disabled, or
(4) in the form of level annuity payments under a lifetime annuity.
Taxes Payable on Annuity Payments
A portion of each annuity payment you receive under a Contract generally will
be treated as a partial recovery of Purchase Payments (as used here, "Purchase
Payments" means the aggregate Purchase Payments less any amounts that were
previously received under the Contract but not included in income) and will
not be taxable. (In certain circumstances, subsequent modifications to an
initially-established payment pattern may result in the imposition of a
penalty tax.) The remainder of each annuity payment will be taxed as ordinary
income. However, after the full amount of aggregate Purchase Payments has been
recovered, the full amount of each annuity payment will be taxed as ordinary
income. Exactly how an annuity payment is divided into taxable and non-taxable
portions depends on the period over which annuity payments are expected to be
received, which in turn is governed by the form of annuity selected and, where
a lifetime annuity is chosen, by the life expectancy of the Annuitant(s) or
payee(s).
Should the death of a Contract Owner cause annuity payments to cease before
Purchase Payments have been fully recovered, an Annuitant (or in certain cases
the Beneficiary) is allowed a deduction on the final tax return for the
unrecovered Purchase Payments; however, if any remaining annuity payments are
made to a Beneficiary, the Beneficiary will recover the balance of the
Purchase Payments as payments are made. A lump sum payment taken in lieu of
remaining monthly annuity payments is not considered an annuity payment for
tax purposes. The portion of any lump sum payment to a Beneficiary in excess
of aggregate unrecovered Purchase Payments would be subject to income tax.
Such a lump sum payment may also be subject to a penalty tax.
If a Contract Owner dies before annuity payments begin, certain minimum
distribution requirements apply. If a Contract Owner dies after the Annuity
Date, the remaining interest in the Contract must be distributed at least as
rapidly as under the method of distribution in effect on the date of death.
Generally, the same tax rules apply to amounts received by the Beneficiary as
those set forth above, except that the early withdrawal penalty tax does not
apply. Thus, any annuity payments or lump sum withdrawal will be divided into
taxable and non-taxable portions. If the Contract Owner or Annuitant dies and
within sixty days after the date on which a lump sum death benefit first
becomes payable the designated recipient elects to receive annuity payments in
lieu of the lump sum death benefit, then the designated recipient will not be
treated for tax purposes as having received the lump sum death benefit in the
tax year it first becomes payable. Rather, in that case, the designated
recipient will be taxed on the annuity payments as they are received.
In addition, designation of a Beneficiary who either is 37 1/2 or more years
younger than a Contract Owner or is a grandchild of a Contract Owner may have
Generation Skipping Transfer Tax consequences under section 2601 of the Code.
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Generally, gifts of non-tax qualified contracts prior to the annuity start
date will trigger tax on the gain on the contract, with the donee getting a
stepped-up basis for the amount included in the donor's income. The 10%
penalty tax and gift tax also may be applicable. This provision does not apply
to transfers between spouses or incident to a divorce.
QUALIFIED CONTRACTS
The Contracts are available to a variety of Qualified Plans. Tax restrictions
and consequences for Contracts under each type of Qualified Plan differ from
each other and from those for Non-Qualified Contracts. In addition, individual
Qualified Plans may have terms and conditions that impose additional rules.
Therefore, no attempt is made herein to provide more than general information
about the use of the Contract with the various types of Qualified Plans.
Participants under such Qualified Plans, as well as Contract Owners,
Annuitants and Beneficiaries, are cautioned that the rights of any person to
any benefits under such Qualified Plans may be subject to the terms and
conditions of the Plans themselves or limited by applicable law, regardless of
the terms and conditions of the Contract issued in connection therewith.
THE FOLLOWING IS ONLY A GENERAL DISCUSSION ABOUT TYPES OF QUALIFIED PLANS FOR
WHICH THE CONTRACTS ARE AVAILABLE. WE ARE NOT THE ADMINISTRATOR OF ANY
QUALIFIED PLAN. THE PLAN ADMINISTRATOR AND/OR CUSTODIAN, WHICHEVER IS
APPLICABLE, (BUT NOT US) IS RESPONSIBLE FOR ALL PLAN ADMINISTRATIVE DUTIES
INCLUDING, BUT NOT LIMITED TO, NOTIFICATION OF DISTRIBUTION OPTIONS,
DISBURSEMENT OF PLAN BENEFITS, COMPLIANCE REGULATORY REQUIREMENTS AND FEDERAL
AND STATE TAX REPORTING OF INCOME/DISTRIBUTIONS FROM THE PLAN TO PLAN
PARTICIPANTS AND, IF APPLICABLE, BENEFICIARIES OF PLAN PARTICIPANTS AND IRA
CONTRIBUTIONS FROM PLAN PARTICIPANTS. OUR ADMINISTRATIVE DUTIES ARE LIMITED TO
ADMINISTRATION OF THE CONTRACT AND ANY DISBURSEMENTS OF ANY CONTRACT BENEFITS
TO THE OWNER, ANNUITANT, OR BENEFICIARY OF THE CONTRACT, AS APPLICABLE. OUR
TAX REPORTING RESPONSIBILITY IS LIMITED TO FEDERAL AND STATE TAX REPORTING OF
INCOME/DISTRIBUTIONS TO THE APPLICABLE PAYEE AND IRA CONTRIBUTIONS FROM THE
OWNER OF A CONTRACT, AS RECORDED ON OUR BOOKS AND RECORDS. THE QUALIFIED PLAN
(THE PLAN ADMINISTRATOR OR THE CUSTODIAN) IS REQUIRED TO PROVIDE US WITH
INFORMATION REGARDING INDIVIDUALS WITH SIGNATORY AUTHORITY ON THE CONTRACT(S)
OWNED. IF YOU ARE PURCHASING A QUALIFIED CONTRACT, YOU SHOULD CONSULT WITH
YOUR PLAN ADMINISTRATOR AND/OR A QUALIFIED TAX ADVISER. YOU SHOULD ALSO
CONSULT WITH YOUR TAX ADVISER AND/OR PLAN ADMINISTRATOR BEFORE YOU WITHDRAW
ANY PORTION OF YOUR CONTRACT VALUE.
Individual Retirement Annuities ("IRAs")
Recent federal tax legislation has expanded the type of IRAs available to
individuals for tax deferred retirement savings: In addition to "traditional"
IRAs established under Code Section 408, there are Roth IRAs governed by Code
Section 408A and SIMPLE IRAs established under Code Section 408(p).
Contributions to each of these types of IRAs are subject to differing
limitations. In addition, distributions from each type of IRA are subject to
differing restrictions. The following is a very general description of each
type of IRA:
Traditional IRAs
Traditional IRAs are subject to limitations on the amount that may be
contributed, the persons who may be eligible, and on the time when
distributions must commence. Depending upon the circumstances of the
individual, contributions to a traditional IRA may be made on a deductible or
non-deductible basis. Failure to make mandatory distributions may result in
imposition of a 50% penalty tax on any difference between the required
distribution amount and the amount actually distributed. A 10% penalty tax is
imposed on the amount includable in gross income from distributions that occur
before you attain age 59 1/2 and that are not made on account of death or
disability, with certain exceptions. These exceptions include distributions
that are part of a series of substantially equal periodic payments made over
your life (or life expectancy) or the joint lives (or joint life expectancies)
of you and your Joint Annuitant. Distributions of minimum amounts specified by
the Code must commence by April 1 of the calendar year following the calendar
year in which you attain age 70 1/2. Additional distribution rules apply after
your death.
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You may rollover funds from certain existing Qualified Plans (such as proceeds
from existing insurance policies, annuity contracts or securities) into your
Traditional IRA if those funds are in cash; this will require you to liquidate
any value accumulated under the existing Qualified Plan. Mandatory withholding
of 20% may apply to any rollover distribution from your existing Qualified
Plan if the distribution is not transferred directly to your Traditional IRA;
to avoid this withholding you should have cash transferred directly from the
insurance company or plan trustee to us. Similar limitations and tax penalties
apply to tax sheltered annuities, government plans, 401(k) plans, and pension
and profit-sharing plans.
SIMPLE Individual Retirement Annuities
The Small Business Job Protection Act of 1996 created a new retirement plan,
the Savings Incentive Match Plan for Employees of Small Employers ("SIMPLE
Plans"). Depending upon the type of SIMPLE Plan, employers may deposit the
plan contributions into a single trust or into SIMPLE individual retirement
annuities ("SIMPLE IRAs") established by each participant. Contributions to a
SIMPLE IRA may be either salary deferral contributions or employer
contributions. Distributions from a SIMPLE IRA may be rolled over to another
SIMPLE IRA tax free or may be eligible for tax free rollover to a traditional
IRA after a required two year period. A distribution from a SIMPLE IRA,
however, is never eligible to be rolled over to a retirement plan qualified
under Code Section 401 or a Section 403(b) annuity contract.
Roth IRAs
Section 408A of the Code permits eligible individuals to establish a Roth IRA,
a new type of IRA which becomes available in 1998. Contributions to a Roth IRA
are not deductible, but withdrawals that meet certain requirements are not
subject to federal income tax. In general, Roth IRAs are subject to
limitations on the amount that may be contributed and the persons who may be
eligible to contribute and are subject to certain required distribution rules
on the death of the Contract Owner. Unlike a traditional IRA, Roth IRAs are
not subject to minimum required distribution rules during the Contract Owner's
lifetime. Generally, however, the amount remaining in a Roth IRA must be
distributed by the end of the fifth year after the death of the Contract
Owner. Beginning in 1998, the owner of a traditional IRA may convert a
traditional IRA into a Roth IRA under certain circumstances. The conversion of
a traditional IRA to a Roth IRA will subject the amount of the converted
traditional IRA to federal income tax. Anyone considering the purchase of a
Qualified Contract as a "conversion" Roth IRA should consult with a qualified
tax adviser.
Tax Sheltered Annuities ("TSAs")
Section 403(b) of the Code permits public school systems and certain tax-
exempt organizations to adopt annuity plans for their employees; Purchase
Payments made on Contracts purchased for these employees are excludable from
the employees' gross income (subject to maximum contribution limits).
Distributions under these Contracts must comply with certain limitations as to
timing, or result in tax penalties.
Government Plans
Section 457 of the Code permits employees of a state or local government (or
of certain other tax-exempt entities) to defer compensation through an
eligible government plan. Contributions to a Contract in connection with an
eligible government plan are subject to limitations.
401(k) Plans; Pension and Profit-Sharing Plans
Deferred compensation plans may be established by an employer for certain
eligible employees under Sections 401(a) and 401(k) of the Code. Contributions
to these plans are subject to limitations.
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LOANS
Certain Qualified Contract Owners may borrow against their Contracts. If yours
is a Qualified Contract issued under Section 401 or 403 of the Code and the
terms of your Qualified Plan permit, you may request a loan from us, using
your Contract Value as your only security.
Tax and Legal Matters
The tax and ERISA rules relating to Contract loans are complex and in many
cases unclear. For these reasons, and because the rules vary depending on the
individual circumstances of each Contract, WE URGE YOU TO CONSULT WITH A
QUALIFIED TAX ADVISER PRIOR TO EFFECTING ANY LOAN TRANSACTION UNDER YOUR
CONTRACT.
Interest paid on your loan under a 401 plan or 403(b) tax-sheltered annuity
will be considered "personal interest" under Section 163(h) of the Code, to
the extent the loan comes from your pre-tax contributions, even if the
proceeds of your loan are used to acquire your principal residence.
We may change these loan provisions to reflect changes in the Code or
interpretations thereof.
Loan Procedures
Your loan request must be submitted on our Loan Agreement Form. You may submit
a loan request at any time after your first Contract Anniversary and before
your Annuity Date; however, before requesting a new loan, you must wait thirty
days after the last payment of a previous loan. If approved, your loan will
usually be effective as of the end of the Business Day on which we receive all
necessary documentation in proper form. We will normally forward proceeds of
your loan to you within seven calendar days after the effective date of your
loan. A loan administration fee of $500 will be deducted from your loan
proceeds, unless state law requires otherwise.
In order to secure your loan, on the effective date of your loan, we will
transfer an amount equal to the principal amount of your loan into an account
called the "Loan Account." To make this transfer, we will transfer amounts
proportionately from your Investment Options, in accordance with the Loan
Agreement. Your GIO Value is not available to secure your loan.
As your loan is repaid, a portion, corresponding to the amount of the
repayment of any amount then held as security for your loan, will be
transferred from the Loan Account back into your Investment Options relative
to your current allocation instructions.
Loan Terms
You may have only one loan outstanding at any time. The minimum loan amount is
$1,000, subject to certain state limitations. Your Contract Debt at the
effective date of your loan may not exceed the lesser of:
. 50% of your Contract Value;
. 100% of your Contract Value excluding your GIO Value; or
. $50,000 less your highest outstanding Contract Debt during the 12-month
period immediately preceding the effective date of your loan.
You should refer to the terms of your particular Qualified Plan for any
additional loan restrictions. If you have other loans outstanding pursuant to
other Qualified Plans, the amount you may borrow may be further restricted.
You will be charged interest on your Contract Debt at an annual rate, set at
the time of the loan withdrawal, equal to the higher of (a) Moody's Corporate
Bond Yield Average-Monthly Average Corporates (the "Moody's Rate"), as
published by Moody's Investors Service, Inc., or its successor, for the most
recently available calendar month, or (b) 5%. In the event that the Moody's
Rate is no longer available, we may substitute a substantially similar average
rate, subject to compliance with applicable state regulations. The amount held
in the Loan Account to secure your loan will earn a return equal to an annual
rate that is two percentage points lower than
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the annual rate of interest charged on your Contract Debt. Interest charges
accrue on your Contract Debt daily, beginning on the effective date of your
loan; interest earnings on the Loan Account Value accrue daily beginning on
the following day, and those earnings will be transferred once a year to your
Investment Options in accordance with your current allocation instructions.
Any amounts that would otherwise be transferred to the DCA Plus Fixed Option
will be transferred to the Variable Investment Options according to your most
recent DCA Plus transfer instructions.
Repayment Terms
Your loan, including principal and accrued interest, must be repaid in
quarterly installments. An installment will be due in each quarter on the date
corresponding to the effective date of your loan, beginning with the first
such date following the effective date of your loan.
Example: On May 1, we receive your loan request, and your loan is
effective. Your first quarterly payment will be due on August 1.
Adverse tax consequences may result if you fail to meet the repayment
requirements for your loan. You must repay principal and interest of any loan
in substantially equal payments over the term of the loan. Normally, the term
of the loan will be five years from the effective date of the loan; however,
if you have certified to us that your loan proceeds are to be used to acquire
a principal residence for yourself, you may request a loan term of 30 years.
In either case, however, you must repay your loan prior to your Annuity Date.
If you elect to annuitize (or withdraw) your Net Contract Value while you have
an outstanding loan, we will deduct any Contract Debt from your Contract Value
at the time of the annuitization (or withdrawal) to repay the Contract Debt.
You may prepay your entire loan at any time; if you do so, we will bill you
for any unpaid interest that has accrued through the date of payoff. Your loan
will be considered repaid only when the interest due has been paid. Subject to
any necessary approval of state insurance authorities, while you have Contract
Debt outstanding, we will treat all payments you send us as Purchase Payments
unless you specifically indicate that your payment is a loan repayment or
include your loan stub with your payment. To the extent allowed by law, any
loan repayments in excess of the amount then due will be refunded to you,
unless such amount is sufficient to pay the balance of your loan.
If we have not received your full payment by its due date, we will declare the
entire remaining loan balance in default. At that time, we will send written
notification of the amount needed to bring the loan back to a current status.
You will have sixty (60) days from the date on which the loan was declared in
default (the "grace period") to make the required payment.
If the required payment is not received by the end of the grace period, the
defaulted loan balance plus accrued interest and any withdrawal charge will be
withdrawn from your Contract Value, if amounts under your Contract are
eligible for distribution. If those amounts are not eligible for distribution,
the defaulted loan balance plus accrued interest and any withdrawal charge
will be considered a Deemed Distribution and will be withdrawn when such
Contract Values become eligible. In either case, the Distribution or the
Deemed Distribution will be considered a currently taxable event, and may be
subject to federal tax withholding, the withdrawal charge and the federal
early withdrawal penalty tax.
If there is a Deemed Distribution under your Contract and to the extent
allowed by law, any future withdrawals will first be applied as repayment of
the defaulted Contract Debt, including accrued interest and charges for
applicable taxes. Any amounts withdrawn and applied as repayment of Contract
Debt will first be withdrawn from your Loan Account, and then from your
Investment Options on a proportionate basis relative to the Account Value in
each Investment Option. If you have an outstanding loan that is in default,
the defaulted Contract Debt will be considered a withdrawal for the purpose of
calculating any Death Benefit Amount and/or Guaranteed Minimum Death Benefit.
We may change the loan provisions of your Contract to reflect changes in the
Code or interpretations thereof.
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WITHHOLDING
Unless you elect to the contrary, any amounts you receive under your Contract
that are attributable to investment income will be subject to withholding to
meet federal and state income tax obligations. The rate of withholding on
annuity payments made to you will be determined on the basis of the
withholding information you provide to us with your application. If you do not
provide us with required withholding information, we will withhold, from every
withdrawal from your Contract and from every annuity payment to you, the
appropriate percentage of the taxable amount of the payment. Please call us at
1-800-722-2333 with any questions about the required withholding information.
For purposes of determining your withholding rate on annuity payments, you
will be treated as a married person with three exemptions. The rate of
withholding on all other payments made to you under your Contract, such as
amounts you receive upon withdrawals, will be 10%, unless otherwise specified
by the Code. Generally, there will be no withholding for taxes until you
actually receive payments under your Contract.
Distributions from a Contract under a Qualified Plan (not including an
individual retirement annuity subject to Code Section 408 or Code Section
408A) to an employee, surviving spouse, or former spouse who is an alternate
payee under a qualified domestic relations order, in the form of a lump sum
settlement or periodic annuity payments for a fixed period of fewer than 10
years are subject to mandatory income tax withholding of 20% of the taxable
amount of the distribution, unless (1) the distributee directs the transfer of
such amounts in cash to another Qualified Plan or a Traditional IRA; or (2)
the payment is a minimum distribution required under the Code. The taxable
amount is the amount of the distribution less the amount allocable to after-
tax contributions. All other types of taxable distributions are subject to
withholding unless the distributee elects not to have withholding apply.
Certain states have indicated that pension and annuity withholding will apply
to payments made to residents. Generally, an election out of federal
withholding will also be considered an election out of state withholding.
IMPACT OF FEDERAL INCOME TAXES
In general, if you expect to accumulate your Contract Value over a relatively
long period of time without making significant withdrawals, there should be
tax advantages, regardless of your tax bracket, in purchasing a Contract
rather than, for example, a mutual fund with a similar investment policy and
approximately the same level of expected investment results. This is because
little or no income taxes are incurred by you or by us while you are
participating in the Subaccounts, and it is generally advantageous to defer
the payment of income taxes, so that the investment return is compounded
without any deduction for income taxes. The advantage will be greater if you
decide to liquidate your Contract Value in the form of monthly annuity
payments after your retirement, or if your tax rate is lower at that time than
during the period that you held the Contract, or both.
TAXES ON PACIFIC LIFE
Although the Separate Account is registered as an investment company, it is
not a separate taxpayer for purposes of the Code. The earnings of the Separate
Account are taxed as part of our operations. No charge is made against the
Separate Account for our federal income taxes (excluding the charge for
premium taxes), but we will review, periodically, the question of charges to
the Separate Account or your Contract for such taxes. Such a charge may be
made in future years for any federal income taxes that would be attributable
to the Separate Account or to our operations with respect to your Contract, or
attributable, directly or indirectly, to Purchase Payments on your Contract.
Under current law, we may incur state and local taxes (in addition to premium
taxes) in several states. At present, these taxes are not significant and they
are not charged against the Contract or the Separate Account. If there is a
material change in applicable state or local tax laws, the imposition of any
such taxes upon us that are attributable to the Separate Account or to our
operations with respect to your Contract may result in a corresponding charge
against the Separate Account or your Contract.
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ADDITIONAL INFORMATION
VOTING RIGHTS
We are the legal owner of the shares of the Portfolios held by the
Subaccounts, and consequently have the right to vote on any matter voted on at
Fund shareholders' meetings. However, our interpretation of applicable law
requires us to vote the shares attributable to your Variable Account Value
(your "voting interest") in accordance with your directions.
We will pass shareholder proxy materials on to you so that you have an
opportunity to give us voting instructions for your voting interest. You may
provide your instructions by proxy or in person at the shareholders' meeting.
If there are shares of a Portfolio held by a Subaccount for which we do not
receive timely voting instructions, we will vote those shares in the same
proportion as all other shares of that Portfolio held by that Subaccount for
which we have received timely voting instructions. If we hold shares of a
Portfolio in our General Account, or hold unvoted shares in the Separate
Account, and/or if any of our non-insurance subsidiaries hold shares of a
Portfolio, such shares will be voted in the same proportion as other votes
cast by all of our separate accounts in the aggregate, including Separate
Account A.
We may elect, in the future, to vote shares of the Portfolios held in Separate
Account A in our own right if we are permitted to do so through a change in
applicable federal securities laws or regulations, or in their interpretation.
The number of Portfolio shares that form the basis for your voting interest is
determined as of the record date set by the Board of Trustees of the Fund. It
is equal to (a) your Contract Value allocated to the Subaccount corresponding
to that Portfolio, divided by (b) the net asset value per share of that
Portfolio. Fractional votes will be counted. We reserve the right, if required
or permitted by a change in federal regulations or their interpretation, to
amend how we calculate your voting interest.
After your Annuity Date, if you have selected a variable annuity, the voting
rights under your Contract will continue during the payout period of your
annuity, but the number of shares that form the basis for your voting
interest, as described above, will decrease throughout the payout period.
CHANGES TO YOUR CONTRACT
Contract Owner(s) and Contingent Owner
You may change your Non-Qualified Contract at any time prior to your Annuity
Date to name a different Contract Owner or to add a Joint Owner, or to add or
change a Contingent Owner; if yours is a Qualified Contract, you must be the
only Contract Owner, but you may still add or change a Contingent Owner. Your
Contract cannot name more than two Contract Owners (Joint Owners) and one
Contingent Owner at any time. Any newly-named Contract Owners, including Joint
and/or Contingent Owners, must be under the age of 86 at the time of change or
addition. Joint ownership is in the form of a joint tenancy. The Contract
Owner(s) may make all decisions regarding the Contract, including making
allocation decisions and exercising voting rights. Transactions under jointly
owned Contracts require authorization from both Contract Owners. Transfer of
Contract ownership may involve federal income tax consequences; you should
consult a qualified tax adviser before effecting such a transfer. A change to
joint Contract ownership is considered a transfer of ownership.
Annuitant and Contingent or Joint Annuitant
Your sole Annuitant cannot be changed, and Joint Annuitants cannot be added or
changed, once your Contract is issued. Certain changes may be permitted in
connection with Contingent Annuitants. See RETIREMENT BENEFITS AND OTHER
PAYOUTS--SELECTING YOUR ANNUITANT. There may be limited exceptions for certain
Qualified Contracts.
Beneficiaries
Your Beneficiary is a person(s) who may receive death benefits under your
Contract. You may change or remove your Beneficiary or add Beneficiaries at
any time prior to the death of the Annuitant or Owner, as applicable. If
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you have named your Beneficiary irrevocably, you will need to obtain that
Beneficiary's consent before making any changes. Qualified Contracts may have
additional restrictions on naming and changing Beneficiaries; for example, if
your Contract was issued in connection with a Qualified Plan subject to Title
I of ERISA, your spouse must either be your Beneficiary or consent to your
naming of a different Beneficiary. If you leave no surviving Beneficiary, your
estate will receive any death benefit proceeds under your Contract.
CHANGES TO ALL CONTRACTS
If, in the judgment of our management, continued investment by Separate
Account A in one or more of the Portfolios becomes unsuitable or unavailable,
we may seek to alter the Variable Investment Options available under the
Contracts. We do not expect that a Portfolio will become unsuitable, but
unsuitability issues could arise due to changes in investment policies, market
conditions, or tax laws, or due to marketing or other reasons.
Alterations of Variable Investment Options may take differing forms. We
reserve the right to replace shares of any Portfolio that were already
purchased under any Contract (or shares that were to be purchased in the
future under a Contract) with shares of another Portfolio, shares of another
investment company or series of an investment company, or another investment
vehicle. We may also purchase, through a Subaccount, other securities for
other series or other classes of contracts, and may permit conversions or
exchanges between series or classes of contracts on the basis of Contract
Owner requests. Required approvals of the SEC and state insurance regulators
will be obtained before any such substitutions are effected, and you will be
notified of any planned substitution.
We may add new Subaccounts to Separate Account A, and any new Subaccounts may
invest in Portfolios or in other investment vehicles; availability of any new
Subaccounts to existing Contract Owners will be determined at our discretion.
We will notify you, and will comply with the filing or other procedures
established by applicable state insurance regulators, to the extent required
by applicable law. We also reserve the right, after receiving any required
regulatory approvals, to do any of the following:
. cease offering any subaccount
. combine Subaccounts
. delete or substitute Subaccounts
. combine Separate Account A or part of it with another of our separate
accounts or with any of our affiliates' separate accounts
. transfer Separate Account A assets attributable to the Contracts to
another of our separate accounts
. deregister the Separate Account under the 1940 Act
. operate Separate Account A as a management investment company under the
1940 Act or another form permitted by law
. establish a committee, board or other group to manage aspects of the
Separate Account's operations
. make any changes required by the 1940 Act or other federal securities
laws
. make any changes necessary to maintain the status of the Contracts as
annuities under the Code
. make other changes required under federal or state law relating to
annuities
. suspend or discontinue sale of the Contracts.
INQUIRIES AND SUBMITTING FORMS AND REQUESTS
You may reach our service representatives at 1-800-722-2333 between the hours
of 6:00 a.m. and 5:00 p.m., Pacific time.
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Please send your forms and written requests or questions to:
Pacific Life Insurance Company
P.O. Box 7187
Pasadena, California 91109-7187
If you are submitting a purchase or other payment by mail, please send it,
along with your application if you are submitting one, to:
Pacific Life Insurance Company
P.O. Box 100060
Pasadena, California 91189-0060
If you are using an overnight delivery service to send payments, please send
them to:
Pacific Life Insurance Company
c/o FCNPC
1111 South Arroyo Parkway, First Floor
Pasadena, California 91105
The effective date of certain notices or of instructions is determined by the
date and time on which we "receive" the notice or instructions. We "receive"
this information only when it arrives, in proper form, at the correct mailing
address set out above. Please call us at 1-800-722-2333 if you have any
questions regarding which address you should use.
Purchase Payments after your initial Purchase Payment, loan requests, transfer
requests, loan repayments and withdrawal requests we receive before 4:00 p.m.
Eastern time will normally be effective on the same Business Day that we
receive them in "proper form," unless the transaction or event is scheduled to
occur on another day. Generally, whenever you submit any other form, notice or
request, your instructions will be effective on the next Business Day after we
receive them in "proper form" unless the transaction or event is scheduled to
occur on another day. "Proper form" may require, among other things, a
signature guarantee or other verification of authenticity. We do not generally
require a signature guarantee unless it appears that the Owner's signature may
have changed over time; an executed application or confirmation of
application, as applicable, in proper form is not received by us; or, due to
other circumstances. Requests regarding death benefits must be accompanied by
both proof of death and instructions regarding payment satisfactory to us. You
should call your registered representative or us if you have questions
regarding the required form of a request.
TELEPHONE TRANSACTIONS
After your "free look" period, you may make transfer requests by telephone if
you have authorized telephone requests (a "telephone authorization"). We
cannot guarantee that you will always be able to reach us to complete a
telephone transaction; for example, all telephone lines may be busy during
certain periods, such as periods of substantial market fluctuations or other
drastic economic or market change, or telephones may be out of service during
severe weather conditions or other emergencies. Under these circumstances, you
should submit your request in writing (or other form acceptable to us).
Transaction instructions we receive by telephone before 4:00 p.m. Eastern time
on any Business Day will normally be effective on that day, and we will send
you written confirmation of each telephone transfer.
We have established procedures reasonably designed to confirm that
instructions communicated by telephone are genuine. These procedures may
require any person requesting a telephone transaction to provide certain
personal identification upon our request. We may also record all or part of
any telephone conversation with respect to transaction instructions. We
reserve the right to deny any transaction request made by telephone. When you
make a proper request for a telephone authorization, you authorize us to
accept and to act upon instructions received by telephone with respect to your
Contract, and you agree that, as long as we comply with our
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procedures, neither we, any of our affiliates, nor the Fund, or any of their
directors, trustees, officers, employees or agents will be liable for any
loss, liability, cost or expense (including attorneys' fees) in connection
with requests that are effected in accordance with your telephone
authorization and that we believe to be genuine. This policy means that you
will bear the risk of loss arising out of your telephone transaction
privileges. If a Contract has Joint Owners, both Owners must sign the written
request for a telephone authorization, but each Owner individually may make
transfer requests by telephone.
TIMING OF PAYMENTS AND TRANSACTIONS
For withdrawals from the Variable Investment Options or for death benefit
payments attributable to your Variable Account Value, we will normally send
the proceeds within seven calendar days after your withdrawal request is
effective or after the Notice Date, as the case may be. Similarly, for
transfers from the Variable Investment Options, we will normally send the
proceeds within seven calendar days after your transfer (or exchange) request
is effective. We will normally effect periodic annuity payments on the day
that corresponds to the Annuity Date and will make payment on the following
day. Payments or transfers may be suspended for a longer period under certain
abnormal circumstances. These include a closing of the New York Stock Exchange
other than on a regular holiday or weekend, a trading restriction imposed by
the SEC, or an emergency declared by the SEC. For (i) withdrawals from the
Fixed Option, DCA Plus Fixed Option or GIOs, (ii) death benefit payments
attributable to Fixed Option Value, DCA Plus Fixed Option Value or GIO Value,
or (iii) fixed periodic annuity payments, payment of proceeds may be delayed
for up to six months (thirty days in West Virginia) after the request is
effective. Similar delays may apply to loans and transfers from the Fixed
Option, the DCA Plus Fixed Option and the GIOs. See THE GENERAL ACCOUNT for
more details.
CONFIRMATIONS, STATEMENTS AND OTHER REPORTS TO CONTRACT OWNERS
Confirmations will be sent out for unscheduled Purchase Payments and
transfers, loans, loan repayments, unscheduled partial withdrawals, a full
withdrawal, GIO renewals, and on payment of any death benefit proceeds. Each
quarter prior to your Annuity Date, we will send you a statement that provides
certain information pertinent to your Contract. These statements disclose
Contract Value, Subaccount values, values under each Fixed Option, DCA Plus
Fixed Option or GIO, fees and charges applied to your Contract Value,
transactions made and specific Contract data that apply to your Contract.
Confirmations of your transactions under the pre-authorized checking plan,
dollar cost averaging, earnings sweep, portfolio rebalancing, and pre-
authorized withdrawal options will appear on your quarterly account
statements. Your fourth-quarter statement will contain annual information
about your Contract Value and transactions. If you suspect an error on a
confirmation or quarterly statement, you must notify us in writing within 30
days from the date of the first confirmation or statement on which the
transaction you believe to be erroneous appeared. When you write, tell us your
name, contract number and a description of the suspected error. You will also
be sent an annual report for the Separate Account and the Fund and a list of
the securities held in each Portfolio of the Fund, as required by the 1940
Act; or more frequently if required by law.
REPLACEMENT OF LIFE INSURANCE OR ANNUITIES
The term "replacement" has a special meaning in the life insurance industry
and is described more fully below. Before you make your purchase decision,
Pacific Life wants you to understand how a replacement may impact your
existing plan of insurance.
A policy "replacement" occurs when a new policy or contract is purchased and,
in connection with the sale, an existing policy or contract is surrendered,
lapsed, forfeited, assigned to the replacing insurer, otherwise terminated, or
used in a financed purchase. A "financed purchase" occurs when the purchase of
a new life insurance policy or annuity contract involves the use of funds
obtained from the values of an existing life insurance policy or annuity
contract through withdrawal, surrender or loan.
There are circumstances in which replacing your existing life insurance policy
or annuity contract can benefit you. As a general rule, however, replacement
is not in your best interest. Accordingly, you should make a careful
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<PAGE>
comparison of the costs and benefits of your existing policy or contract and
the proposed policy or contract to determine whether replacement is in your
best interest.
FINANCIAL STATEMENTS
Audited financial statements of Separate Account A as of December 31, 1997 and
for each of the two years then ended are incorporated by reference in the
Statement of Additional Information from the Annual Report of the Separate
Account A as of December 31, 1997. Pacific Life's audited consolidated
financial statements as of December 31, 1997 and 1996, and for the three years
ended December 31, 1997, are contained in the SAI.
PREPARATION FOR THE YEAR 2000
We rely significantly on computer systems and applications in our daily
operations. In 1995, we began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue involves the ability of computer systems to properly
recognize the year 2000. The inability to do so could result in major failures
or miscalculations.
We have a coordinated plan to remediate, or replace if necessary, any non-
compliant systems and to obtain assurances of the ability to be year 2000
compliant by our service providers, vendors and those with significant
relationships with us. Our plan is directed and overseen by an experienced
Vice President dedicated to year 2000 compliance. We completed the
identification of all critical systems and are in the process of remediating
systems. In addition, we have retained two internationally recognized
consultants to assist in reviewing and remediating our systems and interfaces
with third parties. Our plan calls for all remediation to be completed by the
fourth quarter of 1998 and testing to commence as remediation is completed and
throughout 1999. Some testing has already begun.
Remediation expenses to make our systems year 2000 compliant are currently
estimated to range from $15 to $20 million, which excludes the cost of our
personnel who support year 2000 compliance efforts. We do not anticipate any
other material future costs associated with the year 2000 compliance efforts.
We do not anticipate any other material future costs associated with the year
2000 compliance project, although there can be no assurance. We currently
expect to be year 2000 compliant; however, there can be no assurances that we
will succeed. In the event we or our significant service providers, vendors,
financial institutions or others with which we conduct business, fail to be
year 2000 compliant, there would be a materially adverse effect on us.
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THE GENERAL ACCOUNT
GENERAL INFORMATION
All amounts allocated to the Fixed Option, DCA Plus Fixed Option and GIOs
become part of our General Account. Subject to applicable law, we exercise
sole discretion over the investment of General Account assets, and bear the
associated investment risk; you will not share in the investment experience of
General Account assets.
Because of exemptive and exclusionary provisions, interests in the General
Account under the Contract are not registered under the Securities Act of 1933
and the General Account has not been registered as an investment company under
the 1940 Act. Any interest you have in the Fixed Option, DCA Plus Fixed Option
or GIOs is not subject to these Acts, and we have been advised that the SEC
staff has not reviewed disclosure in this Prospectus relating to the Fixed
Option or GIOs. This disclosure may, however, be subject to certain provisions
of federal securities laws relating to the accuracy and completeness of
statements made in prospectuses.
You may choose among the following General Account options: the Fixed Option
and Guaranteed Interest Options with three available Guarantee Terms: three-
year, six-year and ten-year. Each is described below.
GUARANTEE TERMS
When you allocate any portion of your Purchase Payments or Contract Value to
the Fixed Option, the DCA Plus Fixed Option or one or more GIOs in the General
Account, we guarantee you an interest rate (a "Guaranteed Interest Rate") for
a specified period of time (a "Guarantee Term") of up to ten years. The Fixed
Option, DCA Plus Fixed Option and each GIO offers a separate Guaranteed
Interest Rate and Guarantee Term. Guarantee Terms will be offered at our
discretion. Presently, we offer Guarantee Terms of up to one year for the
Fixed Option, one year for the DCA Plus Fixed Option and three-, six- and ten-
years for the GIOs. You should specify the Fixed Option, DCA Plus Fixed Option
and/or GIO(s) into which you want us to allocate your Purchase Payments or
Contract Value, if any. EACH ALLOCATION TO A GIO MUST BE AT LEAST $500.
Guaranteed Interest Rates for each Fixed Option, DCA Plus Fixed Option and GIO
may be changed periodically for new allocations; your allocation will receive
the Guaranteed Interest Rate in effect for that Fixed Option, DCA Plus Fixed
Option or GIO on the effective date of your allocation. All Guaranteed
Interest Rates will be expressed as annual effective rates; however, interest
will accrue daily. The Guaranteed Interest Rate on your Fixed Option, DCA Plus
Fixed Option and/or GIO will remain in effect for the Guarantee Term and will
never be less than an annual rate of 3%.
DCA Plus Fixed Option
AVAILABILITY OF THE DCA PLUS FIXED OPTION (AND THEREFORE ALSO DCA PLUS) IS
SUBJECT TO APPROVAL OF STATE INSURANCE AUTHORITIES. ASK YOUR REGISTERED
REPRESENTATIVE ABOUT ITS STATUS IN YOUR STATE OF ISSUE.
WHEN YOU ESTABLISH A DCA PLUS AND YOU MAKE YOUR INITIAL PURCHASE PAYMENT
ALLOCATION TO THE DCA PLUS FIXED OPTION, WE ESTABLISH A GUARANTEE TERM THAT
ENDS ONE YEAR FROM THE DAY YOUR ALLOCATION IS EFFECTIVE. We credit each
allocation made to the DCA Plus Fixed Option during that Guarantee Term at the
Guaranteed Interest Rate in effect on the day each allocation is effective
through the earliest of:
(i) the end of the Guarantee Term;
(ii) the day on which the DCA Plus Fixed Option Value is zero;
(iii) the Annuity Date; or
(iv) the day on which death benefit proceeds become payable.
We stop crediting interest on any amount transferred or withdrawn from the DCA
Plus Fixed Option as of the day the transfer or withdrawal is effective.
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Fixed Option
EACH ALLOCATION (OR ROLLOVER) YOU MAKE TO THE FIXED OPTION RECEIVES A
GUARANTEE TERM THAT BEGINS ON THE DAY THAT ALLOCATION OR ROLLOVER IS EFFECTIVE
AND ENDS AT THE END OF THAT CONTRACT YEAR OR, IF EARLIER, ON YOUR ANNUITY
DATE. At the end of that Contract Year, we will roll over your Fixed Option
Value on that day into a new Guarantee Term of one year (or, if shorter, the
time remaining until your Annuity Date) at the then current Guaranteed
Interest Rate, unless you instruct us otherwise.
Example: Your Contract Anniversary is February 1. On February 1 of year 1,
you allocate $1,000 to the Fixed Option and receive a Guarantee Term of one
year and a Guaranteed Interest Rate of 5%. On August 1, you allocate
another $500 to the Fixed Option and receive a Guaranteed Interest Rate of
6%. Through January 31, year 1, your first allocation of $1,000 earns 5%
interest and your second allocation of $500 earns 6% interest. On February
1, year 2, a new interest rate may go into effect for your entire Fixed
Option Value.
Guaranteed Interest Options
EACH ALLOCATION (OR ROLLOVER) YOU MAKE TO A GIO RECEIVES A GUARANTEE TERM THAT
BEGINS ON THE DAY THAT ALLOCATION OR ROLLOVER IS EFFECTIVE AND ENDS AT THE END
OF THE GUARANTEE TERM. For each GIO, at the end of its Guarantee Term, we will
roll over that portion of your Account Value on that day into a new GIO with a
Guarantee Term of the same length and at the then current Guaranteed Interest
Rate corresponding to that Guarantee Term, unless, within thirty days after
the end of the Guarantee Term you instruct us otherwise (SEE END OF GIO
GUARANTEE TERM). However, if the last day of this new Guarantee Term would
occur after the Annuity Date, we will roll over that portion of your Account
Value into the longest Guarantee Term, if any, that ends prior to the Annuity
Date, with the corresponding new Guaranteed Interest Rate then in effect. If
there is no Guarantee Term that ends before the Annuity Date, we will allocate
that portion of your Account Value to the Fixed Option at the corresponding
Guaranteed Interest Rate then in effect for new allocations.
Example: On January 1 of year 1, you allocate $1,000 to a GIO with a
Guarantee Term of three years and a Guaranteed Interest Rate of 7%. On
August 1, you allocate another $500 to another GIO with a Guarantee Term of
three years and a Guaranteed Interest Rate of 7.5%. On November 1, you
allocate $2,000 to a third GIO with a ten-year Guarantee Term at a
Guaranteed Interest Rate of 9%. Through December 31, year 3, your first
allocation of $1,000 earns 7% interest, and on January 1, year 4, a new
interest rate will go into effect for this portion of your GIO Value.
Through July 31, year 4, your second allocation of $500 earns 7.5%
interest, and on August 1, year 4, a new interest rate will go into effect
for this portion of your GIO Value. Finally, through October 31, year 11,
your third allocation of $2,000 earns 9% interest, and on November 1, year
11, a new interest rate will go into effect on this portion of your GIO
Value.
End of GIO Guarantee Term
You have thirty days after the last day of the Guarantee Term of a GIO to
inform us whether you want to (i) renew that particular Account Value in a
different Guarantee Term at its corresponding Guaranteed Interest Rate in
effect for new allocations, (ii) transfer all or part of that Account Value to
another Investment Option, and/or (iii) withdraw all or part of that Account
Value. Any subsequent change to such instructions will be subject to the
provisions of the CHARGES, FEES AND DEDUCTIONS section.
If you instruct us to allocate that portion of you Account Value that was
rolled over in the new GIO to a GIO with a different Guarantee Term, we will
consider that allocation to be made as of the end of the previous Guarantee
Term and will credit interest accordingly. If you instruct us to transfer to a
Variable Investment Option or the Fixed Option or to withdraw that portion of
your Account Value in the new GIO, we will effect such transfer or withdrawal
as of the day we receive your request; interest will be credited at the
Guaranteed Interest Rate for the time the Account Value was allocated to that
GIO. Any amounts that you transfer or withdraw before the last day of the
Guarantee Term or after this thirty-day period will be subject to the MVA, and
any transfer fee. All withdrawals made before, during or after this thirty-day
period will be subject to any applicable withdrawal charge, withdrawal fee and
any charges for premium taxes and/or other taxes.
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WITHDRAWALS AND TRANSFERS
Prior to the Annuity Date, you may withdraw amounts from your Fixed Option,
DCA Plus Fixed Option and/or one or more GIOs, or transfer amounts from your
Fixed Option, DCA Plus Fixed Option and/or GIOs to one or more of the other
Investment Options, except that you may not transfer amounts to the DCA Plus
Fixed Option. The withdrawal or transfer will access each GIO Term Value
proportionately (or you may specify a particular GIO Term Value). Amounts from
the oldest GIO within a GIO Term Value will be withdrawn or transferred first.
Transfer requests to a GIO will be applied as an allocation to a new GIO. If
your Contract was issued in a state that requires refund of Purchase Payments
under the Free Look Right, transfers may only be made after your Free Look
Transfer Date. In addition, no partial withdrawal or transfer (other than a
monthly transfer under DCA Plus) may be made from your Fixed Option, DCA Plus
Fixed Option or GIOs within 30 days of the Contract Date. If your withdrawal
leaves you with a Net Contract Value of less than $1,000, we have the right,
at our option, to terminate your Contract and send you the withdrawal
proceeds.
Payments or transfers from the Fixed Option, DCA Plus Fixed Option or a GIO
may be delayed, as described under ADDITIONAL INFORMATION--TIMING OF PAYMENTS
AND TRANSACTIONS; any amount delayed will, as long as it is held under the
Fixed Option, DCA Plus Fixed Option or that GIO, continue to earn interest at
the Guaranteed Interest Rate then in effect until that Guarantee Term has
ended, and the minimum guaranteed interest rate of 3% thereafter, unless state
law requires a greater rate be paid.
Fixed Option
After the first Contract Anniversary, you may make one transfer or partial
withdrawal from your Fixed Option during any Contract Year, except as provided
under the dollar cost averaging, earnings sweep and pre-authorized withdrawal
programs. You may make one transfer or one partial withdrawal within the 30
days after the end of each Contract Anniversary. Normally, you may transfer or
withdraw up to one-third (33 1/3%) of your Fixed Option Value in any given
Contract Year. However, in consecutive Contract Years you may transfer or
withdraw up to one-third (33 1/3%) of your Fixed Option Value in one year; you
may transfer or withdraw up to one-half (50%) of your remaining Fixed Option
Value in the next year; and you may transfer or withdraw up to the entire
amount (100%) of any remaining Fixed Option Value in the third year. In
addition, if, as a result of a partial withdrawal or transfer, the Fixed
Option Value is less than $500, we have the right, at our option, to transfer
the entire remaining amount to your other Investment Options on a
proportionate basis relative to your most recent allocation instructions. Any
amount that would otherwise be allocated to the DCA Plus Fixed Option will be
allocated to the Variable Investment Options according to your most recent DCA
Plus transfer instructions.
DCA Plus Fixed Option
No transfer to the DCA Plus Fixed Option may be made at any time.
GIOs
You may make unlimited transfers or withdrawals from your GIOs during any
Contract Year, however we reserve the right to impose a transaction fee of up
to $15 per transfer for transfers in excess of 15 in any Contract Year, as
described under HOW YOUR PAYMENTS ARE INVESTED--TRANSFERS.
You may not request an allocation or transfer into or renewal of a GIO that
has a Guarantee Term that ends after the Annuity Date. If you do not specify a
particular GIO Term Value(s), the amount of any transfer or withdrawal will be
deducted proportionately from your GIO Term Values, beginning with the oldest
GIO within each GIO Term Value. In addition, if as the result of a partial
withdrawal or transfer, your Account Value in that GIO is less than $500, we
have the right, at our option, to transfer the remaining amount to your other
Investment Options on a proportionate basis relative to your most recent
allocation instructions. A GIO cannot participate in any systematic transfer
program. In addition, your GIO Value cannot be transferred to the Loan Account
to secure any loan made under the Contract.
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An MVA is applied to the Account Value of a GIO in order to determine the net
amount of the transfer or withdrawal prior to the deduction of any applicable
charges or fees. Unless you request a net amount, the amount actually
transferred or sent to you equals the amount requested, less any MVA, less any
applicable withdrawal charge (based upon the amount requested before the
application of the MVA), and less any charges for Annual Fees, transactions,
premium taxes and/or other taxes, including any taxes required for
withholding.
The MVA is not applied to (i) amounts used to pay charges for the Annual Fee,
transfer fees, and/or premium taxes and/or other taxes, (ii) the amount of
death benefit proceeds, and (iii) subject to medical evidence satisfactory to
us, full or partial withdrawals, after the first Contract Anniversary if the
Annuitant has been diagnosed with a medically determinable condition that
results in a life expectancy of twelve (12) months or less.
The formula for calculating the MVA is set forth in Appendix B to this
Prospectus, which also contains illustrations of the application of the MVA.
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CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PERFORMANCE................................................................ 1
Total Returns............................................................ 1
Yields................................................................... 2
Performance Comparisons and Benchmarks................................... 2
Separate Account Performance............................................. 4
DISTRIBUTION OF THE CONTRACTS.............................................. 7
Pacific Mutual Distributors, Inc......................................... 7
THE CONTRACTS AND THE SEPARATE ACCOUNT..................................... 8
Calculating Subaccount Unit Values....................................... 8
Variable Annuity Payment Amounts......................................... 8
Corresponding Dates...................................................... 10
Age and Sex of Annuitant................................................. 11
Systematic Transfer Programs............................................. 11
Pre-Authorized Withdrawals............................................... 13
Death Benefit............................................................ 13
Joint Annuitants on Qualified Contracts.................................. 14
1035 Exchanges........................................................... 14
Safekeeping of Assets.................................................... 14
Dividends................................................................ 14
FINANCIAL STATEMENTS....................................................... 14
</TABLE>
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APPENDIX A:
STATE LAW VARIATIONS
Issue Date--The term "Issue Date" shall be substituted for the term "Contract
Date" for Contracts issued to residents of the Commonwealth of Massachusetts.
SHORT-TERM CANCELLATION RIGHT ("FREE-LOOK") ("RIGHT TO CANCEL")
VARIATIONS TO THE LENGTH OF THE FREE-LOOK PERIOD. In most states, the Free-Look
period is a 10-day period beginning on the day you receive your Contract. If
your Contract was issued in one of the following states, the Free-Look period
is as specified below:
Colorado (15 days)
Idaho (20 days)
North Dakota (20 days)
In addition, if you reside in California and are age 60 or older on your
Contract Date, the Free-Look period is 30 days.
There may be extended Free Look periods in some states for replacement
business. Please consult with your registered representative if you have any
questions regarding your state's Free Look period.
STATES THAT REQUIRE US TO REFUND YOUR PURCHASE PAYMENTS ALLOCATED TO THE
VARIABLE INVESTMENT OPTIONS INSTEAD OF YOUR VARIABLE ACCOUNT VALUE. If your
Contract was issued in one of the following states and you exercise your Free
Look right and return your Contract to us within 10 days of your receipt of
your Contract (unless specified otherwise below), we will refund your Purchase
Payments under your Contract that we received:
Georgia Oklahoma
Idaho (20 days) South Carolina
Michigan Utah
Missouri Washington
Nebraska West Virginia
North Carolina
ANNUITIZATION. In New Jersey the Conversion Amount you apply to an Annuity
Option must result in an initial annuity payment of at least $250. We will
reduce your payment frequency if the first annuity payment is less than $250.
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APPENDIX B:
MARKET VALUE ADJUSTMENT
The MVA for amounts annuitized, transferred or withdrawn from a GIO prior to
the end of its Guarantee Term are based on the following formula:
MVA = W x [(J - I) x (N/12)] where:
(W) is the amount to be annuitized, withdrawn or transferred from the
GIO.
(J) is the Guaranteed Interest Rate that would apply, as of the date of
transfer, annuitization or withdrawal, to a newly-issued GIO with a
Guarantee Term equal to the number of "years remaining" in the
Guarantee Term of the GIO from which the annuitization, withdrawal or
transfer is to be made, plus 0.25%. (For this purpose, the "years
remaining" will be rounded up to the next higher number of whole
years. If a Guaranteed Interest Rate is required for a Guarantee Term
not currently offered, the Guaranteed Interest Rate will be based on
linear interpolation, between the Guaranteed Interest Rates for
currently offered Guarantee Terms, if possible. Otherwise, we will
determine a substitute Guaranteed Interest Rate that will be no less
favorable to you than the then most recent U.S. Treasury Yield for a
maturity closest to the "years remaining", plus 1.0%);
(I) is the Guaranteed Interest Rate applicable to the GIO; and
(N) is the number of complete months remaining in the Guarantee Term.
The MVA will never exceed, in the positive or negative direction, the excess
interest earned on the GIO from which the annuitization, withdrawal or
transfer is to be made. For this purpose, excess interest is defined as the
dollar amount of interest earned during the current Guarantee Term in excess
of 3%, per annum.
Generally, if the Guaranteed Interest Rate currently in effect for the
Guarantee Term (I) is lower than (J) as defined above, the MVA will result in
a lower amount payable to you. Similarly, if (I) is higher than (J), the MVA
will result in a higher amount payable to you. In no event will the MVA reduce
interest earned to less than 3% per annum.
MVA EXAMPLES
These assumptions are made in the following examples:
1. An allocation of $10,000 was made to a Guaranteed Interest Option (GIO)
with a 6-year Guarantee Term, and with a Guaranteed Interest Rate of
5.5%.
2. A full withdrawal is requested 2 1/2 years (30 months) from the
expiration of the Guarantee Term (i.e., N = 30).
3. The Account Value for the GIO at the time of the request is $12,061.01.
It is assumed that no Contract charges or fees have been applied to this
GIO.
4. If the GIO Account Value had been credited with 3% interest instead of
the 5.5%, the Account Value would have been $11,089.97. The excess
interest for this GIO is then $971.04, (i.e. $12,061.01- $11,089.97).
5. No transfers or withdrawals have been previously made from this GIO.
EXAMPLES OF MVAS THAT REDUCE THE WITHDRAWAL AMOUNT:
Example A (MVA not limited to excess interest)
Assume that on the date of withdrawal the Guaranteed Interest Rate for a new
Guarantee Term of 3 years (2 1/2 years rounded up to the next higher whole
year) is 7.5%. "J" is then 7.75% (i.e. 7.50% + 0.25%). Then:
MVA= ($12,061.01) x [( 7.75% - 5.5%) x (30/12)]
= $678.43 (representing a positive amount to be subtracted from the GIO
Account Value)
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Since the amount of the MVA is less than the excess interest earned on the
GIO, the withdrawal amount will include the GIO Account Value less $678.43.
That amount, $11,382.58, would be further reduced by the withdrawal charge and
any other Contract charges or fees that apply. The withdrawal charge is
calculated based on the GIO Account Value before the MVA.
Example B (MVA is limited to excess interest)
This time, assume that on the date of withdrawal the Guaranteed Interest Rate
for a new Guarantee Term of 3 years (2 1/2 years rounded up to the next higher
whole year) is 9.0%. "J" is then 9.25% (i.e. 9.00% + 0.25%). Then:
MVA = ($12,061.01) x [(9.25% - 5.5%) x (30/12)]
= $1,130.72 (representing a positive amount to be subtracted from the GIO
Account Value)
Since the amount of the MVA exceeds the excess interest earned on the GIO, the
MVA must be reduced to equal the excess interest and the withdrawal amount
will include the GIO Account Value less $971.04. That amount, $11,089.97,
would be further reduced by the withdrawal charge and any other Contract
charges or fees that apply. The withdrawal charge is calculated based on the
GIO Account Value before the MVA.
EXAMPLES OF MVAS THAT INCREASE THE WITHDRAWAL AMOUNT:
Example C (MVA not limited to excess interest)
Assume that on the date of withdrawal the Guaranteed Interest Rate for a new
Guarantee Term of 3 years (2 1/2 years rounded up to the next higher whole
year) is 3.25%. "J" is then 3.50% (i.e. 3.25% + 0.25%). Then:
MVA = ($12,061.01) x [(3.50% - 5.5%) x (30/12)]
= - $603.05 (representing a negative amount to be subtracted from the GIO
Account Value)
Since the absolute amount of the MVA is less than the excess interest earned
on the GIO, the withdrawal amount will include the GIO Account Value plus
$603.05. That amount, $12,664.06, would then be reduced by the withdrawal
charge and any other Contract charges or fees that apply. The withdrawal
charge is calculated based on the GIO Account Value before the MVA.
Example D (MVA is limited to excess interest)
To more readily show this example, and to demonstrate a Guaranteed Interest
Rate ("J") based on interpolation, the assumptions for this example have been
modified and are as follows:
1. An allocation of $10,000 was made to a Guaranteed Interest Option (GIO)
with a 6-year Guarantee Term, and with a Guaranteed Interest Rate of
5.5%.
2. A full withdrawal is requested 3 1/2 years (42 months) from the
expiration of the Guarantee Term (i.e., N = 42).
3. The Account Value for the GIO at the time of the request is $11,432.24.
It is assumed that no Contract charges or fees have been applied to this
GIO.
4. If the GIO Account Value had been credited with 3% interest instead of
the 5.5%, the Account Value would have been $10,766.96. The excess
interest for this GIO is then $665.28.
5. No transfers or withdrawals have been previously made from this GIO.
This time, assume that on the date of withdrawal the Guaranteed Interest Rate
for a new Guarantee Term of 3 years is 3.25%, and also assume that the
Guaranteed Interest Rate for a new Guarantee Term of 6 years is 4.0%.
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Then the Guaranteed Interest Rate for a Guarantee Term of 4 years (3 1/2
rounded to the next higher whole year) is 3.5%. (That result is determined by
interpolation as follows: 3.25% plus (4.0% - 3.25%) x (4 years - 3 years)/(6
years - 3 years))
Then "J" is 3.75% (i.e. 3.50% + 0.25%), and:
MVA = ($11,432.24) x [(3.75% - 5.5%) x (42/12)]
= -$700.22 (representing a negative amount to be subtracted from the GIO
Account Value)
Since the absolute amount of the MVA exceeds the excess interest earned on the
GIO, the MVA must be reduced to equal the excess interest and the withdrawal
amount will include the GIO Account Value plus $665.28. That amount,
$12,097.52, would be reduced by the withdrawal charge and any other Contract
charges or fees that apply. The withdrawal charge is calculated based on the
GIO Account Value before the MVA.
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<PAGE>
To receive a current copy of the Pacific Portfolios SAI without charge, call
(800) 722-2333 or complete the following and send it to:
Pacific Life Insurance Company
Variable Annuities
Post Office Box 7187
Pasadena, CA 91109-7187
Name _________________________
Address ______________________
City _________________________State ______________________ Zip _________________
PH02/53003.29
<PAGE>
[LOGO OF PACIFIC PORTFOLIOS]
Underwritten By:
Pacific Life Insurance Company
Mailing Address:
Variable Annuity Department
P.O. Box 7187
Pasadena, California 91109-7187
Home Office:
700 Newport Center Drive
P.O. Box 9000
Newport Beach, California 92660
Prospectus dated May 1, 1998
<PAGE>
UNDERWRITTEN BY:
[LOGO OF PACIFIC LIFE]
HOME OFFICE
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, CA 92660
(800) 722-2333
MAILING ADDRESS
Variable Annuity Department
P.O. Box 7187
Pasadena, California 91109-7187
Visit us at our website: www.pacificlife.com
[LOGO OF IMSA]
*Membership promotes ethical market conduct
for individual life insurance and
annuities
Form No. 800-8A
<PAGE>
[LOGO OF PACIFIC PORTFOLIOS]
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
PACIFIC PORTFOLIOS
SEPARATE ACCOUNT A
----------------
Pacific Portfolios (the "Contract") is a variable annuity contract
underwritten by Pacific Life Insurance Company ("Pacific Life").
This Statement of Additional Information is not a Prospectus and should be
read in conjunction with the Contract's Prospectus, dated May 1, 1998, which
is available without charge upon written or telephone request to Pacific Life.
Terms used in this Statement of Additional Information ("SAI") have the same
meanings as in the Prospectus, and some additional terms are defined
particularly for this SAI.
----------------
Pacific Life Insurance Company
Mailing Address: P.O. Box 7187
Pasadena, California 91109-7187
1-800-722-2333
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PERFORMANCE............................................................ 1
Total Returns........................................................ 1
Yields............................................................... 2
Performance Comparisons and Benchmarks............................... 2
Separate Account Performance......................................... 4
DISTRIBUTION OF THE CONTRACTS.......................................... 7
Pacific Mutual Distributors, Inc. ................................... 7
THE CONTRACTS AND THE SEPARATE ACCOUNT................................. 8
Calculating Subaccount Unit Values................................... 8
Variable Annuity Payment Amounts..................................... 8
Corresponding Dates.................................................. 10
Age and Sex of Annuitant............................................. 11
Systematic Transfer Programs......................................... 11
Pre-Authorized Withdrawals........................................... 13
Death Benefit........................................................ 13
Joint Annuitants on Qualified Contracts.............................. 14
1035 Exchanges....................................................... 14
Safekeeping of Assets................................................ 14
Dividends............................................................ 14
FINANCIAL STATEMENTS................................................... 14
</TABLE>
<PAGE>
PERFORMANCE
From time to time, our reports or other communications to current or
prospective Contract Owners or our advertising or other promotional material
may quote the performance (yield and total return) of a Subaccount. Quoted
results are based on past performance and reflect the performance of all
assets held in that Subaccount for the stated time period. QUOTED RESULTS ARE
NEITHER AN ESTIMATE NOR A GUARANTEE OF FUTURE INVESTMENT PERFORMANCE, AND DO
NOT REPRESENT THE ACTUAL EXPERIENCE OF AMOUNTS INVESTED BY ANY PARTICULAR
CONTRACT OWNER.
TOTAL RETURNS
A Subaccount may advertise its "average annual total return" over various
periods of time. "Total return" represents the average percentage change in
value of an investment in the Subaccount from the beginning of a measuring
period to the end of that measuring period. "Annualized" total return assumes
that the total return achieved for the measuring period is achieved for each
such period for a full year. "Average annual" total return is computed in
accordance with a standard method prescribed by the SEC.
Average Annual Total Return
To calculate a Subaccount's average annual total return for a specific
measuring period, we first take a hypothetical $1,000 investment in that
Subaccount, at its then-applicable Subaccount Unit Value (the "initial
payment") and we compute the ending redeemable value ("Cash Surrender Value")
of that initial payment at the end of the measuring period. The redeemable
value reflects the effect of all recurring fees and charges applicable to a
Contract Owner under the Contract, including the Risk Charge, the asset-based
Administrative Fee and the deduction of the applicable withdrawal charge, but
does not reflect any charges for applicable premium taxes and/or other taxes,
or the Enhanced Death Benefit Charge for the optional EGMDBR. The Annual Fee
is also taken into account, assuming an average Contract Value of $45,000. The
redeemable value is then divided by the initial payment and this quotient is
taken to the Nth root (N represents the number of days in the measuring
period), and 1 is subtracted from this result. Average annual total return is
expressed as a percentage.
T = (ERV/P)(to the power of 365/N)-1
where T = average annual total return
ERV = ending redeemable value
P = hypothetical initial payment of $1,000
N = number of days
Average annual total return figures will be given for recent one-, three-,
five- and ten-year periods (if applicable), and may be given for other periods
as well (such as from commencement of the Subaccount's operations, or on a
year-by-year basis).
When considering "average" total return figures for periods longer than one
year, it is important to note that the relevant Subaccount's annual total
return for any one year in the period might have been greater or less than the
average for the entire period.
Aggregate Total Return
A Subaccount may use "aggregate" total return figures along with its "average
annual" total return figures for various periods; these figures represent the
cumulative change in value of an investment in the Subaccount for a specific
period. Aggregate total returns may be shown by means of schedules, charts or
graphs and may indicate subtotals of the various components of total return.
The SEC has not prescribed standard formulas for calculating aggregate total
return.
Total returns may also be shown for the same periods that do not take into
account the withdrawal charge, the Annual Fee, or the Enhanced Death Benefit
Charge for the optional EGMDBR.
1
<PAGE>
YIELDS
Money Market Subaccount
The "yield" (also called "current yield") of the Money Market Subaccount is
computed in accordance with a standard method prescribed by the SEC. The net
change in the Subaccount's Unit Value during a seven-day period is divided by
the Unit Value at the beginning of the period to obtain a base rate of return.
The current yield is generated when the base rate is "annualized" by
multiplying it by the fraction 365/7; that is, the base rate of return is
assumed to be generated each week over a 365-day period and is shown as a
percentage of the investment. The "effective yield" of the Money Market
Subaccount is calculated similarly but, when annualized, the base rate of
return is assumed to be reinvested. The effective yield will be slightly
higher than the current yield because of the compounding effect of this
assumed reinvestment.
The formula for effective yield is: [(Base Period Return +1) (To the power of
365/7)] -1.
Realized capital gains or losses and unrealized appreciation or depreciation
of the assets of the underlying Money Market Portfolio are not included in the
yield calculation. Current yield and effective yield do not reflect the
deduction of charges for any applicable premium taxes and/or other taxes or
any Enhanced Death Benefit Charge for the optional EGMDBR, but do reflect a
deduction for the Annual Fee, the Risk Charge and the asset-based
Administrative Fee and assume an average Contract Value of $45,000.
At December 31, 1997, the Money Market Portfolio current yield was 4.05% and
the effective yield was 4.13%.
Other Subaccounts
"Yield" of the other Subaccounts is computed in accordance with a different
standard method prescribed by the SEC. The net investment income (investment
income less expenses) per Subaccount Unit earned during a specified one-month
or 30-day period is divided by the Subaccount Unit Value on the last day of
the specified period. This result is then annualized (that is, the yield is
assumed to be generated each month or each 30-day period for a year),
according to the following formula, which assumes semiannual compounding:
YIELD = 2[(a-b + 1) (To the power of 6) - 1]
---
cd
where: a = net investment income earned during the period by the Portfolio
attributable to the Subaccount.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of Subaccount Units outstanding during
the period that were entitled to receive dividends.
d = the Unit Value of the Subaccount Units on the last day of the
period.
The yield of each Subaccount reflects the deduction of all recurring fees and
charges applicable to the Subaccount, such as the Risk Charge, the asset-based
Administrative Fee and the Annual Fee (assuming an average Contract Value of
$45,000), but does not reflect any withdrawal charge, any charge for
applicable premium taxes and/or other taxes, or any Enhanced Death Benefit
Charge for the optional EGMDBR.
The Subaccounts' yields will vary from time to time depending upon market
conditions, the composition of each Portfolio and operating expenses of the
Fund allocated to each Portfolio. Consequently, any given performance
quotation should not be considered representative of the Subaccount's
performance in the future. Yield should also be considered relative to changes
in Subaccount Unit Values and to the relative risks associated with the
investment policies and objectives of the various Portfolios. In addition,
because performance will fluctuate, it may not provide a basis for comparing
the yield of a Subaccount with certain bank deposits or other investments that
pay a fixed yield or return for a stated period of time.
PERFORMANCE COMPARISONS AND BENCHMARKS
In advertisements and sales literature, we may compare the performance of some
or all of the Subaccounts to the performance of other variable annuity issuers
in general and to the performance of particular types of variable annuities
investing in mutual funds, or series of mutual funds, with investment
objectives similar to each of the
2
<PAGE>
Subaccounts. This performance may be presented as averages or rankings
compiled by Lipper Analytical Services, Inc. ("Lipper"), the Variable Annuity
Research and Data Service ("VARDS(R)") or Morningstar, Inc. ("Morningstar"),
which are independent services that monitor and rank the performance of
variable annuity issuers and mutual funds in each of the major categories of
investment objectives on an industry-wide basis. Lipper's rankings include
variable life issuers as well as variable annuity issuers. VARDS(R) rankings
compare only variable annuity issuers. The performance analyses prepared by
Lipper and VARDS(R) rank such issuers on the basis of total return, assuming
reinvestment of dividends and distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level
into consideration. In addition, VARDS(R) prepares risk adjusted rankings,
which consider the effects of market risk on total return performance. We may
also compare the performance of the Subaccounts with performance information
included in other publications and services that monitor the performance of
insurance company separate accounts or other investment vehicles. These other
services or publications may be general interest business publications such as
The Wall Street Journal, Barron's, Business Week, Forbes, Fortune, and Money.
In addition, our reports and communications to Contract Owners,
advertisements, or sales literature may compare a Subaccount's performance to
various benchmarks that measure the performance of a pertinent group of
securities widely regarded by investors as being representative of the
securities markets in general or as being representative of a particular type
of security. These benchmarks may include the following: (1) the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500"), an unmanaged weighted
index of 500 companies that represent approximately 80% of the market
capitalization of the United States equity markets; (2) the Consumer Price
Index ("CPI"), published by the U.S. Bureau of Labor Statistics, a statistical
measure of change, over time, in the prices of goods and services in major
expenditure groups and generally considered to be a measure of inflation; (3)
the Dow Jones Industrial Average ("DJIA"); (4) the Donoghue Money Market
Institutional Averages; (5) the Lehman Brothers Government Corporate Index;
(6) the Lehman Brothers Government Bond Index; (7) the Salomon Brothers High
Yield Bond Indexes; and (8) the Morgan Stanley Capital International's EAFE
Index. We may also compare the performance of the Subaccounts with that of
other appropriate indices of investment securities and averages for peer
universes of funds or data developed by us derived from such indices or
averages. Unmanaged indices generally assume the reinvestment of dividends or
interest but do not generally reflect deductions for investment management or
administrative costs and expenses.
3
<PAGE>
SEPARATE ACCOUNT PERFORMANCE
The Contract was not available prior to 1997. However, in order to help you
understand how investment performance can affect your Variable Account Value,
we are including performance information based on the historical performance
of the Subaccounts.
The following table presents the annualized total return for each Variable
Account for the period from each such Variable Account's commencement of
operations through December 31, 1997. The table is based on a Contract for
which the average initial premium is approximately $45,000. The Accumulated
Value (AV) reflects the deductions for all contractual expenses except the
contingent deferred sales charge and the Enhanced Death Benefit Charge for the
optional EGMDBR. The Full Withdrawal Value (FWV) reflects the deduction for
all contractual expenses, except the Enhanced Death Benefit Charge.
THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE.
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1997
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
SINCE
1 YEAR** INCEPTION
------------ ------------
VARIABLE ACCOUNTS AV FWV AV FWV
- - ----------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Money Market 1/2/96*................................ 3.73 (2.57) 3.65 0.47
High Yield Bond 1/2/96*............................. 7.83 1.53 8.73 5.79
Managed Bond 1/2/96*................................ 8.31 2.01 5.50 2.46
Government Securities 1/2/96*....................... 7.87 1.57 4.61 1.46
Aggressive Equity 4/17/96*.......................... 2.25 (4.05) 5.81 2.17
Growth LT 1/2/96*................................... 9.33 3.03 12.75 9.91
Equity Income 1/2/96*............................... 26.82 20.52 21.62 19.00
Multi-Strategy 1/2/96*.............................. 17.96 11.66 14.05 11.25
Equity 1/2/96*...................................... 16.54 10.24 21.18 18.54
Bond and Income 1/2/96*............................. 14.71 8.41 5.94 2.92
Equity Index 1/2/96*................................ 31.11 24.81 25.31 22.76
International 1/2/96*............................... 7.67 1.37 12.99 10.16
Emerging Markets 4/17/96*........................... (3.14) (9.44) (4.89) (8.83)
</TABLE>
- - --------
* Date Variable Account commenced operations.
** Effective June 1, 1997 Morgan Stanley Asset Management Inc. became the
Portfolio Manager of the International Portfolio. Effective May 1, 1998,
Alliance Capital Management L.P. became the Portfolio Manager of the
Aggressive Equity Portfolio and Goldman Sachs Asset Management became the
Portfolio Manager of the Equity and Bond and Income Portfolios; prior to
May 1, 1998 some of the investment policies of the Aggressive Equity,
Equity and Bond and Income Portfolios and the investment objective of the
Bond and Income Portfolio differed.
In order to help you understand how investment performance can affect your
Variable Account Value, we are including performance information based on the
historical performance of the Portfolios.
The Separate Account commenced operations as of January 2, 1996. Therefore, no
historical performance data exists for the Subaccounts prior to that date. The
following table represents what the performance of the Subaccounts would have
been if the Subaccounts had been both in existence and invested in the
corresponding Portfolio since the date of the Portfolio's (or predecessor
series') inception or for the indicated time period. Nine of the Portfolios of
the Fund available under the Contract have been in operation since January 4,
1988 (January 30, 1991 in the case of the Equity Index Portfolio, January 4,
1994 in the case of the Growth LT Portfolio and April 1, 1996 in the case of
the Aggressive Equity Portfolio and Emerging Markets Portfolio). Historical
performance information for each of the Equity Portfolio and the Bond and
Income Portfolio is based in part on the performance of that Portfolio's
predecessor; each predecessor series was a series of Pacific Corinthian
Variable Fund that began its first full year of operations on January 1, 1984,
the assets of which were
4
<PAGE>
acquired by the Fund on December 31, 1994. Because the Subaccounts had not
commenced operations until January 2, 1996 or later, as indicated in the chart
above, and because the Contracts were not available until 1997, THESE ARE NOT
ACTUAL PERFORMANCE NUMBERS FOR THE SUBACCOUNTS OR FOR THE CONTRACT.
THESE ARE HYPOTHETICAL TOTAL RETURN NUMBERS based on Account Value ("AV") and
Full Withdrawal Value ("FWV") that represent the actual performance of the
Portfolios, adjusted for the fees and charges applicable to the Contract; the
FWV also includes applicable withdrawal charges. Any charge for premium taxes
and/or other taxes and the Enhanced Death Benefit Charge for the optional
EGMBDR are not reflected in these data, and reflection of the Annual Fee
assumes an average Contract size of $45,000. The information presented also
includes data representing unmanaged market indices.
THE RESULTS SHOWN IN THIS SECTION ARE NOT AN ESTIMATE OR GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE.
ANNUALIZED RATES OF RETURN FOR PERIODS ENDED DECEMBER 31, 1997
ALL NUMBERS ARE EXPRESSED AS A PERCENTAGE
<TABLE>
<CAPTION>
SINCE
1 YEAR 3 YEARS* 5 YEARS* 10 YEARS* INCEPTION*
------------ ----------- ----------- ----------- ------------
VARIABLE ACCOUNTS AV FWV AV FWV AV FWV AV FWV AV FWV
- - ----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market............ 3.73 (2.57) 3.78 2.08 2.94 2.45 3.88 3.88
High Yield Bond......... 7.83 1.53 11.56 10.10 9.86 9.48 9.56 9.56
Managed Bond............ 8.31 2.01 9.36 7.84 6.28 5.85 7.94 7.94
Government Securities... 7.87 1.57 8.69 7.14 5.56 5.12 7.30 7.30
Aggressive Equity....... 2.25 (4.05) 5.11 1.55
Growth LT............... 9.33 3.03 19.70 18.43 17.67 16.97
Equity Income........... 26.82 20.52 24.70 23.53 15.24 14.93 13.01 13.01
Multi-Strategy.......... 17.96 11.66 17.37 16.05 11.06 10.70 10.37 10.37
Equity.................. 16.54 10.24 21.55 20.32 14.49 14.18 13.17 13.17 13.42 13.42
Bond and Income......... 14.71 8.41 13.94 12.54 9.47 9.10 9.74 9.74 10.93 10.93
Equity Index............ 31.11 24.81 28.78 27.69 18.04 17.76 17.11 17.11
International........... 7.67 1.37 12.16 10.71 12.96 12.62 7.76 7.76
Emerging Markets........ (3.14) (9.44) (4.21) (8.04)
</TABLE>
<TABLE>
<CAPTION>
MAJOR INDICES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - ------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
EAFE........................................... 1.78 6.27 11.39 6.25
First Boston High Yield Bond................... 12.63 14.12 11.84 12.10
LB Aggregate................................... 9.65 10.41 7.48 9.17
LBG/Bond....................................... 9.59 10.05 7.34 8.88
LBG/C Bond..................................... 9.76 10.43 7.61 9.15
LBG/C LT Bond.................................. 14.52 14.22 9.97 11.03
Russell 2500................................... 24.36 24.92 17.59 16.94
MSCI Emerging Markets Free..................... (11.59) (3.86) 7.57
S&P 500........................................ 33.36 31.15 20.27 18.05
</TABLE>
- - --------
* The performance of the Aggressive Equity, Equity Income, Multi-Strategy,
Equity, Bond and Income, and International Variable Accounts for a portion
of this period occurred at a time when other Portfolio Managers managed the
corresponding Portfolio in which each Variable Account invests. Effective
January 1, 1994, J. P. Morgan Investment Management, Inc. became the
Portfolio Manager of the Equity Income and Multi-Strategy Portfolios; prior
to January 1, 1994, some of the investment policies of the Equity Income
Portfolio and the investment objective of the Multi-Strategy Portfolio
differed. Effective June 1, 1997 Morgan Stanley Asset Management Inc.
became the Portfolio Manager of the International Portfolio. Effective May
1, 1998, Alliance Capital Management L.P. became the Portfolio Manager of
the Aggressive Equity Portfolio and Goldman Sachs Asset Management became
the Portfolio Manager of the Equity and Bond and Income Portfolios; prior
to May 1, 1998 some of the investment policies of the Aggressive Equity,
Equity and Bond and Income Portfolios and the investment objective of the
Bond and Income Portfolio differed. Performance of the Equity Portfolio and
the Bond and Income Portfolio is based in part on the performance of
predecessor portfolios of Pacific Corinthian Variable Fund, which began
their first full year of operations January 1, 1984 and were acquired by
the Fund on December 31, 1994.
Tax Deferred Accumulation
In reports or other communications to you or in advertising or sales
materials, we may also describe the effects of tax-deferred compounding on the
Separate Account's investment returns or upon returns in general. These
5
<PAGE>
effects may be illustrated in charts or graphs and may include comparisons at
various points in time of returns under the Contract or in general on a tax-
deferred basis with the returns on a taxable basis. Different tax rates may be
assumed.
In general, individuals who own annuity contracts are not taxed on increases
in the value under the annuity contract until some form of distribution is
made from the contract. Thus, the annuity contract will benefit from tax
deferral during the accumulation period, which generally will have the effect
of permitting an investment in an annuity contract to grow more rapidly than a
comparable investment under which increases in value are taxed on a current
basis. The following chart illustrates this benefit by comparing accumulation
under a variable annuity contract with accumulations from an investment on
which gains are taxed on a current basis. The chart shows accumulations on an
initial Purchase Payment of $10,000, assuming hypothetical annual returns of
0%, 4% and 8%, compounded annually, and a tax rate of 36%. The values shown
for the taxable investment do not include any deduction for management fees or
other expenses but assume that taxes are deducted annually from investment
returns. The values shown for the variable annuity do not reflect the
deduction of contractual expenses such as the Risk Charge (equal to an annual
rate of 1.25% of average daily account value), the Administrative Fee (equal
to an annual rate of 0.15% of average daily account value) and the Annual Fee
(equal to $40 per year if your Net Contract Value is less than $50,000), the
Enhanced Death Benefit Charge, any charge for premium taxes and/or other
taxes, or the expenses of an underlying investment vehicle, such as the Fund.
The values shown also do not reflect the Withdrawal Charge. Generally, the
Withdrawal Charge is equal to 7% of the amount withdrawn attributable to
Purchase Payments that are one year old, 7% of the amount withdrawn
attributable to Purchase Payments that are two years old, 6% of the amount
withdrawn attributable to Purchase Payments that are three years old, 5% of
the amount withdrawn attributable to Purchase Payments that are four years
old, 3% of the amount withdrawn attributable to Purchase Payments that are
five years old, and 1% of the amount withdrawn attributable to Purchase
Payments that are six years old. The age of Purchase Payments is considered 1
year old in the Contract Year we receive it and increases by one year on each
Contract Anniversary. There is no Withdrawal Charge on withdrawals of your
Earnings, on amounts attributed to Purchase Payments at least 7 years old, or
to the extent that total withdrawals that are free of charge during the
Contract Year do not exceed 10% of the sum of your remaining Purchase Payments
at the beginning of the Contract Year that have been held under your Contract
for less than seven years plus additional Purchase Payments applied to your
Contract during that Contract Year. If these expenses and fees were taken into
account, they would reduce the investment return shown for both the taxable
investment and the hypothetical variable annuity contract. In addition, these
values assume that you do not surrender the Contract or make any withdrawals
until the end of the period shown. The chart assumes a full withdrawal, at the
end of the period shown, of all Contract Value and the payment of taxes at the
36% rate on the amount in excess of the Purchase Payment.
The rates of return illustrated are hypothetical and are not an estimate or
guarantee of performance. Actual tax rates may vary for different taxpayers
from that illustrated and withdrawals by Contract Owners who have not reached
age 59 1/2 may be subject to a tax penalty of 10%.
6
<PAGE>
POWER OF TAX DEFERRAL
$10,000 investment at annual rates of return of 0%, 4% and 8%, taxed @ 36%
[GRAPH APPEARS HERE]
(PLOT POINTS TO COME)
DISTRIBUTION OF THE CONTRACTS
PACIFIC MUTUAL DISTRIBUTORS, INC.
Pacific Mutual Distributors, Inc. ("PMD"), a wholly-owned subsidiary of ours,
acts as the principal underwriter ("distributor") of the Contracts and offers
the Contracts on a continuous basis. PMD is registered as a broker-dealer with
the SEC and is a member of the National Association of Securities Dealers
("NASD"). We pay PMD for acting as principal underwriter under a Distribution
Agreement. We and PMD enter into selling agreements with broker-dealers whose
registered representatives are authorized by state insurance departments to
sell the Contracts. The aggregate amount of underwriting commissions paid to
PMD for 1997 with regard to this Contract was $7,949,241, of which $0 was
retained.
7
<PAGE>
THE CONTRACTS AND THE SEPARATE ACCOUNT
CALCULATING SUBACCOUNT UNIT VALUES
The Unit Value of the Subaccount Units in each Variable Investment Option is
computed as of the end of each Business Day. The initial Unit Value of each
Subaccount was $10 on the Business Day the Subaccount began operations. At the
end of each Business Day, the Unit Value for a Subaccount is equal to:
Y multiplied by Z
where (Y) = the Unit Value for that Subaccount as of the end of the preceding
Business Day; and
(Z) = the Net Investment Factor for that Subaccount for the period (a
"valuation period") between that Business Day and the immediately
preceding Business Day.
The "Net Investment Factor" for a Subaccount for any valuation period is equal
to:
(A divided by B) - C
where (A) = the "per share value of the assets" of that Subaccount as of the end
of that valuation period, which is equal to: a+b+c
where (a) = the net asset value per share of the corresponding Portfolio
shares held by that Subaccount as of the end of that valuation
period;
(b) = the per share amount of any dividend or capital gain
distributions made by the Fund for that Portfolio during that
valuation period; and
(c) = any per share charge (a negative number) or credit (a positive
number) for any income taxes and/or any other taxes or other
amounts set aside during that valuation period as a reserve
for any income and/or any other taxes which we determine to
have resulted from the operations of the Subaccount or
Contract, and/or any taxes attributable, directly or
indirectly, to Purchase Payments;
(B) = the net asset value per share of the corresponding Portfolio shares
held by the Subaccount as of the end of the preceding valuation
period; and
(C) = a factor that assesses against the Subaccount net assets for each
calendar day in the valuation period, the charge for mortality and
expense risks at a rate that is equal on an annual basis to an
annual factor expressed as a decimal (where 1.00 is equal to 100%)
of 0.0125 and the Administrative Charge at a rate that is equal on
an annual basis to an annual factor of 0.0015 (see CHARGES, FEES AND
DEDUCTIONS in the Prospectus).
As explained in the Prospectus, the Annual Fee, if applicable, and any
Enhanced Death Benefit Charge are assessed against your Variable Account Value
through the automatic debit of Subaccount Units; the Annual Fee decreases the
number of Subaccount Units attributed to your Contract but does not alter the
Unit Value for any Subaccount.
VARIABLE ANNUITY PAYMENT AMOUNTS
The following steps show how we determine the amount of each variable annuity
payment under your Contract.
First: Pay Applicable Premium Taxes
When you convert your Net Contract Value into annuity payments, you must pay
any applicable charge for premium taxes and/or other taxes on your Contract
Value (unless applicable law requires those taxes to be paid at a later time).
We assess this charge by reducing your Contract Value, proportionately,
relative to your Account Value in each Subaccount, in the Fixed Option, the
DCA Plus Fixed Option and in each GIO in an amount equal to the aggregate
amount of the charges. The remaining amount of your available Contract Value
may be used to provide variable annuity payments. Alternatively, your
remaining available Contract Value may be used to
8
<PAGE>
provide fixed annuity payments, or it may be divided to provide both fixed and
variable annuity payments. You may also choose to withdraw some or all of your
remaining Net Contract Value, less any applicable Annual Fees, Enhanced Death
Benefit Charge, withdrawal charge, and any charges for premium taxes and/or
other taxes without converting this amount into annuity payments.
Second: The First Variable Payment
We begin by referring to your Contract's Option Table for your Annuity Option
(the "Annuity Option Table"). The Annuity Option Table allows us to calculate
the dollar amount of the first variable annuity payment under your Contract,
based on the amount applied toward the variable annuity. The number that the
Annuity Option Table yields will be based on the Annuitant's age (and, in
certain cases, sex) and assumes a 5% investment return, as described in more
detail below.
Example: Assume a man is 65 years of age at his Annuity Date and has
selected a lifetime annuity with monthly payments guaranteed for 10 years.
According to the Annuity Option Table, this man should receive an initial
monthly payment of $5.79 for every $1,000 of his Contract Value (reduced by
applicable charges) that he will be using to provide variable payments.
Therefore, if his Contract Value after deducting applicable fees and
charges is $100,000 on his Annuity Date and he applies this entire amount
toward his variable annuity, his first monthly payment will be $579.00.
Third: Subaccount Annuity Units
For each Subaccount, we use the amount of the first variable annuity payment
under your Contract attributable to each Subaccount to determine the number of
Subaccount Annuity Units that will form the basis of subsequent payment
amounts. First, we use the Annuity Option Table to determine the amount of
that first variable payment for each Subaccount. Then, for each Subaccount, we
divide that amount of the first variable annuity payment by the value of one
Subaccount Annuity Unit (the "Subaccount Annuity Unit Value") as of the end of
the Annuity Date to obtain the number of Subaccount Annuity Units for that
particular Subaccount. The number of Subaccount Annuity Units used to
calculate subsequent payments under your Contract will not change unless
exchanges of Annuity Units are made (or if the Joint and Survivor Annuity
Option is elected and the Primary Annuitant dies first), but the value of
those Annuity Units will change daily, as described below.
Fourth: The Subsequent Variable Payments
The amount of each subsequent variable annuity payment will be the sum of the
amounts payable based on each Subaccount. The amount payable based on each
Subaccount is equal to the number of Subaccount Annuity Units for that
Subaccount multiplied by their Subaccount Annuity Unit Value at the end of the
Business Day in each payment period you elected that corresponds to the
Annuity Date.
Each Subaccount's Subaccount Annuity Unit Value, like its Subaccount Unit
Value, changes each day to reflect the net investment results of the
underlying investment vehicle, as well as the assessment of the Risk Charge at
a rate equal on an annual basis to the annual factor expressed as a decimal
(where 1.00 is equal to 100%) of 0.0125 and the Administrative Fee at a rate
equal on an annual basis to the annual factor of 0.0015. In addition, the
calculation of Subaccount Annuity Unit Value incorporates an additional
factor; as discussed in more detail below, this additional factor adjusts
Subaccount Annuity Values to correct for the Option Table's implicit
assumption of a 5% annual investment return on amounts applied but not yet
used to furnish annuity benefits.
Different Subaccounts may be selected for your Contract before and after your
Annuity Date, subject to any restrictions we may establish. Currently, you may
exchange Subaccount Annuity Units in any Subaccount for Subaccount Annuity
Units in any other Subaccount(s) up to four times in any twelve month period
after you annuitize. The number of Subaccount Annuity Units in any Subaccount
may change due to such exchanges. Exchanges following annuitization will be
made by exchanging Subaccount Annuity Units of equivalent aggregate value,
based on their relative Subaccount Annuity Unit Values.
9
<PAGE>
Understanding the "Assumed Investment Return" Factor
The Annuity Option Table incorporates a number of implicit assumptions in
determining the amount of your first variable annuity payment. As noted above,
the numbers in the Annuity Option Table reflect certain actuarial assumptions
based on the Annuitant's age, and, in some cases, the Annuitant's sex. In
addition, these numbers assume that the amount of your Contract Value that you
convert to a variable annuity will have a positive net investment return of 5%
each year during the payout of your annuity; thus 5% is referred to as an
"assumed investment return."
The Subaccount Annuity Unit Value for a Subaccount will increase only to the
extent that the investment performance of that Subaccount exceeds its Risk
Charge, the Administrative Fee, and the assumed investment return. The
Subaccount Annuity Unit Value for any Subaccount will generally be less than
the Subaccount Unit Value for that same Subaccount, and the difference will be
the amount of the assumed investment return factor.
Example: Assume the net investment performance of a Subaccount is at a rate
of 5.00% per year (after deduction of the 1.25% Mortality and Expense Risk
Charge and the 0.15% Administrative Fee). The Subaccount Unit Value for
that Subaccount would increase at a rate of 5.00% per year, but the
Subaccount Annuity Unit Value would not increase (or decrease) at all. The
net investment factor for that 5% return [1.05] is then divided by the
factor for the 5% assumed investment return [1.05] and 1 is subtracted from
the result to determine the adjusted rate of change in Subaccount Annuity
Unit Value: 1.05 = 1; 1 - 1 = 0; 0 X 100% = 0%.
----
1.05
If the net investment performance of a Subaccount's assets is at a rate less
than 5.00% per year, the Subaccount Annuity Unit Value will decrease, even if
the Subaccount Unit Value is increasing.
Example: Assume the net investment performance of a Subaccount is at a rate
of 2.60% per year (after deduction of the 1.25% Mortality and Expense Risk
Charge and the 0.15% Administrative Fee). The Subaccount Unit Value for
that Subaccount would increase at a rate of 2.60% per year, but the
Subaccount Annuity Unit Value would decrease at a rate of 2.29% per year.
The net investment factor for that 2.6% return [1.026] is then divided by
the factor for the 5% assumed investment return [1.05] and 1 is subtracted
from the result to determine the adjusted rate of change in Subaccount
Annuity Unit Value:
1.026 = 0.9771; 0.9771 - 1 = - 0.0229; - 0.0229 X 100% = - 2.29%.
-----
1.05
The assumed investment return will always cause increases in Subaccount
Annuity Unit Values to be somewhat less than if the assumption had not been
made, will cause decreases in Subaccount Annuity Unit Values to be somewhat
greater than if the assumption had not been made, and will (as shown in the
example above) sometimes cause a decrease in Subaccount Annuity Unit Values to
take place when an increase would have occurred if the assumption had not been
made. If we had assumed a higher investment return in our Annuity Option
tables, it would produce annuities with larger first payments, but the
increases in subaccount annuity payments would be smaller and the decreases in
subsequent annuity payments would be greater; a lower assumed investment
return would produce annuities with smaller first payments, and the increases
in subsequent annuity payments would be greater and the decreases in
subsequent annuity payments would be smaller.
CORRESPONDING DATES
If any transaction or event under your Contract is scheduled to occur on a
"corresponding date" that does not exist in a given calendar period, the
transaction or event will be deemed to occur on the following Business Day. In
addition, as stated in the Prospectus, any event scheduled to occur on a day
that is not a Business Day will occur on the next succeeding Business Day.
Example: If your Contract is issued on February 29 in year 1 (a leap year),
your Contract Anniversary in years 2, 3 and 4 will be on March 1.
Example: If your Annuity Date is July 31 and you select monthly annuity
payments, the payments received will be based on valuations made on July
31, August 31, October 1 (for September), October 31, December 1 (for
November), December 31, January 31, March 1 (for February), March 31, May 1
(for April), May 31 and July 1 (for June).
10
<PAGE>
AGE AND SEX OF ANNUITANT
As mentioned in the Prospectus, the Contracts generally provide for sex-
distinct annuity income factors in the case of life annuities. Statistically,
females tend to have longer life expectancies than males; consequently, if the
amount of annuity payments is based on life expectancy, they will ordinarily
be higher if an annuitant is male than if an annuitant is female. Certain
states' regulations prohibit sex-distinct annuity income factors, and
Contracts issued in those states will use unisex factors. In addition,
Contracts issued in connection with Qualified Plans are required to use unisex
factors.
We may require proof of your Annuitant's age and sex before or after
commencing annuity payments. If the age or sex (or both) of your Annuitant are
incorrectly stated in your Contract, the amount payable will be corrected to
equal the amount that the annuitized portion of the Contract Value under that
Contract would have purchased for your Annuitant's correct age and sex. If the
correction is effected after annuity payments have commenced, and we have made
overpayments based on the incorrect information, we will deduct the amount of
the overpayment, with interest at 3% a year, from any payments due then or
later; if we have made underpayments, we will add the amount, with interest at
3% a year, of the underpayments to the next payment we make after we receive
proof of the correct sex and/or date of birth.
SYSTEMATIC TRANSFER PROGRAMS
The GIOs and the DCA Plus Fixed Option are not available for any systematic
transfer programs, except that if you elect DCA Plus, such transfers must be
made from the DCA Plus Fixed Option. For a description of DCA Plus, including
its limitations and restrictions, see HOW YOUR PAYMENTS ARE ALLOCATED--
TRANSFERS in the Prospectus. The Fixed Account is not available in connection
with rebalancing and DCA Plus and may not be used as a source account for
dollar cost averaging programs newly established by you. You may not use
dollar cost averaging, DCA Plus and or the earnings sweep at the same time.
Dollar Cost Averaging
When you request dollar cost averaging, you are authorizing us to make
periodic reallocations of your Contract Value without waiting for any further
instruction from you. You may request to begin or stop dollar cost averaging
at any time prior to your Annuity Date; the effective date of your request
will be the day we receive written notice from you in proper form. Your
request may specify the date on which you want your first transfer to be made.
If you do not specify a date for your first transfer, we will treat your
request as if you had specified the effective date of your request. Your first
transfer may not be made until 30 days after your Contract Date, and if you
specify an earlier date, your first transfer will be delayed until one
calendar month after the date you specify. If you request dollar cost
averaging on your application for your Contract and you fail to specify a date
for your first transfer, your first transfer will be made one period after
your Contract Date (that is, if you specify monthly transfers, the first
transfer will occur 30 days after your Contract Date; quarterly transfers, 90
days after your Contract Date; semiannual transfers, 180 days after your
Contract Date; and if you specify annual transfers, the first transfer will
occur on your Contract Anniversary). If you stop dollar cost averaging, you
must wait 30 days before you may begin this option again.
Your request to begin dollar cost averaging must specify the Investment Option
you wish to transfer money from (your "source account"). You may choose any
one Variable Investment Option as your source account. The Account Value of
your source account must be at least $5,000 for you to begin dollar cost
averaging.
Your request to begin dollar cost averaging must also specify the amount and
frequency of your transfers. You may choose monthly, quarterly, semiannual or
annual transfers. The amount of your transfers may be specified as a dollar
amount or a percentage of your source Account Value; however, each transfer
must be at least $250. Dollar cost averaging transfers are subject to the same
requirements and limitations as other transfers.
Finally, your request must specify the Fixed or Variable Investment Option(s)
you wish to transfer amounts to (your "target account(s)"). If you select more
than one target account, your dollar cost averaging request must
11
<PAGE>
specify how transferred amounts should be allocated among the target accounts.
Your source account may not also be a target account.
Your dollar cost averaging transfers will continue until the earlier of (i)
your request to stop dollar cost averaging is effective, or (ii) your source
Account Value is zero, or (iii) you annuitize. If, as a result of a dollar
cost averaging transfer, your source Account Value falls below any minimum
Account Value we may establish, we have the right, at our option, to transfer
that remaining Account Value to your target account(s) on a proportionate
basis relative to your most recent allocation instructions. We may change,
terminate or suspend the dollar cost averaging option at any time.
Portfolio Rebalancing
Portfolio rebalancing allows you to maintain the percentage of your Contract
Value allocated to each Variable Investment Option at a pre-set level prior to
annuitization. For example, you could specify that 30% of your Contract Value
should be in the Equity Index Subaccount, 40% in the Managed Bond Subaccount,
and 30% in the Growth LT Subaccount. Over time, the variations in each
Subaccount's investment results will shift this balance of these Subaccount
Value allocations. If you elect the portfolio rebalancing feature, we will
automatically transfer your Subaccount Value back to the percentages you
specify.
You may choose to have rebalances made quarterly, semiannually or annually
until your Annuity Date; portfolio rebalancing is not available after you
annuitize.
Procedures for selecting portfolio rebalancing are generally the same as those
discussed in detail above for selecting dollar cost averaging: You may make
your request at any time prior to your Annuity Date and it will be effective
when we receive it in proper form. If you stop portfolio rebalancing, you must
wait 30 days to begin again. You may specify a date for your first rebalance,
or we will treat your request as if you selected the request's effective date.
If you specify a date fewer than 30 days after your Contract Date, your first
rebalance will be delayed one month, and if you request rebalancing on your
application but do not specify a date for the first rebalance, it will occur
one period after your Contract Date, as described above under Dollar Cost
Averaging. We may change, terminate or suspend the portfolio rebalancing
feature at any time.
Earnings Sweep
An earnings sweep automatically transfers the earnings attributable to a
specified Investment Option (the "sweep option") to one or more other
Investment Options (your "target option(s)"). If you elect to use the earnings
sweep, you may select either the Fixed Option or the Money Market Subaccount
as your sweep option. The Account Value of your sweep option will be required
to be at least $5,000 when you elect the earnings sweep. You may select one or
more Variable Investment Options (but not the Money Market Subaccount) as your
target option(s).
You may choose to have earnings sweeps occur monthly, quarterly, semiannually
or annually until you annuitize. At each earnings sweep, we will automatically
transfer your accumulated earnings attributable to your sweep option for the
previous period proportionately to your target option(s). That is, if you
select a monthly earnings sweep, we will transfer the sweep option earnings
from the preceding month; if you select a semiannual earnings sweep, we will
transfer the sweep option earnings accumulated over the preceding six months.
Earnings sweep transfers are subject to the same requirements and limitations
as other transfers.
To determine the earnings, we take the change in the sweep option's Account
Value during the sweep period, add any withdrawals or transfers out of the
sweep option Account that occurred during the sweep period, and subtract any
allocations to the sweep option Account during the sweep period. The result of
this calculation represents the "total earnings" for the sweep period.
If, during the sweep period, you withdraw or transfer amounts from the sweep
option Account, we assume that earnings are withdrawn or transferred before
any other Account Value. Therefore, your "total earnings" for the sweep period
will be reduced by any amounts withdrawn or transferred during the sweep
option period. The remaining earnings are eligible for the sweep transfer.
12
<PAGE>
Procedures for selecting the earnings sweep are generally the same as those
discussed in detail above for selecting dollar cost averaging and portfolio
rebalancing: You may make your request at any time and it will be effective
when we receive it in proper form. If you stop the earnings sweep, you must
wait 30 days to begin again. You may specify a date for your first sweep, or
we will treat your request as if you selected the request's effective date. If
you specify a date fewer than 30 days after your Contract Date, your first
earnings sweep will be delayed one month, and if you request the earnings
sweep on your application but do not specify a date for the first sweep, it
will occur one period after your Contract Date, as described above under
Dollar Cost Averaging.
If you are using the earnings sweep, you may also use portfolio rebalancing
only if you selected the Fixed Option as your sweep option. You may not use
the earnings sweep, DCA Plus and dollar cost averaging at the same time. If,
as a result of an earnings sweep transfer, your source Account Value falls
below any minimum Account Value we may establish, we have the right, at our
option, to transfer that remaining Account Value to your target account(s) on
a proportionate basis relative to your most recent allocation instructions. We
may change, terminate or suspend the earnings sweep option at any time.
PRE-AUTHORIZED WITHDRAWALS
You may specify a dollar amount for your pre-authorized withdrawals, or you
may specify a percentage of your Contract Value or an Account Value. You may
direct us to make your pre-authorized withdrawals from one or more specific
Fixed, DCA Plus Fixed or Variable Investment Options; if you do not give us
these specific directions, amounts will be deducted proportionately from your
Account Value in each Fixed, DCA Plus Fixed or Variable Investment Option.
Procedures for selecting pre-authorized withdrawals are generally the same as
those discussed in detail above for selecting dollar cost averaging, portfolio
rebalancing, and earnings sweeps: You may make your request at any time and it
will be effective when we receive it in proper form. If you stop the pre-
authorized withdrawals, you must wait 30 days to begin again. You may specify
a date for the first withdrawal, or we will treat your request as if you
selected the request's effective date. If you specify a date fewer than 30
days after your Contract Date, your first pre-authorized withdrawal will be
delayed one month, and if you request the pre-authorized withdrawals on your
application but do not specify a date for the first withdrawal, it will occur
one period after your Contract Date.
If your pre-authorized withdrawals cause your Account Value in any Investment
Option to fall below any minimum Account Value we establish, we have the
right, at our option, to transfer that remaining Account Value to your other
Investment Options on a proportionate basis relative to your most recent
allocation instructions. Any such DCA Plus Fixed Option balance or any amount
that would otherwise be allocated to the DCA Plus Fixed Option will be
allocated to the Variable Investment Options according to your most recent DCA
Plus transfer instructions. If your pre-authorized withdrawals cause your
Contract Value to fall below $1,000, we may, at our option, terminate your
Contract and send you the remaining withdrawal proceeds.
Pre-authorized withdrawals are subject to the same withdrawal charges as are
other withdrawals, and each withdrawal is subject to any applicable charge for
premium taxes and/or other taxes, to federal income tax on its taxable
portion, and, if you have not reached age 59 1/2, a 10% tax penalty.
DEATH BENEFIT
Any death benefit payable will be calculated as of the date we receive proof
(in proper form) of the Annuitant's death (or, if applicable, the Contract
Owner's death) and instructions regarding payment; any claim of a death
benefit must be made in proper form. A recipient of death benefit proceeds may
elect to have this benefit paid in one lump sum, in periodic payments, in the
form of a lifetime annuity or in some combination of these. Annuity payments
will begin within 30 days once we receive all information necessary to process
the claim.
If your Contract names Joint or Contingent Annuitants, no death benefit will
be payable unless and until the last Annuitant dies prior to the Annuity Date
or a Contract Owner dies prior to the Annuity Date. If yours is a Qualified
Contract, your Contingent Annuitant or Contingent Owner must be your spouse.
13
<PAGE>
JOINT ANNUITANTS ON QUALIFIED CONTRACTS
If your Contract was issued in connection with a Qualified Plan subject to
Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"), and
you change your marital status after your Contract Date, you may be permitted
to add a Joint Annuitant on your Annuity Date and to change your Joint
Annuitant. Generally speaking, you may be permitted to add a new spouse as a
Joint Annuitant, and you may be permitted to remove a Joint Annuitant who is
no longer your spouse. You may call us for more information.
1035 EXCHANGES
You may make your initial Purchase Payment through an exchange of an existing
annuity contract. To exchange, you must complete a 1035 Exchange form, which
is available by calling your representative, or by calling us at 1-800-722-
2333, and mail the form along with the annuity contract you are exchanging
(plus your completed application if you are making an initial Purchase
Payment) to us.
In general terms, Section 1035 of the Code provides that you recognize no gain
or loss when you exchange one annuity contract solely for another annuity
contract. However, transactions under Section 1035 may be subject to special
rules and may require special procedures and record-keeping, particularly if
the exchanged annuity contract was issued prior to August 14, 1982. You should
consult your tax adviser prior to effecting a 1035 Exchange.
SAFEKEEPING OF ASSETS
We are responsible for the safekeeping of the assets of the Separate Account.
These assets are held separate and apart from the assets of our General
Account and our other separate accounts.
DIVIDENDS
The current dividend scale is zero and we do not anticipate that dividends
will be paid. If any dividend is paid, you may elect to receive the dividend
in cash or to add the dividend to your Contract Value. If you make no
election, the dividend will be added to your Contract Value. We will allocate
any dividend to Contract Value in accordance with your most recent allocation
instructions, unless instructed otherwise. You should consult with your tax
adviser before making an election.
FINANCIAL STATEMENTS
Audited financial statements of Separate Account A as of December 31, 1997 and
for the year then ended are incorporated by reference in this SAI from the
Annual Report of the Separate Account dated as of December 31, 1997. Pacific
Life's audited consolidated financial statements as of December 31, 1997 and
1996 and for the three years ended December 31, 1997 are set forth beginning
on the next page. These financial statements should be considered only as
bearing on the ability of Pacific Life to meet its obligations under the
Contracts and not as bearing on the investment performance of the assets held
in the Separate Account.
The consolidated financial statements of Pacific Life as of December 31,
1997 and 1996 and for the three years ended December 31, 1997 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Pacific Life Insurance Company and
Subsidiaries:
We have audited the accompanying consolidated statements of financial
condition of Pacific Life Insurance Company (formerly Pacific Mutual Life
Insurance Company) and subsidiaries (the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholder's equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pacific Life Insurance
Company and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 19, 1998
15
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
1997 1996
- - -------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Securities available for sale at estimated fair value:
Fixed maturity securities $13,990.7 $12,193.8
Equity securities 346.4 260.8
Mortgage loans 1,922.1 1,477.3
Real estate 192.1 280.0
Policy loans 3,769.2 3,131.8
Short-term investments 83.8 66.1
Other investments 380.2 208.0
- - -------------------------------------------------------------------------------
TOTAL INVESTMENTS 20,684.5 17,617.8
Cash and cash equivalents 110.4 109.0
Deferred policy acquisition costs 716.9 531.5
Accrued investment income 255.4 202.5
Other assets 636.5 462.4
Separate account assets 11,605.1 8,142.1
- - -------------------------------------------------------------------------------
TOTAL ASSETS $34,008.8 $27,065.3
===============================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Universal life, annuity and other investment contract de-
posits $16,644.5 $13,877.4
Future policy benefits 2,133.8 2,506.5
Short-term and long-term debt 253.6 270.1
Other liabilities 1,224.5 572.0
Separate account liabilities 11,605.1 8,142.1
- - -------------------------------------------------------------------------------
Total Liabilities 31,861.5 25,368.1
- - -------------------------------------------------------------------------------
Commitments and contingencies
Stockholder's Equity:
Common stock - $50 par value; 600,000 shares authorized,
issued and outstanding 30.0
Paid-in capital 120.1
Retained earnings 1,422.0 1,318.0
Unrealized gain on securities available for sale, net 575.2 379.2
- - -------------------------------------------------------------------------------
Total Stockholder's Equity 2,147.3 1,697.2
- - -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $34,008.8 $27,065.3
===============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
16
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- - ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Insurance premiums $ 504.3 $ 465.4 $ 458.5
Policy fees from universal life, annuity and other
investment contract deposits 431.2 348.6 309.0
Net investment income 1,225.3 1,087.3 1,038.4
Net realized capital gains 85.3 44.0 61.5
Commission revenue 146.6 79.6 62.0
Other income 181.7 123.1 90.3
- - ------------------------------------------------------------------------------
TOTAL REVENUES 2,574.4 2,148.0 2,019.7
- - ------------------------------------------------------------------------------
BENEFITS AND EXPENSES
Interest credited to universal life, annuity and
other investment contract deposits 797.8 665.0 675.2
Policy benefits paid or provided 675.7 652.9 647.5
Commission expenses 303.7 233.6 197.5
Operating expenses 507.7 316.2 278.6
- - ------------------------------------------------------------------------------
TOTAL BENEFITS AND EXPENSES 2,284.9 1,867.7 1,798.8
- - ------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 289.5 280.3 220.9
Provision for income taxes 113.5 113.7 86.1
- - ------------------------------------------------------------------------------
NET INCOME $ 176.0 $ 166.6 $ 134.8
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Common Stock on Securities
------------- Paid-in Retained Available
Shares Amount Capital Earnings for Sale, net Total
- - ---------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1995 $1,016.6 $(207.3) $ 809.3
Net income 134.8 134.8
Change in unrealized
gain (loss) on
securities available
for sale, net 689.3 689.3
- - ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1995 1,151.4 482.0 1,633.4
Net income 166.6 166.6
Change in unrealized
gain on securities
available for sale, net (102.8) (102.8)
- - ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1996 1,318.0 379.2 1,697.2
Net income 176.0 176.0
Change in unrealized
gain on securities
available for sale, net 196.0 196.0
Issuance of partnership
units by affiliate $ 85.1 85.1
Initial member
capitalization of
Pacific Mutual Holding
Company (2.0) (2.0)
Issuance of common stock 0.6 $30.0 35.0 (65.0) --
Dividend paid to parent (5.0) (5.0)
- - ---------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 0.6 $30.0 $120.1 $1,422.0 $ 575.2 $2,147.3
=================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- - --------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 176.0 $ 166.6 $ 134.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization on fixed maturities (26.6) (45.2) (67.2)
Depreciation and other amortization 38.3 43.8 36.8
Deferred income taxes (14.4) (49.8) (30.3)
Net realized capital gains (85.3) (44.0) (61.5)
Net change in deferred policy acquisition
costs (185.4) (140.4) 48.8
Interest credited to universal life, annuity
and other investment contract deposits 797.8 665.0 675.2
Change in accrued investment income (52.9) (3.7) (16.1)
Change in future policy benefits (372.7) 62.3 88.8
Change in other assets and liabilities 577.4 158.1 151.9
- - --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 852.2 812.7 961.2
- - --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale:
Purchases (6,343.2) (4,525.0) (3,001.3)
Sales 2,247.5 2,511.0 1,940.3
Maturities and repayments 2,406.8 1,184.7 926.9
Held to maturity securities:
Purchases (181.9)
Sales 62.3
Maturities and repayments 111.0
Repayments of mortgage loans 179.3 220.4 267.7
Proceeds from sales of mortgage loans and real
estate 104.4 14.5 27.4
Purchases of mortgage loans and real estate (643.7) (414.3) (244.7)
Distributions from partnerships 91.6 78.8 49.0
Change in policy loans (637.4) (338.5) (389.8)
Change in short-term investments (17.7) 37.2 (66.7)
Other investing activity, net 78.8 (144.5) (137.2)
- - --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,533.6) (1,375.7) (637.0)
- - --------------------------------------------------------------------------------
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements
19
<PAGE>
Pacific Life Insurance Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(Continued) 1997 1996 1995
- - ------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits $ 4,373.6 $ 2,105.0 $ 1,437.9
Withdrawals (2,667.3) (1,756.6) (1,774.2)
Net change in short-term debt 8.5 42.5 (38.8)
Repayment of long-term debt (25.0) (5.0) (5.0)
Initial capitalization of Pacific Mutual
Holding Company (2.0)
Dividend paid to parent (5.0)
- - ------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING AC-
TIVITIES 1,682.8 385.9 (380.1)
- - ------------------------------------------------------------------------------
Net change in cash and cash equivalents 1.4 (177.1) (55.9)
Cash and cash equivalents, beginning of year 109.0 286.1 342.0
- - ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 110.4 $ 109.0 $ 286.1
==============================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF INVESTING AND FINANCING ACTIVITIES
In connection with the acquisition of an insurance block of business as
discussed in Note 5, the following assets and liabilities were assumed:
<TABLE>
<S> <C>
Cash $1,215.9
Policy loans 440.3
Other assets 43.4
--------
Total assets assumed $1,699.6
========
Policyholder account values $1,693.8
Other liabilities 5.8
--------
Total liabilities assumed $1,699.6
========
================================================================================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES
As a result of the Conversion as discussed in Note 1, $65 million of retained
earnings was allocated for the issuance of 600,000 shares of common stock with
a par value totaling $30 million and $35 million was allocated to paid-in
capital.
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<S> <C> <C> <C>
Income taxes paid $144.5 $185.9 $96.9
Interest paid $ 26.1 $ 27.2 $23.3
================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
CONVERSION TO MUTUAL HOLDING COMPANY STRUCTURE
Pursuant to consent received from the Insurance Department of the State of
California, Pacific Mutual Life Insurance Company ("Pacific Mutual")
implemented a plan of conversion to form a mutual holding company
structure (the "Conversion") on September 1, 1997. The Conversion created
Pacific LifeCorp, an intermediate stock holding company and Pacific Mutual
Holding Company ("PMHC"), a mutual holding company. Pacific Mutual was
converted to a stock life insurance company and renamed Pacific Life
Insurance Company ("Pacific Life"). Under their respective charters, PMHC
must always own at least 51% of the outstanding voting stock of Pacific
LifeCorp, and Pacific LifeCorp must always own 100% of the voting stock of
Pacific Life. Owners of Pacific Life's annuity contracts and life
insurance policies have certain membership interests in PMHC, consisting
principally of the right to vote on the election of the Board of Directors
of PMHC and on other matters, and certain rights upon liquidation or
dissolution of PMHC.
As a result of the Conversion, $65 million of retained earnings was
allocated for the issuance of 600,000 shares of common stock with a par
value totaling $30 million and $35 million was allocated to paid-in
capital.
DESCRIPTION OF BUSINESS
Pacific Life was established in 1868 and is organized under the laws of
the State of California as a stock life insurance company. Pacific Life
conducts business in every state except New York.
Pacific Life and its subsidiaries and affiliates have primary business
operations which consist of life insurance, annuities, pension products,
group employee benefits and investment management and advisory services.
These primary business operations provide a broad range of life insurance,
asset accumulation and investment products for individuals and businesses
and offer a range of investment products to institutions and pension
plans. Additionally, through its major subsidiaries and affiliates,
Pacific Life provides a variety of group employee benefits, as well as
investment management and advisory services.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements of Pacific Life
Insurance Company and subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles ("GAAP") and
include the accounts of Pacific Life and its wholly-owned insurance
subsidiaries, PM Group Life Insurance Company ("PM Group") and World-Wide
Holdings Limited, and its noninsurance subsidiaries, Pacific Asset
Management LLC ("PAM"), Pacific Mutual Distributors, Inc. ("PMD"), Pacific
Mutual Realty Finance, Inc. and Pacific Mezzanine Associates, L.L.C. All
significant intercompany transactions and balances have been eliminated.
Pacific Life prepares its regulatory financial statements based on
accounting practices prescribed or permitted by the Insurance Department
of the State of California. These consolidated financial statements differ
from those followed in reports to regulatory authorities (Note 2).
PAM was initially capitalized on December 31, 1997, when Pacific Life
completed a subsidiary restructuring in which all the assets and
liabilities of Pacific Financial Asset Management Corporation ("PFAMCo")
were contributed into this newly formed limited liability company. PFAMCo
was then merged into Pacific Life. On October 30, 1997, Pacific Corinthian
Life Insurance Company ("PCL"-Note 4), a wholly-owned insurance
subsidiary, was merged into Pacific Life, with Pacific Life as the
surviving entity.
ACCOUNTING PRONOUNCEMENTS ADOPTED
In 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 120, "Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain Long-
Duration Participating Contracts", and Interpretation No. 40,
"Applicability of Generally Accepted
21
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Principles to Mutual Life Insurance and Other Enterprises" (the
"Interpretation") issued by the Financial Accounting Standards Board
("FASB"). SFAS No. 120 and the Interpretation permit mutual life insurance
companies and their insurance subsidiaries to adopt all applicable
authoritative GAAP pronouncements in any general purpose financial
statements that they may issue. This differs from prior years when the
Company issued its regulatory financial statements as general purpose
financial statements. The accompanying consolidated financial statements
for 1997, 1996 and 1995 reflect the effects of implementing SFAS No. 120
and the Interpretation.
On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", as amended by SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125". SFAS No. 125 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement provides consistent accounting standards for securitizations and
other transfers of financial assets, determines when financial assets
(liabilities) should be considered sold (settled) and removed from the
statement of financial condition, and determines when related revenues and
expenses should be recognized. Adoption of this accounting standard did
not have a significant impact on the consolidated financial position or
results of operations of the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general
purpose financial statements. The Company currently plans to adopt SFAS
No. 130 on January 1, 1998.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132 revises
current note disclosure requirements for employers' pensions and other
retiree benefits. It does not address recognition or measurement issues.
The Company plans to adopt SFAS No. 132 during 1998.
INVESTMENTS
Available for sale fixed maturity and equity securities are reported at
estimated fair value, with unrealized gains and losses, net of deferred
income tax and adjustments related to deferred policy acquisition costs,
included as a separate component of equity on the accompanying
consolidated statements of financial condition. Trading securities, which
are included in short-term investments, are reported at estimated fair
value with unrealized gains and losses included in net realized capital
gains on the accompanying consolidated statements of operations.
For mortgage-backed securities included in fixed maturity securities, the
Company recognizes income using a constant effective yield based on
anticipated prepayments and the estimated economic life of the securities.
When estimates of prepayments change, the effective yield is recalculated
to reflect actual payments to date and anticipated future payments. The
net investment in the securities is adjusted to the amount that would have
existed had the new effective yield been applied since the acquisition of
the securities. This adjustment is reflected in net investment income.
In the first and second quarter of 1995, Pacific Life sold two securities
from the held to maturity category. The amortized cost of the securities
was $62.3 million and a net after tax loss of $0.7 million was realized on
the sales. The securities were sold due to the significant deterioration
of the issuer's creditworthiness.
Beginning with the third quarter of 1995, Pacific Life transferred
approximately $1.5 billion of securities from the held to maturity
category to the available for sale category. This amount represented the
amortized cost of
22
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the securities at the date of transfer. The estimated fair value of those
securities was approximately $1.6 billion, resulting in a net after tax
unrealized gain of $52.5 million, which was reflected as a direct increase
to equity. The change in classification was a result of a change in
management's intent with respect to these securities. In order to have the
flexibility to respond to changes in interest rates and to take advantage
of changes in the availability of and the yield on alternative
investments, management determined that the reclassification of these
securities as available for sale was appropriate.
Realized gains and losses on investment transactions are determined on a
specific identification basis and are included in revenues.
Short-term investments are carried at estimated fair value and include all
trading securities.
Derivative financial instruments are carried at estimated fair value.
Unrealized gains and losses of derivatives used to hedge securities
classified as available for sale are reflected in a separate component of
equity, similar to the accounting of the underlying hedged assets.
Realized gains and losses on derivatives used for hedging are deferred and
amortized over the average life of the related hedged assets or insurance
liabilities. Unrealized gains and losses of other derivatives are
reflected in operations.
Mortgage loans and policy loans are stated at unpaid principal balances.
Real estate is carried at depreciated cost, or for real estate acquired in
satisfaction of debt, estimated fair value less estimated selling costs at
the date of acquisition if lower than the related unpaid balance.
On November 15, 1994, certain of the Company's investment management and
advisory subsidiaries entered into an agreement and plan of consolidation
with Thomson Advisory Group L.P., a Delaware limited partnership with
publicly traded units, to merge into a newly capitalized partnership named
PIMCO Advisors L.P. ("PIMCO Advisors"). In December 1997, PIMCO Advisors
completed a transaction in which it acquired the assets of Oppenheimer
Capital, L.P., including its interest in Oppenheimer Capital, by issuing
approximately 33 million PIMCO Advisors General and Limited Partner units.
In connection with this transaction, the Company increased its investment
in PIMCO Advisors to reflect the excess of the Company's pro rata share of
PIMCO Advisors partners' capital subsequent to this transaction over the
carrying value of the Company's investment in PIMCO Advisors. The net
result of this transaction was to directly increase stockholder's equity
by $85.1 million. The Company's beneficial ownership in PIMCO Advisors was
approximately 42% prior to this transaction and 31% subsequent to the
transaction. Deferred taxes as a result of this transaction have been
established on the accompanying consolidated financial statements. This
investment, which is included in other investments on the accompanying
consolidated statements of financial condition, is accounted for using the
equity method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all liquid debt instruments with an
original maturity of three months or less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions,
medical examinations, underwriting, policy issue and other expenses, all
of which vary with and are primarily related to the production of new
business, have been deferred. For universal life, annuity and other
investment contract products, such costs are generally amortized in
proportion to the present value of expected gross profits using the
assumed crediting rate. Adjustments are reflected in earnings or equity in
the period the Company experiences deviations in gross profit assumptions.
Adjustments directly affecting equity result from experience deviations
due to changes in unrealized gains and losses in investments classified as
available for sale. For life insurance products, such costs are being
amortized over the premium-paying period of the related policies in
proportion to premium revenues
23
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized, using assumptions consistent with those used in computing
policy reserves. For the years ended December 31, 1997, 1996 and 1995, net
amortization of deferred policy acquisition costs included in commission
expenses amounted to $50.2 million, $42.6 million and $39.4 million,
respectively, and included in operating expenses amounted to $29.4
million, $27.4 million and $20.8 million, respectively, on the
accompanying consolidated statements of operations.
PRESENT VALUE OF FUTURE PROFITS
Included in other assets on the accompanying consolidated statement of
financial condition as of December 31, 1996 was $16.1 million which
represented the present value of estimated future profits of acquired
business in connection with the rehabilitation of First Capital Life
Insurance Company ("FCL"-Note 4). The aforementioned future profits were
discounted to provide an appropriate rate of return and were being
amortized over the rehabilitation plan period. Amortization for the years
ended December 31, 1997, 1996 and 1995 amounted to $16.1 million, $24.2
million and $17.1 million, respectively, and is included in commission
expenses in the accompanying consolidated statements of operations. During
1996, the Company changed certain assumptions regarding the estimated life
which resulted in an increase in amortization in 1996 of approximately
$17.0 million.
UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Universal life, annuity and other investment contract deposits are valued
using the retrospective deposit method and consist principally of deposits
received plus interest credited less accumulated assessments. Interest
credited to these policies primarily ranged from 4.0% to 8.4% during 1997,
1996 and 1995.
FUTURE POLICY BENEFITS
Life insurance reserves are valued using the net level premium method.
Interest rate assumptions range from 4.5% to 9.3% for 1997, 1996 and 1995.
Mortality, morbidity and withdrawal assumptions are generally based on the
Company's experience, modified to provide for possible unfavorable
deviations. Future dividends for participating business are provided for
in the liability for future policy benefits. Included in policy benefits
paid or provided on the accompanying consolidated statements of operations
are dividends to policyholders.
Dividends are provided based on dividend formulas approved by the Board of
Directors and reviewed for reasonableness and equitable treatment of
policyholders by an independent consulting actuary. As of December 31,
1997 and 1996, participating experience rated policies paying dividends
represented approximately 1% of direct written life insurance in force.
STATE GUARANTY FUND ASSESSMENTS
Insurance companies are subject to assessments by life and health guaranty
associations in most states in which they are licensed to do business.
These assessments are based on the volume and type of business they sell
in those states and may be partially recovered in some states through a
future reduction in premium taxes. Based on current information available
from the National Organization of Life and Health Guaranty Association,
the Company, as of December 31, 1997, has accrued in other liabilities on
the accompanying consolidated statements of financial condition an amount
adequate for anticipated payments of known insolvencies, net of estimated
recoveries of premium tax offsets.
REVENUES AND EXPENSES
Insurance premiums are recognized as revenue when due. Benefits and
expenses, other than deferred policy acquisition costs, are recognized
when incurred.
24
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Generally, receipts for universal life, annuities and other investment
contracts are classified as deposits. Policy fees from these contracts
include mortality charges, surrender charges and earned policy service
fees. Expenses related to these products include interest credited to
account balances and benefit amounts in excess of account balances.
Commission revenue from Pacific Life's broker dealer subsidiaries is
generally recorded on a settlement basis, generally the third business day
following the trade date. The difference between the settlement date and
trade date is not considered material.
DEPRECIATION AND AMORTIZATION
Depreciation of investment real estate is computed on the straight-line
method over the estimated useful lives which range from 15 to 30 years.
Certain other assets are depreciated or amortized on the straight-line method
over varying periods ranging from 3 to 40 years. Depreciation of investment
real estate is included in net investment income on the accompanying
consolidated statements of operations. Depreciation and amortization of other
assets is included in operating expenses on the accompanying consolidated
statements of operations.
INCOME TAXES
Pacific Life is taxed as a life insurance company for income tax purposes and
is included in the consolidated income tax returns of PMHC. The amount of
income tax expense includes an equity tax calculated by a prescribed formula
that incorporates a differential earnings rate between stock and mutual life
insurance companies. Deferred income taxes are provided for timing
differences in the recognition of revenues and expenses for financial
reporting and income tax purposes.
SEPARATE ACCOUNTS
Separate account assets are recorded at market value and the related
liabilities represent segregated contract owner funds maintained in accounts
with individual investment objectives. The investment results of separate
account assets generally pass through to separate account contract owners.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments disclosed in Notes 6 and 7
have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented may not be indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant effect
on the estimated fair value amounts.
BUSINESS RISKS
The Company operates in a business environment which is subject to various
risks and uncertainties. Such risks and uncertainties include interest
rate risk, credit risk and legal and regulatory changes.
Interest rate risk is the potential for interest rates to change, which can
cause fluctuations in the value of investments. To the extent that
fluctuations in interest rates cause the duration of assets and liabilities
to differ, the Company may have to sell assets prior to their maturity and
realize losses. The Company controls its exposure to this risk by, among
other things, asset/liability matching techniques which attempt to match the
duration of assets and liabilities and utilization of derivative instruments.
25
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Credit risk is the risk that issuers of investments owned by the Company
may default or that other parties may not be able to pay amounts due to
the Company. The Company manages its investments to limit credit risk by
diversifying its portfolio among various security types and industry
sectors. The credit risk of financial instruments is controlled through
credit approvals, limits and monitoring procedures. Real estate and
mortgage loan investments are diversified by geographic location and
property type. Management believes that significant concentrations of
credit risk do not exist.
The Company is also exposed to credit loss in the event of nonperformance
by the counterparties to interest rate swap contracts and other derivative
securities. However, the Company does not anticipate nonperformance by the
counterparties.
The Company is subject to various state and Federal regulatory
authorities. The potential exists for changes in regulatory initiatives
which can result in additional, unanticipated expense to the Company.
Existing Federal laws and regulations affect the taxation of life
insurance or annuity products and insurance companies. There can be no
assurance as to what, if any, future legislation might be enacted, or if
enacted, whether such legislation would contain provisions with possible
negative effects on the Company's life insurance or annuity products.
USE OF ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
financial statement presentation.
2. STATUTORY RESULTS
The following are reconciliations of statutory capital and surplus and
statutory net income for Pacific Life as calculated in accordance with
accounting practices prescribed or permitted by the Insurance Department
of the State of California, to the amounts reported as stockholder's
equity and net income included in the accompanying consolidated financial
statements:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------
(In Millions)
<S> <C> <C>
Statutory capital and surplus $ 944.8 $ 815.2
Deferred policy acquisition costs 730.7 542.0
Unrealized gain on securities available for
sale, net 575.2 379.2
Asset valuation reserve 252.4 209.5
Deferred income tax 240.9 174.6
Subsidiary equity 108.7 60.7
Non-admitted assets 25.2 22.8
Surplus notes (149.6) (149.6)
Insurance and annuity reserves (511.5) (340.4)
Other (69.5) (16.8)
------------------
Stockholder's equity as reported herein $2,147.3 $1,697.2
==================
</TABLE>
26
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. STATUTORY RESULTS (CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Statutory net income $ 121.5 $ 113.1 $ 85.1
Deferred policy acquisition costs 160.4 111.2 76.4
Deferred income tax 41.2 70.9 31.5
Interest maintenance reserve 7.6 3.8 12.2
Net realized gain (loss) on trading
securities (5.8) (11.6) 13.2
Earnings of subsidiaries (40.6) (33.0) 5.9
Insurance and annuity reserves (107.0) (91.3) (95.5)
Other (1.3) 3.5 6.0
--------------------------
Net income as reported herein $ 176.0 $ 166.6 $ 134.8
==========================
</TABLE>
RISK-BASED CAPITAL
Risk-based capital is a method developed by the National Association of
Insurance Commissioners ("NAIC") to measure the minimum amount of capital
appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. The formulas for
determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances or various levels of
activity based on the perceived degree of risk. The adequacy of a
company's actual capital is measured by comparing it to the risk-based
capital as determined by the formulas. Companies below minimum risk-based
capital requirements are classified within certain levels, each of which
requires specified corrective action. As of December 31, 1997 and 1996,
Pacific Life and PM Group exceeded the minimum risk-based capital
requirements.
DIVIDEND RESTRICTIONS
Dividend payments by Pacific Life 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 previous calendar year,
without prior approval from the Insurance Department of the State of
California. Based on this limitation and 1997 statutory results, Pacific
Life could pay approximately $76.5 million in dividends in 1998 without
prior approval.
Extraordinary dividends to Pacific Life from PM Group are subject to
regulatory restrictions and approvals by the Insurance Department of the
State of Arizona, PM Group's state of domicile. The maximum amount of
ordinary dividends that can be paid by PM Group without restriction cannot
exceed the lesser of 10% of surplus as regards policyholders, or the
statutory net gain from operations. During 1997, 1996 and 1995, PM Group
received approval to pay dividends of $14 million, $25 million and $25
million for the years ended December 31, 1997, 1996 and 1995 of which $8
million, $18 million and $17.2 million, respectively, were considered
extraordinary.
In accordance with the terms of the rehabilitation agreement (Note 4), PCL
was precluded from paying any dividends during the rehabilitation period
without the prior consent of the Insurance Department of the State of
California. No such dividends were paid.
27
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CLOSED BLOCK
In connection with the Conversion, an arrangement known as a closed block
(the "Closed Block"), was established, for dividend purposes only, for the
exclusive benefit of certain individual life insurance policies that have
an experience based dividend scale for 1997. The Closed Block is designed
to give reasonable assurance to holders of Closed Block policies that
policy dividends will not change solely as a result of the Conversion.
Assets of Pacific Life have been allocated to the Closed Block in an
amount that produces cash flows, which, together with anticipated
revenues, are expected to be sufficient to support the policies. Pacific
Life is not required to support the payment of dividends on these policies
from its general funds. The Closed Block will continue in effect until
either the last policy is no longer in force, or the dissolution of the
Closed Block. Total assets of $316.2 million and total liabilities of
$356.0 million for the Closed Block are included in other assets and other
liabilities, respectively, in the accompanying consolidated statements of
financial condition as of December 31, 1997. The contribution to income
from the Closed Block of $5.7 million, consisting of net revenues and
expenses generated by the Closed Block is included in other income in the
accompanying consolidated statements of operations for the year ended
December 31, 1997.
4. REHABILITATION OF FIRST CAPITAL LIFE INSURANCE COMPANY
On September 30, 1997, PCL completed the rehabilitation of FCL pursuant to
a five-year rehabilitation plan approved by the California Superior Court
and the Insurance Department of the State of California (the
"Rehabilitation Plan"). Under the terms of the Rehabilitation Plan, FCL's
insurance policies in force, primarily individual annuities and universal
life insurance, were restructured and assumed by PCL on December 31, 1992,
pursuant to an assumption reinsurance agreement and asset purchase
agreement. On October 30, 1997, PCL was merged into Pacific Life, with
Pacific Life as the surviving entity.
5. ACQUISITION OF INSURANCE BLOCK OF BUSINESS
On June 1, 1997, Pacific Life acquired a block of corporate-owned life
insurance ("COLI") policies from Confederation Life Insurance Company
(U.S.) in Rehabilitation, which is currently under rehabilitation, which
consisted of approximately 38,000 policies having a face amount of
insurance of $8.6 billion and reserves of approximately $1.7 billion. The
assets received as part of this acquisition amounted to approximately $1.2
billion in cash and approximately $0.4 billion in policy loans. This block
is primarily non-leveraged COLI.
As part of this transaction, an amount equal to the excess of the
estimated fair value of the reserves assumed over the estimated fair value
of the assets acquired which represents the cost of acquiring the
business, amounting to $43.4 million at December 31, 1997, is included in
deferred policy acquisition costs in the accompanying consolidated
statements of financial condition. Amortization of this asset for the year
ended December 31, 1997 was $0.9 million and is included in commission
expenses in the accompanying consolidated statements of operations.
28
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
value of fixed maturity and equity securities are shown below. The
estimated fair value of publicly traded securities is based on quoted
market prices. For securities not actively traded, estimated fair values
were provided by independent pricing services specializing in "matrix
pricing" and modeling techniques. The Company also estimates certain fair
values based on interest rates, credit quality and average maturity or
from securities with comparable trading characteristics.
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ----------------- Estimated
Cost Gains Losses Fair Value
--------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Securities Available for Sale:
------------------------------
As of December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 85.4 $ 17.5 $ 102.9
Obligations of states, political
subdivisions and foreign govern-
ments 730.2 89.4 $ 3.0 816.6
Corporate securities 7,704.8 594.3 72.7 8,226.4
Mortgage-backed and asset-backed
securities 4,597.7 147.1 15.5 4,729.3
Redeemable preferred stock 107.8 10.3 2.6 115.5
=====================================
Total fixed maturity securities $13,225.9 $ 858.6 $ 93.8 $13,990.7
=====================================
Total equity securities $ 231.7 $ 123.6 $ 8.9 $ 346.4
=====================================
Securities Available for Sale:
------------------------------
As of December 31, 1996:
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies $ 297.9 $ 11.2 $ 0.3 $ 308.8
Obligations of states, political
subdivisions and foreign
governments 638.1 46.2 1.0 683.3
Corporate securities 6,848.3 506.3 91.9 7,262.7
Mortgage-backed and asset-backed
securities 3,753.6 98.0 19.4 3,832.2
Redeemable preferred stock 102.5 6.4 2.1 106.8
--------------------------------------
Total fixed maturity securities $11,640.4 $ 668.1 $ 114.7 $12,193.8
======================================
Total equity securities $ 229.6 $ 40.8 $ 9.6 $ 260.8
======================================
</TABLE>
29
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The amortized cost and estimated fair values of fixed maturity securities
as of December 31, 1997, by contractual repayment date of principal, are
shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------------------
(In Millions)
<S> <C> <C>
Securities Available for Sale:
Due in one year or less $ 969.9 $ 1,075.2
Due after one year through five years 2,678.4 2,823.1
Due after five years through ten years 2,810.1 2,939.3
Due after ten years 2,169.8 2,423.8
--------------------
8,628.2 9,261.4
Mortgage-backed and asset-backed
securities 4,597.7 4,729.3
--------------------
Total $13,225.9 $13,990.7
====================
</TABLE>
Proceeds from sales of all securities available for sale during 1997, 1996
and 1995 were $2.2 billion, $2.5 billion and $1.9 billion, respectively.
Gross gains of $69.1 million, $89.3 million and $58.0 million and gross
losses of $32.9 million, $29.9 million and $32.3 million were realized on
those sales during 1997, 1996 and 1995, respectively.
Major categories of investment income are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Fixed maturity securities $ 935.1 $ 831.6 $ 808.1
Equity securities 12.8 17.8 7.3
Mortgage loans 129.5 109.4 112.9
Real estate 53.6 51.3 43.2
Policy loans 137.1 113.0 105.2
Other 65.8 71.7 63.2
--------------------------
Gross investment income 1,333.9 1,194.8 1,139.9
Investment expense 108.6 107.5 101.5
--------------------------
Net investment income $1,225.3 $1,087.3 $1,038.4
==========================
</TABLE>
30
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT IN FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
The change in gross unrealized gain (loss) on investments in available for
sale and trading securities is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
------------------------
(In Millions)
<S> <C> <C> <C>
Available for sale and trading securities:
Fixed maturity $222.4 $(169.1) $1,039.3
Equity 85.7 6.5 17.2
------------------------
Total $308.1 $(162.6) $1,056.5
========================
</TABLE>
As of December 31, 1997 and 1996, investments in fixed maturity securities
with a carrying value of $14.4 million and $19.6 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements.
No investment, aggregated by issuer, exceeded 10% of total equity as of
December 31, 1997. The Company has no non-income producing fixed maturity
securities, mortgage loans, real estate or other long-term investments as
of December 31, 1997.
7. FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-----------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
Assets:
Fixed maturity and equity
securities (Note 6) $14,337.1 $14,337.1 $12,454.6 $12,454.6
Mortgage loans 1,922.1 1,990.9 1,477.3 1,533.9
Policy loans 3,769.2 3,769.2 3,131.8 3,131.8
Cash and cash equivalents 110.4 110.4 109.0 109.0
Derivative financial
instruments:
Interest rate floors and
caps, options and swaptions 22.9 22.9 59.3
Interest rate swap contracts 0.5 0.5 1.0 1.0
Credit and total return swaps 1.1 1.1
Foreign currency derivatives 4.1 4.1
Liabilities:
Guaranteed interest contracts 3,982.0 4,035.7 2,948.3 3,056.1
Deposit liabilities 733.5 737.4 799.6 800.6
Annuity liabilities 1,883.5 1,872.6 2,459.4 2,459.4
Surplus notes 149.6 164.7 149.6 157.5
Derivative financial
instruments:
Options written 1.6 1.6 1.5 1.5
Asset swap contracts 12.6 12.6 12.5 12.5
Credit and total return swaps 4.0 4.0
Foreign currency derivatives 4.3 4.3
</TABLE>
31
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of these financial instruments as of December 31, 1997 and 1996:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by
discounting the estimated future cash flows, using a year-end market rate
which is applicable to the yield, credit quality and average maturity of
the composite portfolio.
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their
fair values.
CASH AND CASH EQUIVALENTS
The carrying amounts of these items are a reasonable estimate of their
fair values.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are financial instruments whose value or cash flows are
"derived" from another source, such as an underlying security. They can
facilitate total return and, when used for hedging, they achieve the
lowest cost and most efficient execution of positions. Derivatives can
also be used to leverage by using very large notional amounts or by
creating formulas that multiply changes in the underlying security. The
Company's approach is to avoid highly leveraged or overly complex
investments. The Company utilizes certain derivative financial instruments
to diversify its business risk and to minimize its exposure to
fluctuations in market prices, interest rates or basis risk as well as for
facilitating total return. Risk is limited through modeling derivative
performance in product portfolios for hedging and setting loss limits in
total return portfolios.
Derivatives used by the Company involve elements of credit risk and market
risk in excess of amounts recognized in the accompanying consolidated
financial statements. The notional amounts of these instruments reflect
the extent of involvement in the various types of financial instruments.
The estimated fair values of these instruments are based on quoted market
prices, dealer quotations or internal price estimates believed to be
comparable to dealer quotations. These amounts estimate what the Company
would have to pay or receive if the contracts were terminated. The Company
determines, on an individual counterparty basis, the need for collateral
or other security to support financial instruments with off-balance sheet
counterparty risk.
32
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
A reconciliation of the notional or contract amounts and discussion of the
various derivative instruments is as follows:
<TABLE>
<CAPTION>
Balance Terminations Balance
Beginning and End
of Year Acquisitions Maturities of Year
--------------------------------------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1997:
Interest rate floors and
caps, options and
swaptions $4,538.2 $1,644.2 $3,452.4 $2,730.0
Interest rate swap
contracts 988.3 1,356.0 318.2 2,026.1
Asset swap contracts 30.0 47.4 10.0 67.4
Credit and total return
swaps 356.5 98.9 166.9 288.5
Financial futures contracts 609.2 3,930.6 4,325.7 214.1
Foreign currency
derivatives 41.4 217.0 51.4 207.0
December 31, 1996:
Interest rate floors and
caps, options and
swaptions 1,834.6 3,075.0 371.4 4,538.2
Interest rate swap
contracts 619.6 620.9 252.2 988.3
Asset swap contracts 20.0 15.3 5.3 30.0
Credit and total return
swaps 146.1 307.2 96.8 356.5
Financial futures contracts 310.1 3,358.9 3,059.8 609.2
Foreign currency
derivatives 15.4 43.1 17.1 41.4
</TABLE>
Interest Rate Floors and Caps, Options and Swaptions
----------------------------------------------------
The Company uses interest rate floors and caps, options and swaptions to
hedge against fluctuations in interest rates and in its total return
portfolios. Interest rate floor agreements entitle the Company to receive
the differential, if below, between the specified rate and the current
value of the underlying index. Interest rate cap agreements entitle the
Company to receive the differential, if above, between the specified rate
and the current value of the underlying index. Options purchased involve
the right, but not the obligation, to purchase the underlying securities
at a specified price during a given time period. Swaptions are options to
enter into a swap transaction at a specified price. The Company uses
written covered call options on a limited basis. Gains and losses on
covered calls are offset by gains and losses on the underlying position.
Options and floors are reported as assets and options written are reported
as liabilities in the consolidated statements of financial condition. Cash
requirements for these instruments are generally limited to the premium
paid by the Company at acquisition. The purchase premium of these
instruments is amortized on a constant effective yield basis and included
as a component of net investment income over the term of the agreement.
Interest rate floors and caps, options and swaptions mature during fiscal
years 1998 through 2007.
Interest Rate Swap Contracts
----------------------------
The Company uses interest rate swaps to manage interest rate risk. The
interest rate swap agreements generally involve the exchange of fixed and
floating rate interest payments or the exchange of floating to floating
interest payments tied to different indexes. Generally, no premium is paid
to enter into the contract and no principal payments are made by either
party. The amounts to be received or paid pursuant to these agreements are
accrued and recognized through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. The interest rate swap contracts mature during fiscal
years 1998 through 2021.
33
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
Asset Swap Contracts
--------------------
The Company uses asset swap contracts to manage interest rate and equity
risk to better match portfolio duration to liabilities. Asset swap
contracts involve the exchange of upside equity potential for preferred
cash flow streams. The amounts to be received or paid pursuant to these
agreements are accrued and recognized through an adjustment to net
investment income in the accompanying consolidated statements of
operations over the life of the agreements. The asset swap contracts
mature during fiscal years 1998 through 2003.
Credit and Total Return Swaps
-----------------------------
The Company uses credit and total return swaps to take advantage of market
opportunities. Credit swaps involve the receipt of floating or fixed rate
payments in exchange for assuming potential credit losses of an underlying
security. Total return swaps involve the exchange of floating rate
payments for the total return performance of a specified index or market.
The amounts to be received or paid pursuant to these agreements are
accrued and recognized through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. Credit and total return swaps mature during fiscal years
1998 through 2013.
Financial Futures Contracts
---------------------------
The Company uses exchange-traded financial futures contracts to hedge cash
flow timing differences between assets and liabilities and overall
portfolio duration. Assets and liabilities are rarely acquired or sold at
the same time, which creates a need to hedge their change in value during
the unmatched period. In addition, foreign currency futures may be used to
hedge foreign currency risk on non-U.S. dollar denominated securities.
Financial futures contracts obligate the holder to buy or sell the
underlying financial instrument at a specified future date for a set price
and may be settled in cash or delivery of the financial instrument. Price
changes on futures are settled daily through the daily margin cash flows.
The notional amounts of the contracts do not represent future cash
requirements, as the Company intends to close out open positions prior to
expiration.
Foreign Currency Derivatives
----------------------------
The Company enters into foreign exchange forward contracts and swaps to
hedge against fluctuations in foreign currency exposure. Foreign currency
derivatives involve the exchange of foreign currency denominated payments
for U.S. dollar denominated payments. Gains and losses on foreign exchange
forward contracts offset currency gains and losses on the related assets.
The amounts to be received or paid under the foreign currency swaps are
accrued and recognized through an adjustment to net investment income in
the accompanying consolidated statements of operations over the life of
the agreements. Foreign currency derivatives expire during fiscal years
1998 through 2011.
GUARANTEED INTEREST CONTRACTS AND DEPOSIT LIABILITIES
The estimated fair values of fixed maturity guaranteed interest contracts
are estimated using the rates currently offered for deposits of similar
remaining maturities. The estimated fair value of deposit liabilities with
no defined maturities is the amount payable on demand.
ANNUITY LIABILITIES
The estimated fair value of annuity liabilities approximates carrying
value and primarily includes policyholder deposits and accumulated
credited interest.
34
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. FINANCIAL INSTRUMENTS (CONTINUED)
SURPLUS NOTES
The estimated fair value of surplus notes is based on market quotes.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Pacific Life has issued certain contracts to plan sponsors totaling $1.6
billion as of December 31, 1997, pursuant to the terms of which the plan
sponsor retains direct ownership and control of the assets related to
these contracts. Pacific Life agrees to provide benefit responsiveness in
the event that plan benefit requests exceed plan cash flows. In return for
this guarantee, Pacific Life receives a fee which varies by contract.
Pacific Life sets the investment guidelines to provide for appropriate
credit quality and cash flow matching.
8. UNIVERSAL LIFE, ANNUITY AND OTHER INVESTMENT CONTRACT DEPOSITS
Detail of universal life, annuity and other investment contract deposit
liabilities follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------
(In Millions)
<S> <C> <C>
Universal life $10,012.0 $ 7,562.5
Annuity 1,817.4 2,459.3
Other investment contract
deposits 4,815.1 3,855.6
-------------------
$16,644.5 $13,877.4
===================
</TABLE>
Detail of universal life, annuity and other investment contract deposits
policy fees and interest credited net of reinsurance ceded follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Policy fees
Universal life $ 377.5 $ 318.4 $ 292.6
Annuity 50.3 26.6 12.8
Other investment contract
deposits 3.4 3.6 3.6
--------------------------
Total policy fees $ 431.2 $ 348.6 $ 309.0
--------------------------
Interest credited
Universal life $ 368.2 $ 284.3 $ 267.3
Annuity 116.8 138.7 137.5
Other investment contract
deposits 312.8 242.0 270.4
--------------------------
Total interest credited $ 797.8 $ 665.0 $ 675.2
==========================
</TABLE>
35
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. SHORT-TERM AND LONG-TERM DEBT
Pacific Life borrows for short-term needs by issuing commercial paper.
There was no commercial paper debt outstanding as of December 31, 1997 and
1996. Pacific Life had a revolving credit facility available of $350
million and $250 million as of December 31, 1997 and 1996, respectively.
There was no debt outstanding under the revolving credit facility as of
December 31, 1997 and 1996.
The borrowing limit for PAM as of December 31, 1997 and 1996 was $200
million and $150 million, respectively. The interest rate averaged 5.8%,
5.6% and 6.1% for the years ended December 31, 1997, 1996 and 1995,
respectively. The balance outstanding as of December 31, 1997 and 1996
totaled $104 million and $95.5 million, respectively. Outstanding debt is
due and payable in 1998 and subject to renewal.
During 1992, a wholly-owned subsidiary of Pacific Life entered into a
credit agreement with a group of banks for borrowings of $45 million.
Proceeds of this note were paid to PCL in connection with the issuance of
a certificate of contribution by PCL (Note 4). On December 31, 1996, the
applicable interest rate was 6.2%. The outstanding balance of $25 million
was prepaid per the terms of the agreement on January 27, 1997.
Pacific Life has $150 million of long-term debt which consists of surplus
notes outstanding at an interest rate of 7.9% maturing on December 30,
2023. Interest is payable semiannually on June 30 and December 30. The
surplus notes may not be redeemed at the option of Pacific Life or any
holder of the surplus notes. The surplus notes are unsecured and
subordinated to all present and future senior indebtedness and policy
claims of Pacific Life. Each payment of interest on and the payment of
principal of the surplus notes may be made only with the prior approval of
the Insurance Commissioner of the State of California. Interest expense
amounted to $11.8 million for each of the years ended December 31, 1997,
1996 and 1995 and is included in net investment income in the accompanying
consolidated statements of operations.
10. INCOME TAXES
As required by SFAS No. 109, "Accounting for Income Taxes", the Company
accounts for income taxes using the liability method. Under SFAS No. 109,
the deferred tax consequences of changes in tax rates or laws must be
computed on the amounts of temporary differences and carryforwards
existing at the date a new law is enacted. Recording the effects of the
change involves adjusting deferred tax liabilities and assets with a
corresponding charge or credit recognized in the provision for income
taxes. The objective is to measure a deferred tax liability or asset using
the enacted tax rates and laws expected to apply to taxable income in the
periods in which the deferred tax liability or asset is expected to be
settled or realized.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Current $ 127.9 $ 163.5 $ 116.4
Deferred (14.4) (49.8) (30.3)
----------------------------
$ 113.5 $ 113.7 $ 86.1
============================
</TABLE>
36
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
The sources of the Company's provision for deferred taxes are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Reserves $ 20.1 $(28.5) $(28.7)
Investment valuation 3.9 (7.3) 8.1
Deferred policy acquisition costs (18.0) 2.1 (6.0)
Other (20.4) (16.1) (3.7)
----------------------------
$ (14.4) $(49.8) $(30.3)
============================
</TABLE>
A reconciliation of the provision for income taxes based on the prevailing
corporate tax rate to the provision reflected in the consolidated
financial statements is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---------------------------
(In Millions)
<S> <C> <C> <C>
Income taxes at the statutory rate $ 101.3 $ 98.1 $ 77.3
Equity tax 5.0 16.3
Amortization of intangibles on equity
method investments 7.6 6.5 6.5
Non-taxable investment income (2.6) (2.1) (2.1)
Other 2.2 (5.1) 4.4
---------------------------
$ 113.5 $ 113.7 $ 86.1
===========================
</TABLE>
The net deferred tax asset (liability) included in other assets on the
accompanying consolidated statements of financial condition was comprised
of the tax effects of the following temporary differences:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------
(In Millions)
<S> <C> <C>
Reserves $ 224.8 $ 244.9
Deferred compensation 25.9 27.6
Investment valuation 20.1 24.0
Postretirement benefits 9.3 9.8
Dividends 7.7 9.6
Depreciation (2.5) (9.8)
Deferred policy acquisition costs (25.9) (43.9)
Other 41.0 23.8
----------------
Deferred taxes from operations 300.4 286.0
Issuance of partnership units by affiliate (47.9)
Unrealized gain on securities available for
sale (307.8) (204.5)
----------------
Net deferred tax asset (liability) $ (55.3) $ 81.5
================
</TABLE>
37
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. REINSURANCE
The Company accounts for reinsurance transactions utilizing SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration And Long-
Duration Contracts". SFAS No. 113 establishes the conditions required for
a contract with a reinsurer to be accounted for as reinsurance and
prescribes accounting and reporting standards for those contracts. Amounts
receivable from reinsurers for reinsurance on future policy benefits,
universal life deposits, and unpaid losses is reported as an asset and
included in other assets on the accompanying consolidated statements of
financial condition.
The Company has reinsurance agreements with other insurance companies for
the purpose of diversifying risk and limiting exposure on larger risks or,
in the case of a producer-owned reinsurance company, to diversify risk and
retain top producing agents. All assets associated with reinsured business
remain with, and under the control of the Company. Approximate amounts
recoverable (payable) from (to) reinsurers include the following amounts:
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------
(In Millions)
<S> <C> <C>
Reinsured universal life deposits $(39.6) $(35.9)
Future policy benefits 92.2 90.0
Unpaid claims 14.0 4.6
Paid claims 10.2 8.4
</TABLE>
As of December 31, 1997, 72% of the reinsurance recoverables were from one
reinsurer, of which 100% is secured by payables to the reinsurer. To the
extent that the assuming companies become unable to meet their obligations
under these agreements, the Company remains contingently liable. The
Company does not anticipate nonperformance by the assuming companies.
Revenues and benefits are shown net of the following reinsurance
transactions:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------------------------
(In Millions)
<S> <C> <C> <C>
Ceded reinsurance netted against insurance
premiums $ 70.7 $ 44.3 $ 29.2
Assumed reinsurance included in insurance
premiums 18.1 17.8 15.6
Ceded reinsurance netted against policy fees 77.5 71.0 66.5
Ceded reinsurance netted against net
investment income 204.9 192.5 176.6
Ceded reinsurance netted against interest
credited 165.8 155.2 140.0
Ceded reinsurance netted against policy
benefits 93.4 56.7 51.4
Assumed reinsurance included in policy
benefits 12.7 9.9 14.5
</TABLE>
38
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SEGMENT INFORMATION
The operations of the Company have been classified into four business
segments as follows: Individual Life Insurance and Annuities, Pensions,
Group Employee Benefits and Corporate and Other. These segments are based
on the organization of the Company and are generally distinguished by the
products offered. The Corporate and Other segment generally includes the
assets and operations that do not support the other segments such as
certain non-life insurance related subsidiary operations. Depreciation
expense and capital expenditures are not material and have not been
reported. Revenues, income before income taxes and assets by segment are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---------------------------
(In Millions)
<S> <C> <C> <C>
Revenues:
Individual Life Insurance and Annuities $1,137.7 $ 964.0 $ 927.0
Pensions 584.0 507.3 513.9
Group Employee Benefits 507.5 456.0 419.3
Corporate and Other 345.2 220.7 159.5
---------------------------
Total $2,574.4 $2,148.0 $2,019.7
===========================
Income before provision for income taxes:
Individual Life Insurance and Annuities $ 164.0 $ 93.9 $ 102.3
Pensions 98.3 80.7 53.3
Group Employee Benefits 28.8 26.5 25.2
Corporate and Other (1.6) 79.2 40.1
---------------------------
Total $ 289.5 $ 280.3 $ 220.9
===========================
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------
(In Millions)
<S> <C> <C>
Assets:
Individual Life Insurance and Annuities $19,969.2 $15,484.4
Pensions 12,653.6 10,514.8
Group Employee Benefits 368.6 344.4
Corporate and Other 1,017.4 721.7
-------------------
Total $34,008.8 $27,065.3
===================
</TABLE>
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS
PENSION PLANS
Pacific Life has defined benefit pension plans which cover all eligible
employees who have one year of continuous employment and have attained age
21. The full-benefit vesting period for all participants is five years.
Benefits for employees are based on years of service and the highest five
consecutive years of compensation during the last ten years of employment.
Pacific Life's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional
amounts as may be determined appropriate. Contributions are intended to
provide
39
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
not only for benefits attributed to employment to date but also for those
expected to be earned in the future. All such contributions are made to a
tax-exempt trust. Plan assets consist primarily of group annuity contracts
issued by Pacific Life, as well as participating units of a real estate
trust and mutual funds managed by an indirect subsidiary of Pacific Life.
Components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost - benefits earned during
the year $ 3.6 $ 3.7 $ 2.8
Interest cost on projected benefit
obligation 10.4 9.8 9.3
Actual return on plan assets (33.1) (21.7) (25.0)
Amortization of net obligations and
prior service cost 18.9 9.1 14.0
----------------------------
Net periodic pension cost $ (0.2) $ 0.9 $ 1.1
============================
</TABLE>
The following table sets forth the pension plan's funded status and
amounts recognized on Pacific Life's consolidated statements of financial
condition:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------
(In Millions)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $ 137.1 $ 121.2
Nonvested benefits 1.2 1.2
----------------
Accumulated benefit obligation 138.3 122.4
Effect of projected future compensation increases 19.6 18.5
----------------
Projected benefit obligation 157.9 140.9
Plan assets at fair value (180.3) (154.2)
----------------
Plan assets in excess of projected benefit
obligation (22.4) (13.3)
Unrecognized net gain 14.7 3.6
Unrecognized transition asset 4.8 6.0
Unrecognized prior service cost 1.2 2.2
----------------
Prepaid pension cost $ (1.7) $ (1.5)
================
</TABLE>
In determining the actuarial present value of the projected benefit
obligation as of December 31, 1997 and 1996, the weighted average discount
rate used was 7.0% and 7.5%, respectively, and the rate of increase in
future compensation levels was 5.5% and 6.0%, respectively. The expected
long-term rate of return on plan assets was 8.5% in 1997 and 1996.
In connection with the merger of PCL into Pacific Life as discussed in
Note 4, Pacific Life assumed sponsorship of PCL's defined benefit pension
plan. This pension plan provides for retirement income benefits at age 65
with reduced benefits for early retirement. Effective December 31, 1997,
PCL's defined benefit plan merged into Pacific Life's plan. All benefits
associated with PCL's plan remain unchanged subsequent to the merger.
40
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE PLANS
Pacific Life sponsors a defined benefit health care plan and a defined
benefit life insurance plan (the "Plans") that provide postretirement
benefits for all eligible retirees and their dependents. Generally,
qualified employees may become eligible for these benefits if they reach
normal retirement age, have been covered under Pacific Life's policy as an
active employee for a minimum continuous period prior to the date retired,
and have an employment date before January 1, 1990. The Plans contain
cost-sharing features such as deductibles and coinsurance, and require
retirees to make contributions which can be adjusted annually. Pacific
Life's commitment to qualified employees who retire after April 1, 1994 is
limited to specific dollar amounts. Pacific Life reserves the right to
modify or terminate the Plans at any time. As in the past, the general
policy is to fund these benefits on a pay-as-you-go basis. The amount of
benefits paid under the programs during 1997, 1996 and 1995 was
approximately $1.5 million, $1.6 million and $1.7 million, respectively.
Components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------------------------
(In Millions)
<S> <C> <C> <C>
Service cost $ 0.1 $ 0.2 $ 0.2
Interest cost 1.4 1.5 1.9
Amortization (0.7) (0.3) (0.3)
----------------------------
Net periodic postretirement benefit cost $ 0.8 $ 1.4 $ 1.8
============================
</TABLE>
The following table sets forth the Plans' funded status and amounts
recorded in other liabilities on the accompanying consolidated statements
of financial condition:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------
(In Millions)
<S> <C> <C>
Accumulated postretirement obligation:
Retirees $ 17.6 $ 17.3
Fully eligible active Plan participants 1.4 2.0
Other active Plan participants 1.1 2.5
-------------
Total accumulated postretirement obligation 20.1 21.8
Fair value of Plan assets -- --
-------------
Unfunded accumulated postretirement obligation 20.1 21.8
Unrecognized net gain 3.2 3.7
Prior service cost 2.7 1.3
-------------
Accrued postretirement benefit liability $ 26.0 $ 26.8
=============
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
benefit obligation was 9% for 1997 and 1996 and is assumed to decrease
gradually to 4% in 2003 and remain at that level thereafter. The amount
reported is materially effected by the health care cost trend rate
assumptions. If the health care cost trend rate assumptions were increased
by 1%, the accumulated postretirement benefit obligation as of December
31, 1997 and 1996 would be increased by 8.5% and 11.5%, respectively. The
effect of this change would increase the
41
<PAGE>
Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. PENSION PLANS, POSTRETIREMENT BENEFITS AND OTHER PLANS (CONTINUED)
aggregate of the service and interest cost components of the net periodic
benefit cost by 7.7%, 12.3% and 11.4% for 1997, 1996 and 1995,
respectively.
The discount rate used in determining the accumulated postretirement
benefit obligation is 7.0% and 7.5% for 1997 and 1996, respectively.
OTHER PLANS
Pacific Life provides a voluntary Retirement Incentive Savings Plan
("RISP") pursuant to Section 401(k) of the Internal Revenue Code covering
all eligible employees of the Company. Effective October 1, 1997, Pacific
Life's RISP changed the matching percentage of each employee's
contributions from 50% to 75%, up to a maximum of six percent of eligible
employee compensation and restricted the matched investment to an Employee
Stock Ownership Plan ("ESOP") sponsored by Pacific LifeCorp. The ESOP was
formed at the time of the Conversion and is currently only available to
the participants of the RISP in the form of matching contributions.
Pacific Life also has a deferred compensation plan which permits certain
employees to defer portions of their compensation and earn a guaranteed
interest rate on the deferred amounts. The interest rate is determined
annually and is guaranteed for one year. The compensation which has been
deferred has been accrued and the primary expense, other than
compensation, related to this plan is interest on the deferred amounts.
The Company also has performance based incentive compensation plans for
its employees.
14. TRANSACTIONS WITH AFFILIATES
Pacific Life serves as the investment advisor for the Pacific Select Fund,
the investment vehicle provided to the Company's variable life and
variable annuity contractholders. Pacific Life charges fees based upon the
net asset value of the portfolios of the Pacific Select Fund, which
amounted to $27.5 million, $14.3 million and $6.5 million for the years
ended December 31, 1997, 1996 and 1995, respectively. In addition, Pacific
Life entered into an agreement with the Pacific Select Fund on October 1,
1995, to provide certain support services for an administration fee which
is based on an allocation of actual costs. Such administration fees
amounted to $165,000, $108,000 and $28,550 for the years ended December
31, 1997, 1996 and 1995, respectively.
PIMCO Advisors provides investment advisory services to the Company for
which the fees amounted to $11.4 million, $6.2 million and $5.0 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Included in equity securities on the accompanying consolidated statements
of financial condition are investments in mutual funds and other
investments managed by PIMCO Advisors which amounted to $46.5 million and
$90.8 million as of December 31, 1997 and 1996, respectively.
Pacific Life provides certain support services to PIMCO Advisors. Charges
for these services are based on an allocation of actual costs and amounted
to $1.2 million, $1.4 million and $1.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
15. TERMINATION AND NON-COMPETITION AGREEMENTS
Effective November 15, 1994, in connection with the PIMCO Advisors
transaction (Note 1), termination and non-competition agreements were
entered into with certain former key employees of PAM's subsidiaries.
These agreements provide terms and conditions for the allocation of future
proceeds received from distributions and sales of certain PIMCO Advisors
units and other noncompete payments. When the amount of future obligations
to be made to a key employee is determinable, a liability for such amount
is established.
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Pacific Life Insurance Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. TERMINATION AND NON-COMPETITION AGREEMENTS (CONTINUED)
For the years ended December 31, 1997, 1996 and 1995, approximately $85.8
million, $35.3 million and $28.6 million, respectively, is included in
operating expenses in the consolidated statements of operations related to
the termination and non-competition agreements. This includes payments of
$43.1 million in 1997 to former key employees who elected to sell to PAM's
subsidiaries their rights to the future proceeds from the PIMCO Advisors
units.
16. INVESTMENT COMMITMENTS
The Company has outstanding commitments to make investments primarily in
mortgage loans, limited partnerships and other investments as follows (In
Millions):
<TABLE>
<S> <C>
Years Ending December 31:
-------------------------
1998 $245.4
1999-2002 131.8
2003 and thereafter 16.6
------
Total $393.8
======
</TABLE>
17. LITIGATION
The Company has been named in civil litigation proceedings which appear to
be substantially similar to other litigation brought against many life
insurers alleging misconduct in the sale of products. These matters are
sometimes referred to as market conduct litigation. The litigation against
the Company purports to include all persons in the United States who
purchased life insurance and annuity products from the Company during the
period from 1982 to present. The Company has retained national and local
counsel experienced in the handling of similar matters for other life
insurers. Informal discovery has commenced in these matters. At this time,
it is not feasible to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome in such actions.
Further, the Company is a respondent in a number of other legal
proceedings, some of which involve allegations for extra-contractual
damages.
In the opinion of management, the outcome of the foregoing proceedings is
not likely to have a material adverse effect on the consolidated financial
position or results of operations of the Company.
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Form No. 801-8A
