As filed with the Securities and Exchange Commission on 26 September 1997
Registration No. _______
___________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
SEPARATE ACCOUNT D OF PARAGON LIFE INSURANCE COMPANY
(Exact Name of Registrant)
PARAGON LIFE INSURANCE COMPANY
(Name of Depositor)
100 South Brentwood Boulevard
St. Louis, MO 63105
(Address of Depositor's Principal Executive Office)
Matthew P. McCauley, Esquire
Paragon Life Insurance Company
700 Market Street
St. Louis, MO 63101
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2404
Approximate date of proposed public offering: As soon as practical after the
effective date of this Registration Statement.
Securities Being Offered: Flexible Premium Variable Life Insurance Contracts.
An indefinite number of the securities being offered is being registered under
the Securities Act of 1933 pursuant to Rule 24f-2 issued under the Investment
Company Act of 1940.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
Item No. of
Form N-8B-2 Caption in Prospectus
1. Introductory Page 1
2. Introductory Page 1
3. Not Applicable
4. Distribution of the Policies
5. The Company and the Separate Account
6. The Separate Account
7. Not Required
8. Not Required
9. Legal Proceedings
10. Summary; Policy Benefits; Policy Rights and Privileges;
Charges and Deductions Voting Rights; General Matters
Relating to the Policy
11. Summary; Policy Benefits; Policy Rights and Privileges
12. Summary; The Company and the Separate Account
13. Summary; Charges and Deductions
14. Summary; Payment and Allocation of Premiums
15. Payment and Allocation of Premiums
16. Payment and Allocation of Premiums
17. Summary; Policy Rights and Privileges; Charges and
Deductions
18. Payment and Allocation of Premiums
19. General Matters Relating to the Policy; Voting Rights
20. Not Applicable
21. Policy Rights and Privileges; General Matters Relating to
the Policy
22. Not Applicable
23. Safekeeping of the Separate Account's Assets
24. General Matters Relating to the Policy
25. The Company and the Separate Account
26. Not Applicable
27. The Company and the Separate Account
28. Management of the Company
-i-
PART I
Information Required in Prospectus
Underlying Funds Through:
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
MFS VARIABLE INSURANCE TRUST
PUTNAM VARIABLE TRUST
SCUDDER VARIABLE LIFE INVESTMENT FUND
T. ROWE PRICE EQUITY SERIES, INC.
T. ROWE PRICE FIXED INCOME SERIES, INC.
[LOGO OF PARAGON LIFE INSURANCE COMPANY]
FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY
Prospectus dated ,
50414
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
ISSUED BY
PARAGON LIFE INSURANCE COMPANY
100 SOUTH BRENTWOOD
ST. LOUIS, MO 63105
(314) 862-2211
This Prospectus describes an individual flexible premium variable life
insurance Policy (the "Policy") offered by Paragon Life Insurance Company (the
"Company"). The Policy is designed to provide lifetime insurance protection to
age 100 and at the same time provide flexibility to vary premium payments and
change the level of death benefits payable under the Policy. This flexibility
allows an Owner to provide for changing insurance needs under a single
insurance policy. An Owner also has the opportunity to allocate net premiums
among several investment portfolios with different investment objectives.
The Policy provides for: (1) a Cash Surrender Value that can be obtained by
surrendering the Policy; (2) Policy Loans; and (3) a death benefit payable at
the Insured's death. As long as a Policy remains in force, the death benefit
payable on the Insured's death will not be less than the current Face Amount of
the Policy. The insurance under a Policy will remain in force so long as its
Cash Surrender Value is sufficient to pay certain monthly charges imposed in
connection with the Policy.
At the end of the "Right to Examine Policy" period, the Owner may allocate
net premiums to one or more of the Divisions of the Separate Account D (the
"Separate Account"). The duration of the Policy and the amount of the Cash
Value will vary to reflect the investment performance of the Divisions of the
Separate Account selected by the Owner, and, depending on the death benefit
option elected, the amount of the death benefit above the minimum may also vary
with that investment performance. Thus, the Owner bears the entire investment
risk under the Policy; there is no minimum guaranteed Cash Value.
Each Division of the Separate Account will invest in the following
corresponding investment company portfolios ("Funds"):
FIDELITY VARIABLE INSURANCE PRODUCTS FUND OR
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
MANAGER
Growth Portfolio Fidelity Management & Research
Index 500 Portfolio Company
Equity-Income Portfolio
Contrafund Portfolio
MFS VARIABLE INSURANCE TRUST MANAGER
MFS Emerging Growth Series Massachusetts Financial Services
Company
PUTNAM VARIABLE TRUST MANAGER
Putnam VT High Yield Fund Putnam Investment Management,
Putnam VT New Opportunities Fund Inc.
Putnam VT U.S. Government and High Quality Bond Fund
Putnam VT Voyager Fund
SCUDDER VARIABLE LIFE INVESTMENT FUND MANAGER
Money Market Portfolio Scudder, Stevens & Clark, Inc.
International Portfolio
T. ROWE PRICE EQUITY SERIES, INC. AND
T. ROWE PRICE FIXED INCOME SERIES, INC. MANAGER
New America Growth Portfolio T. Rowe Price Associates, Inc.
Personal Strategy Balanced Portfolio
Limited-Term Bond Portfolio
The date of this prospectus is .
The Policy is not available in all states.
1
A full description of the Funds, including the investment policies,
restrictions, risks, and charges is contained in the prospectus of each Fund.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance or as a means to obtain additional insurance protection
if the purchaser already owns another flexible premium variable life insurance
policy.
This Prospectus Must Be Accompanied Or Preceded By A Current Prospectus For
the underlying Funds.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN
INVESTMENT IN THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE LOSS OF
PREMIUM PAYMENTS (PRINCIPAL).
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.
Please Read This Prospectus Carefully And Retain It For Future Reference.
2
TABLE OF CONTENTS
PAGE
----
Definitions.............................................................. 4
Summary.................................................................. 5
The Company and the Separate Account..................................... 10
The Company
The Separate Account
The Underlying Funds
Addition, Deletion, or Substitution of Investments
Payment and Allocation of Premiums....................................... 15
Issuance of a Policy
Premiums
Allocation of Net Premiums and Cash Value
Policy Lapse and Reinstatement
Policy Benefits.......................................................... 17
Death Benefit
Cash Value
Policy Rights and Privileges............................................. 22
Exercising Rights and Privileges Under the Policies
Loans
Surrender and Partial Withdrawals
Transfers
Right to Examine Policy
Payment of Benefits at Maturity
Payment of Policy Benefits
Charges and Deductions................................................... 26
Sales Charges
Premium Tax Charge
Monthly Deduction
Partial Withdrawal Transaction Charge
Separate Account Charges
General Matters Relating to the Policy................................... 29
Distribution of the Policies............................................. 32
Federal Tax Matters...................................................... 32
Unisex Requirements Under Montana Law.................................... 35
Safekeeping of the Separate Account's Assets............................. 35
Voting Rights............................................................ 36
State Regulation of the Company.......................................... 36
Management of the Company................................................ 37
Legal Matters............................................................ 38
Legal Proceedings........................................................ 38
Experts.................................................................. 38
Additional Information................................................... 38
Financial Statements..................................................... 38
Appendix A............................................................... A-1
THE POLICY IS NOT AVAILABLE IN ALL STATES.
THIS 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.
3
DEFINITIONS
Attained Age--The Issue Age of the Insured plus the number of completed
Policy Years.
Beneficiary--The person(s) named in an application for this insurance Policy
or by later designation to receive Policy proceeds in the event of the
Insured's death. A Beneficiary may be changed as set forth in the Policy and
this Prospectus.
Cash Value--The total amount that a Policy provides for investment at any
time. It is equal to the total of the amounts credited to the Owner in the
Separate Account and in the Loan Account.
Cash Surrender Value--The Cash Value of a Policy on the date of surrender,
less any Indebtedness.
Division--A subaccount of the Separate Account. Each Division invests
exclusively in an available underlying Fund.
Effective Date--The date as of which insurance coverage begins under a
Policy.
Face Amount--The minimum death benefit under the Policy so long as the Policy
remains in force.
Fund--A separate investment portfolio of Fidelity Variable Insurance Products
Fund, Fidelity Variable Insurance Products Fund II, MFS Variable Insurance
Trust, Putnam Variable Trust, Scudder Variable Life Insurance Fund, or two T.
Rowe Price Funds, mutual funds in which the Separate Account's assets are
invested. Although sometimes referred to elsewhere as "Portfolios," they are
referred to herein as "Funds," except where "Portfolio" is a part of the name.
Home Office--The service office of the Company, the mailing address of which
is 100 South Brentwood, St. Louis, Missouri 63105.
Indebtedness--The sum of all unpaid Policy Loans and accrued interest charged
on loans.
Initial Premium--The premium required to be paid for the Policy to become
effective.
Insured--The person whose life is insured under a Policy.
Investment Start Date--The date the initial premium is applied to the Money
Market Division of the Separate Account. This date is the later of the Issue
Date or the date the initial premium is received at the Company's Home Office.
Issue Age--The Insured's Age at his or her last birthday as of the date the
Policy is issued.
Issue Date--The Issue Date is the date from which Policy Anniversaries,
Policy Years, and Policy Months are measured.
Loan Account--The account of the Company to which amounts securing Policy
Loans are allocated. It is a part of the Company's general assets.
Loan Subaccount--A Loan Subaccount exists for each Division of the Separate
Account. Any Cash Value transferred to the Loan Account will be allocated to
the appropriate Loan Subaccount to reflect the origin of the Cash Value. At any
point in time, the Loan Account will equal the sum of all the Loan Subaccounts.
Loan Value--The maximum amount that may be borrowed under a Policy after the
first Policy Anniversary.
Maturity Date--The Policy Anniversary on which the Insured reaches Attained
Age 100.
4
Monthly Anniversary--The same date in each succeeding month as the Issue Date
except that whenever the Monthly Anniversary falls on a date other than a
Valuation Date, the Monthly Anniversary will be deemed the next Valuation Date.
If any Monthly Anniversary would be the 29th, 30th, or 31st day of a month that
does not have that number of days, then the Monthly Anniversary will be the
last day of that month.
Net Premium--The premium less any premium expense charge and the charge for
premium taxes.
Owner--The Owner of a Policy, as designated in the application or as
subsequently changed.
Policy--The flexible premium variable life insurance Policy offered by the
Company and described in this Prospectus.
Policy Anniversary--The same date each year as the Issue Date.
Policy Month--A month beginning on the Monthly Anniversary.
Policy Year--A period beginning on a Policy Anniversary and ending on the day
immediately preceding the next Policy Anniversary.
Portfolio--See Fund.
Separate Account--The Separate Account B, a separate investment account
established by the Company to receive and invest the net premiums paid under
the Policy and allocated by the Owner to provide variable benefits.
Valuation Date--Each day that the New York Stock Exchange is open for
trading, except on the day after Thanksgiving when the Company is closed.
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.
SUMMARY
The following summary of Prospectus information should be read in conjunction
with the detailed information appearing elsewhere in this Prospectus. Unless
otherwise indicated, the description of the Policies contained in this
Prospectus assumes that a Policy is in effect and that there is no outstanding
Indebtedness.
The Policy. The flexible premium variable life insurance Policy described in
this Prospectus allows the Owner, subject to certain limitations, to make
premium payments in any amount and at any frequency. The Policy is a life
insurance contract with death benefits, Cash Value, surrender rights, Policy
Loan privileges, and other features traditionally associated with life
insurance. It is a "flexible premium" Policy because, unlike a traditional
insurance policy, there is no fixed schedule for premium payments. Although the
Owner may establish a schedule of premium payments ("planned premium
payments"), failure to make the planned premium payments will not necessarily
cause a Policy to lapse, nor will making the planned premium payments guarantee
that a Policy will remain in force. Thus, an Owner may, but is not required to,
pay additional premiums. This flexibility permits an Owner to provide for
changing insurance needs within a single insurance Policy.
The Policy is a "variable" Policy because, unlike the fixed benefits under an
ordinary life insurance contract, the Cash Value and, under certain
circumstances, the death benefit under a Policy may increase or decrease
depending upon the investment performance of the Divisions of the Separate
Account to which the Owner has allocated net premium payments. However, so long
as a Policy's Cash Surrender Value continues to be sufficient to pay the
monthly deduction, an Owner is guaranteed a minimum death benefit equal to the
5
Face Amount of his or her Policy or an accelerated death benefit in a reduced
amount determined in accordance with certain riders available under the Policy,
less any outstanding Indebtedness. (See "General Matters Relating to the
Policy--Additional Insurance Benefits.")
The Separate Account. The Owner may allocate the net premiums to one or more
Divisions of the Separate Account. Assets of each Division are invested at net
asset value in shares of a corresponding Fund. See "The Company and the
Separate Account" for a complete description of the available Funds. An Owner
may change future allocations of net premiums at any time by notifying the
Company directly.
Until the end of the "Right to Examine Policy" period (see "Right to Examine
Policy,") all Net Premiums automatically will be allocated to the Division that
invests in the Money Market Fund. (See "Payment and Allocation of Premiums--
Allocation of Net Premiums and Cash Value.")
To the extent Net Premiums are allocated to the Divisions of the Separate
Account, the Cash Value will, and the death benefit may, vary with the
investment performance of the chosen Division. Thus, depending upon the
allocation of Net Premiums, investment risk over the life of a Policy may be
borne by the Owner, by the Company, or by both.
Subject to certain restrictions, an Owner may transfer Cash Values among the
Divisions of the Separate Account. Currently, no charge is assessed for
transfers. The Company reserves the right to revoke or modify the transfer
privilege. (See "Policy Rights and Privileges--Transfers.")
Premiums. An Owner has flexibility concerning the amount and frequency of
premium payments. An initial premium equal to one-twelfth (1/12) of the planned
annual premium set forth in the specifications page of a Policy is necessary to
place a Policy in force. The planned annual premium is an amount specified for
each Policy based on the requested initial Face Amount and certain other
factors. However, as is discussed below, planned premiums need not be paid so
long as there is sufficient Cash Surrender Value to keep the Policy in force.
Subject to certain limitations, additional premium payments in any amount and
at any frequency may be made directly by the Owner. (See "Payment and
Allocation of Premiums--Issuance of a Policy--Premiums.")
A Policy will lapse (and terminate without value) when the Cash Surrender
Value is insufficient to pay the next monthly deduction and a grace period of
62 days expires without an adequate payment being made by the Owner (see
"Payment and Allocation of Premiums--Policy Lapse and Reinstatement"). The
Policies, therefore, differ in two important respects from conventional life
insurance policies. First, the failure to make planned premium payments
following the initial premium payment will not itself cause a Policy to lapse.
Second, under the circumstances described above, a Policy can lapse even if
planned premiums have been paid. Thus, the payment of premiums in any amount
does not guarantee that the Policy will remain in force until the Maturity
Date. (See "Payment and Allocation of Premiums--Policy Lapse and
Reinstatement.")
Death Benefit. Death benefit proceeds are payable to the named Beneficiary
when the Insured under a Policy dies or, under certain riders available under
the Policy, to the Owner, prior to the Insured's death under circumstances
described in those riders. (See "General Matters Relating to the Policy--
Additional Insurance Benefits.") Two death benefit options are available. Under
the "Level Type" death benefit, the death benefit is the Face Amount of the
Policy or, if greater, the applicable percentage of Cash Value. Under the
"Increasing Type" death benefit, the death benefit is the Face Amount of the
Policy plus the Cash Value or, if greater, the applicable percentage of Cash
Value. So long as a Policy remains in force, the minimum death benefit under
either option will be at least equal to the current Face Amount. The death
benefit proceeds will be increased by the amount of the cost of insurance for
the portion of the month from the date of death to the end of the month, and
reduced by any outstanding Indebtedness. (See "Policy Benefits--Death
Benefit.")
There will be a minimum Face Amount established by the Company which will
vary by age at issue. The Owner may generally change the Face Amount (subject
to the minimum and maximum amounts
6
applicable to his or her policy) and the death benefit option, but in certain
cases evidence of insurability may be required. (See "Policy Benefits--Death
Benefit.")
Additional insurance benefits offered under the Policy by rider may include
an accelerated death benefit settlement option rider and a waiver of monthly
deductions rider. (See "General Matters Relating to the Policy--Additional
Insurance Benefits.") The cost of these additional insurance benefits will be
deducted from Cash Value as part of the monthly deduction. (See "Charges and
Deductions--Monthly Deduction.")
Benefits under the Policy may be paid in a single sum or under one of the
settlement options set forth in the Policy or an applicable rider. (See "Policy
Benefits--Death Benefit" and "Policy Rights and Privileges--Payment of Policy
Benefits.")
Cash Value. The Policies provide for a Cash Value equal to the total of the
Policy's Cash Value in the Separate Account and the Loan Account (securing
Policy Loans). A Policy's Cash Value will reflect the amount and frequency of
net premium payments, the investment performance of any selected Divisions of
the Separate Account transfers, any Policy Loans, loan account interest rate
credited, any partial withdrawals, and the charges imposed in connection with
the Policy. (See "Policy Benefits--Cash Value.") There is no minimum guaranteed
Cash Value.
Charges and Deductions. A charge of 1.25 percent of premiums will be deducted
from each premium paid for policy years one through ten ("premium expense
charge").
A charge of 2.25 percent to cover state premium taxes will be deducted from
premiums paid. (See "Charges and Deductions--Premium Tax Charge.")
A monthly deduction will be made from a Policy's Cash Value in the Divisions
of the Separate Account. The monthly deduction includes an administrative
charge, a cost of insurance charge, and the cost of any additional insurance
benefits provided by rider. The amount of the administrative charge will be set
forth in the specification pages of the Policy. The charge is $3.50 per month.
The cost of insurance charge is calculated on each Monthly Anniversary. (See
"Charges and Deductions--Monthly Deduction--Cost of Insurance.") Monthly cost
of insurance rates will be determined by the Company based upon its
expectations as to future mortality experience. For a discussion of the factors
affecting the rate class of the Insured, see "Charges and Deductions--Monthly
Deduction--Cost of Insurance."
Cost of insurance rates are guaranteed not to exceed 125 percent of the
maximum rates that could be charged based on the male/female smoker/nonsmoker
1980 Commissioners Standard Ordinary Mortality Tables (1980 CSO Table SA, 1980
CSO Table NA, 1980 CSO Table SG, and 1980 CSO Table NG), age last birthday.
A daily charge equal to .0020471% (an annual rate of .75%) of the net assets
of each Division of the Separate Account will be imposed for the Company's
assumption of certain mortality and expense risks incurred in connection with
the Policy. (See "Charges and Deductions--Separate Account Charges.")
No charges are currently made from the Separate Account for Federal or state
income taxes. However, if it is determined that such taxes may be incurred,
then the Company may make deductions from the Separate Account to pay these
taxes or to pay any economic burden resulting from the application of the tax
laws that the Company determines to be properly attributable to the Separate
Account or the Policy. (See "Federal Tax Matters.")
7
The value of the assets of the Divisions of the Separate Account will reflect
the investment advisory fee and other expenses incurred by the Funds. (See "The
Company and the Separate Account.") The total annual investment advisory fee
and fund expenses for the funds available during the last fiscal year as a
percentage of net assets are as follows: Fidelity Variable Insurance Products
Fund or Fidelity Variable Insurance Products Fund II--Growth Portfolio .69%,
Index 500 Portfolio .28%, Equity-Income Portfolio .58%; and Contrafund
Portfolio .74%; MFS Variable Insurance Trust--Emerging Growth Series 1.00%;
Putnam Variable Trust--Putnam VT High Yield Fund .76%, Putnam VT New
Opportunities Fund .72%, Putnam VT U.S. Government and High Quality Bond Fund
.69%, and Putnam VT Voyager Fund .63%; Scudder Variable Life Investment Fund--
Money Market Portfolio .46%, and International Portfolio 1.05%; and T. Rowe
Price--New America Growth Portfolio .85%; Personal Strategy Balanced Portfolio
.90%, and Limited-Term Bond Portfolio .70%. Fidelity Management & Research
Company ("FMR") agreed to reimburse a portion of Index 500 Portfolio's expenses
during the period. Without this reimbursement, the fund's total expenses would
have been .43%. MFS has agreed to bear expenses for the Emerging Growth Series
during the period. Without this reimbursement, the series' total expenses would
have been 1.16%.
A transaction charge equal to the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal of amounts from the
Separate Account. Currently, there are no transaction charges imposed for
transfers of amounts between Divisions of the Separate Account. In addition,
transfers and withdrawals are subject to restrictions relative to amount and
frequency. (See "Payment and Allocation of Premiums--Allocation of Net Premiums
and Cash Value," "Policy Rights and Privileges--Surrender and Partial
Withdrawals--Transfers," and "Charges and Deductions--Partial Withdrawal
Transaction Charge.")
Policy Loans. After the first Policy Anniversary an Owner may borrow against
the Cash Value of a Policy. The Loan Value is (a) minus (b), where (a) is 85
percent of the Cash Value of the Policy on the date the loan request is
received and (b) is any outstanding Indebtedness. Loan interest is due and
payable in arrears on each Policy Anniversary or on a pro rata basis for such
shorter period as the Policy Loan may exist. All outstanding Indebtedness will
be deducted from proceeds payable at the Insured's death, upon maturity, or
upon surrender.
A Policy Loan will be allocated among the various Divisions of the Separate
Account. A portion of the Policy's Cash Value in each Division of the Separate
Account to which the loan is allocated will be transferred to the Loan Account
as security for the loan. Therefore, a Policy Loan may have a permanent impact
on the Policy's Cash Value even if it is repaid. A Policy Loan may be repaid in
whole or in part at any time while the Policy is in force. (See "Policy Rights
and Privileges--Loans," page 21.) Loans taken from, or secured by, a Policy may
in certain circumstances be treated as taxable distributions from the Policy.
Moreover, with certain exceptions, a ten percent additional income tax would be
imposed on the portion of any loan that is included in income. (See "Federal
Tax Matters.")
Surrender and Partial Withdrawals. At any time that a Policy is in effect, an
Owner may elect to surrender the Policy and receive its Cash Surrender Value.
After the first year, an Owner may also request a partial withdrawal of the
Cash Value of the Policy. When the death benefit under either death benefit
option is not based on an applicable percentage of the Cash Value, a partial
withdrawal reduces the death benefit payable under the Policy by an amount
equal to the reduction in the Policy's Cash Value. (See "Policy Rights and
Privileges--Surrender and Partial Withdrawals.") Surrenders and partial
withdrawals may have federal income tax consequences. (See "Federal Tax
Matters.")
Right to Examine Policy. The Owner has a limited right to return a Policy for
cancellation within 10 days after receiving it or such longer period required
by state law. If a Policy is cancelled within this time period, a refund will
be paid which will equal all premiums paid under the Policy or any different
amount required by state law. The Owner also has a right to cancel a requested
increase in Face Amount. Upon cancellation of an increase, the Owner may
request that the Company refund the amount of the additional charges deducted
in connection with the increase, or have the amount of the additional charges
added to the Cash Value. (See "Policy Rights and Privileges--Right to Examine
Policy.")
8
Illustrations of Death Benefits and Cash Surrender Values. Illustrations on
pages A-1 to A-7 in Appendix A show how death benefits and Cash Values may vary
based on certain hypothetical rate of return assumptions as well as assumptions
pertaining to the level of the administrative charge and the level of the sales
charges. These illustrations also show how these benefits compare with amounts
which would accumulate if premiums were invested to earn interest (after taxes)
at 5% compounded annually. If a Policy is surrendered in the early Policy
Years, the Cash Surrender Value payable will be low as compared with premiums
accumulated with interest, and consequently the insurance protection provided
prior to surrender will be costly. You may make a written request for a
projection of illustrated future cash values and death benefits for a nominal
fee.
Tax Consequences of the Policy. While guidance is limited, the Company
believes that the Policy should be treated as a life insurance contract for
Federal income tax purposes. Assuming that a Policy qualifies as a life
insurance contract for Federal income tax purposes, a Policy Owner should not
be deemed to be in constructive receipt of Cash Surrender Value under a Policy
until there is a distribution from the Policy. Moreover, death benefits payable
under a Policy should be completely excludable from the gross income of the
Beneficiary. As a result, the Beneficiary generally should not be taxed on
these proceeds.
Under certain circumstances, a Policy may be treated as a "modified endowment
contract." If the Policy is a modified endowment contract, then all pre-death
distributions, including Policy loans, will be treated first as a distribution
of taxable income and then as a return of basis or investment in the contract.
In addition, prior to age 59 1/2 any such distributions generally will be
subject to a 10% penalty tax.
If the 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. Loans will not be treated as distributions.
Neither distributions nor loans from a Policy that is not a modified endowment
contract are subject to the 10% penalty tax. (See "Federal Tax Matters.")
Specialized Uses of the Policy. Because the Policy provides for an
accumulation of Cash Value as well as a death benefit, the Policy can be used
for various individual and business financial planning purposes. Purchasing the
Policy in part for such purposes entails certain risks. For example, if the
investment performance of Divisions to which Cash Value is allocated is poorer
than expected or if sufficient premiums are not paid, the Policy may lapse or
may not accumulate sufficient Cash Value to fund the purpose for which the
Policy was purchased. Partial withdrawals and Policy loans may significantly
affect current and future Cash Value, Cash Surrender Value, or death benefit
proceeds. Depending upon Division investment performance and the amount of a
Policy loan, the loan may cause a Policy to lapse. Because the Policy is
designed to provide benefits on a long-term basis, before purchasing a Policy
for a specialized purpose a purchaser should consider whether the long-term
nature of the Policy is consistent with the purpose for which it is being
considered. Using a Policy for a specialized purpose may have tax consequences.
(See "Federal Tax Matters.")
9
THE COMPANY AND THE SEPARATE ACCOUNT
THE COMPANY
Paragon Life Insurance Company (the "Company") is a stock life insurance
company incorporated under the laws of Missouri. The Company was organized in
1981 as General American Insurance Company and on December 31, 1987, its name
was changed. No change in operations or ownership took place in connection with
the name change. The Company is principally engaged in writing individual and
group life insurance policies and annuity contracts. As of December 31, 1996,
it had assets in excess of $180 million. The Company is admitted to do business
in 49 states and the District of Columbia. The principal offices of the Company
are at 100 South Brentwood, St. Louis, Missouri 63105 ("Home Office").
The Company is a wholly-owned subsidiary of General American Life Insurance
Company (the "Parent Company"), a Missouri life insurance company. The Parent
Company is wholly owned by General American Corporation, a Missouri general
business corporation, which is wholly owned by General American Holding
Company, a Missouri mutual insurance holding company. The Parent Company has
agreed that until March 23, 1999, it will maintain capital and surplus within
the Company sufficient to satisfy the capital requirements of the states in
which the Company is authorized to do business.
In addition, the Parent Company agrees to guarantee that the Company will
have sufficient funds to meet all of its contractual obligations. In the event
a policyholder presents a legitimate claim for payment on a Paragon insurance
policy, the Parent Company will pay such claim directly to the policyholder if
Paragon is unable to make such payment. This guarantee, which does not have a
predetermined termination date, can be modified or ended only as to policies
not yet issued. The guarantee agreement is binding on the Parent Company, its
successor or assignee and shall cease only if the guarantee is assigned to an
organization having a financial rating from Standard & Poor's equal to or
better than the Parent Company's rating. The Parent Company does not intend
this guarantee to be a guarantee with regard to the investment experience or
cash values of the Policy.
The Company may from time to time publish in advertisements, sales
literature, and reports to Owners or Contractholders, 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
the Company and should not be considered as bearing on the investment
performance of assets held in the Separate 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 Best's 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 the Company as measured by Standard &
Poor's Insurance Ratings Services or Duff & Phelps may be referred to in
advertisements or sales literature or in reports to Owners or Contractholders.
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. These ratings do not reflect the investment performance of the
Separate Account or the degree of risk associated with an investment in the
Separate Account.
The Company also may include in advertisements and other literature certain
rankings assigned to the Company by the National Association of Insurance
Commissioners ("NAIC"), and the Company's analyses of statistical information
produced by the NAIC. These rankings and analyses of statistical information
may describe, among other things, the Company's growth, premium income,
investment income, capital gains and losses, policy reserves, policy claims,
and life insurance in force. The Company's use of such rankings and statistical
information is not an endorsement by the NAIC.
Advertisements and literature prepared by the Company also may include
discussions of taxable and tax-deferred investment programs (including
comparisons based on selected tax brackets), alternative investment vehicles,
and general economic conditions.
10
THE SEPARATE ACCOUNT
Separate Account D (the "Separate Account") was established by the Company as
a separate investment account on January 3, 1995 under Missouri law. The
Separate Account receives and invests the net premiums paid under the Policies.
In addition, the Separate Account receives and invests net premiums for other
flexible premium variable life insurance policies issued by the Company that
are invested in other subaccounts of the Separate Account.
The Separate Account is divided into Divisions. Each Division of the Separate
Account will invest in the following corresponding portfolios ("Funds") of the
investment companies: (1) Fidelity Variable Insurance Products Fund or Fidelity
Variable Insurance Products Fund II--Growth Portfolio, Index 500 Portfolio,
Equity--Income Portfolio, and Contrafund Portfolio; (2) MFS Variable Insurance
Trust--Emerging Growth Series; (3) Putnam Variable Trust--Putnam VT High Yield
Fund, Putnam VT New Opportunities Fund, Putnam VT U.S. Government and High
Quality Bond Fund and Putnam VT Voyager Fund; (4) Scudder Variable Life
Investment Fund--Money Market Portfolio, and Class A Shares of International
Portfolio; and (5) T. Rowe Price--New America Growth Portfolio, Personal
Strategy Balanced Portfolio and Limited-Term Bond Portfolio. Income and both
realized and unrealized gains or losses from the assets of each Division of the
Separate Account are credited to or charged against that Division without
regard to income, gains, or losses from any other Division of the Separate
Account or arising out of any other business the Company may conduct.
Although the assets of the Separate Account are the property of the Company,
the assets in the Separate Account equal to the reserves and other liabilities
of the Separate Account are not chargeable with liabilities arising out of any
other business which the Company may conduct. The assets of the Separate
Account are available to cover the general liabilities of the Company only to
the extent that the Separate Account's assets exceed its liabilities arising
under the Policies. From time to time, these excess assets may be transferred
out of the Separate Account and included in the Company's general assets.
Before making any such transfers, the Company will consider any possible
adverse impact the transfer may have on the Separate Account.
The Separate Account has been registered with the Securities and Exchange
Commission ("SEC" or "Commission") as a unit investment trust under the
Investment Company Act of 1940 (the "1940 Act") and meets the definition of a
"separate account" under federal securities laws. Registration with the SEC
does not involve supervision of the management or investment practices or
policies of the Separate Account or the Company by the Commission.
THE UNDERLYING FUNDS
The Separate Account invests in shares of various investment management
companies. These are series-type mutual funds registered with the SEC as open-
end, investment management companies. The assets of each Fund used by the
Policies are held separate from the assets of the other Funds, and each Fund
has investment objectives and policies which are generally different from those
of the other Funds. The income or losses of one Fund generally have no effect
on the investment performance of any other Fund.
The following summarizes the investment policies of each Fund under the
corresponding investment management company:
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Variable Insurance Products Fund ("VIP") is an open-end diversified
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for VIP. Fidelity
Management & Research Company ("FMR") of Boston, Massachusetts is the manager
of the Funds.
. Growth Portfolio
The investment objective seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments
are not restricted to any one type of security. Capital appreciation
may also be found in other types of securities, including bonds and
preferred stocks.
11
. Equity-Income Portfolio
The investment objective seeks reasonable income by investing primarily
in income-producing equity securities. In choosing these securities,
the Portfolio will also consider the potential for capital
appreciation. The Portfolio's goal is to achieve a yield which exceeds
the composite yield on the securities comprising the Standard & Poor's
500 Composite Stock Price Index.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Variable Insurance Products II Fund ("VIP II") is an open-end diversified
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for VIP II. Fidelity
Management & Research Company ("FMR") of Boston, Massachusetts is the manager
of the Funds.
.Index 500 Portfolio
The investment objective seeks to provide investment results that
correspond to the total return (i.e., the combination of capital change
and income) of common stocks publicly traded in the United States as
represented by the Standard & Poor's 500 Composite Stock Price Index
while keeping transaction costs and other expenses low. The Portfolio
is designed as a long-term investment option.
. Contrafund Portfolio
The investment objective seeks long-term capital appreciation by
investing in companies that are undergoing positive changes but are
currently unpopular, undervalued or overlooked by the market.
MFS VARIABLE INSURANCE TRUST
MFS Variable Insurance Trust ("MFS Trust") is an open-end diversified
management investment company. Only the Funds described in this section of the
prospectus are currently available as investment choices of the Policies even
though additional Funds may be described in the prospectus for MFS Trust.
Massachusetts Financial Services Company ("MFS") provides investment advisory
services to MFS Trust for fees in accordance with the terms of the current
prospectus for the Fund.
. Emerging Growth Series
The investment objective seeks to provide long-term growth of capital.
Dividend and interest income from portfolio securities, if any, is
incidental to the Series investment objective of long-term growth of
capital. The Series' policy is to invest primarily (i.e., at least 80%
of its assets under normal circumstances) in common stocks of small and
medium-sized companies that are early in their life cycle but which
have the potential to become major enterprises (emerging growth
companies).
PUTNAM VARIABLE TRUST
Putnam Variable Trust ("Putnam VT") is an open-end diversified management
investment company. Only the Funds described in this section of the prospectus
are currently available as investment choices of the Policies even though
additional Funds may be described in the prospectus for Putnam Variable Trust.
Putnam Investment Management, Inc. ("Putnam Management") provides investment
advisory services to Putnam Variable Trust for fees in accordance with the
terms described in the current Fund prospectus.
. Putnam VT High Yield Fund
Seeks high current income and, consistent with this objective, a
secondary objective of capital growth, by investing primarily in high-
yielding, lower-rated fixed income securities (commonly known as "junk
bonds"), constituting a diversified portfolio which Putnam Management
believes does not involve undue risk to income or principal. See the
special considerations for investments in high yield securities
described in the Putnam Variable Trust prospectus.
12
. Putnam VT New Opportunities Fund
Seeks long-term capital appreciation by investing principally in common
stocks of companies in sectors of the economy which Putnam Management
believes possess above-average long-term growth potential.
. Putnam VT U.S. Government and High Quality Bond Fund
Seeks current income consistent with preservation of capital by
investing primarily in securities issued or guaranteed as to principal
and interest by the U.S. Government or by its agencies or
instrumentalities and in other debt obligations rated at least A by a
nationally recognized securities rating agency such as Standard &
Poor's or Moody's Investors Service, Inc. or, if not rated, determined
by Putnam Management to be of comparable quality.
. Putnam VT Voyager Fund
Seeks capital appreciation by investing primarily in common stocks of
companies that Putnam Management believes have potential for capital
appreciation that is significantly greater than that of market
averages.
SCUDDER VARIABLE LIFE INVESTMENT FUND
Scudder Variable Life Investment Fund ("Scudder VLI") is a series-type mutual
fund registered with the SEC as an open-end, diversified management investment
company. Only the Money Market Portfolio and the Class A Shares of the
International Portfolio described herein are currently available as investment
choices of the Policies even though other classes and other Funds may be
described in the prospectus for Scudder VLI. Scudder, Stevens & Clark, Inc.
("Scudder") provides investment advisory services to Scudder VLI whose terms
and fees are set forth in the Scudder VLI prospectus.
. Money Market Portfolio
The investment objective seeks to maintain the stability of capital
and, consistent therewith, to maintain the liquidity of capital and to
provide current income. The Fund seeks to maintain a constant net asset
value of $1.00 per share, although there can be no assurance that this
will be achieved.
. International Portfolio
The investment objective seeks long-term growth of capital primarily
through diversified holdings of marketable foreign equity investments.
The Fund invests in companies, wherever organized, which do business
primarily outside the United States. The Fund intends to diversify
investments among several countries and to have represented in its
holdings, in substantial portions, business activities in not less than
three different countries. The Fund does not intend to concentrate
investments in any particular industry.
T. ROWE PRICE
T. Rowe Price Equity Series, Inc. and T. Rowe Price Fixed Income Series, Inc.
(collectively referred to as "TRP") are open-end management investment
companies. Only the Funds described in this section of the prospectus are
currently available as investment choices of the Policies even though
additional Funds may be described in the prospectus for TRP. T. Rowe Price
Associates, Inc. provides investment advisory services to TRP for fees in
accordance with the terms described in the current Fund prospectus.
.New America Growth Portfolio
The investment objective seeks long-term growth of capital through
investment in common stock of U.S. companies which operate in the
service sector of the economy.
13
.Personal Strategy Balanced Portfolio
The investment objective seeks the highest total return consistent with
an emphasis on both capital appreciation and income by investing in a
diversified portfolio typically consisting of approximately 60% stocks,
30% bonds, and 10% money market securities.
.Limited-Term Bond Portfolio
The investment objective seeks a high level of current income
consistent with modest price fluctuations by investing primarily in
short-term and intermediate-term investment-grade debt securities.
There is no assurance that any of the Funds will achieve its stated
objective. More detailed information, including a description of risks, is in
the prospectus for the Funds, which must accompany or precede this Prospectus
and which should be read carefully.
Resolving Material Conflicts. All of the Funds are also available to
registered separate accounts of other insurance companies offering variable
annuity and variable life insurance products. As a result, there is a
possibility that a material conflict may arise between the interests of Owners
of Policies and of owners of policies whose cash values are allocated to other
separate accounts investing in the Funds. In the event a material conflict
arises, the Company will take any necessary steps, including removing the
assets of the Separate Account from one or more of the Funds, to resolve the
matter.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
The Company reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the shares that are
held by the Separate Account or that the Separate Account may purchase. The
Company reserves the right to eliminate the shares of any of the Funds and to
substitute shares of another Fund of the existing management investment
companies or of another registered open-end investment company, if the shares
of a Fund are no longer available for investment, or if in the Company's
judgment further investment in any Fund becomes inappropriate in view of the
purposes of the Separate Account. The Company will not substitute any shares
attributable to an Owner's interest in a Division of the Separate Account
without notice to the Owner and prior approval of the SEC, to the extent
required by the 1940 Act or other applicable law. Nothing contained in this
Prospectus shall prevent the Separate Account from purchasing other securities
for other series or classes of policies, or from permitting a conversion
between series or classes of policies on the basis of requests made by Owners.
The Company also reserves the right to establish additional Divisions of the
Separate Account, each of which would invest in a new Fund of the existing
management investment companies, or in shares of another investment company,
with a specified investment objective. New Divisions may be established when,
in the sole discretion of the Company, marketing needs or investment conditions
warrant, and any new Division will be made available to existing Owners on a
basis to be determined by the Company. To the extent approved by the SEC, the
Company may also eliminate or combine one or more Divisions, substitute one
Division for another Division, or transfer assets between Divisions if, in its
sole discretion, marketing, tax, or investment conditions warrant.
In the event of a substitution or change, the Company may, if it considers it
necessary, make such changes in the Policy by appropriate endorsement. The
Company will notify all Owners of any such changes.
If deemed by the Company to be in the best interests of persons having voting
rights under the Policy, and to the extent any necessary SEC approvals or Owner
votes are obtained, the Separate Account may be: (a) operated as a management
company under the 1940 Act; (b) deregistered under that Act in the event
14
such registration is no longer required; or (c) combined with other separate
accounts of the Company. To the extent permitted by applicable law, the Company
may also transfer the assets of the Separate Account associated with the Policy
to another separate account.
The Company cannot guarantee that the shares of the Funds will always be
available. The Funds sell shares to the Separate Account in accordance with the
terms of a participation agreement between the Fund distributors and the
Company. Should this agreement terminate or should shares become unavailable
for any other reason, the Separate Account will not be able to purchase the
existing Fund shares. Should this occur, the Company will be unable to honor
Owner requests to allocate their cash values or premium payments to the
Divisions of the Separate Account investing in such shares. In the event that a
Fund is no longer available, the Company will, of course, take reasonable steps
to obtain alternative investment options.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
Individuals wishing to purchase a Policy, must complete the appropriate
application for this Individual Insurance Policy and submit it to an authorized
representative of the Company or to the Company's Home Office. The Company will
issue an Individual Policy to each Owner.
A Policy generally will be issued only to Insureds of Issue Ages 17 through
80 who supply evidence of insurability satisfactory to the Company. The Company
may, at its sole discretion, issue Policies to individuals falling outside
those Issue Ages or decline to issue Policies to individuals within those Issue
Ages.
PREMIUMS
The initial premium is due on the Issue Date, and may be paid to an
authorized representative of the Company or to the Company's Home Office. The
Company requires that the initial premium for a Policy be at least equal to
one-twelfth ( 1/12) of the planned annual premium for the Policy set forth in
the specifications pages. The planned annual premium is an amount specified for
each Policy based on the requested initial Face Amount, the Issue Age of the
Insured and the charges under the Policy. (See "Charges and Deductions.")
However, the Owner is not required to pay premiums equal to the planned annual
premium.
Following the initial premium, subject to the limitations described below,
premiums may be paid in any amount and at any interval. Premiums after the
first premium payment must be paid to the Company at its Home Office. The Owner
may establish a schedule of planned premiums which will be billed by the
Company at regular intervals. Those offered are annual premiums or monthly
premiums via electronic bank draft. The Owner may skip planned premium
payments. Failure to pay one or more planned premium payments will not cause
the Policy to lapse until such time as the Cash Surrender Value is insufficient
to cover the next Monthly Deduction. (See "Payment and Allocation of Premiums--
Policy Lapse and Reinstatement.")
In addition to any planned payments made, an Owner may make unscheduled
premium payments at any time in any amount, subject to the minimum and maximum
premium limitations described below. The payment of an unscheduled premium
payment may have Federal income tax consequences. (See "Federal Tax Matters.")
Moreover, as mentioned above, an Owner may also skip planned premium payments.
Therefore, unlike conventional insurance policies, a Policy does not obligate
the Owner to pay premiums in accordance with a rigid and inflexible premium
schedule.
If the Policy is in the intended Owner's possession, but the initial premium
has not been paid, the Policy is not in force. Under these circumstances, the
intended Owner is deemed to have the Policy for inspection only.
15
Premium Limitations. Every premium payment must be at least $20. In no event
may the total of all premiums paid under a Policy in any Policy Year exceed the
current maximum premium limitations for that year established by Federal tax
laws. The maximum premium limitation for a Policy Year is the most premium that
can be paid in that Policy Year such that the sum of the premiums paid under
the Policy will not at any time exceed the guideline premium limitations
referred to in section 7702(c) of the Internal Revenue Code of 1986, or any
successor provision. If at any time a premium is paid which would result in
total premiums exceeding the current maximum premium limitation, the Company
will accept only 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 directly to the Owner within 60 days of the end of the Policy Year in
which payment is received or applied as otherwise agreed and no further
premiums will be accepted until allowed by the current maximum premium
limitations prescribed by Federal tax law. See "Federal Tax Matters" for a
further explanation of premium limitations. Section 7702A creates an additional
premium limitation, which, if exceeded, can change the tax status of a Policy
to that of a "modified endowment contract." A modified endowment contract is a
life insurance contract, withdrawals from which are, for tax purposes, treated
first as a distribution of any taxable income under the contract, and then as a
distribution of nontaxable investment in the contract. Additionally, such
withdrawals may be subject to a 10% federal income tax penalty. The Company has
adopted administrative steps designed to notify an Owner when it is believed
that a premium payment will cause a Policy to become a modified endowment
contract. The Company has administrative procedures to prevent a modified
endowment contract by monitoring premium limits. The Owner will be given a
limited amount of time to request that the premium be reversed in order to
avoid the Policy's being classified as a modified endowment contract. (See
"Federal Tax Matters.")
ALLOCATION OF NET PREMIUMS AND CASH VALUE
Net Premiums. The net premium equals the premium paid less the premium
expense charge less the premium tax charge. (See "Charges and Deductions--Sales
Charges.")
Allocation of Net Premiums. In the application for a Policy, the Owner
indicates how net premiums are to be allocated among the Divisions of the
Separate Account. However, the minimum percentage, other than zero ("0"), that
may be allocated to a Division is 10 percent of the net premium, and fractional
percentages may not be used.
The allocation for future net premiums may be changed without charge at any
time by providing notice in writing directly to the Company. Any change in
allocation will take effect immediately upon receipt by the Company of the
written notification. No charge is imposed for changing the allocations of
future net premiums. The initial allocation will be shown on the application
which is attached to the Policy.
During the period from the Issue Date to the end of the Right to Examine
Policy period, Net Premiums will automatically be allocated to the Division
that invests in the Money Market Fund. (See "Right to Examine Policy"). When
this period expires, the Policy's Cash Value in that Division will be
transferred to the Divisions of the Separate Account in accordance with the
allocation requested in the application for the Policy, or any allocation
instructions received subsequent to the receipt of the application. Net
Premiums received after the Right to Examine Policy period will be allocated
according to the allocation instructions most recently received by the Company
unless otherwise instructed for that particular premium receipt.
The Policy's Cash Value also may be transferred between the Divisions of the
Separate Account. (See "Policy Rights and Privileges--Transfers.")
The value of amounts allocated to Divisions of the Separate Account will vary
with the investment performance of the chosen Divisions and the Owner bears the
entire investment risk. This will affect the Policy's Cash Value, and may
affect the death benefit as well. Owners should periodically review their
allocations of premiums and values in light of market conditions and overall
financial planning requirements.
16
POLICY LAPSE AND REINSTATEMENT
Lapse. Unlike conventional life insurance policies, the failure to make a
premium payment following the initial premium will not itself cause a Policy to
lapse. Lapse will occur only when the Cash Surrender Value is insufficient to
cover the monthly deduction, and a grace period expires without a sufficient
payment being made.
The grace period, which is 62 days, begins on the Monthly Anniversary on
which the Cash Surrender Value becomes insufficient to meet the next monthly
deduction. The Company will notify the Owner at the beginning of the grace
period by mail addressed to the last known address on file with the Company.
The notice will specify the amount of premium required to keep the Policy in
force and the date the payment is due. Subject to minimum premium requirements,
the amount of the premium required to keep the Policy in force will be the
amount of the current monthly deduction, premium expense charge, and premium
tax charge. (See "Charges and Deductions.") If the Company does not receive the
required amount within the grace period, the Policy will lapse and terminate
without Cash Value. If the Insured dies during the grace period, any overdue
monthly deductions will be deducted from the death benefit otherwise payable.
Reinstatement. The Owner may reinstate a lapsed Policy by written application
any time within five years after the date of lapse and before the Maturity
Date. Reinstatment is subject to the following conditions:
1. Evidence of the insurability of the Insured satisfactory to the
Company (including evidence of insurability of any person covered by a
rider to reinstate the rider).
2. Payment of a premium that, after the deduction of any premium expense
charge and any premium tax charge, is large enough to cover: (a) the
monthly deductions due at the time of lapse, and (b) two times the monthly
deduction due at the time of reinstatement.
3. Payment or reinstatement of any Indebtedness. Any Indebtedness
reinstated will cause a Cash Value of an equal amount also to be
reinstated. Any loan paid at the time of reinstatement will cause an
increase in Cash Value equal to the amount of the repaid loan.
4. The Policy cannot be reinstated if it has been surrendered.
The amount of Cash Value on the date of reinstatement will be equal to the
amount of any Indebtedness reinstated, increased by the net premiums paid at
reinstatement and any loans paid at the time of reinstatement. The Insured must
be alive on the date the Company approves the application for reinstatement. If
the Insured is not then alive, such approval is void and of no effect.
The effective date of reinstatement will be the date of approval by the
Company of the application for reinstatement. There will be a full monthly
deduction for the Policy Month that includes that date.
POLICY BENEFITS
DEATH BENEFIT
As long as the Policy remains in force, the Company will, upon proof of the
Insured's death, pay the death benefit proceeds of a Policy in accordance with
the death benefit option in effect at the time of the Insured's death.
If a rider permitting the accelerated payment of death benefit proceeds has
been added to the Policy, the death benefit may be paid in a single sum prior
to the death of the Insured and may be less than otherwise would be paid upon
the death of the Insured. (See "General Matters Relating to the Policy--
Additional Insurance Benefits.")
The amount of the death benefit proceeds payable will be determined at the
end of the Valuation Period during which the Insured's death occurred. The
proceeds may be paid in a single sum or under one or more
17
of the settlement options set forth in the Policy. (See "Policy Rights and
Privileges--Payment of Policy Benefits.") Death benefit proceeds will be paid
to the surviving Beneficiary or Beneficiaries specified in the application or
as subsequently changed.
The Policy provides two death benefit options: a "Level Type" death benefit
("Option A") and an "Increasing Type" death benefit ("Option B"). Option B
generally will be the only option presented. The death benefit under either
option will never be less than the current Face Amount of the Policy as long as
the Policy remains in force. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement.") The minimum Face Amount currently varies by age
ranging from $75,000 for ages 65 and older to $275,000 for ages less than 30.
The maximum Face Amount is generally $5,000,000.
Option A. Under Option A, the death benefit is the current Face Amount of the
Policy or, if greater, the applicable percentage of Cash Value on the date of
death. The applicable percentage is 250 percent for an Insured Attained Age 40
or below on the Policy Anniversary prior to the date of death. For Insureds
with an Attained Age over 40 on that Policy Anniversary, the percentage is
lower and declines with age as shown in the Applicable Percentage Table below.
Accordingly, under Option A the death benefit will remain level at the Face
Amount unless the applicable percentage of Cash Value exceeds the current Face
Amount, in which case the amount of the death benefit will vary as the Cash
Value varies. (See Illustrations of Death Benefits and Cash Values, Appendix
A.) Owners who prefer to have favorable investment performance reflected in
higher Cash Value for the same Face Amount, rather than increased death
benefit, generally should select Option A.
APPLICABLE PERCENTAGE OF CASH VALUE TABLE*
PERCENTAGE
OF
INSURED AGE CASH VALUE
- - ----------- ----------
0 to 40................. 250%
45...................... 215
50...................... 185
55...................... 150
60...................... 130
PERCENTAGE
OF
INSURED AGE CASH VALUE
- - ----------- ----------
65 120%
70...................... 115
75-90................... 105
95 and older............ 100
* For ages that are not shown on the table, the applicable percentage
multiples will decrease by a ratable portion for each full year.
The applicable percentages in the foregoing table are based on Federal tax
law requirements described in Section 7702(d) of the Code. The Company reserves
the right to alter the applicable percentage to the extent necessary to comply
with changes to Section 7702(d) or any successor provision thereto.
Option B. Under Option B, the death benefit is equal to the current Face
Amount plus the Cash Value of the Policy or, if greater, the applicable
percentage of the Cash Value on the date of death. The applicable percentage is
the same as under Option A: 250 percent for an Insured with an Attained Age of
40 or below on the Policy Anniversary prior to the date of death, and for
Insureds with an Attained Age over 40 on that Policy Anniversary the percentage
declines as shown in the Applicable Percentage Table above. Accordingly, under
Option B the amount of the death benefit will always vary as the Cash Value
varies (but will never be less than the Face Amount). (See Illustrations of
Death Benefits and Cash Values, Appendix A.) Owners who prefer to have
favorable investment performance reflected in higher death benefits for the
same Face Amount generally should select Option B. All other factors equal, for
the same premium dollar, Option B provides lower initial Face Amount resulting
in earlier cash accumulation.
Change in Death Benefit Option. After the first Policy Anniversary, the Owner
may change the death benefit option in effect. The Company reserves the right
to limit the number of changes in death benefit options to one each Policy
Year. A request for change must be made directly to the Company in writing. The
18
effective date of such a change will be the Monthly Anniversary on or following
the date the Company receives the change request. A change in death benefit
option may have Federal income tax consequences. (See Federal Tax Matters.)
If the death benefit option is changed from Option A to Option B, the Face
Amount after the change will equal the Face Amount before the change less the
Cash Value on the effective date of the change. Satisfactory evidence of
insurability must be submitted directly to the Company in connection with a
request for a change from Option A to Option B. This change may not be made if
it would result in a Face Amount of less than the minimum.
If the death benefit option is changed from Option B to Option A, the Face
Amount after the change will equal the Face Amount before the change plus the
Cash Value on the effective date of change.
A change in death benefit option will not in itself result in an immediate
change in the amount of a Policy's death benefit or Cash Value. No charges will
be imposed upon a change from death benefit Option B to Option A. Changing from
Option A to Option B, however, will result in a decrease in the Face Amount. In
addition, if, prior to or accompanying a change in the death benefit option,
there has been an increase in the Face Amount, the cost of insurance charge may
be different for the increased amount. (See "Charges and Deductions--Monthly
Deduction--Cost of Insurance.")
No change in death benefit option will be permitted that results in the death
benefit under a Policy being included in gross income due to not satisfying the
requirements of Federal tax law. (See "Federal Tax Matters.")
Change in Face Amount. Subject to certain limitations set forth below, an
Owner may increase or decrease the Face Amount of a Policy (without changing
the death benefit option) after the first Policy Anniversary. A written request
for a change in the Face Amount must be sent directly to the Company. A change
in Face Amount may affect the cost of insurance rate and the net amount at
risk, both of which affect an Owner's cost of insurance charge. (See "Charges
and Deductions--Monthly Deduction--Cost of Insurance.") In addition, a change
in Face Amount may have Federal income tax consequences. (See "Federal Tax
Matters.")
Any decrease in the Face Amount will become effective on the Monthly
Anniversary on or following receipt of the written request by the Company. The
amount of the requested decrease must be at least $5,000 and the Face Amount
remaining in force after any requested decrease may not be less than the
minimum amount Face Amount. If, following a decrease in Face Amount, the Policy
would not comply with the maximum premium limitations required by Federal tax
law (see "Payment and Allocation of Premiums"), the decrease may be limited or
Cash Value may be returned to the Owner (at the Owner's election), to the
extent necessary to meet these requirements. A decrease in the Face Amount will
reduce the Face Amount in the following order:
(a) The Face Amount provided by the most recent increase;
(b) The next most recent increases successively; and
(c) The initial Face Amount.
This order of reduction will be used to determine the amount of subsequent cost
of insurance charges (see "Charges and Deductions--Monthly Deduction--Cost of
Insurance").
For an increase in the Face Amount, the Company requires that satisfactory
evidence of insurability be submitted. An application for an increase must be
received by the Company. If approved, the increase will become effective on the
Monthly Anniversary on or following receipt of the satisfactory evidence of
insurability. In addition, the Insured must have an Attained Age of not greater
than 80 on the effective date of the increase. The amount of the increase may
not be less than $5,000. The Face Amount may not be
19
increased more than the maximum Face Amount for that Policy. Although an
increase need not necessarily be accompanied by an additional premium (unless
it is required to meet the next monthly deduction), the Cash Surrender Value in
effect immediately after the increase must be sufficient to cover the next
monthly deduction. To the extent the Cash Surrender Value is not sufficient, an
additional premium must be paid. (See "Charges and Deductions--Monthly
Deduction.") An increase in the Face Amount may result in certain additional
charges. (See "Charges and Deductions.")
An increase in Face Amount may be cancelled within 10 days after receiving it
or such longer period required by state law. Upon cancellation, any additional
charges, which would not have been assessed without the increase, will be
refunded to the Owner if requested. If a request for a refund is not made, the
charges will be restored to the Policy's Cash Value and allocated to Divisions
of the Separate Account in the same manner as they were deducted. Premiums paid
following an increase in Face Amount and prior to the time the right to cancel
the increase expires will become part of the Policy's Cash Value and will not
be subject to refund. (See "Policy Rights and Privileges--Right to Examine
Policy.")
Methods of Affecting Insurance Protection. An Owner may increase or decrease
the pure insurance protection provided by a Policy--the difference between the
death benefit and the Cash Value--in several ways as insurance needs change.
These ways include increasing or decreasing the Face Amount, changing the level
of premium payments, and, to a lesser extent, making partial withdrawals from
the Policy. Although the consequences of each of these methods will depend upon
the individual circumstances, they may be generally summarized as follows:
(a) A decrease in the Face Amount will, subject to the applicable
percentage limitations (see "Policy Benefits--Death Benefit"), decrease the
pure insurance protection and the cost of insurance charges under the
Policy without reducing the Cash Value.
(b) An increase in the Face Amount may increase the amount of pure
insurance protection, depending on the amount of Cash Value and the
resultant applicable percentage limitation. If the insurance protection is
increased, the Policy charges generally will increase as well.
(c) An increased level of premium payments will reduce the pure insurance
protection if Option A is in effect. However, when the applicable
percentage of Cash Value exceeds either the Face Amount (if Option A is in
effect) or the Cash Value plus the Face Amount (if Option B is in effect),
increased premium payments will increase the pure insurance protection.
Increased premiums should also increase the amount of funds available to
keep the Policy in force.
(d) A reduced level of premium payments generally will increase the
amount of pure insurance protection, depending on the applicable percentage
limitations. If the reduced level of premium payments is insufficient to
cover monthly deductions or to offset negative investment performance, Cash
Value may also decrease, which in turn will increase the possibility that
the Policy will lapse. (See "Payment and Allocation of Premiums--Policy
Lapse and Reinstatement.")
(e) A partial withdrawal will reduce the death benefit. (See "Policy
Rights and Privileges--Surrender and Partial Withdrawals.") However, it
only affects the amount of pure insurance protection and cost of insurance
charges if the death benefit before or after the withdrawal is based on the
applicable percentage of Cash Value, because otherwise the decrease in the
death benefit is offset by the amount of Cash Value withdrawn. The primary
use of a partial withdrawal is to withdraw Cash Value.
Payment of Death Benefit Proceeds. Death benefit proceeds under the Policy
ordinarily will be paid within seven days after the Company receives all
documentation required for such a payment at its Home Office. Payment may,
however, be postponed in certain circumstances. (See "General Matters Relating
to the
20
Policy--Postponement of Payments," page 30.) The Owner may decide the form in
which the proceeds will be paid. During the Insured's lifetime, the Owner may
arrange for the death benefit proceeds to be paid in a single sum or under one
or more of the optional methods of settlement described below. The death
benefit will be increased by the amount of the monthly cost of insurance for
the portion of the month from the date of death to the end of the month, and
reduced by any outstanding Indebtedness. (See "General Matters Relating to the
Policy--Additional Insurance Benefits," and "Charges and Deductions.") The
Company will pay interest on the death benefit from the date of the Insured's
death to the date of payment. Interest will be at an annual rate determined by
the Company.
When no election for an optional method of settlement is in force at the
death of the Insured, the Beneficiary may select one or more of the optional
methods of settlement at any time before death benefit proceeds are paid. (See
"Policy Rights and Privileges--Payment of Policy Benefits.")
An election or change of method of settlement must be in writing. A change in
Beneficiary revokes any previous settlement election. Once payments have begun,
the settlement option may not be changed.
CASH VALUE
The Cash Value of the Policy is equal to the total of the Policy's Cash Value
in the Separate Account and the Loan Account. The Policy's Cash Value in the
Separate Account will reflect the investment performance of the chosen
Divisions of the Separate Account, the frequency and amount of net premiums
paid, transfers, partial withdrawals, Policy Loans, loan account interest rate
credited, and the charges assessed in connection with the Policy. An Owner may
at any time surrender the Policy and receive the Policy's Cash Surrender Value.
(See "Policy Rights and Privileges--Surrender and Partial Withdrawals.") The
Policy's Cash Value in the Separate Account equals the sum of the Policy's Cash
Value in each Division. There is no guaranteed minimum Cash Value.
Determination of Cash Value. Cash Value is determined on a daily basis. On
the Investment Start Date, the Cash Value in a Division will equal the portion
of any net premium allocated to the Division, reduced by the portion of the
monthly deductions due from the Issue Date through the Investment Start Date
allocated to that Division. Depending upon the length of time between the Issue
Date and the Investment Start Date, this amount may be more than the amount of
one monthly deduction. (See "Payment and Allocation of Premiums.") Thereafter,
on each Valuation Date, the Cash Value in a Division of the Separate Account
will equal:
(1) The Cash Value in the Division on the preceding Valuation Date,
multiplied by the Division's Net Investment Factor (defined below) for
the current Valuation Period; plus
(2) Any net premium payments received during the current Valuation Period
which are allocated to the Division; plus
(3) Any loan repayments allocated to the Division during the current
Valuation Period; plus
(4) Any amounts transferred to the Division from another Division during
the current Valuation Period; plus
(5) That portion of the interest credited on outstanding Policy Loans which
is allocated to the Division during the current Valuation Period; minus
(6) Any amounts transferred from the Division during the current Valuation
Period (including transfers to the Loan Account) plus transfer charges
if any; minus
(7) Any partial withdrawals plus any partial withdrawal transaction charge,
from the Division during the current Valuation Period; minus
(8) If a Monthly Anniversary occurs during the current Valuation Period,
the portion of the monthly deduction allocated to the Division during
the current Valuation Period to cover the Policy Month which starts
during that Valuation Period. (See "Charges and Deductions.")
21
The Policy's Cash Value in the Separate Account equals the sum of the Policy's
Cash Values in each Division.
Net Investment Factor. The Net Investment Factor measures the investment
performance of a Division during a Valuation Period. The Net Investment Factor
for each Division for a Valuation Period is calculated as follows:
(1) The value of the assets at the end of the preceding Valuation Period;
plus
(2) The investment income and capital gains--realized or unrealized--
credited to the assets in the Valuation Period for which the Net
Investment Factor is being determined; minus
(3) The capital losses, realized or unrealized, charged against those
assets during the Valuation Period; minus
(4) Any amount charged against each Division for taxes or other economic
burden resulting from the application of tax laws, determined by the
Company to be properly attributable to the Divisions of the Separate
Account or the Policy, or any amount set aside during the Valuation
Period as a reserve for taxes attributable to the operation or
maintenance of each Division; minus
(5) A charge not to exceed .0020471% of the net assets for each day in the
Valuation Period. This corresponds to 0.75% per year for mortality and
expense risks; divided by
(6) The value of the assets at the end of the preceding Valuation Period.
The Company may use an equivalent method to determine Cash Value in each
Division on each Valuation Date in lieu of the Net Investment Factor method.
This method directly determines the units of Cash Value in each Division and
the corresponding unit value. Unit value is obtained as follows:
(1) The value of assets in a Division are obtained by multiplying shares
outstanding by the net asset value as of the Valuation Date: minus
(2) A reduction based upon a charge not to exceed .0020471% of the net
assets for each day in the Valuation Period is made (This corresponds
to 0.75% per year for mortality and expense risk charge); divided by
(3) Aggregate units outstanding in the Division at the end of the preceding
Valuation Period.
POLICY RIGHTS AND PRIVILEGES
LOANS
Loan Privileges. After the first Policy Anniversary, the Owner may, by
written request directly to the Company, borrow an amount up to the Loan Value
of the Policy, with the Policy serving as sole security for such loan. The Loan
Value is equal to (a) minus (b), where (a) is 85 percent of the Cash Value of
the Policy on the date the Policy Loan is requested and (b) is the amount of
any outstanding Indebtedness. Loan interest is due and payable in arrears on
each Policy Anniversary or on a pro rata basis for such shorter period as the
loan may exist. The minimum amount that may be borrowed is $100. The loan may
be completely or partially repaid at any time while the Insured is living. Any
amount due to an Owner under a Policy Loan ordinarily will be paid within seven
days after the Company receives the loan request at its Home Office, although
payments may be postponed under certain circumstances. (See "General Matters
Relating to the Policy--Postponement of Payments.")
When a Policy Loan is made, Cash Value equal to the amount of the loan will
be transferred to the Loan Account as security for the loan. Unless the Owner
requests a different allocation, amounts will be transferred from the Divisions
of the Separate Account in the same proportion that the Policy's Cash Value in
each Division bears to the Policy's total Cash Value, less the Cash Value in
the Loan Account, at the end
22
of the Valuation Period during which the request for a Policy Loan is received.
This will reduce the Policy's Cash Value in the Separate Account. These
transactions will not be considered transfers for purposes of the limitations
on transfers between Divisions.
Loan Account Interest Rate Credited. Cash Value transferred to the Loan
Account to secure a Policy Loan will accrue interest daily at an annual rate
not less than five percent. The rate is declared by action of Company
management as authorized by the Board of Directors of the Company. The Loan
Account interest credited will be transferred to the Divisions of the Separate
Account: (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.
Interest Rate Charged for Policy Loans. The interest rate charged will be at
an annual rate of eight percent. Interest charged will be due and payable
annually in arrears on each Policy Anniversary or for such shorter period as
the Policy Loan may exist. If the Owner does not pay the interest charged when
it is due, an amount of Cash Value equal to that which is due will be
transferred to the Loan Account. (See "Effect of Policy Loans.") The amount
transferred will be deducted from the Divisions of the Separate Account in the
same proportion that the portion of the Cash Value in each Division bears to
the total Cash Value of the Policy minus the Cash Value in the Loan Account.
Effect of Policy Loans. A loan taken from, or secured by, a Policy may have
Federal income tax consequences. (See "Federal Tax Matters.")
Whether or not a Policy Loan is repaid, it will permanently affect the Cash
Value of a Policy, and may permanently affect the amount of the death benefit,
even if the loan is repaid. This is because the collateral for the Policy Loan
(the amount held in the Loan Account) does not participate in the performance
of the Separate Account while the loan is outstanding. If the Loan Account
interest credited is less than the investment performance of the selected
Division, the Policy values will be lower as a result of the loan. Conversely,
if the Loan Account interest credited is higher than the investment performance
of the Division, the Policy values may be higher.
In addition, if the Indebtedness exceeds the Cash Value on any Monthly
Anniversary, the Policy may lapse, subject to a grace period. (See "Payment and
Allocation of Premiums--Policy Lapse and Reinstatement.") A sufficient payment
must be made within the later of the grace period of 62 days from the Monthly
Anniversary immediately before the date Indebtedness exceeds the Cash Value, or
31 days after notice that the Policy will terminate without a sufficient
payment has been mailed, or the Policy will lapse and terminate without value.
A lapsed Policy, however, may later be reinstated. (See "Payment and Allocation
of Premiums--Policy Lapse and Reinstatement.")
All outstanding Indebtedness will be deducted from the proceeds payable upon
the death of the Insured, surrender, or the maturity of the Policy.
Repayment of Indebtedness. A Policy Loan may be repaid in whole or in part at
any time prior to the death of the Insured and as long as a Policy is in
effect. All repayments should be made directly to the Company at its Home
Office. Amounts paid while a Policy Loan is outstanding will be treated as
premiums unless the Owner requests in writing that they be treated as repayment
of Indebtedness. When a loan repayment is made, an amount securing the
Indebtedness in the Loan Account equal to the loan repayment will be
transferred to the Divisions of the Separate Account in the same proportion
that Cash Value in the Loan Account bears to the Cash Value in each Loan
Subaccount. A Loan Subaccount exists for each Division of the Separate Account.
Amounts transferred to the Loan Account to secure Indebtedness are allocated to
the appropriate Loan Subaccount to reflect their origin.
23
SURRENDER AND PARTIAL WITHDRAWALS
At any time during the lifetime of the Insured and while a Policy is in
force, the Owner may surrender, or make a partial withdrawal under, the Policy
by sending a written request to the Company. The amount available upon
surrender is the Cash Surrender Value (described below) at the end of the
Valuation Period during which the surrender request is received at the
Company's Home Office. Amounts payable upon surrender or a partial withdrawal
ordinarily will be paid within seven days of receipt of the written request.
(See "General Matters Relating to the Policy--Postponement of Payments.")
Surrenders and partial withdrawals may have Federal income tax consequences.
(See "Federal Tax Matters.")
Surrender. To effect a surrender, the Policy itself must be returned to the
Company along with the request, or the request must be accompanied by a
completed affidavit of lost policy, which is available from the Company. Upon
surrender, the Company will pay the Cash Surrender Value to the Owner. The Cash
Surrender Value equals the Cash Value on the date of surrender, less any
Indebtedness. Surrender proceeds will be paid in a single sum. If the request
is received on a Monthly Anniversary, the monthly deduction otherwise
deductible will be included in the amount paid. Coverage under a Policy will
terminate as of the date of surrender.
Partial Withdrawals. After the first Policy Year, an Owner may make up to one
partial withdrawal each Policy Month from the Separate Account. The minimum
amount of a partial withdrawal, net of any transaction charges, is $500. The
minimum amount that can be withdrawn from a Division is $50, or the Policy's
Cash Value in a Division, if smaller. The maximum amount that may be withdrawn,
including the partial withdrawal transaction charge, is the Loan Value. The
partial withdrawal transaction charge is equal to the lesser of $25 or two
percent of the amount withdrawn. The Owner may allocate the amount withdrawn,
subject to the above conditions, among the Divisions of the Separate Account.
If no allocation is specified, then the partial withdrawal will be allocated
among the Divisions of the Separate Account in the same proportion that the
Policy's Cash Value in each Division bears to the total Cash Value of the
Policy, less the Cash Value in the Loan Account, on the date the request for
the partial withdrawal is received.
A partial withdrawal will decrease the Face Amount in two situations. First,
if the death benefit Option A is in effect and the death benefit equals the
Face Amount then the partial withdrawal will decrease the Face Amount, and,
thus, the death benefit by an amount equal to the partial withdrawal plus the
partial withdrawal transaction charge. Second, if the death benefit equals the
applicable percentage of Cash Value (whether Option A or Option B is in
effect), then a partial withdrawal will decrease the Face Amount by the amount
that the partial withdrawal plus the partial withdrawal transaction charge
exceeds the difference between the death benefit and the Face Amount. The death
benefit also will be reduced in this circumstance. If Option B is in effect and
the death benefit equals the Face Amount plus the Cash Value, the partial
withdrawal will not reduce the Face Amount, but it will reduce the Cash Value
and, thus, the death benefit by the amount of the partial withdrawal plus the
partial withdrawal transaction charge. The Face Amount will be decreased in the
following order: (1) the Face Amount at issue; and (2) any increases in the
same order in which they were issued.
Generally, the partial withdrawal transaction charge will be allocated among
the Divisions of the Separate Account in the same proportion as the partial
withdrawal is allocated. If, following a partial withdrawal, insufficient funds
remain in a Division to pay the partial withdrawal transaction charge allocated
to a Division, the unpaid charges will be allocated equally among the remaining
Divisions. In addition, an Owner may request that the partial withdrawal
transaction charge be paid from the Owner's Cash Value in another Division.
The Face Amount remaining in force after a partial withdrawal may not be less
than $25,000. Any request for a partial withdrawal that would reduce the Face
Amount below this amount will not be executed.
Partial withdrawals may affect the way in which the cost of insurance charge
is calculated and the amount of pure insurance protection afforded under a
Policy. (See "Policy Benefits--Death Benefit--Methods of Affecting Insurance
Protection.")
24
TRANSFERS
Under the Company's current rules, a Policy's Cash Value, except amounts
credited to the Loan Account, may be transferred among the Divisions of the
Separate Account available with the Policy. Requests for transfers from or
among Divisions of the Separate Account must be made in writing directly to the
Company and may be made once each Policy Month. Transfers must be in amounts of
at least $250 or, if smaller, the Policy's Cash Value in a Division. The
Company will effectuate transfers and determine all values in connection with
transfers as of the end of the Valuation Period during which the transfer
request is received.
All requests received on the same Valuation Day will be considered a single
transfer request. Each transfer must meet the minimum requirement of $250 or
the entire Cash Value in a Division. Where a single transfer request calls for
more than one transfer, and not all of the transfers would meet the minimum
requirements, the Company will effectuate those transfers that do meet the
requirements. Transfers resulting from Policy Loans will not be counted for
purposes of the limitations on the amount or frequency of transfers allowed in
each month or year.
Although the Company currently intends to continue to permit transfers for
the foreseeable future, the Policy provides that the Company may modify the
transfer privilege, by changing the minimum amount transferable, by altering
the frequency of transfers, by imposing a transfer charge, by prohibiting
transfers, or in such other manner as the Company may determine at its
discretion.
RIGHT TO EXAMINE POLICY
The Owner may cancel a Policy within 10 days after receiving it or such
longer period required by state law. If a Policy is cancelled within this time
period, a refund will be paid. Except for Policies sold in Kansas, the refund
will equal all premiums paid under the Policy. For Policies sold in Kansas, the
Company will refund an amount equal to the greater of premiums paid or (1) plus
(2) where (1) is the difference between the premiums paid, including any policy
fees or other charges, and the amounts allocated to the Separate Account under
the Policy and (2) is the value of the amounts allocated to the Separate
Account under the Policy on the date the returned Policy is received by the
Company or its representative.
To cancel the Policy, the Owner should mail or deliver the Policy directly to
the Company. A refund of premiums paid by check may be delayed until the check
has cleared the Owner's bank. (See "General Matters Relating to the Policy--
Postponement of Payments.")
A request for an increase in Face Amount (see "Policy Benefits--Death
Benefit") also may be cancelled. The request for cancellation must be made
within the latest of 20 days from the date the Owner received the new Policy
specifications pages for the increase, 10 days of mailing the right to
cancellation notice to the Owner, or 45 days after the Owner signed the
application for the increase.
Upon cancellation of an increase, the Owner may request that the Company
refund the amount of the additional charges deducted in connection with the
increase. This will equal the amount by which the monthly deductions since the
increase went into effect exceeded the monthly deductions which would have been
made absent the increase (see "Charges and Deductions--Monthly Deduction"). If
no request is made, the Company will increase the Policy's Cash Value by the
amount of these additional charges. This amount will be allocated among the
Divisions of the Separate Account in the same manner as it was deducted.
PAYMENT OF BENEFITS AT MATURITY
If the Insured is living and the Policy is in force, the Company will pay the
Cash Surrender Value of the Policy to the Owner on the Maturity Date. An Owner
may elect to have amounts payable on the Maturity Date paid in a single sum or
under a settlement option. (See "Policy Rights and Privileges--Payment of
25
Policy Benefits.") Amounts payable on the Maturity Date ordinarily will be paid
within seven days of that date, although payment may be postponed under certain
circumstances. (See "General Matters Relating to the Policy--Postponement of
Payments.") A Policy will mature if and when the Insured reaches Attained Age
100.
PAYMENT OF POLICY BENEFITS
A lump sum payment will be made. Provisions for settlement of proceeds
different from a lump sum payment may only be made upon written agreement with
the Company.
Settlement Options. The Company may offer settlement options that apply to
the payment of death benefit proceeds, as well as to benefits payable at
maturity. Once a settlement option is in effect, there will no longer be value
in the Separate Account.
Accelerated Death Benefits. The Company offers certain riders which permit
the Owner to elect to receive an accelerated payment of the Policy's death
benefit in a reduced amount under certain circumstances. (See "General Matters
Relating to the Policy--Additional Insurance Benefits.")
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate the
Company for providing the insurance benefits set forth in the Policy and any
additional benefits added by rider, administering the Policy, incurring
expenses in distributing the Policy, and assuming certain risks in connection
with the Policy.
PREMIUM EXPENSE CHARGE
Prior to allocation of net premiums among the Divisions of the Separate
Account, premium payments will be reduced by any premium expense charge. The
premium expense charge is equal to a percentage of each premium paid and covers
certain administrative expenses and acquisition related costs as set forth on
the specifications pages of the Policy. The charge is 1.25 percent and is
incurred in Policy years one through ten.
The premium payment less the premium expense charge less the premium tax
charge equals the net premium.
PREMIUM TAX CHARGE
Various states and subdivisions impose a tax on premiums received by
insurance companies. Premium taxes vary from jurisdiction to jurisdiction. To
cover these premium taxes, premium payments will be reduced by a premium tax
charge of 2.25 percent from all Policies.
MONTHLY DEDUCTION
Charges will be deducted monthly from the Cash Value of each Policy ("monthly
deduction") to compensate the Company for (a) certain administrative costs; (b)
insurance underwriting and acquisition expenses in connection with issuing a
Policy; (c) the cost of insurance; and (d) the cost of optional benefits added
by rider. The monthly deduction will be deducted on the Investment Start Date
and on each succeeding Monthly Anniversary. It will be allocated among each
Division of the Separate Account in the same proportion that a Policy's Cash
Value in each Division bears to the total Cash Value of the Policy, less the
Cash Value in the Loan Account, on the date the deduction is made. 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.
26
Monthly Administrative Charge. The Company has responsibility for the
administration of the Policies and the Separate Account. Administrative
expenses include premium billing and collection, recordkeeping, processing
death benefit claims, cash surrenders, partial withdrawals, Policy changes,
reporting and overhead costs, processing applications, and establishing Policy
records. As reimbursement for administrative expenses related to the
maintenance of each Policy and the Separate Account, the Company assesses a
monthly administration charge from each Policy. The amount of this charge is
$3.50 per month and is set forth in the specifications pages of the Policy.
These charges, once established at the time a Policy is issued, are guaranteed
not to increase over the life of the Policy.
The Company may administer the Policy itself, or the Company may purchase
administrative services from such sources (including affiliates) as may be
available. Such services will be acquired on a basis which, in the Company's
sole discretion, affords the best services at the lowest cost. The Company
reserves the right to select a company to provide services which the Company
deems, in its sole discretion, is the best able to perform such services in a
satisfactory manner even though the costs for such services may be higher than
would prevail elsewhere.
Cost of Insurance. The cost of insurance is deducted on each Monthly
Anniversary for the following Policy Month. Because the cost of insurance
depends upon a number of variables, the cost will vary for each Policy Month.
The cost of insurance is determined separately for the initial Face Amount and
for any subsequent increases in Face Amount. The Company will determine the
monthly cost of insurance charge by multiplying the applicable cost of
insurance rate or rates by the net amount at risk for each Policy Month.
The cost of insurance rates are determined at the beginning of each Policy
Year for the initial Face Amount and each increase in Face Amount. The current
cost of insurance rates will be determined by the Company based on its
expectations as to future mortality experience.
The current cost of insurance rates will be based on the Attained Age of the
Insured, the rate class of the Insured, and sex (except for Policies sold in
Montana, see Unisex Requirements Under Montana Law) of the Insured at issue or
the date of an increase in Face Amount. The cost of insurance rates generally
increase as the Insured's Attained Age increases.
The rate class of an Insured will affect the cost of insurance rate. For the
initial Face Amount, the Company will use the rate class on the Issue Date. For
each increase in Face Amount, other than one caused by a change in the death
benefit option, the Company will use the rate class applicable to that
increase. If the death benefit equals a percentage of Cash Value, an increase
in Cash Value will cause an automatic increase in the death benefit. The rate
class for such increase will be the same as that used for the most recent
increase, excluding any rider, that required proof of insurability.
The Company currently places Insureds into a preferred rate class, a standard
rate class, or into rate classes involving a higher mortality risk. The degree
of underwriting imposed may vary from full underwriting to simplified issue
underwriting.
Actual cost of insurance rates may change, and the actual monthly cost of
insurance rates will be determined by the Company based on its expectations as
to future mortality experience. However, the actual cost of insurance rates
will not be greater than the guaranteed cost of insurance rates set forth in
the Policy. For fully underwritten and simplified issue Policies which are not
in a substandard risk class, the guaranteed cost of insurance rates are equal
to 100% of the rates set forth in the male/female smoker/nonsmoker 1980 CSO
Mortality Tables (1980 CSO Table SA, 1980 CSO Table NA, 1980 CSO Table SG, and
1980 CSO Table NG), age last birthday. Higher rates apply if the Insured is
determined to be in a substandard risk class.
In two otherwise identical Policies, an Insured in the preferred rate class
will have a lower cost of insurance than an Insured in a rate class involving
higher mortality risk. Each rate class is also divided into two categories:
smokers and nonsmokers. Nonsmoker Insureds will generally incur a lower cost of
insurance than similarly situated Insureds who smoke. Policies issued with
simplified underwriting will, in general, incur a higher cost of insurance than
Policies issued under full underwriting.
27
The net amount at risk for a Policy Month is (a) the death benefit at the
beginning of the Policy Month divided by 1.0040741 (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 five
percent), less (b) the Cash Value at the beginning of the Policy Month.
The net amount at risk may be affected by changes in the Cash Value or
changes in the Face Amount of the Policy. If there is an increase in the Face
Amount and the rate class applicable to the increase is different from that for
the initial Face Amount, the net amount at risk will be calculated separately
for each rate class. If Option A is in effect, for purposes of determining the
net amounts at risk for each rate class, Cash Value will first be considered a
part of the initial Face Amount. If the Cash Value is greater than the initial
Face Amount, the excess Cash Value will then be considered a part of each
increase in order, starting with the first increase. If Option B is in effect,
the net amount at risk for each rate class will be determined by the Face
Amount associated with that rate class. In calculating the cost of insurance
charge, the cost of insurance rate for a Face Amount is applied to the net
amount at risk for the corresponding rate class.
Because the calculation of the net amount at risk is different under Option A
and Option B when more than one rate class is in effect, a change in the death
benefit option may result in a different net amount at risk for each rate class
than would have occurred had the death benefit option not been changed. Since
the cost of insurance is calculated separately for each rate class, any change
in the net amount at risk resulting from a change in the death benefit option
may affect the total cost of insurance paid by the Owner.
Partial withdrawals and decreases in Face Amount will affect the manner in
which the net amount at risk for each rate class is calculated. (See "Policy
Benefits--Death Benefit," and "Policy Rights and Privileges--Surrender and
Partial Withdrawals.")
Additional Insurance Benefits. The monthly deduction will include charges for
any additional benefits provided by rider. (See "General Matters Relating to
the Policy--Additional Insurance Benefits.")
PARTIAL WITHDRAWAL TRANSACTION CHARGE
A transaction charge which is the lesser of $25 or two percent of the amount
withdrawn will be assessed on each partial withdrawal, to cover administrative
costs incurred in processing the partial withdrawal.
SEPARATE ACCOUNT CHARGES
Mortality and Expense Risk Charge. The Company will deduct a daily charge
from the Separate Account at a rate not to exceed .0020471% of the net assets
of each Division of the Separate Account, which equals an annual rate of .75%
of those net assets. This deduction is guaranteed not to increase for the
duration of the Policy.
The mortality risk assumed by the Company is that Insureds may die sooner
than anticipated and that therefore the Company will pay an aggregate amount of
death benefits greater than anticipated. The expense risk assumed is that
expenses incurred in issuing and administering the Policy will exceed the
amounts realized from the administrative charges assessed against the Policy.
Federal Taxes. Currently no charge is made to the Separate Account for
Federal income taxes that may be attributable to the Separate Account. The
Company may, however, make such a charge in the future. Charges for other
taxes, if any, attributable to the Account may also be made. (See "Federal Tax
Matters.")
Expenses of the Funds. The value of the net assets of the Separate Account
will reflect the investment advisory fee and other expenses incurred by the
Funds. (See "The Company and the Separate Account--the Underlying Funds.")
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GENERAL MATTERS RELATING TO THE POLICY
POSTPONEMENT OF PAYMENTS
Payment of any amount due from the Separate Account upon surrender, partial
withdrawals, election of an accelerated death benefit under a rider, death of
the Insured, or the Maturity Date, as well as payments of a Policy loan and
transfers, may be postponed whenever: (i) the New York Stock Exchange is closed
other than customary weekend and holiday closings, or trading on the New York
Stock Exchange is restricted as determined by the SEC; (ii) the SEC by order
permits postponement for the protection of Owners; or (iii) an emergency
exists, as determined by the SEC, as a result of which disposal of securities
is not reasonably practicable or it is not reasonably practicable to determine
the value of the Separate Account's net assets.
Payments under the Policy of any amounts derived from premiums paid by check
may be delayed until such time as the check has cleared the Owner's bank.
THE CONTRACT
The Policy, the attached application, any riders, endorsements, any
application for an increase in Face Amount, and any application for
reinstatement constitute the entire contract between the Owner and the Company.
All statements made by the Insured in the application are considered
representations and not warranties, except in the case of fraud. Only
statements in the application and any supplemental applications can be used to
contest a claim or the validity of the Policy. Any change to the Policy must be
approved in writing by the President, a Vice President, or the Secretary of the
Company. No agent has the authority to alter or modify any of the terms,
conditions, or agreements of the Policy or to waive any of its provisions.
CONTROL OF POLICY
The Insured will be considered Owner of the Policy unless another person is
shown as the Owner in the application. Ownership may be changed, however, as
described below. The Owner is entitled to all rights provided by the Policy,
prior to its Maturity Date. After the Maturity Date, the Owner cannot change
the payee nor the mode of payment, unless otherwise provided in the Policy. Any
person whose rights of ownership depend upon some future event will not possess
any present rights of ownership. If there is more than one Owner at a given
time, all must exercise the rights of ownership. If the Owner should die, and
the Owner is not the Insured, the Owner's interest will go to his or her estate
unless otherwise provided.
Unless otherwise provided, the Policy is jointly owned by all Owners named in
the Policy or by the survivors of those joint Owners. Unless otherwise stated
in the Policy, the final Owner is the estate of the last joint Owner to die.
The Company may rely on the written request of any trustee of a trust which is
the Owner of the Policy, and the Company is not responsible for the proper
administration of any such trust.
BENEFICIARY
The Beneficiary(ies) is (are) the person(s) specified in the application or
by later designation. Unless otherwise stated in the Policy, the Beneficiary
has no rights in a Policy before the death of the Insured. If there is more
than one Beneficiary at the death of the Insured, each will receive equal
payments unless otherwise provided by the Owner. If no Beneficiary is living at
the death of the Insured, the proceeds will be payable to the Owner or, if the
Owner is not living, to the Owner's estate. The Policy permits the designation
of various types of trust as Beneficiary(ies), including trusts for minor
beneficiaries, trusts under a will, and trusts under a separate written
agreement. An Owner is also permitted to designate several types of
beneficiaries, including business beneficiaries. For more details about the use
of trusts and specialized types of beneficiaries, refer to the Policy.
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CHANGE OF OWNER OR BENEFICIARY
The Owner may change the ownership and/or Beneficiary designation by written
request in a form acceptable to the Company at any time during the Insured's
lifetime. The Company may require that the Policy be returned for endorsement
of any change. 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 at
the Company's Home Office. The Company will not be liable for any payment made
or action taken before the Company received the written request for change. If
the Owner is also a Beneficiary of the Policy at the time of the Insured's
death, the Owner may, within 60 days of the Insured's death, designate another
person to receive the Policy proceeds. Any change will be subject to any
assignment of the Policy or any other legal restrictions.
POLICY CHANGES
The Company reserves the right to limit the number of Policy changes to one
per Policy Year and to restrict such changes in the first Policy Year.
Currently, no change may be made during the first Policy Year. For this
purpose, changes include increases or decreases in Face Amount and changes in
the death benefit option. No change will be permitted that would result in the
death benefit under a Policy being included in gross income due to not
satisfying the requirements of Section 7702 of the Internal Revenue Code or any
applicable successor provision.
CONFORMITY WITH STATUTES
If any provision in a Policy is in conflict with the laws of the state
governing the Policy, the provision will be deemed to be amended to conform to
such laws. In addition, the Company reserves the right to change the Policy if
it is determined that a change is necessary to cause this Policy to comply
with, or give the Owner the benefit of, any Federal or state statute, rule, or
regulation, including, but not limited to requirements of the Internal Revenue
Code, or its regulations or published rulings.
CLAIMS OF CREDITORS
To the extent permitted by law, neither the Policy nor any payment thereunder
will be subject to the claims of creditors or to any legal process.
INCONTESTABILITY
The Policy is incontestable after it has been in force for two years from the
Issue Date during the lifetime of the Insured. An increase in Face Amount or
addition of a rider after the Issue Date is incontestable after such increase
or addition has been in force for two years from its effective date during the
lifetime of the Insured. Any reinstatement of a Policy is incontestable, except
for nonpayment of premiums, only after it has been in force during the lifetime
of the Insured for two years after the effective date of the reinstatement.
ASSIGNMENT
The Company will be bound by an assignment of a Policy only if: (a) it is in
writing; (b) the original instrument or a certified copy is filed with the
Company at its Home Office; and (c) the Company sends an acknowledged copy to
the Owner. The Company is not responsible for determining the validity of any
assignment. Payment of Policy proceeds is subject to the rights of any assignee
of record. If a claim is based on an assignment, the Company may require proof
of the interest of the claimant. A valid assignment will take precedence over
any claim of a Beneficiary.
SUICIDE
Suicide within two years of the Issue Date is not covered by the Policy. If
the Insured dies by suicide, while sane or insane, within two years from the
Issue Date (or within the maximum period permitted by the
30
laws of the state in which the Policy was delivered, if less than two years),
the amount payable will be limited to premiums paid, less any partial
withdrawals and outstanding Indebtedness. If the Insured, while sane or insane,
dies by suicide within two years after the effective date of any increase in
Face Amount, the death benefit for that increase will be limited to the amount
of the monthly deductions for the increase.
If the Insured is a Missouri citizen when the Policy is issued, this
provision does not apply on the Issue Date of the Policy, or on the effective
date of any increase in Face Amount, unless the Insured intended suicide at the
time of application for the Policy or any increase in Face Amount.
MISSTATEMENT OF AGE OR SEX AND CORRECTIONS
If the age or sex (except under any policies sold in Montana, see Unisex
Requirements Under Montana Law) of the Insured has been misstated in the
application, the amount of the death benefit will be that which the most recent
cost of insurance charge would have purchased for the correct age and sex.
Any payment or Policy changes made by the Company in good faith, relying on
its records or evidence supplied with respect to such payment, will fully
discharge the Company's duty. The Company reserves the right to correct any
errors in the Policy.
ADDITIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following additional
insurance benefits may be added to a Policy by rider. Certain riders may not be
available in all states. In addition, should it be determined that the tax
status of a Policy as life insurance is adversely affected by the addition of
any of these riders, the Company will cease offering such riders. The
descriptions below are intended to be general; the terms of the Policy riders
providing the additional benefits may vary from state to state, and the Policy
should be consulted. The cost of any additional insurance benefits will be
deducted as part of the monthly deduction. (See "Charges and Deductions--
Monthly Deduction.")
Waiver of Monthly Deductions Rider. Provides for the waiver of the monthly
deductions while the Insured is totally disabled, subject to certain
limitations described in the rider. The Insured must have become disabled
before age 65.
Accelerated Death Benefit Settlement Option Rider. Provides for the
accelerated payment of a portion of death benefit proceeds in a single sum to
the Owner if the Insured is terminally ill. Under the rider, which is available
at no additional cost, the Owner may make a voluntary election to completely
settle the Policy in return for the Company's accelerated payment of a reduced
death benefit. The Owner may make such an election under the rider if
evidenced, including a certification from a licensed physician, is provided to
the Company that the Insured has a life expectancy of 12 months or less. Any
irrevocable beneficiary and assignees of record must provide written
authorization in order for the Owner to receive the accelerated benefit.
The amount of the death benefit payable under the rider will equal the cash
surrender value under the Policy on the date the Company receives satisfactory
evidence of terminal illness as discussed above, (less any Indebtedness and any
term insurance added by other riders) plus the product of the applicable
"benefit factor" multiplied by the difference of (a) minus (b), where (a)
equals the Policy's death benefit proceeds, and (b) equals the Policy's cash
surrender value. The "benefit factor", in the case of terminal illness, is
0.85.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, the Company believes that for federal income tax
purposes an accelerated death benefit payment made under the Accelerated Death
Benefit Settlement Option Rider should be fully excludable from the gross
income of the beneficiary, as long as the beneficiary is the Insured under the
Policy. However, you should consult a qualified tax adviser about the
consequences of adding this Rider to a Policy or requesting an accelerated
death benefit payment under this Rider.
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RECORDS AND REPORTS
The Company will maintain all records relating to the Separate Account and
will mail to the Owner once each Policy Year, at the last known address of
record, a report which shows the current Policy values, premiums paid,
deductions made since the last report, and any outstanding Policy Loans. The
Owner will also be sent without comment periodic reports for the Funds and a
list of the portfolio securities held in each Fund. Receipt of premium payments
directly from the Owner, transfers, partial withdrawals, Policy Loans, loan
repayments, changes in death benefit options, increases or decreases in Face
Amount, surrenders and reinstatements will be confirmed promptly following each
transaction.
An Owner may request in writing a projection of illustrated future Cash
Surrender Values and death benefits. This projection will be furnished by the
Company for a nominal fee.
DISTRIBUTION OF THE POLICIES
Walnut Street Securities, Inc. ("Walnut Street") acts as principal
underwriter of the Policies pursuant to an Underwriting Agreement with the
Company. Walnut Street is a wholly-owned subsidiary of General American Holding
Company, which is an affiliate of the Company. Walnut Street, a Missouri
corporation formed May 4, 1994, is registered with the SEC under the Securities
Exchange Act of 1934 as a broker-dealer and is a member of the National
Association of Securities Dealers.
Broker-dealers may receive a marketing allowance to assist in marketing the
product. This allowance may include an amount up to two thousand dollars per
Policy at issue and an on-going annual percentage up to 0.25 percent of Cash
Value to reimburse the broker-dealer for expenses and due diligence efforts
performed in connection with marketing the product. This allowance will
generally be retained by the broker-dealer in order to offset its expenses.
Generally, no compensation will be paid by the Company, Walnut Street, or the
broker-dealer to the individual directly involved in the sale of the product.
FEDERAL TAX MATTERS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisers should be consulted for more
complete information. This discussion is based upon the Company's understanding
of the present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service. No representation is made as to the likelihood of
continuation of the present Federal income tax laws or of the current
interpretations by the Internal Revenue Service.
TAXATION OF THE POLICY
Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code")
sets forth a definition of a life insurance contract for Federal tax purposes.
Although the Secretary of the Treasury (the "Treasury") is authorized to
prescribe regulations implementing Section 7702, while proposed regulations and
other interim guidance has been issued, final regulations have not been
adopted. In short, guidance as to how Section 7702 is to be applied is limited.
The Company nonetheless believes that the Policy should meet the Section 7702
definition of a life insurance contract. If a Policy were determined not to be
a life insurance contract for purposes of Section 7702, such Policy would not
provide the tax advantages normally provided by a life insurance policy.
Therefore, if it is subsequently determined that a Policy does not satisfy
section 7702, the Company will take whatever steps are appropriate and
necessary to attempt to cause such Policy to comply with section 7702,
including possibly refunding any premiums paid that exceed the limitations
allowable under section 7702 (together with interest or other earnings on any
such premiums refunded as required by law). For these reasons, the Company
reserves the right to modify the Policy as necessary to attempt to qualify it
as a life insurance contract under section 7702.
32
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of each Division of the Separate
Account to be "adequately diversified" in order for the Policy to be treated as
a life insurance contract for Federal tax purposes. Although the Company does
not control the investment management companies or their investments, the
investment management companies have represented that they intend to comply
with the diversification requirements prescribed by the Treasury in Reg.
section 1.817-5. Thus, the Company believes that each Division of the Separate
Account will be in compliance with the requirements prescribed by the Treasury.
The IRS has stated in published rulings that a variable contract owner will
be considered the owner of separate account assets, for federal income tax
purposes, if the contract owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. If
that were to be determined to be the case, income and gains from the separate
account assets would be includible in the variable contract owner's gross
income. The Treasury Department has 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
Owner), 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 subaccounts without being treated as
owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating Premium payments
and Policy Values. These differences could result in an Owner being treated as
the owner of a pro rata portion of the assets of the Separate Account. In
addition, the Company 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. The Company therefore reserves the right to modify the Policy
as necessary to attempt to prevent an Owner from being considered the owner of
a pro rata share of the assets of the Separate Account.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
1. IN GENERAL. As a life insurance contract, 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.
The exchange of a Policy, a change in the Policy's death benefit option
(e.g., a change from Option B to Option A), a change in the Policy's Face
Amount, a conversion to a fixed policy, an exchange, a Policy loan, an
unscheduled premium payment, a Policy lapse with an outstanding loan, a partial
withdrawal, a surrender, or an assignment of the Policy may have Federal income
tax consequences depending on the circumstances. In addition, Federal estate
and state and local estate, inheritance, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Policy owner or Beneficiary. A competent tax adviser should be consulted for
further information.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, the Company believes that for federal income tax
purposes an accelerated death benefit payment made under the Accelerated Death
Benefit Settlement Option Rider should be fully excludable from the gross
income of the beneficiary, as long as the beneficiary is the Insured under the
Policy. However, you should consult a qualified tax adviser about the
consequences of adding this Rider to a Policy or requesting an acceletrated
death benefit payment under this Rider.
33
The Policies may be used in various arrangements, such as 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 vary depending on the particular facts and
circumstances of each individual arrangement. Therefore, if you are
contemplating the use of such Policies in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
Generally, the Owner 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". Whether a Policy is or is not classified as a
modified endowment contract, upon a complete surrender or lapse of the Policy
or when benefits are paid at the 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. POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS. In general, 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. Further, a Policy that is not otherwise a modified endowment contract
may become a modified endowment contract if it is "materially changed." The
determination whether a Policy will be a modified endowment contract after a
material change generally depends upon the relationship of the death benefit
and the cash value at the time of such change and the additional premiums paid
in the seven years following the material change.
Due to the Policy's flexibility, classification as a modified endowment
contract will depend on the individual circumstances of each Policy. Moreover,
the rules relating to whether a Policy will be treated as a modified endowment
contract are extremely complex. Therefore, a current or prospective Policy
owner is strongly advised to retain and consult with a competent advisor before
purchasing a Policy, making an unscheduled premium payment on an existing
Policy or making any change in an existing Policy, to determine whether the
Policy will be treated as a modified endowment contract.
The Company has adopted administrative steps designed to protect a
Policyowner against inadvertently having the Policy become a modified endowment
contract. Although the Company cannot provide complete assurance at this time
that a Policy will not inadvertently become a modified endowment contract, it
is continuing its efforts to enhance its administrative systems to monitor
potential modified endowment classifications automatically.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT CONTRACTS.
Policies classified as modified endowment contracts will be subject to the
following tax rules: First, all distributions, including distributions upon
surrender and benefits paid at maturity, from such a Policy 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 (as well as due but unpaid interest that is added to the loan
amount) are treated as distributions from such a Policy and taxed accordingly.
Third, a 10 percent 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 distributions or loan is made on or after
the Policy owner attains age 59 1/2, is attributable to the Policy owner's
becoming disabled, or is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the Policy owner or the joint
lives (or joint life expectancies) of the Policy owner and the Policy owner's
Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions made during the policy year in which it becomes a modified
endowment contract, distributions in any subsequent policy year and
distributions within two years before the Policy becomes a modified endowment
contract will be subject to
34
the tax treatment described above. This means that a distribution from a Policy
that is not a modified endowment contract could later become taxable as a
distribution from a modified endowment contract.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not a modified endowment
contract, and which is not materially changed, or, if materially changed, is
not classified as a modified endowment contract after such material change, 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 decrease in the Policy's death benefit (e.g., partial withdrawal or a
change from Option B to Option A) or any other change that reduces benefits
under the Policy in the first 15-years after the Policy is issued and that
results in a cash distribution to the Policy owner in order for the Policy to
continue complying with the section 7702 definitional limits. Such a cash
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 Owner.
Finally, neither distributions (including distributions upon surrender or
lapse) nor loans from, or secured by, a Policy that is not a modified endowment
contract are subject to the 10 percent additional income tax.
If a Policy which is not a Modified Endowment Contract subsequently becomes a
modified endowment contract, then any distribution made from the Policy within
two years prior to the date of such change in status may become taxable.
5. POLICY LOAN INTEREST. If there is any borrowing against a Policy, the
interest paid on the loan generally will not be tax deductible. An Owner should
consult a competent tax advisor before deducting any Policy Loan interest.
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 gross income
of the Policy owner (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 Owner.
7. MULTIPLE POLICIES. All modified endowment contracts that are issued by the
Company (or its affiliates) to the same Policy owner during any calendar year
are treated as one modified endowment contract for purposes of determining the
amount includible in gross income.
POSSIBLE CHARGE FOR TAXES
At the present time, the Company makes no charge to the Separate Account for
any Federal, state or local taxes the Company incurs that may be attributable
to the Separate Account or to the Policies. The Company, 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 Separate Account or to the Policies.
UNISEX REQUIREMENTS UNDER MONTANA LAW
The State of Montana generally prohibits the use of actuarial tables that
distinguish between men and women in determining premiums and Policy benefits
for policies issued on the lives of their residents. Therefore, all Policies
offered by this Prospectus to insure residents of Montana will have premiums
and benefits which are based on actuarial tables that do not differentiate on
the basis of sex.
SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS
The Company holds the assets of the Separate Account. The assets are kept
physically segregated and held separate and apart from the Company's general
assets. The Company maintains records of all purchases
35
and redemptions of Fund shares by each of the Divisions. Additional protection
for the assets of the Separate Account is afforded by a blended executive risk
insurance program, including blanket fidelity coverage issued by CNA and Chubb
Insurance Companies with a limit of $25 million, covering all officers and
employees of the Company who have access to the assets of the Separate Account.
VOTING RIGHTS
To the extent required by law, the Company will vote the shares held in the
Separate Account at regular and special shareholder meetings of the underlying
Funds in accordance with instructions received from persons having voting
interests in the corresponding Divisions of the Separate Account. If, however,
the 1940 Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result the Company determines
that it is permitted to vote shares of the underlying Funds in its own right,
it may elect to do so. No voting privileges apply to the Policy with respect to
Cash Value removed from the Separate Account as a result of a Policy Loan.
The Owners of Policies ordinarily are the persons having a voting interest in
the Divisions of the Separate Account. The number of votes which an Owner has
the right to instruct will be calculated separately for each Division. The
number of votes which each Owner has the right to instruct will be determined
by dividing a Policy's Cash Value in a Division by the net asset value per
share of the corresponding Fund in which the Division invests. Fractional
shares will be counted. The number of votes of the Fund which the Owner has
right to instruct will be determined as of the date coincident with the date
established by that Fund for determining shareholders eligible to vote at the
meeting of the underlying Funds. Voting instructions will be solicited by
written communications prior to such meeting in accordance with procedures
established by the underlying Funds.
Because the Funds serve as investment vehicles for this Policy as well as for
other variable life insurance policies sold by insurers other than the Company
and funded through other separate investment accounts, persons owning the other
policies will enjoy similar voting rights. The Company will vote Fund shares
held in the Separate Account for which no timely voting instructions are
received and Fund shares that it owns as a consequence of accrued charges under
the Policies, in proportion to the voting instructions which are received with
respect to all Policies participating in a Fund. Each person having a voting
interest in a Division will receive proxy material, reports, and other
materials relating to the appropriate Fund.
Disregard of Voting Instructions. The Company 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
subclassification or investment objective of or one or more of the Funds or to
approve or disapprove an investment advisory contract for a Fund. In addition,
the Company itself may disregard voting instructions in favor of changes
initiated by an Owner in the investment policy or by the investment adviser or
sub-adviser of a Fund if the Company reasonably disapproves of such changes. A
proposed change would be disapproved only if the proposed change is contrary to
state law or prohibited by state regulatory authorities, or the Company
determined that the change would have an adverse effect on its general assets
in that the proposed investment policy for a Fund may result in overly
speculative or unsound investments. In the event the Company does disregard
voting instructions, a summary of that action and the reasons for such action
will be included in the next annual report to Owners.
STATE REGULATION OF THE COMPANY
The Company, a stock life insurance company organized under the laws of
Missouri, is subject to regulation by the Missouri Division of Insurance. An
annual statement is filed with the Director of Insurance on or before March 1
each year covering the operations and reporting on the financial condition of
the Company as of December 31 of the preceding year. Periodically, the Director
of Insurance examines the liabilities and reserves of the Company and the
Separate Account and certifies their adequacy, and a full examination of the
Company's operations is conducted by the National Association of Insurance
Commissioners at least once every three years.
In addition, the Company is subject to the insurance laws and regulations of
other states within which it is licensed or may become licensed to operate.
Generally, the insurance departments of other states apply the laws of the
state of domicile in determining permissible investments.
36
MANAGEMENT OF THE COMPANY
NAME PRINCIPAL OCCUPATION(S)
DURING PAST FIVE YEARS*
EXECUTIVE OFFICERS**
Carl H. Anderson@ President and Chief Executive Officer since June,
1986, and Vice President, New Ventures, since June
1986, General American Life Insurance Co., St.
Louis, Mo. (GenAm).
Matthew K. Duffy Vice President and Chief Financial Officer since
July, 1996. Formerly Director of Accounting,
Prudential Insurance Company of America, March,
1987-June, 1996.
E. Thomas Hughes, Jr.@ Treasurer since December, 1994. Corporate Actuary
General American Life and Treasurer, GenAm since October, 1994. Executive
Insurance Company Vice President--Group Pensions, GenAm January,
700 Market Street 1990-October, 1994.
St. Louis, MO 63101
Matthew P. McCauley@ Vice President and General Counsel since 1984. Sec-
General American Life retary since August, 1981. Vice President and Asso-
Insurance Company ciate General Counsel, GenAm, since December 30,
700 Market Street 1995.
St. Louis, MO 63101
Craig K. Nordyke@ Executive Vice President and Chief Actuary since
November, 1996. Vice President and Chief Actuary
August, 1990-November, 1996; Second Vice President
and Chief Actuary, May, 1987-August, 1990.
George E. Phillips Vice President--Operations and System Development
since January, 1995. Formerly, Senior Vice Presi-
dent, Fortis, Inc. July, 1991-August, 1994. Vice
President, Mutual Benefit prior to July, 1991.
DIRECTORS***
Richard A. Liddy Chairman, President, and Chief Executive Officer,
GenAm, since May, 1992. President and Chief Operat-
ing Officer, GenAm, May, 1988-May, 1992.
Leonard M. Rubenstein Chairman and Chief Executive Officer--Conning Cor-
poration and Conning Asset Management Company since
January, 1997. Executive Vice President--Invest-
ments, GenAm, February, 1991-January, 1997.
Warren J. Winer Executive Vice President--Group, GenAm, since Sep-
tember, 1995. Formerly, Managing Director, Wm. M.
Mercer, July, 1993-August, 1995; President, W F
Corroon, September, 1990-July, 1993.
Bernard H Wolzenski Executive Vice President--Individual, GenAm, since
November, 1991. Vice President--Life Product Man-
agement, GenAm, May, 1989- November, 1991.
A. Greig Woodring President, Reinsurance Group of America, Inc.,
since May, 1993, Formerly, Executive Vice Presi-
dent--Reinsurance, GenAm, since January, 1990.
- - --------
*All positions listed are with the Company unless otherwise indicated.
**The principal business address of each person listed is Paragon Life
Insurance Company, 100 South Brentwood, St. Louis, Missouri 63105 unless
otherwise noted.
37
***The principal business address of each person listed is General American
Life Insurance Company, 700 Market Street, St. Louis, MO 63101, except A.
Greig Woodring--Reinsurance Group of America, 660 Mason Ridge Center Drive,
St. Louis, MO 63141.
@Indicates Executive Officers who are also Directors.
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
certain legal matters relating to aspects of Federal securities laws. All
matters of Missouri law pertaining to the Policies, including the validity of
the Policies and the Company's right to issue the Policies and the Group
Contract under Missouri insurance law, and all legal matters relating to the
Parent Company's resolution concerning policies issued by Paragon have been
passed upon by Matthew P. McCauley, Esquire, General Counsel of Paragon Life
Insurance Company.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. The Company is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Separate Account.
EXPERTS
The audited financial statements of the Company included in this Prospectus
and in the registration statement have been included in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants, and
on the authority of said firm as experts in accounting and auditing.
Actuarial matters included in this Prospectus have been examined by Craig K.
Nordyke, FSA, MAAA, Executive Vice President and Chief Actuary of the Company,
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
Policies offered hereby. This 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 Separate Account, the Company 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.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this Prospectus
should be considered only as bearing on the ability of the Company to meet its
obligations under the Policy. They should not be considered as bearing on the
investment performance of the assets held in the Separate Account. No Financial
Statements of the Separate Account are included in this prospectus because, as
of the date of this prospectus, the Separate Account had not yet commenced
operations and had no assets, liabilities, income or expenses.
[Financial Statements To Be Filed By Amendment.]
38
APPENDIX A
ILLUSTRATIONS OF DEATH BENEFITS AND CASH VALUES
The following tables illustrate how the Cash Value and Death Benefit of a
Policy change with the investment experience of a Division of the Separate
Account. The tables show how the Cash Value and Death Benefit of a Policy
issued to an Insured of a given age and at a given premium would vary over time
if the investment return on the assets held in each Division of the Separate
Account were a uniform, gross, after-tax annual rate of 0%, 6% or 12%. In
addition, the Cash Values and Death Benefits would be different from those
shown if the gross annual investment rates of return averaged 0%, 6%, and 12%
over a period of years, but fluctuated above and below those averages for
individual Policy years.
The tables illustrate a Policy issued to an Insured Male, age 40, in a
nonsmoker rate class as well as an Insured, age 50, in a nonsmoker rate class.
This assumes the monthly administrative charge of $3.50. If the Insured falls
into a smoker rate class, the Cash Values, and Death Benefits would be lower
than those shown in the tables. In addition, the Cash Values, Cash Surrender
Values, and death benefits would be different from those shown if the gross
annual investment rates of return averaged 0%, 6%, or 12% over a period of
years, but fluctuated above and below those averages for individual Policy
Years.
The Cash Value column under the "Guaranteed" heading shows the accumulated
value of the premiums paid reflecting deduction of the charges described above
and monthly charges for the cost of insurance based on the guaranteed rate
which is the maximum allowed under the 1980 Commissioners Standard Ordinary
Mortality Table C. The "Cash Value" column under the "Current" heading shows
the accumulated value of the premiums paid reflecting deduction of the charges
described above and monthly charges for the cost of insurance. The
illustrations of Death Benefits reflect the above assumptions. The Death
Benefits also vary between tables depending upon whether Level Type (Option A)
or Increasing Type (Option B) Death Benefits are illustrated.
The amounts shown for the Cash Value and Death Benefit reflect the fact that
the investment rate of return is lower than the gross after-tax return on the
assets held in a Division of the Separate Account. The charges include a
maximum .75% charge for mortality and expense risk, an assumed combined
investment advisory fee (representing the average of the fees incurred by The
Funds in which The Divisions invest) and the Funds' expenses (based on the
average of the actual expenses incurred in fiscal year 1996) of .718%. See the
respective Fund prospectus for details. After deduction for these amounts, the
illustrated gross annual investment rates of return of 0%, 6% and 12%
correspond to approximate net annual rates of -1.468%, 4.532%, and 10.532%,
respectively. An expense reimbursement arrangement exists between the Company
and Scudder VLI as part of the participation agreement with the Company.
However, fund assets are of a sufficient size that no reimbursement is
currently necessary. No other expense reimbursement arrangement exists between
the Company and the other investment Funds. FMR reimbursed expenses in 1996 for
the Index 500 Portfolio. MFS reimbursed expenses in 1996 for the Emerging
Growth Series.
The hypothetical values shown in the tables do not reflect any charges for
federal income taxes against the Separate Account, since the Company is not
currently making any such charges. However, such charges may be made in the
future and, in that event, the gross annual investment rate of return of the
divisions of the Separate Account would have to exceed 0%, 6%, or 12% by an
amount sufficient to cover the tax charges in order to produce the Death
Benefit and Cash Value illustrated. (See "Federal Tax Matters.")
The tables illustrate the Policy values that would result based upon the
investment rates of return if premiums are paid as indicated, and if no Policy
loans have been made. The tables are also based on the assumptions that the
Owner has not requested an increase or decrease in the Face Amount, that no
partial withdrawals have been made, that no transfer charges were incurred, and
that no optional riders have been requested.
Upon request, the Company will provide a comparable illustration based upon
the proposed Insured's age, sex, and rate class, the Face Amount and premium
requested and the proposed frequency of premium payments.
A-1
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $750,000.00 AGE: 40 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $13,500.00
PREMIUM EXPENSE CHARGE: 1.25% (yrs 1-10)
PREMIUM TAX: 2.25%
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 0.00% (NET RATE @ -1.468%)
----------------------------------------------------------------------
GUARANTEED* CURRENT**
-------------------------------- --------------------------------
PREM CASH DEATH CASH DEATH
YR @5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- -------- -------- --------
1 $ 14,175 $ 11,032 $761,032 $ 11,815 $761,815
2 29,058 21,769 771,769 23,369 773,369
3 44,686 32,207 782,207 34,663 784,663
4 61,096 42,331 792,331 45,704 795,704
5 78,325 52,138 802,138 56,404 806,404
6 96,417 61,604 811,604 66,769 816,769
7 115,412 70,728 820,728 76,804 826,804
8 135,358 79,495 829,495 86,514 836,514
9 156,301 87,894 837,894 95,904 845,904
10 178,291 95,902 845,902 104,978 854,978
11 201,381 103,648 853,648 113,907 863,907
12 225,625 110,934 860,934 122,528 872,528
13 251,081 117,712 867,712 130,755 880,755
14 277,810 123,937 873,937 138,683 888,683
15 305,876 129,556 879,556 146,229 896,229
16 335,344 134,522 884,522 153,397 903,397
17 366,287 138,794 888,794 160,015 910,015
18 398,776 142,345 892,345 166,092 916,092
19 432,890 145,105 895,105 171,724 921,724
20 468,709 147,007 897,007 176,917 926,917
25 676,531 140,010 890,010 195,658 945,658
30 941,770 94,128 844,128 199,277 949,277
- - --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the PolicyOwner,
and the investment results for the Funds. The Cash Value and Death Benefit for
a Policy would be different from those shown if the actual rates of return
averaged the rate shown above over a period of years, but also fluctuated above
or below that average for individual years. No representation can be made by
the Company, Walnut Street Securities, the investment management companies, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary and further assume there is no Policy indebtedness outstanding.
A-2
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $750,000.00 AGE 40 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1.25% (Yrs. 1-10) $13,500.00
PREMIUM TAX: 2.25%
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.532%)
-------------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------- -------------------------------
PREM CASH DEATH CASH DEATH
YR @5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- -------- ---------- -------- ----------
1 $ 14,175 $ 11,755 $ 761,755 $ 12,564 $ 762,564
2 29,058 23,906 773,906 25,605 775,605
3 44,686 36,460 786,460 39,146 789,146
4 61,096 49,418 799,418 53,209 803,209
5 78,325 62,789 812,789 67,725 817,725
6 96,417 76,563 826,563 82,716 832,716
7 115,412 90,751 840,751 98,203 848,203
8 135,358 105,353 855,353 114,208 864,208
9 156,301 120,368 870,368 130,754 880,754
10 178,291 135,789 885,789 147,867 897,867
11 201,381 151,764 901,764 165,749 915,749
12 225,625 168,105 918,105 184,257 934,257
13 251,081 184,774 934,774 203,329 953,329
14 277,810 201,730 951,730 223,082 973,082
15 305,876 218,922 968,922 243,455 993,455
16 335,344 236,307 986,307 264,476 1,014,476
17 366,287 253,837 1,003,837 285,992 1,035,992
18 398,776 271,483 1,021,483 308,024 1,058,024
19 432,890 289,168 1,039,168 330,688 1,080,688
20 468,709 306,811 1,056,811 354,012 1,104,012
25 676,531 389,891 1,139,891 480,685 1,230,685
30 941,770 448,308 1,198,308 623,052 1,373,052
- - --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the PolicyOwner,
and the investment results for the Funds. The Cash Value and Death Benefit for
a Policy would be different from those shown if the actual rates of return
averaged the rate shown above over a period of years, but also fluctuated above
or below that average for individual years. No representation can be made by
the Company, Walnut Street Securities, the investment management companies, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness outstanding.
A-3
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $750,000 AGE: 40 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM: $13,500.00
PREMIUM EXPENSE CHARGE: 1.25% (yrs. 1-10)
PREMIUM TAX: 2.25%
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.532%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ ------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5.00% VALUE BENEFIT VALUE BENEFIT
--- -------- ---------- ---------- ---------- ----------
1 $ 14,175 $ 12,479 $ 762,479 $ 13,313 $ 763,313
2 29,058 26,131 776,131 27,933 777,933
3 44,686 41,069 791,069 43,999 793,999
4 61,096 57,409 807,409 61,662 811,662
5 78,325 75,292 825,292 80,996 830,996
6 96,417 94,849 844,849 102,177 852,177
7 115,412 116,249 866,249 125,400 875,400
8 135,358 139,666 889,666 150,879 900,879
9 156,301 165,293 915,293 178,852 928,852
10 178,291 193,337 943,337 209,583 959,583
11 201,381 224,190 974,190 243,548 993,548
12 225,625 257,923 1,007,923 280,901 1,030,901
13 251,081 294,784 1,044,784 321,905 1,071,905
14 277,810 335,046 1,085,046 367,039 1,117,039
15 305,876 379,001 1,129,001 416,643 1,166,643
16 335,344 426,980 1,176,980 471,189 1,221,189
17 366,287 479,353 1,229,353 531,007 1,281,007
18 398,776 536,543 1,286,543 596,655 1,346,655
19 432,890 598,974 1,348,974 668,840 1,418,840
20 468,709 667,114 1,417,114 748,251 1,498,251
25 676,531 1,112,047 1,862,047 1,282,303 2,032,303
30 941,770 1,794,421 2,544,421 2,145,601 2,895,601
- - --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the PolicyOwner,
and the investment results for the Funds. The Cash Value and Death Benefit for
a Policy would be different from those shown if the actual rates of return
averaged the rate shown above over a period of years, but also fluctuated above
or below that average for individual years. No representation can be made by
the Company, Walnut Street Securities, the investment management companies, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness outstanding.
A-4
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $1,000,000.00 AGE: 50 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1.25% (Yrs. 1-10) $28,000.00
PREMIUM TAX: 2.25%
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 0.00% (NET RATE @ -
1.468%)
------------------------------------------------------------
GUARANTEED* CURRENT**
---------------------------- ----------------------------
CASH DEATH CASH DEATH
YR PREM @ 5.00% VALUE BENEFIT VALUE BENEFIT
--- ------------ -------- ---------- -------- ----------
1 $ 29,400 $ 21,503 $1,021,503 $ 23,259 $1,023,259
2 60,270 42,229 1,042,229 45,940 1,045,940
3 92,683 62,117 1,062,117 67,933 1,067,933
4 126,717 81,108 1,081,108 89,366 1,089,366
5 162,453 99,133 1,099,133 110,128 1,110,128
6 199,976 116,135 1,116,135 130,230 1,130,230
7 239,375 132,057 1,132,057 149,445 1,149,445
8 280,743 146,869 1,146,869 167,785 1,167,785
9 324,180 160,479 1,160,479 185,381 1,185,381
10 369,790 172,799 1,172,799 202,246 1,202,246
11 417,679 184,050 1,184,050 218,733 1,218,733
12 467,963 193,773 1,193,773 234,387 1,234,387
13 520,761 201,788 1,201,788 249,218 1,249,218
14 576,199 207,908 1,207,908 263,239 1,263,239
15 634,409 211,958 1,211,958 276,462 1,276,462
16 695,530 213,790 1,213,790 289,017 1,289,017
17 759,706 213,249 1,213,249 300,559 1,300,559
18 827,092 210,213 1,210,213 310,746 1,310,746
19 897,846 204,494 1,204,494 319,598 1,319,598
20 972,139 195,835 1,195,835 327,018 1,327,018
25 1,403,176 93,434 1,093,434 340,766 1,340,766
30 1,953,302 0 0 305,646 1,305,646
- - --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the PolicyOwner,
and the investment results for the Funds. The Cash Value and Death Benefit for
a Policy would be different from those shown if the actual rates of return
averaged the rate shown above over a period of years, but also fluctuated above
or below that average for individual years. No representation can be made by
the Company, Walnut Street Securities, the investment management companies, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness outstanding.
A-5
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $1,000,000.00 AGE: 50 MALE NONSMOKER
DEATH BENEFIT OPTION: B ANNUAL PREMIUM:
PREMIUM EXPENSE CHARGE: 1.25% (yrs. 1-10) $28,000.00
PREMIUM TAX: 2.25%
FOR SEPARATE ACCOUNT D--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 6.00% (NET RATE @ 4.532%)
----------------------------------------------------------------
GUARANTEED* CURRENT**
------------------------------ --------------------------------
PREM CASH DEATH CASH DEATH
YR @ 5.00% VALUE BENEFIT VALUE BENEFIT
--- --------- ----------- ------------- ------------ -------------
1 $ 29,400 $ 22,957 $1,022,957 $ 24,771 $ 1,024,771
2 60,270 46,478 1,046,478 50,420 1,050,420
3 92,683 70,515 1,070,515 76,864 1,076,864
4 126,717 95,016 1,095,016 104,262 1,104,262
5 162,453 119,918 1,119,918 132,535 1,132,535
6 199,976 145,165 1,145,165 161,722 1,161,722
7 239,375 170,700 1,170,700 191,620 1,191,620
8 280,743 196,487 1,196,487 222,262 1,222,262
9 324,180 222,427 1,222,427 253,803 1,253,803
10 369,790 248,418 1,248,418 286,284 1,286,284
11 417,679 274,680 1,274,680 320,115 1,320,115
12 467,963 300,726 1,300,726 354,868 1,354,868
13 520,761 326,338 1,326,338 390,585 1,390,585
14 576,199 351,276 1,351,276 427,310 1,427,310
15 634,409 375,302 1,375,302 465,089 1,465,089
16 695,530 398,192 1,398,192 504,092 1,504,092
17 759,706 419,699 1,419,699 544,008 1,544,008
18 827,092 439,600 1,439,600 584,511 1,584,511
19 897,846 457,591 1,457,591 625,629 1,625,629
20 972,139 473,279 1,473,279 667,267 1,667,267
25 1,403,176 495,377 1,495,377 881,344 1,881,344
30 1,953,302 357,846 1,357,846 1,093,539 2,093,539
- - --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the PolicyOwner,
and the investment results for the Funds. The Cash Value and Death Benefit for
a Policy would be different from those shown if the actual rates of return
averaged the rate shown above over a period of years, but also fluctuated above
or below that average for individual years. No representation can be made by
the Company, Walnut Street Securities, the investment management companies, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness outstanding.
A-6
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
FACE AMOUNT OF COVERAGE: $1,000,000.00 AGE: 50 MALE NONSMOKER
DEATH BENEFIT OPTION: D ANNUAL PREMIUM: $28,000.00
PREMIUM EXPENSE CHARGE: 1.25% (Yrs. 1-10)
PREMIUM TAX: 2.25%
FOR SEPARATE ACCOUNT B--A HYPOTHETICAL GROSS
ANNUAL RATE OF RETURN @ 12.00% (NET RATE @ 10.532%)
-----------------------------------------------------------
GUARANTEED* CURRENT**
----------------------------- -----------------------------
PREM CASH DEATH CASH DEATH
YR @ 5.00% VALUE BENEFIT VALUE BENEFIT
--- ---------- ------------ ------------- ------------ -------------
1 $ 29,400 $ 24,415 $ 1,024,415 $ 26,284 $ 1,026,284
2 60,270 50,909 1,050,909 55,085 1,055,085
3 92,683 79,626 1,079,626 86,540 1,086,540
4 126,717 110,724 1,110,724 121,056 1,121,056
5 162,453 144,365 1,144,365 158,829 1,158,829
6 199,976 180,743 1,180,743 200,202 1,200,202
7 239,375 220,069 1,220,069 245,302 1,245,302
8 280,743 262,604 1,262,604 294,522 1,294,522
9 324,180 308,573 1,308,573 348,422 1,348,422
10 369,790 358,224 1,358,224 407,496 1,407,496
11 417,679 412,182 1,412,182 472,674 1,472,674
12 467,963 470,374 1,470,374 544,089 1,544,089
13 520,761 533,034 1,533,034 622,397 1,622,397
14 576,199 600,405 1,600,405 708,324 1,708,324
15 634,409 672,771 1,672,771 802,674 1,802,674
16 695,530 750,470 1,750,470 906,461 1,906,461
17 759,706 833,863 1,833,863 1,020,301 2,020,301
18 827,092 923,389 1,923,389 1,144,876 2,144,876
19 897,846 1,019,457 2,019,457 1,281,319 2,281,319
20 972,139 1,122,442 2,122,442 1,430,755 2,430,755
25 1,403,176 1,750,056 2,750,056 2,423,162 3,423,162
30 1,953,302 2,596,932 3,596,932 3,998,035 4,998,035
- - --------
*These values reflect investment results using guaranteed cost of insurance
rates.
**These values reflect investment results using current cost of insurance
rates.
The hypothetical investment rate of return shown above is illustrative only,
and should not be deemed a representation of past or future results. Actual
investment results may be more or less than those shown and will depend on a
number of factors, including the investment allocation made by the PolicyOwner,
and the investment results for the Funds. The Cash Value and Death Benefit for
a Policy would be different from those shown if the actual rates of return
averaged the rate shown above over a period of years, but also fluctuated above
or below that average for individual years. No representation can be made by
the Company, Walnut Street Securities, the investment management companies, or
any representative thereof, that this hypothetical rate of return can be
achieved for any one year, or sustained over any period of time.
Illustrated values shown above are as of the end of the years indicated and
assume any additional premiums shown are received monthly on the Policy
Anniversary day and further assume there is no Policy indebtedness outstanding.
A-7
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore, or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article III, Section 13 of the Bylaws of Paragon Life Insurance Company
provides: "The Corporation may indemnify any person who is made a party to any
civil or criminal suit, or made a subject of any administrative or investigative
proceeding by reason of the fact that he is or was a director, officer, or agent
of the Corporation. This indemnity may extend to expenses, including attorney's
fees, judgments, fine, and amounts paid in settlement. The indemnity shall not
be available to persons being sued by or upon the information of the Corporation
nor to persons who are being investigated by the Corporation. The indemnity
shall be discretionary with the Board of Directors and shall not be granted
until the Board of Directors has made a determination that the person who would
be indemnified acted in good faith and in a manner he reasonably believed to be
in the best interest of the Corporation. The Corporation shall have such other
and further powers of indemnification as are not inconsistent with the laws of
Missouri."
Insofar as indemnification for liability arising under the Securities Act
of 1933,(the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the Charter and Articles of Incorporation
of the Company, the By-Laws of the Company, agreement, statute, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-1
REPRESENTATION CONCERNING FEES AND CHARGES
Paragon Life Insurance Company (the "Company") hereby represents that the
fees and charges deducted under the terms of the policies described in this
Registration Statement are, in the aggregate, reasonable in relationship to the
services rendered, the expenses expected to be incurred, and the risks assumed
by the Company.
II-2
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following Papers and Documents:
The facing sheet.
The Individual Flexible Premium Variable Life Prospectus consisting of
45 pages.
The undertaking to file reports required by Section 15(d)
of the Securities Exchange Act of 1934.
The undertaking pursuant to Rule 484.
Representations concerning fees and charges.
The signatures.
1. The following exhibits (which correspond in number to the numbers under
paragraph A of the instructions as to exhibits for Form N-8B-2):
(1) Resolution of the Board of Directors of the Company authorizing
establishment of the Separate Account. 3
(2) Not applicable.
(3) (a) Form of Underwriting Agreement. 1
(b) Form of Selling Agreement. 1
(c) Not applicable.
(4) Not applicable.
(5) Form of Individual Policy and Policy Riders. 3
(6) (a) Amended Charter and Articles of Incorporation of the Company. 2
(b) By-Laws of the Company. 2
(7) Not applicable.
(8) Participation Agreement. 4
(9) Not applicable.
(10) Proposed Form of Application. 3
(11) Memorandum describing the Company's issuance, transfer, and redemption
procedures for the Policies. 3
II-3
2. Opinion of Matthew P. McCauley, Esquire, General Counsel of Paragon Life
Insurance Company as to the legality of the securities being offered. 3
3. Not applicable
4. Not applicable
5. Not applicable
6. Opinion and consent of Craig K. Nordyke, F.S.A., M.A.A.A., Executive Vice
President and Chief Actuary as to actuarial matters pertaining to the
securities being registered. 4
7. (a) The consent of KPMG Peat Marwick, LLP, Independent Certified Public
Accountants. 4
(b) Written consent of Sutherland, Asbill & Brennan. 4
8. Original powers of attorney authorizing Carl H. Anderson, Matthew P.
McCauley, and Craig K. Nordyke, and each of them singly, to sign this
Registration Statement and Amendments thereto on behalf of the Board of
Directors of Paragon Life Insurance Company. 4
* * *
1 Incorporated by reference to the initial Registration Statement on Form S-6
found in File No. 33-58796, filed with the Securities and Exchange
Commission on February 25, 1993.
2 Incorporated by reference to the Registration Statement on Form S-6 found
in File No. 33-67970, filed with the Securities and Exchange Commission on
August 26, 1993.
3 Filed herewith.
4 To be filed with pre-effective amendment.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Paragon Life
Insurance Company and Separate Account D of Paragon Life Insurance Company have
duly caused this Registration Statement to be signed on their behalf by the
undersigned thereunto duly authorized, and the seal of Paragon Life Insurance
Company to be hereunto affixed and attested, all in the City of St. Louis, State
of Missouri, on the 26th day of September, 1997.
Separate Account D of Paragon
Life Insurance Company
(Name of Registrant)
(Seal) Paragon Life Insurance Company
(Name of Depositor)
Attest:/s/ _______________________ By:/s/________________________
Matthew P. McCauley, Carl H. Anderson, President
Secretary and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/_____________________ 9/26/97
Carl H. Anderson President and Director
(Chief Executive Officer)
/s/_____________________ 9/26/97
Matthew K. Duffy Vice President and Chief
Financial Officer (Principal
Accounting Officer and
Principal Financial Officer)
________________________
Warren J. Winer* Director
________________________
Richard A. Liddy* Director
II-5
Signature Title Date
/s/
- - ------------------------------ 9/26/97
Matthew P. McCauley Vice President
General Counsel,
Secretary and Director
/s/
- - ------------------------------ 9/26/97
Craig K. Nordyke Director
- - ------------------------------
Leonard M. Rubenstein* Director
- - ------------------------------
E. Thomas Hughes, Jr.* Director and Treasurer
- - ------------------------------
Bernard H. Wolzenski* Director
- - ------------------------------
A. Greig Woodring* Director
By: /s/
--------------------------- 9/26/97
Craig K. Nordyke Director
*Original powers of attorney authorizing Matthew P. McCauley, Carl H. Anderson,
Craig K. Nordyke, and each of them singly, to sign this Registration Statement
and Amendments thereto on behalf of the Board of Directors of Paragon Life
Insurance Company is being filed with the Securities and Exchange Commission
with this Registration Statement.
II-6
EXHIBIT INDEX
Exhibit
1. Resolution of the Board of Directors of the Company authorizing
establishment of the Separate Account D.
2. Form of Individual Policy and Policy Riders.
3. Proposed Form of Application.
4. Memorandum describing the Company's issuance, transfer, and redemption
procedures.
5.(3)Opinion of Matthew P. McCauley.
6. Powers of Attorney for E. Thomas Hughes, Richard A. Liddy, Warren J. Winer,
Bernard H Wolzenski, and A. Greig Woodring.