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PFL ENDEAVOR VARIABLE LIFE
INDIVIDUAL FLEXIBLE
PREMIUM VARIABLE LIFE
INSURANCE POLICY
Issued by
PFL LIFE INSURANCE COMPANY
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499
(800) 525-6205
The individual flexible premium variable life insurance policy ("Policy")
issued by PFL Life Insurance Company ("PFL") and described in this Prospectus
is designed to provide lifetime insurance protection and maximum flexibility
in connection with premium payments and death benefits. A Policyowner may,
subject to certain restrictions, vary the timing and amount of premium
payments and increase or decrease the level of life insurance benefits payable
under the Policy. This flexibility allows a Policyowner to provide for
changing insurance needs under a single insurance policy. The minimum
Specified Amount for a Policy at issue is generally $50,000.
The Policy provides for a death benefit payable at the Insured's death, and
for a Net Surrender Value that can be obtained by completely or partially
surrendering the Policy. Surrender charges and taxes may apply. Net premiums
are allocated according to the Policyowner's directions among the Sub-Accounts
of the PFL Endeavor Variable Life Account ("Variable Account"), or to a fixed
interest account ("Fixed Account") or a combination of both. With respect to
amounts allocated to Sub-Accounts of the Variable Account, the amount of the
death benefit may, and the Cash Value will, vary to reflect both the
investment experience of the Sub-Accounts and the timing and amount of
additional premium payments. However, as long as the Policy remains In Force,
PFL guarantees that the death benefit will never be less than the Specified
Amount of the Policy. Additional premium payments may be necessary to prevent
Lapse.
The Policy provides for a free-look period. The Policyowner may cancel the
Policy within 10 days after the Policyowner receives it, or 10 days after PFL
mails or delivers a written notice of withdrawal right to the Policyowner, or
within 45 days after signing the application, whichever is latest.
The assets of each of the thirteen Sub-Accounts of the Variable Account will
be invested solely in a corresponding mutual fund portfolio. The thirteen
Portfolios currently available are the twelve Portfolios of the Endeavor
Series Trust and the WRL Growth Portfolio of the WRL Series Fund, Inc.
(together, the "Funds"). The Prospectuses for the Funds describe the
investment objectives and the risks of investing in the Portfolios of the
Funds corresponding to the Sub-Accounts currently available under the Policy.
The Policyowner bears the entire investment risk for all amounts allocated to
the Variable Account; there is no guaranteed minimum Cash Value.
It may not be to your advantage to replace existing insurance or supplement
an existing flexible premium variable life insurance policy with a Policy
described in this Prospectus.
Please read this Prospectus and the Prospectuses for the Funds carefully and
keep them for future reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Prospectus Dated September 17, 1998
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TABLE OF CONTENTS
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DEFINITIONS................................................................ 4
INTRODUCTION............................................................... 6
PAST INVESTMENT EXPERIENCE................................................. 12
PFL AND THE ACCOUNTS....................................................... 14
PFL...................................................................... 14
The Variable Account..................................................... 14
The Fixed Account........................................................ 18
POLICY RIGHTS AND BENEFITS................................................. 20
Death Benefit............................................................ 20
Cash Value............................................................... 23
Transfers................................................................ 24
Policy Loans............................................................. 25
Surrender Privileges..................................................... 26
Examination of Policy Privilege ("Free-Look")............................ 27
Benefits at Maturity..................................................... 28
Payment of Policy Benefits............................................... 28
PAYMENT AND ALLOCATION OF PREMIUMS......................................... 29
Issuance of a Policy..................................................... 29
Temporary Insurance Coverage............................................. 29
Premiums................................................................. 29
Allocation of Premiums and Cash Value.................................... 31
Policy Lapse and Reinstatement........................................... 31
CHARGES AND DEDUCTIONS..................................................... 32
Premium Expense Charges.................................................. 32
Contingent Surrender Charges............................................. 33
Monthly Deductions....................................................... 35
Transaction Charges...................................................... 36
Variable Account Asset (Daily) Charges................................... 36
Administrative Expenses................................................ 36
Distribution Financing Charge.......................................... 36
Deferred Acquisition Costs............................................. 36
Mortality and Expense Risk Charge...................................... 36
Taxes.................................................................... 37
Investment Advisory Fee.................................................. 37
Group or Sponsored Arrangements.......................................... 37
GENERAL PROVISIONS......................................................... 38
DISTRIBUTION OF THE POLICIES............................................... 39
FEDERAL TAX MATTERS........................................................ 40
Introduction............................................................. 40
Tax Charges.............................................................. 40
Tax Status of the Policy................................................. 40
Tax Treatment of Policy Benefits......................................... 41
Employment-Related Benefit Plans......................................... 44
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS............................... 44
VOTING RIGHTS OF THE VARIABLE ACCOUNT...................................... 44
STATE REGULATION OF PFL.................................................... 45
EXECUTIVE OFFICERS AND DIRECTORS OF PFL.................................... 45
YEAR 2000 MATTERS.......................................................... 45
LEGAL MATTERS.............................................................. 46
LEGAL PROCEEDINGS.......................................................... 46
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EXPERTS.................................................................... 46
ADDITIONAL INFORMATION..................................................... 46
INFORMATION ABOUT PFL'S FINANCIAL STATEMENTS............................... 47
APPENDIX A--SAMPLE ILLUSTRATIONS OF BENEFITS............................... 48
APPENDIX B--LONG TERM MARKET TRENDS........................................ 53
APPENDIX C--DOLLAR COST AVERAGING.......................................... 55
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The Policy is not available in all States.
THE PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
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DEFINITIONS
Accounts--Allocation options including the Fixed Account and Sub-Accounts of
the Variable Account.
Attained Age--The Issue Age plus the number of completed Policy years.
Anniversary--The same day and month as the Policy Date for each succeeding
year the Policy remains in Force.
Beneficiary--The person or persons specified by the Owner as entitled to
receive the death benefit proceeds under the Policy.
Cash Value--The sum of the values in each Sub-Account plus the Policy's
value in the Fixed Account.
Fixed Account--An allocation option other than the Variable Account. The
Fixed Account is part of PFL's General Account.
Funds--The Endeavor Series Trust and WRL Series Fund, Inc., registered
management investment companies in which the assets of the Variable Account
are invested.
General Account--The assets of PFL other than those allocated to the
Variable Account or any other separate account.
Guideline Premium--The level annual premium payment necessary to provide the
benefits selected by the Policyowner under the Policy through its Maturity
Date, based on the particular facts relating to the Insured and certain
assumptions allowed by law. The dollar amount of the Guideline Premium is
shown on the Policy's Schedule Page.
In Force--Condition under which the coverage is active and the Insured's
life remains insured.
Initial Premium--The amount which must be paid before coverage begins.
Insured--The person upon whose life the Policy is issued.
Issue Age--Issue Age refers to the age on the Insured's birthday nearest the
Policy Date.
Lapse--Termination of the Policy at the end of the grace period.
Loan Reserve--A part of the Fixed Account to which amounts are transferred
as collateral for Policy loans.
Maturity Date--The date when coverage under the Policy will terminate if the
Insured is living and the Policy is In Force.
Monthly Anniversary or Monthiversary--The same date in each succeeding month
as the Policy Date. For purposes of the Variable Account, whenever the Monthly
Anniversary falls on a date other than a Valuation Date, the Monthly
Anniversary will be deemed to be the next Valuation Date.
Net Surrender Value--The amount payable upon surrender of the Policy equal
to the Cash Value less indebtedness and less any surrender charge.
Net Premium--The portion of the premium available for allocation to either
the Fixed Account or the Sub-Accounts of the Variable Account equal to the
premium paid by the Policyowner less any applicable premium expense charges.
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Administrative Office--The administrative office of PFL whose mailing
address is 4333 Edgewood Road NE, Cedar Rapids, Iowa 52499.
Planned Periodic Premium--A scheduled premium of a level amount at a fixed
interval over a specified period of time. The Policy could lapse even if
Planned Periodic Premiums are paid in full and on schedule.
Policy--The flexible premium variable life insurance policy offered by PFL
and described in this Prospectus.
Policy Date--The date set forth in the Policy when insurance coverage is
effective and monthly deductions commence under the Policy. The Policy Date is
used to determine Policy years and Policy Months. Policy Anniversaries are
measured from the Policy Date.
Policy Month--A month beginning on the Monthly Anniversary.
Policyowner ("Owner")--The person who owns the Policy and who may exercise
all rights under the Policy while living.
Portfolio--A separate investment portfolio of the Funds.
Record Date--The date the Policy is recorded on the books of PFL as an In
Force Policy.
Specified Amount--The minimum death benefit payable under the Policy as long
as the Policy remains In Force. The death benefit proceeds will be reduced by
any outstanding indebtedness and any due and unpaid charges.
Sub-Account--A sub-division of the Variable Account. Each Sub-Account
invests exclusively in the shares of a specified Portfolio of the Funds.
Termination--Condition when the Insured's life is no longer insured under
the coverage provided.
Valuation Date--Each day on which the net asset value of the Fund is
determined.
Valuation Period--The period between two successive Valuation Dates,
commencing at the close of business of a Valuation Date and ending at the
close of business of the next succeeding Valuation Date.
Variable Account--PFL Variable Account, a separate investment account
established by PFL to receive and invest Net Premiums allocated to it under
the Policy.
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INTRODUCTION
1. WHAT IS THE DIFFERENCE BETWEEN THE POLICY AND A CONVENTIONAL FIXED-BENEFIT
LIFE INSURANCE POLICY?
Like conventional fixed-benefit life insurance, as long as the Policy
remains In Force, the Policy will provide for: (1) the payment of a minimum
death benefit to a Beneficiary upon the Insured's death; (2) the accumulation
of Cash Value; and (3) surrender rights and Policy loan privileges.
The Policy differs from conventional fixed-benefit life insurance by
allowing Policyowners to allocate Net Premiums to one or more Sub-Accounts of
the Variable Account, or to the Fixed Account, or to a combination of both.
Each Sub-Account invests in a designated Portfolio of the Fund. Unlike
conventional fixed-benefit life insurance, the amount and/or duration of the
life insurance coverage and the Cash Value of the Policy are not guaranteed
and may increase or decrease depending upon the investment experience of the
Variable Account. Accordingly, the Policyowner bears the investment risk of
any depreciation in value of the underlying assets of the Variable Account but
reaps the benefits of any appreciation in value. (See Allocation of Premiums
and Cash Value, p.31.) Unlike conventional fixed-benefit life insurance, a
Policyowner also has the flexibility, subject to certain restrictions (see
Premiums, p.29.), to vary the frequency and amount of premium payments and to
adjust the death benefits payable under the Policy by increasing or decreasing
the Specified Amount. Thus, unlike conventional fixed-benefit life insurance,
the Policy does not require a Policyowner to adhere to a fixed premium
schedule. Moreover, the failure to pay a scheduled premium ("Planned Periodic
Premium") will not itself cause the Policy to Lapse, although the Policy may
lapse even if the scheduled premiums are paid because additional premium
payments may be necessary to prevent Lapse if Net Surrender Value is
insufficient to pay certain monthly charges, and a grace period expires
without a sufficient payment. (See Policy Lapse and Reinstatement, p.31.)
2. WHAT DEATH BENEFIT OPTIONS ARE AVAILABLE UNDER THE POLICY?
The Policy provides for the payment of benefits upon the death of the
Insured. The Policy contains two death benefit options. Under Death Benefit
Option A, the death benefit is the greater of (a) the Specified Amount of the
Policy or (b) a specified percentage times the Cash Value of the Policy on the
date of death of the Insured. Under Death Benefit Option B, the death benefit
is the greater of (a) the Specified Amount of the Policy plus the Cash Value
of the Policy on the date of death of the Insured or (b) a specified
percentage of Cash Value of the Policy on the date of death of the Insured.
Under either death benefit option, as long as the Policy remains In Force, the
death benefit will not be less than the current Specified Amount of the
Policy. These proceeds will be reduced by any outstanding indebtedness and any
due and unpaid charges, and increased by any additional insurance benefits
added by rider and any unearned loan interest. The minimum Specified Amount
will be set forth in the Policyowner's Policy. (See Death Benefit, p.20.)
Benefits under the Policy may be paid in a lump sum or under one of the
settlement options set forth in the Policy. (See Payment of Policy Benefits,
p.28.)
3. HOW WILL THE CASH VALUE VARY?
The Policy's Cash Value in the Variable Account will increase or decrease to
reflect the amount and frequency of premium payments, the investment
experience of the chosen Sub-Accounts of the Variable Account, any partial
surrenders, and any charges imposed in connection with the Policy. The entire
investment risk for amounts allocated to the Variable Account is borne by the
Policyowner; PFL does not guarantee a minimum Cash Value. (See Cash Value,
p.23.)
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4. WHAT FLEXIBILITY DOES A POLICYOWNER HAVE TO ADJUST THE AMOUNT OF THE DEATH
BENEFIT?
The Policyowner has significant flexibility to adjust the death benefit
payable by increasing or decreasing the Specified Amount of the Policy or by
changing the Death Benefit Option type. No change in the Death Benefit Option
type may be made during the first three Policy years. The Policyowner may
change the death benefit option only once each Policy year after the third
Policy year. (See Death Benefit, p.20.) No increase in the Specified Amount
may be requested during the first Policy year nor on or after the Insured's
Attained Age 86, and no decrease may be requested during the first policy
year. Any increase in the Specified Amount will result in additional charges
and will be subject to PFL's underwriting requirement as well as Suicide
Exclusions and Incontestability restrictions. (See Death Benefit, p. 20, and
Monthly Deductions, p.35.)
5. WHAT FLEXIBILITY DOES A POLICYOWNER HAVE IN CONNECTION WITH PREMIUM
PAYMENTS?
A Policyowner has considerable flexibility concerning the amount and
frequency of premium payments. PFL will require the Policyowner to pay an
Initial Premium at least equal to a minimum monthly guaranteed coverage
premium set forth in the Policy before issuing the Policy. Thereafter, a
Policyowner may, subject to certain restrictions, make premium payments in any
amount and at any frequency. (See Premiums, p.29.)
Each Policyowner will also determine a Planned Periodic Premium schedule.
The schedule will provide for a premium payment of a level amount at a fixed
interval over a specified period of time. The amount and frequency of planned
premium payments will be prescribed in the Policy. The amount and frequency of
planned premium payments may be changed upon written request. Payment of the
planned premiums may not prevent the Policy from lapsing. (See Premiums,
p.29.)
6. HOW LONG WILL THE POLICY REMAIN IN FORCE?
The Policy will Lapse whenever Net Surrender Value is insufficient to pay
the monthly deduction (see Charges and Deductions, p. ), and a grace period
expires without a sufficient payment by the Policyowner. The Policy,
therefore, differs in two important respects from a conventional life
insurance policy. First, the failure to pay a Planned Periodic Premium will
not automatically cause the Policy to Lapse. Second, the Policy can lapse even
if Planned Periodic Premiums are paid on schedule, or premiums in other
amounts have been paid, if Net Surrender Value is insufficient to pay certain
monthly charges, and a grace period expires without a sufficient payment. If
the Insured is alive and the Policy is In Force on the Maturity Date, which is
the Policy Anniversary nearest the Insured's 100th birthday, the Policy will
then terminate and no longer be In Force as of the Maturity Date. The Net
Surrender Value as of the Maturity Date will be paid to the Policyowner.
However, the Policy has a "death benefit guarantee" that prevents lapse in
certain circumstances. During the first three Policy years, the Policy will
remain In Force and no grace period will begin provided there is no increase
in the Specified Amount or addition of any riders, and the total premiums paid
(minus any withdrawals and minus any outstanding loans) equals or exceeds the
minimum monthly guarantee premium times the number of months since the Policy
Date, including the current month. (See Policy Lapse and Reinstatement, p.31.)
7. HOW ARE NET PREMIUMS ALLOCATED?
The portion of the premium available for allocation ("Net Premium") equals
the premium paid less the premium expense charges. (See Premium Expense
Charges, p.32.) The Policyowner determines in the application how the Net
Premiums are to be allocated. Net
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premiums may be allocated to the Sub-Accounts of the Variable Account, the
Fixed Account, or a combination of both. Each Sub-Account invests in shares of
a designated mutual fund Portfolio. The Policyowner may change the allocation
of future premiums at any time by notifying PFL in writing. Each Portfolio has
a different investment objective. (See The Variable Account, p.14.)
The following thirteen Sub-Accounts are currently available under the
Policies:
1.Endeavor Money Market
2.Endeavor Asset Allocation
3.Endeavor Value Equity
4.Endeavor Opportunity Value
5.Endeavor Enhanced Index
6.Endeavor Select 50
7.Endeavor High Yield
8.Dreyfus Small Cap Value
9.Dreyfus U.S. Government Securities
10.T. Rowe Price Equity Income
11.T. Rowe Price Growth Stock
12.T. Rowe Price International Stock
13.WRL Growth
Sub-Accounts 1 through 12 each invest in a corresponding portfolio of the
Endeavor Series Trust, and Sub-Account 13 invests in the WRL Growth Portfolio
of the WRL Series Fund, Inc.
Subject to certain restrictions, a Policyowner may transfer amounts among
the Sub-Accounts of the Variable Account or from the Sub-Accounts to the Fixed
Account. Transfers may also be made from the Fixed Account to the Sub-Accounts
subject to certain restrictions. The transfer will be effective on the first
Valuation Date on or following the day appropriate notice of such transfer is
received at the Administrative Office. (See Transfers, p.24 and The Fixed
Account, p.18.)
8. IS THERE A "FREE-LOOK" PERIOD?
Yes, the Policy provides a free-look period. The Policyowner may cancel the
Policy within 10 days after the Policyowner receives it, or within 10 days
after PFL mails or delivers a written notice of withdrawal right to the
Policyowner, or within 45 days after signing the application, whichever is
latest. Certain states require a Free-Look period longer than 10 days, either
for all Policyowners or for certain classes of Policyowners. In most states,
PFL will refund the Net Premiums plus any charges previously deducted. (See
Examination of Policy Privilege, p.27.)
9. MAY THE POLICY BE SURRENDERED?
Yes, the Policyowner may totally surrender the Policy at any time and
receive the Net Surrender Value of the Policy (the Net Surrender Value is the
Cash Value less indebtedness less any surrender Charge). Subject to certain
limitations, the Policyowner may also make cash withdrawals from the Policy at
any time after the first Policy year and prior to the Maturity Date. (See
Surrender Privileges, p.26.) If Death Benefit Option A is in effect, cash
withdrawals will reduce the Policy's Specified Amount by the amount of the
cash withdrawal.
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Withdrawals (including total surrenders) may be taxable and subject to a
penalty tax (see Federal Tax Matters, p.40) and surrender charges (see
Contingent Surrender Charges, p.33).
10. WHAT IS THE LOAN PRIVILEGE?
After the first Policy Anniversary, a Policyowner may obtain a Policy loan
in any amount which is not greater than 90% of the Net Surrender Value. It
should be noted, however, that a loan taken from, or secured by, a Policy may
be treated as a taxable distribution, and also may be subject to a penalty
tax. (See Federal Tax Matters, p.40.)
The Loan Interest Rate is 8.0% per annum, charged in advance. Loan interest
is due at each anniversary. Interest not paid when due will be added to the
loan and bear interest at the same rate. The requested loan amount, plus
interest in advance, will be transferred from the Variable Account to the Loan
Reserve and credited with guaranteed interest at a rate of 4% per year (the
Loan Reserve is part of PFL's general account). PFL may from time to time, and
in its sole discretion, credit the Loan Reserve with additional interest at a
rate higher than 4% per year. The Loan Reserve is currently being credited
with a rate higher than 4% per year. The minimum loan amount is generally
$500. (See Policy Loans, p.25.) Upon repayment of a loan, amounts in the Loan
Reserve in excess of the outstanding value of the loan are currently
transferred to the Variable Account in the same manner as Net Premium
allocations.
There are risks involved in taking a Policy loan, which include the
additional potential for a Policy to lapse if projected earnings, taking into
account outstanding loans, are not achieved, as well as adverse tax
consequences which occur if a Policy lapses with loans outstanding. (See
Federal Tax Matters, p.40.)
11. WHAT CHARGES ARE ASSESSED IN CONNECTION WITH THE POLICY?
Various charges may be deducted from premiums, periodically from cash value,
and upon surrender. (See Charges and Deductions, p.32.)
Premium Charges. A sales charge and a premium tax charge may be deducted
from each premium. The sales charge is 2.5% of each premium, and the premium
tax charge is 2.5% of each premium (so the total deducted from each premium is
5.0% of the premium). These charges are guaranteed not to increase for the
life of the Policy. Currently, PFL intends to waive the 2.5% sales charge
after the tenth Policy year.
Surrender Charges. A surrender charge is deducted from certain early
surrenders or cash withdrawals. The Surrender Charge applies in the first
fifteen Policy Years (and in the first fifteen years after an increase in
Specified Amount) and consists of both a deferred sales charge of up to 26.5%
of premiums and a deferred issue (or underwriting) charge of up to $5.00 per
$1,000 of Specified Amount. However, there is a Free Withdrawal Amount: up to
10% of the Cash Value can be withdrawn free of surrender charge once each
Policy year after the first year.
Variable Account Asset (Daily) Charges. Various charges are deducted from
the assets of the Variable Account on a daily basis to compensate PFL for
mortality and expense risks (0.90%), administrative expenses (0.40%),
distribution expenses (0.50%), and deferred acquisition cost taxes (0.10%).
The total of these charges equals the daily equivalent of an annual charge of
1.90% of the Variable Account assets for the first ten policy years, and 1.30%
thereafter (the charges for distribution expenses and deferred acquisition
cost taxes only apply for ten years); these charges are guaranteed not to
increase for the life of the Policy. (None of these charges are deducted from
the Fixed Account).
Monthly Deductions. Two charges are deducted from the Cash Value each month.
There is a $5.00 monthly administrative charge (guaranteed not to increase),
and a monthly
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charge for the cost of insurance that varies according to the age, sex, and
risk classification of the insured.
Transaction Charges. There may be a transaction charge of $25 for each
transfer in excess of 12 in any one Policy Year (PFL currently waives this
charge). There is a charge for each partial withdrawal of Cash Value of the
lesser of $25 or 2% of the amount withdrawn.
Other Charges and Expenses. No charges are currently made from the Variable
Account for Federal or state income taxes. However, PFL reserves the right to
make deductions from the Variable Account to pay these taxes. (See Federal Tax
Matters, p.40.)
Management fees and other expenses are deducted from each applicable
Portfolio. The Management fees and other expenses for each portfolio for 1997,
stated as a percentage of the aggregate average daily net assets of the
Portfolio are as follows:
PORTFOLIO ANNUAL EXPENSES
(as a percentage of average net assets and after expense reimbursements)
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TOTAL PORTFOLIO
MANAGEMENT OTHER RULE 12B-1 ANNUAL
FEES EXPENSES FEES EXPENSES(/1/)
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ENDEAVOR SERIES TRUST
Endeavor Money Market......... 0.50% 0.10% -- 0.60%
Endeavor Asset Allocation..... 0.75% 0.09% -- 0.84%
Endeavor Value Equity......... 0.80% 0.09% -- 0.89%
Endeavor Opportunity Value.... 0.80% 0.35% -- 1.15%
Endeavor Enhanced Index....... 0.75% 0.55% -- 1.30%
Endeavor Select 50............ 1.10% 0.40% -- 1.50%
Endeavor High Yield........... 0.80% 0.50% -- 1.30%
Dreyfus Small Cap Value....... 0.80% 0.11% -- 0.91%
Dreyfus U.S. Government
Securities................... 0.65% 0.15% -- 0.80%
T. Rowe Price Equity Income... 0.80% 0.14% -- 0.94%
T. Rowe Price Growth Stock.... 0.80% 0.16% -- 0.96%
T. Rowe Price International
Stock........................ 0.90% 0.17% -- 1.07%
WRL SERIES FUND, INC.(/2/)
WRL Growth.................... 0.80% 0.07% -- 0.87%
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(/1/)Endeavor Investment Advisers has agreed, until terminated by it, to assume
expenses of the Portfolios that exceed the following rates: Endeavor Money
Market--0.99%; Endeavor Asset Allocation--1.25%; T. Rowe Price
International Stock--1.53%; Endeavor Value Equity--1.30%; Dreyfus Small
Cap Value--1.30%; T. Rowe Price Growth Stock--1.30%; Endeavor Opportunity
Value--1.30%; Endeavor Enhanced Index--1.30%; Endeavor Select 50--1.50%;
and Endeavor High Yield--1.30%. During 1997, Endeavor Investment Advisers
waived fees relative to, or reimbursed, the Endeavor Enhanced Index
Portfolio; the annualized operating expense ratio before
waiver/reimbursement by Endeavor Investment Advisers for the period ended
December 31, 1997, was 1.56%. Amounts shown for the Endeavor Select 50
Portfolio and the Endeavor High Yield Portfolio are estimated for 1998.
The fee table information relating to the Underlying Funds was provided to
PFL by the Underlying Funds, and PFL has not independently verified such
information.
(/2/)Effective January 1, 1997, the WRL Series Fund, Inc. adopted a Plan of
Distribution pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("Distribution Plan") and pursuant to the Distribution Plan, entered
into a Distribution Agreement with InterSecurities, Inc. ("ISI"),
principal underwriter for the WRL Series Fund, Inc. Under the Distribution
Plan, the WRL Series Fund, Inc., on behalf of the WRL Growth Portfolio, is
authorized to pay to various service providers, as direct payment for
expenses incurred in connection with the distribution of the Portfolio's
shares, amounts equal to actual expenses associated with distributing the
Portfolio's shares, up to a maximum rate of 0.15% (fifteen one-hundredths
of one percent) on an annualized basis of the average daily net assets.
This fee is measured and accrued daily and paid monthly. ISI has
determined that it would not seek payment by the WRL Series Fund, Inc. of
distribution expenses incurred with respect to any portfolio (including
the WRL Growth Portfolio) during the fiscal year ending December 31, 1998.
Owners will be notified in advance prior to ISI's seeking such
reimbursement in the future.
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12. ARE TRANSFERS PERMITTED AMONG THE ACCOUNTS?
Yes. A Policyowner may transfer amounts among the Sub-Accounts of the
Variable Account or from the Sub-Accounts to the Fixed Account. Transfers may
also be made from the Fixed Account to the Sub-Accounts subject to certain
restrictions. (See the Fixed Account, p.18.) PFL reserves the right to impose
a charge of $25 for each transfer following the first twelve transfers made
during any Policy year. However, PFL does not currently impose a charge for
transfers, regardless of the number made.
13. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PURCHASING A POLICY?
At present, there is only limited guidance for determining whether a Policy
meets the requirements prescribed by tax legislation for tax treatment as a
life insurance contract under Section 7702 of the Internal Revenue Code. PFL
nonetheless believes that a Policy issued on a standard rate class should meet
the Section 7702 definition of a life insurance contract. With respect to a
Policy that is issued on a substandard rate class (e.g., where higher cost of
insurance charges are imposed because of the insured's health or other
conditions) there is even less guidance to determine whether such a Policy
meets the Section 7702 definition of a life insurance contract. Thus, it is
not clear whether such a Policy would satisfy Section 7702, particularly if
the Policyowner pays the full amount of premiums permitted under the Policy.
If it is subsequently determined that a Policy does not qualify as a life
insurance contract, PFL will take whatever steps are appropriate and
reasonable to attempt to have such a Policy comply with Section 7702. For
these reasons, PFL reserves the right to modify the Policy as necessary to
attempt to qualify it as a life insurance contract under Section 7702.
Assuming that a Policy qualifies as a life insurance contract for federal
income tax purposes, PFL believes that the death benefit paid under the Policy
generally should be fully excludable from the gross income of the Beneficiary
for federal income tax purposes. Moreover, the Owner should not be deemed in
constructive receipt of Cash Values under a Policy until there is a
distribution from the Policy.
Policies may be treated as a "modified endowment contract" depending upon
the amount of premiums paid in relation to the death benefit. (See Tax
Treatment of Policy Benefits, p.41.) If the Policy is a modified endowment
contract, then all pre-death distributions, including Policy loans and loans
secured by a Policy, will be treated first as a distribution of taxable income
to the extent of any gain and then as a return of basis or investment in the
contract. In addition, prior to age 59 1/2 any distributions of gains
generally will be subject to a 10% penalty tax.
If a Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the contract and
then as disbursing taxable income. Moreover, loans and loans secured by a
Policy will not be treated as distributions. Finally, neither distributions
nor loans from a Policy that is not a modified endowment contract are subject
to the 10% penalty tax.
INQUIRIES AND WRITTEN NOTICES AND REQUESTS
Any questions about procedures or the Policy, or any Written Notice or
Written Request required to be sent to PFL, should be sent to PFL's
Administrative and Service Office, Financial Markets Division--Variable Life
Dept., 4333 Edgewood Road N.E., Cedar Rapids, Iowa 52499. Telephone requests
and inquires may be made by calling 800-525-6205. All inquiries, Notices and
Requests should include the Policy number and the Policyowner's name.
* * *
Note: The foregoing summary is qualified in its entirety by the detailed
information in the remainder of this Prospectus, in the prospectuses for the
Funds, and in the Policy, all of which should be referred to for more detailed
information. This Prospectus generally describes only the Policy and the
Variable Account. Separate prospectuses describe the Funds. (There is no
prospectus for the Fixed Account since interests in the Fixed Account are not
securities. See "The Fixed Account," p.18.)
- 11 -
<PAGE>
PAST INVESTMENT EXPERIENCE
The information provided in this section shows the historical investment
experience of the Portfolios and assumed investment experiences of the Sub-
Accounts based on the historical investment experience of the Portfolios. It
does not represent or project future investment performance. (The Sub-Accounts
are new and therefore do not have actual investment experience).
PFL from time to time may advertise the "total return" and the "average
return" of the Sub-Accounts and the Portfolios. Both total return and average
annual return figures are based on historical earnings and are not intended to
indicate future performance.
"Total Return" for a Portfolio refers to the total of the income generated
by the Portfolio net of total Portfolio operating expenses plus capital gains
or losses, realized or unrealized. "Total Return" for the Sub-Accounts refers
to the total of the income generated by the Portfolio less fees and operating
expenses and the Variable Account Asset Charges. "Average Annual Total Return"
reflects the hypothetical annually compounded return that would have produced
the same cumulative return if the Portfolio's or Sub-Account's performance had
been constant over the entire period. Because average annual total returns
tend to smooth out variations in the return of the Portfolio, they are not the
same as actual year-by-year results. Total Returns and Average Annual Total
Returns do not reflect the surrender charge.
Performance information may be compared, in reports and promotional
literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P 500"), Dow
Jones Industrial Average ("DJIA"), Shearson Lehman Aggregate Bond Index or
other unmanaged indices so that investors may compare the Sub-Account results
with those of a group of unmanaged securities widely regarded by investors as
representative of the securities markets in general; (ii) other groups of
variable life separate accounts or other investment products tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds and other investment products by overall performance, investment
objectives, and assets, or tracked by other services, companies, publications,
or persons, such as Morningstar, Inc., who rank such investment products on
overall performance or other criteria; or (iii) the Consumer Price Index (a
measure for inflation) to assess the real rate of return from an investment in
the Sub-Account. Unmanaged indices may assume the reinvestment of dividends
but generally do not reflect deductions for administrative and management
costs and expenses.
PFL may provide information on various topics of interest to Policyowners
and prospective Policyowners in advertising, sales literature, periodic
publications, or other materials. These topics may include the relationship
between sectors of the economy and the economy as a whole and its effect on
various securities markets, investment strategies and techniques (such as
value investing, market timing, dollar cost averaging, asset allocation,
constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles, and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparisons
between the Policies and the characteristics of and market for such financial
instruments.
The Policies were first offered to the public in 1998. However, total return
data may be advertised based on the period of time that the Portfolios have
been in existence. The results for any period prior to the Policies being
offered will be calculated as if the Policies had been offered during that
period of time, with all charges assumed to be those applicable to the
Policies.
Portfolio Performance Data. The following performance information of the
Portfolio reflects the total of the income generated by the Portfolio net of
total Portfolio operating expenses plus capital gains and losses, realized or
unrealized. It does not reflect the Policy or Separate Account charges.
- 12 -
<PAGE>
AVERAGE ANNUAL TOTAL RETURN OF THE PORTFOLIOS (through 12/31/97)
<TABLE>
<CAPTION>
10 YEARS* OF
PORTFOLIO INCEPTION DATE 1 YEAR 5 YEARS LIFE OF PORTFOLIO
- --------- -------------- ------ ------- -----------------
<S> <C> <C> <C> <C>
Endeavor Asset Allocation.... 04/08/91 20.14% 13.99% 13.79%
Endeavor Value Equity........ 05/27/93 24.81% 19.03%
Endeavor Opportunity Value... 11/18/96 16.81% 15.55%
Endeavor Enhanced Index...... 05/01/97 -- 22.90%
Endeavor Select 50........... 02/02/98 -- --
Endeavor High Yield.......... N/A -- --
Dreyfus Small Cap Value...... 05/04/93 25.56% 15.74%
Dreyfus U.S. Government
Securities.................. 05/09/94 9.15% 7.03%
T. Rowe Price Equity Income.. 01/03/95 28.27% 26.21%
T. Rowe Price Growth Stock... 01/03/95 28.57% 28.76%
T. Rowe Price International
Stock....................... 04/08/91 2.54% 10.14%
WRL Growth................... 10/02/86 17.54% 14.23% 18.66%*
</TABLE>
The annualized yield for the Endeavor Money Market Portfolio for the seven
days ending December 31, 1997 was 5.07%.
Sub-Account Performance. Although as of the date of this prospectus the Sub-
Accounts have not commenced operations and therefore have no performance
history, the following performance information of the Sub-Accounts assumes
that the Sub-Accounts have been in operation for the same periods as the
corresponding Portfolio and investing in the corresponding Portfolio. It
reflects the total of the income generated by the Portfolio net of total
Portfolio operating expenses, plus capital gains and losses, realized or
unrealized, net of the premium charges (5.00%), the monthly administrative
charge ($5.00), and Variable Account Asset Charges of 1.9% a year for the
first 10 years.
AVERAGE ANNUAL TOTAL RETURN OF THE SUB-ACCOUNTS (through 12/31/97)
<TABLE>
<CAPTION>
10 YEARS* OR
PORTFOLIO 1 YEAR 5 YEARS SINCE INCEPTION DATE
- --------- ------ ------- --------------------
<S> <C> <C> <C>
Endeavor Asset Allocation................. 12.13% 10.78% 10.87%
Endeavor Value Equity..................... 16.52% -- 15.61%
Endeavor Opportunity Value................ 8.99% -- 8.38%
Endeavor Enhanced Index................... -- -- 11.75%
Endeavor Select 50........................ -- -- --
Endeavor High Yield....................... -- -- --
Dreyfus Small Cap Value................... 17.23% -- 12.41%
Dreyfus U.S. Government Securities........ 1.79% -- 3.56%
T. Rowe Price Equity Income............... 19.77% -- 21.92%
T. Rowe Price Growth...................... 20.06% -- 24.40%
T. Rowe Price International Stock......... (4.43%) -- 6.11%
WRL Growth................................ 9.68% 11.02% 15.95%*
</TABLE>
- ----------------------------
* The above Sub-Account Performance figures do not reflect the Surrender
Charge (summarized above) or the cost of insurance charge.
Performance information for any Sub-Account reflects only the performance of
a hypothetical investment in the Sub-Account during the particular time period
on which the calculations are based. Performance information should be
considered in light of the investment objectives and policies, characteristics
and quality of the Portfolio in which the Sub-Account invests and the market
conditions during the given time period, and should not be considered as a
representation of what may be achieved in the future. Actual returns may be
more or less than those shown and will depend on a number of factors,
including the investment allocations by an owner and the different investment
rates of return for the Portfolios.
- 13 -
<PAGE>
PFL AND THE ACCOUNTS
PFL
PFL was originally incorporated under the laws of Iowa on April 19, 1991.
PFL is engaged in the business of issuing life insurance policies and annuity
contracts. PFL is admitted to do business in 49 states and the District of
Columbia. PFL is located in Cedar Rapids, Iowa; the mailing address is 4333
Edgewood Road NE, Cedar Rapids, Iowa 52499. PFL is a wholly-owned indirect
subsidiary of AEGON USA, Inc. AEGON USA, Inc. is a financial services holding
company whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON USA, Inc. is a wholly-owned indirect subsidiary of
AEGON nv, a Netherlands corporation, which is a publicly traded international
insurance group.
Published Ratings. PFL may from time to time publish in advertisements,
sales literature and reports to Policyowners, the ratings and other
information assigned to it by one or more independent rating organizations
such as A.M. Best Company, Standard & Poor's, and Duff & Phelps. The purpose
of the ratings is to reflect the financial strength and/or claims-paying
ability of PFL; the ratings should not be considered as bearing on the
investment performance or safety of assets held in the Variable Account. Each
year the A.M. Best Company reviews the financial status of thousands of
insurers, culminating in the assignment of Best's ratings. These ratings
reflect their current opinion of the relative financial strength and operating
performance of an insurance company in comparison to the norms of the
life/health insurance industry. In addition, the claims-paying ability of PFL
as measured by Standard and Poor's Insurance Ratings Services or Duff & Phelps
may be referred to in advertisements or sales literature or in reports to
Owners. These ratings are opinions of an operating insurance company's
financial capacity to meet the obligations of its insurance policies in
accordance with their terms. Claims-paying ability ratings do not refer to an
insurer's ability to meet non-policy obligations (i.e., debt/commercial
paper).
THE VARIABLE ACCOUNT
The PFL Endeavor Variable Life Account ("Variable Account") was established
by PFL as a separate account on April 4, 1995. The Variable Account will
receive and invest the Net Premiums paid under this Policy and other flexible
premium variable life insurance policies issued by PFL. Each Sub-Account
invests exclusively in shares of a single mutual fund Portfolio of the Funds.
The Variable Account currently is divided into thirteen Subaccounts.
Additional Subaccounts may be established in the future at the discretion of
PFL. Under Iowa law, the assets of the Variable Account are owned by PFL, but
they are held separately from the other assets of PFL and are not chargeable
with liabilities incurred in any other business operation of PFL (except to
the extent that assets in the Variable Account exceed the reserves and other
liabilities of the Variable Account). Income, gains, and losses incurred on
the assets in the Subaccounts of the Variable Account, whether or not
realized, are credited to or charged against that Subaccount without regard to
other income, gains or losses of any other Account or Subaccount of PFL.
Therefore, the investment performance of any Subaccount should be entirely
independent of the investment performance of PFL's general account assets or
any other Account or Subaccount maintained by PFL. The assets of the Variable
Account shall, however, be available to cover the liabilities of the General
Account of PFL to the extent that the Variable Account's assets exceed its
liabilities arising under the Policies supported by it.
The Variable Account is registered with the SEC under the Investment Company
Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a separate account under federal securities laws. However, the
SEC does not supervise the management or the investment practices or policies
of the Variable Account or PFL.
- 14 -
<PAGE>
The Variable Account will invest exclusively in shares of the Endeavor
Series Trust and the WRL Growth Portfolio of the WRL Series Fund, Inc.
(collectively the "Funds"). The Endeavor Series Trust is a series-type mutual
fund registered with the SEC under the 1940 Act as an open-end, diversified
management investment company. The registration of the Funds does not involve
supervision of the management or investment practices or policies of the Funds
by the SEC. Thirteen Portfolios of the Funds are available under the Policies:
1.Endeavor Money Market Portfolio;
2.Endeavor Asset Allocation Portfolio;
3.Endeavor Value Equity Portfolio;
4.Endeavor Opportunity Value Portfolio;
5.Endeavor Enhanced Index Portfolio;
6.Endeavor Select 50 Portfolio;
7.Endeavor High Yield Portfolio;
8.Dreyfus Small Cap Value Portfolio;
9.Dreyfus U.S. Government Securities Portfolio;
10.T. Rowe Price Equity Income Portfolio;
11.T. Rowe Price Growth Stock Portfolio;
12.T. Rowe Price International Stock Portfolio; and
13.WRL Growth Portfolio.
The assets of each Portfolio are held separate from the assets of the other
Portfolios, and each Portfolio has its own distinct investment objectives and
policies. Each Portfolio operates as a separate investment fund, and the
income or losses of one Portfolio generally have no effect on the investment
performance of any other Portfolio.
Endeavor Investment Advisers (the "Manager"), an investment adviser
registered with the SEC under the Investment Advisers Act of 1940 and an
affiliate of PFL, is the Endeavor Series Trust's manager. The Manager selects
and contracts with advisers for investment services for the Portfolios of
Endeavor Series Trust, reviews the advisers' activities, and otherwise
performs administerial and managerial functions for the Endeavor Series Trust.
The adviser of each portfolio of the Endeavor Series Trust (the sub-adviser
for the WRL Growth Portfolio of the WRL Series Fund) is listed below.
<TABLE>
<CAPTION>
PORTFOLIO ADVISER
- --------- -------
<S> <C>
Endeavor Money Market................. Morgan Stanley Asset Management Inc.
Endeavor Asset Allocation............. Morgan Stanley Asset Management Inc.
Endeavor Value Equity................. OpCap Advisors
Endeavor Opportunity Value............ OpCap Advisors
Endeavor Enhanced Index............... J.P. Morgan Investment Management Inc.
Endeavor Select 50.................... Montgomery Asset Management, LLC
Endeavor High Yield................... Massachusetts Financial Services Company
Dreyfus Small Cap Value............... The Dreyfus Corporation
Dreyfus U.S. Government Securities.... The Dreyfus Corporation
T. Rowe Price Equity Income........... T. Rowe Price Associates, Inc.
T. Rowe Price Growth.................. T. Rowe Price Associates, Inc.
T. Rowe Price International Stock..... Rowe-Price Fleming International, Inc.
WRL Growth............................ Janus Capital Corporation
</TABLE>
The Adviser of a Portfolio is responsible for selecting the investments of
the Portfolio consistent with the investment objectives and policies of the
Portfolio, and will conduct securities trading for the Portfolio. All Advisers
are investment advisers registered with the SEC under the Investment Advisers
Act of 1940.
Morgan Stanley Asset Management Inc. is a subsidiary of Morgan Stanley, Dean
Witter, and Discover & Co.; OpCap Advisors, formerly known as Quest for Value
Advisors, is a
- 15 -
<PAGE>
subsidiary of Oppenheimer Capital; J.P. Morgan Investment Management Inc. is a
wholly-owned subsidiary of J.P. Morgan and Co. Incorporated; Montgomery Asset
Management is a wholly-owned subsidiary of Commerzbank AG; Massachusetts
Financial Services Company is a subsidiary of Sun Life of Canada (U.S.)
Financial Services Holdings, Inc.; The Dreyfus Corporation is a wholly-owned
subsidiary of Mellon Bank, N.A.; Rowe-Price Fleming International, Inc. is a
joint venture between T. Rowe Price Associates, Inc. and Robert Fleming
Holdings Limited.
WRL Investment Management, Inc., a subsidiary of Western Reserve Life
Assurance Co. of Ohio (an affiliate of PFL) is the Adviser for the WRL Series
Fund, Inc. and contracts with Janus Capital Corporation (also an "Adviser") as
a sub-adviser to the Growth Portfolio of the WRL Series Fund, Inc.
The investment objectives of each Portfolio are summarized as follows:
Endeavor Money Market Portfolio--seeks current income, preservation of
capital and maintenance of liquidity through investment in short-term money
market securities. The Portfolio seeks to maintain a constant net asset value
of $1.00 per share although no assurances can be given that such constant net
asset value will be maintained.
Endeavor Asset Allocation Portfolio--seeks high total return through a
managed asset allocation portfolio of equity, fixed income and money market
securities.
Endeavor Value Equity Portfolio--seeks long-term capital appreciation
through investment in securities (primarily equity securities) of companies
that are believed by the Portfolio's Adviser to be undervalued in the
marketplace in relation to factors such as the companies' assets or earnings.
Endeavor Opportunity Value Portfolio--seeks growth of capital over time
through investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based upon the Portfolio
Adviser's assessment of relative values.
Endeavor Enhanced Index Portfolio--seeks to earn a total return modestly in
excess of the total return performance of the S&P 500 Composite Stock Index
(the "S&P 500 Index") while maintaining a volatility of return similar to the
S&P 500 Index.
Endeavor Select 50 Portfolio--seeks capital appreciation by investing at
least 65% of its total assets in at least 50 different equity securities of
companies of all sizes throughout the world. Each of five teams from different
investment management disciplines of the Portfolio's investment adviser
selects ten equity securities based on the potential for capital appreciation.
Endeavor High Yield Portfolio--seeks to maximize total return by investing
in a diversified portfolio of high yield fixed income securities that offer a
yield above that generally available on debt securities in the four highest
rating categories of the recognized rating services.
Dreyfus Small Cap Value Portfolio--seeks capital appreciation through
investments in a diversified portfolio consisting primarily of equity
securities of companies with market capitalizations of under $1 billion.
Dreyfus U.S. Government Securities Portfolio--seeks as high a level of total
return as is consistent with prudent investment strategies by investing under
normal conditions at least 65% of its assets in debt obligations and mortgage-
backed securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
- 16 -
<PAGE>
T. Rowe Price Equity Income Portfolio--seeks to provide substantial dividend
income and also capital appreciation by investing primarily in dividend paying
stocks of established companies.
T. Rowe Price Growth Stock Portfolio--seeks long-term growth of capital and
to increase dividend income through investment primarily in common stocks of
well established growth companies.
T. Rowe Price International Stock Portfolio--seeks long-term growth of
capital through investments primarily in common stocks of established non-U.S.
companies.
WRL Growth Portfolio--seeks growth of capital. At most times this portfolio
will be invested primarily in equity securities which are selected solely for
their capital growth potential; investment income is not a consideration.
PFL may from time to time receive revenue or fees from the underlying funds
or their advisers or sub-advisers for administrative, transfer agency,
information and other services. The amount of the fees, if any, may be based
on the amount of assets that PFL or the Variable Account invests in the
underlying funds.
THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS STATED OBJECTIVE.
MORE DETAILED INFORMATION, INCLUDING A DESCRIPTION OF EACH PORTFOLIO'S
INVESTMENT OBJECTIVE AND POLICIES AND A DESCRIPTION OF RISKS INVOLVED IN
INVESTING IN EACH OF THE PORTFOLIOS AND OF EACH PORTFOLIO'S FEES AND EXPENSES
IS CONTAINED IN THE PROSPECTUSES FOR THE FUNDS, CURRENT COPIES OF WHICH
ACCOMPANY THIS PROSPECTUS. INFORMATION CONTAINED IN THE FUNDS' PROSPECTUSES
SHOULD BE READ CAREFULLY BEFORE INVESTING IN A SUBACCOUNT OF THE VARIABLE
ACCOUNT.
An investment in the Variable Account, or in any Portfolio, including the
Endeavor Money Market Portfolio, is not insured or guaranteed by the U.S.
government or any agency of the government.
Addition, Deletion, or Substitution of Investments. PFL cannot and does not
guarantee that any of the Portfolios will always be available for Premium
Payments, allocations, or transfers. PFL retains the right, subject to any
applicable law, to make certain changes in the Variable Account and its
investments. PFL reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Funds, or of another registered open-end management investment company for the
shares of any Portfolio, if the shares of the Portfolio are no longer
available for investment or if, in PFL's judgment, investment in any Portfolio
would be inappropriate in view of the purposes of the Variable Account. To the
extent required by the 1940 Act, substitutions of shares attributable to an
Owner's interest in a Subaccount will not be made without prior notice to the
Owner and the prior approval of the SEC. Nothing contained herein shall
prevent the Variable Account from purchasing other securities for other series
or classes of variable insurance policies, or from effecting an exchange
between series or classes of variable insurance policies on the basis of
requests made by Owners.
New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio or
other investment vehicle. PFL may also eliminate one or more Subaccounts if,
in its sole discretion, marketing, tax, investment or other conditions warrant
such change, subject to applicable laws and regulations. In the event any
Subaccount is eliminated, PFL will notify Owners and request a reallocation of
the amounts invested in the eliminated Subaccount. If no such reallocation is
provided by the
- 17 -
<PAGE>
Owner, PFL will reinvest the amounts invested in the eliminated Subaccount in
the Subaccount that invests in the Endeavor Money Market Portfolio (or in a
similar portfolio of money market instruments) or in another Subaccount, if
appropriate.
In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, the Variable
Account may be (i) operated as a management company under the 1940 Act or any
other form permitted by law, (ii) deregistered under the 1940 Act in the event
such registration is no longer required or (iii) combined with one or more
other separate accounts. To the extent permitted by applicable law, PFL also
may transfer the assets of the Variable Account associated with the Policies
to another account or accounts.
THE FIXED ACCOUNT
This Prospectus is generally intended to serve as a disclosure document only
for the Policy and the Variable Account. For complete details regarding the
Fixed Account, see the Policy itself.
Premiums allocated and amounts transferred to the Fixed Account become part
of the general account of PFL, which supports insurance and annuity
obligations. Interests in the general account have not been registered under
the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the Investment Company Act of 1940
(the "1940 Act"). Accordingly, neither the general account nor any interests
therein are generally subject to the provisions of the 1933 or 1940 Acts and
PFL has been advised that the staff of the Securities and Exchange Commission
has not reviewed the disclosures in this Prospectus which relate to the Fixed
Account.
The Fixed Account is made up of all the general assets of PFL, other than
those in the Variable Account or in any other segregated asset account. The
Policyowner may allocate Premium Payments to the Fixed Account at the time of
Premium Payment or by subsequent transfers from the Variable Account. Instead
of the Policyowner bearing the investment risk as is the case for Policy Value
in the Variable Account, PFL bears the full investment risk for all Policy
Value in the Fixed Account. PFL has sole discretion to invest the assets of
its general account, including the Fixed Account, subject to applicable law.
PFL guarantees that it will credit interest to amounts in the Fixed Account
at an effective annual rate of at least 4.0% per year. PFL may, in its sole
discretion, credit amounts in the Fixed Account with interest at a Current
Interest Rate in excess of 4.0%. Once declared, a Current Interest Rate will
be guaranteed for at least one year. Transfers out of the Fixed Account are
subject to restrictions on amount and timing. (See "Transfers," p.24, and
"Surrender Privileges," p.26). For purposes of crediting interest, the oldest
payment or transfer into the Fixed Account, plus interest allocable to that
payment or transfer, is considered to be withdrawn or transferred out first;
the next oldest payment plus interest is considered to be transferred out
next, and so on (this is a "first-in, first-out" procedure).
PFL guarantees that, at any time prior to the Maturity Date, the amount in
the Fixed Account allocable to a particular Policy will be not less than the
amount of the Premium Payments allocated or transferred to the Fixed Account,
plus interest at the rate of 4.0% per year, plus any excess interest credited
to amounts in the Fixed Account, less any applicable premium or other taxes
allocable to the Fixed Account, and less any amounts deducted from the Fixed
Account for charges in connection with partial surrenders (including any
Contingent Deferred Sales Charges) or transfers to the Variable Account.
The Current Interest Rates will be determined by PFL in its sole discretion.
THE POLICYOWNER BEARS THE RISK THAT THE CURRENT INTEREST RATE WILL NOT EXCEED
4% PER YEAR.
- 18 -
<PAGE>
Fixed Account Value. The portion of the Cash Value allocated to the Fixed
Account (the "Fixed Account Value") will be credited with rates of interest,
as described below. Because the Fixed Account Value becomes part of PFL's
General Account, PFL assumes the risk of investment gain or loss on this
amount. All assets in the General Account are subject to PFL's general
liabilities from business operations.
At the end of any Valuation Period, the Fixed Account Value is equal to:
1.The sum of all Net Premium payments allocated to the Fixed Account; plus
2.Any amounts transferred from a Sub-Account to the Fixed Account; plus
3.Total interest credited to the Fixed Account; minus
4.Any amounts charged to pay for monthly deductions as they are due; minus
5.Any cash withdrawals or surrenders from the Fixed Account; minus
6.Any amounts transferred to a Sub-Account from the Fixed Account.
Minimum Guaranteed and Current Interest Rates. The Fixed Account Value,
including the Loan Reserve, is guaranteed to accumulate at a minimum effective
annual interest rate of 4%. PFL presently credits the Fixed Account Value with
current rates in excess of the minimum guarantee but it is not obligated to do
so. These current interest rates are influenced by, but do not necessarily
correspond to, prevailing general market interest rates. Because PFL, at its
sole discretion, anticipates changing the current interest rate from time to
time, different allocations to and from the Fixed Account Value will be
credited with different current interest rates.
PFL further guarantees that when a higher current interest rate is declared
on an allocation to the Fixed Account, that interest rate will be guaranteed
on such allocation for at least a one year period (the "Guarantee Period"),
unless the Cash Value associated with an allocation has been transferred to
the Loan Reserve. PFL reserves the right to apply a different current interest
rate to that part of the Cash Value equal to the Loan Reserve. At the end of
the Guarantee Period, PFL reserves the right to declare a new current interest
rate on such allocation and accrued interest thereon (which may be a different
current interest rate than the current interest rate on new allocations to the
Fixed Account on that date). The rate declared on such allocation and accrued
interest thereon at the end of each Guarantee Period will be guaranteed again
for another Guarantee Period. At the end of any Guarantee Period, any interest
credited on the Policy's Cash Value in the Fixed Account in excess of the
minimum guaranteed rate of 4% per year will be determined in the sole
discretion of PFL. The Policyowner assumes the risk that interest credited may
not exceed the minimum guaranteed rate.
Currently, for the purpose of crediting interest, allocations from the Fixed
Account Value are accounted for on a first in, first out method when used to
provide: a) cash withdrawal amounts, b) transfers to the Variable Account, or
c) monthly deduction charges.
PFL reserves the right to change the method of crediting interest from time
to time, provided that such changes will not have the effect of reducing the
guaranteed rate of interest below 4% per annum or shorten the Guarantee Period
to less than one year.
Allocations and Withdrawals. Net premium payments and transfers to the Fixed
Account will be allocated to the Fixed Account on the first Valuation Date on
or following the date PFL receives the payment or transfer request at its
Administrative Office, except that any allocation of any Net Premium received
prior to the Policy Date will take place on the Policy Date (or the Record
Date, if later).
For transfers from the Fixed Account to a Sub-Account, PFL reserves the
right to require that transfer requests be in writing and received at the
Administrative Office within 30 days after a Policy Anniversary. The amount
that may be transferred each Policy Year is limited to the greater of (a) 20%
of the amount in the Fixed Account, or (b) the amount transferred
- 19 -
<PAGE>
in the prior Policy year from the Fixed Account, unless PFL consents
otherwise. No transfer charge will apply to transfers from the Fixed Account
to a Sub-Account. Amounts may be withdrawn from the Fixed Account for cash
withdrawals and surrenders only upon written request of the Policyowner, and
are subject to any applicable requirement for a signature guarantee. (See
Policy Rights--Surrender Privileges, p.26.) PFL further reserves the right to
defer payment of transfers, cash withdrawals, or surrenders from the Fixed
Account for up to six months. In addition, Policy provisions relating to
transfers, cash withdrawals or surrenders from the Variable Account will also
apply to Fixed Account transactions.
POLICY RIGHTS AND BENEFITS
DEATH BENEFIT
Policyowners designate in the initial application one of two death benefit
options offered under the Policy: Death Benefit Option A ("Option A") and
Death Benefit Option B ("Option B"). As long as the Policy remains In Force,
(see Policy Lapse and Reinstatement--Lapse, p. ), PFL will, upon receiving due
proof of the Insured's death, pay the death benefit proceeds of a Policy to
the named Beneficiary in accordance with the designated death benefit option.
The amount of the death benefit proceeds payable will be determined at the end
of the Valuation Period during which the Insured dies. The proceeds may be
paid in a lump sum or under one or more of the settlement options set forth in
the Policy. (See Payments of Policy Benefits--Settlement Options, p.28.) PFL
guarantees that as long as the Policy remains In Force (see Policy Lapse and
Reinstatement--Lapse, p.31), the death benefit proceeds under either option
will never be less than the Specified Amount of the Policy, but the proceeds
will be reduced by any outstanding indebtedness and any due and unpaid
charges. These proceeds will be increased by any additional insurance In Force
and any unearned loan interest.
OPTION A. The death benefit is the greater of the Specified Amount of the
Policy or the applicable percentage (the "corridor percentage") times the Cash
Value on the date of death. The corridor percentage is 250% for an Insured age
40 or below on the Policy Anniversary prior to the date of death. For an
Insured with an Attained Age over 40 on a Policy Anniversary, the percentage
declines as shown in the following Corridor Percentage Table. Accordingly,
under Option A the death benefit will remain level unless the corridor
percentage times the Cash Value exceeds the Specified Amount, in which case
the amount of the death benefit will vary as the Cash Value varies.
OPERATION OF OPTION A. For purposes of this explanation, assume that the
Insured's Attained Age is under 40 and that there is no outstanding
indebtedness. Under Option A, a Policy with a $50,000 Specified Amount will
generally pay $50,000 in death benefits. However, because the death benefit
must be equal to or be greater than 250% of Cash Value, any time the Cash
Value of the Policy exceeds $20,000, the death benefit will exceed the $50,000
Specified Amount. Each additional dollar added to Cash Value above $20,000
will increase the death benefit by $2.50.
Similarly, so long as Cash Value exceeds $20,000, each dollar taken out of
Cash Value will reduce the death benefit by $2.50. If at any time, however,
the Cash Value multiplied by the corridor percentage is less than the
Specified Amount, the death benefit will equal the Specified Amount of the
Policy.
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<PAGE>
CORRIDOR PERCENTAGE TABLE
<TABLE>
<CAPTION>
ATTAINED AGE APPLICABLE PERCENTAGE
------------ ---------------------
<S> <C>
40 and under.......................... 250%
41 through 45......................... 250% minus 7% for each age over age 40
46 through 50......................... 215% minus 6% for each age over age 45
51 through 55......................... 185% minus 7% for each age over age 50
56 through 60......................... 150% minus 4% for each age over age 55
61 through 65......................... 130% minus 2% for each age over age 60
66 through 70......................... 120% minus 1% for each age over age 65
71 through 75......................... 115% minus 2% for each age over age 70
76 through 90......................... 105%
91 through 95......................... 105% minus 1% for each age over age 90
</TABLE>
OPTION B. The death benefit is equal to the greater of the Specified Amount
plus the Cash Value of the Policy or the corridor percentage times the Cash
Value on or prior to the date of death. The applicable percentage is 250% for
an Insured age 40 or below on the Policy Anniversary prior to the date of
death. For Insureds with an Attained Age over 40 on a Policy Anniversary, the
percentage declines as shown in the Corridor Percentage Table above.
Accordingly, under Option B the amount of the death benefit will always vary
as the Cash Value varies.
OPERATION OF OPTION B. For purposes of this explanation, assume that the
Insured is under the age of 40 and that there is no outstanding indebtedness.
Under Option B, a Policy with a Specified Amount of $50,000 will generally pay
a death benefit of $50,000 plus Cash Value. Thus, for example, a Policy with a
Cash Value of $10,000 will have a death benefit of $60,000 ($50,000 +
$10,000). The death benefit, however, must be at least 250% of Cash Value. As
a result, if the Cash Value of the Policy exceeds $33,333, the death benefit
will be greater than the Specified Amount plus Cash Value. Each additional
dollar of Cash Value above $33,333 will increase the death benefit by $2.50.
Similarly, any time Cash Value exceeds $33,333, each dollar taken out of
Cash Value will reduce the death benefit by $2.50. If at any time, however,
Cash Value multiplied by the corridor percentage is less than the Specified
Amount plus the Cash Value, then the death benefit will be the Specified
Amount plus the Cash Value of the Policy.
CHOOSING DEATH BENEFIT OPTION A OR OPTION B. As described above and assuming
the death benefit is not being determined by reference to the corridor
percentage, Option A will provide a Specified Amount of death benefit which
does not vary with changes in Cash Value. Thus, under Option A, as Cash Value
increases, PFL's net amount at risk under the Policy will decline. In
contrast, Option B involves a constant net amount at risk, again assuming that
the death benefit is not being determined by reference to the corridor
percentage. Therefore, assuming positive investment experience, the deduction
for cost of insurance under a Policy with an Option A death benefit will be
less than under a corresponding Policy with an Option B death benefit. Because
of this, if investment performance is positive, Cash Value under Option A will
increase faster than under Option B but the total death benefit under Option B
will generally be greater. Thus, Option A generally could be considered more
suitable for Policyowners whose goal is increasing Cash Values based upon
positive investment experience while Option B generally could be considered
more suitable for Policyowners whose goal is increasing total death benefits.
However, individual circumstances and goals should always be carefully
considered in choosing the death benefit option.
CHANGE IN SPECIFIED AMOUNT. Subject to certain limitations, a Policyowner
may increase or decrease the Specified Amount of a Policy. PFL reserves the
right to limit changes to once each Policy year. A change in Specified Amount
may affect the net amount
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<PAGE>
at risk, which may affect a Policyowner's cost of insurance charge. (See
Monthly Deductions--Cost of Insurance, p.35.) A change in Specified Amount
could also have Federal income tax consequences. (See Federal Tax Matters,
p.40.)
DECREASES. Any decrease in the Specified Amount will become effective on the
Monthly Anniversary date on or following receipt of a written request from the
Policyowner by PFL. No requested decrease in the Specified Amount will be
permitted during the first policy year. The Specified Amount remaining In
Force after any requested decrease may not be less than the minimum Specified
Amount set forth in the Policy. If, following the decrease in Specified
Amount, the Policy would not comply with the maximum premium limitations
required by Federal tax law (see Premiums, p.29), the decrease may be limited
to the extent necessary to meet these requirements. A decrease in the
Specified Amount will be applied against increases in the Specified Amount in
the reverse order from which the increases occurred.
INCREASES. For an increase in the Specified Amount, written application must
be submitted. PFL will also require that additional evidence of insurability
be submitted. PFL reserves the right to decline any increase request. Any
increase will become effective on the effective date shown on an endorsement
to the Policy. The effective date of the increase will be the Monthly
Anniversary on or following written approval of the increase by PFL. No
increase in the Specified Amount will be permitted during the first Policy
year nor on or after the Insured's Attained Age of 86. An increase need not be
accompanied by an additional premium, but there must be sufficient Net
Surrender Value to cover the next monthly deduction after the increase becomes
effective. (See Charges and Deductions, p.32.)
CHANGE IN DEATH BENEFIT OPTION. Generally, the death benefit option in
effect may be changed by the Policyowner once each Policy year after the third
Policy year by sending PFL a written request for change. A change in death
benefit option may have Federal income tax consequences. (See Federal Tax
Matters, p.40.)
Under PFL's current rules, no change may be made if it would result in a
Specified Amount less than the minimum Specified Amount set forth in the
Policy. The effective date of any change will be the Monthly Anniversary on or
following receipt of the request. No charges will be imposed for making a
change in death benefit option.
If the death benefit option is changed from Option B to Option A, the
Specified Amount will be increased by an amount equal to the Policy's Cash
Value on the effective date of change. If the death benefit option is changed
from Option A to Option B, the Specified Amount will be decreased by an amount
equal to the Cash Value on the effective date of the change.
CORRIDOR PERCENTAGE. If, pursuant to requirements of the Internal Revenue
Code of 1986, as amended, the death benefit under a Policy is determined by
reference to the corridor percentages discussed above, the Policy is described
as "in the corridor," and an increase in the Cash Value of the Policy will
increase the net amount at risk assumed by PFL and consequently, increase the
cost of insurance deducted from the Cash Value of the Policy. (See Cost of
Insurance, p.35.)
INSURANCE PROTECTION. A Policyowner may increase or decrease the pure
insurance protection provided by a Policy (i.e., the difference between the
death benefit and the Cash Value) in one of several ways as insurance needs
change. These ways include increasing or decreasing the Specified Amount of
insurance, changing the level of premium payments, and, to a lesser extent,
making a cash withdrawal from the Policy. Although the consequences of each of
these methods will depend upon the individual circumstances, they may be
generally summarized as follows:
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<PAGE>
(a) A decrease in the Specified Amount will, subject to the corridor
percentage (see Death Benefit, p.20), in general decrease the insurance
protection and the charges under the Policy without reducing the Cash
Value.
(b) Under Death Benefit Option A, an increased level of premium payments
also will reduce the pure insurance protection, until the corridor
percentage times the Cash Value exceeds the Specified Amount. Furthermore,
increased premiums should increase the amount of funds available to keep
the Policy In Force.
(c) A cash withdrawal will reduce the death benefit. (See Surrender
Privileges, p.26.) However, it has no effect on the amount of pure
insurance protection and charges under the Policy, unless the death benefit
payable is governed by the corridor percentages.
(d) An increase in the Specified Amount may increase the amount of pure
insurance protection, depending on the amount of Cash Value and the
resultant corridor percentage. If the insurance protection is increased,
the Policy charges generally will increase as well.
(e) A reduced level of premium payments also generally increases the
amount of pure insurance protection under Option A, or maintains the same
amount of pure insurance protection if Option B is elected, again depending
on the corridor percentage. Furthermore, it results in a reduced amount of
Cash Value and increases the possibility that the Policy will Lapse.
Increases or decreases in a Policy's insurance protection may have adverse
Federal income tax consequences. (See Tax Treatment of Policy Benefits, p.41.)
HOW DEATH BENEFITS MAY VARY IN AMOUNT. As long as the Policy remains In
Force, PFL guarantees that the death benefit will never be less than the
Specified Amount of the Policy. These proceeds will be reduced by any
outstanding indebtedness and any due and unpaid charges. The death benefit
may, however, vary with the Policy's Cash Value. Under Option A, the death
benefit will only vary when the Cash Value multiplied by the corridor
percentage exceeds the Specified Amount of the Policy. The death benefit under
Option B will always vary with the Cash Value because the death benefit equals
either the Specified Amount plus the Cash Value or the corridor percentage
times the Cash Value.
HOW THE DURATION OF THE POLICY MAY VARY. The duration of the Policy depends
upon the Net Surrender Value. The Policy will remain In Force until maturity
so long as the Net Surrender Value is sufficient to pay the monthly deduction.
(See Charges and Deductions, p.32.) Where, however, Net Surrender Value is
insufficient to pay the monthly deduction, and a grace period expires without
an adequate payment by the Policyowner, the Policy will Lapse and terminate
without value, except as provided for with respect to death benefit
guarantees. (See Policy Lapse and Reinstatement, p.31.)
CASH VALUE
At the end of any Valuation Period, the Cash Value of the Policy is equal to
the sum of the Sub-Account values of the Variable Account plus the Fixed
Account Value. There is no guaranteed minimum Cash Value.
NET SURRENDER VALUE. A Policyowner may at any time surrender the Policy and
receive the Policy's Net Surrender Value. (See Surrender Privileges, p.26.)
The Net Surrender Value as of any date is equal to:
(1) the Cash Value as of such date; minus
(2) any surrender charge as of such date (as described on p.34); minus
(3) any outstanding Policy loan; plus
(4) any unearned loan interest.
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<PAGE>
DETERMINATION OF VALUES IN THE VARIABLE ACCOUNT. On the Policy Date, the
Policy's value in a Sub-Account of the Variable Account will equal the portion
of any Net Premium allocated to the Sub-Account reduced by the portion of the
first monthly deduction allocated to that Sub-Account. (See Allocation of
Premiums and Cash Value, p.31.) Thereafter, on each Valuation Date, the
Policy's value in a Sub-Account of the Variable Account will equal:
(1) The Policy's value in the Sub-Account on the preceding Valuation
Date, multiplied by the experience factor for the current Valuation Period;
plus
(2) Any Net Premium payments received during the current Valuation Period
which are allocated to the Sub-Account; plus
(3) All values transferred to the Sub-Account from the Loan Reserve, from
the Fixed Account or from another Sub-Account during the current Valuation
Period; minus
(4) All values transferred from the Sub-Account to the Loan Reserve, to
the Fixed Account or to another Sub-Account during the current Valuation
Period; minus
(5) All cash withdrawals from the Sub-Account during the current
Valuation Period; minus
(6) The portion of the monthly deduction allocated to the Sub-Account
during the current Valuation Period.
The Policy's total value in the Variable Account equals the sum of the
Policy's value in each Sub-Account. (For a description of how the values of
the Fixed Account are calculated, see The Fixed Account, p.18.) A Policy's
Cash Value cannot be predetermined because the Cash Value is dependent upon a
number of variables, including the investment experience of the chosen Sub-
Accounts of the Variable Account, the frequency and amount of premium
payments, transfers and surrenders, and charges assessed in connection with
the Policy.
THE EXPERIENCE FACTOR. The experience factor measures investment experience
during a Valuation Period. Each Sub-Account has its own distinct experience
factor. In calculating a Sub-Account's experience factor for a Valuation
Period, the net asset value for each share of the corresponding Portfolio at
the end of the current Valuation Period is increased by the amount per
Portfolio share of any dividend or capital gain distribution declared by the
Portfolio during the current Valuation Period and decreased by a charge for
any applicable taxes. The total is then divided by the net asset value per
Portfolio share at the end of the preceding Valuation Period. A charge equal
to the Variable Account Asset Charges is then subtracted. (See Variable
Account Asset (Daily) Charges, p.36.)
TRANSFERS
Cash Value may be transferred among the Sub-Accounts of the Variable Account
or from the Sub-Accounts to the Fixed Account. Transfers may also be made from
the Fixed Account to the Sub-Accounts, subject to certain restrictions. (See
The Fixed Account, p.18.) The minimum amount that may be transferred is $100,
or the entire Sub-Account value if less. The amount of Cash Value available
for transfer from any Sub-Account, or the Fixed Account, is determined at the
end of the Valuation Period during which the transfer request is received at
the Administrative Office. The net asset value for each share of the
corresponding Portfolio of any Sub-Account is determined, once daily, as of
the close of the regular business session of the New York Stock Exchange
(currently 4:00 p.m. Eastern time), which coincides with the end of each
Valuation Period. Therefore, any transfer request received after 4:00 p.m.,
Eastern time, on any day the New York Stock Exchange is open for business will
be processed utilizing the net asset value for each share of the applicable
Portfolio determined as of 4:00 p.m., Eastern time, on the next day the New
York Stock Exchange is open for business. Cash Value available for transfer
from the Fixed Account will be determined in the same manner.
- 24 -
<PAGE>
Policyowners may make transfer requests in writing, or by telephone. Written
requests must be in a form acceptable to PFL. PFL permits all Policyowners to
make telephone transfers upon request without the necessity for the
Policyowner to have previously authorized telephone transfers in writing. If,
for any reason, a Policyowner does not want the ability to make transfers by
telephone, the Policyowner should provide written notice to PFL at its
Administrative Office. All telephone transfers should be made by calling PFL
at our toll-free number 1-800-525-6205. PFL will not be liable for complying
with telephone instructions it reasonably believes to be authentic, nor for
any loss, damage, cost or expense in acting on such telephone instructions,
and Policyowners will bear the risk of any such loss. PFL will employ
reasonable procedures to confirm that telephone instructions are genuine. If
PFL does not employ such procedures, it may be liable for losses due to
unauthorized or fraudulent instructions. Such procedures may include, among
others, requiring forms of personal identification prior to acting upon such
telephone instructions, providing written confirmation of such transactions to
Policyowners, and/or tape recording of telephone instructions received from
Policyowners. PFL reserves the right to limit transfers to 12 in any one
Policy Year. PFL may, at any time, revoke or modify the transfer privilege.
Under PFL's current procedures, it will effect transfers and determine all
values in connection with transfers at the end of the Valuation Period during
which the transfer request is received at the Administrative Office.
Although PFL does not currently impose a charge for any transfers, PFL
reserves the right to impose a $25 charge for each transfer after the first
twelve transfers during any Policy Year. (See Transfers, p.24.)
POLICY LOANS
After the first Policy year and so long as the Policy remains In Force, the
Policyowner may borrow money from PFL using the Policy as the only security
for the loan. The maximum amount that may be borrowed is 90% of the Cash
Value, less any surrender charge and any already outstanding Policy loan. PFL
reserves the right to limit the amount of any Policy loan to not less than
$500. Outstanding loans have priority over the claims of any assignee or other
person. The loan may be repaid totally or in part before the Maturity Date of
the Policy and while the Policy is In Force. A loan which is taken from, or
secured by, a Policy may have Federal income tax consequences. (See Federal
Tax Matters, p.40.)
An amount equal to the loan plus interest in advance until the next
anniversary will be withdrawn from the Account or Accounts specified and
transferred to the Loan Reserve until the loan is repaid. The Sub-Accounts of
the Variable Account may be specified. If no Account is specified, the loan
amount will be withdrawn from each Account in the same manner as the current
premium allocation instructions.
The loan will normally be paid within seven days after receipt of a request
in a manner permitted by PFL. Postponement of loans may take place under
certain conditions. (See General Provisions, p.38.) Under PFL's current
procedures, at each Anniversary, PFL will compare the amount of the
outstanding loan (including interest since the prior Policy Anniversary, if
not paid) to the amount in the Loan Reserve. PFL will also make this
comparison any time the Policyowner repays all or part of the loan. At each
such time, if the amount of the outstanding loan exceeds the amount in the
Loan Reserve, PFL will withdraw the difference from the Accounts and transfer
it to the Loan Reserve in the same manner as when a loan is made. If the
amount in the Loan Reserve exceeds the amount of the outstanding loan, PFL
will withdraw the difference from the Loan Reserve and transfer it to the
Accounts in the same manner as Net Premiums are allocated. (See The Fixed
Account, p.18.) No charge will be imposed for these transfers.
INTEREST RATE CHARGED. The interest rate charged on Policy loans is at the
rate of 8% payable in advance on each Policy Anniversary. If unpaid when due,
interest will be added
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<PAGE>
to the amount of the loan and will become part of the loan and bear interest
at the same rate.
LOAN RESERVE INTEREST RATE CREDITED. The amount transferred to the Loan
Reserve will accrue interest daily at an annual rate not less than 4%. The
rate is determined by PFL as authorized by its Board of Directors. The Loan
Reserve interest credited will be transferred to the Sub-Accounts: (1) each
Policy Anniversary; (2) when a new loan is made; (3) when a loan is partially
or fully repaid; and (4) when an amount is needed to meet a monthly deduction.
The amount of interest charged may be more or less than the amount of interest
credited to the Loan Reserve during any Policy year.
EFFECT OF POLICY LOANS. A Policy loan affects the Policy since the death
benefit and Net Surrender Value under the Policy are reduced by the amount of
the loan. Repayment of the loan causes the death benefit and Net Surrender
Value to increase by the amount of the repayment.
As long as a loan is outstanding, an amount equal to the loan plus unpaid
interest is held in the Loan Reserve. This amount will not be affected by the
Variable Account's investment performance. Amounts transferred from the
Variable Account to the Loan Reserve will affect the Variable Account value
because such amounts will be credited with an interest rate declared by PFL
rather than a rate of return reflecting the investment performance of the
Variable Account. (See The Fixed Account, p.18.)
There are risks involved in taking a Policy loan, a few of which include the
potential for a Policy to lapse if projected earnings, taking into account
outstanding loans, are not achieved, as well as adverse tax consequences which
may occur if a Policy lapses with loans outstanding. (See Federal Tax Matters,
p.40.)
INDEBTEDNESS. Indebtedness equals the total of all Policy loans less any
unearned loan interest on the loans. If indebtedness exceeds the Cash Value
less the then applicable surrender charge, PFL will notify the Policyowner and
any assignee of record. If a sufficient payment equal to excess indebtedness
is not received by PFL within 61 days from the date notice is sent, the Policy
will Lapse and terminate without value. The Policy, however, may later be
reinstated. (See Policy Lapse and Reinstatement, p.31.)
REPAYMENT OF INDEBTEDNESS. Indebtedness may be repaid any time before the
Maturity Date of the Policy and while the Policy is In Force. Payments made by
the Policyowner while there is indebtedness will be treated as premium
payments unless the Policyowner indicates that the payment should be treated
as a loan repayment. (See Benefits at Maturity, p.28.) If not repaid, PFL may
deduct indebtedness from any amount payable under the Policy. As indebtedness
is repaid, the Policy's value in the Loan Reserve securing the indebtedness
repaid will be transferred from the Loan Reserve to the Accounts in the same
manner as Net Premiums are allocated. PFL will allocate the repayment of
indebtedness at the end of the Valuation Period during which the repayment is
received.
SURRENDER PRIVILEGES
At any time before the earlier of the death of the Insured or the Maturity
Date, the Policyowner may totally surrender or, after the first Policy year,
make a cash withdrawal from the Policy by sending a written request to PFL.
The amount available for surrender is the Net Surrender Value at the end of
the Valuation Period during which the surrender request is received at the
Administrative Office. The Net Surrender Value is equal to the Cash Value less
indebtedness and less any surrender charge. (See Contingent Surrender Charges,
p.33.) Surrenders from the Variable Account will generally be paid within
seven days of receipt of the written request. Postponement of payments may,
however, occur in certain circumstances. (See General Provisions, p.38.)
Additional restrictions may be applied to
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<PAGE>
surrenders from the Fixed Account. (See The Fixed Account, p.18.) For the
protection of Policyowners, all requests for cash withdrawals or total
surrenders of more than $50,000, or where the withdrawal or surrender proceeds
are to be sent to an address other than the address of record, will require a
signature guarantee. All required guarantees of signatures must be made by a
national or state bank, a member firm of a national stock exchange or any
other institution which is an eligible guarantor institution (such as, banks,
broker-dealers, credit unions, and savings associations). If the Policyowner
is a corporation, partnership, trust or fiduciary, evidence of the authority
of the person seeking redemption is required before the request for withdrawal
is accepted, including withdrawals under $50,000. For additional information,
Policyowners may call PFL at (800) 525-6205. A cash withdrawal or total
surrender may have Federal income tax consequences. (See Federal Tax Matters,
p.40.)
TOTAL SURRENDERS. If the Policy is being totally surrendered, the Policy
itself must be returned to PFL along with the request. A Policyowner may elect
to have the amount paid in a lump sum or under a settlement option. (See
Payment of Policy Benefits, p.28.)
CASH WITHDRAWALS. For a cash withdrawal, the amount withdrawn must be at
least $500 and must not cause the Net Surrender Value after the cash
withdrawal to be less than $500. The amount paid will be deducted from the
Policy's Cash Value at the end of the Valuation Period during which the
request is received. A charge equal to the lesser of $25 or 2% of the amount
withdrawn will be deducted from the amounts withdrawn from the Policy, and the
balance will then be paid to the Policyowner. The amount will be deducted from
the Accounts in the same manner as the current premium allocation instructions
unless the Policyowner directs otherwise. Cash withdrawals free of surrender
charge are allowed only once each Policy year.
Cash withdrawals will affect both the Policy's Cash Value and the death
benefit payable under the Policy. The Policy's Cash Value will be reduced by
the amount of the cash withdrawal. Moreover, the death benefit proceeds
payable under a Policy will generally be reduced by at least the amount of the
cash withdrawal.
In addition, when death benefit Option A is in effect, the Specified Amount
will be reduced by the cash withdrawal. No cash withdrawal will be permitted
which would result in a Specified Amount lower than the minimum Specified
Amount set forth in the Policy or would deny the Policy status as life
insurance under the Internal Revenue Code and applicable regulations.
EXAMINATION OF POLICY PRIVILEGE ("FREE-LOOK")
The Policyowner may cancel the Policy within 10 days after the Policyowner
receives it, or 10 days after PFL mails or delivers a written notice of
withdrawal right to the Policyowner or within 45 days after signing the
application, whichever is latest. Certain states require a Free-Look period
longer than 10 days, either for all Policyowners or for certain classes of
Policyowners. In such states, PFL will comply with the specific requirements
of those states. The Policyowner should mail or deliver the Policy to either
PFL or the agent who sold it. If the Policy is cancelled in a timely fashion,
a refund will be made to the Policyowner. The refund will equal the sum of:
(i) the difference between the premiums paid and the amounts allocated to any
Accounts under the Policy; (ii) the total amount of monthly deductions made
and any other charges imposed on amounts allocated to the Accounts; and (iii)
the value of amounts allocated to the Accounts on the date PFL or its agent
receives the returned Policy. If state law prohibits the calculation above,
the refund will equal the total of all premiums paid for the Policy.
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<PAGE>
BENEFITS AT MATURITY
If the Insured is living and the Policy is In Force, PFL will pay the Net
Surrender Value of the Policy on the Maturity Date. The Policy will mature on
the Anniversary nearest the Insured's 100th birthday, if the Insured is living
and the Policy is In Force.
PAYMENT OF POLICY BENEFITS
Death benefits under the Policy will ordinarily be paid within seven days
after PFL receives due proof of death, and verifies the validity of the claim.
Other benefits will ordinarily be paid within seven days of receipt of proper
written request (including an election as to tax withholding). Payments may be
postponed in certain circumstances. (See General Provisions, p.38 and The
Fixed Account, p.18.) The Policyowner may decide the form in which the
benefits will be paid. During the Insured's lifetime, the Policyowner may
arrange for the death benefits to be paid in a lump sum or under one or more
of the settlement options described below. These choices are also available if
the Policy is surrendered or matures. If no election is made, PFL will pay the
benefits in a lump sum.
When death benefits are payable in a lump sum, the Beneficiary may select
one or more of the settlement options. If death benefits become payable under
a settlement option and the Beneficiary has the right to withdraw the entire
amount, the Beneficiary may name and change contingent Beneficiaries.
SETTLEMENT OPTIONS. Policyowners and Beneficiaries, subject to a prior
election of the Policyowner, may elect to have benefits paid in a lump sum or
in accordance with a variety of settlement options offered under the Policy.
Proceeds of less than $1,000 may not be applied under any settlement option.
PFL may change the payment frequency if payments under an option become less
than $20. Once a settlement option is in effect, there will no longer be value
in the Variable Account or the Fixed Account. PFL may make other settlement
options available on the Fixed Account in the future. The effective date of a
settlement provision will be either the date of surrender or the date of death
of the Insured. For additional information concerning these options, see the
Policy itself.
OPTION 1--INTEREST PAYMENTS. The interest on the proceeds will be paid at
intervals and for a period chosen by the Policyowner and approved by PFL. The
Policyowner may withdraw the proceeds in amounts of at least $100. At the end
of the period, any remaining proceeds will be paid in either a lump sum or
under any other method approved by PFL.
OPTION 2--PAYMENTS FOR A FIXED PERIOD. The proceeds plus interest will be
paid in equal monthly installments for the period chosen until the fund has
been paid in full. The period chosen may not exceed 30 years.
OPTION 3--LIFE INCOME. The proceeds will be paid in equal installments for
the guaranteed payment period elected and continue for the life of the person
on whose life the option is based. Such installments will be payable: (a)
during the lifetime of the payee or (b) during a fixed period certain and for
the remaining lifetime of the payee or (c) until the sum of installments paid
equals the proceeds applied and for the remaining life of the payee.
Guaranteed payment periods may be elected for 10 or 20 years, or the period in
which the total payments will equal the amount retained.
OPTION 4--PAYMENTS OF A SPECIFIED AMOUNT. The proceeds and interest will be
paid monthly in a specified amount until all proceeds and interest are paid in
full.
OPTION 5--JOINT AND SURVIVOR LIFE INCOME. The proceeds will be paid during
the joint lifetime of two persons and continue upon the death of the first
payee for the remaining lifetime of the survivor.
- 28 -
<PAGE>
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
Individuals wishing to purchase a Policy must send a completed application
to PFL, 4333 Edgewood Road NE, Cedar Rapids, Iowa 52499. Under PFL's current
rules, the minimum Specified Amount of a Policy is generally $50,000. Policies
will generally be issued only to Insureds 85 years of age or under who supply
satisfactory evidence of insurability sufficient to PFL. PFL may, however, at
its sole discretion, issue a Policy to an individual above the age of 85.
Acceptance is subject to PFL's underwriting rules and PFL reserves the right
to reject an application for any reason permitted by law.
TEMPORARY INSURANCE COVERAGE
The full Initial Premium indicated on the application must be paid on or
before the date on which the Policy is delivered to the Policyowner. When the
full Initial Premium is not submitted with the application, no insurance under
a Policy will take effect (a) until a policy is delivered and the full Initial
Premium is paid while the person to be insured is living, and (b) unless
information in the application continues to be true and complete, without
material change, as of the time the Initial Premium is paid.
Temporary Insurance Coverage is provided subject to certain conditions: (a)
the full Initial Premium is submitted with the application; and (b) PFL
determines to its satisfaction that on the date the application is signed and
submitted with the initial payment the proposed Insured and all additional
Insureds proposed for coverage were insurable and acceptable under PFL's
underwriting rules and standards for insurance in the amount and plan applied
for in the application. The insurance protection applied for, subject to the
limits of liability and in accordance with the terms set forth in the Policy
and in the conditional receipt, will by reason of such payment take effect on
the later of the date of the application or the date of completion of all
medical tests and examinations, if required. The maximum amount of such
temporary insurance coverage is the lesser of the amount applied for or
$100,000 minus any amounts payable under other insurance on the life of the
proposed Insured In Force with PFL. Temporary insurance coverage expires on
the earliest of the following dates: (1) the date PFL approves the Policy as
applied for; or (2) at the end of the fraction of a year which the payment
bears to the premium required to provide one month of insurance coverage; or
(3) at the beginning of the sixtieth (60th) day following the date of the
conditional receipt.
If an Initial Premium of $2,000 or more is paid upon submission of the
application, amounts allocated to the Variable Account will be allocated to
the Money Market Portfolio upon receipt by PFL until the date the Policy is
recorded on PFL's books (the Record Date). In such instances, the Policy Date
will ordinarily be the date of receipt of the premium payment. If an Initial
Premium of less than $2,000 is paid with the application, such amounts will be
held by PFL until the Policy Date. In such instances, both the Record Date and
the Policy Date will ordinarily be the date the Policy goes In Force.
Insurance coverage under the Policy and associated monthly deductions commence
on the Policy Date. In either case, the Record Date of the Policy will be the
date on which the Policy is recorded on PFL's books as an In Force Policy and
PFL will allocate Net Premiums to the Accounts on the first Valuation Date on
or following the Record Date in accordance with the directions in the
application. (See Allocation of Premiums and Cash Value, p.31.)
PREMIUMS
Subject to certain limitations, a Policyowner has flexibility in determining
the frequency and amount of premiums.
- 29 -
<PAGE>
PREMIUM FLEXIBILITY. Unlike conventional insurance policies, this Policy
frees the Policyowner from the requirement that premiums be paid in accordance
with a rigid and inflexible Premium schedule. PFL may require the Policyowner
to pay an Initial Premium at least equal to a minimum monthly guarantee
premium set forth in the Policy. (See Premium Expense Charges, p.32.)
Thereafter, subject to the minimum and maximum premium limitations described
below, a Policyowner may make unscheduled premium payments at any time and in
any amount.
PLANNED PERIODIC PREMIUMS. Each Policyowner will determine a Planned
Periodic Premium schedule that provides for the payment of a level premium at
a fixed interval over a specified period of time. However, the Policyowner is
not required to pay premiums in accordance with this schedule. Furthermore,
the Policyowner has considerable flexibility to alter the amount, frequency,
and the time period over which Planned Periodic Premiums are paid.
The payment of all Planned Periodic Premiums will not guarantee that the
Policy remains In Force. Instead, the duration of the Policy depends upon the
Policy's Net Surrender Value. (See Death Benefit, p.20.) Thus, even if Planned
Periodic Premiums are paid by the Policyowner, the Policy will nonetheless
lapse any time Net Surrender Value is insufficient to pay certain monthly
charges, and a grace period expires without a sufficient payment. However,
during the first three Policy years, the Policy will remain In Force and no
grace period will begin provided there has been no increase in the Specified
Amount and the total of the premiums received is equal to or exceeds the
minimum monthly guarantee premium specified in the Policy times the number of
months since the Policy Date, including the current month. (See Policy Lapse
and Reinstatement, p.31.)
PREMIUM LIMITATIONS. In no event may the total of all premiums paid, both
scheduled and unscheduled, exceed the current maximum premium limitations
according to federal tax laws. If at any time a premium is paid which would
result in total premiums exceeding the current maximum premium limitation, PFL
will only accept that portion of the premium which will make total premiums
equal the maximum. Any part of the premium in excess of that amount will be
returned and no further premiums will be accepted until allowed by the current
maximum premium limitations set forth in the Policy. Every premium payment,
whether scheduled or unscheduled, must be at least the minimum payment amount
required. Under PFL's current rules, the minimum payment amount is $50.
Premium payments less than this minimum amount may be returned to the
Policyowner.
PAYMENT OF PREMIUMS. While a Policy loan is outstanding, payments made by
the Policyowner will be treated as a premium payment unless clearly marked as
loan repayments.
As an accommodation to Policyowners, PFL will accept transmittal of initial
and subsequent premiums of at least $1,000 by wire transfer. For an Initial
Premium, the wire transfer must be accompanied by a simultaneous telephone
facsimile transmission ("FAX") of a completed application. An Initial Premium
of $2,000 or more accepted via wire transfer with FAX will be invested the
business day following receipt. An Initial Premium made by wire transfer not
accompanied by a simultaneous FAX, or accompanied by a FAX of an incomplete
application, will be retained for a period of time while PFL attempts to
obtain the FAX or complete the essential information required to establish the
Policy and allocate the Initial Premium the business day after receipt of the
FAX or information necessary to complete the application.
In the event the application with original signature is later received and
the allocation instructions in that application, for any reason, are
inconsistent with those previously designated on the FAX, the Initial Premium
will be reallocated in accordance with the
- 30 -
<PAGE>
allocation instructions in the application with original signature at the unit
value next determined after receipt of such application.
Policyowners wishing to make payments via bank wire should instruct their
banks to wire Federal Funds as follows:
First National Bank of Maryland
ABA# 052000113
For credit to: PFL Life
Account #: 1838816-2
Policyowner's Name:
Policy Number:
Attention: Operational Accounting
ALLOCATION OF PREMIUMS AND CASH VALUE
NET PREMIUMS. The Net Premium equals the premium paid less the premium
expense charges (if any). (See Premium Expense Charges, p.32)
ALLOCATION OF NET PREMIUMS. In the application for a Policy, the Policyowner
will allocate Net Premiums to one or more of the Sub-Accounts of the Variable
Account, to the Fixed Account, or to a combination of both. Notwithstanding
the allocation in the application, if a premium payment of $2,000 or more is
paid upon submission of the application, the Net Premium will initially be
allocated to the Sub-Account of the Variable Account that invests exclusively
in shares of the Money Market Portfolio and will be reallocated on the first
Valuation Date on or following the Record Date in accordance with the
directions in the application. If a premium payment of less than $2,000
accompanies the application, the Net Premium will be allocated on the first
Valuation Date on or following the Record Date in accordance with the
directions in the application.
Net premiums paid after the Record Date will be allocated in accordance with
the Policyowner's instructions in the application. The minimum percentage of
each premium that may be allocated to any account is 10%; percentages must be
in whole numbers. The allocation of future Net Premiums may be changed without
charge at any time by providing PFL with written notification from the
Policyowner. PFL reserves the right to limit the number of changes of the
allocation of Net Premiums to one per year. Investment returns from the
amounts allocated to Sub-Accounts of the Variable Account will vary with the
investment experience of these Sub-Accounts and the Policyowner bears the
entire investment risk for these amounts.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Unlike conventional life insurance policies, payment of the Planned
Periodic Premiums might not be enough to keep the Policy from lapsing;
similarly, the failure to make a Planned Periodic Premium payment will not
itself cause the Policy to Lapse. Lapse will only occur where Net Surrender
Value is insufficient to cover the monthly deduction, and a grace period
expires without a sufficient payment. If Net Surrender Value is insufficient
to cover the monthly deduction, the Policyowner must, except as noted below,
pay during the grace period a payment at least sufficient to provide a Net
Premium to cover the sum of the monthly deductions due within the grace
period. (See Charges and Deductions, p.32.) However, during the first three
Policy years, the Policy will not lapse and no grace period will begin
provided there has been no increase in the Specified Amount and the total of
the premiums received (minus any withdrawals and outstanding loans) equals or
exceeds the minimum monthly guarantee premium shown in the Policy times the
number of months since the Policy Date, including the current month.
- 31 -
<PAGE>
If Net Surrender Value is insufficient to cover the monthly deduction, PFL
will notify the Policyowner and any assignee of record of the minimum payment
needed to keep the Policy In Force. The Policyowner will then have a grace
period of 61 days, measured from the date notice is sent to the Policyowner,
for PFL to receive sufficient payments. If PFL does not receive a sufficient
payment within the grace period, the Policy will lapse. If a sufficient
payment is received during the grace period, any resulting Net Premium will be
allocated among the Accounts, and any monthly deductions due will be charged
to such Accounts, in accordance with the Policyowner's then current premium
allocation instructions. (See Allocation of Premiums and Cash Value--
Allocation of Net Premiums, p.31, and Monthly Deductions--Optional Cash Value
Charges, p.35.) If the Insured dies during the grace period, the death benefit
proceeds will equal the amount of the death benefit proceeds immediately prior
to the commencement of the grace period, reduced by any due and unpaid
charges.
REINSTATEMENT. A lapsed Policy may be reinstated any time within five years
after the date of Lapse and before the Maturity Date by submitting the
following items to PFL:
1. A written request for reinstatement from the Policyowner;
2. Evidence of insurability satisfactory to PFL; and
3. A premium that, after the deduction of premium expense charges, is large
enough to cover:
(a) one monthly deduction at the time of termination;
(b) the next two monthly deductions which will become due after the
time of reinstatement; and
(c) an amount sufficient to cover any surrender charge (as described on
p.34) as of the date of reinstatement.
PFL reserves the right to decline a reinstatement request. Any indebtedness
on the date of Lapse will not be reinstated. The Cash Value of the Loan
Reserve on the date of reinstatement will be zero. The amount of Net Surrender
Value on the date of reinstatement will be equal to the Net Premiums paid at
reinstatement, less the amounts paid in accordance with (a) and (c) above.
Upon approval of the application for reinstatement, the effective date of
reinstatement will be the first Monthly Anniversary on or next following the
date PFL approves the application for reinstatement.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate PFL
for: (1) providing the insurance benefits set forth in the Policy and any
optional insurance benefits added by rider; (2) administering the Policy; (3)
assuming certain risks in connection with the Policy; and (4) incurring
expenses in distributing the Policy.
PREMIUM EXPENSE CHARGES
Prior to allocation of Net Premiums among the Accounts, premiums paid will
be reduced by a 5.0% premium expense charge consisting of a sales charge and a
charge for premium taxes.
SALES CHARGE. A sales charge equal to 2.5% of the premiums paid will be
deducted to partially compensate PFL for distribution expenses incurred in
connection with the Policy. These expenses include agent sales commissions,
the cost of printing prospectuses and sales literature, and any advertising
costs. The sales charge in any Policy year is not necessarily related to
actual distribution expenses incurred in that year. PFL expects to incur the
majority of distribution expenses in the first Policy year and to recover any
deficiency over
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<PAGE>
the life of the Policy and from PFL's General Account, which may include
profits, if any, derived from the mortality and expense risk charge collected
under the Policy.
PREMIUM TAXES. Various states and subdivisions impose a tax on premiums
received by insurance companies. Premium tax rates vary from state to state
from a range of 0.5% to 3.5%. Regardless of the actual rate assessed by a
particular state, a deduction of an amount equal to 2.5% of each premium
payment will be made to compensate PFL for paying this tax.
CONTINGENT SURRENDER CHARGES
If a Policy is totally surrendered (or the Net Surrender Value is applied
under a settlement option) prior to the end of the fifteenth (15th) Policy
year, a surrender charge for the initial Specified Amount will be deducted
from the Policy's Cash Value. This surrender charge consists of the sum of:
(a) an administrative component (deferred issue charge), and (b) a sales
component (deferred sales charge).
(1) Deferred Issue Charge. The deferred issue charge is a charge per
thousand of initial Specified Amount. This charge varies by Issue Age, the
length of time the Policy is in effect, and the sex of the insured. The
maximum initial charge is $5.00 per thousand of initial Specified Amount in
year 1 (it is lower for males age 76 and older), and decreases to $0.00 in
years 15 and later for all insureds. This charge is to assist PFL in
recovering the underwriting, processing and start-up expenses incurred in
connection with the Policy and the Variable Account. These expenses include
the cost of processing applications, conducting medical examinations,
determining insurability, and establishing Policy records. A surrender charge
consisting only of a deferred issue charge applies prior to the 15th Policy
year to the amount of any increase in the Specified Amount.
(2) Deferred Sales Charge. The deferred sales charge is (1) X% of the sum of
all premiums paid up to the Guideline Premium shown in the Policy, plus (2) Y%
of the sum of all premiums paid in excess of the first Guideline Premium
("excess premium charge"). X and Y vary by the Issue Age, the length of time
the Policy is in effect, and sex of the Insured and shown in Appendix I of the
Policy. For the first 10 years, X is 26.5% for males under age 64 at issue,
and for females under age 71 at issue. For the first 10 years, Y is 4.2% for
males under age 56 at issue and for females under age 63. The percentages
decline at older ages and Policy Year. There is no surrender charge in the
15th Policy Year and thereafter.
The deferred sales charge is designed to assist PFL in recovering
distribution expenses incurred in connection with the Policy, including agent
sales commissions, the cost of printing prospectuses and sales literature, and
any advertising costs. The proceeds of the charge may not be sufficient to
cover these expenses. To the extent they are not, PFL will cover the shortfall
from its General Account assets, which may include profits from the mortality
and expense risk charge under the Policy.
THE TOTAL SURRENDER CHARGE ON ANY DATE OTHER THAN AN ANNIVERSARY WILL BE
INTERPOLATED BETWEEN THE TWO END OF YEAR CHARGES.
- 33 -
<PAGE>
EXAMPLE (1)--Assume a male Insured purchases the Policy when age 55 for
$100,000 of Specified Amount, paying the Guideline Premium of $3,237, and an
additional premium amount of $763 in excess of the Guideline Premium, for a
total premium of $4,000 per year for four years ($16,000 total for four
years), and then surrenders the Policy. The surrender charge would be
calculated as follows:
<TABLE>
<S> <C> <C>
(i) Deferred Issue Charge--[100 X $5.00] = $ 500.00
($5.00/$1,000 of Initial Specified Amount)
(ii) Deferred Sales Charge:
(1) 26.5% of Guideline Premium paid
[26.5% X $3,237], and = $ 857.81
(2) 4.2% of premiums paid in excess of Guideline
Premium
[4.2% X $12,763] = $ 536.05
(iii) Applicable Surrender Charge
[(a)$500.00 + (b)($857.81 + $536.05)]
Surrender Charge = $500.00 + $1,398.86 = $1,893.86
=========
=========
EXAMPLE (2)--Assume the same facts as in Example (1), except the Owner pays
premiums for 14 years and surrenders the Policy on the 14th Policy
Anniversary:
(i) Deferred Issue Charge--[100 X $1.00] = $ 100.00
(ii) Deferred Sales Charge:
(1) [5.3% X $3,237], and = $ 171.56
(2) [.84% X $52,763] = $ 443.21
(iii) Applicable Surrender Charge
[(a)$100.00 + (b)($171.56 + $443.21)]
Surrender Charge = $100.00 +$614.77 = $ 714.77
=========
</TABLE>
If the Owner waits until the 15th Policy Anniversary or after, there will be
no surrender charge.
(3) Deferred Issue Charge on Increases. During the 15 Policy years following
each increase in Specified Amount, an additional surrender charge will be
incurred upon surrender of the Policy. This charge is calculated by
multiplying the amount of the increase in Specified Amount, in thousands, by
the applicable deferred issue charge shown in the Policy, with Policy years
commencing on the date of the increase.
(4) Free Withdrawal Amount. The Deferred Sales Charge portion of the
surrender charge is waived, after the first Policy year, on the first
withdrawal each year that does not exceed 10% of the Cash Value on the date of
the withdrawal.
MONTHLY DEDUCTIONS
Charges will be deducted monthly from the Cash Value of each Policy
("monthly deduction") to compensate PFL for certain administrative costs, the
cost of insurance, and optional benefits added by rider. The monthly deduction
will be deducted on each Monthly Anniversary and will be allocated among the
Accounts on the same basis as Net Premiums are allocated. If the value of any
Account is insufficient to pay its part of the monthly deduction, the monthly
deduction will be taken on a pro rata basis from all Accounts.
- 34 -
<PAGE>
Because portions of the monthly deduction, such as the cost of insurance, can
vary from month-to-month, the monthly deduction itself will vary in amount
from month-to-month.
COST OF INSURANCE. A charge for the cost of insurance, described below, will
be deducted as a monthly deduction. PFL will determine the monthly cost of
insurance charge by multiplying the applicable cost of insurance rates by the
net amount at risk for each Policy Month. The net amount at risk for a Policy
Month is (a) the death benefit at the beginning of the Policy Month divided by
1.0032737 (which reduces the net amount at risk, solely for purposes of
computing the cost of insurance, by taking into account assumed monthly
earnings at an annual rate of 4%), less (b) the Cash Value at the beginning of
the Policy Month. Then there is an increase in the Specified Amount of a
Policy which results in a greater net amount at risk, the cost of insurance
deduction will increase.
Cost of insurance rates will be based on the sex and Attained Age of the
Insured, and the length of time a Policy has been In Force. The actual monthly
cost of insurance rates will be based on PFL's expectations as to future
experience. They will not, however, be greater than the guaranteed cost of
insurance rates set forth in the Policy. These guaranteed rates are based on
the 1980 Commissioners Standard Ordinary (C.S.O.) Mortality Tables and the
Insured's sex and Attained Age. PFL also may guarantee that actual cost of
insurance rates will not be changed for a specified period of time (e.g., one
year). Any change in the cost of insurance rates will apply to all Insureds of
the same age and sex whose Policies have been In Force for the same length of
time.
The Policies offered by this Prospectus are based on mortality tables that
distinguish between men and women. As a result, the Policy may pay different
benefits to, and may have different cost of insurance charges for, men and
women of the same age except where prohibited by state law or regulation.
PFL may also issue certain Policies on a simplified or expedited basis to
certain categories of individuals (for example, Policies issued at a
predetermined Specified Amount or underwritten on a group basis). Policies
issued on this basis will have guaranteed cost of insurance rates no higher
than the 1980 CSO table specified in the Policy; however, due to the special
underwriting criteria established for these issues, actual rates may be higher
or lower than the current cost of insurance rates charged under otherwise
identical Policies that are underwritten using standard underwriting criteria.
MONTHLY ADMINISTRATION CHARGE. PFL has primary responsibility for the
administration of the Policy and the Variable Account. Annual administrative
expenses include recordkeeping, processing death benefit claims, Policy
changes, reporting and overhead costs. As reimbursement for administrative
expenses related to the maintenance of each Policy and the Variable Account,
PFL assesses a monthly administration charge from each Policy. This charge is
currently $5.00 per Policy Month and will not be increased.
Substandard Premium Class Rating Charges. Charges for a Substandard Premium
class rating will be deducted from the policy as monthly deductions.
Optional Cash Value Charges. Cash Value charges for any optional insurance
benefits added to the Policy by rider will be deducted from the Policy as
monthly deductions.
TRANSACTION CHARGES
Cash Value Transfers. PFL reserves the right to impose a transfer charge of
$25 for each transfer following the first twelve transfers made during any
Policy year. However, PFL does not currently impose a charge for transfers,
regardless of the number made.
- 35 -
<PAGE>
Cash Withdrawals. A charge equal to the lesser of $25 or 2% of the amount
withdrawn will be deducted from amounts withdrawn from the Policy and the
balance will then be paid to the Policyowner. This charge will not be
increased.
VARIABLE ACCOUNT ASSET (DAILY) CHARGES
Certain charges will be deducted as a percentage of the value of the net
assets of the Variable Account on a daily basis to compensate PFL for certain
expenses incurred and risks assumed in connection with the Policy.
These charges are for administrative expenses, mortality and expense risks,
distribution financing costs, and certain Federal income tax expenses
(referred to as "deferred acquisition cost" taxes). The charges for
distribution financing and deferred acquisition costs are only imposed during
the first ten Policy years; the other charges are imposed throughout the life
of the Policy. These charges are deducted on a daily basis, but the following
chart summarizes these charges as annual percentages of the daily net assets
of the Variable Account.
<TABLE>
<S> <C>
All Policy Years
Mortality & Expense Risks............................................... .90%
Administrative Expenses................................................. .40%
-----
SUBTOTAL, all Policy years: 1.30%
First Ten Policy Years only
Distribution financing.................................................. .50%
Deferred Acquisition Costs.............................................. .10%
-----
SUBTOTAL, additional first ten years:................................... .60%
-----
TOTAL, First ten Policy years:.......................................... 1.90%
</TABLE>
These Variable Account asset charges are not deducted from the Fixed
Account.
Each of the daily Variable Account asset charges is described below.
Administrative Expenses. The daily charge for administrative expenses
compensates PFL for the costs incurred in administering the Policies and the
Variable Account, such as the costs of processing applications, premiums,
withdrawals, loans, policy changes (such as a change of address, a change in
beneficiary or beneficiaries, etc.).
Distribution Financing Charge. The Distribution Financing Charge, together
with the deferred sales charge (see above) is designed to compensate PFL for
the costs of distribution and selling the Policies (including sales
commissions, advertising and marketing, and preparing and printing
prospectuses). The deferred sales charge will be reduced by the amount of
Distribution Financing Charges previously deducted with respect to that
particular Policy.
Deferred Acquisition Costs. In computing its Federal income taxes, PFL is
required to "defer" or capitalize certain acquisition costs (rather than
taking such costs as a current deduction). The deferred acquisition cost
charge is designed to compensate PFL for these additional Federal income tax
expenses related to the Policies.
Mortality and Expense Risk Charge. PFL will deduct a daily charge from the
Variable Account at an annual rate of .90% of the average daily net assets of
the Variable Account. Under PFL's current procedures, these amounts are paid
to the General Account monthly. PFL may profit from this charge.
- 36 -
<PAGE>
The mortality risk assumed by PFL is that Insureds may live for a shorter
time than projected. The expense risk assumed is that expenses incurred in
issuing and administering the Policies will exceed the limits on
administrative charges set in the Policies. PFL also assumes risks with
respect to other contingencies including the incidence of Policy loans, which
may cause PFL to incur greater costs than anticipated when designing the
Policies.
TAXES
Currently no charge is made to the Variable Account for Federal income taxes
that may be attributable to the Variable Account. PFL may, however, make such
a charge in the future. Charges for other taxes, if any, attributable to the
Variable Account may also be made. (See Federal Tax Matters, p.40.)
INVESTMENT ADVISORY FEE
Because the Variable Account purchases shares of the Funds, the net assets
of the Variable Account will reflect the investment advisory fee and other
expenses incurred by the Funds. (See p.10 for a discussion of the investment
advisory fees and other expenses of each Portfolio.)
GROUP OR SPONSORED ARRANGEMENTS
Policies may be purchased under group or sponsored arrangements, as well as
on an individual basis. A "group arrangement" includes a program under which a
trustee, employer or similar entity purchases individual Policies covering a
group of individuals on a group basis. Examples of such arrangements are
employer-sponsored benefit plans which are qualified under Section 401 of the
Internal Revenue Code and deferred compensation plans. A "sponsored
arrangement" includes a program under which an employer permits group
solicitation of its employees or an association permits group solicitation of
its members for the purchase of Policies on an individual basis.
The premium expense charges, contingent surrender charges, minimum premium
and minimum Specified Amount may be different or reduced for Policies issued
in connection with group or sponsored arrangements. PFL will reduce these
charges in accordance with its rules in effect as of the date an application
for a Policy is approved. To qualify for such a reduction, a group or
sponsored arrangement must satisfy certain criteria as to, for example, size
and number of years in existence. Generally, the sales contacts and effort,
administrative costs and mortality cost per Policy vary based on such factors
as the size of the group or sponsored arrangement, its stability as indicated
by its term of existence, the purposes for which Policies are purchased and
certain characteristics of its members. The amount of reduction and the
criteria for qualification will reflect the reduced sales effort resulting
from sales to qualifying groups and sponsored arrangements.
PFL may, in addition to waiving or reducing the premium expense charges,
contingent surrender charges, minimum premium and minimum Specified Amount,
also waive or reduce the Monthly Administration Charge and the charge for a
cash withdrawal when lower administrative costs are incurred for: (a) current
and retired directors, officers, full-time employees and agents of PFL and its
affiliates; (b) current and retired directors, officers, full-time employees
and registered representatives of AFSG Securities Corporation and any broker-
dealer which has a sales agreement with AFSG Securities Corporation; (c) any
trust, pension, profit-sharing or other employee benefit plan of any of the
foregoing persons or entities; (d) current and retired directors, officers and
full-time employees of the Funds; and (e) any member of a family of any of the
foregoing (e.g., spouse, child, sibling, parent-in-law). PFL reserves the
right to modify or terminate this arrangement at any time.
- 37 -
<PAGE>
PFL may modify both the amounts of reductions and the criteria for
qualification. In no event, however, will group or sponsored arrangements
established for the sole purpose of purchasing Policies, or which have been in
existence for less than six months, qualify for such reductions. Reductions in
these charges will not be unfairly discriminatory against any person,
including the affected Policyowners and all other Policyowners of Policies
funded by the Variable Account.
In 1983 the United States Supreme Court held that certain insurance
policies, the benefits under which vary based on sex, may not be used to fund
certain employer-sponsored benefit plans and fringe benefit programs. PFL
recommends that any employer proposing to offer the Policies to employees
under a group or sponsored arrangement consult his or her attorney before
doing so. (See Federal Tax Matters, p.40.)
GENERAL PROVISIONS
POSTPONEMENT OF PAYMENTS
GENERAL. Payment of any amount from the Variable Account upon complete
surrender, cash withdrawal, Policy loan, or benefits payable at death or
maturity may be postponed whenever: (i) the New York Stock Exchange is closed
other than customary weekend and holiday closing, or trading on the New York
Stock Exchange is restricted as determined by the Commission; (ii) the
Commission by order permits postponement for the protection of Policyowners;
or (iii) an emergency exists, as determined by the Commission, as a result of
which disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Variable Account's net
assets. Transfers may also be postponed under these circumstances. For
restrictions applicable to payments from the Fixed Account, see The Fixed
Account, p.18.
PAYMENT BY CHECK. Payments under the Policy of any amounts derived from
premiums paid by check or bank draft may be delayed until such time as the
check or bank draft has cleared the Policyowner's bank.
THE CONTRACT
The Policy, endorsements, if any, the attached copy of the application and
any supplemental applications are the entire contract. Only statements in the
application and any supplemental applications can be used to void the Policy
or defend a claim. The statements are considered representations and not
warranties. No Policy provision can be waived or changed except by
endorsement. Only the President, a vice president, officer of PFL, or
Secretary of PFL can agree to change or waive any provisions of the Policy.
SUICIDE
If the Insured, whether sane or insane, commits suicide within two years
after the Policy Date, PFL will pay only the premiums received, less any cash
withdrawals and outstanding indebtedness. In the event of Lapse of the Policy,
the suicide period will be measured from the effective date of reinstatement.
If the Insured, while sane or insane, commits suicide within two years after
the effective date of any increase in insurance or any reinstatement, PFL's
total liability with respect to such increase or reinstatement will be the
cost of insurance charges deducted for such increase or reinstatement.
INCONTESTABILITY
PFL cannot contest the Policy as to the initial Specified Amount after it
has been In Force during the lifetime of the Insured for two years from the
Policy Date. A new two year contestability period will apply to each increase
in Specified Amount beginning on the
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effective date of each such increase and will apply to statements made in the
application for the increase. If the Policy is reinstated, a new two year
contestability period (apart from any remaining contestability period) will
apply from the date of the application for reinstatement and will apply only
to statements made in the application for reinstatement.
CHANGE OF OWNER OR BENEFICIARY
The Beneficiary, as named in the Policy application or subsequently changed,
will receive the Policy benefits at the Insured's death. If the named
Beneficiary dies before the Insured, the contingent Beneficiary, if named,
becomes the Beneficiary. If no Beneficiary survives the Insured, the benefits
payable at the Insured's death will be paid to the Policyowner or the
Policyowner's estate. As long as the Policy is In Force, the Policyowner or
Beneficiary may be changed by written request from the Policyowner in a form
acceptable to PFL. If the Policyowner has not reserved the right to change the
beneficiary, a written consent of any irrevocable beneficiary will be needed
prior to a change in the beneficiary. The Policy need not be returned unless
requested by PFL. The change will take effect as of the date the request is
signed, whether or not the Insured is living when the request is received by
PFL. PFL will not, however, be liable for any payment made or action taken
before receipt of the request.
ASSIGNMENT
The Policy may be assigned by the Policyowner. PFL will not be bound by the
assignment until a written copy has been received at its Administrative Office
and will not be liable with respect to any payment made prior to receipt. PFL
assumes no responsibility for determining whether an assignment is valid or
the extent of the assignee's interest.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured has been misstated, the death benefit will
be adjusted based on what the cost of insurance charge for the most recent
monthly deduction would have purchased based on the correct age and sex.
REPORTS AND RECORDS
PFL will maintain all records relating to the Variable Account and the Fixed
Account. PFL will mail to Policyowners, at their last known address of record,
any reports required by any applicable law or regulation.
PFL will send Policyowners written confirmation within seven days of the
following transactions: unplanned and certain planned premium payments, Cash
Value transfers between Accounts, change in death benefit option or Specified
Amount, total surrenders or cash withdrawals, and Policy loans or repayments.
PFL will also send each Policyowner an annual statement at the end of the
Policy year showing for the year, among other things, the month and amount of
each: premium payment made, monthly deduction, transfer, cash withdrawal and
Policy loan or repayment. The annual statement will also show Policy year-end
Net Surrender Value, death benefit and Policy loan value, as well as other
Policy activity during the year.
DISTRIBUTION OF THE POLICIES
AFSG Securities Corporation, member NASD, 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499, an affiliate of PFL, is the principal underwriter of the
Policies. AFSG Securities Corporation has entered or will enter into one or
more contracts with various broker-dealers for the distribution of the
Policies. Commissions on Policy sales are paid to dealers. Commissions payable
to a broker-dealer will be up to 65% of the Guideline Premium (and 5%
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of any excess premiums). In addition, certain broker-dealers may receive
additional commissions and certain expense allowances based upon the
attainment of specific sales volume targets and other factors. Certain broker-
dealers may also receive annual continuing fees based on Policy Values. These
commissions are not deducted from Premium Payments, they are paid by PFL.
FEDERAL TAX MATTERS
INTRODUCTION
The ultimate effect of Federal income taxes on the Cash Value and on the
economic benefit to the Policyowner or Beneficiary depends on PFL's tax status
and upon the tax status of the individual concerned. The discussion contained
herein is general in nature and is not intended as tax advice. For complete
information on Federal and state tax considerations, a qualified tax adviser
should be consulted. No attempt is made to consider any applicable state or
other tax laws. Because the discussion herein is based upon PFL's
understanding of Federal income tax laws as they are currently interpreted,
PFL cannot guarantee the tax status of any Policy. No representation is made
regarding the likelihood of continuation of the current Federal income tax
laws, Treasury Regulations, or of the current interpretations by the Internal
Revenue Service ("IRS"). PFL reserves the right to make changes to the Policy
in order to assure that it will continue to qualify as life insurance for tax
purposes.
TAX CHARGES
At the present time, PFL makes no charge for any Federal, state or local
taxes (other than premium taxes) that PFL incurs that may be attributable to
such Account or to the Policies. PFL, however, reserves the right in the
future to make a charge for any such tax or other economic burden resulting
from the application of the tax laws that it determines to be properly
attributable to the Variable Account or to the Policies.
TAX STATUS OF THE POLICY
Section 7702 of the Code sets forth a definition of a life insurance
contract for Federal tax purposes. The Secretary of the Treasury (the
"Treasury") has issued proposed regulations that would specify what will be
considered reasonable mortality charges under Section 7702. Guidance as to how
Section 7702 is to be applied is, however, limited. If a Policy were
determined not to be a life insurance contract for purposes of Section 7702,
such Policy would not provide most of the tax advantages normally provided by
a life insurance policy.
With respect to a Policy that is issued on the basis of a standard rate
class, while there is some uncertainty due to the limited guidance on Section
7702, PFL nonetheless believes that such a Policy should meet the Section 7702
definition of a life insurance contract. With respect to a Policy that is
issued on a substandard rate class, there is even less guidance to determine
whether such a Policy meets the Section 7702 definition of a life insurance
contract. Thus, it is not clear whether or not such a Policy would satisfy
Section 7702, particularly if the Policyowner pays the full amount of premiums
permitted under the Policy. If it is subsequently determined that a Policy
does not satisfy Section 7702, PFL will take whatever steps are appropriate
and reasonable to attempt to cause such a Policy to comply with Section 7702,
including possibly refunding any premiums paid that exceed the limitation
allowable under Section 7702 (together with interest or other earnings on any
such premiums refunded as required by law). For these reasons, PFL reserves
the right to modify the Policy as necessary to attempt to qualify it as a life
insurance contract under Section 7702.
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Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Variable Account to be
"adequately diversified" in order for the Policy to be treated as a life
insurance contract for Federal tax purposes. The Variable Account, through the
Funds, intends to comply with the diversification requirements prescribed by
the Treasury in Reg. sec. 1.817-5, which affect how each Fund's assets may be
invested. PFL believes that the Funds will be operated in compliance with the
requirements prescribed by the Treasury.
In certain circumstances, owners of variable life insurance policies may be
considered the owners, for Federal income tax purposes, of the assets of the
separate account used to support their policies. In those circumstances,
income and gains from the separate account assets would be includable in the
owner's gross income. The IRS has stated in published rulings that the owner
of a variable life insurance policy will be considered the owner of separate
account assets if the owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The
Treasury Department also announced, in connection with the issuance of
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
policyowner), rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would
be issued by way of regulations or rulings on the "extent to which
policyholders may direct their investments to particular sub-account without
being treated as owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policyowners were not owners of separate account assets. For
example, the Policyowner has additional flexibility in allocating premium
payments and Policy values. These differences could result in a Policyowner
being treated as the owner of a pro rata portion of the assets of the Variable
Account. In addition, PFL does not know what standards will be set forth, if
any, in the regulations or rulings which the Treasury Department has stated it
expects to issue. PFL therefore reserves the right to modify the Policy as
necessary to attempt to prevent a Policyowner from being considered the owner
of a pro rata share of the assets of the Variable Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. In general. PFL believes that the proceeds and Cash Value increases of a
Policy should be treated in a manner consistent with a fixed-benefit life
insurance policy for Federal income tax purposes. Thus, the death benefit
under the Policy should be excludable from the gross income of the Beneficiary
under section 101(a)(1) of the Code.
A change in a Policy's Specified Amount, a change in a Policy's insurance
protection, the payment of an unscheduled premium, the taking of a Policy
loan, a cash withdrawal, a total surrender, a Policy Lapse with an outstanding
indebtedness, a change in death benefit options, a change in owner, the
exchange of a Policy, or the assignment of a Policy may have tax consequences
depending upon the circumstances. In addition, Federal estate and state and
local estate, inheritance, and other tax consequences of ownership or receipt
of Policy proceeds depend upon the circumstances of each Policyowner or
Beneficiary. A competent tax adviser should be consulted for further
information.
The Policy may be used in various arrangements, including nonqualified
deferred compensation or salary continuance plans, split dollar insurance
plans, executive bonus plans, retiree medical benefit plans, and others. The
tax consequences of such plans may
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vary depending on the particular facts and circumstances of each individual
arrangement. Therefore, if you are contemplating the use of a Policy in any
arrangement the value of which depends in part on its tax consequences, you
should be sure to consult a qualified tax adviser regarding the tax attributes
of the particular arrangement.
In recent years, Congress has adopted new rules relating to life insurance
owned by businesses. Any business contemplating the purchase of a new Policy
or a change in an existing Policy should consult a tax adviser.
Generally, the Policyowner will not be deemed to be in constructive receipt
of the Cash Value, including increments thereof, under the Policy until there
is a distribution. The tax consequences of distributions from, and loans taken
from, or secured by, a Policy depend on whether the Policy is classified as a
"modified endowment contract" under Section 7702A. Section 7702A generally
applies to Policies entered into or materially changed after June 20, 1988.
Whether a Policy is or is not a modified endowment contract, upon a complete
surrender or lapse of a Policy, or when benefits are paid at such Policy's
maturity date, if the amount received plus the amount of indebtedness exceeds
the total investment in the Policy, the excess will generally be treated as
ordinary income subject to tax.
2. Modified Endowment Contracts. A Policy may be treated as a modified
endowment contract depending upon the amount of premiums paid in relation to
the death benefit provided under such Policy. The premium limitation rules for
determining whether such a Policy is a modified endowment contract are
extremely complex. In general, however, a Policy will be a modified endowment
contract if the accumulated premiums paid at any time during the first seven
Policy years exceeds the sum of the net level premiums which would have been
paid on or before such time if the Policy provided for paid-up future benefits
after the payment of seven level annual premiums. In addition, if a Policy
(regardless of when it was entered into) is "materially changed," it may cause
such Policy to be treated as a modified endowment contract. The material
change rules for determining whether a Policy is a modified endowment contract
are also extremely complex. In general, however, the determination whether a
Policy will be a modified endowment contract after a material change depends
upon the relationship of the death benefit at the time of change to the Cash
Value at the time of such change and the additional premiums paid in the seven
Policy years starting with the date on which the material change occurs.
Under PFL's current procedures, the Policyowner will be notified at the time
a Policy is issued whether, according to PFL's calculations, the Policy is or
is not classified as a modified endowment contract based on the premium then
received. The Policyowner will also be notified of the amount of the maximum
annual premium which can be paid without causing a Policy to be classified as
a modified endowment contract.
Due to the flexibility of the Policies, classification of the Policies as a
modified endowment contract will depend upon the circumstances of each Policy.
Accordingly, a prospective Policyowner should contact a competent tax adviser
before purchasing a Policy to determine the circumstances under which the
Policy would be a modified endowment contract. In addition, a Policyowner
should contact a competent tax adviser before making any change to, including
an exchange of, a Policy to determine whether such change would cause the
Policy (or the new policy in the case of an exchange) to be treated as a
modified endowment contract.
3. Distributions from Policies Classified as Modified Endowment
Contracts. Policies classified as modified endowment contracts are subject to
the following tax rules: First, all pre-death distributions from such a Policy
(including distributions upon surrender, distributions made in anticipation of
the Policy becoming a modified endowment contract,
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and benefits paid at maturity) are treated as ordinary income subject to tax
up to the amount equal to the excess (if any) of the Cash Value immediately
before the distribution over the investment in the Policy (described below) at
such time. Second, loans taken from, or secured by, such a Policy are treated
as distributions from such a Policy and taxed accordingly. (Unpaid Policy loan
interest will be treated as a loan for these purposes.) Third, a 10%
additional income tax is imposed on the portion of any distribution from, or
loan taken from, or secured by, such a Policy that is included in income
except where the distribution or loan is made on or after the Owner attains
age 59 1/2, is attributable to the Policyowner's becoming disabled, or is part
of a series of substantially equal periodic payments for the life (or life
expectancy) of the Policyowner or the joint lives (or joint life expectancies)
of the Policyowner and the Policyowner's Beneficiary.
4. Distribution from Policies not Classified as Modified Endowment
Contracts. Distributions from a Policy that is not classified as a modified
endowment contract are generally treated as first recovering the investment in
the Policy (described below) and then, only after the return of all such
investment in the Policy, as distributing taxable income. An exception to this
general rule occurs in the case of a cash withdrawal, a decrease in the
Policy's death benefit, or any other change that reduces benefits under the
Policy in the first 15 years after the Policy is issued and results in a cash
distribution to the Policyowner in order for the Policy to continue complying
with the Section 7702 definitional limits. In that case, such distribution
will be taxed in whole or in part as ordinary income (to the extent of any
gain in the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a modified endowment
contract are not treated as distributions. Instead, such loans are treated as
indebtedness of the Policyowner.
Finally, distributions (including distributions upon surrender or lapse) or
loans from, or secured by, a Policy that is not a modified endowment contract
are not subject to the 10% additional income tax.
5. Policy loan interest. Generally, interest paid on any loan under a Policy
which is owned by an individual is not deductible. In addition, interest on
any loan under a Policy owned by a taxpayer and covering the life of any
individual who is an officer of or is financially interested in the business
carried on by that taxpayer will not be tax deductible to the extent the
aggregate amount of such loans with respect to Policies covering such
individuals exceeds $50,000. The deductibility of Policy loan interest may be
further limited by other provisions of the Code. Therefore, a Policyowner
should consult a competent tax adviser as to whether Policy loan interest will
be deductible.
6. Investment in the Policy. Investment in the Policy means (i) the
aggregate amount of any premiums or other consideration paid for a Policy,
minus (ii) the aggregate amount received under the Policy which is excluded
from the gross income of the Policyowner (except that the amount of any loan
from, or secured by, a Policy that is a modified endowment contract, to the
extent such amount is excluded from gross income, will be disregarded), plus
(iii) the amount of any loan from, or secured by, a Policy that is a modified
endowment contract to the extent that such amount is included in the gross
income of the Policyowner.
7. Multiple Policies. All modified endowment contracts that are issued by
PFL (or its affiliates) to the same Policyowner during any calendar year are
treated as one modified endowment contract for purposes of determining the
amount includable in gross income under Section 72(e) of the Code.
8. Possible Tax Law Changes. Although the likelihood of legislative changes
is uncertain, there is always the possibility that the tax treatment of the
Policy could change by legislation or otherwise. For instance, the President's
1999 Budget Proposal
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recommended legislation that, if enacted, would adversely modify the Federal
taxation of this Policy. It is possible that any legislative change could be
retroactive (that is, effective prior to the date of the change). A tax
adviser should be consulted with respect to legislative developments and their
effect on the Policy.
EMPLOYMENT-RELATED BENEFIT PLANS
On July 6, 1983, the Supreme Court held in Arizona Governing Committee v.
Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women on the basis of sex. The Policy described in this
Prospectus contains guaranteed cost of insurance rates and guaranteed purchase
rates for certain payment options that distinguish between men and women.
Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of Norris, and Title VII
generally, on any employment-related insurance or benefit program for which a
Policy may be purchased.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
PFL holds the assets of the Variable Account. PFL maintains records of all
purchases and redemptions of Fund shares by each of the Sub-Accounts.
Additional protection for the assets of the Variable Account is provided by a
blanket fidelity bond issued to PFL and its affiliates in the amount of $10
million (subject to a $1 million deductible), covering all the employees of
PFL and its affiliates. A Stockbrokers Blanket Bond, issued to AEGON U.S.,
providing fidelity coverage, covers the activities of registered
representatives of AFSG Securities Corporation to a limit of $10,000,000,
subject to a $50,000 deductible.
VOTING RIGHTS OF THE VARIABLE ACCOUNT
To the extent required by law, PFL will vote the Funds' shares held in the
Variable Account at shareholder meetings of the Fund in accordance with
instructions received from persons having voting interests in the
corresponding Sub-Accounts of the Variable Account. Except as required by the
1940 Act, the Fund does not hold regular or special shareholder meetings. If
the 1940 Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result PFL determines that it
is permitted to vote the Funds' shares in its own right, it may elect to do
so.
The number of votes which a Policyowner has the right to instruct will be
calculated separately for each Sub-Account. The number of votes which each
Policyowner has the right to instruct will be determined by dividing a
Policy's Cash Value in that Sub-Account by $100. Fractional shares will be
counted. The number of votes of the Portfolio which the Policyowner has the
right to instruct will be determined as of the date coincident with the date
established by that Portfolio for determining shareholders eligible to vote at
the meeting of the Funds. Voting instructions will be solicited by written
communications prior to such meeting in accordance with procedures established
by the Underlying Funds.
PFL will vote Fund shares as to which no timely instructions are received
and Fund shares which are not attributable to Policyowners in proportion to
the voting instructions which are received with respect to all Policies
participating in that Portfolio. Voting instructions to abstain on any item to
be voted upon will reduce the votes eligible to be cast by PFL.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports and other materials relating to the appropriate Portfolio.
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DISREGARD OF VOTING INSTRUCTIONS. PFL may, when required by state insurance
regulatory authorities, disregard voting instructions if the instructions
require that the shares be voted so as to cause a change in the sub-
classification or investment objective of the Fund or one or more of its
Portfolios or to approve or disapprove an investment advisory contract for a
Portfolio of the Fund. In addition, PFL itself may disregard voting
instructions in favor of changes initiated by a Policyowner in the investment
policy or the investment adviser of a Portfolio of the Fund if PFL reasonably
disapproves of such changes. A change would be disapproved only if the
proposed change is contrary to state law or prohibited by state regulatory
authorities or PFL determined that the change would have an adverse effect on
its General Account in that the proposed investment policy for a Portfolio may
result in overly speculative or unsound investments. In the event PFL does
disregard voting instructions, a summary of that action and the reasons for
such action will be included in the next annual report to Policyowners.
STATE REGULATION OF PFL
As a life insurance company organized and operated under Iowa law, PFL is
subject to provisions governing such companies and to regulation by the Iowa
Commissioner of Insurance.
PFL's books and Accounts are subject to review and examination by the Iowa
Insurance Department at all times and a full examination of its operations is
conducted by the National Association of Insurance Commissioners at least once
every three years.
PFL intends to reinsure a portion of the risks assumed under the Policies.
EXECUTIVE OFFICERS AND DIRECTORS OF PFL
<TABLE>
<CAPTION>
NAME AND POSITION(S)(/1/) PRINCIPAL OCCUPATION(S)
WITH PFL LAST FIVE YEARS
------------------------- -----------------------
<S> <C>
William L. Busler... Director, Chairman of the Board, and President
Larry N. Norman..... Director and Executive Vice President
Robert J. Kontz..... Vice President and Corporate Controller
Vice President, Treasurer and Chief Financial
Brenda K. Clancy.... Officer
Director, Senior Vice President, and Chief Operating
Patrick S. Baird.... Officer
Douglas C. Kolsrud.. Director, Senior Vice President, Chief Investment
Officer and Corporate Actuary
Director, Vice President, Secretary and General
Craig D. Vermie..... Counsel
</TABLE>
- ----------------------------
(/1/)The principal business address of each person listed is PFL Life Insurance
Company, 4333 Edgewood Road, N.E., Cedar Rapids, IA 52449, unless
otherwise noted.
YEAR 2000 MATTERS
In October, 1996, PFL adopted and presently has in place a Year 2000
Assessment and Planning Project (the "Plan") to review and analyze exiting
hardware and software systems, as well as voice and data communications
systems, to determine if they are Year 2000 compatible. The Plan provides for
a management process which ensures that when a particular system, or software
application, is determined to be "non-compliant" the proper steps are in place
to either remedy the "non-compliance" or cease using the particular system or
software. The Plan also provides that the Chief Information Officer report to
the Board of Directors as to the status of the efforts under the Plan on a
regular and routine basis. PFL has engaged the services of a third-party that
is specialized in Year 2000 issues to work on the project.
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The Plan has four specific objectives (1) develop an inventory of all
applications: (2) evaluate all applications in the inventory to determine the
most prudent manner to move them to Year 2000 compliance, if required; (3)
estimate budgets, resources and schedules for the migration of the "affected"
applications to Year 2000 compliance; and (4) define testing and deployment
requirements to successfully manage validation and re-deployment of any
changed code. It is anticipated that all compliance issues will be resolved by
December 1998.
As of the date of this Prospectus, PFL has identified and made available
what it believes are the appropriate resources of hardware, people, and
dollars, including the engagement of outside third parties, to ensure that the
Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that the
systems or equipment addresses Year 2000 data prior to the Year 2000). Even
with appropriate and diligent pursuit of a well-conceived response plan,
including testing procedures, there is no certainty that any company will
achieve complete success. Further, notwithstanding our efforts or results,
PFL's ability to function unaffected to and through the Year 2000 may be
adversely affected by actions (or failure to act) of third parties beyond our
knowledge or control.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP, Washington, D.C., has provided advice on
certain legal matters concerning Federal securities laws in connection with
the Policies. All matters of Iowa law pertaining to the Policy, including the
validity of the Policy and PFL's right to issue the Policy under Iowa
Insurance Law, have been passed upon by Frank A. Camp, Vice President and
Division General Counsel, PFL Life Insurance Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Variable Account is a party or
to which the assets of the Variable Account are subject. PFL, like other life
insurance companies, is a defendant in lawsuits. In some class action and
other lawsuits involving other insurers, substantial damages have been sought
and/or material settlement payments have been made. Although the outcome of
any litigation cannot be predicted with certainty, PFL believes that at the
present time there are no pending or threatened lawsuits that are reasonably
likely to have a material adverse impact on the Variable Account or PFL.
EXPERTS
The financial statements of PFL as of December 31, 1997 and 1996 and for the
three years in the period ended 1997, appearing in this Prospectus and
registration statement have been audited by Ernst & Young LLP, Independent
Auditors, 801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309, as set forth
in their report thereon appearing elsewhere herein. The financial statements
referred to above are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Richard
R. Greer as stated in the opinion filed as an exhibit to the registration
statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policy offered hereby. This
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Prospectus does not contain all the information set forth in the registration
statement and the amendments and exhibits to the registration statement, to
all of which reference is made for further information concerning the Variable
Account, PFL and the Policy offered hereby. Statements contained in this
Prospectus as to the contents of the Policy and other legal instruments are
summaries. For a complete statement of the terms thereof reference is made to
such instruments as filed. Information about the Variable Account can be
reviewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You may obtain information about the
operation of the public reference room by calling the Commission at 1-800-SEC-
0330. In addition, the Securities and Exchange Commission maintains a website
(http://www.sec.gov) that contains other information regarding the Variable
Account.
INFORMATION ABOUT PFL'S FINANCIAL STATEMENTS
The financial statements of PFL which are included in this Prospectus (see
p. 57) should be considered only as bearing on the ability of PFL to meet its
obligations under the Policies. They should not be considered as bearing on
the investment performance of the assets held in the Variable Account.
Financial statements for PFL for the years ended December 31, 1997, 1996 and
1995, have been prepared on the basis of statutory accounting principles,
rather than generally accepted accounting principles ("GAAP").
There are no financial statements for the Variable Account because as of the
date of this prospectus the Variable Account had not commenced operations, had
no assets or liabilities, and had incurred no expenses.
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APPENDIX A
ILLUSTRATION OF BENEFITS
The tables in Appendix A illustrate the way in which a Policy operates. They
show how the death benefit, Cash Value and Net Surrender Value of a Policy
issued to an Insured of a given age and a given premium could vary over an
extended period of time assuming hypothetical gross rates of return equivalent
to constant after tax annual rates of 0%, 6% and 12%. The tables illustrate
the Policy values that would result based on the assumptions that the premium
is paid as indicated, that the Owner has not requested an increase or decrease
in the Specified Amount of the Policy, and that no cash withdrawals or Policy
loans have been made.
The death benefits, Cash Values and Net Surrender Values under a Policy
would be different from those shown if the actual rate of return averages 0%,
6% or 12% over a period of years, but fluctuates above and below those
averages for individual Policy years. They would also differ if any Policy
loans were made during the period of time illustrated.
The illustrations on page A-2 is based on a Policy for an Insured who is [a
35 year old male with annual premiums of $2,000, a $165,000 Specified Amount
and death] benefit Option A. The illustrations on that page also assume the
guaranteed premium charges and cost of insurance rates (based on the 1980
Commissioners Standard Ordinary Mortality Table).
The illustrations on page A-3 are based on the same factors as those on page
A-2, except that premium charges and cost of insurance charges are based on
PFL's current rates.
The illustrations on page A-4 and A-5 are based on the same factors as the
foregoing examples, but death benefit Option B is used.
The amounts shown for the death benefits, Cash Values and Net Surrender
Values take into account (1) the Premium Charge, (2) the daily Variable
Account Asset Charges of 1.9% for the first 10 years and 1.3% thereafter, of
the average net assets of the Sub-Accounts; (3) estimated daily expenses
equivalent to an effective arithmetic average annual expense level of 1.01% of
the average daily net assets of all of the available Portfolios (based on 1997
expense levels); and (4) all applicable monthly deductions. The 1.01% expense
level assumes an equal allocation of amounts among the thirteen Sub-Accounts
and is based on an average investment advisory fee and 1997 average operating
expenses. Taking into account the assumed charges of 2.91%, the gross annual
investment return rates of 0%, 6% and 12% are equivalent to net annual
investment return rates of (2.91)%, 7.09%, and 9.09%.
The hypothetical returns shown in the tables are without any tax charges
that may be attributable to the Variable Account since PFL is not currently
making such charges. In order to produce after tax returns of 0%, 6% or 12% if
such charges are made in the future, the Variable Account would have to earn a
sufficient amount in excess of 0%, 6% or 12% to cover any tax charges. (See
Charges and Deductions--Taxes, p.37.)
The "Premium Accumulated at 5%" column of each table shows the amount which
would accumulate if an amount equal to the premium were invested to earn
interest at 5% per year, compounded annually.
PFL will furnish, upon request, a comparable illustration reflecting the
proposed Insured's age, sex, risk classification and desired plan features.
48
<PAGE>
PFL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
Specified Amount:$165,000 Asset Based Charges*:2.91%/2.31%
Product Type:Standard Class Policy Annual Premium:$2,000
Using:Guaranteed Mortality Death Benefit:Option A
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT CASH VALUE NET SURRENDER VALUE
ACCUMULATED ------------------------- ----------------------- -----------------------
AT 5% ASSUMING HYPOTHETICAL GROSS AND NET ANNUAL INVESTMENT RETURN OF
END OF ----------- -------------------------------------------------------------------------
POLICY GROSS 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR NET -2.91% 3.09% 9.09% -2.91% 3.09% 9.09% -2.91% 3.09% 9.09%
- ----------- ----------- ------- ------- --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,100 165,000 165,000 165,000 1,447 1,548 1,650 92 93 295
2 4,305 165,000 165,000 165,000 2,835 3,126 3,431 1,256 1,547 1,852
3 6,620 165,000 165,000 165,000 4,159 4,731 5,351 2,496 3,068 3,688
4 9,051 165,000 165,000 165,000 5,420 6,360 7,422 3,673 4,613 5,675
5 11,604 165,000 165,000 165,000 6,615 8,010 9,652 4,784 6,179 7,821
6 14,284 165,000 165,000 165,000 7,743 9,679 12,055 5,828 7,764 10,140
7 17,098 165,000 165,000 165,000 8,800 11,363 14,641 6,801 9,364 12,642
8 20,053 165,000 165,000 165,000 9,788 13,064 17,430 7,705 10,981 15,347
9 23,156 165,000 165,000 165,000 10,704 14,775 20,436 8,537 12,608 18,269
10 26,414 165,000 165,000 165,000 11,549 16,498 23,680 9,297 14,247 21,429
11 29,834 165,000 165,000 165,000 12,396 18,336 27,333 10,528 16,468 25,465
12 33,426 165,000 165,000 165,000 13,173 20,196 31,306 11,721 18,745 29,855
13 37,197 165,000 165,000 165,000 13,875 22,075 35,630 12,874 21,074 34,629
14 41,157 165,000 165,000 165,000 14,503 23,974 40,343 13,986 23,457 39,825
15 45,315 165,000 165,000 165,000 15,050 25,887 45,481 15,050 25,887 45,481
16 49,681 165,000 165,000 165,000 15,514 27,812 51,092 15,514 27,812 51,092
17 54,265 165,000 165,000 165,000 15,883 29,740 57,219 15,883 29,740 57,219
18 59,078 165,000 165,000 165,000 16,149 31,664 63,916 16,149 31,664 63,916
19 64,132 165,000 165,000 165,000 16,301 33,573 71,245 16,301 33,573 71,245
20 69,439 165,000 165,000 165,000 16,325 35,456 79,274 16,325 35,456 79,274
30 (Age 65) 139,522 165,000 165,000 266,544 7,098 50,984 218,479 7,098 50,984 218,479
40 (Age 75) 253,680 * 165,000 591,419 * 42,221 552,728 * 42,221 552,728
50 (Age 85) 439,631 * * 1,422,212 * * 1,354,488 * * 1,354,488
60 (Age 95) 742,526 * * 3,180,934 * * 3,149,439 * * 3,149,439
</TABLE>
- --------------------------
* In the absence of additional premium the policy will lapse.
Note:
* Asset Based Charges
The average fund expense charge is 1.01%
The Variable Account Asset Charge is 1.90% for the first ten policy years
only, after that, it will be reduced to 1.30%.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return.
Actual investment rates of return may be more or less than those shown and
will depend on a number of factors, including the investment allocations by an
owner and the different investment rates of return for the fund. The death
benefit, cash values and net surrender value for a policy would be different
from those shown if the actual investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated above or below that average for
individual policy years. No representation can be made by PFL or the fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time. This illustration must be preceded or
accompanied by a current prospectus.
49
<PAGE>
PFL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
Specified Amount:$165,000 Asset Based Charges*:2.91%/2.31%
Product Type:Standard Class Policy Annual Premium:$2,000
Using:Current Mortality Nonsmoker Death Benefit:Option A
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT CASH VALUE NET SURRENDER VALUE
ACCUMULATED ------------------------- ------------------------ ------------------------
AT 5% ASSUMING HYPOTHETICAL GROSS AND NET ANNUAL INVESTMENT RETURN OF
END OF ----------- ---------------------------------------------------------------------------
POLICY GROSS 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR NET -2.91% 3.09% 9.09% -2.91% 3.09% 9.09% -2.91% 3.09% 9.09%
- ----------- ----------- ------- ------- --------- ------ ------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,100 165,000 165,000 165,000 1,602 1,708 1,814 247 353 459
2 4,305 165,000 165,000 165,000 3,142 3,454 3,778 1,700 2,011 2,335
3 6,620 165,000 165,000 165,000 4,601 5,215 5,881 3,074 3,689 4,355
4 9,051 165,000 165,000 165,000 6,002 7,016 8,161 4,391 5,406 6,551
5 11,604 165,000 165,000 165,000 7,346 8,857 10,634 5,651 7,163 8,939
6 14,284 165,000 165,000 165,000 8,639 10,744 13,321 6,861 8,966 11,542
7 17,098 165,000 165,000 165,000 9,879 12,675 16,239 8,016 10,812 14,376
8 20,053 165,000 165,000 165,000 11,064 14,647 19,406 9,117 12,700 17,460
9 23,156 165,000 165,000 165,000 12,194 16,662 22,847 10,164 14,632 20,817
10 26,414 165,000 165,000 165,000 13,278 18,728 26,593 11,163 16,613 24,478
11 29,834 165,000 165,000 165,000 14,396 20,959 30,833 12,637 19,200 29,074
12 33,426 165,000 165,000 165,000 15,467 23,254 35,474 14,097 21,885 34,104
13 37,197 165,000 165,000 165,000 16,493 25,618 40,557 15,546 24,672 39,610
14 41,157 165,000 165,000 165,000 17,491 28,070 46,142 17,001 27,580 45,652
15 45,315 165,000 165,000 165,000 18,457 30,608 52,276 18,457 30,608 52,276
16 49,681 165,000 165,000 165,000 19,389 33,234 59,014 19,389 33,234 59,014
17 54,265 165,000 165,000 165,000 20,254 35,921 66,391 20,254 35,921 66,391
18 59,078 165,000 165,000 165,000 21,055 38,672 74,476 21,055 38,672 74,476
19 64,132 165,000 165,000 165,000 21,782 41,484 83,342 21,782 41,484 83,342
20 69,439 165,000 165,000 165,000 22,432 44,357 93,072 22,432 44,357 93,072
30 (Age 65) 139,522 165,000 165,000 316,348 22,864 75,904 259,302 22,864 75,904 259,302
40 (Age 75) 253,680 165,000 165,000 717,425 12,256 118,733 670,491 12,256 118,733 670,491
50 (Age 85) 439,631 * 192,609 1,760,278 * 183,392 1,676,456 * 183,392 1,676,456
60 (Age 95) 742,526 * 273,661 4,065,582 * 270,884 4,025,329 * 270,884 4,025,329
</TABLE>
- --------------------------
* In the absence of additional premium the policy will lapse.
Note:
* Asset Based Charges
The average fund expense charge is 1.01%
The Variable Account Asset Charge is 1.90% for the first ten policy years
only, after that, it will be reduced to 1.30%.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return.
Actual investment rates of return may be more or less than those shown and
will depend on a number of factors, including the investment allocations by an
owner and the different investment rates of return for the fund. The death
benefit, cash values and net surrender value for a policy would be different
from those shown if the actual investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated above or below that average for
individual policy years. No representation can be made by PFL or the fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time. This illustration must be preceded or
accompanied by a current prospectus.
50
<PAGE>
PFL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
Specified Amount:$165,000 Asset Based Charges*:2.91%/2.31%
Product Type:Standard Class Policy Annual Premium:$2,000
Using:Guaranteed Mortality Death Benefit:Option B
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT CASH VALUE NET SURRENDER VALUE
ACCUMULATED ------------------------- ----------------------- -----------------------
AT 5% ASSUMING HYPOTHETICAL GROSS AND NET ANNUAL INVESTMENT RETURN OF
END OF ----------- -------------------------------------------------------------------------
POLICY GROSS 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR NET -2.91% 3.09% 9.09% 2.91% 3.09% 9.09% -2.91% 3.09% 9.09%
- ----------- ----------- ------- ------- --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 2,100 166,443 166,543 166,644 1,443 1,543 1,644 88 188 289
2 4,305 167,822 168,113 168,416 2,822 3,113 3,416 1,243 1,533 1,836
3 6,620 169,135 169,703 170,320 4,135 4,703 5,320 2,472 3,040 3,657
4 9,051 170,381 171,313 172,366 5,381 6,313 7,366 3,634 4,566 5,619
5 11,604 171,556 172,937 174,562 6,556 7,937 9,562 4,725 6,106 7,731
6 14,284 172,660 174,572 176,918 7,660 9,572 11,918 5,745 7,657 10,003
7 17,098 173,687 176,213 179,441 8,687 11,213 14,441 6,688 9,214 12,441
8 20,053 174,641 177,859 182,146 9,641 12,859 17,146 7,558 10,776 15,063
9 23,156 175,516 179,503 185,043 10,516 14,503 20,043 8,349 12,336 17,876
10 26,414 176,314 181,144 188,148 11,314 16,144 23,148 9,063 13,893 20,897
11 29,834 177,106 182,882 191,621 12,106 17,882 26,621 10,238 16,013 24,753
12 33,426 177,820 184,620 195,365 12,820 19,620 30,365 11,368 18,169 28,914
13 37,197 178,451 186,355 199,403 13,451 21,355 34,403 12,450 20,354 33,402
14 41,157 178,999 188,083 203,758 13,999 23,083 38,758 13,482 22,566 38,241
15 45,315 179,458 189,795 208,454 14,458 24,795 43,454 14,458 24,795 43,454
16 49,681 179,823 191,486 213,517 14,823 26,486 48,517 14,823 26,486 48,517
17 54,265 180,084 193,139 218,967 15,084 28,139 53,967 15,084 28,139 53,967
18 59,078 180,229 194,741 224,830 15,229 29,741 59,830 15,229 29,741 59,830
19 64,132 180,249 196,275 231,130 15,249 31,275 66,130 15,249 31,275 66,130
20 69,439 180,128 197,720 237,891 15,128 32,720 72,891 15,128 32,720 72,891
30 (Age 65) 139,522 169,080 203,312 339,427 4,080 38,312 174,427 4,080 38,312 174,427
40 (Age 75) 253,680 * * 534,087 * * 369,087 * * 369,087
50 (Age 85) 439,631 * * 863,224 * * 698,224 * * 698,224
60 (Age 95) 742,526 * * 1,316,683 * * 1,151,683 * * 1,151,683
</TABLE>
- --------------------------
* In the absence of additional premium the policy will lapse.
Note:
* Asset Based Charges
The average fund expense charge is 1.01%
The Variable Account Asset Charge is 1.90% for the first ten policy years
only, after that, it will be reduced to 1.30%.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return.
Actual investment rates of return may be more or less than those shown and
will depend on a number of factors, including the investment allocations by an
owner and the different investment rates of return for the fund. The death
benefit, cash values and net surrender value for a policy would be different
from those shown if the actual investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated above or below that average for
individual policy years. No representation can be made by PFL or the fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time. This illustration must be preceded or
accompanied by a current prospectus.
51
<PAGE>
PFL FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
Specified Amount: $165,000 Asset Based Charges*:2.91%/2.31%
Product Type: Standard Class Policy
Using: Current Mortality Nonsmoker Annual Premium: $2,000
Death Benefit:Option B
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT CASH VALUE NET SURRENDER VALUE
ACCUMULATED ------------------------- ----------------------- -----------------------
AT 5% ASSUMING HYPOTHETICAL GROSS AND NET ANNUAL INVESTMENT RETURN OF
END OF ----------- -------------------------------------------------------------------------
POLICY GROSS 0% 6% 12% 0% 6% 12% 0% 6% 12%
YEAR NET -2.91% 3.09% 9.09% -2.91% 3.09% 9.09% -2.91% 3.09% 9.09%
- ----------- ----------- ------- ------- --------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 12,100 166,599 166,705 166,811 1,599 1,705 1,811 244 350 456
2 4,305 168,135 168,446 168,769 3,135 3,446 3,769 1,692 2,003 2,326
3 6,620 169,586 170,198 170,862 4,586 5,198 5,862 3,059 3,671 4,335
4 9,051 170,977 171,986 173,126 5,977 6,986 8,126 4,366 5,376 6,515
5 11,604 172,307 173,810 175,575 7,307 8,810 10,575 5,613 7,115 8,880
6 14,284 173,585 175,674 178,231 8,585 10,674 13,231 6,806 8,895 11,452
7 17,098 174,806 177,576 181,108 9,806 12,576 16,108 7,943 10,714 14,245
8 20,053 175,968 179,514 184,222 10,968 14,514 19,222 9,021 12,567 17,275
9 23,156 177,072 181,486 187,593 12,072 16,486 22,593 10,042 14,455 20,563
10 26,414 178,127 183,500 191,252 13,127 18,500 26,252 11,012 16,386 24,137
11 29,834 179,210 185,668 195,379 14,210 20,668 30,379 12,451 18,909 28,620
12 33,426 180,242 187,888 199,879 15,242 22,888 34,879 13,872 21,519 33,509
13 37,197 181,224 190,164 204,787 16,224 25,164 39,787 15,277 24,217 38,840
14 41,157 182,175 192,515 210,162 17,175 27,515 45,162 16,685 27,025 44,671
15 45,315 183,091 194,939 216,043 18,091 29,939 51,043 18,091 29,939 51,043
16 49,681 183,970 197,436 222,478 18,970 32,436 57,478 18,970 32,436 57,478
17 54,265 184,773 199,968 229,477 19,773 34,968 64,477 19,773 34,968 64,477
18 59,078 185,502 202,537 237,095 20,502 37,537 72,095 20,502 37,537 72,095
19 64,132 186,148 205,131 245,380 21,148 40,131 80,380 21,148 40,131 80,380
20 69,439 186,705 207,745 254,389 21,705 42,745 89,389 21,705 42,745 89,389
30 (Age 65) 139,522 185,275 232,144 400,201 20,275 67,144 235,201 20,275 67,144 235,201
40 (Age 75) 253,680 172,186 251,515 747,168 7,186 86,515 582,168 7,186 86,515 582,168
50 (Age 85) 439,631 * 208,257 1,533,693 * 43,257 1,368,693 * 43,257 1,368,693
60 (Age 95) 742,526 * * 3,252,217 * * 3,087,217 * * 3,087,217
</TABLE>
- --------------------------
* In the absence of additional premium the policy will lapse.
Note:
* Asset Based Charges
The average fund expense charge is 1.01%
The Variable Account Asset Charge is 1.90% for the first ten policy years
only, after that, it will be reduced to 1.30%.
The hypothetical investment rates of return shown above and elsewhere in
this prospectus are illustrative only and should not be deemed a
representation of past or future investment rates of return.
Actual investment rates of return may be more or less than those shown and
will depend on a number of factors, including the investment allocations by an
owner and the different investment rates of return for the fund. The death
benefit, cash values and net surrender value for a policy would be different
from those shown if the actual investment rates of return averaged 0%, 6% and
12% over a period of years, but fluctuated above or below that average for
individual policy years. No representation can be made by PFL or the fund that
these hypothetical rates of return can be achieved for any one year or
sustained over any period of time. This illustration must be preceded or
accompanied by a current prospectus.
52
<PAGE>
APPENDIX B
WEALTH INDICES OF INVESTMENTS IN THE U.S. CAPITAL MARKETS
The information below graphically depicts the growth of $1.00 invested in
large company stocks, small company stocks, long-term government bonds,
Treasury bills, and hypothetical asset returning the inflation rate over the
period from the end of 1925 to the end of 1997. All results assume reinvestment
of dividends on stocks or coupons on bonds and no taxes. Transaction costs are
not included, except in the small stock index starting in 1982.
Each of the cumulative index values is initialized at $1.00 at year-end 1925.
The graph illustrates that large company stocks and small company stocks have
the best performance over the entire 72-year period: investments of $1.00 in
these assets would have grown to $1,878.33 and $5,519.97, respectively, by
year-end 1997. This higher growth was earned by investments involving
substantial risk. In contrast, long-term government bonds (with an approximate
20-year maturity), which exposed the holder to much less risk, grew to only
$29.07.
The lowest-risk strategy over the past 72 years (for those with short-term
time horizons) was to buy U.S. Treasury bills. Since Treasury bills tended to
track inflation, the resulting real (inflation-adjusted) returns were near zero
for the entire 1926-1977 period.
[CHART APPEARS HERE]
53
<PAGE>
COMPOUND ANNUAL RATES OF RETURN BY DECADE
<TABLE>
<CAPTION>
1920S* 1930S 1940S 1950S 1960S 1970S 1980S 1990S** 1988-97
------ ----- ----- ----- ----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Large Company...... 19.2% (0.1)% 9.2% 19.4% 7.8% 5.9% 17.5% 16.6% 18.0%
Small Company...... (4.5) 1.4 20.7 16.9 15.5 11.5 15.8 16.5 16.5
Long-Term Corp. ... 5.2 6.9 2.7 1.0 1.7 6.2 13.0 10.2 10.8
Long-Term Govt. ... 5.0 4.9 3.2 (0.1) 1.4 5.5 12.6 10.7 11.3
Inter-Term Govt. .. 4.2 4.6 1.8 1.3 3.5 7.0 11.9 8.0 8.3
Treasury Bills..... 3.7 0.6 0.4 1.9 3.9 6.3 8.9 5.0 5.4
Inflation.......... (1.1) (2.0) 5.4 2.2 2.5 7.4 5.1 3.1 3.4
</TABLE>
- ----------------------------
* Based on the period 1926-1929.
** Based on the period 1990-1997.
Source: (C) Stocks, Bonds, Bills and Inflation 1998 Yearbook(TM), Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and
Rex A. Sinquefield). Used with permission. All rights reserved.
INDEX TO FINANCIAL STATEMENTS
PFL LIFE INSURANCE COMPANY:
<TABLE>
<S> <C>
Statutory-Basis Balance Sheet at June 30, 1998 (unaudited)
Statutory-Basis Statement of Operations for the Six Months Ended June 20,
1998 (unaudited)
Statutory-Basis Statement of Changes in Capital and Surplus for the Six
Months ended June 30, 1998
Statutory-Basis Statement of Cash Flow for the Six Months Ended June 30,
1998 (unaudited)
Statutory-Basis Notes to Financial Statements (unaudited)
Report of Independent Auditors dated February 27, 1998
Statutory-Basis Balance Sheets at December 31, 1997 and 1996.
Statutory-Basis Statements of Operations for the years ended December 31,
1997, 1996 and 1995.
Statutory-Basis Statements of Changes in Capital and Surplus for the years
ended December 31, 1997, 1996 and 1995
Statutory-Basis Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Statutory-Basis Notes to Financial Statements
Statutory-Basis Financial Statement Schedules
</TABLE>
54
<PAGE>
APPENDIX C
THE PFL ENDEAVOR VARIABLE LIFE ACCOUNT AND
THE "DOLLAR COST AVERAGING" INVESTMENT METHOD
The investment performance of many common stocks has generally been positive
over certain relatively long periods. Common stocks have, however, also been
subject to market declines, often dramatic ones, and general volatility of
prices over shorter time periods. The price fluctuations of common stocks has
historically been greater than that of high grade debt securities.
The relative volatility of common stock prices as compared with prices of
high grade debt instruments offers both advantages and disadvantages to
investors. Unfortunately, many investors who otherwise might be interested in
common stocks see only the disadvantages and not the advantages of stock price
fluctuation. The primary disadvantage, of course, is that price declines can
be prolonged and substantial, and when this occurs, investors cannot liquidate
their investments without realizing losses. Price declines, however, also
offer investors important opportunities.
Opportunity arises from the fact that investors can purchase more common
stock for the same amount of money than they would before prices declined.
Investors may take advantage of this if they remain willing to continue
investing in both rising and falling markets. The dollar cost averaging method
of investing demonstrates this.
In this method of investing:
. Relatively constant dollar amounts are invested at regular intervals
(monthly, quarterly, or annually),
. Stock Market fluctuations, especially the savings on purchases from
price declines, are exploited for the investor's benefit.
HOW DOLLAR COST AVERAGING WORKS
<TABLE>
<CAPTION>
INVESTMENTS AT COMMON STOCK SHARES
REGULAR INTERVALS MARKET PRICE PURCHASED
----------------- ------------ ---------
<S> <C> <C>
$150 $20 7.5
150 15 10.0
150 10 15.0
150 5 30.0
150 10 15.0
150 15 10.0
---- ----
$900 87.5
</TABLE>
<TABLE>
<S> <C>
Total Value of 87.5 shares @ $15/share.. $1,312.50
Less Investment made.................. (900.00)
---------
Gain/Profit......................... $ 412.50
</TABLE>
Though the market price has not returned to the initial high of $20 per
share, dollar cost averaging has permitted the investor to purchase more
shares at a savings and thus realize a significant gain. Obviously, the dollar
cost averaging method only works if the investor continues to invest
relatively constant amounts over a long period of time.
This plan of investing does not assure a profit or protect against a loss in
declining markets; it does allow investors to take advantage of market
fluctuations. Since the success of this strategy is dependent on systematic
investing, purchasers should consider their ability to sustain their payments
through all periods of market fluctuations.
55
<PAGE>
How does the dollar cost averaging method relate to the PFL Endeavor
Variable Life Insurance Policy? A Policyowner may invest his or her Net
Premium in a Sub-Account, and although a Policy's value in a Sub-Account or
Sub-Accounts is affected by several factors other than investment experience
(e.g., Cash Value charges and charges against the Variable Account), the
dollar cost averaging method can be generally applied to the Policy to the
extent that the Policyowner pays a Planned Periodic Premium on a regular basis
and he or she allocates Net Premium resulting from those Planned Periodic
Premiums to the Growth Sub-Account in relatively constant amounts.
56
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEET--STATUTORY BASIS
AS OF JUNE 30, 1998
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<CAPTION>
ADMITTED ASSETS
<S> <C>
Cash and invested assets:
Cash and short-term investments $ 25,948
Bonds 5,277,887
Preferred stock 4,824
Common stock, at market 52,131
Mortgage loans on real estate 896,794
Home office properties, at cost less accumulated depreciation 8,170
Real estate acquired in satisfaction of debt, at cost less accumu-
lated depreciation 11,681
Investment real estate 39,315
Policy loans 58,563
Other invested assets 54,217
----------
Total cash and invested assets 6,429,530
Premiums deferred and uncollected 16,382
Accrued investment income 70,329
Transfers from separate accounts 68,005
Other assets 33,749
Separate account assets 3,038,608
----------
Total admitted assets $9,656,603
==========
</TABLE>
<TABLE>
<S> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $1,051,299
Annuity 4,053,009
Accident and health 187,050
Policy and contract claim reserves:
Life 9,261
Accident and health 54,553
Other policyholders' funds 154,465
Remittances and items not allocated 295,747
Federal income taxes payable 8,392
Asset valuation reserve 81,988
Interest maintenance reserve 42,308
Short-term note payable to affiliate 74,700
Payable to affiliate 66,172
Other liabilities 85,963
Separate account liabilities 3,032,859
----------
Total liabilities 9,197,766
Capital and surplus:
Common stock, $10.00 par value, 500 shares
authorized, 266 issued and outstanding 2,660
Paid-in surplus 154,282
Unassigned surplus 301,895
----------
Total capital and surplus 458,837
----------
Total liabilities and capital and surplus $9,656,603
==========
</TABLE>
57
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS--STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<CAPTION>
Revenues:
<S> <C>
Premiums and other considerations, net of reinsurance:
Life $191,768
Annuity 333,959
Accident and health 91,900
Net investment income 224,680
Amortization of interest maintenance reserve 6,731
Commissions and expense allowances on reinsurance ceded 13,050
Other income 28,922
--------
891,010
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits 20,895
Surrender benefits 392,899
Other benefits 127,545
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 167,282
Annuity (150,832)
Accident and health 17,721
Other 10,862
--------
586,372
Insurance expenses:
Commissions 70,807
General insurance expenses 24,215
Taxes, licenses and fees 9,503
Transfer to separate accounts 142,021
Other expenses 1,541
--------
248,087
--------
834,459
--------
Gain from operations before federal income
taxes and realized capital gains on
investments 56,551
Federal income tax expense 21,190
--------
Gain from operations before realized
capital gains on investments 35,361
Net realized capital gains on investments
(net of related federal income taxes and
amounts transferred to interest maintenance
reserve) 3,494
--------
Net income $ 38,855
========
</TABLE>
58
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENT OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $2,660 $154,282 $272,420 $429,362
Net income 0 0 38,855 38,855
Net unrealized gains 0 0 2,682 2,682
Increase in non-admitted assets 0 0 (680) (680)
Increase in asset valuation reserve 0 0 (12,163) (12,163)
Other adjustments 0 0 781 781
------ -------- -------- --------
Balance at June 30, 1998 $2,660 $154,282 $301,895 $458,837
====== ======== ======== ========
</TABLE>
59
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOW--STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
Premiums and other considerations, net of reinsurance $ 658,990
Net investment income 234,739
Life and accident and health claims (75,188)
Surrender benefits to policyholders and other fund withdrawals (392,899)
Other benefits to policyholders (75,840)
Commissions, other expenses and other taxes (106,960)
Federal income taxes, excluding tax on capital gains (14,686)
Other, net 208,278
Net transfers to separate accounts (149,832)
---------
Net cash provided by operating activities 286,602
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks 1,753,306
Common stocks 13,754
Mortgage loans on real estate 103,910
Other 3,129
---------
1,874,099
Cost of investments acquired:
Bonds and preferred stocks 2,116,408
Common stocks 11,738
Mortgage loans 56,253
Other 21,963
---------
2,206,362
Net tax on capital gains 10,630
---------
Net cash used by investing activities (342,893)
---------
FINANCING ACTIVITIES
Borrowed money 58,300
---------
Net cash provided by financing activities 58,300
Increase in cash and short-term investments 2,009
Cash and short-term investments at beginning of year 23,939
---------
Cash and short-term investments at end of year $ 25,948
=========
</TABLE>
60
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)(UNAUDITED)
1.BASIS OF PRESENTATION
The accompanying unaudited statutory basis financial statements have been
prepared in accordance with statutory accounting principles for interim
financial information and the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the accompanying
statutory basis financial statements and notes thereto for the year ended
December 31, 1997.
61
<PAGE>
FINANCIAL STATEMENTS--STATUTORY BASIS
PFL LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
62
<PAGE>
PFL LIFE INSURANCE COMPANY
FINANCIAL STATEMENTS--STATUTORY BASIS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 1
Audited Financial Statements
Balance Sheets--Statutory Basis........................................... 2
Statements of Operations--Statutory Basis................................. 3
Statements of Changes in Capital and Surplus--Statutory Basis............. 4
Statements of Cash Flows--Statutory Basis................................. 5
Notes to Financial Statements--Statutory Basis............................ 6
</TABLE>
63
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
PFL Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1997 and 1996, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles.
The variances between such practices and generally accepted accounting
principles also are described in Note 1. The effects on the financial
statements of these variances are not reasonably determinable but are presumed
to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of PFL Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1997.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997 in conformity with accounting practices prescribed or permitted by the
Insurance Division, Department of Commerce, of the State of Iowa. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic statutory-basis financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 27, 1998
64
<PAGE>
PFL LIFE INSURANCE COMPANY
BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---------- ----------
ADMITTED ASSETS
---------------
<S> <C> <C>
Cash and invested assets:
Cash and short-term investments............................ $ 23,939 $ 50,737
Bonds...................................................... 4,913,144 4,773,433
Stocks:
Preferred................................................ 2,750 3,097
Common (cost: 1997--$33,058; 1996--$23,212).............. 42,345 32,038
Affiliated entities (cost: 1997--$10,798; 1996--
$14,893)................................................ 8,031 6,934
Mortgage loans on real estate.............................. 935,207 911,705
Real estate, at cost less accumulated depreciation ($8,655
in 1997; $11,338 in 1996):
Home office properties................................... 8,283 10,372
Properties acquired in satisfaction of debt.............. 11,814 12,260
Investment properties.................................... 36,416 35,922
Policy loans............................................... 57,136 54,214
Other invested assets...................................... 29,864 16,343
---------- ----------
Total cash and invested assets......................... 6,068,929 5,907,055
Premiums deferred and uncollected........................... 16,101 16,345
Accrued investment income................................... 69,662 70,401
Short-term notes receivable from affiliate.................. -- 53,900
Federal income taxes recoverable............................ -- 4,018
Transfers from separate accounts............................ 60,193 38,528
Other assets................................................ 37,624 31,215
Separate account assets..................................... 2,517,365 1,844,515
---------- ----------
Total admitted assets.................................. $8,769,874 $7,965,977
========== ==========
<CAPTION>
LIABILITIES AND CAPITAL AND SURPLUS
-----------------------------------
<S> <C> <C>
Liabilities:
Aggregate reserves for policies and contracts:
Life..................................................... $ 884,018 $ 736,100
Annuity.................................................. 4,204,125 4,408,419
Accident and health...................................... 169,328 139,269
Policy and contract claim reserves:
Life..................................................... 8,635 7,369
Accident and health...................................... 57,713 66,988
Other policyholders' funds................................. 143,831 126,672
Remittances and items not allocated........................ 153,745 64,064
Asset valuation reserve.................................... 69,825 54,851
Interest maintenance reserve............................... 30,287 23,745
Federal income taxes payable............................... 1,889 --
Short-term notes payable to affiliates..................... 16,400 --
Other liabilities.......................................... 75,070 70,663
Payable to affiliates...................................... 13,240 4,975
Separate account liabilities............................... 2,512,406 1,844,515
---------- ----------
Total liabilities...................................... 8,340,512 7,547,630
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding.................................... 2,660 2,660
Paid-in surplus............................................ 154,282 154,129
Unassigned surplus......................................... 272,420 261,558
---------- ----------
Total capital and surplus.............................. 429,362 418,347
---------- ----------
Total liabilities and capital and surplus.............. $8,769,874 $7,965,977
========== ==========
</TABLE>
See accompanying notes.
65
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net
of reinsurance:
Life.................................. $ 202,435 $ 204,872 $ 114,704
Annuity............................... 657,695 725,966 921,452
Accident and health................... 207,982 227,862 232,738
Net investment income................... 446,424 428,337 392,685
Amortization of interest maintenance re-
serve.................................. 3,645 2,434 4,341
Commissions and expense allowances on
reinsurance ceded...................... 49,859 73,931 77,071
---------- ---------- ----------
1,568,040 1,663,402 1,742,991
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health bene-
fits................................. 146,583 147,024 146,346
Surrender benefits.................... 658,071 512,810 498,626
Other benefits........................ 126,495 101,288 88,607
Increase (decrease) in aggregate re-
serves for
policies and contracts:
Life.................................. 149,575 140,126 50,071
Annuity............................... (203,139) 188,002 528,330
Accident and health................... 30,059 26,790 17,694
Other................................. 16,998 19,969 16,017
---------- ---------- ----------
924,642 1,136,009 1,345,691
Insurance expenses:
Commissions............................. 157,300 177,466 200,706
General insurance expenses.............. 57,571 57,282 57,623
Taxes, licenses and fees................ 8,715 13,889 15,700
Net transfers to separate accounts...... 297,480 171,785 42,981
Other expenses.......................... 119 526 760
---------- ---------- ----------
521,185 420,948 317,770
---------- ---------- ----------
1,445,827 1,556,957 1,663,461
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital gains
(losses) on investments.................. 122,213 106,445 79,530
Federal income tax expense................ 43,381 41,177 33,335
---------- ---------- ----------
Gain from operations before net realized
capital gains (losses) on investments.... 78,832 65,268 46,195
Net realized capital gains (losses) on in-
vestments (net of related federal income
taxes and amounts
transferred to interest maintenance re-
serve)................................... 7,159 (3,503) (18,096)
---------- ---------- ----------
Net income................................ $ 85,991 $ 61,765 $ 28,099
========== ========== ==========
</TABLE>
See accompanying notes.
66
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995................ $2,660 $114,129 $211,552 $328,341
Capital contribution.................... -- 40,000 -- 40,000
Net income for 1995..................... -- -- 28,099 28,099
Net unrealized capital losses........... -- -- (7,574) (7,574)
Decrease in non-admitted assets......... -- -- 50 50
Increase in asset valuation reserve..... -- -- (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a
division............................... -- -- 35 35
Cancellation of reinsurance agreement... -- -- 585 585
Amendment of reinsurance agreement...... -- -- 419 419
Transfer of subsidiary investment to
stockholder............................ -- -- (3,250) (3,250)
Change in reserve valuation methodolo-
gy..................................... -- -- (501) (501)
Increase in liability for reinsurance in
unauthorized companies................. -- -- (2,730) (2,730)
------ -------- -------- --------
Balance at December 31, 1995.............. 2,660 154,129 220,739 377,528
Net income for 1996..................... -- -- 61,765 61,765
Net unrealized capital gains............ -- -- 2,351 2,351
Increase in non-admitted assets......... -- -- (148) (148)
Increase in asset valuation reserve..... -- -- (10,930) (10,930)
Dividend to stockholder................. -- -- (20,000) (20,000)
Prior period adjustment................. -- -- 5,025 5,025
Surplus effect of sale of a division.... -- -- (384) (384)
Surplus effect of ceding commission
associated with the sale of a
division............................... -- -- 29 29
Amendment of reinsurance agreement...... -- -- 421 421
Decrease in liability for reinsurance in
unauthorized companies................. -- -- 2,690 2,690
------ -------- -------- --------
Balance at December 31, 1996.............. 2,660 154,129 261,558 418,347
Capital contribution.................... -- 153 -- 153
Net income for 1997..................... -- -- 85,991 85,991
Net unrealized capital gains............ -- -- 3,592 3,592
Increase in non-admitted assets......... -- -- (481) (481)
Increase in asset valuation reserve..... -- -- (14,974) (14,974)
Dividend to stockholder................. -- -- (62,000) (62,000)
Surplus effect of sale of a division.... -- -- (161) (161)
Surplus effect of ceding commissions
associated with the sale of a
division............................... -- -- 5 5
Surplus effect of amendment of reinsur-
ance agreement......................... -- -- 389 389
Surplus effect of reinsurance agree-
ment................................... -- -- 402 402
Increase in liability for reinsurance in
unauthorized companies................. -- -- (1,901) (1,901)
------ -------- -------- --------
Balance at December 31, 1997.............. $2,660 $154,282 $272,420 $429,362
====== ======== ======== ========
</TABLE>
See accompanying notes.
67
<PAGE>
PFL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net
of reinsurance......................... $ 1,119,936 $ 1,240,748 $ 1,353,407
Net investment income................... 452,091 431,456 398,051
Life and accident and health claims..... (154,383) (147,556) (140,798)
Surrender benefits and other fund with-
drawals................................ (658,071) (512,810) (498,626)
Other benefits to policyholders......... (126,462) (101,254) (88,519)
Commissions, other expenses and other
taxes.................................. (225,042) (248,321) (278,241)
Net transfers to separate accounts...... (319,146) (210,312) (42,981)
Federal income taxes, excluding tax on
capital gains.......................... (47,909) (35,551) (32,905)
Cash paid in conjunction with an
amendment of a reinsurance agreement... (4,826) (5,812)
Repayment of intercompany notes and re-
ceivables, net......................... -- -- (48,070)
Cash received in connection with a
reinsurance agreement.................. 1,477 -- --
Other, net.............................. 89,693 (41,677) 62,345
----------- ----------- -----------
Net cash provided by operating
activities............................. 127,358 368,911 683,663
INVESTING ACTIVITIES
Proceeds from investment sold, matured
or repaid:
Bonds and preferred stocks............ 3,284,095 2,112,831 1,757,229
Common stocks......................... 34,004 27,214 20,338
Mortgage loans on real estate......... 138,162 74,351 36,550
Real estate........................... 6,897 18,077 23,203
Cash received from ceding commissions
associated with the sale of a
division............................. 8 45 55
Other................................. 57,683 22,568 8,258
----------- ----------- -----------
3,520,849 2,255,086 1,845,633
Cost of investments acquired:
Bonds and preferred stocks............ (3,411,442) (2,270,105) (2,294,195)
Common stocks......................... (37,339) (29,799) (23,284)
Mortgage loans on real estate......... (159,577) (324,381) (192,292)
Real estate........................... (2,013) (222) (10,188)
Policy loans.......................... (2,922) (1,539) (877)
Cash paid in association with the sale
of a division........................ -- (539) --
Cash paid in conjunction with sales of
a division........................... (591) (123) --
Other................................. (15,674) (6,404) (2,670)
----------- ----------- -----------
(3,629,558) (2,633,112) (2,523,506)
----------- ----------- -----------
Net cash used in investing activities... (108,709) (378,026) (677,873)
FINANCING ACTIVITIES
Issuance of short-term intercompany
notes payable.......................... 16,400 -- 40,000
Capital contribution.................... 153 -- --
Dividends to stockholder................ (62,000) (20,000) --
----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. (45,447) (20,000) 40,000
----------- ----------- -----------
Increase (decrease) in cash and short-
term investments....................... (26,798) (29,115) 45,790
Cash and short-term investments at be-
ginning of year........................ 50,737 79,852 34,062
----------- ----------- -----------
Cash and short-term investments at end
of year................................ $ 23,939 $ 50,737 $ 79,852
=========== =========== ===========
</TABLE>
See accompanying notes.
68
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PFL Life Insurance Company ("the Company") is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands.
In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through
mergers. In addition, the Company has canceled or entered into several
coinsurance and reinsurance agreements with affiliates and non-affiliates. The
following is a description of those transactions:
. During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association,
an independent insurance agency, will be written by the insurance
subsidiaries of UICI and will not be shared with the Company and its
affiliates through coinsurance arrangements. As a result of the sale,
during 1996 the Company transferred $123 in assets, substantially all of
which was cash, and $70 of liabilities. The difference between the assets
and liabilities of $(53) plus a tax credit of $19 was charged directly to
unassigned surplus. During 1997, the Company transferred $591 in assets,
substantially all of which was cash and $343 of liabilities. The difference
between the assets and liabilities of $(248) net of a tax credit of $87 was
charged directly to unassigned surplus.
. Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference
between the assets and liabilities, net of a tax effect of $302 was
credited directly to unassigned surplus.
. On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2 1/2% each year
(primarily group health business). As a result, the Company transferred
$4,303 in assets and liabilities of $4,467 during 1995. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets
and liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus. During 1997, the Company transferred $5,045 in assets,
including $4,826 of cash and short-term investments, and liabilities of
$5,164. The difference between the assets and liabilities of $119 plus a
tax credit of $270 was credited directly to unassigned surplus.
. During 1993, the Company sold the Oakbrook Division (primarily group health
business). The initial transfer of risk occurred through an indemnity
reinsurance agreement. The policies will then be assumed by the reinsurer
by novation as state regulatory and policyholder approvals are received.
During 1996, the Company paid $539 in association with this sale; the
payment, net of a tax credit of $189, were charged
69
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
directly to unassigned surplus. In addition, the Company will receive from
the third party administrator a ceding commission of one percent of the
premiums collected between January 1, 1994 and December 31, 1996. As a
result of the sale, in 1995, the Company received $55 for ceding
commissions; the commissions net of the related tax effect of $20 was
credited directly to unassigned surplus. During 1996, the Company received
$45 for ceding commissions; the commissions net of the related tax effect
of $(16) was charged directly to unassigned surplus. In 1997, the Company
received $8 for ceding commissions; the commissions net of the related tax
effect of $3 was credited directly to unassigned surplus.
. During 1997, the Company entered into a reinsurance agreement with a non-
affiliate. As a result of the agreement, the Company received $1,480 of
assets, including $1,477 of cash and short-term securities, and $861 of
liabilities. The difference between the assets and liabilities of $619, net
of a tax effect of $217 was credited directly to unassigned surplus.
NATURE OF BUSINESS
The Company sells individual non-participating whole life, endowment and
term contracts, as well as a broad line of single fixed and flexible premium
annuity products. In addition, the Company offers group life, universal life,
and individual and specialty health coverages. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
primarily through the Company's agents and financial institutions.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant
of these differences are as follows: (a) bonds are generally reported at
amortized cost rather than segregating the portfolio into held-to-maturity
(reported at amortized cost), available-for-sale (reported at fair value), and
trading (reported at fair value) classifications; (b) acquisition costs of
acquiring new business are charged to current operations as incurred rather
than deferred and amortized over the life of the policies; (c) policy reserves
on traditional life products are based on statutory mortality rates and
interest which may differ from reserves based on reasonable assumptions of
expected mortality, interest, and withdrawals which include a provision for
possible unfavorable deviation from such assumptions; (d) policy reserves on
certain investment products use discounting methodologies based on statutory
interest rates rather than full account values; (e) reinsurance amounts are
netted against the corresponding asset or liability rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (g) net realized gains or losses attributed to changes in the
level of
70
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
interest rates in the market are deferred and amortized over the remaining
life of the bond or mortgage loan, rather than recognized as gains or losses
in the statement of operations when the sale is completed; (h) potential
declines in the estimated realizable value of investments are provided for
through the establishment of a formula-determined statutory investment reserve
(reported as a liability) changes to which are charged directly to surplus,
rather than through recognition in the statement of operations for declines in
value, when such declines are judged to be other than temporary; (i) certain
assets designated as "non-admitted assets" have been charged to surplus rather
than being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; (m) gains or losses on
dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations; and (n) a
liability is established for "unauthorized reinsurers" and changes in this
liability are charged or credited directly to unassigned surplus. The effects
of these variances have not been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1998, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-
term investments are reported at cost adjusted for amortization of premiums
and accrual of discounts. Amortization is computed using methods which result
in a level yield over the expected life of the security. The Company reviews
its prepayment assumptions on mortgage and other asset backed securities at
regular intervals and adjusts amortization rates retrospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in good standing are reported at cost.
Investments in preferred stocks not in good standing are reported at the lower
of cost or market. Common stocks of affiliated and unaffiliated companies,
which includes shares of mutual funds (money market and other), are carried at
market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as
required or permitted by Iowa Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for potential
losses in the event of default by issuers
71
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
of certain invested assets. These amounts are determined using a formula
prescribed by the NAIC and are reported as a liability. The formula for the
AVR provides for a corresponding adjustment for realized gains and losses.
Under a formula prescribed by the NAIC, the Company defers, in the Interest
Maintenance Reserve (IMR), the portion of realized gains and losses on sales
of fixed income investments, principally bonds and mortgage loans,
attributable to changes in the general level of interest rates and amortizes
those deferrals over the remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or on real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1997, 1996 and 1995,
the Company excluded investment income due and accrued of $177, $1,541 and
$2,272, respectively, with respect to such practices.
The Company uses interest rate swaps and caps as part of its overall
interest rate risk management strategy for certain life insurance and annuity
products. The Company entered into several interest rate swap contracts to
modify the interest rate characteristics of the underlying liabilities. The
net interest effect of such swap transactions is reported as an adjustment of
interest income from the hedged items as incurred.
The Company has entered into interest-rate cap agreements to hedge the
exposure of changing interest rates. The cash flows from the interest rate
caps will help offset losses that might occur from changes in interest rates.
The cost of such agreements is included in interest expense ratably during the
life of the agreement. Income received as a result of the cap agreement will
be recognized in investment income as earned. Unamortized cost of the
agreements is included in other assets.
AGGREGATE POLICY RESERVES
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables based on
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are
calculated using interest rates ranging from 2.00 to 6.00 percent and are
computed principally on the Net Level Premium Valuation and the Commissioners'
Reserve Valuation Methods. Reserves for universal life policies are based on
account balances adjusted for the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 2.50 to 11.25 percent and mortality rates, where
appropriate, from a variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
72
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate accounts are valued at
market. Income and gains and losses with respect to the assets in the separate
accounts accrue to the benefit of the policyholders and, accordingly, the
operations of the separate accounts are not included in the accompanying
financial statements. The separate accounts do not have any minimum guarantees
and the investment risks associated with market value changes are borne
entirely by the policyholders. The Company received variable contract premiums
of $281,095, $227,864 and $133,386 in 1997, 1996 and 1995, respectively. All
variable account contracts are subject to discretionary withdrawal by the
policyholder at the market value of the underlying assets less the current
surrender charge.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No.
119, Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments, requires additional disclosure about derivatives. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparisons to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement of Financial Accounting Standards No. 107 and No. 119
exclude certain financial instruments and all nonfinancial instruments from
their disclosure requirements and allow companies to forego the disclosures
when those estimates can only be made at excessive cost. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For
73
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
fixed maturity securities not actively traded, fair values are estimated
using values obtained from independent pricing services or, in the case of
private placements, are estimated by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality, and
maturity of the investments. The fair values for equity securities are
based on quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal their carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Interest rate cap and interest rate swaps: Estimated fair value of the
interest rate cap is based upon the latest quoted market price.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1997 1996
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds.............................. $4,913,144 $5,046,527 $4,773,433 $4,867,770
Preferred stocks................... 2,750 8,029 3,097 7,133
Common stocks...................... 42,345 42,345 32,038 32,038
Affiliated common stock............ 8,031 8,031 6,934 6,934
Mortgage loans on real estate...... 935,207 983,720 911,705 922,010
Policy loans....................... 57,136 57,136 54,214 54,214
Cash and short-term investments.... 23,939 23,939 50,737 50,737
Interest rate cap.................. 5,618 1,513 6,797 6,975
Interest rate swaps................ -- 2,546 -- --
Separate account assets............ 2,517,365 2,517,365 1,844,515 1,844,515
LIABILITIES
Investment contract liabilities.... 4,345,181 4,283,461 4,532,568 4,398,630
Separate account liabilities....... 2,452,205 2,452,205 1,803,057 1,803,057
</TABLE>
74
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
CARRYING UNREALIZED UNREALIZED ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and
agencies........................ $ 188,241 $ 2,562 $ (21) $ 190,782
State, municipal and other
government...................... 61,532 2,584 (1,774) 62,342
Public utilities................. 121,582 5,384 (2,952) 124,014
Industrial and miscellaneous..... 1,955,587 85,233 (7,752) 2,033,068
Mortgage-backed securities....... 2,586,202 55,382 (5,263) 2,636,321
---------- -------- -------- ----------
4,913,144 151,145 (17,762) 5,046,527
Preferred stocks................... 2,750 5,279 -- 8,029
---------- -------- -------- ----------
$4,915,894 $156,424 $(17,762) $5,054,556
========== ======== ======== ==========
DECEMBER 31, 1996
Bonds:
United States Government and
agencies........................ $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other
government...................... 59,644 1,906 177 61,373
Public utilities................. 147,918 5,616 1,020 152,514
Industrial and miscellaneous..... 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities....... 2,470,740 43,896 15,610 2,499,026
---------- -------- -------- ----------
4,773,433 119,429 25,092 4,867,770
Preferred stocks................... 3,097 4,036 -- 7,133
---------- -------- -------- ----------
$4,776,530 $123,465 $ 25,092 $4,874,903
========== ======== ======== ==========
</TABLE>
The carrying value and estimated fair value of bonds at December 31, 1997,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................... $ 132,834 $ 133,608
Due after one year through five years................. 1,036,862 1,066,474
Due after five years through ten years................ 886,542 915,229
Due after ten years................................... 270,704 294,895
---------- ----------
2,326,942 2,410,206
Mortgage and other asset-backed securities............ 2,586,202 2,636,321
---------- ----------
$4,913,144 $5,046,527
========== ==========
</TABLE>
75
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes......................... $373,496 $364,356 $342,182
Dividends on equity investments..................... 1,460 1,436 1,822
Interest on mortgage loans.......................... 80,266 69,418 52,702
Rental income on real estate........................ 7,501 9,526 10,443
Interest on policy loans............................ 3,400 3,273 3,112
Other investment income............................. 613 1,799 1,803
-------- -------- --------
Gross investment income............................. 466,736 449,808 412,064
Investment expenses................................. 20,312 21,471 19,379
-------- -------- --------
Net investment income............................... $446,424 $428,337 $392,685
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds................................... $3,284,095 $2,112,831 $1,757,229
========== ========== ==========
Gross realized gains....................... $ 30,094 $ 19,876 $ 19,721
Gross realized losses...................... (17,265) (19,634) (34,399)
---------- ---------- ----------
Net realized gains (losses)................ $ 12,829 $ 242 $ (14,678)
========== ========== ==========
</TABLE>
At December 31, 1997, investments with an aggregate carrying value of
$5,944,376 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------
YEAR ENDED DECEMBER 31
---------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Debt securities.................................... $ 12,829 $ 242 $(14,678)
Short-term investments............................. (19) (197) 24
Equity securities.................................. 6,972 1,798 504
Mortgage loans on real estate...................... 2,252 (5,530) (1,053)
Real estate........................................ 4,252 1,210 (1,908)
Other invested assets.............................. 1,632 12 (970)
-------- ------- --------
27,918 (2,465) (18,081)
Tax effect......................................... (10,572) (1,235) 7,878
Transfer to interest maintenance reserve........... (10,187) 197 (7,891)
-------- ------- --------
Net realized gains (losses)........................ $ 7,159 $(3,503) $(18,096)
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
---------------------------
YEAR ENDED DECEMBER 31
---------------------------
1997 1996 1995
------- --------- --------
<S> <C> <C> <C>
Debt securities......... $40,289 $(115,867) $355,560
Equity securities....... 5,653 2,929 (16,379)
------- --------- --------
Change in unrealized ap-
preciation (deprecia-
tion).................. $45,942 $(112,938) $339,181
======= ========= ========
</TABLE>
76
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
Gross unrealized gains and gross unrealized losses on equity securities were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Unrealized gains..................................... $10,356 $ 9,590 $ 6,833
Unrealized losses.................................... (3,836) (8,723) (8,895)
------- ------- -------
Net unrealized gains (losses)........................ $ 6,520 $ 867 $(2,062)
======= ======= =======
</TABLE>
During 1997, the Company issued mortgage loans with interest rates ranging
from 7.32% to 8.62%. The maximum percentage of any one mortgage loan to the
value of the underlying real estate at origination was 80%. Mortgage loans
with a carrying value of $237 were non-income producing for the previous
twelve months. Accrued interest of $79 related to these mortgage loans was
excluded from investment income. The Company requires all mortgaged properties
to carry fire insurance equal to the value of the underlying property.
During 1996 and 1995, mortgage loans of $13,163 and $1,644, respectively,
were foreclosed and transferred to real estate. No mortgage loans were
foreclosed during 1997. At December 31, 1997 and 1996, the Company held a
mortgage loan loss reserve in the asset valuation reserve of $11,985 and
$5,432, respectively. The mortgage loan portfolio is diversified by geographic
region and specific collateral property type as follows:
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1997 1996
----- -----
<S> <C> <C>
South Atlantic........................................... 29% 26%
Pacific.................................................. 15 13
E. North Central......................................... 12 15
Mountain................................................. 10 10
W. South Central......................................... 9 12
E. South Central......................................... 8 9
Middle Atlantic.......................................... 7 6
W. North Central......................................... 6 6
New England.............................................. 4 3
</TABLE>
PROPERTY TYPE DISTRIBUTION
<TABLE>
<CAPTION>
DECEMBER 31
-------------
1997 1996
----- -----
<S> <C> <C>
Retail................................................... 35% 37%
Office................................................... 31 34
Apartment................................................ 14 14
Other.................................................... 14 12
Industrial............................................... 6 3
</TABLE>
At December 31, 1997, the Company had the following investments (excluding
U.S. Government guaranteed or insured issues) which individually represented
more than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
CARRYING
DESCRIPTION OF SECURITY OR ISSUER VALUE
--------------------------------- --------
<S> <C>
Bonds:
Structured Asset Securities Corporation.......................... $66,650
Countrywide Mortgage Backed Securities, Inc. .................... 94,918
</TABLE>
77
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
The Company utilizes a variety of off-balance sheet financial instruments as
part of its efforts to hedge and manage fluctuations in the market value of
its investment portfolio attributable to changes in general interest rate
levels and to manage duration mismatch of assets and liabilities. Those
instruments include interest rate exchange agreements (swaps and caps),
options, and commitments to extend credit and all involve elements of credit
and market risks in excess of the amounts recognized in the accompanying
financial statements at a given point in time. The contract or notional
amounts of those instruments reflect the extent of involvement in the various
types of financial instruments.
The Company's exposure to credit risk is the risk of loss from a
counterparty failing to perform according to the terms of the contract. That
exposure includes settlement risk (i.e., the risk that the counterparty
defaults after the Company has delivered funds or securities under terms of
the contract) that would result in an accounting loss and replacement cost
risk (i.e., the cost to replace the contract at current market rates should
the counterparty default prior to settlement date). Credit loss exposure
resulting from nonperformance by a counterparty for commitments to extend
credit is represented by the contractual amounts of the instruments.
At December 31, 1997 and 1996, the Company's outstanding financial
instruments with on and off-balance sheet risks, shown in notional amounts,
are summarized as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
-----------------
1997 1996
-------- --------
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed pay floating................................ $100,000 $ --
Receive floating (uncapped)--pay floating (capped)........ 67,229 --
Interest rate cap agreements.................................. 500,000 500,000
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and
ceded amounts:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums............................. $1,312,446 $1,457,450 $1,591,531
Reinsurance assumed......................... 2,038 1,796 2,356
Reinsurance ceded........................... (246,372) (300,546) (324,993)
---------- ---------- ----------
Net premiums earned......................... $1,068,112 $1,158,700 $1,268,894
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $183,638,
$168,155 and $167,287 during 1997, 1996 and 1995, respectively. At December
31, 1997 and 1996, estimated amounts recoverable from reinsurers that have
been deducted from policy and contract claim reserves totaled $60,437 and
$63,226, respectively. The aggregate reserves for policies and contracts were
reduced for reserve credits for reinsurance ceded at December 31, 1997 and
1996 of $2,434,130 and $2,737,441, respectively.
78
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
At December 31, 1997, amounts recoverable from unauthorized reinsurers of
$73,080 (1996 $73,434) and reserve credits for reinsurance ceded of $78,838
(1996 $55,035) were associated with a single reinsurer and its affiliates. The
Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $117,686 at December 31, 1997 that can be drawn on
for amounts that remain unpaid for more than 120 days.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a tax-
sharing agreement between the Company and its affiliates, the Company computes
federal income tax expense as if it were filing a separate income tax return,
except that tax credits and net operating loss carryforwards are determined on
the basis of the consolidated group. Additionally, the alternative minimum tax
is computed for the consolidated group and the resulting tax, if any, is
allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%)......... $42,775 $37,256 $27,835
Tax reserve adjustment............................... 2,004 2,211 2,405
Excess tax depreciation.............................. (392) (384) (365)
Deferred acquisition costs--tax basis................ 4,308 5,583 4,581
Prior year over accrual.............................. (1,016) (499) (306)
Dividend received deduction.......................... (941) (454) (56)
Charitable contribution.............................. (848) -- --
Other items--net..................................... (2,509) (2,536) (759)
------- ------- -------
Federal income tax expense........................... $43,381 $41,177 $33,335
======= ======= =======
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($20,387 at December 31, 1997). To the extent dividends are
paid from the amount accumulated in the policyholders' surplus account, net
earnings would be reduced by the amount of tax required to be paid. Should the
entire amount in the policyholders' surplus account become taxable, the tax
thereon computed at current rates would amount to approximately $7,135.
The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual.
This included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related
interest of $1,686, net of a tax effect of $590. An examination is underway
for years 1988 through 1995.
79
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which
entitle policyholders to a share in the earnings of the participating
policies, provided that a dividend distribution, which is determined annually
based on mortality and persistency experience of the participating policies,
is authorized by the Company. Participating insurance constituted
approximately .9% and 1.0% of ordinary life insurance in force at December 31,
1997 and 1996, respectively.
A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on
a variety of the Company's products that are not subject to significant
mortality or morbidity risk; however, there may be certain restrictions placed
upon the amount of funds that can be withdrawn without penalty. The amount of
reserves on these products, by withdrawal characteristics are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
1997 1996
------------------ ------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment................ $ 8,912 0% $ 20,800 0%
Subject to discretionary withdrawal at
book value less surrender charge........ 755,300 8 794,881 9
Subject to discretionary withdrawal at
market value............................ 2,454,845 27 1,803,057 20
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments)............................ 5,821,049 63 6,284,876 69
Not subject to discretionary withdrawal
provision............................... 203,522 2 174,416 2
---------- --- ---------- ---
9,243,628 100% 9,078,030 100%
Less reinsurance ceded................... 2,372,495 2,677,432
---------- ----------
Total policy reserves on annuities and
deposit fund liabilities................ $6,871,134 $6,400,598
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of operations
of the
separate accounts statement:
Transfers to separate accounts................... $281,095 $227,864 $133,386
Transfers from separate accounts................. 9,819 75,172 104,219
-------- -------- --------
Net transfers to separate accounts................. 271,276 152,692 29,167
Reconciling adjustments charges for investment
management, administration fees and contract
guarantees........................................ 26,204 19,093 13,814
-------- -------- --------
Transfers as reported in the summary of operations
of the life, accident and health annual state-
ment.............................................. $297,480 $171,785 $ 42,981
======== ======== ========
</TABLE>
80
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1997 and 1996, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
------- ------- -------
<S> <C> <C> <C>
DECEMBER 31, 1997
Life and annuity:
Ordinary direct first year business................ $ 2,316 $1,698 $ 618
Ordinary direct renewal business................... 22,724 6,834 15,890
Group life direct business......................... 1,523 646 877
Reinsurance ceded.................................. (1,464) (81) (1,383)
------- ------ -------
25,099 9,097 16,002
Accident and health:
Direct............................................. 148 -- 148
Reinsurance ceded.................................. (49) -- (49)
------- ------ -------
Total accident and health............................ 99 -- 99
------- ------ -------
$25,198 $9,097 $16,101
======= ====== =======
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business................ $ 2,657 $1,865 $ 792
Ordinary direct renewal business................... 23,307 7,180 16,127
Group life direct business......................... 1,788 1,195 593
Reinsurance ceded.................................. (1,706) (438) (1,268)
------- ------ -------
26,046 9,802 16,244
Accident and health:
Direct............................................. 104 -- 104
Reinsurance ceded.................................. (3) -- (3)
------- ------ -------
Total accident and health............................ 101 -- 101
------- ------ -------
$26,147 $9,802 $16,345
======= ====== =======
</TABLE>
At December 31, 1997 and 1996, the Company had insurance in force
aggregating $69,271 and $69,251, respectively, in which the gross premiums are
less than the net premiums required by the standard valuation standards
established by the Insurance Division, Department of Commerce, of the State of
Iowa. The Company established policy reserves of $1,128 and $1,252 to cover
these deficiencies at December 31, 1997 and 1996, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $501
was made for the year ended December 31, 1995, related to the change in
reserve methodology.
81
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.
The Company paid dividends to its parent of $62,000 and $20,000 in 1997 and
1996, respectively. No dividends were paid in 1995.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB No. 87 expense as a percent of salaries. The benefits are based on years
of service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $422, $1,056 and $942 for the
years ended December 31, 1997, 1996 and 1995, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee
Retirement and Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974. Expense related to this plan was $226, $297 and $465 for
the years ended December 31, 1997, 1996 and 1995, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.
In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $62, $184 and $164 for the years ended December 31, 1997,
1996 and 1995, respectively.
82
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company shares certain offices, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997,
1996 and 1995, the Company paid $18,705, $17,028 and $14,214, respectively,
for these services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.6% at December 31, 1997. During 1997,
1996 and 1995, the Company paid net interest of $1,188, $174 and $71,
respectively, to affiliates.
During 1997 and 1995, the Company received capital contributions of $153 and
$40,000, respectively, in cash from its parent.
At December 31, 1997, the Company has a $16,400 short-term note payable to
an affiliate. Interest on this note accrues at 5.6%.
During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable.
No gain was recognized on this sale. This note matured during 1996.
During the year ended December 31, 1995, the Company restructured demand
notes and accrued interest of $13,250 and $745, respectively, related to an
affiliate. The Company received 9,750 shares of preferred stock from the
affiliate for satisfaction of debt. The Company realized a loss of $8,695
related to this transaction. At December 31, 1996 and 1995, the preferred
stock related to this affiliate was deemed to have no value and an unrealized
loss of $4,555 was recognized in 1995.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of
available facts, that damages arising from such demands will not be material
to the Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. Assessments are charged to operations
when received by the Company except where right of offset against other taxes
paid is allowed by law; amounts available for future offsets are recorded as
an asset on the Company's balance sheet. Potential future obligations for
unknown insolvencies are not determinable by the Company. The future
obligation has been based on the most recent information available from the
National Organization of Life and Health Insurance Guaranty Associations. The
Company has established a reserve of $17,700 and $21,774 and an offsetting
premium tax benefit of $7,984 and $8,752 at December 31, 1997 and 1996,
respectively, for its estimated share of future guaranty fund assessments
related to several major insurer insolvencies. The guaranty fund expense
(benefit) was $(975), $2,617 and $5,859 for December 31, 1997, 1996 and 1995,
respectively.
83
<PAGE>
PFL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
11. YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning
Project (the "Project") to review and analyze its information technology and
systems to determine if they are Year 2000 compatible. The Company has begun
to convert or modify, where necessary, critical data processing systems. It is
contemplated that the plan will be substantially completed by early 1999. The
Company does not expect this project to have a significant effect on
operations. However, to mitigate the effect of outside influences upon the
success of the project, the Company has undertaken communications with its
significant customers, suppliers and other third parties to determine their
Year 2000 compatibility and readiness. Management believes that the issues
associated with the Year 2000 will be resolved with no material financial
impact on the Company.
Since the Year 2000 computer problem, and its resolution is complex and
multifaceted, the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that systems
or equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived Project, including
testing procedures, there is no certainty that any company will achieve
complete success. Notwithstanding the efforts or results of the Company, its
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond its knowledge
or control.
84
<PAGE>
PFL LIFE INSURANCE COMPANY
SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
- ------------------ ---------- ---------- ---------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities.............. $1,325,817 $1,355,098 $1,325,817
States, municipalities and political
subdivisions.......................... 136,058 139,110 136,058
Foreign governments.................... 51,407 51,154 51,407
Public utilities....................... 124,013 124,013 121,582
All other corporate bonds.............. 3,275,849 3,377,152 3,278,280
Redeemable preferred stock............... 2,750 8,029 2,750
---------- ---------- ----------
Total fixed maturities................... 4,915,894 5,054,556 4,915,894
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance............. 7,593 9,046 9,046
Industrial, miscellaneous and all oth-
er.................................... 36,263 41,330 41,330
---------- ---------- ----------
Total equity securities.................. 43,856 50,376 50,376
Mortgage loans on real estate............ 935,207 935,207
Real estate.............................. 44,699 44,699
Real estate acquired in satisfaction of
debt.................................... 11,814 11,814
Policy loans............................. 57,136 57,136
Other long-term investments.............. 29,864 29,864
Cash and short-term investments.......... 23,939 23,939
---------- ----------
Total investments........................ $6,062,409 $6,068,929
========== ==========
</TABLE>
- ----------------------------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
85
<PAGE>
PFL LIFE INSURANCE COMPANY
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE BENEFITS,
POLICY CLAIMS
BENEFITS POLICY AND NET LOSSES AND OTHER
AND UNEARNED CONTRACT PREMIUM INVESTMENT SETTLEMENT OPERATING PREMIUMS
EXPENSES PREMIUMS LIABILITIES REVENUE INCOME* EXPENSES EXPENSES* WRITTEN
---------- -------- ----------- ---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1997
Individual life $ 882,003 $ -- $ 8,550 $ 200,175 $ 75,914 $ 211,921 $ 36,185 --
Individual health....... 62,033 9,207 12,821 63,548 5,934 37,706 29,216 $ 63,383
Group life and health... 88,211 11,892 44,977 146,694 11,888 103,581 91,568 143,580
Annuity................. 4,204,125 -- -- 657,695 352,688 571,434 364,216 --
---------- ------- ------- ---------- -------- ---------- --------
$5,236,372 $21,099 $66,348 $1,068,112 $446,424 $ 924,642 $521,185
========== ======= ======= ========== ======== ========== ========
YEAR ENDED DECEMBER 31,
1996
Individual life......... $ 734,350 $ -- $ 7,240 $ 202,082 $ 66,538 $ 197,526 $ 38,067 --
Individual health....... 39,219 8,680 13,631 55,871 5,263 32,903 29,511 $ 55,678
Group life and health... 78,418 14,702 53,486 174,781 12,877 105,459 122,953 171,320
Annuity................. 4,408,419 -- -- 725,966 343,659 800,121 230,417 --
---------- ------- ------- ---------- -------- ---------- --------
$5,260,406 $23,382 $74,357 $1,158,700 $428,337 $1,136,009 $420,948
========== ======= ======= ========== ======== ========== ========
YEAR ENDED DECEMBER 31,
1995
Individual life......... $ 594,274 $ -- $ 6,066 $ 111,918 $ 49,929 $ 97,065 $ 37,933 --
Individual health....... 24,225 7,768 11,863 47,692 4,091 25,793 26,033 $ 47,690
Group life and health... 67,994 16,662 58,813 187,832 11,665 106,065 139,640 184,545
Annuity................. 4,220,274 -- 921,452 327,000 1,116,768 114,164 --
---------- ------- ------- ---------- -------- ---------- --------
$4,906,767 $24,430 $76,742 $1,268,894 $392,685 $1,345,691 $317,770
========== ======= ======= ========== ======== ========== ========
</TABLE>
- -------------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
86
<PAGE>
PFL LIFE INSURANCE COMPANY
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE IV
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER ASSUMED TO
AMOUNT COMPANIES COMPANIES NET AMOUNT NET
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER
31, 1997
Life insurance in force.. $5,025,027 $420,519 $35,486 $4,639,994 .8%
========== ======== ======= ========== ===
Premiums:
Individual life......... $ 201,691 $ 3,554 $ 2,038 $ 200,175 1.0%
Individual health....... 73,593 10,045 -- 63,548 --
Group life and health... 339,269 192,575 -- 146,694 --
Annuity................. 697,893 40,198 -- 657,695 --
---------- -------- ------- ---------- ---
$1,312,446 $246,372 $ 2,038 $1,068,112 .2%
========== ======== ======= ========== ===
YEAR ENDED DECEMBER 31,
1996
Life insurance in force.. $4,863,416 $477,112 $30,685 $4,416,989 .7%
========== ======== ======= ========== ===
Premiums:
Individual life......... $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health....... 68,699 12,828 -- 55,871 --
Group life and health... 390,296 215,515 -- 174,781 --
Annuity................. 794,311 68,345 -- 725,966 --
---------- -------- ------- ---------- ---
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
========== ======== ======= ========== ===
YEAR ENDED DECEMBER 31,
1995
Life insurance in force.. $4,594,434 $468,811 $22,936 $4,148,559 .6%
========== ======== ======= ========== ===
Premiums:
Individual life......... $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health....... 60,309 12,617 -- 47,692 --
Group life and health... 408,097 220,265 -- 187,832 --
Annuity................. 1,009,191 88,270 531 921,452 .05%
---------- -------- ------- ---------- ---
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
========== ======== ======= ========== ===
</TABLE>
87
