As filed with the Securities and Exchange Commission on August 28, 1998
Registration File Nos. __________/811-4420
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
---------------------------------
WRL SERIES LIFE ACCOUNT
-----------------------
(Exact Name of Trust)
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
------------------------------------------
(Name of Depositor)
201 HIGHLAND AVENUE
LARGO, FLORIDA 33770
-------------------------------------------------------------
(Complete Address of Depositor's Principal Executive Offices)
THOMAS E. PIERPAN, ESQ.
VICE PRESIDENT, ASSISTANT SECRETARY AND ASSOCIATE GENERAL COUNSEL
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
201 HIGHLAND AVENUE
LARGO, FLORIDA 33770
-----------------------------------------------------------------
(Name and Complete Address of Agent for Service)
Copies to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
---------------------------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the Registration Statement.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
hereby elects to register an indefinite amount of securities being offered.
--------------------------------------------------
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.
CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 Item Caption in Prospectus
- ----------- -----------------------------------
1 Cover Page; The Series Account
2 Cover Page; Western Reserve Life Assurance Co. of Ohio
3 Not Applicable
4 Distribution of the Policies
5 The Series Account
6 The Series Account
7 Not Applicable
8 Not Applicable
9 Legal Proceedings
10 Introduction; Policy Benefits; Payment and Allocation of
Premiums; Investments of the Series Account; Policy Rights
11 The Series Account; WRL Series Fund, Inc.
12 The Series Account; WRL Series Fund, Inc.
13 Charges and Deductions; The Series Account; Investments of
the Series Account
14 Introduction; Allocation of Premiums and Cash Value
15 Allocation of Premiums and Cash Value
16 The Series Account
17 Cash Value; The Series Account; Policy Rights
18 Payment and Allocation of Premiums; Cash Value
19 Voting Rights of the Series Account; Reports and Records
20 Not Applicable
21 Loan Privileges
22 Not Applicable
2
N-8B-2 Item Caption in Prospectus
- ----------- ------------------------------------------
23 Safekeeping of the Series Account's Assets
24 Policy Rights
25 Western Reserve Life Assurance Co. of Ohio
26 Not Applicable
27 Western Reserve Life Assurance Co. of Ohio; The Series
Account; WRL Series Fund, Inc.
28 Western Reserve Life Assurance Co. of Ohio; Executive Officers
and Directors of Western Reserve
29 Western Reserve Life Assurance Co. of Ohio
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Western Reserve Life Assurance Co. of Ohio
36 Not Applicable
37 Not Applicable
38 Distribution of the Policies
39 Distribution of the Policies
40 Not Applicable
41 Distribution of the Policies; Western Reserve Life Assurance
Co. of Ohio
42 Not Applicable
43 Not Applicable
44 Cash Value
45 Not Applicable
46 Cash Value
3
N-8B-2 Item Caption in Prospectus
- ----------- --------------------------------------------
47 Introduction; Allocation of Premiums and Cash Value
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 Introduction; Western Reserve Life Assurance Co. of Ohio;
Policy Benefits; Charges and Deductions
52 The Series Account; WRL Series Fund, Inc.
53 Federal Tax Matters
54 Not Applicable
55 Not Applicable
56 Not Applicable
57 Not Applicable
58 Not Applicable
59 Not Applicable
4
WRL FREEDOM ELITE(SM)
INDIVIDUAL FLEXIBLE
PREMIUM VARIABLE LIFE
INSURANCE POLICY
Issued by
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
201 Highland Avenue
Largo, Florida 33770
1-800-851-9777
(813) 585-6565
The individual flexible premium variable life insurance policy ("Policy")
issued by Western Reserve Life Assurance Co. of Ohio ("Western Reserve") and
described in this Prospectus is designed to provide lifetime insurance
protection and maximum flexibility in connection with premium payments and
death benefits. A Policyowner may, subject to certain restrictions, vary the
timing and amount of premium payments and increase or decrease the level of
life insurance benefits payable under the Policy. This flexibility allows a
Policyowner to provide for changing insurance needs under a single life
insurance policy. The minimum Specified Amount for a Policy at issue is
$250,000 for Issue Ages 0-60, and $100,000 for Issue Ages above 60.
The Policy provides a death benefit payable at the Insured's death, and a
Net Surrender Value that can be obtained by completely or partially
surrendering the Policy. Net premiums are allocated according to the
Policyowner's directions among the Sub-Accounts of the WRL Series Life Account
("Series Account"), or to a fixed interest account ("Fixed Account") or a
combination of both. With respect to amounts allocated to Sub-Accounts of the
Series Account, the amount of the death benefit may, and the Cash Value will,
vary to reflect both the investment experience of the Sub-Accounts and the
timing and amount of additional premium payments. However, as long as the
Policy remains In Force, Western Reserve guarantees that the death benefit will
never be less than the Specified Amount of the Policy. While additional premium
payments are not required under the Policy, additional premium payments may be
necessary to prevent Lapse if there is insufficient Net Surrender Value.
The Policy provides a free-look period allowing the Policyowner to cancel
the Policy within 10 days after receipt. Certain states require a free-look
period longer than 10 days, either for all Policyowners or certain classes of
Policyowners.
The assets of each Sub-Account of the Series Account will be invested
solely in a corresponding Portfolio of the WRL Series Fund, Inc. (the "Fund").
The Prospectus for the Fund describes the investment objectives and the risks
of investing in the Portfolios of the Fund corresponding to the Sub-Accounts
currently available under the Policy. The Policyowner bears the entire
investment risk for all amounts allocated to the Series Account; there is no
guaranteed minimum Cash Value.
It may not be to your advantage to replace existing insurance or
supplement an existing flexible premium variable life insurance policy with a
Policy described in this Prospectus.
Please read this Prospectus and the Prospectus for the Fund carefully and
retain for future reference.
The Policy is not a deposit or obligation of, or guaranteed or endorsed by, any
bank or depository institution, and the Policy is not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
agency, and involves investment risk, including possible loss of principal
amount invested.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No dealer, salesperson 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.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY THE CURRENT PROSPECTUS
FOR THE WRL SERIES FUND, INC. CERTAIN PORTFOLIOS MAY NOT BE AVAILABLE IN ALL
STATES. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
Prospectus Dated , 1998
TABLE OF CONTENTS
Page
-----
DEFINITIONS ............................................ 1
INTRODUCTION ........................................... 2
INVESTMENT EXPERIENCE INFORMATION ...................... 6
Rates of Return ....................................... 7
Death Benefit, Cash Value and Net Surrender
Value Illustrations ............................... 7
Other Performance Data ................................ 12
WESTERN RESERVE AND THE
SERIES ACCOUNT ......................................... 13
Western Reserve Life Assurance Co.
of Ohio ........................................... 13
The Series Account .................................... 13
POLICY BENEFITS ........................................ 13
Death Benefit ......................................... 13
When Insurance Coverage Takes Effect .................. 15
Cash Value ............................................ 16
INVESTMENTS OF THE SERIES ACCOUNT ...................... 17
WRL Series Fund, Inc. ................................. 17
Addition, Deletion, or Substitution
of Investments .................................... 19
PAYMENT AND ALLOCATION OF PREMIUMS ..................... 20
Issuance of a Policy .................................. 20
Premiums .............................................. 20
Allocation of Premiums and Cash Value ................. 21
Dollar Cost Averaging ................................. 22
Asset Rebalancing Program ............................. 22
Policy Lapse and Reinstatement ........................ 23
CHARGES AND DEDUCTIONS ................................. 24
Contingent Deferred Surrender Charges ................. 24
Pro Rata Decrease Charge .............................. 25
Cash Value Charges .................................... 25
Optional Cash Value Charges ........................... 26
Charges Against the Series Account .................... 26
Expenses of the Fund .................................. 26
POLICY RIGHTS .......................................... 27
Loan Privileges ....................................... 27
Surrender Privileges .................................. 28
Examination of Policy Privilege ("Free-Look") ......... 28
Conversion Rights ..................................... 28
Benefits at Maturity .................................. 28
Payment of Policy Benefits ............................ 29
GENERAL PROVISIONS ..................................... 29
Postponement of Payments .............................. 29
The Contract .......................................... 29
Suicide ............................................... 29
Page
-----
Incontestability ...................................... 29
Change of Owner or Beneficiary ........................ 30
Assignment ............................................ 30
Misstatement of Age or Sex ............................ 30
Reports and Records ................................... 30
Optional Insurance Benefits ........................... 30
THE FIXED ACCOUNT ...................................... 31
Fixed Account Value ................................... 32
Minimum Guaranteed and Current
Interest Rates .................................... 32
Allocations, Transfers and Withdrawals ................ 32
DISTRIBUTION OF THE POLICIES ........................... 33
FEDERAL TAX MATTERS .................................... 33
Introduction .......................................... 33
Tax Charges ........................................... 33
Tax Status of the Policy .............................. 33
Tax Treatment of Policy Benefits ...................... 34
Possible Tax Law Changes .............................. 35
Employment-Related Benefit Plans ...................... 35
SAFEKEEPING OF THE SERIES
ACCOUNT'S ASSETS ....................................... 36
VOTING RIGHTS OF THE SERIES ACCOUNT .................... 36
STATE REGULATION OF WESTERN
RESERVE ................................................ 36
REINSURANCE ............................................ 36
EXECUTIVE OFFICERS AND DIRECTORS
OF WESTERN RESERVE ..................................... 36
LEGAL MATTERS .......................................... 37
LEGAL PROCEEDINGS ...................................... 37
EXPERTS ................................................ 37
ADDITIONAL INFORMATION ................................. 38
YEAR 2000 MATTERS ...................................... 38
INFORMATION ABOUT
WESTERN RESERVE'S
FINANCIAL STATEMENTS ................................... 38
APPENDIX A - ILLUSTRATION
OF BENEFITS ............................................ 39
APPENDIX B - WEALTH INDICES OF
INVESTMENTS IN THE U.S. CAPITAL
MARKETS ................................................ 42
INDEX TO FINANCIAL
STATEMENTS ............................................. 44
The Policy is not available in the State of New York
i
DEFINITIONS
ACCOUNTS -- Allocation options including the Fixed Account and
Sub-Accounts of the Series Account.
ATTAINED AGE -- The Issue Age plus the number of completed Policy years.
ANNIVERSARY -- The same day and month as the Policy Date for each
succeeding year the Policy remains In Force.
BENEFICIARY -- The person or persons specified by the Owner as entitled
to receive the death benefit proceeds under the Policy.
CASH VALUE -- The sum of the values in each Sub-Account plus the Policy's
value in the Fixed Account.
FIXED ACCOUNT -- An allocation option other than the Series Account. The
Fixed Account is part of Western Reserve's General Account.
FUND -- WRL Series Fund, Inc., a registered management investment company
in which the assets of the Series Account are invested.
GENERAL ACCOUNT -- The assets of Western Reserve other than those
allocated to the Series Account or any other separate account.
IN FORCE -- Condition under which the coverage under the Policy or a
rider is active and the Insured's life remains insured.
INITIAL PREMIUM -- The amount which must be paid before coverage begins.
INSURED -- The person whose life is insured under the Policy.
ISSUE AGE -- Issue Age refers to the age on the Insured's birthday
nearest the Policy Date.
LAPSE -- Termination of the Policy at the end of the grace period.
LOAN RESERVE -- A part of the Fixed Account to which amounts are
transferred as collateral for Policy loans.
MATURITY DATE -- The Anniversary nearer the Insured's 95th birthday, when
coverage under the Policy will terminate if the Insured is living and the
Policy is In Force. The Maturity Date may be extended under the Extension of
Maturity Date provision of the Policy.
MONTHLY ANNIVERSARY OR MONTHIVERSARY -- The same date in each succeeding
month as the Policy Date. For purposes of the Series Account, whenever the
Monthly Anniversary falls on a date other than a Valuation Date, the Monthly
Anniversary will be deemed to be the next Valuation Date.
NET SURRENDER VALUE -- The amount payable upon surrender of the Policy
equal to the Cash Value as of the date of surrender, less any Contingent
Deferred Surrender Charges, and less any outstanding Policy loan, plus unearned
loan interest.
OFFICE -- The administrative office of Western Reserve whose mailing
address is P. O. Box 5068, Clearwater, Florida 33758-5068.
PLANNED PERIODIC PREMIUM -- A scheduled premium of a level amount at a
fixed interval over a specified period of time.
POLICY -- The flexible premium variable life insurance policy offered by
Western Reserve and described in this Prospectus.
POLICY DATE -- The date set forth in the Policy when insurance coverage
is effective and monthly deductions commence under the Policy. The Policy Date
is used to determine Policy years and Policy Months. Policy Anniversaries are
measured from the Policy Date.
POLICY MONTH -- A month beginning on the Monthly Anniversary.
POLICYOWNER ("OWNER") -- The person who owns the Policy and who may
exercise all rights under the Policy while living.
PORTFOLIO -- A separate investment portfolio of the Fund.
PREMIUM -- The portion of the premium available for allocation to either
the Fixed Account or the Sub-Accounts of the Series Account, equal to the
premium paid by the Policyowner.
REALLOCATION ACCOUNT -- The Sub-Account where the Initial Premium will be
held during the Free Look Period. The Reallocation Account is shown on the
Policy Schedule Page.
REALLOCATION DATE -- The date on which any premiums are reallocated from
the Reallocation Account to the Accounts as elected by the Owner on the
application. The Reallocation Date is shown on the Policy Schedule Page.
RECORD DATE -- The date the Policy is recorded on the books of Western
Reserve as an In Force Policy.
SERIES ACCOUNT -- WRL Series Life Account, a separate investment account
established by Western Reserve to receive and invest Net Premiums allocated
under the Policy.
SPECIFIED AMOUNT -- The minimum death benefit payable under the Policy as
long as the Policy remains In Force. The death benefit proceeds will be reduced
by any outstanding indebtedness and any due and unpaid charges.
SUB-ACCOUNT -- A sub-division of the Series Account. Each Sub-Account
invests exclusively in the shares of a specified Portfolio of the Fund.
TERMINATION -- Condition when the Insured's life is no longer insured
under the coverage provided.
VALUATION DATE -- Each day on which the New York Stock Exchange is open
for business.
VALUATION PERIOD -- The period commencing at the end of one Valuation
Date and continuing to the end of the next succeeding Valuation Date.
1
INTRODUCTION
1. WHAT IS THE DIFFERENCE BETWEEN THE POLICY AND A CONVENTIONAL FIXED-BENEFIT
LIFE INSURANCE POLICY?
Like conventional fixed-benefit life insurance, as long as the Policy
remains In Force, the Policy can provide for: (1) the payment of a minimum
death benefit to a Beneficiary upon the Insured's death; (2) the
accumulation of Cash Value; and (3) surrender rights and Policy loan
privileges.
The Policy differs from conventional fixed-benefit life insurance by
allowing Policyowners to allocate Premiums to one or more Sub-Accounts of
the Series Account, or to the Fixed Account, or to a combination of both.
Each Sub-Account invests in a designated Portfolio of the Fund. The amount
and/or duration of the life insurance coverage and the Cash Value of the
Policy are not guaranteed and may increase or decrease depending upon the
investment experience of the Sub-Accounts. Accordingly, the Policyowner
bears the investment risk of any depreciation in value of the underlying
assets of the Series Account but reaps the benefits of any appreciation in
value. (See Allocation of Premiums and Cash Value - Allocation of Premiums,
p. 21.) Unlike conventional fixed-benefit life insurance, a Policyowner
also has the flexibility, subject to certain restrictions (see Premiums -
Premium Limitations, p. 20), to vary the frequency and amount of premium
payments and to adjust the death benefits payable under the Policy by
decreasing the Specified Amount. Thus, unlike conventional fixed-benefit
life insurance, the Policy does not require a Policyowner to adhere to a
fixed premium schedule. Moreover, the failure to pay a scheduled premium
("Planned Periodic Premium") will not itself cause the Policy to Lapse,
although additional premium payments may be necessary to prevent Lapse if
Net Surrender Value is insufficient to pay certain monthly charges, and a
grace period expires without a sufficient payment. (See Policy Lapse and
Reinstatement - Lapse, p. 23.)
2. WHAT DEATH BENEFIT OPTIONS ARE AVAILABLE UNDER THE POLICY?
The Policy provides the payment of benefits upon the death of the
Insured. The Policy contains two death benefit options. Under Death Benefit
Option A, the death benefit is the greater of the Specified Amount of the
Policy or a specified percentage times the Cash Value of the Policy on the
date of death of the Insured. Under Death Benefit Option B, the death
benefit is the greater of the Specified Amount of the Policy plus the Cash
Value of the Policy on the date of death of the Insured or a specified
percentage times the Cash Value of the Policy on the date of death of the
Insured. As long as the Policy remains In Force, the minimum death benefit
payable under either option will be the current Specified Amount. The
amount of death benefit will be reduced by any outstanding indebtedness and
any due and unpaid charges, and increased by any additional insurance
benefits added by rider and any unearned loan interest. Under Western
Reserve's current rules, the minimum Specified Amount for a Policy at issue
is $250,000 for Issue Ages 0-60, and $100,000 for Issue Ages above 60. The
minimum Specified Amount will be set forth in the Policyowner's Policy.
(See Policy Benefits - Death Benefit, p. 13.)
Optional insurance benefits offered under the Policy include a
Children's Insurance Rider; an Other Insured Rider; an Accidental Death
Benefit Rider; a Disability Waiver Rider; a Disability Waiver and Income
Rider; a Primary Insured Rider and a Primary Insured Rider Plus. (See
Optional Cash Value Charges - Optional Insurance Benefits, p. 26.) The cost
of these optional insurance benefits will be deducted from Cash Value as
part of the monthly deduction. (See Charges and Deductions - Cash Value
Charges, p. 25.)
A Terminal Illness Accelerated Death Benefit Rider is automatically
included with every Policy at no additional charge (this Rider may not be
available in all states). This rider makes a "Single Sum Benefit" available
prior to the Insured's death if the Insured has incurred a condition
resulting from illness which, as determined by a Physician, has reduced the
Insured's life expectancy as defined in the rider. (See General Provisions
- Optional Insurance Benefits - Terminal Illness Accelerated Death Benefit
Rider, p. 31.)
Benefits under the Policy may be paid in a lump sum or under one of
the settlement options set forth in the Policy. (See Payment of Policy
Benefits - Settlement Options, p. 29.)
3. HOW MAY THE AMOUNT OF THE DEATH BENEFIT AND CASH VALUE VARY?
Under either death benefit option, as long as the Policy remains In
Force, the death benefit will not be less than the current Specified Amount
of the Policy. The amount of death benefit will be reduced by any
outstanding policy loan, plus any unearned loan interest and any due and
unpaid charges. The death benefit may, however, exceed the Specified Amount
under certain circumstances. The amount by which the death benefit exceeds
the Specified Amount depends upon the option chosen and the Cash Value of
the Policy. (See Policy Benefits - Death Benefit, p. 13.)
The Policy's Cash Value in the Series Account will reflect the amount
and frequency of premium payments, the investment experience of the chosen
Sub-Accounts of the Series Account, any cash withdrawals, and any charges
imposed in connection with the Policy. The entire investment risk for
amounts allocated to the Sub-Accounts of the Series Account is borne by the
2
Policyowner; Western Reserve does not guarantee a minimum Cash Value.
(See Policy Benefits - Cash Value, p. 16.)
4. WHAT FLEXIBILITY DOES A POLICYOWNER HAVE TO ADJUST THE AMOUNT OF THE DEATH
BENEFIT?
The Policyowner has significant flexibility to adjust the death
benefit payable by changing the Death Benefit Option, by decreasing the
Specified Amount of the Policy or by adding riders to increase the total
death benefit payable. No change in the Death Benefit Option may be made
during the first three Policy years. The Policyowner may change the Death
Benefit Option only once each Policy year after the third Policy year. (See
Death Benefit - Change in Death Benefit Option, p. 14.) No decrease in the
Specified Amount may be requested during the first three Policy years. (See
Policy Benefits - Death Benefit, p. 13.) (See Cash Value Charges - Cost of
Insurance, p. 25.)
5. WHAT FLEXIBILITY DOES A POLICYOWNER HAVE IN CONNECTION WITH PREMIUM
PAYMENTS?
A Policyowner has considerable flexibility concerning the amount and
frequency of premium payments. Western Reserve will require the Policyowner
to pay an Initial Premium at least equal to a minimum monthly first year
premium set forth in the Policy before insurance coverage is In Force.
Thereafter, a Policyowner may, subject to certain restrictions, make
premium payments in any amount and at any frequency. (See Payment and
Allocation of Premiums - Premiums, p. 20.) Each Policyowner will also
determine a Planned Periodic Premium schedule. The schedule will provide a
premium payment of a level amount at a fixed interval over a specified
period of time. The amount and frequency of Planned Periodic Premium
payments will be set forth in the Policy. The amount and frequency of
Planned Periodic Premium payments may be changed upon written request. (See
Premiums - Planned Periodic Premiums, p. 20.)
6. HOW LONG WILL THE POLICY REMAIN IN FORCE?
The Policy will Lapse only when Net Surrender Value is insufficient to
pay the monthly deduction (see Charges and Deductions - Cash Value Charges,
p. 25), and a grace period expires without a sufficient payment by the
Policyowner. (See Loan Privileges - Indebtedness, p. 27.) However, during
the first three Policy years, the Policy will remain In Force and no grace
period will begin provided the total premiums received (minus any
withdrawals, any outstanding loans, and any pro rata Decrease Charge
deducted from the Cash Value) equals or exceeds the minimum monthly
guarantee premium times the number of months since the Policy Date,
including the current month. The minimum monthly guarantee premium is set
forth in the Policy, unless changed due to a requested change under the
Policy by the Policyowner, at which time the Policyowner will be notified
of the new minimum monthly guarantee premium and its effective date. The
Policy, therefore, differs in two important respects from a conventional
life insurance policy. First, the failure to pay a Planned Periodic Premium
will not automatically cause the Policy to Lapse. Second, the Policy can
lapse even if Planned Periodic Premiums or premiums in other amounts have
been paid, if Net Surrender Value is insufficient to pay the monthly
deduction, and a grace period expires without a sufficient payment. Such a
Lapse could happen if the investment experience has been sufficiently
unfavorable to have resulted in a decrease in the Net Surrender Value, or
the Net Surrender Value has decreased because not enough premiums have been
paid to offset the monthly deductions. If the Insured is alive and the
Policy is In Force on the Maturity Date, which is the Insured's 95th
birthday, the Policy will then terminate and no longer be In Force. The Net
Surrender Value as of the Maturity Date will be paid to the Policyowner.
Upon written request, Western Reserve will extend the Maturity Date, as
elected by the Policyowner, to one of the following: (1) if the Death
Benefit Option Type is other than Option A, the Option Type will be changed
to Option A. On each Valuation Date, the Specified Amount will be adjusted
to equal the Cash Value, and the Limitation Percentage will be 100%. No
additional premium payments will be permitted except to prevent lapse of
the Policy. All future monthly deductions will be waived; or (2) the
Maturity Date will automatically be extended until the next Policy
Anniversary. The Policyowner must request in writing that the Maturity Date
be extended prior to each Policy Anniversary thereafter. (See Policy Rights
- Benefits at Maturity, p. 28.)
7. HOW ARE PREMIUMS ALLOCATED?
The full premium is available for allocation ("Premium"). The
Policyowner initially determines the allocation of the Premium among the
Sub-Accounts of the Series Account, each of which invests in shares of a
designated Portfolio of the Fund, or to the Fixed Account, or a combination
of both. Each Portfolio has a different investment objective. (See
Investments of the Series Account - WRL Series Fund, Inc., p. 17.) The
allocation of future Premiums may be changed without charge at any time by
providing Western Reserve with written notification from the Policyowner,
or by calling Western Reserve's toll-free number, 1-800-851-9777.
8. IS THERE A "FREE-LOOK" PERIOD?
Yes, the Policy provides a free-look period. The Policyowner may
cancel the Policy within 10 days after the Policyowner receives it. Certain
states require a Free-Look period longer than 10 days, either for all
Policyowners or for certain classes of Policyowners. In most states,
Western Reserve will refund the value of the
3
amounts allocated to the Accounts plus any charges previously deducted.
In certain states, the refund will be the total of all premiums paid.
(See Policy Rights - Examination of Policy Privilege, p. 28.)
9. MAY THE POLICY BE SURRENDERED?
Yes, the Policyowner may totally surrender the Policy at any time and
receive the Net Surrender Value of the Policy. Subject to certain
limitations, the Policyowner may also make cash withdrawals from the Policy
at any time after the first Policy year and prior to the Maturity Date.
(See Policy Rights - Surrender Privileges, p. 28.) If Death Benefit Option
A is in effect, cash withdrawals will reduce the Policy's Specified Amount
by the amount of the cash withdrawal.
10. WHAT IS THE LOAN PRIVILEGE?
After the first Policy Anniversary, a Policyowner may obtain a Policy
loan in any amount which is not greater than 90% of the Cash Value less any
surrender charge and any already outstanding loan. Western Reserve reserves
the right to permit a Policy Loan prior to the first Policy Anniversary for
Policies issued pursuant to a transfer of cash values from another life
insurance policy, under Section 1035(a) of the Internal Revenue Code of
1986, as amended. It should be noted, however, that a loan taken from, or
secured by, a Policy may be treated as a taxable distribution, and also may
be subject to a Federal income tax penalty. (See Federal Tax Matters, p.
33.)
The interest rate charged on Policy loans is at the rate of 5.2%
payable annually in advance (equivalent to an effective annual rate of
5.5%). The requested loan amount, plus interest in advance, will be
transferred from the Accounts to the Loan Reserve and credited at the end
of each Policy year with guaranteed interest at a rate of 4% per year.
Western Reserve may from time to time, and in its sole discretion, credit
the Loan Reserve with additional interest at a rate higher than 4% per
year. The Loan Reserve is currently credited with a rate higher than 4% per
year. The minimum loan amount is generally $500. (See Policy Rights - Loan
Privileges, p. 27.) Upon repayment of a loan, amounts in the Loan Reserve
in excess of the outstanding value of the loan are currently transferred to
the Accounts in the same manner as Premium allocations; however, Western
Reserve may in the future require these amounts to be transferred to the
Fixed Account. (See The Fixed Account, p. 31.)
There are risks involved in taking a Policy loan, including the
potential for a Policy to lapse if anticipated earnings, taking into
account any outstanding loans, are not achieved, as well as adverse tax
consequences which occur if a Policy lapses with loans outstanding. (See
Federal Tax Matters - Tax Treatment of Policy Benefits, p. 34.)
11. WHAT CHARGES ARE ASSESSED IN CONNECTION WITH THE POLICY?
"Contingent Deferred Surrender Charges" are deducted if the Policy is
surrendered during the first fifteen Policy years. The surrender charges
consist of an Issue Charge of $5.00 per $1,000 of Specified Amount, and
also consists of a Sales Charge equal to 26.5% of the Surrender Charge Base
Premium and not more than 8.4% of premiums above that amount. A declining
percentage of the surrender charge is assessed after the tenth year. The
Contingent Deferred Surrender Charges imposed upon early surrender or a
decrease in Specified Amount will be significant. As a result, you should
purchase a Policy only if you have the financial capability to keep it In
Force for a substantial period of time. In addition, a pro rata Decrease
Charge equal to a pro rata portion of the Contingent Deferred Surrender
Charges will be calculated and charged to the Cash Value for any decreases
in the Policy's Specified Amount which occur during the first fifteen
Policy years. Any future Contingent Deferred Surrender Charges will be
reduced proportionately according to the amount of any previous pro rata
Decrease Charge. (See Charges and Deductions - Contingent Deferred
Surrender Charge, p. 24 and Pro Rata Decrease Charge, p. 25.)
Cost of insurance charges and a $5.00 monthly Policy Charge, are
deducted monthly from the Cash Value of each Policy to compensate Western
Reserve for the cost of administering the Policy. Cost of insurance charges
will vary with the Policy's Specified Amount, the Death Benefit Option
chosen and the investment experience of the Portfolios in which the Policy
is invested. (See Charges and Deductions - Cash Value Charges, p. 25.)
Optional Cash Value charges are deducted from the Policy as a result
of Policyowner changes or elections made to the Policy. Optional Cash Value
charges include charges for: optional insurance benefits, change in Premium
allocation, certain Cash Value transfers and cash withdrawals. (See Charges
and Deductions - Optional Cash Value Charges, p. 26.)
Western Reserve charges the Sub-Accounts of the Series Account for the
mortality and expense risks Western Reserve assumes. The charge is made
daily at an effective annual rate of 0.90% of the average daily net assets
of each Sub-Account of the Series Account. This charge is guaranteed to be
reduced to 0.60% after the first fifteen Policy years. Western Reserve
intends to reduce this charge to 0.30% starting in the sixteenth Policy
year. However, such reduction is not guaranteed and Western Reserve
reserves the right to maintain this charge at
4
0.60% level after the fifteenth Policy year. (See Charges and Deductions
- Charges Against the Series Account, p. 26.)
Each Sub-Account invests in a corresponding Portfolio of the Fund.
Each Portfolio pays investment management fees based on a percentage of the
Portfolio's average daily net assets. The annual management fees and other
Fund expenses for the Portfolios are provided on p. 6, under the heading
Fund Annual Expenses. Effective January 1, 1997, the Fund adopted a Plan of
Distribution pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "1940 Act") ("Distribution Plan") and pursuant to the
Plan, entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), principal underwriter for the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for
expenses incurred in connection with the distribution of a Portfolio's
shares, amounts equal to actual expenses associated with distributing a
Portfolio's shares, up to a maximum rate of 0.15% (fifteen one-hundredths
of one percent) on an annualized basis of the average daily net assets.
This fee is measured and accrued daily and paid monthly. ISI has determined
that it will not seek payment by the Fund of distribution expenses incurred
with respect to any Portfolio until April 30, 1999. Prior to ISI seeking
reimbursement, Policyowners will be notified in advance. In addition, the
Portfolios incur certain operating expenses. (See Investments of the Series
Account - WRL Series Fund, Inc., p. 17.)
No charges are currently made from the Series Account for Federal or
state income taxes. Should Western Reserve determine that such taxes may be
imposed by Federal or state agencies, Western Reserve may make deductions
from the Series Account to pay these taxes. (See Federal Tax Matters, p.
33.)
12. ARE TRANSFERS PERMITTED AMONG THE ACCOUNTS?
Yes. A Policyowner may transfer Cash Value among the Sub-Accounts of
the Series Account or from the Sub-Accounts to the Fixed Account. Transfers
may also be made from the Fixed Account to the Sub-Accounts subject to
certain restrictions. (See the Fixed Account - Allocations, Transfers and
Withdrawals, p. 32.) Twelve Cash Value transfers are permitted without
charge in a Policy year. Each additional transfer will be subject to a
transfer charge of $10. This charge will not be increased. Certain
restrictions apply to transfers from the Fixed Account. Western Reserve may
at any time revoke or modify the transfer privilege. (See Payment and
Allocation of Premiums - Allocation of Premiums and Cash Value - Transfers,
p. 21.)
13. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PURCHASING A POLICY?
At present, there is only limited guidance for determining whether a
Policy meets the requirements prescribed by tax legislation for tax
treatment as a life insurance contract under Section 7702 of the Internal
Revenue Code. With respect to a Policy that is issued on the basis of a
rate class using non-tobacco use Ultimate Select, non-tobacco use Select,
tobacco use Ultimate Standard or tobacco use Standard guaranteed rates,
while there is some uncertainty due to the limited guidance on Section
7702, Western Reserve nonetheless believes that such a Policy should meet
the Section 7702 definition of a life insurance contract. With respect to a
Policy that is issued on a substandard rate class, there is even less
guidance to determine whether such a Policy meets the Section 7702
definition of a life insurance contract. Thus, it is not clear whether such
a Policy would satisfy Section 7702, particularly if the Policyowner pays
the full amount of premiums permitted under the Policy. If it is
subsequently determined that a Policy does not qualify as a life insurance
contract, Western Reserve will take whatever steps are appropriate and
reasonable to attempt to have such a Policy comply with Section 7702. For
these reasons, Western Reserve reserves the right to modify the Policy as
necessary to attempt to qualify it as a life insurance contract under
Section 7702. Assuming that a Policy qualifies as a life insurance contract
for Federal income tax purposes, Western Reserve believes that the death
benefit paid under the Policy generally should be fully excludable from the
gross income of the Beneficiary for Federal income tax purposes. Moreover,
the Owner should not be deemed in constructive receipt of Cash Values under
a Policy until there is a distribution from the Policy.
A Policy may be treated as a "modified endowment contract" depending
upon the amount of premiums paid in relation to the death benefit. (See Tax
Treatment of Policy Benefits - Modified Endowment Contracts, p. 34.) If the
Policy is a modified endowment contract, then all pre-death distributions,
including Policy loans and loans secured by a Policy, will be treated first
as a distribution of taxable income to the extent of any gain and then as a
return of basis or investment in the contract. In addition, prior to age
59-1/2 any distributions of gains generally will be subject to a 10%
Federal income tax penalty.
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. Moreover, loans and loans
secured by a Policy will not be treated as distributions. Finally, neither
distributions nor loans from a Policy that is not a modified endowment
contract are subject to the 10% Federal income tax penalty. For further
elaboration on the tax consequences of a Policy, see Federal Tax Matters,
p. 33.
5
FUND ANNUAL EXPENSES* (AS A % OF FUND AVERAGE NET ASSETS)
Aggressive Emerging
Growth Growth Growth
Portfolio Portfolio Portfolio
------------ ----------- -----------
Management Fees .............................. 0.80% 0.80% 0.80%
Other Expenses (after reimbursement) ......... 0.16% 0.13% 0.07%
Total Fund Annual Expenses ................... 0.96% 0.93% 0.87%
C.A.S.E.
Global Balanced Value Equity Growth
Portfolio Portfolio Portfolio Portfolio
----------- ----------- -------------- ----------
Management Fees .............................. 0.80% 0.80% 0.80% 0.80%
Other Expenses (after reimbursement) ......... 0.20% 0.14% 0.09% 0.20%
Total Fund Annual Expenses ................... 1.00% 0.94% 0.89% 1.00%
Strategic Growth & Money
Bond Total Return Income Market
Portfolio Portfolio Portfolio Portfolio
----------- -------------- ----------- -----------
Management Fees .................... 0.45% 0.80% 0.75% 0.40%
Other Expenses
(after reimbursement) ............. 0.14% 0.08% 0.21% 0.08%
Total Fund Annual Expenses ......... 0.59% 0.88% 0.96% 0.48%
Tactical Third Real
Asset International Avenue Estate
Allocation Equity U.S. Equity Value Securities
Portfolio Portfolio Portfolio Portfolio** Portfolio**
------------ --------------- ------------- ------------- ------------
Management Fees .................... 0.80% 1.00% 0.80% 0.80% 0.80%
Other Expenses
(after reimbursement) ............. 0.07% 0.50% 0.50% 0.20% 0.20%
Total Fund Annual Expenses ......... 0.87% 1.50% 1.30% 1.00% 1.00%
<FN>
* Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant
to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the
Plan, entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), principal underwriter for the Fund. Under the Distribution Plan,
the Fund, on behalf of the Portfolios, is authorized to pay to various
service providers, as direct payment for expenses incurred in connection
with the distribution of a Portfolio's shares, amounts equal to actual
expenses associated with distributing a Portfolio's shares, up to a maximum
rate of 0.15% (fifteen one-hundredths of one percent) on an annualized
basis of the average daily net assets. This fee is measured and accrued
daily and paid monthly. ISI has determined that it will not seek payment by
the Fund of distribution expenses incurred with respect to any Portfolio
until April 30, 1999. Prior to ISI seeking reimbursement, Policyowners will
be notified in advance.
** Because the Third Avenue Value Portfolio commenced operations on January 2,
1998, and the Real Estate Securities Portfolio commenced operations on May
1, 1998, the percentages set forth as "Other Expenses" and "Total Fund
Annual Expenses" reflect estimates of "Other Expenses" for the first year
of operations.
</FN>
The purpose of the preceding Table is to assist the Policyowner in
understanding the various costs and expenses that a Policyowner will bear
directly and indirectly. The Table reflects charges and expenses of the
Portfolios of the Fund for the fiscal year ended December 31, 1997, except that
the "Other Expenses" and "Total Fund Annual Expenses" for the Third Avenue
Value and Real Estate Securities Portfolios are estimates. Expenses of the Fund
may be higher or lower in the future. Certain states and other governmental
entities may impose a premium tax, which the Table does not include. For more
information on the charges described in this Table, see "Charges And
Deductions" on page 24 and the Fund Prospectus which accompanies this
Prospectus.
WRL Investment Management, Inc. ("WRL Management") has undertaken, until
at least April 30, 1999, to pay Fund expenses on behalf of the Portfolios to
the extent normal operating expenses of a Portfolio exceed a stated percentage
of each Portfolio's average daily net assets. The expense limitation for the
Aggressive Growth, Emerging Growth, Growth, Global, Balanced, Value Equity,
C.A.S.E. Growth, Third Avenue Value, Strategic Total Return, Growth & Income,
Tactical Asset Allocation and Real Estate Securities Portfolios is 1.00% of the
average daily net assets; 0.70% of the average daily net assets of the Bond and
Money Market Portfolios; 1.50% of the average daily net assets of the
International Equity Portfolio; and 1.30% of the average daily net assets of
the U.S. Equity Portfolio. In 1997, WRL Management, the Fund's Investment
Adviser, reimbursed the C.A.S.E. Growth Portfolio in the amount of $50,000, the
International Equity Portfolio in the amount of $179,000 and the U.S. Equity
Portfolio in the amount of $29,000. Without such reimbursement, the total
annual Fund expenses during 1997 for the C.A.S.E. Growth Portfolio,
International Equity Portfolio and U.S. Equity Portfolio would have been 1.13%,
3.12% and 1.49%, respectively.
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Fund and hypothetical illustrations of the Policy based on
the historical investment experience of the Fund. It does not represent or
project future investment performance.
The Policies became available for sale in of 1999. The Series
Account and the Fund commenced operations on October 2, 1986. The rates of
return shown below depict the historic investment experience of each Portfolio
of the Fund for the periods shown and assumes that the rate of return for each
Portfolio in each calendar year was uniformly earned throughout the year. The
actual performance of the Portfolios, however, has and will vary throughout the
year, and will result in variable monthly deductions from Cash Value that could
affect performance. The illustrations of death benefits, Cash Values and Net
Surrender Values shown below depict these Policy features for a hypothetical
Policy as if it had been purchased on January 1, 1987, for an Insured in the
age and risk classes indicated, based on the historical investment experience
of the Portfolio indicated since January 1 of the year following a Portfolio's
inception. The actual rate of return for each Portfolio in each calendar year
was assumed to be uniformly earned throughout that year. The actual performance
of the Portfolios, however, has and will vary throughout the year.
6
RATES OF RETURN
The rates of return shown below are based on the historic investment
performance, as described above, after the deduction of investment management
fees and direct Fund expenses, of the Portfolios of the Fund. The rates are
average annual compounded rates of return for the periods ended on December 31,
1997. (See Investments of the Series Account - WRL Series Fund, Inc., p. 17.)
These rates of return do not reflect the annual charge against the assets
of the Series Account for mortality and expense risks. These rates of return
also do not reflect the monthly deductions from Cash Value, or surrender
charges. (See Contingent Deferred Surrender Charges, p. 24; and Cash Value
Charges, p. 25.) Accordingly, these rates of return do not illustrate how
actual investment performance will affect benefits under the Policies. (See,
however, Death Benefit, Cash Value and Net Surrender Value Illustrations,
below.) Moreover, these rates of return are not an estimate, projection or
guarantee of future performance.
Also shown are comparable figures for the unmanaged Standard & Poor's
Index of 500 Common Stocks ("S&P 500"), a widely used measure of stock market
performance. As an unmanaged index, the S&P 500 does not reflect any deduction
for the expense of operating and managing an investment portfolio.
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN
FOR THE PERIODS ENDED ON DECEMBER 31, 1997
10 5 3 1
Fund Portfolio Inception* Years Years Years Year
- ------------------------ ------------ ---------- ---------- ---------- ----------
Growth 17.65% 18.66% 14.23% 26.83% 17.54%
Global 20.41% N/A 20.38% 23.13% 18.75%
Bond 7.77% 8.98% 7.24% 10.37% 9.16%
Money Market 5.00% 5.06% 4.31% 5.22% 5.24%
Emerging Growth 20.33% N/A N/A 28.45% 21.45%
Strategic Total Return 15.07% N/A N/A 20.43% 21.85%
Aggressive Growth 17.72% N/A N/A 23.73% 24.25%
Balanced 10.44% N/A N/A 15.81% 17.10%
Growth & Income 14.17% N/A N/A 20.35% 24.65%
Tactical Asset
Allocation 17.04% N/A N/A 17.01% 16.59%
C.A.S.E Growth 20.09% N/A N/A N/A 15.03%
Value Equity 23.14% N/A N/A N/A 25.04%
International Equity 7.50% N/A N/A N/A 7.50%
U.S. Equity 27.01% N/A N/A N/A 27.01%
S&P 500 16.95% 18.06% 20.27% 31.15% 33.36%
<FN>
* The Growth, Bond and Money Market Portfolios of the Fund commenced operations
on October 2, 1986. The Global Portfolio commenced operations on December
3, 1992. The Emerging Growth and Strategic Total Return Portfolios
commenced operations on March 1, 1993. The Aggressive Growth, Balanced and
Growth & Income Portfolios commenced operations on March 1, 1994. The
Tactical Asset Allocation Portfolio commenced operations on January 3,
1995. The C.A.S.E. Growth Portfolio commenced operations on May 1, 1995.
The Value Equity Portfolio commenced operations on May 1, 1996. The
International Equity and U.S. Equity Portfolios commenced operations on
January 2, 1997. The S&P 500 returns are based on an inception date of
October 2, 1986.
</FN>
Because the Third Avenue Value and Real Estate Securities Portfolios had not
yet commenced operations as of December 31, 1997, the above chart does not
reflect rates of return for these Portfolios.
Additional information regarding the investment performance of the
Portfolios of the Fund appears in the attached Prospectus for the Portfolios of
the Fund.
DEATH BENEFIT, CASH VALUE AND NET SURRENDER VALUE
ILLUSTRATIONS
In order to demonstrate how the historic investment experience of the
Portfolios could have affected the Option A death benefits, the Policy Cash
Value and the Net Surrender Value, the following hypothetical illustrations are
based on the historic investment experience of each Portfolio. These
hypothetical illustrations are designed to show the performance that could have
resulted if the Policy available for purchase today had been in existence
during the period of time illustrated. The actual rate of return in each
calendar year was assumed to be uniformly earned throughout that year. The
actual performance of the Portfolios, however, has and will vary throughout the
year, and will result in variable monthly deductions from Cash Value that could
affect performance. These illustrations do not represent what may happen in the
future.
For each Portfolio, the illustrations show Option A based on the payment
of annual premiums of $5,500 at the beginning of each Policy year, and a
Specified Amount of $500,000 for a male age 35. The illustrations assume that
the Insured is placed in Western Reserve's non-tobacco use Ultimate Select
underwriting rate class. (See Cash Value Charges - Cost of Insurance, p. 25.)
The illustrations also assume that the Policy's entire Cash Value is allocated
to the Sub-Account corresponding to the Portfolio shown. The illustrated values
would be different if the Policyowner had chosen Option B death benefits.
The amounts shown for death benefits, Cash Values and Net Surrender
Values take into account all charges and deductions from the Policy, the Series
Account and the Fund (see Charges and Deductions - Charges Against the Series
Account, p. 26, and Investments of the Series Account - WRL Series Fund, Inc.,
p. 17).
For each Portfolio of the Fund, one illustration is based on the
guaranteed cost of insurance rates, while the other illustration is based on
the current cost of insurance rates. These examples of Policy performance are
for the specific age, sex, rate class, premium payment pattern and Policy set
forth above. The amount and timing of premium payments would affect individual
Policy benefits as would any withdrawals or loans.
This Prospectus also contains illustrations based on hypothetical rates
of return. (See Appendix A, pages 39-41.)
The following example shows how the hypothetical net return of the Growth
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1987. This example assumes that the Premiums and related Cash Values were in
the Sub-Account for the entire period and that the values were determined on
the first Valuation Date following January 1st of each year.
7
GROWTH PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ ---------- ------------ ---------- -----------
1988 ............................... $ 5,230 $ 5,157 $ 1,357 $ 1,284
1989* .............................. 11,490 11,310 7,155 6,975
1990* .............................. 24,123 23,719 19,325 18,921
1991* .............................. 27,907 27,375 22,647 22,115
1992* .............................. 52,102 51,062 46,381 45,340
1993* .............................. 57,475 56,266 51,291 50,083
1994* .............................. 63,480 62,076 56,834 55,431
1995* .............................. 61,646 60,203 54,539 53,096
1996* .............................. 97,318 95,030 89,749 87,460
1997* .............................. 118,226 115,441 110,195 107,409
1998* .............................. 144,947 141,570 138,152 134,776
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
The following example shows how the hypothetical net return of the Bond
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1987. This example assumes that Premiums and related Cash Values were in the
Sub-Account for the entire period and that the values were determined on the
first Valuation Date following January 1st of each year.
BOND PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1988 ............................... $ 4,421 $ 4,354 $ 548 $ 481
1989* .............................. 9,648 9,486 5,313 5,151
1990* .............................. 16,440 16,134 11,643 11,337
1991* .............................. 22,369 21,896 17,110 16,637
1992* .............................. 31,344 30,631 25,623 24,910
1993* .............................. 38,503 37,574 32,320 31,390
1994* .............................. 47,783 46,571 41,138 39,926
1995* .............................. 48,358 47,060 41,251 39,953
1996* .............................. 64,439 62,697 56,870 55,127
1997* .............................. 67,734 65,890 59,702 57,859
1998* .............................. 78,666 76,562 71,871 69,767
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
8
The following example shows how the hypothetical net return of the Money
Market Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1987. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
MONEY MARKET PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1988 ............................... $ 4,939 $ 4,868 $ 1,066 $ 995
1989* .............................. 10,133 9,968 5,798 5,632
1990* .............................. 15,862 15,569 11,065 10,772
1991* .............................. 21,837 21,376 16,578 16,117
1992* .............................. 27,578 26,942 21,857 21,220
1993* .............................. 32,839 32,026 26,655 25,843
1994* .............................. 37,883 36,884 31,238 30,239
1995* .............................. 43,418 42,206 36,311 35,098
1996* .............................. 49,882 48,468 42,312 40,899
1997* .............................. 56,352 54,748 48,320 46,717
1998* .............................. 63,090 61,330 56,295 54,536
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
The following example shows how the hypothetical net return of the Global
Portfolio of the Fund would have affected benefits for a Policy dated January
1, 1993. This example assumes that Premiums and related Cash Values were in the
Sub-Account for the entire period and that the values were determined on the
first Valuation Date following January 1st of each year.
GLOBAL PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1994 ............................... $ 6,383 $ 6,302 $ 2,509 $ 2,428
1995* .............................. 11,008 10,839 6,673 6,504
1996* .............................. 19,249 18,919 14,452 14,121
1997* .............................. 29,868 29,295 24,609 24,036
1998* .............................. 41,264 40,416 35,543 34,694
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
The following example shows how the hypothetical net return of the
Emerging Growth Portfolio of the Fund would have affected benefits for a Policy
dated January 1, 1994. This example assumes that Premiums and related Cash
Values were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
EMERGING GROWTH PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1995 ............................... $ 4,281 $ 4,214 $ 407 $ 341
1996* .............................. 13,323 13,117 8,987 8,781
1997* .............................. 21,002 20,642 16,205 15,845
1998* .............................. 31,182 30,587 25,923 25,328
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
9
The following example shows how the hypothetical net return of the
Strategic Total Return Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1994. This example assumes that Premiums and related
Cash Values were in the Sub-Account for the entire period and that the values
were determined on the first Valuation Date following January 1st of each year.
STRATEGIC TOTAL RETURN PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1995 ............................... $ 4,631 $ 4,562 $ 758 $ 689
1996* .............................. 11,644 11,460 7,309 7,124
1997* .............................. 18,395 18,069 13,598 13,271
1998* .............................. 28,146 27,589 22,887 22,330
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
The following example shows how the hypothetical net return of the
Aggressive Growth Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1995. This example assumes that Premiums and related
Cash Values were in the Sub-Account for the entire period and that the values
were determined on the first Valuation Date following January 1st of each year.
AGGRESSIVE GROWTH PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current an Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1996 ............................... $ 6,666 $ 6,583 $ 2,792 $ 2,709
1997* .............................. 12,314 12,132 7,978 7,797
1998* .............................. 21,153 20,803 16,355 16,005
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
The following example shows how the hypothetical net return of the
Balanced Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1995. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
BALANCED PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1996 ............................... $ 5,654 $ 5,578 $ 1,781 $ 1,704
1997* .............................. 11,244 11,069 6,908 6,734
1998* .............................. 18,785 18,457 13,988 13,660
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
10
The following example shows how the hypothetical net return of the Growth
& Income Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1995. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
GROWTH & INCOME PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1996 ............................... $ 5,950 $ 5,872 $ 2,077 $ 1,999
1997* .............................. 11,584 11,407 7,249 7,071
1998* .............................. 20,274 19,929 15,477 15,132
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
The following example shows how the hypothetical net return of the
Tactical Asset Allocation Portfolio of the Fund would have affected benefits
for a Policy dated January 1, 1995. This example assumes that Premiums and
related Cash Values were in the Sub-Account for the entire period and that the
values were determined on the first Valuation Date following January 1st of
each year.
TACTICAL ASSET ALLOCATION PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1996 ............................... $ 5,703 $ 5,626 $ 1,829 $ 1,753
1997* .............................. 11,672 11,492 7,336 7,157
1998* .............................. 18,980 18,652 14,183 13,855
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
The following example shows how the hypothetical net return of the
C.A.S.E. Growth Portfolio of the Fund would have affected benefits for a Policy
dated January 1, 1996, if the C.A.S.E. Growth Portfolio had been offered by the
Policy as of January 1, 1996. This example assumes that Premiums and related
Cash Values were in the Sub-Account for the entire period and that the values
were determined on the first Valuation Date following January 1st of each year.
C.A.S.E. GROWTH PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1997 ............................... $ 5,447 $ 5,373 $1,574 $1,499
1998* .............................. 11,759 11,577 7,424 7,242
<FN>
* For each year shown, benefits and values reflect only premiums paid during
previous Policy years.
</FN>
11
The following example shows how the hypothetical net return of the Value
Equity Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1997. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
VALUE EQUITY PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1998 ............................... $5,906 $5,829 $2,033 $1,955
The following example shows how the hypothetical net return of the U.S.
Equity Portfolio of the Fund would have affected benefits for a Policy dated
January 1, 1997. This example assumes that Premiums and related Cash Values
were in the Sub-Account for the entire period and that the values were
determined on the first Valuation Date following January 1st of each year.
U.S. EQUITY PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1998 ............................... $6,006 $5,927 $2,133 $2,054
The following example shows how the hypothetical net return of the
International Equity Portfolio of the Fund would have affected benefits for a
Policy dated January 1, 1997. This example assumes that Premiums and related
Cash Values were in the Sub-Account for the entire period and that the values
were determined on the first Valuation Date following January 1st of each year.
INTERNATIONAL EQUITY PORTFOLIO
Male, Issue Age 35, $5,500 Annual Premium
($500,000 Specified Amount, Non-Tobacco Use Ultimate Select Risk)
Death Benefit Option A
Both Current and Guaranteed Cost of Insurance Rates
Cash Value Net Surrender Value
------------------------ -----------------------
Policy Anniversary on January 1 of Current Guaranteed Current Guaranteed
- ------------------------------------ --------- ------------ --------- -----------
1998 ............................... $5,035 $4,964 $1,162 $1,090
Because the Third Avenue Value Portfolio and Real Estate Securities
Portfolio had not yet commenced operations as of December 31, 1997, there are
no hypothetical illustrations for these Portfolios.
OTHER PERFORMANCE DATA
Western Reserve may compare the performance of each Sub-Account in
advertising and sales literature to the performance of other variable life
issuers in general, or to the performance of particular types of variable life
insurance policies investing in mutual funds, or investment series of mutual
funds, with investment objectives similar to each of the Sub-Accounts whose
performance is reported by Lipper Analytical Services, Inc. ("Lipper") and
Morningstar, Inc. ("Morningstar") or reported by other services, companies,
individuals or other industry or financial publications of general interest,
such as Forbes, Money, The Wall Street Journal, Business Week, Barron's,
Kiplinger's Personal Finance and Fortune. Lipper and Morningstar are widely
used independent research services which monitor and rank the performance of
variable life insurance policies in each of the major categories of investment
objectives on an industry-wide basis.
Lipper's and Morningstar's rankings include variable annuity contracts as
well as variable life insurance policies. The performance analyses prepared by
Lipper and Morningstar rank such policies and contracts on the basis of total
return, assuming reinvestment of distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level
into consideration.
Western Reserve may also compare the performance of each Sub-Account in
advertising and sales literature to the S&P 500, a widely used measure of stock
market performance, or
12
other widely recognized indices. Unmanaged indices may assume the reinvestment
of dividends, but usually do not reflect any "deduction" for the expense of
operating or managing an investment portfolio.
Western Reserve is a member of the Insurance Marketplace Standards
Association ("IMSA"), and as such may include the IMSA logo and information
about IMSA membership in its advertisements. Companies that belong to IMSA
subscribe to a set of ethical standards covering the various aspects of sales
and service for individually sold life insurance and annuities.
In addition, Western Reserve may, as appropriate, compare each
Sub-Account's performance to that of other types of investments such as
certificates of deposit, savings accounts and U.S. Treasuries, or to certain
interest rate and inflation indices, such as the Consumer Price Index, which is
published by the U.S. Department of Labor and measures the average change in
prices over time of a fixed "market basket" of certain specified goods and
services. Similar comparisons of Sub-Account performance may also be made with
appropriate indices measuring the performance of a defined group of securities
widely recognized by investors as representing a particular segment of the
securities markets. For example, Sub-Account performance may be compared with
Donoghue Money Market Institutional Average (money market rates), Lehman
Brothers Corporate Bond Index (corporate bond interest rates) or Lehman
Brothers Government Bond Index (long-term U.S. Government obligation interest
rates).
WESTERN RESERVE AND THE SERIES ACCOUNT
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Western Reserve was originally incorporated under the laws of Ohio on
October 1, 1957. Western Reserve is engaged in the business of writing life
insurance policies and annuity contracts. Western Reserve is admitted to do
business in 49 states and the District of Columbia. The Office of Western
Reserve is located in Largo, Florida; however, the mailing address is P.O. Box
5068, Clearwater, FL 33758-5068. Western Reserve is a wholly-owned subsidiary
of First AUSA Life Insurance Company ("First AUSA"), a stock life insurance
company which is wholly-owned by AEGON USA, Inc. ("AEGON USA"). AEGON USA is a
financial services holding company whose primary emphasis is on life and health
insurance and annuity and investment products. AEGON USA is a wholly-owned
indirect subsidiary of AEGON nv, a Netherlands corporation, which is a publicly
traded international insurance group.
PUBLISHED RATINGS OF WESTERN RESERVE. Western Reserve may from time to
time publish in advertisements, sales literature and reports to Policyowners,
the ratings and other information assigned to it by one or more independent
rating organizations such as A.M. Best Company ("A.M. Best"), Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Insurance Rating Services
("Standard & Poor's"), and Duff & Phelps Credit Rating Co. ("Duff & Phelps").
A.M. Best's and Moody's ratings reflect their current opinion of the relative
financial strength and operating performance of an insurance company in
comparison to the norms of the life/health insurance industry. Standard &
Poor's and Duff & Phelps provide ratings which measure the claims-paying
ability of insurance companies. These ratings are opinions of an operating
insurance company's financial capacity to meet the obligations of its insurance
policies in accordance with their terms. Claims-paying ability ratings do not
refer to an insurer's ability to meet non-policy obligations (I.E.,
debt/commercial paper). These ratings do not apply to the Series Account, its
Sub-Accounts, the Fund, its Portfolios, or to their performance.
THE SERIES ACCOUNT
WRL Series Life Account ("Series Account") was established by Western
Reserve as a separate account on July 16, 1985. The Series Account meets the
definition of a "separate account" under the Federal securities laws. The
Series Account will receive and invest the Net Premiums paid under this Policy
and other flexible premium variable life insurance policies issued by Western
Reserve.
Although the assets of the Series Account are the property of Western
Reserve, the Code of Ohio, under which the Series Account was established,
provides that the assets in the Series Account attributable to the Policies are
not chargeable with liabilities arising out of any other business which Western
Reserve may conduct. The assets of the Series Account shall, however, be
available to cover the liabilities of the General Account of Western Reserve to
the extent that the Series Account's assets exceed its liabilities arising
under the Policies supported by it.
The Series Account is currently divided into sixteen Sub-Accounts. Each
Sub-Account invests exclusively in shares of a single Portfolio of the Fund.
Income and both realized and unrealized gains or losses from the assets of each
Sub-Account of the Series Account are credited to or charged against that
Sub-Account without regard to income, gains or losses from any other
Sub-Account of the Series Account or arising out of any other business Western
Reserve may conduct.
POLICY BENEFITS
DEATH BENEFIT
Policyowners designate in the initial application one of two death
benefit options offered under the Policy: Death Benefit Option A ("Option A")
and Death Benefit Option B ("Option B"). As long as the Policy remains In
Force, (see Policy Lapse and Reinstatement - Lapse, p. 23), Western Reserve
will, upon receiving due proof of the Insured's death, pay the death benefit
proceeds of a Policy to the named Beneficiary in accordance with the designated
death benefit option. The amount of the death benefit proceeds payable will be
determined at the end of the Valuation Period during which the Insured dies.
The proceeds may be paid in a lump sum or under one or more of the settlement
options set forth in the Policy. (See Payment of Policy Benefits - Settlement
Options, p. 29.) Western Reserve guarantees that as long as the Policy remains
In Force (see Policy Lapse and Reinstatement - Lapse, p. 23), the death benefit
proceeds under either option will never be less than the
13
Specified Amount of the Policy, but the proceeds will be reduced by any
outstanding indebtedness and any due and unpaid charges. These proceeds will be
increased by any additional insurance In Force provided by rider and any
unearned loan interest.
OPTION A. The death benefit is the greater of (i) the Specified Amount
of the Policy or (ii) a specified percentage (the "limitation percentage")
times the Cash Value of the Policy on the date of death of the Insured. The
limitation percentage is 250% for an Insured age 40 or below on the Policy
Anniversary prior to the date of death. For an Insured with an Attained Age
over 40 on a Policy Anniversary, the percentage declines as shown in the
following Limitation Percentage Table. Accordingly, under Option A the death
benefit will remain level unless the limitation percentage times the Cash Value
exceeds the Specified Amount, in which case the amount of the death benefit
will vary as the Cash Value varies.
ILLUSTRATION OF OPTION A. For purposes of this illustration, assume
that the Insured's Attained Age is under 40 and that there is no outstanding
indebtedness. Under Option A, a Policy with a $500,000 Specified Amount will
generally pay $500,000 in death benefits. However, because the death benefit
must be equal to or be greater than 250% of Cash Value, any time the Cash Value
of the Policy exceeds $200,000, the death benefit will exceed the $500,000
Specified Amount. Each additional dollar added to Cash Value above $200,000
will increase the death benefit by $2.50.
Similarly, so long as the Cash Value exceeds $200,000, each dollar taken
out of the Cash Value will reduce the death benefit by $2.50. If at any time,
however, the Cash Value multiplied by the limitation percentage is less than
the Specified Amount, the death benefit will equal the Specified Amount of the
Policy.
LIMITATION PERCENTAGE TABLE
ATTAINED AGE PER YEAR
OF INSURED LESS OVER AGE
- ---------------------- ------ ---------
40 and under ......... 250%
41 - 45 .............. 250% 7% 40
46 - 50 .............. 215% 6% 45
51 - 55 .............. 185% 7% 50
56 - 60 .............. 150% 4% 55
61 - 65 .............. 130% 2% 60
66 - 70 .............. 120% 1% 65
71 - 75 .............. 115% 2% 70
76 - 90 .............. 105% 0% 75
91 - 95 .............. 105% 1% 90
OPTION B. The death benefit is equal to the greater of (i) the
Specified Amount plus the Cash Value of the Policy on the date of death of the
Insured or (ii) the limitation percentage times the Cash Value of the Policy on
or prior to the date of death of the Insured. The applicable percentage is 250%
for an Insured age 40 or below on the Policy Anniversary prior to the date of
death. For Insureds with an Attained Age over 40 on a Policy Anniversary, the
percentage declines as shown in the Limitation Percentage Table above.
Accordingly, under Option B the amount of the death benefit will always vary as
the Cash Value varies.
ILLUSTRATION OF OPTION B. For purposes of this illustration, assume
that the Insured is under the age of 40 and that there is no outstanding
indebtedness. Under Option B, a Policy with a Specified Amount of $500,000 will
generally pay a death benefit of $500,000 plus Cash Value. Thus, for example, a
Policy with a Cash Value of $100,000 will have a death benefit of $600,000
($500,000 + $100,000). The death benefit, however, must be at least 250% of
Cash Value. As a result, if the Cash Value of the Policy exceeds $333,333, the
death benefit will be greater than the Specified Amount plus Cash Value. Each
additional dollar of Cash Value above $333,333 will increase the death benefit
by $2.50.
Similarly, any time Cash Value exceeds $333,333, each dollar taken out of
Cash Value will reduce the death benefit by $2.50. If at any time, however,
Cash Value multiplied by the limitation percentage is less than the Specified
Amount plus the Cash Value, then the death benefit will be the Specified Amount
plus the Cash Value of the Policy.
CHOOSING DEATH BENEFIT OPTION A OR OPTION B. Assuming the death benefit
is not determined by reference to the limitation percentage, Option A will
provide a Specified Amount of death benefit which does not vary with changes in
Cash Value. Thus, under Option A, as Cash Value increases, Western Reserve's
net amount at risk and therefore the pure insurance protection under the Policy
will decline. In contrast, Option B involves a constant net amount at risk,
assuming that the death benefit is not determined by reference to the
limitation percentage. Assuming positive investment experience, the deduction
for cost of insurance under a Policy with an Option A death benefit will be
less than under a corresponding Policy with an Option B death benefit. Because
of this, if investment performance is positive, Cash Value under Option A will
increase faster than under Option B but the total death benefit under Option B
will generally be greater. Thus, Option A could be considered more suitable for
Policyowners whose goal is increasing Cash Value based upon positive investment
experience while Option B could be considered more suitable for Policyowners
whose goal is increasing total death benefit.
CHANGE IN DEATH BENEFIT OPTION. Generally, the death benefit option in
effect may be changed by the Policyowner once each Policy year after the third
Policy year by sending Western Reserve a written request for change. A change
in death benefit option may have Federal income tax consequences. (See Federal
Tax Matters, p. 33.)
Under Western Reserve's current rules, no change may be made if it would
result in a Specified Amount less than the minimum Specified Amount set forth
in the Policy. The effective date of any change will be the Monthly Anniversary
on or following receipt of the request. No charges will be imposed for making a
change in death benefit option.
If the death benefit option is changed from Option B to Option A, the
Specified Amount will be increased by an
14
amount equal to the Policy's Cash Value on the effective date of change. If the
death benefit option is changed from Option A to Option B, the Specified Amount
will be decreased by an amount equal to the Cash Value on the effective date of
the change. The Policyowner may either change the Death Benefit Option or
decrease the Specified Amount, but not both, only once each Policy year after
the third Policy year.
CORRIDOR PERCENTAGE. If, pursuant to requirements of the Internal
Revenue Code of 1986, as amended, the death benefit under a Policy is
determined by reference to the limitation percentages discussed above, the
Policy is described as "in the corridor," and an increase in the Cash Value of
the Policy will increase the net amount at risk assumed by Western Reserve and
consequently increase the cost of insurance deducted from the Cash Value of the
Policy. (See Cash Value Charges - Cost of Insurance, p. 25.)
INSURANCE PROTECTION. A Policyowner may increase or decrease the pure
insurance protection provided by a Policy (I.E., the difference between the
death benefit and the Cash Value) in one of several ways as insurance needs
change. These ways include decreasing the Specified Amount of insurance,
changing the level of premium payments, and, to a lesser extent, making a cash
withdrawal from the Policy. Although the consequences of each of these methods
will depend upon the individual circumstances, they may be generally summarized
as follows:
(a) A decrease in the Specified Amount will, subject to the limitation
percentage (see Policy Benefits - Death Benefit, p. 13), in general
decrease the insurance protection and the charges under the Policy
without reducing the Cash Value. A pro rata Decrease Charge will be
assessed against Cash Value at the time of decrease during the first
fifteen Policy years. (See Charges and Deductions - Pro Rata Decrease
Charge, p. 25)
(b) If Option A is elected, an increased level of premium payments will
reduce the pure insurance protection, until the limitation percentage
times the Cash Value exceeds the Specified Amount. Increased premiums
should increase the amount of Net Surrender Value available to keep
the Policy In Force.
(c) A cash withdrawal will reduce the death benefit. (See Surrender
Privileges - Cash Withdrawals, p. 28.) However, it has no effect on
the amount of pure insurance protection and charges under the Policy,
unless the death benefit payable is governed by the limitation
percentages. It results in a reduced amount of Net Surrender Value
available to pay the monthly deduction, thereby increasing the
possibility that the Policy will lapse.
(d) A reduced level of premium payments also generally increases the
amount of pure insurance protection if Option A is elected, or
maintains the same amount of pure insurance protection if Option B is
elected, again depending on the limitation percentage. It results in a
reduced amount of Cash Value and increases the possibility that the
Policy will Lapse.
HOW DEATH BENEFITS MAY VARY IN AMOUNT. As long as the Policy remains In
Force, Western Reserve guarantees that the death benefit will never be less
than the Specified Amount of the Policy. These proceeds will be reduced by any
outstanding policy loan, plus any unearned loan interest, and any due and
unpaid charges. The death benefit may, however, vary with the Policy's Cash
Value. Under Option A, the death benefit will only vary when the Cash Value
multiplied by the limitation percentage exceeds the Specified Amount of the
Policy. The death benefit under Option B will always vary with the Cash Value
because the death benefit equals either the Specified Amount plus the Cash
Value or the limitation percentage times the Cash Value.
DECREASE IN SPECIFIED AMOUNT. Subject to certain limitations, a
Policyowner may decrease the Specified Amount of a Policy. A decrease in
Specified Amount may affect the net amount at risk, which may affect a
Policyowner's cost of insurance charge. (See Cash Value Charges - Cost of
Insurance, p. 25.) A decrease in Specified Amount may also have Federal income
tax consequences. (See Federal Tax Matters, p. 33.) The Policyowner may either
change the death benefit Option or decrease the Specified Amount, but not both,
only once each Policy year after the third Policy year. A pro rata Decrease
Charge will be assessed against Cash Value at the time of decrease during the
first fifteen Policy years. (See Charges and Deductions - Pro Rata Decrease
Charge, p. 25.)
No requested decrease in the Specified Amount will be permitted during
the first three Policy years. Thereafter, any decrease in the Specified Amount
will become effective on the Monthly Anniversary date on or following receipt
of a written request from the Policyowner by Western Reserve. The Specified
Amount remaining In Force after any requested decrease may not be less than the
minimum Specified Amount set forth in the Policy. Western Reserve reserves the
right to limit any decrease to no more than 20% of the Specified Amount
immediately prior to the decrease. If, following the decrease in Specified
Amount, the Policy would not comply with the maximum premium limitations
required by Federal tax law (see Premiums - Premium Limitations, p. 20), the
decrease may be limited to the extent necessary to meet these requirements.
NO INCREASE IN SPECIFIED AMOUNT. No increase in Specified Amount will
be permitted.
WHEN INSURANCE COVERAGE TAKES EFFECT
No life insurance coverage shall take effect unless the proposed Insured
and all additional Insureds proposed for coverage are alive and in the same
condition of health as described in the application when the policy is
delivered to the Policyowner and the full Initial Premium is paid. However, if
the full Initial Premium is paid as set forth in the conditional receipt
attached to the application, and the conditional receipt is delivered to the
Policyowner, the terms of the conditional receipt shall apply.
15
CONDITIONAL INSURANCE COVERAGE. Each and every person proposed for
insurance must be insurable and acceptable to Western Reserve under its
underwriting rules for the amount, Policy and risk classification applied for
on the later of: (a) the date of application, or (b) the date of completion of
all medical tests and examinations required by Western Reserve. Any check given
for payment must be honored on first presentation. The conditional receipt and
all coverages applied for on the application are void if a check or draft
received for payment of the Initial Premium is not honored when first presented
for payment.
AMOUNT OF CONDITIONAL LIFE INSURANCE COVERAGE. If conditional insurance
coverage becomes effective under the terms of the conditional receipt, then the
amount of conditional life insurance coverage on any person proposed for
insurance is the lesser of: (a) the amount of life insurance applied for on
such person, or (b) $300,000 reduced by the amounts payable under all other
life insurance or accidental death benefits then in force or pending with
Western Reserve.
WHEN CONDITIONAL LIFE INSURANCE COVERAGE BEGINS. If the conditions listed
above are fulfilled, then the amount of conditional insurance coverage
specified above shall take effect on the later of: (a) the date of the
application, or (b) the date of the completion of all medical tests and
examinations required by Western Reserve. All conditional coverages for each
and every person proposed for insurance will be deemed void if the application
contains material misrepresentation or is fraudulently completed. Benefits
under the conditional receipt coverage will be denied if any person proposed
for insurance commits suicide.
WHEN CONDITIONAL LIFE INSURANCE COVERAGE ENDS. Conditional life insurance
coverage shall terminate automatically, without notice, on the earliest of the
following dates: (a) the date Western Reserve approves the Policy as applied
for, or (b) 10 days following any counteroffer by Western Reserve to offer
insurance to any person proposed for insurance under a different Policy or at
an increased premium or on a different rate class or (c) at the end of the
fraction of a year which the payment bears to the premium required to provide
one month of insurance coverage in the amount as described above, or (d) at the
beginning of the 60th day following the date of the conditional receipt.
CASH VALUE
At the end of any Valuation Period, the Cash Value of the Policy is equal
to the sum of the Policy's value in each Sub-Account of the Series Account plus
the Fixed Account Value. There is no guaranteed minimum Cash Value.
NET SURRENDER VALUE. A Policyowner may at any time surrender the Policy
and receive the Policy's Net Surrender Value. (See Policy Rights - Surrender
Privileges, p. 30.) The Net Surrender Value as of any date is equal to:
(1) the Cash Value as of such date; minus
(2) any surrender charge as of such date (as described on p. 24); minus
(3) any outstanding Policy loan; plus
(4) any unearned loan interest.
DETERMINATION OF VALUES IN THE SERIES ACCOUNT. On the Reallocation
Date, the Policy's value in a Sub-Account of the Series Account will equal the
portion of any Premium allocated to the Sub-Account, reduced by the portion of
the first monthly deduction allocated to that Sub-Account. (See Payment and
Allocation of Premiums - Allocation of Premiums and Cash Value, p. 21.)
Thereafter, on each Valuation Date, the Policy's value in a Sub-Account of the
Series Account will equal the number of units in the Sub-Account, multiplied by
the unit value of that Sub-Account.
The number of units that the Policy has in each Sub-Account is equal to:
(1) The initial units purchased on the Policy Date; plus
(2) Units purchased at the time additional Premiums are allocated to the
Sub-Account; plus
(3) Units purchased through transfers from another Sub-Account or the
Fixed Account; minus
(4) Units redeemed to pay for monthly deductions as they are due; minus
(5) Units redeemed to pay for any cash withdrawals; minus
(6) Units redeemed as part of any transfer to another Sub-Account or the
Fixed Account; minus
(7) Units redeemed to pay for a pro rata Decrease Charge because of any
Specified Amount decreases.
The Policy's total value in the Series Account equals the sum of the
Policy's value in each Sub-Account. (For a description of how the values of the
Fixed Account are calculated, see The Fixed Account - Fixed Account Value, p.
32.) Because the Cash Value is dependent upon a number of variables, including
the investment experience of the chosen Sub-Accounts of the Series Account, the
frequency and amount of premium payments, transfers and surrenders, and charges
assessed in connection with the Policy, a Policy's Cash Value cannot be
predetermined.
UNIT VALUE. The unit value of each Sub-Account was originally
established at $10 per unit. The unit value may increase or decrease from one
Valuation Period to the next. Unit values also will vary between Sub-Accounts.
The unit value of any Sub-Account at the end of a Valuation Period is the
result of:
(1) The total value of the assets held in the Sub-Account, determined by
multiplying the number of shares of the designated Portfolio owned by
the Sub-Account times the Portfolio's net asset value per share; minus
(2) A deduction for the charge for mortality and expense risks. This
charge is used to compensate Western Reserve for its assumption of
certain mortality and expense risks. The daily amount of this charge
is equal to the net assets of the Sub-Account times the daily
16
pro rata portion of the annual Mortality and Expense Risk Charge rate.
This annual rate is equal to ninety one-hundredths of one percent
(0.90%). This charge is guaranteed to be reduced to 0.60% after the
first fifteen Policy years. Western Reserve intends to reduce this
charge to 0.30% starting in the sixteenth Policy year. However, such
reduction is not guaranteed; minus
(3) The accrued amount of reserve for any taxes or other economic burden
resulting from the application of tax laws that are determined by
Western Reserve to be properly attributable to the Sub-Account; and
the result divided by
(4) The number of outstanding units in the Sub-Account.
VALUATION DATE AND VALUATION PERIOD. The net asset value per share of
shares of the Fund is determined, once daily, as of the close of the regular
session of business on the New York Stock Exchange ("Exchange") (usually 4:00
p.m., Eastern time), on each day the Exchange is open.
INVESTMENTS OF THE SERIES ACCOUNT
WRL SERIES FUND, INC.
The Series Account invests in shares of the Fund, a series mutual fund
which is registered with the Commission as an open-end management investment
company. Such registration does not involve supervision of the management or
investment practices or policies of the Fund by the Commission.
Currently, the Portfolios of the Fund corresponding to the Sub-Accounts
of the Series Account are: Aggressive Growth Portfolio, Emerging Growth
Portfolio, Growth Portfolio, Global Portfolio, Balanced Portfolio, Strategic
Total Return Portfolio, Bond Portfolio, Growth & Income Portfolio, Money Market
Portfolio, Tactical Asset Allocation Portfolio, C.A.S.E. Growth Portfolio,
Value Equity Portfolio, U.S. Equity Portfolio, International Equity Portfolio,
Third Avenue Value Portfolio and Real Estate Securities Portfolio. The assets
of each Portfolio are held separate from the assets of the other Portfolios,
and each Portfolio has investment objectives and policies which are different
from those of the other Portfolios. Thus, each Portfolio operates as a separate
investment fund, and the income or losses of one Portfolio generally have no
effect on the investment performance of any other Portfolio. Pending any prior
approval by a state insurance regulatory authority, certain Sub-Accounts and
corresponding Portfolios may not be available to residents of some states.
The investment objective and policies of each Portfolio are summarized
below. THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS STATED
OBJECTIVE. More detailed information, including a description of risks, can be
found in the Prospectus for the Fund which should be read carefully.
AGGRESSIVE GROWTH PORTFOLIO: This Portfolio seeks long-term capital
appreciation by investing in a diversified, actively managed portfolio of
equity securities.
EMERGING GROWTH PORTFOLIO: This Portfolio seeks capital appreciation by
investing primarily in common stocks of small and medium sized companies.
GROWTH PORTFOLIO: This Portfolio seeks growth of capital by investing
primarily in common stocks listed on a national securities exchange or traded
on NASDAQ.
GLOBAL PORTFOLIO: This Portfolio seeks long-term growth of capital in a
manner consistent with preservation of capital, primarily through investments
in common stocks of foreign and domestic issuers.
BALANCED PORTFOLIO: This Portfolio seeks preservation of capital,
reduced volatility, and superior long-term risk adjusted returns by investing
primarily in common stock, convertible securities and fixed-income securities.
STRATEGIC TOTAL RETURN PORTFOLIO: This Portfolio seeks to provide
current income, long-term growth of income and capital appreciation by
investing primarily in a blend of equity and fixed-income securities, including
common stocks, income producing securities convertible into common stocks, and
fixed-income securities.
BOND PORTFOLIO: This Portfolio seeks the highest possible current
income within the confines of the primary goal of insuring the protection of
capital by investing at least 65%, and usually a higher percentage, of its
assets in debt securities issued by the U.S. Government and its agencies and
instrumentalities and in other medium to high-quality debt securities.
GROWTH & INCOME PORTFOLIO: This Portfolio's objective is to seek total
return by investing in securities that have defensive characteristics. The
Portfolio will invest primarily in a diversified portfolio of equity and debt
securities with an emphasis on sector investing.
MONEY MARKET PORTFOLIO: This Portfolio seeks to obtain maximum current
income consistent with preservation of principal and maintenance of liquidity.
The Portfolio maintains a dollar-weighted average portfolio maturity of not
more than 90 days by investing in U.S. dollar-denominated securities which have
effective maturities of not more than 13 months and present minimal credit
risks.
TACTICAL ASSET ALLOCATION PORTFOLIO: This Portfolio seeks preservation
of capital and competitive investment returns by investing primarily in stocks,
United States Treasury bonds, notes and bills, and money market funds.
C.A.S.E. GROWTH PORTFOLIO: This Portfolio seeks annual growth of
capital through investment in companies whose management, financial resources
and fundamentals appear attractive on a scale measured against each company's
present value.
VALUE EQUITY PORTFOLIO: This Portfolio seeks to achieve maximum,
consistent total return with minimum risk to principal by investing primarily
in common stocks with above-average statistical value which, in the
Sub-Adviser's opinion, are in fundamentally attractive industries and are
undervalued at the time of purchase.
17
INTERNATIONAL EQUITY PORTFOLIO: This Portfolio seeks long-term growth
of capital by investing primarily in the common stock of foreign issuers traded
on overseas exchanges and in foreign over-the-counter markets.
U.S. EQUITY PORTFOLIO: This Portfolio seeks long-term growth of capital
by investing primarily in equity securities of U.S. companies.
THIRD AVENUE VALUE PORTFOLIO: This Portfolio seeks long-term capital
appreciation by investing primarily in a portfolio of equity securities of
well-financed companies believed to be priced below their private market values
and debt securities providing strong protective covenants and high, effective
yields.
REAL ESTATE SECURITIES PORTFOLIO: This Portfolio seeks long-term total
return from investments primarily in equity securities of real estate
companies. Total return will consist of realized and unrealized capital gains
and losses plus income.
WRL Investment Management, Inc. ("WRL Management"), located at 201
Highland Avenue, Largo, FL 33770, a wholly-owned subsidiary of Western Reserve,
serves as investment adviser to the Fund and manages the Fund in accordance
with policies and guidelines established by the Board of Directors of the Fund.
Each Sub-Adviser is a registered investment adviser under the Investment
Advisers Act of 1940, as amended.
Janus Capital Corporation ("Janus") is sub-adviser to the Growth and
Global Portfolios of the Fund. WRL Management and Janus will divide equally
monthly compensation at a current annual rate of 0.80% of the aggregate average
daily net assets each of the Growth Portfolio and Global Portfolio.
AEGON USA Investment Management, Inc. ("AIMI") is sub-adviser to the Bond
and Balanced Portfolios of the Fund. AIMI is a wholly-owned subsidiary of AEGON
USA and thus is an affiliate of Western Reserve. WRL Management and AIMI will
divide equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the Balanced Portfolio. WRL Management
will receive monthly compensation at the current annual rate of 0.45% and AIMI
will receive 0.20% of the aggregate average daily net assets of the Bond
Portfolio. AIMI's compensation will be reduced by 50% of the amount paid by WRL
Management on behalf of the Bond and Balanced Portfolios pursuant to any
expense limitation or other reimbursement.
Van Kampen American Capital Asset Management, Inc. ("Van Kampen American
Capital") is sub-adviser to the Emerging Growth Portfolio of the Fund. Van
Kampen American Capital is an indirect wholly-owned subsidiary of VK/AC
Holding, Inc. ("VK/AC Holding"). VK/AC Holding is a wholly-owned subsidiary of
MSAM Holdings II, Inc., which, in turn, is a wholly-owned subsidiary of Morgan
Stanley Group, Inc. WRL Management and Van Kampen American Capital will divide
equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the Emerging Growth Portfolio. Van Kampen
American Capital's compensation will be reduced by 50% of the amount paid by
WRL Management on behalf of the Emerging Growth Portfolio pursuant to any
expense limitation or other reimbursement.
Luther King Capital Management Corporation ("Luther King") is sub-adviser
to the Strategic Total Return Portfolio of the Fund. Ultimate control of Luther
King is exercised by J. Luther King, Jr. WRL Management and Luther King will
divide equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the Strategic Total Return Portfolio.
Federated Investment Counseling ("Federated") is sub-adviser to the Growth
& Income Portfolio of the Fund. Federated is a wholly-owned subsidiary of
Federated Investors. WRL Management will receive monthly compensation at the
current annual rate of 0.75% of the aggregate average daily net assets of the
Growth & Income Portfolio. From this amount, as compensation for its services,
Federated will receive payment of fees equal to 0.50% of the first $30 million
of average daily net assets, 0.35% of the next $20 million of average daily net
assets, and 0.25% of average daily net assets in excess of $50 million of the
Growth & Income Portfolio.
Fred Alger Management, Inc. ("Fred Alger") is sub-adviser to the
Aggressive Growth Portfolio of the Fund. Fred Alger is a wholly-owned subsidiary
of Fred Alger & Company, Incorporated, which, in turn, is a wholly-owned
subsidiary of Alger Associates, Inc., a financial services holding company. WRL
Management and Fred Alger will divide equally monthly compensation at the
current annual rate of 0.80% of the aggregate average daily net assets of the
Aggressive Growth Portfolio.
Dean Investment Associates, a Division of C.H. Dean and Associates, Inc.
("Dean") is sub-adviser to the Tactical Asset Allocation Portfolio of the Fund.
Dean is wholly-owned by C.H. Dean and Associates, Inc. WRL Management and Dean
will divide equally monthly compensation at the current annual rate of 0.80% of
the aggregate average daily net assets of the Tactical Asset Allocation
Portfolio. Dean's compensation will be reduced by 50% of the amount paid by WRL
Management on behalf of the Tactical Asset Allocation Portfolio pursuant to any
expense limitation or other reimbursement.
J.P. Morgan Investment Management Inc. ("J.P. Morgan") is sub-adviser to
the Money Market and Real Estate Securities Portfolios of the Fund. J.P. Morgan
is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated. WRL Management
will receive monthly compensation at the current annual rate of 0.40% of the
aggregate average daily net assets of the Money Market Portfolio and 0.80% of
the aggregate average daily net assets of the Real Estate Securities Portfolio.
From this amount, as compensation for its services, J.P. Morgan will receive
0.15% of the average daily net assets of the Money Market Portfolio and 0.40%
of the average daily net assets of the Real Estate Securities Portfolio.
C.A.S.E. Management, Inc. ("C.A.S.E.") is sub-adviser to the C.A.S.E.
Growth Portfolio of the Fund. C.A.S.E. is a
18
wholly-owned subsidiary of C.A.S.E. Inc. C.A.S.E. Inc. is indirectly controlled
by William Edward Lange, president and chief executive officer of C.A.S.E. WRL
Management and C.A.S.E. will divide equally monthly compensation at the current
annual rate of 0.80% of the aggregate average daily net assets of the C.A.S.E.
Growth Portfolio.
NWQ Investment Management Company, Inc. ("NWQ Investment") is sub-adviser
to the Value Equity Portfolio of the Fund. NWQ Investment was founded in 1982
and is a wholly-owned subsidiary of United Asset Management Corporation. WRL
Management and NWQ Investment will divide equally monthly compensation at the
current annual rate of 0.80% of the aggregate average daily net assets of the
Value Equity Portfolio. NWQ Investment's compensation will be reduced by 50% of
the amount paid by WRL Management on behalf of the Value Equity Portfolio
pursuant to any expense limitation or other reimbursement.
Scottish Equitable Investment Management Limited ("Scottish Equitable")
is co-sub-adviser to the International Equity Portfolio. Scottish Equitable is
a wholly-owned subsidiary of Scottish Equitable plc, successor to Scottish
Equitable Life Assurance Society, which was founded in Edinburgh in 1831.
Scottish Equitable is also an indirect wholly-owned subsidiary of AEGON nv. WRL
Management receives monthly compensation at the annual rate of 1.00% of the
aggregate average daily net assets of the International Equity Portfolio. From
this amount, Scottish Equitable receives 0.50% of average daily net assets of
the Portfolio managed by Scottish Equitable.
GE Investment Management Incorporated ("GEIM") also is a co-sub-adviser
to the International Equity Portfolio and is sub-adviser to the U.S. Equity
Portfolio. GEIM is a wholly-owned subsidiary of General Electric Company
("GE"). GEIM's principal officers and directors serve in similar capacities
with respect to General Electric Investment Corporation ("GEIC," and, together
with GEIM, collectively referred to as "GE Investments"), which like GEIM is a
wholly-owned subsidiary of GE. WRL Management receives monthly compensation at
the annual rate of 1.00% of the aggregate average daily net assets of the
International Equity Portfolio. From this amount, GEIM, receives 0.50% of
average daily net assets managed by GEIM.
With respect to the U.S. Equity Portfolio, WRL Management and GEIM will
divide equally monthly compensation at the current annual rate of 0.80% of the
aggregate average daily net assets of the U.S. Equity Portfolio.
EQSF Advisers, Inc. ("EQSF") is sub-adviser to the Third Avenue Value
Portfolio. EQSF is a New York corporation organized in 1988 and is controlled
by Martin J. Whitman. WRL Management and EQSF divide equally monthly
compensation at the current annual rate of 0.80% of the aggregate average daily
net assets of the Third Avenue Value Portfolio. EQSF's compensation will be
reduced by 50% of the amount paid by WRL Management on behalf of the Third
Avenue Value Portfolio pursuant to any expense limitation or other
reimbursement.
In addition to the Series Account, shares of the Fund are also sold to
the WRL Series Annuity Account, a separate account established by Western
Reserve for its variable annuity contracts, and to various separate accounts of
PFL Life Insurance Company and AUSA Life Insurance Company, Inc., all
affiliates of Western Reserve. It is conceivable that, in the future, it may
become disadvantageous for variable life insurance separate accounts and
variable annuity separate accounts to invest in the Fund simultaneously.
Although neither Western Reserve nor the Fund currently foresees any such
disadvantages, either to variable life insurance policyowners or to variable
annuity contract owners, the Fund's Board of Directors intends to monitor
events in order to identify any material conflicts between the interests of
such variable life insurance policyowners and variable annuity contract owners
and to determine what action, if any, it should take. Such action could include
the sale of Fund shares by one or more of the separate accounts, which could
have adverse consequences. Material conflicts could result from, for example,
(1) changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policyowners and those given by variable annuity contract owners. If
the Board of Directors were to conclude that separate funds should be
established for variable life and variable annuity separate accounts, Western
Reserve will bear the attendant expenses, but variable life insurance
policyowners and variable annuity contract owners would no longer have the
economies of scale resulting from a larger combined fund.
ADDITION, DELETION, OR SUBSTITUTION OF INVESTMENTS
Western Reserve reserves the right to transfer assets of the Series
Account to another separate account which Western Reserve determines to be
associated with the class of contracts to which the Policy belongs. Western
Reserve also reserves the right, subject to compliance with applicable law, to
make additions to, deletions from, or substitutions for the investments that
are held by any Sub-Account or that any Sub-Account may purchase. Any such
addition, deletion or substitution by Western Reserve of shares of another
Portfolio of the Fund or of another open-end, registered investment company,
will only be taken if the shares of a Portfolio are no longer available for
investment, or if in Western Reserve's judgement further investment in any
Portfolio should become inappropriate in view of the purposes of the Series
Account. Western Reserve will not add, delete or substitute any shares
attributable to a Policyowner's interest in a Sub-Account of the Series Account
without notice to and prior approval of the Commission, to the extent required
by the 1940 Act or other applicable law. Nothing contained herein shall prevent
the Series Account from purchasing other securities for other Portfolios or
classes of
19
policies, or from permitting a conversion between Portfolios or classes of
policies on the basis of requests made by Policyowners.
Western Reserve also reserves the right to establish additional
Sub-Accounts of the Series Account, each of which would invest in a new
Portfolio of the Fund, or in shares of another investment company, with a
specified investment objective. New Sub-Accounts may be established when, in
the sole discretion of Western Reserve, marketing, tax or investment conditions
warrant, and any new Sub-Accounts will be made available to existing
Policyowners on a basis to be determined by Western Reserve. Western Reserve
may also eliminate one or more Sub-Accounts if, in its sole discretion,
marketing, tax, or investment conditions warrant.
In the event of any such substitution or change, Western Reserve may make
such changes in this and other policies as may be necessary or appropriate to
reflect such substitution or change. If deemed by Western Reserve to be in the
best interests of persons having voting rights under the Policies, and when
permitted by law, the Series Account may be (1) operated as a management
company under the 1940 Act, (2) deregistered under the 1940 Act in the event
such registration is no longer required, (3) managed under the direction of a
committee, or (4) combined with one or more other separate accounts, or
sub-accounts.
PAYMENT AND ALLOCATION OF PREMIUMS
ISSUANCE OF A POLICY
Individuals wishing to purchase a Policy must send a completed
application to Western Reserve, P.O. Box 628069, Orlando, Florida 32862-8069
for Policies submitted by World Marketing Alliance distribution systems; and to
Western Reserve, P.O. Box 628078, Orlando, Florida 32862-8078 for Policies
submitted by all other distribution systems, including ISI. Under Western
Reserve's current rules, the minimum Specified Amount of a Policy is $250,000
for Issue Ages 0-60, and $100,000 for Issue Ages above 60. Policies will
generally be issued only to Insureds 80 years of age or under who supply
satisfactory evidence of insurability sufficient to Western Reserve. Western
Reserve may, however, at its sole discretion, issue a Policy to an individual
above the age of 80. Acceptance is subject to Western Reserve's underwriting
rules and Western Reserve reserves the right to reject an application for any
reason permitted by law.
PREMIUMS
Subject to certain limitations, a Policyowner has flexibility in
determining the frequency and amount of premiums.
PREMIUM FLEXIBILITY. Unlike conventional insurance policies, this
Policy frees the Policyowner from the requirement that premiums be paid in
accordance with a rigid and inflexible premium schedule. Western Reserve may
require the Policyowner to pay an Initial Premium at least equal to a minimum
monthly guarantee premium set forth in the Policy before issuing the Policy.
Thereafter, subject to the minimum and maximum premium limitations described on
p. 21, a Policyowner may make unscheduled premium payments at any time in any
amount.
PLANNED PERIODIC PREMIUMS. Each Policyowner will determine a Planned
Periodic Premium schedule that provides for the payment of a level premium at a
fixed interval over a specified period of time. The Policyowner is not required
to pay premiums in accordance with this schedule. Furthermore, the Policyowner
has considerable flexibility to alter the amount, frequency, and the time
period over which Planned Periodic Premiums are paid.
The payment of a Planned Periodic Premium will not guarantee that the
Policy remains In Force. Instead, the duration of the Policy depends upon the
Policy's Net Surrender Value. Thus, even if Planned Periodic Premiums are paid
by the Policyowner, the Policy will nonetheless lapse any time Net Surrender
Value is insufficient to pay certain monthly charges, and a grace period
expires without a sufficient payment. However, during the first three Policy
years, the Policy will remain In Force and no grace period will begin provided
the total premiums received (minus any withdrawals, any outstanding loans and
any pro rata Decrease Charge deducted from the Cash Value) is equal to or
exceeds the minimum monthly guarantee premium times the number of months since
the Policy Date, including the current month. (See Policy Lapse and
Reinstatement - Lapse, p. 23.) The minimum monthly guarantee premium is set
forth in the Policy, unless changed due to a requested change under the Policy
by the Policyowner, at which time the Policyowner will be notified of the new
minimum monthly guarantee premium.
PREMIUM LIMITATIONS. In no event may the total of all premiums paid,
both scheduled and unscheduled, exceed the current maximum premium limitations
which qualify the Policy as life insurance according to Federal tax laws. If at
any time a premium is paid which would result in total premiums exceeding the
current maximum premium limitation, Western Reserve will only accept that
portion of the premium which will make total premiums equal the maximum. Any
part of the premium in excess of that amount will be returned and no further
premiums will be accepted until allowed by the current maximum premium
limitations set forth in the Policy. Every premium payment, whether scheduled
or unscheduled, must be at least the minimum payment amount required. Under
Western Reserve's current rules, the minimum payment amount is $84. Premium
payments less than this minimum amount may be returned to the Policyowner.
PAYMENT OF PREMIUMS. As an accommodation to Policyowners, Western
Reserve will accept transmittal of initial and subsequent premiums of at least
$1,000 by wire transfer. For an Initial Premium, the wire transfer must be
accompanied by a simultaneous telephone facsimile transmission ("FAX") of a
completed application. An Initial Premium accepted via wire transfer with FAX
will be allocated in accordance with current procedures explained in the next
section entitled, "Allocation of Premiums and Cash Value - Allocation
20
of Premiums," below. An Initial Premium made by wire transfer not accompanied
by a simultaneous FAX, or accompanied by a FAX of an incomplete application,
will be retained for a period up to five business days while Western Reserve
attempts to obtain the FAX or complete the essential information required to
establish the Policy and allocate the Initial Premium at the unit value next
determined after receipt of the FAX or information necessary to complete the
application. If Western Reserve cannot obtain the FAX or essential information
within five business days, Western Reserve will return the Initial Premium to
the applicant, unless the applicant consents to allow Western Reserve to retain
the Initial Premium until the required FAX or essential information is
received.
In the event the application with original signature is later received
and the allocation instructions in that application, for any reason, are
inconsistent with those previously designated on the FAX, the Initial Premium
will be reallocated on the first Valuation Date on or following the
Reallocation Date in accordance with the allocation instructions in the
application with original signature.
Policyowners wishing to make payments via bank wire should instruct their
banks to wire Federal Funds as follows:
Barnett Bank of Pinellas County
ABA # 063000047
For credit to: Western Reserve Life
Account #: 2452641830
Policyowner's Name:
Policy Number:
Attention: General Accounting
Fax Number: (813) 588-1600
ALLOCATION OF PREMIUMS AND CASH VALUE
PREMIUMS. When an Initial Premium accompanies the application, monthly
deductions from the Cash Value of the Policy commence on the Policy Date.
ALLOCATION OF PREMIUMS. In the application for a Policy, the
Policyowner will allocate Premiums to one or more of the Sub-Accounts of the
Series Account, to the Fixed Account, or to a combination of both.
Notwithstanding the allocation in the application, the Initial Premium, will
first be allocated on the first Valuation Date on or following the Policy Date,
to the Reallocation Account of the Series Account as specified on the Policy
Schedule Page and will be reallocated in accordance with the Policyowner's
directions in the application on the first Valuation Date on or following the
Reallocation Date. The Record Date of the Policy will be the date on which the
Policy is recorded on Western Reserve's books as an In Force Policy. (See
Payment and Allocation of Premiums beginning on page 20, and Policy Benefits -
When Conditional Life Insurance Coverage Begins, p. 16.)
Premiums paid after the Reallocation Date will be allocated in accordance
with the Policyowner's instructions. Western Reserve does not currently require
that allocation of Premiums to an Account meet a minimum percentage. Western
Reserve does reserve the right to limit allocation of Premiums to any Account
to no less than 1% of each Premium payment. No fractional percentages are
permitted. The allocation of future Premiums may be changed at any time by
providing Western Reserve with written notification from the Policyowner, or by
calling Western Reserve's toll-free number, 1-800-851-9777. Western Reserve
reserves the right to impose a $25 charge for each allocation change in excess
of one per Policy year quarter. Western Reserve will employ the same procedures
to confirm that such telephone instructions are genuine as it employs regarding
transfers among Sub-Accounts and the Fixed Account by telephone. Upon
instructions from the Policyowner, the registered representative/agent of
record may also change the allocation of future Premiums. Western Reserve
reserves the right to limit the number of changes of the allocation of Premiums
to one per year. INVESTMENT RETURNS FROM THE AMOUNTS ALLOCATED TO SUB-ACCOUNTS
OF THE SERIES ACCOUNT WILL VARY WITH THE INVESTMENT EXPERIENCE OF THESE
SUB-ACCOUNTS AND THE POLICYOWNER BEARS THE ENTIRE INVESTMENT RISK.
TRANSFERS. Cash Value may be transferred among the Sub-Accounts of the
Series Account or from the Sub-Accounts to the Fixed Account. Transfers may
also be made from the Fixed Account to the Sub-Accounts, subject to certain
restrictions. (See The Fixed Account - Allocations, Transfers and Withdrawals,
p. 32.) The amount of Cash Value available for transfer from any Sub-Account,
or the Fixed Account, is determined at the end of the Valuation Period during
which the transfer request is received at Western Reserve's Office. The net
asset value for each share of the corresponding Portfolio of any Sub-Account is
determined, once daily, as of the close of the regular business session of the
New York Stock Exchange ("Exchange") (usually 4:00 p.m., Eastern time), which
coincides with the end of each Valuation Period. (See Policy Benefits - Cash
Value - Valuation Date and Valuation Period, p. 17.) Therefore, any transfer
request received after the close of the regular business session of the
Exchange, on any day the Exchange is open, will be processed on the next day
the Exchange is open for business, utilizing the net asset value for each share
of the applicable Portfolio determined as of the close of the regular business
session of the Exchange. Cash Value available for transfer from the Fixed
Account will be determined in the same manner.
Policyowners may make transfer requests in writing, or by telephone.
Written requests must be in a form acceptable to Western Reserve. The
registered representative/agent of record for the Policy may, upon instructions
from the Policyowner for each transfer, make telephone transfers upon request
without the necessity for the Policyowner to have previously authorized
telephone transfers in writing. If, for any reason, a Policyowner does not want
the ability to make transfers by telephone, the Policyowner should provide
written notice to Western Reserve at its Office. All telephone transfers should
be made by calling Western Reserve at the toll-free number 1-800-851-9777.
Western Reserve will not be liable for complying with telephone instructions it
reasonably believes to be authentic, nor for any loss, damage, cost or expense
in acting on such telephone instructions, and Policyowners will bear the risk
of any
21
such loss. Western Reserve will employ reasonable procedures to confirm that
telephone instructions are genuine. If Western Reserve does not employ such
procedures, it may be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, among others, requiring forms of
personal identification prior to acting upon such telephone instructions,
providing written confirmation of such transactions to Policyowners, and/or
tape recording of telephone instructions received from Policyowners. Western
Reserve may, at any time, revoke or modify the transfer privilege. Under
Western Reserve's current procedures, it will effect transfers and determine
all values in connection with transfers at the end of the Valuation Period
during which the transfer request is received at Western Reserve's Office.
Twelve Cash Value transfers are permitted without charge during any one
Policy year. Western Reserve may impose a charge of $10 for each subsequent
transfer. The transfer charge will not be increased. (See Optional Cash Value
Charges - Cash Value Transfers, p. 26.) All transfers made in any one day will
be considered a single transfer and any transfer charges will be deducted in an
equal amount from each Sub-Account from which a transfer was made. Transfers
resulting from policy loans, the exercise of conversion rights, and the
reallocation of Cash Value immediately after the Reallocation Date, will not be
treated as a transfer for the purpose of this charge. No transfer charge will
apply to transfers from the Fixed Account to a Sub-Account or to the exercise
of the Conversion Rights. (See Policy Rights - Conversion Rights, p. 28.)
Western Reserve or an affiliate may provide administrative or other
support services to independent third parties authorized by Policyowners to
conduct transfers on a Policyowner's behalf, or who provide recommendations as
to how Sub-Account values should be allocated. This includes, but is not
limited to, transferring Sub-Account values among Sub-Accounts in accordance
with various investment allocation strategies such third party may employ. Such
independent third parties may or may not be appointed Western Reserve agents
for the sale of Policies. However, WESTERN RESERVE DOES NOT ENGAGE ANY THIRD
PARTIES TO OFFER INVESTMENT ALLOCATION SERVICES OF ANY TYPE, SO THAT PERSONS OR
FIRMS OFFERING SUCH SERVICES DO SO INDEPENDENT FROM ANY AGENCY RELATIONSHIP
THEY MAY HAVE WITH WESTERN RESERVE FOR THE SALE OF POLICIES. WESTERN RESERVE
THEREFORE TAKES NO RESPONSIBILITY FOR THE INVESTMENT ALLOCATIONS AND TRANSFERS
TRANSACTED ON A POLICYOWNER'S BEHALF BY SUCH THIRD PARTIES OR ANY INVESTMENT
ALLOCATION RECOMMENDATIONS MADE BY SUCH PARTIES. Western Reserve does not
currently charge a Policyowner any additional fees for providing these support
services.
DOLLAR COST AVERAGING
The Policyowner may direct Western Reserve to automatically transfer
specified amounts from the Money Market Sub-Account, the Bond Sub-Account, the
Fixed Account or any combination of these Accounts on a monthly basis to a Sub-
Account. This service is intended to allow the Owner to utilize "Dollar Cost
Averaging," a long-term investment strategy which provides for regular, level
investments over time. Western Reserve makes no guarantees that Dollar Cost
Averaging will result in a profit or protect against loss. To qualify for
Dollar Cost Averaging a minimum of $5,000 must be in each Account from which
transfers will be made and at least $100, in the aggregate, must be transferred
each month, unless Western Reserve consents to a smaller amount.
To further qualify for Dollar Cost Averaging from the Fixed Account, no
more than one-tenth (1/10) of the amount in the Fixed Account at the
commencement of Dollar Cost Averaging can be transferred each month. Other
types of transfers from the Fixed Account may also be subject to certain other
restrictions. (See The Fixed Account - Allocations, Transfers and Withdrawals
on p. 32.)
A written election of this service, on a form provided by Western
Reserve, must be completed by the Policyowner in order to begin transfers. The
first transfer will occur during the month which follows receipt of the form,
providing the form is received by the 25th day of the month. Once elected,
transfers from the Money Market or Bond Sub-Accounts or the Fixed Account will
be processed monthly until the entire value of each Account from which
transfers are made is completely depleted or the Policyowner instructs Western
Reserve in writing to cancel the monthly transfers. For example, if $15,000 was
allocated to the Money Market Sub-Account and $10,000 was allocated to the Bond
Sub-Account and transfers of $500 are made each month from each of these
Sub-Accounts to the Growth Sub-Account, transfers of $500 per month would
continue to be made from the Money Market Sub-Account even though transfers
from the Bond Sub-Account had ceased as a result of depletion of value.
There is no charge for Dollar Cost Averaging. Each transfer which occurs
under the Dollar Cost Averaging service will not be counted towards the twelve
free transfers allowed during each Policy year. (See Payment and Allocation of
Premiums - Allocation of Premiums and Cash Value - Transfers on p. 21.) Western
Reserve may discontinue, modify, or suspend Dollar Cost Averaging at any time,
following prior written notice to Policyowners. Dollar Cost Averaging is not
available if the Owner has elected the Asset Rebalancing Program, or has
elected an asset allocation service provided by a third party.
ASSET REBALANCING PROGRAM
Western Reserve will offer a program under which the Policyowner may
authorize Western Reserve to transfer automatically Cash Value periodically to
maintain a particular percentage allocation among the Sub-Accounts. The Cash
Value allocated to each Sub-Account will grow or decline in value at different
rates. The Asset Rebalancing Program automatically reallocates the Cash Value
in the Sub-Accounts at the end of each period to match the Contract's currently
effective Net Premium allocation schedule. The Asset Rebalancing Program is
intended to transfer Cash Value from those Sub-Accounts that have increased in
value to those Sub-Accounts that have declined in value. Over time, this method
of investing may help
22
an Owner buy low and sell high. This investment method does not guarantee
gains, nor does it assure that any Sub-Account will not have losses.
To qualify for Asset Rebalancing, a minimum Cash Value of $5,000 for an
existing Policy, or a minimum Initial Premium of $5,000 for a new Policy, is
required. To participate in the Asset Rebalancing Program, a properly completed
Asset Rebalancing Request Form must be received by Western Reserve at its
Administrative Office. An Asset Rebalancing Request Form is available upon
request.
Owners may elect rebalancing to occur on each quarterly, semi-annual or
annual anniversary of the Policy Date. Following receipt of the Asset
Rebalancing Request Form, Western Reserve will effect the initial rebalancing
of Cash Value on the next such anniversary, in accordance with the Policy's
current Net Premium allocation schedule. The amounts transferred will be
credited at the unit value next determined on the dates the transfers are made.
If a day on which rebalancing would ordinarily occur falls on a day on which
the New York Stock Exchange is closed, rebalancing will occur on the next day
the New York Stock Exchange is open. The Asset Rebalancing Program is available
only before the Maturity Date, and is not available if the Policyowner has
elected Dollar Cost Averaging, or has elected an asset allocation service
provided by a third party. There is no charge for the Asset Rebalancing
Program. Each reallocation which occurs under the Asset Rebalancing Program
will not be counted towards the twelve free transfers allowed during each
Policy year. (See Payment and Allocation of Premiums - Allocation of Premiums
and Cash Value - Transfers on p. 21.)
The Policyowner may terminate participation at any time in the Asset
Rebalancing Program by oral or written request to Western Reserve.
Participating in the Asset Rebalancing Program will terminate automatically if
any transfer is made to, or from, any Sub-Account, other than on account of a
scheduled rebalancing. If the Policyowner wishes to resume the Asset
Rebalancing Program after it has been canceled, a new Asset Rebalancing Request
Form must be completed and sent to Western Reserve. The Policyowner may start
and stop participation in the Asset Rebalancing Program at any time; however,
Western Reserve reserves the right to restrict entry into the Asset Rebalancing
Program to once per Policy Year. Cash Value allocated to the Fixed Account may
not be included in the Asset Rebalancing Program.
Western Reserve may discontinue, modify, or suspend, the Asset
Rebalancing Program at any time, following prior written notice to
Policyowners.
POLICY LAPSE AND REINSTATEMENT
LAPSE. Unlike conventional life insurance policies, the failure to make a
Planned Periodic Premium payment will not itself cause the Policy to lapse.
Conversely, paying all Planned Periodic Premium payments will not necessarily
guarantee that the Policy will not lapse (except if certain conditions are met
during the first three Policy years, as explained below). Lapse will only occur
where Net Surrender Value is insufficient to cover the monthly deduction, and a
grace period expires without a sufficient payment by the Policyowner. If the Net
Surrender Value on any Monthly Anniversary is insufficient to cover the monthly
deduction on such day, Western Reserve will mail a notice to the last known
address of the Policyowner and any assignee of record. A grace period of 61 days
after the mailing date of the notice will be allowed for the payment of
premiums. The notice will specify the minimum payment and the final date on
which such payment must be received by Western Reserve to keep the Policy In
Force. (See Charges and Deductions, p. 24.) If Western Reserve does not receive
a sufficient payment within the grace period, Lapse of the Policy will result.
If a sufficient payment is received during the grace period, any resulting
Premium will be allocated among the Accounts, and any monthly deductions due
will be charged to such Accounts, in accordance with the Policyowner's then
current instructions. (See Allocation of Premiums and Cash Value - Allocation of
Premiums, p. 21 and Charges and Deductions - Cash Value Charges, p. 25.) If the
Insured dies during the grace period, the death benefit proceeds will equal the
amount of the death benefit proceeds immediately prior to the commencement of
the grace period, reduced by any due and unpaid charges.
However, until the No Lapse Date as provided in the Policy, the Policy
will not lapse and no grace period will begin provided: (1) no riders have been
added since the Policy Date, including the current month, and (2) the total of
the premiums received (minus any withdrawals and outstanding loans and any pro
rata Decrease Charge deducted from the Cash Value) equals or exceeds the
minimum monthly guarantee premium shown in the Policy times the number of
months since the Policy Date, including the current month. Should the
Policyowner request the addition of any rider after the Policy Date but prior
to the No Lapse Date, the Policyowner will be notified as to the effect on
grace period processing prior to the date the rider is effective.
Essentially, the Policy will not lapse prior to the No Lapse Date, as
long as the conditions in (1) and (2) above have been met, and even though Net
Surrender Value at any point during the No Lapse Date is insufficient to cover
the monthly deduction and a grace period has expired without a payment
sufficient to cover the monthly deduction. Such a Lapse could happen if the
investment experience has been sufficiently unfavorable to have resulted in a
decrease in the Net Surrender Value, or the Net Surrender Value has decreased
because not enough premiums have been paid to offset the monthly charges.
23
REINSTATEMENT. A lapsed Policy may be reinstated any time within five
years after the date of Lapse and before the Maturity Date by submitting the
following items to Western Reserve:
1. A written application for reinstatement from the Policyowner;
2. Evidence of insurability satisfactory to Western Reserve; and
3. A premium that is large enough to cover:
(a) one monthly deduction at the time of termination;
(b) the next two monthly deductions which will become due after the
time of reinstatement; and
(c) an amount sufficient to cover any surrender charge (as described
below) as of the date of reinstatement.
Any indebtedness on the date of Lapse will not be reinstated. The Cash
Value of the Loan Reserve on the date of reinstatement will be zero. The amount
of Net Surrender Value on the date of reinstatement will be equal to the Net
Premiums paid at reinstatement, less the amounts paid in accordance with 3(a)
and (c) above.
Upon approval of the application for reinstatement, the effective date of
reinstatement will be the first Monthly Anniversary on or next following the
date Western Reserve approves the application for reinstatement. Western
Reserve reserves the right to decline a reinstatement request.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate
Western Reserve for: (1) providing the insurance benefits set forth in the
Policy and any optional insurance benefits added by rider; (2) administering
the Policy; (3) assuming certain risks in connection with the Policy; and (4)
incurring expenses in distributing the Policy. The nature and amount of these
charges are described more fully below.
CONTINGENT DEFERRED SURRENDER CHARGES
If the Policy is totally surrendered (or the Net Surrender Value is
applied under a settlement option) prior to the end of the fifteenth (15th)
Policy year, a surrender charge for the Specified Amount at issue will be
deducted from the Policy's Cash Value. The surrender charge consists of the sum
of:
(a) an Issue Charge and
(b) a Sales Charge.
The sum of (a) and (b) are multiplied by (c), the applicable SURRENDER
CHARGE FACTOR.
(a) ISSUE CHARGE. The Issue Charge is a level charge of $5.00 per
thousand of Specified Amount at issue.
(b) SALES CHARGE. The Sales Charge is (1) 26.5% of the sum of all
premiums paid up to the Surrender Charge Base Premium shown in the Policy and,
(2) for the sum of all premiums paid in excess of the first Surrender Charge
Base Premium ("excess premium charge"), a percentage which varies by the Issue
Age and sex of the Insured as follows:
Issue Age Percentage Unisex
- --------------------- ------------ -------------------------
Male Female Issue Age Percentage
- --------- --------- ----------- -----------
0 - 55 0 - 62 8.4% 0 - 55 8.95%
56 - 63 63 - 69 4.4% 56 - 63 6.84%
64 - 68 70 - 74 3.6% 64 - 68 3.52%
69 - 73 75 - 79 3.1% 69 - 73 2.31%
74 - 78 80+ 2.5% 74 - 78 1.79%
79+ 2.0% 79+ 1.20%
(c) SURRENDER CHARGE FACTOR. As stated above, the factor is applied to
the sum of the Issue Charge and Sales Charge due upon any surrender of a Policy
during the first fifteen Policy years. In Policy years 1-10 this factor is 1.00
for male Insureds at Issue Ages 0-65 and female Insureds at Issue Ages 0-70,
and then declines at the rate of .20 per year until reaching zero at the end of
the fifteenth (15th) Policy year as shown below. For Insureds with older Issue
Ages, this factor is less than 1.00 at the end of the tenth (10th) Policy year
and declines to 0 at the end of the fifteenth (15th) Policy year. Therefore,
application of the factor to the sum of the Issue Charge and Sales Charge in
the event of any surrender during the eleventh through fifteenth Policy years
will result in reduced surrender charges. If a surrender occurs after the
fifteenth (15th) Policy year, there are no Issue Charge or Sales Charge due.
See Example (2) below.
SURRENDER CHARGE FACTORS
MALES ISSUE AGES 0-65
FEMALES ISSUE AGES 0-70
Surrender Charge Factor
End of Policy Year* Factor
- ------------------------ -------
At Issue 1.00
1-10 1.00
11 .80
12 .60
13 .40
14 .20
15 0
16+ 0
<FN>
* THE FACTOR ON ANY DATE OTHER THAN AN ANNIVERSARY WILL BE INTERPOLATED BETWEEN
THE TWO END OF YEAR PERCENTAGES.
</FN>
(d) EXAMPLE (1) Assume a male Insured purchases the Policy when age 35
for $250,000 of Specified Amount, paying the Surrender Charge Base Premium of
$2,518, and an additional premium amount of $482 in excess of the Surrender
Charge Base Premium, for a total premium of $3,000 per year for four years
($12,000 total for four years), and then surrenders the Policy. The surrender
charge would be calculated as follows:
24
(i) ISSUE CHARGE - [250 x $5.00]
($5.00/$1,000 of Initial Specified Amount
at issue) = $1,250.00
(ii) SALES CHARGE:
(1) 26.5% of Surrender Charge Base
Premium paid
[26.5% x $2,518], and = $ 667.27
(2) 8.4% of premiums paid in excess
of Surrender Charge
Base Premium
[8.4% x $9,482] = $ 796.49
(iii) APPLICABLE SURRENDER CHARGE FACTOR = 1.00
[(a)$1,250 + (b)($667.27 + $796.49)]
x 1.00
SURRENDER CHARGES = [$1,250.00 +
$1,463.76]
x 1.00 = $2,713.76
=========
EXAMPLE (2) - Assume the same facts as in Example (1), EXCEPT the Owner
surrenders the Policy on the 14th Policy Anniversary:
(i) ISSUE CHARGE - [250 x $5.00] = $1,250.00
(ii) SALES CHARGE
(1) [26.5% x $2,518], and = $ 667.27
(2) [8.4% x $39,482] = $3,316.49
(iii) APPLICABLE SURRENDER CHARGE FACTOR = .20
[(a)$1,250.00 + (b)($667.27 + $3,316.49)]
x .20
SURRENDER CHARGE = [$1,250.00 +
$3,983.76] x .20 = $1,046.75
=========
If the Owner waits until the 15th Policy Anniversary or after, there will
be no surrender charges.
PRO RATA DECREASE CHARGE
If, during the first 15 Policy years, the Specified Amount is decreased,
a pro rata Decrease Charge will be deducted from the Cash Value. The pro rata
Decrease Charge is equal to:
(1) the amount of the Specified Amount decrease; divided by
(2) the Specified Amount at issue; multiplied by
(3) The then current Contingent Deferred Surrender Charges as of the date
of the decrease applicable to the Specified Amount at issue, as
determined under the Surrender Charge provision.
This pro rata Decrease Charge will not be deducted from the Cash Value
when a Specified Amount decrease results from (a) a change in the Death Benefit
Option, or (b) a withdrawal when the Death Benefit is Option A, as described in
the Cash Withdrawals section, p. 26. If a pro rata Decrease Charge is deducted
due to a decrease in Specified Amount, any future Contingent Deferred Surrender
Charges incurred during the first fifteen Policy years will be reduced
proportionately.
CASH VALUE CHARGES
Charges will be deducted monthly from the Cash Value of each Policy
("monthly deduction") to compensate Western Reserve for certain administrative
costs, the cost of insurance and optional benefits added by rider. The monthly
deduction will be deducted on each Monthly Anniversary and will be allocated
among the Accounts on the same basis as Premiums are allocated. If the value of
any Account is insufficient to pay its part of the monthly deduction, the
monthly deduction will be taken on a pro rata basis from all Accounts. Because
portions of the monthly deduction, such as the cost of insurance, can vary from
month-to-month, the monthly deduction itself will vary in amount from
month-to-month.
COST OF INSURANCE. Western Reserve will determine the monthly cost of
insurance charge by multiplying the applicable cost of insurance rates by the
net amount at risk for each Policy Month. The net amount at risk for a Policy
Month is (a) the death benefit at the beginning of the Policy Month divided by
1.0024663 (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 3%), less (b) the Cash Value at the beginning of
the Policy Month.
Cost of insurance rates will be based on the sex, Attained Age and rate
class of the Insured, and the length of time a Policy has been In Force. The
actual monthly cost of insurance rates will be based on Western Reserve's
expectations as to future experience. They will not, however, be greater than
the guaranteed cost of insurance rates set forth in the Policy. These
guaranteed rates are based on the 1980 Commissioners Standard Ordinary (C.S.O.)
Mortality Tables and the Insured's sex, Attained Age and rate class. For
standard rate classes, these rates will not exceed rates contained in the 1980
C.S.O. Tables. Western Reserve also may guarantee that actual cost of insurance
rates will not be changed for a specified period of time (E.G., one year). Any
change in the cost of insurance rates will apply to all Insureds of the same
age, sex, and rate class whose Policies have been In Force for the same length
of time.
The Policies offered by this Prospectus are based on mortality tables
that distinguish between men and women. As a result, the Policy pays different
benefits to men and women of the same age. The State of Montana 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 its residents.
The State of Massachusetts formerly had a similar prohibition and has
introduced legislation which would reinstate such prohibition. Therefore,
Policies offered by this Prospectus to insure residents of the states of
Montana and Massachusetts will have premiums and benefits which are based on
actuarial tables that do not differentiate on the basis of sex.
The rate class of an Insured will affect the cost of insurance rate.
Western Reserve currently places Insureds into the following five standard rate
classes: Ultimate Select, non-tobacco use; Select, non-tobacco use; Ultimate
Standard, tobacco use; Standard, tobacco use; and Juvenile (under 18); as
25
well as various other sub-standard rate classes involving a higher mortality
risk. In an otherwise identical Policy, the cost of insurance rate is generally
higher for tobacco use than for non-tobacco use and, within these two
categories, higher for Insureds not in the Ultimate category than for Insureds
in the Ultimate category. Ultimate rate classes are available only if the
Specified Amount (Primary Insured) or Face Amount of Riders for other Insureds
require blood testing at the proposed Insured's age under current Western
Reserve underwriting guidelines.
Western Reserve may also issue certain Policies on a "simplified" or
expedited basis to certain categories of individuals (for example, Policies
issued at a predetermined Specified Amount or underwritten on a group basis).
Policies issued on this basis will have guaranteed cost of insurance rates no
higher than the guaranteed rates for Select, non-tobacco use or Standard
tobacco use categories (as appropriate); however, due to the special
underwriting criteria established for these issues, actual rates may be higher
or lower than the current cost of insurance rates charged under otherwise
identical Policies that are underwritten using standard underwriting criteria.
MONTHLY POLICY CHARGE. Western Reserve has primary responsibility for
the administration of the Policy and the Series Account. Annual administrative
expenses include recordkeeping, processing death benefit claims, Policy
changes, reporting and overhead costs. As reimbursement for administrative
expenses related to the maintenance of each Policy and the Series Account,
Western Reserve assesses a monthly administration charge from each Policy. This
charge is currently $5.00 per Policy Month and will not be increased. Western
Reserve reserves the right to waive the Monthly Policy Charge on additional
policies issued to existing Policyowners at the time the second policy is
issued.
OPTIONAL CASH VALUE CHARGES
The following optional Cash Value charges will be deducted from the
Policy as the result of changes or elections made to the Policy and initiated
by the Policyowner.
OPTIONAL INSURANCE BENEFITS. The monthly deduction will include charges
for any optional insurance benefits added to the Policy by rider.
CHANGE IN PREMIUM ALLOCATION. Western Reserve does not currently levy
or charge when changes are made to allocation of Premium. However, Western
Reserve reserves the right to impose a $25 charge for each change of Premium
allocation in excess of one change per Policy year quarter. If Western Reserve
decides to impose this charge, Policyowners will be notified in writing in
advance.
CASH VALUE TRANSFERS. After twelve (12) free transfers per year,
Western Reserve will impose and deduct from each amount transferred a transfer
charge of $10 to compensate Western Reserve for the costs in effectuating the
transfer. The transfer charge will not be increased in the future.
CASH WITHDRAWALS. A processing fee equal to the lesser of $25 or 2% of
the amount withdrawn will be deducted from amounts withdrawn from the Policy
and the balance will then be paid to the Policyowner. This fee will not be
increased.
CHARGES AGAINST THE SERIES ACCOUNT
Certain expenses will be deducted as a percentage of the value of the net
assets of the Series Account to compensate Western Reserve for certain risks
assumed in connection with the Policy.
MORTALITY AND EXPENSE RISK CHARGE. Western Reserve will deduct a daily
charge from the Series Account at an annual rate of 0.90% of the average daily
net assets of the Series Account. Western Reserve guarantees to reduce this
charge to 0.60% after the first fifteen Policy years. Western Reserve intends
to reduce this charge to 0.30% starting in the sixteenth Policy year. However,
such reduction is not guaranteed and Western Reserve reserves the right to
maintain this charge at 0.60% level after the sixteenth Policy year. Under
Western Reserve's current procedures, these amounts are paid to the General
Account monthly.
The mortality risk assumed by Western Reserve is that Insureds may live
for a shorter time than projected. The expense risk assumed is that expenses
incurred in issuing and administering the Policies will exceed the limits on
administrative charges set in the Policies. Western Reserve also assumes risks
with respect to other contingencies including the incidence of Policy loans,
which may cause Western Reserve to incur greater costs than anticipated when
designing the Policies.
TAXES. Currently no charge is made to the Series Account for Federal
income taxes that may be attributable to the Series Account. Western Reserve
may, however, make such a charge in the future. Charges for other taxes, if
any, attributable to the Series Account may also be made. (See Federal Tax
Matters, p. 33.)
EXPENSES OF THE FUND
Because the Series Account purchases shares of the Fund, the net assets
of the Series Account will reflect the investment management fee and other
expenses incurred by the Fund. (See p. 6 for a table of the Fund Annual
Expenses and pp. 18-19 for a discussion of the investment management fees of
each Portfolio.)
Effective January 1, 1997, the Fund adopted a Plan of Distribution
pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to
the Plan, entered into a Distribution Agreement with ISI, principal underwriter
for the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing a Portfolio's shares, up
to a maximum rate of 0.15% (fifteen one-hundredths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it will not seek
payment by the Fund of
26
distribution expenses incurred with respect to any Portfolio until April 30,
1999. Prior to ISI seeking reimbursement, Policyowners will be notified in
advance.
POLICY RIGHTS
LOAN PRIVILEGES
POLICY LOAN. After the first Policy year and so long as the Policy
remains In Force, the Policyowner may borrow money from Western Reserve using
the Policy as the only security for the loan. Western Reserve reserves the
right to permit a Policy loan prior to the first Policy Anniversary for
Policies issued pursuant to a transfer of cash values from another life
insurance policy under Section 1035(a) of the Internal Revenue Code of 1986, as
amended. The maximum amount that may be borrowed is 90% of the Cash Value, less
any surrender charge and any already outstanding Policy loan. Western Reserve
reserves the right to limit the amount of any Policy loan to not less than
$500. Outstanding loans have priority over the claims of any assignee or other
person. The loan may be repaid totally or in part before the Maturity Date of
the Policy and while the Policy is In Force. A loan which is taken from, or
secured by, a Policy may have Federal income tax consequences. (See Federal Tax
Matters, p. 33.)
An amount equal to the loan plus interest in advance until the next
Policy Anniversary will be withdrawn from the Account or Accounts specified and
transferred to the Loan Reserve until the loan is repaid. The Loan Reserve is a
portion of the Fixed Account used as collateral for a Policy loan. The
Sub-Accounts of the Series Account may be specified. If no Account is
specified, the loan amount will be withdrawn from each Account in the same
manner as the current allocation instructions.
The amount of the loan will normally be paid within seven days after
receipt of a proper request in a manner permitted by Western Reserve.
Postponement of loans may take place under certain conditions. (See General
Provisions - Postponement of Payments, p. 29.) Under Western Reserve's current
procedures, at each Anniversary, Western Reserve will compare the amount of the
outstanding loan (including loan interest in advance until the next Policy
Anniversary, if not paid) to the amount in the Loan Reserve (including interest
credited to the Loan Reserve during the previous Policy year). Western Reserve
will also make this comparison any time the Policyowner repays all of the loan,
or makes a request to borrow an additional amount. At each such time, if the
amount of the outstanding loan exceeds the amount in the Loan Reserve, Western
Reserve will withdraw the difference from the Accounts and transfer it to the
Loan Reserve in the same manner as when a loan is made. If the amount in the
Loan Reserve exceeds the amount of the outstanding loan, Western Reserve will
withdraw the difference from the Loan Reserve and transfer it to the Accounts
in accordance with the Policyowner's current allocation instructions. Western
Reserve reserves the right to require the transfer of such amounts to the Fixed
Account, if such loans were originally transferred from the Fixed Account. (See
The Fixed Account, p. 31.) No charge will be imposed for these transfers.
INTEREST RATE CHARGED. The interest rate on a Policy loan is 5.2%
payable annually in advance. If unpaid when due, interest will be added to the
amount of the loan and will become part of the loan and bear interest at the
same rate. Interest paid on a Policy loan is generally not tax deductible.
LOAN RESERVE INTEREST RATE CREDITED. The amount transferred to the Loan
Reserve will accrue interest at a minimum effective annual rate not less than
4%. Western Reserve may credit a higher rate, but it is not obligated to do so.
Currently, Western Reserve is crediting, in arrears, an effective annual
interest rate of 4.75%, on all amounts borrowed during the first ten Policy
years. On amounts borrowed after the tenth Policy year that are part of the
Cash Value in excess of the cost basis (premiums less withdrawals) of the
Policy the interest rate credited is currently equal to the interest rate being
charged on the total loan while the remaining portion, if any, of the loan is
credited the current rate of 4.75% for loans during the first ten Policy years.
EFFECT OF POLICY LOANS. A Policy loan affects the Policy, because the
death benefit and Net Surrender Value under the Policy are reduced by the
amount of the loan. Repayment of the loan causes the death benefit and Net
Surrender Value to increase by the amount of the repayment.
As long as a loan is outstanding, an amount equal to the loan plus
interest in advance until the next Policy Anniversary is held in the Loan
Reserve. This amount will not be affected by the Series Account's investment
performance. Amounts transferred from the Series Account to the Loan Reserve
will affect the Series Account value because such amounts will be credited with
an interest rate declared by Western Reserve rather than a rate of return
reflecting the investment performance of the Series Account. (See The Fixed
Account - Minimum Guaranteed and Current Interest Rates, p. 32.)
There are risks involved in taking a Policy loan, a few of which include
the potential for a Policy to lapse if projected earnings, taking into account
outstanding loans, are not achieved, as well as adverse tax consequences which
occur if a Policy lapses with loans outstanding. (See Federal Tax Matters - Tax
Treatment of Policy Benefits, p. 34.)
INDEBTEDNESS. Indebtedness equals the total of all Policy loans less
any unearned loan interest on the loans. If indebtedness exceeds the Cash Value
less the then applicable surrender charge, Western Reserve will notify the
Policyowner and any assignee of record. If a sufficient payment equal to excess
indebtedness is not received by Western Reserve within 61 days from the date
notice is sent, the Policy will Lapse and terminate without value. The Policy,
however, may later be reinstated. (See Policy Lapse and Reinstatement, p. 23.)
REPAYMENT OF INDEBTEDNESS. Indebtedness may be repaid any time before
the Maturity Date of the Policy and while the Policy is In Force. Payments made
by the Policyowner while there is indebtedness will be treated as premium
payments unless the Policyowner indicates that the payment should be treated as
a loan repayment. (See Policy Rights - Benefits at Maturity, p. 28.) If not
repaid, Western Reserve may
27
deduct indebtedness from any amount payable under the Policy. As indebtedness
is repaid, the Policy's value in the Loan Reserve securing the indebtedness
repaid will be transferred from the Loan Reserve to the Accounts in the same
manner as Premiums are allocated. However, Western Reserve reserves the right
to require the transfer to the Fixed Account. Western Reserve will allocate the
repayment of indebtedness at the end of the Valuation Period during which the
repayment is received.
SURRENDER PRIVILEGES
At any time before the earlier of the death of the Insured or the
Maturity Date, the Policyowner may totally surrender or, after the first Policy
year, make a cash withdrawal from the Policy by sending a written request to
Western Reserve. A Surrender Charge may apply. The amount available for
surrender is the Net Surrender Value at the end of the Valuation Period during
which the surrender request is received at Western Reserve's Office. The Net
Surrender Value is equal to the Cash Value as of the date of Surrender, less
any surrender charge, and less any outstanding Policy loan, plus any unearned
loan interest. (See Charges and Deductions - Contingent Deferred Surrender
Charges, p. 24.) Surrenders from the Series Account will generally be paid
within seven days of receipt of the written request. Postponement of payments
may, however, occur in certain circumstances. (See General Provisions -
Postponement of Payments, p. 29.) Additional restrictions may be applied to
surrenders from the Fixed Account. (See The Fixed Account - Allocations,
Transfers and Withdrawals, p. 32.) For the protection of Policyowners, all
requests for cash withdrawals or total surrenders of more than $100,000, or
where the withdrawal or surrender proceeds are to be sent to an address other
than the address of record will require a signature guarantee. All required
guarantees of signatures must be made by a national or state bank, a member
firm of a national stock exchange or any other institution which is an eligible
guarantor institution as defined by rules and regulations of the Commission. If
the Policyowner is a corporation, partnership, trust or fiduciary, evidence of
the authority of the person seeking redemption is required before the request
for withdrawal is accepted, including withdrawals under $100,000. For
additional information, Policyowners may call Western Reserve at
1-800-851-9777. A cash withdrawal or total surrender may have Federal income
tax consequences. (See Federal Tax Matters, p. 33.)
TOTAL SURRENDERS. When the Policy is being totally surrendered, the
Policy itself must be returned to Western Reserve along with the request. A
Policyowner may elect to have the amount paid in a lump sum or under a
settlement option. (See Payment of Policy Benefits - Settlement Options, p.
29.)
CASH WITHDRAWALS. For a cash withdrawal, the amount available may be
limited to no less than $500 and to no more than 10% of the Net Surrender
Value. Western Reserve intends to allow a cash withdrawal up to 25% of the Net
Surrender Value after the tenth Policy year. The amount paid plus a processing
fee equal to the lesser of $25 or 2% of the amount withdrawn will be deducted
from the Policy's Cash Value at the end of the Valuation Period during which
the request is received. The amount will be deducted from the Accounts in the
same manner as the current allocation instructions unless the Policyowner
directs otherwise. Cash withdrawals are allowed only once each Policy year
after the first Policy year.
Cash withdrawals will affect both the Policy's Cash Value and the death
benefit payable under the Policy. The Policy's Cash Value will be reduced by
the amount of the cash withdrawal. Moreover, the death benefit proceeds payable
under a Policy will generally be reduced by at least the amount of the cash
withdrawal.
In addition, when death benefit Option A is in effect, the Specified
Amount will be reduced by the cash withdrawal. No cash withdrawal will be
permitted which would result in a Specified Amount lower than the minimum
Specified Amount set forth in the Policy or would deny the Policy status as
life insurance under the Internal Revenue Code and applicable regulations. (See
Cash Value Charges - Cost of Insurance, p. 25; Death Benefit - Insurance
Protection, p. 15; and Federal Tax Matters - Tax Treatment of Policy Benefits,
p. 34.)
EXAMINATION OF POLICY PRIVILEGE ("FREE-LOOK")
The Policyowner may cancel the Policy within 10 days after the
Policyowner receives it. Certain states require a Free-Look period longer than
10 days, either for all Policyowners or for certain classes of Policyowners. In
such states, Western Reserve will comply with the specific requirements of
those states. The Policyowner should mail or deliver the Policy to either
Western Reserve or the agent who sold it. If the Policy is cancelled in a
timely fashion, a refund will be made to the Policyowner equal to the sum of:
(i) the difference between the premiums paid and the amounts allocated to any
Accounts under the Policy; (ii) the total amount of monthly deductions made and
any other charges imposed on amounts allocated to the Accounts; and (iii) the
value of amounts allocated to the Accounts on the date Western Reserve or its
agent receives the returned Policy. If state law prohibits the calculation
above, the refund will equal the total of all premiums paid for the Policy.
CONVERSION RIGHTS
At any time upon written request within 24 months of the Policy Date, the
Policyowner may elect to transfer all Sub-Account values to the Fixed Account.
No transfer charge will be assessed.
BENEFITS AT MATURITY
If the Insured is living and the Policy is In Force, Western Reserve will
pay the Net Surrender Value of the Policy on the Maturity Date. (See Cash Value
- - Net Surrender Value, p. 16.) The Policy will mature on the Anniversary
nearest the Insured's 95th birthday, if the Insured is living and the Policy is
In Force. Western Reserve will extend the Maturity Date provided the Policy is
still In Force on the Maturity Date. Extension of the Maturity Date will be
made upon written request to Western Reserve, between 90 and 180 days prior to
the Maturity Date, as elected by the Policyowner, to one of the following: (1)
if the Death Benefit Option Type is other than Option A, the Option Type will
be changed to Option A. On each
28
Valuation Date, the Specified Amount will be adjusted to equal the Cash Value,
and the Limitation Percentage will be 100%. No additional premium payments will
be permitted except to prevent lapse of the Policy. All future monthly
deductions will be waived; or (2) the Maturity Date will automatically be
extended until the next Policy Anniversary. The Policyowner must request in
writing that the Maturity Date be extended prior to each Policy Anniversary
thereafter.
PAYMENT OF POLICY BENEFITS
Death benefits under the Policy will ordinarily be paid within seven days
after Western Reserve receives due proof of death, and verifies the validity of
the claim. Other benefits will ordinarily be paid within seven days of receipt
of proper written request (including an election as to tax withholding).
Payments may be postponed in certain circumstances. (See General Provisions -
Postponement of Payments, p. 29 and The Fixed Account - Allocations, Transfers
and Withdrawals, p. 32.) The Policyowner may decide the form in which the
benefits will be paid. During the Insured's lifetime, the Policyowner may
arrange for the death benefits to be paid in a lump sum or under one or more of
the settlement options described below. These choices are also available if the
Policy is surrendered or matures. If no election is made, Western Reserve will
pay the benefits in a lump sum.
When death benefits are payable in a lump sum, the Beneficiary may select
one or more of the settlement options. If death benefits become payable under a
settlement option and the Beneficiary has the right to withdraw the entire
amount, the Beneficiary may name and change contingent Beneficiaries.
SETTLEMENT OPTIONS. Policyowners and Beneficiaries, subject to a prior
election of the Policyowner, may elect to have benefits paid in a lump sum or
in accordance with a variety of settlement options offered under the Policy.
Once a settlement option is in effect, there will no longer be value in the
Series Account or the Fixed Account. Western Reserve may make other settlement
options available on the Fixed Account in the future. The effective date of a
settlement provision will be either the date of surrender or the date of death
of the Insured. For additional information concerning these options, see the
Policy itself.
OPTION A - PAYMENTS FOR A FIXED PERIOD. The proceeds plus interest will
be paid in equal monthly installments for the period chosen until paid in full.
The period chosen may not exceed 30 years.
OPTION B - LIFE INCOME. The proceeds will be paid in equal installments
for the guaranteed payment period elected and continue for the life of the
person on whose life the option is based. Such installments will be payable:
(a) during the lifetime of the payee or (b) during a fixed period certain and
for the remaining lifetime of the payee or (c) until the sum of installments
paid equals the proceeds applied and for the remaining life of the payee.
Guaranteed payment periods may be elected for 5 and 10 years, or the period in
which the total payments will equal the amount retained.
OPTION C - JOINT AND SURVIVOR LIFE INCOME. The proceeds will be paid
during the joint lifetime of two persons and (a) continue upon the death of the
first payee for the remaining lifetime of the survivor or (b) be reduced by
one-third upon the death of the first payee and continue for the remaining
lifetime of the survivor.
GENERAL PROVISIONS
POSTPONEMENT OF PAYMENTS
GENERAL. Payment of any amount from the Series Account upon complete
surrender, cash withdrawal, Policy loan, or benefits payable at death or
maturity may be postponed whenever: (i) the New York Stock Exchange is closed
other than customary weekend and holiday closing, or trading on the New York
Stock Exchange is restricted as determined by the Commission; (ii) the
Commission by order permits postponement for the protection of Policyowners; or
(iii) an emergency exists, as determined by the Commission, as a result of
which disposal of securities is not reasonably practicable or it is not
reasonably practicable to determine the value of the Series Account's net
assets. Transfers may also be postponed under these circumstances. For
restrictions applicable to payments from the Fixed Account, see The Fixed
Account - Allocations, Transfers and Withdrawals, p. 32.
PAYMENT BY CHECK. Payments under the Policy of any amounts derived from
premiums paid by check or bank draft may be delayed until such time as the
check or bank draft has cleared the Policyowner's bank.
THE CONTRACT
The Policy and attached copy of the application and any supplemental
applications are the entire contract. Only statements in the application and
any supplemental applications can be used to void the Policy or defend a claim.
The statements are considered representations and not warranties. No Policy
provision can be waived or changed except by endorsement. Only the President or
Secretary of Western Reserve can agree to change or waive any provisions of the
Policy.
SUICIDE
If the Insured, while sane or insane, commits suicide within two years
after the Policy Date, Western Reserve will pay only the premiums received,
less any cash withdrawals and outstanding indebtedness. In the event of Lapse
of the Policy, the suicide period will be measured from the effective date of
reinstatement. If the Insured, while sane or insane, commits suicide within two
years after the effective date of any increase in insurance or any
reinstatement, Western Reserve's total liability with respect to such increase
or reinstatement will be the cost of insurance charges deducted for such
increase or reinstatement.
INCONTESTABILITY
Western Reserve cannot contest the Policy as to the initial Specified
Amount after it has been In Force during the lifetime of the Insured for two
years from the Policy Date. If a lapsed Policy is reinstated, a new two year
contestability period (apart
29
from any remaining contestability period) will apply from the date of the
application for reinstatement and will apply only to statements made in the
application for reinstatement.
CHANGE OF OWNER OR BENEFICIARY
The Beneficiary, as named in the Policy application or subsequently
changed, will receive the Policy benefits at the Insured's death. If the named
Beneficiary dies before the Insured, the contingent Beneficiary, if named,
becomes the Beneficiary. If no Beneficiary survives the Insured, the benefits
payable at the Insured's death will be paid to the Policyowner or the
Policyowner's estate. As long as the Policy is In Force, the Policyowner or
Beneficiary may be changed by written request from the Policyowner in a form
acceptable to Western Reserve. The Policy need not be returned unless requested
by Western Reserve. The change will take effect as of the date the request is
signed, regardless of whether the Insured is living when the request is
received by Western Reserve. Western Reserve will not, however, be liable for
any payment made or action taken before receipt of the request.
ASSIGNMENT
The Policy may be assigned by the Policyowner. Western Reserve will not
be bound by the assignment until a written copy has been received at its Office
and will not be liable with respect to any payment made prior to receipt.
Western Reserve assumes no responsibility for determining whether an assignment
is valid or the extent of the assignee's interest.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured has been misstated, the death benefit
will be adjusted based on what the cost of insurance charge for the most recent
monthly deduction would have purchased based on the correct age and sex.
REPORTS AND RECORDS
Western Reserve will maintain all records relating to the Series Account
and the Fixed Account. Western Reserve will mail to each Policyowner, at the
last known address of record, reports required by applicable laws and or
regulations.
Western Reserve will send Policyowners written confirmation within seven
days of the following transactions: unplanned and certain planned premium
payments, Cash Value transfers, change in death benefit option or Specified
Amount, total surrender or cash withdrawals, and Policy loans or repayments.
Western Reserve will also send each Policyowner an annual statement at the end
of the Policy year showing for the year, among other things, the month and
amount of each: premium payment made, monthly deduction, transfer, cash
withdrawal and Policy loan or repayment. The annual statement will also show
Policy year-end Net Surrender Value, death benefit and Policy loan value, as
well as other Policy activity during the year.
OPTIONAL INSURANCE BENEFITS
Subject to certain requirements, one or more of the following optional
insurance benefits may be added to a Policy by rider. The cost of any optional
insurance benefits will be deducted as part of the monthly deduction. (See
Charges and Deductions - Optional Cash Value Charges, p. 26.) For purposes of
the riders, the person insured under the Policy is referred to as the Primary
Insured, and the term "Face Amount" refers to the level term insurance amount
payable at death.
CHILDREN'S INSURANCE RIDER: Provides a Face Amount on each of the
Primary Insured's children, as defined in the rider. Under the terms of the
rider, the death benefit will be payable to the Primary Insured upon receipt of
proof that the death of an insured child occurred while the rider and coverage
on such child was In Force. Upon the Primary Insured's death, while the rider
is In Force, the rider will terminate 31 days after such death and a separate
life insurance policy will be offered to each insured child for an amount equal
to the level death benefit amount of the rider at a premium based upon the
attained age of each insured child.
ACCIDENTAL DEATH BENEFIT RIDER: Provides a Face Amount if the Primary
Insured's death results from accidental bodily injury, as defined in the rider.
Certain risks, as defined in the rider, are not covered. Under the terms of the
rider, the additional benefits provided in the rider will be paid upon receipt
of proof by Western Reserve that death resulted from bodily injuries effected
directly and independently of all other causes through external, violent and
accidental means; occurred within 90 days from the date of accident causing
such injuries; and occurred while the rider was In Force. The rider will
terminate on the earliest of the Policy Anniversary nearest the Primary
Insured's 70th birthday, the date the Policy terminates, or the Monthiversary
on which the rider is terminated on request by the Policyowner.
OTHER INSURED RIDER: Provides that Western Reserve will pay the Face
Amount of the rider to the Primary Insured upon receipt of due proof of the
other Insured's death. On any Monthiversary while the rider is In Force, the
Policyowner may exchange the rider without evidence of insurability for a new
Policy on the other Insured's life upon written request subject to the
following: (a) the rider has not reached the Anniversary nearest the other
Insured's 70th birthday; (b) the new policy is any permanent plan of insurance
then offered by Western Reserve; (c) the amount of insurance upon conversion
will equal the Face Amount then In Force under the rider; and (d) the payment
of the premium will be based on the other Insured's rate class under the rider.
DISABILITY WAIVER RIDER: Provides a waiver of the monthly deductions
for the Policy while the Insured is disabled. Under the terms of the rider, the
monthly deductions will be waived upon receipt of proof adequate to Western
Reserve that: the Insured is totally disabled, as defined in the rider; the
disability commenced while the rider was In Force; the disability began before
the Anniversary nearest the Insured's 60th birthday; and total disability has
existed continuously for at least six months. No monthly deduction will be
waived which falls due more than one year prior to receipt by Western Reserve
of written notice of a claim. Certain risks, as defined in the rider, are not
covered.
30
DISABILITY WAIVER AND INCOME RIDER: Provides the identical benefit as
the Disability Waiver Rider and, in addition, a monthly income benefit up to a
maximum 120 monthly payments.
PRIMARY INSURED RIDER (|P`PIR|P') AND PRIMARY INSURED RIDER PLUS (|P`PIR
PLUS|P'): Provides term insurance coverage for the insured on a basis different
from the coverage provided under the Policy. The PIR may be purchased at any
time, either at the time of application for the Policy, or after the Record
Date. The PIR Plus may only be purchased at the time of application.
PIR or PIR Plus increases the death benefit provided under the Policy by
the Face Amount of the rider. The PIR terminates at age 90; the PIR Plus
terminates at age 85. No additional Surrender Charge is assessed in connection
with PIR or PIR Plus coverage. Generally, coverage provided by PIR or PIR Plus
has a lower cost than that provided under the Policy, but has no Cash Value
associated with it. Owners may reduce or cancel coverage under a PIR or PIR
Plus rider separately from reducing the Specified Amount of a Policy. Likewise,
the Specified Amount of a Policy may be decreased, subject to certain minimums,
without reducing the coverage under PIR or PIR Plus. Continuing coverage on an
increment of Specified Amount under the Policy may have a cost of insurance
that is higher than the cost of the same amount of coverage under PIR or PIR
Plus.
There may be circumstances in which it will be to your advantage to
obtain a portion of your insurance coverage under PIR or PIR Plus. These
circumstances depend on many factors, including the premium levels, amounts and
duration of coverage needed, as well as the age, sex and risk classification of
the Insured. Your registered representative can provide you with further
information explaining how PIR and PIR Plus coverage can affect your Policy
values under different assumptions. Western Reserve reserves the right to
discontinue the availability of these riders for new Policies at any time, and
also reserves the right to modify the terms of these riders for new Policies,
subject to approval by the state insurance departments.
TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER: In states where this
rider has been approved by that state's department of insurance, upon receipt
of proof satisfactory to Western Reserve that the Insured has incurred a
condition resulting from illness which, as determined by a Physician, has
reduced life expectancy to not more than 12 months from the date of the
Physician's Statement (a "Terminal Condition"), Western Reserve will pay to the
Policyowner a "Single Sum Benefit", equal to:
(a) the Death Benefit in effect on the date the Single Sum Benefit is
paid; multiplied by
(b) the Election Percentage; divided by
(c) 1 + i, where i equals the greater of (A) and (B) on the date the
Single Sum Benefit is paid. (A) equals the interest rate determined
under Internal Revenue Code section 846(c)(2), as it may be amended
from time to time; and (B) equals the Policy Loan Interest Rate;
minus
(d) indebtedness, if any, at the time the Single Sum Benefit is paid,
multiplied by the Election Percentage.
"Death Benefit" under the Rider means the amount payable at death of the
Insured under the Policy, plus the benefit payable under any In Force Primary
Insured Rider. (See Optional Insurance Benefits - Primary Insured Rider, above)
"Election Percentage" means a percentage, selected by the Policyowner, not to
exceed 100% of the Policy's Death Benefit, as defined under the Rider; however,
in no event will the Election Percentage result in a Single Sum Benefit greater
than $500,000. A "Physician" may be a Doctor of Medicine or a Doctor of
Osteopathy, licensed to practice medicine and treat injury or illness in the
state in which treatment is received and who is acting within the scope of that
license, and must be someone other than the Insured, the Policyowner, a person
who lives with the Insured or Policyowner, or a person who is part of the
Insured's or Policyowner's "Immediate Family" (spouse, child, brother, sister,
parent, grandparent or grandchild of the Insured). The "Physician's Statement"
must be a written statement signed by a Physician which provides the
Physician's diagnosis of the Insured's non-correctable medical condition. It
must state with reasonable medical certainty that the non-correctable medical
condition will result in the death of the Insured within 12 months of the
Physician's Statement, taking into consideration the ordinary and reasonable
medical care, advice and treatment available in the same or similar
communities.
The Rider will not pay benefits for a Terminal Condition resulting from
self-inflicted bodily injuries occurring within the same period specified in
the Policy's suicide provision. The Rider terminates at the earliest of (a) the
date the Policy terminates, (b) the effective date of a settlement option
elected under the Policy, (c) the date the Single Sum Benefit is paid, or (d)
the date the Policyowner elects to terminate the Rider.
Pursuant to the recently enacted Health Insurance Portability and
Accountability Act of 1996, Western Reserve believes that for Federal income
tax purposes a Single Sum Benefit payment made under the Terminal Illness
Accelerated Death Benefit Rider should be fully excludable from the gross
income of the Beneficiary, as long as the Beneficiary is the insured under the
Policy. However, a Policyowner should consult a qualified tax advisor about the
consequences of adding this Rider to a Policy or requesting a Single Sum
Benefit payment under this Rider.
There is no additional charge for this rider. This rider may not be
available in all states or, if available, the terms of the rider may vary, in
accordance with the requirements of each state's insurance laws.
THE FIXED ACCOUNT
A Policyowner may allocate Premiums and transfer Cash Value to the Fixed
Account, which is part of Western Reserve's
31
General Account. Because of exemptive and exclusionary provisions, interests in
the Fixed Account have not been registered under the Securities Act of 1933 and
neither the Fixed Account nor the General Account has been registered as an
investment company under the 1940 Act. Accordingly, neither the Fixed Account,
the General Account nor any interests therein are generally subject to the
provisions of these acts and Western Reserve has been advised that the staff of
the Commission has not reviewed the disclosures in this Prospectus relating to
the Fixed Account. Disclosures regarding the Fixed Account may, however, be
subject to certain generally applicable provisions of the Federal securities
laws relating to the accuracy and completeness of statements made in
prospectuses.
The portion of the Cash Value allocated to the Fixed Account (the "Fixed
Account Value") will be credited with rates of interest, as described below.
Because the Fixed Account Value becomes part of Western Reserve's General
Account, Western Reserve assumes the risk of investment gain or loss on this
amount. All assets in the General Account are subject to Western Reserve's
general liabilities from business operations.
FIXED ACCOUNT VALUE
At the end of any Valuation Period, the Fixed Account Value is equal to:
1. The sum of all Premium payments allocated to the Fixed Account; plus
2. Any amounts transferred from a Sub-Account to the Fixed Account; plus
3. Total interest credited to the Fixed Account; minus
4. Any amounts charged to pay for monthly deductions as they are due;
minus
5. Any cash withdrawals or surrenders from the Fixed Account; minus
6. Any amounts transferred to a Sub-Account from the Fixed Account; minus
7. Any amounts withdrawn from the Fixed Account to pay the pro rata
Decrease Charge incurred as a result of a decrease in the Specified
Amount.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Fixed Account Value is guaranteed to accumulate at a minimum
effective annual interest rate of 3% per year on unloaned amounts, and a
minimum guaranteed effective annual interest rate of 4% per year for loaned
amounts. Western Reserve presently credits the Fixed Account Value with current
rates in excess of the minimum guarantee but it is not obligated to do so.
Western Reserve has no specific formula for determining current interest rates.
Some of the factors that Western Reserve may consider, in its sole discretion,
in determining whether to credit interest in excess of the 3% guaranteed rate
are: general economic trends, rates of return currently available and
anticipated on the company's investments, regulatory and tax requirements, and
competitive factors. The Fixed Account Value will not share in the investment
performance of the company's general account or any portion thereof. Because
Western Reserve, at its sole discretion, anticipates changing the current
interest rate from time to time, different allocations to and from the Fixed
Account Value will be credited different current interest rates.
Western Reserve further guarantees that when a higher current interest
rate is declared on an allocation to the Fixed Account, that interest rate will
be guaranteed on such allocation for at least a one year period (the "Guarantee
Period"), unless the Cash Value associated with an allocation has been
transferred to the Loan Reserve. Western Reserve reserves the right to apply a
different current interest rate to that part of the Cash Value equal to the
Loan Reserve. At the end of the Guarantee Period, Western Reserve reserves the
right to declare a new current interest rate on such allocation and accrued
interest thereon (which may be a different current interest rate than the
current interest rate on new allocations to the Fixed Account on that date).
The rate declared on such allocation and accrued interest thereon at the end of
each Guarantee Period will be guaranteed again for another Guarantee Period. At
the end of any Guarantee Period, any interest credited on the Policy's Cash
Value in the Fixed Account in excess of the minimum guaranteed rate of 3% per
year will be determined in the sole discretion of Western Reserve. The
Policyowner assumes the risk that interest credited may not exceed the
guaranteed minimum rate.
Allocations from the Fixed Account Value to provide: a) cash withdrawal
amounts, b) transfers to the Series Account, or c) monthly deduction charges
are currently, for the purpose of crediting interest, accounted for on a last
in, first out ("LIFO") method.
Western Reserve reserves the right to change the method of crediting
interest from time to time, provided that such changes will not have the effect
of reducing the guaranteed rate of interest below 3% per annum or shorten the
Guarantee Period to less than one year.
ALLOCATIONS, TRANSFERS AND WITHDRAWALS
Premium payments and transfers to the Fixed Account will be allocated to
the Fixed Account on the first Valuation Date on or following the date Western
Reserve receives the payment or transfer request at its Office, except that any
allocation of Premium received prior to the Reallocation Date will take place
on the Policy Date (or the Reallocation Date, if later).
For transfers from the Fixed Account to a Sub-Account, Western Reserve
reserves the right to limit the transfers to one per Policy year and require
that transfer requests be in writing and received at Western Reserve's Office
within 30 days after a Policy Anniversary. The maximum amount that may be
transferred is limited to the greater of (a) 25% of the amount in the Fixed
Account, or (b) the amount transferred in the prior Policy year from the Fixed
Account, unless Western Reserve consents otherwise. Please consult your Policy
for details. No transfer charge will apply to transfers from the Fixed Account
to a Sub-Account. Amounts may be withdrawn from the Fixed
32
Account for cash withdrawals and surrenders only upon written request of the
Policyowner, and are subject to any applicable requirement for a signature
guarantee. (See Policy Rights - Surrender Privileges, p. 28.) Western Reserve
further reserves the right to defer payment of transfers, cash withdrawals, or
surrenders from the Fixed Account for up to six months. In addition, Policy
provisions relating to transfers, cash withdrawals or surrenders from the
Series Account will also apply to Fixed Account transactions.
DISTRIBUTION OF THE POLICIES
The Policy will be sold by individuals who, in addition to being licensed
as life insurance agents for Western Reserve, are also registered
representatives of ISI, an affiliate of Western Reserve and the principal
underwriter of the Policies, or of broker-dealers who have entered into written
sales agreements (|P`Sales Agreements|P') with the principal underwriter for
promotion and sale of the Policies. ISI is registered with the Commission under
the Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. No amounts have been retained
by ISI for acting as principal underwriter for the Policies. The compensation
payable to registered representatives who are appointed agents of Western
Reserve for sales of the Policies may vary with the Sales Agreement, but is not
expected to exceed 65% of all premiums paid during the first Policy year, and
2.10% of all premium payments in years 2 through 10. An additional sales
commission of up to 0.10% (ten one-hundredths of one percent) of the Policy's
Cash Value is payable on the fifth Policy Anniversary, and on each Anniversary
thereafter, provided the Policy's Cash Value at such times, minus any amounts
attributable to Policy loans, is at least $10,000. In addition, certain
production, persistency and managerial bonuses may be paid.
FEDERAL TAX MATTERS
INTRODUCTION
The ultimate effect of Federal income taxes on the Cash Value and on the
economic benefit to the Policyowner or Beneficiary depends on Western Reserve's
tax status and upon the tax status of the individual concerned. The discussion
contained herein is general in nature and is not intended as tax advice. For
complete information on Federal and state tax considerations, a qualified tax
adviser should be consulted. No attempt is made to consider any applicable
state or other tax laws. Because the discussion herein is based upon Western
Reserve's understanding of Federal income tax laws as they are currently
interpreted, Western Reserve cannot guarantee the tax status of any Policy.
Western Reserve makes no representations regarding the likelihood of
continuation of the current Federal income tax laws, Treasury Regulations, or
of the current interpretations by the Internal Revenue Service ("IRS"). Western
Reserve reserves the right to make changes to the Policy in order to assure
that it will continue to qualify as life insurance for tax purposes.
TAX CHARGES
At the present time, Western Reserve makes no charge for any Federal,
state or local taxes (other than premium taxes) that the Company incurs that
may be attributable to such Account or to the Policies. Western Reserve,
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 Series Account or to the
Policies.
TAX STATUS OF THE POLICY
Section 7702 of the Code sets forth a definition of a life insurance
contract for Federal tax purposes. The Secretary of the Treasury (the
"Treasury") has recently issued proposed regulations that would specify what
will be considered reasonable mortality charges under Section 7702. Guidance as
to how Section 7702 is to be applied is, however, limited. If a Policy were
determined not to be a life insurance contract for purposes of Section 7702,
such Policy would not provide most of the tax advantages normally provided by a
life insurance policy.
With respect to a Policy that is issued on the basis of a rate class
using Ultimate Select, non-tobacco use; Select, non-tobacco use; Ultimate
Standard, tobacco use; Standard tobacco use, guaranteed rates or Juvenile,
while there is some uncertainty due to the limited guidance on Section 7702,
Western Reserve nonetheless believes that such a Policy should meet the Section
7702 definition of a life insurance contract. With respect to a Policy that is
issued on a substandard rate class, there is even less guidance to determine
whether such a Policy meets the Section 7702 definition of a life insurance
contract. Thus, it is not clear whether such a Policy would satisfy Section
7702, particularly if the Policyowner pays the full amount of premiums
permitted under the Policy. If it is subsequently determined that a Policy does
not satisfy Section 7702, Western Reserve will take whatever steps are
appropriate and reasonable to attempt to cause such a Policy to comply with
Section 7702, including possibly refunding any premiums paid that exceed the
limitation allowable under Section 7702 (together with interest or other
earnings on any such premiums refunded as required by law). For these reasons,
Western Reserve reserves the right to modify the Policy as necessary to attempt
to qualify it as a life insurance contract under Section 7702.
Section 817(h) of the Code authorizes the Treasury to set standards by
regulation or otherwise for the investments of the Series Account to be
"adequately diversified" in order for the Policy to be treated as a life
insurance contract for Federal tax purposes. The Series Account, through the
Fund, intends to comply with the diversification requirements prescribed by the
Treasury in Reg. sec. 1.817-5, which affect how the Fund's assets may be
invested. Western Reserve believes that the Fund will be operated in compliance
with the requirements prescribed by the Treasury.
In certain circumstances, owners of variable life insurance policies may
be considered the owners, for Federal income tax purposes, of the assets of the
separate account used to support their policies. In those circumstances, income
and
33
gains from the separate account assets would be includable in the owner's gross
income. The IRS has stated in published rulings that the owner of a variable
life insurance policy will be considered the owner of separate account assets
if the owner possesses incidents of ownership in those assets, such as the
ability to exercise investment control over the assets. The Treasury Department
also announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated
asset account may cause the investor (I.E., the policyowner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policyowners were not owners of separate account assets. For
example, the Policyowner has additional flexibility in allocating premium
payments and Policy values. These differences could result in a Policyowner
being treated as the owner of a pro rata portion of the assets of the Series
Account. In addition, Western Reserve 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. Western Reserve therefore reserves the right to
modify the Policy as necessary to attempt to prevent a Policyowner from being
considered the owner of a pro rata share of the assets of the Series 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. Western Reserve believes that the proceeds and Cash Value
increases of a Policy should be treated in a manner consistent with a
fixed-benefit life insurance policy for Federal income tax purposes. Thus, the
death benefit under the Policy should be excludable from the gross income of
the Beneficiary under section 101(a)(1) of the Code.
A change in a Policy's Specified Amount, the payment of an unscheduled
premium, the taking of a Policy loan, a cash withdrawal, a total surrender, a
Policy Lapse with an outstanding indebtedness, a change in death benefit
options, the exchange of a Policy, or the assignment of a Policy may have tax
consequences depending upon the circumstances. In addition, Federal estate and
state and local estate, inheritance, and other tax consequences of ownership or
receipt of Policy proceeds depend upon the circumstances of each Policyowner or
Beneficiary. A competent tax adviser should be consulted for further
information.
The Policy may also be used in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if a
Policyowner is contemplating the use of a Policy in any arrangement the value
of which depends in part on its tax consequences, that Policyowner should be
sure to consult a qualified tax adviser regarding the tax attributes of the
particular arrangement.
Generally, the Policyowner will not be deemed to be in constructive
receipt of the Cash Value, including increments thereof, under the Policy until
there is a distribution. The tax consequences of distributions from, and loans
taken from, or secured by, a Policy depend on whether the Policy is classified
as a "modified endowment contract" under Section 7702A. Section 7702A generally
applies to Policies entered into or materially changed after June 20, 1988.
2. MODIFIED ENDOWMENT CONTRACTS. A Policy may be treated as a modified
endowment contract depending upon the amount of premiums paid in relation to
the death benefit provided under such Policy. The premium limitation rules for
determining whether such a Policy is a modified endowment contract are
extremely complex. In general, however, a Policy will be a modified endowment
contract if the accumulated premiums paid at any time during the first seven
Policy years exceed the sum of the net level premiums which would have been
paid on or before such time if the Policy provided for paid-up future benefits
after the payment of seven level annual premiums. In addition, if a Policy is
"materially changed," it may cause such Policy to be treated as a modified
endowment contract. The material change rules for determining whether a Policy
is a modified endowment contract are also extremely complex. In general,
however, the determination whether a Policy will be a modified endowment
contract after a material change depends upon the relationship of the death
benefit at the time of change to the Cash Value at the time of such change and
the additional premiums paid in the seven Policy years starting with the date
on which the material change occurs.
Under Western Reserve's current procedures, the Policyowner will be
notified at the time a Policy is issued whether, according to Western Reserve's
calculations, the Policy is or is not classified as a modified endowment
contract based on the premium then received. The Policyowner will also be
notified of the amount of the maximum annual premium which can be paid without
causing a Policy to be classified as a modified endowment contract.
Due to the Policy's flexibility, classification of a Policy as a modified
endowment contract will depend upon the circumstances of each Policy.
Accordingly, a prospective Policyowner should contact a competent tax adviser
before purchasing a Policy to determine the circumstances under which the
Policy would be a modified endowment contract. In addition, a Policyowner
should contact a competent tax adviser before making any change to, including
an exchange of, a Policy to determine whether such change would cause the
Policy (or the new policy in the case of an exchange) to be treated as a
modified endowment contract.
34
If a Policy becomes a modified endowment contract, distributions that
occur during the Policy year it becomes a modified endowment contract and any
subsequent Policy year will be taxed as distributions from a modified endowment
contract. In addition, distributions from a Policy within two years before it
becomes a modified endowment contract will be taxed in this manner. This means
that a distribution made from a Policy that is not a modified endowment
contract could later become taxable as a distribution from a modified endowment
contract.
3. DISTRIBUTIONS FROM POLICIES CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Policies classified as modified endowment contracts are subject to
the following tax rules: First, all pre-death distributions from such a Policy
(including distributions upon surrender, distributions made in anticipation of
the Policy becoming a modified endowment contract, and benefits paid at
maturity) are treated as ordinary income subject to tax up to the amount equal
to the excess (if any) of the Cash Value immediately before the distribution
over the investment in the Policy (described below) at such time. Second, loans
taken from, or secured by, such a Policy are treated as distributions from such
a Policy and taxed accordingly. (Unpaid Policy loan interest will be treated as
a loan for these purposes.) Third, a 10% Federal income tax penalty is imposed
on the portion of any distribution from, or loan taken from, or secured by,
such a Policy that is included in income except where the distribution or loan
is made on or after the Owner attains age 59-1/2, is attributable to the
Policyowner's becoming disabled, or is part of a series of substantially equal
periodic payments for the life (or life expectancy) of the Policyowner or the
joint lives (or joint life expectancies) of the Policyowner and the
Policyowner's Beneficiary.
4. DISTRIBUTIONS FROM POLICIES NOT CLASSIFIED AS MODIFIED ENDOWMENT
CONTRACTS. Distributions from a Policy that is not classified as a modified
endowment contract are generally treated as first recovering the investment in
the Policy (described below) and then, only after the return of all such
investment in the Policy, as distributing taxable income. An exception to this
general rule occurs in the case of a cash withdrawal, a decrease in the
Policy's death benefit, or any other change that reduces benefits under the
Policy in the first 15 years after the Policy is issued and results in a cash
distribution to the Policyowner in order for the Policy to continue complying
with the Section 7702 definitional limits. In that case, such distribution will
be taxed in whole or in part as ordinary income (to the extent of any gain in
the Policy) under rules prescribed in Section 7702.
Loans from, or secured by, a Policy that is not a modified endowment
contract are generally not treated as distributions. Instead, such loans are
treated as indebtedness of the Policyowner. However, the tax treatment of a
loan from a Policy that is not a modified endowment contract is uncertain to
the extent that the interest rate credited is equal to the interest rate
charged on the amount borrowed. A tax advisor should be consulted.
Finally, distributions (including distributions upon surrender or lapse)
or loans from, or secured by, a Policy that is not a modified endowment
contract are not subject to the 10% Federal income tax penalty.
5. POLICY LOAN INTEREST. Interest paid on a Policy loan generally is not
tax deductible. Therefore, a Policyowner 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 the gross income of the Policyowner (except that the amount of any loan
from, or secured by, a Policy that is a modified endowment contract, to the
extent such amount is excluded from gross income, will be disregarded), plus
(iii) the amount of any loan from, or secured by, a Policy that is a modified
endowment contract to the extent that such amount is included in the gross
income of the Policyowner.
7. MULTIPLE POLICIES. All modified endowment contracts that are issued by
Western Reserve (or its affiliates) to the same Policyowner during any calendar
year are treated as one modified endowment contract for purposes of determining
the amount includable in gross income under Section 72(e) of the Code.
8. TERMINAL ILLNESS ACCELERATED DEATH BENEFIT RIDER. Pursuant to the
recently enacted Health Insurance Portability and Accountability Act of 1996,
Western Reserve believes that for Federal income tax purposes a Single Sum
Benefit payment made under the Terminal Illness Accelerated Death Benefit Rider
should be fully excludable from the gross income of the beneficiary, as long as
the beneficiary is the Insured under the Policy. However, a Policyowner should
consult a qualified tax advisor about the consequences of adding this Rider to
a Policy or requesting a Single Sum Benefit payment under this Rider.
9. BUSINESS-OWNED INSURANCE. In recent years, Congress has adopted new
rules relating to life insurance owned by businesses. Any business
contemplating the purchase of a new Policy or a change in an existing Policy
should consult a tax advisor.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Policy could change by
legislation or otherwise. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the Federal
taxation of this Policy. It is possible that any legislative change could be
retroactive (that is, effective prior to the date of the change.) A tax advisor
should be consulted with respect to legislative developments and their effect
on the Policy.
EMPLOYMENT-RELATED BENEFIT PLANS
On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V.
NORRIS that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary
35
between men and women on the basis of sex. The Policy described in this
Prospectus contains guaranteed cost of insurance rates and guaranteed purchase
rates for certain payment options that distinguish between men and women.
Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of NORRIS, and Title VII generally,
on any employment-related insurance or benefit program for which a Policy may
be purchased.
SAFEKEEPING OF THE
SERIES ACCOUNT'S ASSETS
Western Reserve holds the assets of the Series Account. The assets are
kept physically segregated and held separate and apart from the General
Account. Western Reserve maintains records of all purchases and redemptions of
Fund shares by each of the Sub-Accounts. Additional protection for the assets
of the Series Account is provided by a blanket bond issued to AEGON U.S.
Holding Corporation ("AEGON U.S.") in the amount of $5 million (subject to a $1
million deductible), covering all of the employees of AEGON U.S. and its
affiliates, including Western Reserve. A Stockbrokers Blanket Bond, issued to
AEGON U.S.A. Securities, Inc. provides additional fidelity coverage, to a limit
of $12 million.
VOTING RIGHTS OF THE SERIES ACCOUNT
To the extent required by law, Western Reserve will vote the Fund shares
held in the Series Account at shareholder meetings of the Fund in accordance
with instructions received from persons having voting interests in the
corresponding Sub-Accounts of the Series Account. Except as required by the
1940 Act, the Fund does not hold regular or special shareholder meetings. If
the 1940 Act or any regulation thereunder should be amended or if the present
interpretation thereof should change, and as a result Western Reserve
determines that it is permitted to vote the Fund shares in its own right, it
may elect to do so.
The number of votes which a Policyowner has the right to instruct will be
calculated separately for each Sub-Account. The number of votes which each
Policyowner has the right to instruct will be determined by dividing a Policy's
Cash Value in that Sub-Account by $100. Fractional shares will be counted. The
number of votes of the Portfolio which the Policyowner has the right to
instruct will be determined as of the date coincident with the date established
by that Portfolio for determining shareholders eligible to vote at the meeting
of the Fund. Voting instructions will be solicited by written communications
prior to such meeting in accordance with procedures established by the Fund.
Western Reserve will vote Fund shares as to which no timely instructions
are received and Fund shares which are not attributable to Policyowners in
proportion to the voting instructions which are received with respect to all
Policies participating in that Portfolio. Voting instructions to abstain on any
item to be voted upon will reduce the votes eligible to be cast by Western
Reserve.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports and other materials relating to the appropriate Portfolio.
DISREGARD OF VOTING INSTRUCTIONS. Western Reserve may, when required by
state insurance regulatory authorities, disregard voting instructions if the
instructions require that the shares be voted so as to cause a change in the
sub-classification or investment objective of the Fund or one or more of its
Portfolios or to approve or disapprove an investment advisory contract for a
Portfolio of the Fund. In addition, Western Reserve itself may disregard voting
instructions in favor of changes initiated by a Policyowner in the investment
policy or the investment adviser of a Portfolio of the Fund if Western Reserve
reasonably disapproves of such changes. A change would be disapproved only if
the proposed change is contrary to state law or prohibited by state regulatory
authorities or Western Reserve determined that the change would have an adverse
effect on its General Account in that the proposed investment policy for a
Portfolio may result in overly speculative or unsound investments. In the event
Western Reserve does disregard voting instructions, a summary of that action
and the reasons for such action will be included in the next annual report to
Policyowners.
STATE REGULATION OF WESTERN RESERVE
As a life insurance company organized and operated under Ohio law,
Western Reserve is subject to provisions governing such companies and to
regulation by the Ohio Commissioner of Insurance.
Western Reserve's books and Accounts are subject to review and
examination by the Ohio Insurance Department at all times and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners at least once every three years.
REINSURANCE
Western Reserve intends to reinsure a portion of the risks assumed under
the Policies.
EXECUTIVE OFFICERS AND DIRECTORS
OF WESTERN RESERVE
JOHN R. KENNEY(1), CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER
AND PRESIDENT. Chairman of the Board of Directors (1987 - present) and
Chief Executive Officer (1982 - present), President, (1978 - 1987 and
December, 1992 - present), Director (1978 - present), Western Reserve Life
Assurance Co. of Ohio; Chairman of the Board of Directors (1985 -
present), President (March, 1993 - present), WRL Series Fund, Inc.;
Chairman of the Board (September, 1996 - present), WRL Investment
Management, Inc.; Chairman of the Board (September, 1996 - present), WRL
Investment Services, Inc.; Chairman of the Board of Directors (February,
1997 - present), AEGON Asset Management Services, Inc., Largo, Florida;
Chairman of the Board of Directors and Chief Executive Officer (1988 -
February, 1991), President
36
(1988 - 1989), Director (1976 - February, 1991), Executive Vice President
(1972 - 1988), Pioneer Western Corporation (financial services), Largo,
Florida; Trustee (1987 - present), Chairman (December, 1989 to September,
1990 and November, 1990 to present) and President and Chief Executive
Officer (November, 1986 to September, 1990), IDEX Series Fund; former
Trustee of IDEX Fund, IDEX II Series Fund and IDEX Fund 3 (investment
companies), all of Largo, Florida.
ALAN M. YAEGER(1), EXECUTIVE VICE PRESIDENT, ACTUARY AND CHIEF FINANCIAL
OFFICER. Executive Vice President (June, 1993 - present), Chief Financial
Officer (December, 1995 - present), Senior Vice President (1981 - June,
1993) and Actuary (1972 - present), Western Reserve Life Assurance Co. of
Ohio; Director (September, 1996 - present), WRL Investment Management,
Inc.; Director (September, 1996 - present), WRL Investment Services, Inc.;
Executive Vice President (September, 1993 - present), WRL Series Fund,
Inc.
WILLIAM H. GEIGER(1), SENIOR VICE PRESIDENT, SECRETARY AND CORPORATE COUNSEL.
Senior Vice President, Secretary and Corporate Counsel (July, 1990 -
present) of Western Reserve Life Assurance Co. of Ohio; Vice President,
Secretary and General Counsel of Pioneer Western Corporation (financial
services) and Secretary of its subsidiaries (May, 1990 to February, 1991);
Vice President and Assistant Secretary (November, 1990 to present) and
Secretary (June, 1990 to September, 1990) IDEX Series Fund, former Vice
President and Assistant Secretary of IDEX Fund, IDEX II Series Fund and
IDEX Fund 3 (investment companies), all of Largo, Florida.
ALLAN J. HAMILTON(1), VICE PRESIDENT, TREASURER AND CONTROLLER. Vice President
and Controller (1987 - present), Treasurer, (February, 1997 - present),
Assistant Vice President and Assistant Controller (1983 - 1987), Western
Reserve Life Assurance Co. of Ohio; Treasurer and Principal Financial
Officer (February, 1997 - present), WRL Series Fund, Inc.; Vice President
and Controller (1988 to February 1991), Pioneer Western Corporation
(financial services), Largo, Florida.
PATRICK S. BAIRD, DIRECTOR, 4333 Edgewood Road, NE, Cedar Rapids, Iowa 52499,
Director (February, 1991 to present), Western Reserve Life Assurance Co.
of Ohio; Vice President and Chief Tax Officer (1984 - present), Chief
Financial Officer (1992 - present) AEGON USA, Inc., formerly known as Life
Investors, Inc., (financial services holding company), Cedar Rapids, Iowa.
- ------------------------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 33758-5068
JACK E. ZIMMERMAN, DIRECTOR, 507 St. Michel Circle, Kettering, Ohio 45429,
Director (1987 - present), Western Reserve Life Assurance Co. of Ohio;
Trustee, IDEX Series Fund, former Trustee of IDEX Fund, IDEX II Series
Fund and IDEX Fund 3 (investment companies); Director, Regional Marketing,
(1986 - January, 1993), Martin Marietta Corporation, Dayton, Ohio.
LYMAN H. TREADWAY, DIRECTOR, 30195 Chagrin Blvd. Ste. 210N, Cleveland, Ohio
44124, Director (September, 1994 - present), Western Reserve Life
Assurance Co. of Ohio; Consultant (1988 - 1993), Cleveland, Ohio.
JAMES R. WALKER, DIRECTOR, 3320 Office Park Dr., Dayton, Ohio 45439, Director
(June, 1996 - present) Western Reserve Life Assurance Co. of Ohio;
Self-employed, Public Accountant (1996 - present); Partner, C.P.A. (1990 -
1995), Walker-Davis C.P.A.'s, Dayton, Ohio.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP, Washington, D.C., has provided advice
on certain legal matters concerning Federal securities laws in connection with
the Policies. All matters of Ohio law pertaining to the Policy, including the
validity of the Policy and Western Reserve's right to issue the Policy under
Ohio Insurance Law, have been passed upon by Thomas E. Pierpan, Vice President,
Assistant Secretary and Associate General Counsel of Western Reserve.
LEGAL PROCEEDINGS
Western Reserve, like other life insurance companies, is involved in
lawsuits. Western Reserve is not aware of any class action lawsuits naming it
as a Defendant or involving the Series Account. In some lawsuits involving
other insurers, substantial damages have been sought and/or material settlement
payments have been made. Although the outcome of any litigation cannot be
predicted with certainty, Western Reserve believes that at the present time
there are no pending or threatened lawsuits that are reasonably likely to have
a material adverse impact on the Series Account or Western Reserve.
EXPERTS
The financial statements of WRL Series Life Account as of December 31,
1997 and for the year then ended have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, and upon the
authority of that firm as experts in accounting and auditing.
The financial statements and schedules of Western Reserve Life Assurance
Co. of Ohio at December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein
which are based in part on the reports of Price Waterhouse LLP, independent
accountants. The financial statements referred to above are included in
reliance upon such
37
reports given upon the authority of such firms as experts in accounting and
auditing.
Actuarial matters included in this Prospectus have been examined by Alan
Yaeger as stated in the opinion filed as an exhibit to the registration
statement.
ADDITIONAL INFORMATION
A registration statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933, as amended, with respect to the
Policy offered hereby. This 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 Series Account, Western Reserve 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.
YEAR 2000 MATTERS
In October 1996, Western Reserve adopted and presently has in place a
Year 2000 Assessment and Planning Project (the "Plan") to review and analyze
existing hardware and software systems, as well as voice and data
communications systems, to determine if they are Year 2000 compatible. Western
Reserve has also engaged the services of a third-party provider that is
specialized in Year 2000 issues to work on the Plan.
As of the date of this Prospectus, Western Reserve has identified and
made available what it believes are the appropriate resources of hardware,
people, and dollars, including the engagement of outside third parties, to
ensure that the Plan will be completed.
The Year 2000 computer problem, and its resolution, is complex and
multifaceted, and success of a response plan cannot be conclusively known until
the Year 2000 is reached (or an earlier date to the extent that the systems or
equipment addresses Year 2000 data prior to the Year 2000). Even with the
appropriate and diligent pursuit of a well-conceived response plan, including
testing procedures, there is no certainty that any company will achieve
complete success. Further, notwithstanding its efforts or results, Western
Reserve's ability to function unaffected to and through the Year 2000 may be
adversely affected by actions (or failure to act) of third parties beyond our
knowledge or control. See the Fund's prospectus for information on the Fund's
preparation for Year 2000.
INFORMATION ABOUT WESTERN RESERVE'S
FINANCIAL STATEMENTS
The financial statements of Western Reserve which are included in this
Prospectus (see p. 65) should be considered only as bearing on the ability of
Western Reserve to meet its obligations under the Policies. They should not be
considered as bearing on the investment performance of the assets held in the
Series Account.
Financial statements for Western Reserve for the years ended December 31,
1997, 1996 and 1995, have been prepared on the basis of statutory accounting
principles, rather than generally accepted accounting principles ("GAAP").
38
APPENDIX A
ILLUSTRATION OF BENEFITS
The tables in Appendix A illustrate the way in which a Policy operates.
They show how the death benefit, Cash Value and Net Surrender Value of a Policy
issued to an Insured of a given age and a given premium could vary over an
extended period of time assuming hypothetical gross rates of return equivalent
to constant after tax annual rates of 0%, 6% and 12%. The tables illustrate the
Policy values that would result based on the assumptions that the premium is
paid as indicated, that the Owner has not requested a decrease in the Specified
Amount of the Policy, and that no cash withdrawals or Policy loans have been
made.
The death benefits, Cash Values and Net Surrender Values under a Policy
would be different from those shown if the actual rate of return averages 0%,
6% or 12% over a period of years, but fluctuates above and below those averages
for individual Policy years. They would also differ if any Policy loans were
made during the period of time illustrated.
The illustration on page 40 is based on a Policy for an Insured who is a
35 year old male in the non-tobacco user Ultimate Select rate class, annual
premiums of $5,500, a $500,000 Specified Amount and Death Benefit Option A. The
illustrations on that page also assume cost of insurance charges based on
Western Reserve's CURRENT cost of insurance rates.
The illustration on page 41 is based on the same factors as those on page
40, except that cost of insurance rates are based on the GUARANTEED cost of
insurance rates (based on the 1980 Commissioners Standard Ordinary Mortality
Table).
The amounts shown for the death benefits, Cash Values and Net Surrender
Values take into account (1) the daily charge for assuming mortality and
expense risks assessed against each Sub-Account which is equivalent to an
annual charge of 0.90% of the average net assets of the Sub-Accounts during the
first fifteen Policy years and 0.30% thereafter. However, the reduced annual
charge after the first fifteen Policy years is guaranteed to be at least 0,60%;
(2) estimated daily expenses equivalent to an effective average annual expense
level of 0.95% of the average daily net assets of the Portfolios of the Fund;
and (3) applicable Cash Value charges. The 0.95% average Portfolio expense
level assumes an equal allocation of amounts among the sixteen Sub-Accounts and
is based on an average 0.76% investment advisory fee and estimated 1997 average
normal operating expenses of 0.19% for each of the Portfolios in operation
during 1997. Calculation of the average annual expense level utilized
annualized actual audited expenses incurred during 1997 for the Money Market
(0.48%), Bond (0.64%), Growth (0.85%) (including voluntary fee reductions
effective May 1, 1998), Strategic Total Return (0.88%), Emerging Growth
(0.93%), Global (1.00%), Aggressive Growth (0.96%), Balanced (0.94%), Growth &
Income (0.96%), C.A.S.E. Growth (1.00%), Tactical Asset Allocation (0.87%),
Value Equity (0.89%), International Equity (1.50%), and U.S. Equity (1.30%). In
addition, because the Third Avenue Value and Real Estate Securities Portfolios
had not commenced operations as of December 31, 1997, the estimated average
annual Portfolio expense level reflects estimated expenses for each of these
two Portfolios at 1.00%, for 1998. WRL Management has undertaken until April
30, 1999 to pay expenses to the extent normal operating expenses of a Portfolio
exceed a stated percentage of the Portfolio's average daily net assets. Taking
into account the assumed charges of 1.85%, the gross annual investment return
rates of 0%, 6% and 12% are equivalent to net annual investment return rates of
- -1.85%, 4.15% and 10.15% during the first fifteen Policy years and -1.25%,
4.75% and 10.75% thereafter.
The hypothetical returns shown in the tables are without any tax charges
that may be attributable to the Series Account, because Western Reserve is not
currently making such charges. In order to produce after tax returns of 0%, 6%
or 12% if such charges are made in the future, the Series Account would have to
earn a sufficient amount in excess of 0%, 6% or 12% to cover any tax charges.
(See Charges Against the Series Account - Taxes, p. 26.)
The "Premium Accumulated at 5%" column of each table shows the amount
which would accumulate if an amount equal to the premium were invested to earn
interest at 5% per year, compounded annually.
Western Reserve will furnish, upon request, a comparable illustration
reflecting the proposed Insured's age, sex, risk classification and desired
plan features.
39
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
Specified Amount $500,000 Ultimate Select Class
Annual Premium $5,500 Option Type A
Using Current Cost of Insurance Rates
DEATH BENEFIT
ASSUMING HYPOTHETICAL GROSS AND NET
END OF PREMIUMS ANNUAL INVESTMENT RETURN OF
POLICY ACCUMULATED 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR AT 5% -1.85% (NET) YEARS 1-15 4.15% (NET) YEARS 1-15 10.15% (NET) YEARS 1-15
-1.25% (NET) YEARS 16+ 4.75% (NET) YEARS 16+ 10.75% (NET) YEARS 16+
1 5,775 500,000 500,000 500,000
2 11,839 500,000 500,000 500,000
3 18,206 500,000 500,000 500,000
4 24,891 500,000 500,000 500,000
5 31,911 500,000 500,000 500,000
6 39,281 500,000 500,000 500,000
7 47,020 500,000 500,000 500,000
8 55,146 500,000 500,000 500,000
9 63,678 500,000 500,000 500,000
10 72,637 500,000 500,000 500,000
15 124,616 500,000 500,000 500,000
20 190,956 500,000 500,000 500,000
30(AGE 65) 383,684 500,000 500,000 1,095,334
40(AGE 75) 697,619 500,000 500,000 2,724,666
50(AGE 85) 1,208,985 * 845,195 7,423,634
60(AGE 95) 2,041,946 * 1,335,588 19,490,445
CASH VALUE NET SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
POLICY YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
-1.85% (NET) 4.15% (NET) 10.15% (NET) -1.85% (NET) 4.15% (NET) 10.15% (NET)
YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15
-1.25% (NET) 4.75% (NET) 10.75% (NET) -1.25% (NET) 4.75% (NET) 10.75% (NET)
YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+
1 4,581 4,885 5,189 708 1,011 1,315
2 9,065 9,960 10,892 4,730 5,625 6,557
3 13,445 15,225 17,155 8,647 10,428 12,357
4 17,726 20,693 24,039 12,467 15,434 18,779
5 21,879 26,339 31,575 16,158 20,618 25,854
6 25,902 32,169 39,828 19,719 25,985 33,645
7 29,789 38,181 48,866 23,143 31,536 42,220
8 33,542 44,386 58,771 26,435 37,279 51,664
9 37,098 50,726 69,569 29,528 43,157 62,000
10 40,488 57,237 81,388 32,456 49,206 73,356
15 54,796 92,444 159,866 54,796 94,444 159,866
20 66,653 136,754 294,347 66,653 136,754 294,347
30(AGE 65) 83,405 263,904 897,815 83,405 263,904 897,815
40(AGE 75) 73,075 468,412 2,546,417 73,075 468,412 2,546,417
50(AGE 85) * 804,948 7,070,127 * 804,948 7,070,127
60(AGE 95) * 1,322,364 19,297,470 * 1,322,364 19,297,470
* In the absence of an additional payment, the Policy would lapse.
The hypothetical investment rates of return shown above and elsewhere in the
Prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return.
Actual investment rates of return may be more or less than those shown and will
depend on a number of factors, including the investment allocations by an Owner
and the different investment rates of return for the Fund. The Death Benefit,
Cash Value and Net Surrender Value for a Policy would be different from those
shown if the actual investment rates of return averaged 0%, 6% and 12% over a
period of years, but fluctuated above or below that average for individual
Policy years. No representation can be made by Western Reserve or the Fund that
these hypothetical investment rates of return can be achieved for any one year
or sustained over any period of time. This illustration must be preceded or
accompanied by a current Prospectus.
40
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
Specified Amount $500,000 Ultimate Select Class
Annual Premium $5,500 Option Type A
Using Guaranteed Cost of Insurance Rates
DEATH BENEFIT
ASSUMING HYPOTHETICAL GROSS AND NET
END OF PREMIUMS ANNUAL INVESTMENT RETURN OF
POLICY ACCUMULATED 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR AT 5% -1.85% (NET) YEARS 1-15 4.15% (NET) YEARS 1-15 10.15% (NET) YEARS 1-15
-1.25% (NET) YEARS 16+ 4.75% (NET) YEARS 16+ 10.75% (NET) YEARS 16+
1 5,775 500,000 1500,000 500,000
2 11,839 500,000 500,000 500,000
3 18,206 500,000 500,000 500,000
4 24,891 500,000 500,000 500,000
5 31,911 500,000 500,000 500,000
6 39,281 500,000 500,000 500,000
7 47,020 500,000 500,000 500,000
8 55,146 500,000 500,000 500,000
9 63,678 500,000 500,000 500,000
10 72,637 500,000 500,000 500,000
15 124,616 500,000 500,000 500,000
20 190,956 500,000 500,000 500,000
30(AGE 65) 383,684 500,000 500,000 1,058,623
40(AGE 75) 697,619 * 500,000 2,593,787
50(AGE 85) 1,208,985 * 720,735 6,923,820
60(AGE 95) 2,041,946 * 1,106,564 17,490,930
CASH VALUE NET SURRENDER VALUE
END OF ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
POLICY YEAR ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
-1.85% (NET) 4.15% (NET) 10.15% (NET) -1.85% (NET) 4.15% (NET) 10.15% (NET)
YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15 YEARS 1-15
-1.25% (NET) 4.75% (NET) 10.75% (NET) -1.25% (NET) 4.75% (NET) 10.75% (NET)
YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+ YEARS 16+
1 4,513 4,814 5,116 640 941 1,243
2 8,911 9,797 10,719 4,576 5,461 6,384
3 13,182 14,940 16,847 8,385 10,143 12,049
4 17,326 20,249 23,548 12,066 14,990 18,289
5 21,334 25,721 30,876 15,613 20,000 25,154
6 25,207 31,361 38,891 19,023 25,178 32,707
7 28,933 37,164 47,654 22,287 30,518 41,009
8 32,516 43,138 57,246 25,409 36,030 50,139
9 35,946 49,280 67,744 28,377 41,710 60,174
10 39,227 55,599 79,246 31,196 47,568 71,215
15 53,072 89,802 155,713 53,072 89,802 155,713
20 63,465 131,831 286,041 63,465 131,831 286,041
30(AGE 65) 68,562 245,033 867,724 68,562 245,033 867,724
40(AGE 75) * 406,533 2,424,100 * 406,533 2,424,100
50(AGE 85) * 686,414 6,594,114 * 686,414 6,594,114
60(AGE 95) * 1,095,608 17,317,752 * 1,095,608 7,317,752
* In the absence of an additional payment, the Policy would lapse
The hypothetical investment rates of return shown above and elsewhere in the
Prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return.
Actual investment rates of return may be more or less than those shown and will
depend on a number of factors, including the investment allocations by an Owner
and the different investment rates of return for the Fund. The Death Benefit,
Cash Value and Net Surrender Value for a Policy would be different from those
shown if the actual investment rates of return averaged 0%, 6% and 12% over a
period of years, but fluctuated above or below that average for individual
Policy years. No representation can be made by Western Reserve or the Fund that
these hypothetical investment rates of return can be achieved for any one year
or sustained over any period of time. This illustration must be preceded or
accompanied by a current Prospectus.
41
APPENDIX B
WEALTH INDICES OF INVESTMENTS IN THE
U.S. CAPITAL MARKETS
The information below graphically depicts the growth of $1.00 invested in
large company stocks, small company stocks, long-term government bonds,
Treasury bills, and a hypothetical asset returning the inflation rate over the
period from the end of 1925 to the end of 1997. All results assume reinvestment
of dividends on stocks or coupons on bonds and no taxes. Transaction costs are
not included, except in the small stock index starting in 1982.
Each of the cumulative index values is initialized at $1.00 at year-end
1925. The graph illustrates that large company stocks and small company stocks
have the best performance over the entire 72-year period; investments of $1.00
in these assets would have grown to $1,828.33 and $5,519.97, respectively, by
year-end 1997. This higher growth was earned by investments involving
substantial risk. In contrast, long-term government bonds (with an approximate
20-year maturity), which exposed the holder to much less risk, grew to only
$39.07.
The lowest-risk strategy over the past 72 years (for those with
short-term time horizons) was to buy U.S. Treasury bills. Since Treasury bills
tended to track inflation, the resulting real (inflation-adjusted) returns were
near zero for the entire 1926 - 1997 period.
[GRAPHIC OMITTED]
COMPOUND
ANNUAL
RETURN
- Small Company Stocks 12.7%
Dimensional Fund Advices
Small Company Fund
- Large Company Stocks 11.0%
S&P 500
- Long-Term Government Bonds 5.2%
20-year U.S. Government Bonds
- Treasury Bills 3.8%
30-day U.S. T-Bills
- Inflation 3.1%
Consumer Price Index
* Source: (c) STOCKS, BONDS, BILLS AND INFLATION 1998 YEARBOOK/trademark/,
Ibbotson Associates, Chicago (annually updates work by Roger G. Ibbotson and
Rex A. Sinquefield). Used with permission. All
rights reserved.
42
COMPOUND ANNUAL RATES OF RETURN BY DECADE
1920s* 1930s 1940s 1950s 1960s 1970s 1980s 1990s** 1988-97
Large Company ............. 19.2% -0.1% 9.2% 19.4% 7.8% 5.9% 17.5% 16.6% 18.0%
Small Company ............. -4.5 1.4 20.7 16.9 15.5 11.5 15.8 16.5 16.5
Long-Term Corp. ........... 5.2 6.9 2.7 1.0 1.7 6.2 13.0 10.2 10.8
Long-Term Govt. ........... 5.0 4.9 3.2 -0.1 1.4 5.5 12.6 10.7 11.3
Inter-Term Govt. .......... 4.2 4.6 1.8 1.3 3.5 7.0 11.9 8.0 8.3
Treasury Bills ............ 3.7 0.6 0.4 1.9 3.9 6.3 8.9 5.0 5.4
Inflation ................. -1.1 -2.0 5.4 2.2 2.5 7.4 5.1 3.1 3.4
- ------------------------------
* Based on the period 1926-1929.
** Based on the period 1990-1997.
Source: (c) STOCKS, BONDS, BILLS AND INFLATION 1998 YEARBOOK/trademark/,
Ibbotson Associates, Inc., Chicago (annually updates work by Roger G. Ibbotson
and Rex A. Sinquefield). Used with permission. All rights reserved.
THE WRL FREEDOM ELITE(SM)
AND THE "DOLLAR COST AVERAGING" INVESTMENT STRATEGY
As the Long Term Market Trends graph indicates, the investment
performance of many common stocks has generally been positive over certain
relatively long periods. Common stocks have, however, also been subject to
market declines, often dramatic ones, and general volatility of prices over
shorter time periods. The price fluctuations of common stocks has historically
been greater than that of high grade debt securities.
The relative volatility of common stock prices as compared with prices of
high grade debt instruments offers both advantages and disadvantages to
investors. Unfortunately, many investors who otherwise might be interested in
common stocks see only the disadvantages and not the advantages of stock price
fluctuation. The primary disadvantage, of course, is that price declines can be
prolonged and substantial, and when this occurs, investors cannot liquidate
their investments without realizing losses. Price declines, however, also offer
investors important opportunities.
Opportunity arises from the fact that investors can purchase more common
stock for the same amount of money than they would before prices declined.
Investors may take advantage of this if they remain willing to continue
investing in both rising and falling markets. The dollar cost averaging
strategy of investing demonstrates this.
In this method of investing:
/bullet/ Relatively constant dollar amounts are invested at regular
intervals (monthly, quarterly, or annually),
/bullet/ Stock Market fluctuations, especially the savings on purchases
from price declines, are exploited for the investor's benefit.
HOW DOLLAR COST AVERAGING WORKS
Investments at Common Stock Shares
Regular Intervals Market Price Purchased
- ------------------- -------------- ----------
$150 $20 7.5
150 15 10.0
150 10 15.0
150 5 30.0
150 10 15.0
150 15 10.0
----------- ----
$900 87.5
Total Value of 87.5 shares
@ $15/share $1,312.50
Less Investment made (900.00)
---------
Gain/Profit $ 412.50
Though the market price has not returned to the initial high of $20 per
share, dollar cost averaging has permitted the investor to purchase more shares
at a savings and thus realize a significant gain. Obviously, the dollar cost
averaging strategy is for the investor who can continue to invest relatively
constant amounts over a long period of time.
This plan of investing does not assure a profit or protect against a loss
in declining markets; it does allow investors to take advantage of market
fluctuations. Since the success of this strategy is dependent on systematic
investing, purchasers should consider their ability to sustain their payments
through all periods of market fluctuations.
How does the dollar cost averaging method relate to the WRL Freedom
Elite(sm)? A Policyowner may invest his or her Premium in a Sub-Account, and
although a Policy's value in a Sub-Account or Sub-Accounts is affected by
several factors other than investment experience (E.G., Cash Value charges and
charges against the Series Account), the dollar cost averaging strategy can be
generally applied to the Policy to the extent that the Policyowner pays a
Planned Periodic Premium on a regular basis and he or she allocates Premium
resulting from those Planned Periodic Premiums to Sub-Accounts in relatively
constant amounts.
43
INDEX TO FINANCIAL STATEMENTS
WRL SERIES LIFE ACCOUNT:
Report of Independent Accountants dated January 30, 1998
Statements of assets, liabilities and equity accounts and statements of
operations for the year ended December 31, 1997
Statements of changes in equity accounts for the years ended December 31,
1997 and 1996
Selected per unit data and ratios for the years ended December 31, 1997,
1996, 1995, 1994 and 1993
Notes to Financial Statements
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO:
Report of Independent Auditors dated February 27, 1998
Statutory-Basis Balance Sheets at December 31, 1997 and 1996
Statutory-Basis Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Statutory-Basis Statements of changes in Capital and Surplus for the
years ended December 31, 1997, 1996 and 1995
Statutory-Basis Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Notes to Statutory-Basis Financial Statements
Statutory-Basis Financial Statement Schedules
WRL00005-01/99
44
PART II.
OTHER INFORMATION
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.
REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A)
Western Reserve Life Assurance Co. of Ohio ("Western Reserve") hereby
represents that the fees and charges deducted under the Contracts, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by Western Reserve.
STATEMENT WITH RESPECT TO INDEMNIFICATION
Provisions exist under the Ohio General Corporation Law, the Second Amended
Articles of Incorporation of Western Reserve and the Amended Code of Regulations
of Western Reserve whereby Western Reserve may indemnify certain persons against
certain payments incurred by such persons. The following excerpts contain the
substance of these provisions.
OHIO GENERAL CORPORATION LAW
SECTION 1701.13 AUTHORITY OF CORPORATION.
(E)(1) A corporation may indemnify or agree to indemnify any person who was
or is a party or is threatened to be made a party, to any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of the
corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, or agent of another
corporation (including a subsidiary of this corporation), domestic or foreign,
nonprofit or for profit, partnership, joint venture, trust, or other enterprise,
against expenses, including attorneys' fees, judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendre or its equivalent, shall not, of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person who was or
is a party, or is threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any of the following:
II-1
(a) Any claim, issue, or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless, and only to the extent that the court of
common pleas, or the court in which such action or suit was brought determines
upon application that, despite the adjudication of liability, but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court of common pleas or such other court
shall deem proper;
(b) Any action or suit in which the only liability asserted against a
director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, or agent has
been successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in divisions (E)(1) and (2) of this section, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection therewith.
(4) Any indemnification under divisions (E)(1) and (2) of this section,
unless ordered by a court, shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
trustee, officer, employee, or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in divisions (E)(1) and (2)
of this section. Such determination shall be made as follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened with
any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this section is
not obtainable or if a majority vote of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been retained
by or who has performed services for the corporation, or any person to be
indemnified within the past five years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which such action,
suit, or proceeding was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or brought
the action or suit by or in the right of the corporation under division (E)(2)
of this section, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or the court
in which such action or suit was brought to review the reasonableness of such
determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit or proceeding referred to in divisions (E)(1) and (2)
of this section, the articles or the regulations of a corporation state by
specific reference to this division that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or proceeding
upon receipt of an undertaking by or on behalf of the director in which he
agrees to do both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or failure to act
involved an act or omission undertaken with
II-2
deliberate intent to cause injury to the corporation or undertaken with reckless
disregard for the best interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the
action, suit, or proceeding.
(b) Expenses, including attorneys' fees incurred by a director,
trustee, officer, employee, or agent in defending any action, suit, or
proceeding referred to in divisions (E)(1) and (2) of this section, may be paid
by the corporation as they are incurred, in advance of the final disposition of
the action, suit, or proceeding as authorized by the directors in the specific
case upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, if it ultimately is determined
that he is entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be exclusive
of, and shall be in addition to, any other rights granted to those seeking
indemnification under the articles or the regulations or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
trustee, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including but not limited to trust funds, letters of credit, or
self-insurance on behalf of or for any person who is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, or agent of another
corporation, domestic or foreign, nonprofit or for profit, partnership, joint
venture, trust, or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section. Insurance may be purchased from or maintained
with a person in which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
divisions (E)(1) and (2) of this section does not limit the payment of expenses
as they are incurred, indemnification, insurance, or other protection that may
be provided pursuant to divisions (E)(5), (6), and (7) of this section.
Divisions (E)(1) and (2) of this section do not create any obligation to repay
or return payments made by the corporation pursuant to divisions (E)(5), (6), or
(7).
(9) As used in this division, references to "corporation" include all
constituent corporations in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee, or
agent of such a constituent corporation, or is or was serving at the request of
such constituent corporation as a director, trustee, officer, employee or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, shall stand in the same
position under this section with respect to the new or surviving corporation as
he would if he had served the new or surviving corporation in the same capacity.
SECOND AMENDED ARTICLES OF INCORPORATION OF WESTERN RESERVE
ARTICLE EIGHTH
EIGHTH: (1) The corporation may indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of the
corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, or agent of another
corporation (including a subsidiary of this corporation), domestic or foreign,
nonprofit or for profit, partnership, joint venture, trust, or other enterprise,
against expenses, including attorneys'
II-3
fees, judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendre or its equivalent, shall not, of
itself create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
(2) The corporation may indemnify or agree to indemnify any person who was
or is a party, or is threatened to be made a party to any threatened, pending,
or completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation (including a subsidiary of this corporation), domestic or
foreign, nonprofit or for profit, partnership, joint venture, trust, or other
enterprise against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue, or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless, and only to
the extent that the court of common pleas, or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the court of
common pleas or such other court shall deem proper.
(3) To the extent that a director, trustee, officer, employee, or agent has
been successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in sections (1) and (2) of this article, or in defense of
any claim, issue, or matter therein, he shall be indemnified against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
therewith.
(4) Any indemnification under sections (1) and (2) of this article, unless
ordered by a court, shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
trustee, officer, employee, or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in sections (1) and (2) of
this article. Such determination shall be made (a) by a majority vote of a
quorum consisting of directors of the indemnifying corporation who were not and
are not parties to or threatened with any such action, suit, or proceeding, or
(b) if such a quorum is not obtainable or if a majority vote of a quorum of
disinterested directors so directs, in a written opinion by independent legal
counsel other than an attorney, or a firm having associated with it an attorney,
who has been retained by or who has performed services for the corporation, or
any person to be indemnified within the past five years, or (c) by the
shareholders, or (d) by the court of common pleas or the court in which such
action, suit, or proceeding was brought. Any determination made by the
disinterested directors under section (4)(a) or by independent legal counsel
under section (4)(b) of this article shall be promptly communicated to the
person who threatened or brought the action or suit by or in the right of the
corporation under section (2) of this article, and within ten days after receipt
of such notification, such person shall have the right to petition the court of
common pleas or the court in which such action or suit was brought to review the
reasonableness of such determination.
(5) Expenses, including attorneys' fees incurred in defending any action,
suit, or proceeding referred to in sections (1) and (2) of this article, may be
paid by the corporation in advance of the final disposition of such action,
suit, or proceeding as authorized by the directors in the specific case upon
receipt of a written undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, unless it shall ultimately be
determined that he is entitled to be indemnified by the corporation as
authorized in this article. If a majority vote of a quorum of disinterested
directors so directs by resolution, said written undertaking need not be
submitted to the corporation. Such a determination
II-4
that a written undertaking need not be submitted to the corporation shall in no
way affect the entitlement of indemnification as authorized by this article.
(6) The indemnification provided by this article shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under the articles or the regulations or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
trustee, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
(7) The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of the corporation,
or is or was serving at the request of the corporation as a director, trustee,
officer, employee, or agent of another corporation (including a subsidiary of
this corporation), domestic or foreign, nonprofit or for profit, partnership,
joint venture, trust, or other enterprise against any liability asserted against
him and incurred by him in any such capacity or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under this section.
(8) As used in this section, references to "the corporation" include all
constituent corporations in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee, or
agent of such a constituent corporation, or is or was serving at the request of
such constituent corporation as a director, trustee, officer, employee or agent
of another corporation (including a subsidiary of this corporation), domestic or
foreign, nonprofit or for profit, partnership, joint venture, trust, or other
enterprise shall stand in the same position under this article with respect to
the new or surviving corporation as he would if he had served the new or
surviving corporation in the same capacity.
(9) The foregoing provisions of this article do not apply to any proceeding
against any trustee, investment manager or other fiduciary of an employee
benefit plan in such person's capacity as such, even though such person may also
be an agent of this corporation. The corporation may indemnify such named
fiduciaries of its employee benefit plans against all costs and expenses,
judgments, fines, settlements or other amounts actually and reasonably incurred
by or imposed upon said named fiduciary in connection with or arising out of any
claim, demand, action, suit or proceeding in which the named fiduciary may be
made a party by reason of being or having been a named fiduciary, to the same
extent it indemnifies an agent of the corporation. To the extent that the
corporation does not have the direct legal power to indemnify, the corporation
may contract with the named fiduciaries of its employee benefit plans to
indemnify them to the same extent as noted above. The corporation may purchase
and maintain insurance on behalf of such named fiduciary covering any liability
to the same extent that it contracts to indemnify.
AMENDED CODE OF REGULATIONS OF WESTERN RESERVE
ARTICLE V
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each Director, officer and member of a committee of this Corporation, and
any person who may have served at the request of this Corporation as a Director,
officer or member of a committee of any other corporation in which this
Corporation owns shares of capital stock or of which this Corporation is a
creditor (and his heirs, executors and administrators) shall be indemnified by
the Corporation against all expenses, costs, judgments, decrees, fines or
penalties as provided by, and to the extent allowed by, Article Eighth of the
Corporation's Articles of Incorporation, as amended.
II-5
RULE 484 UNDERTAKING
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 foregoing provisions, 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.
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet
The Prospectus, consisting of 44 pages
The undertaking to file reports Representation Pursuant to Section 26(e)(2)
(A)
The statement with respect to indemnification
The Rule 484 undertaking The signatures
Written consent of the following persons:
(a) Alan Yaeger
(b) Thomas E. Pierpan, Esq.
(c) Sutherland, Asbill & Brennan LLP
(d) Ernst & Young LLP
(e) Pricewaterhouse Coopers LLP
The following exhibits:
1. The following exhibits correspond to those required by paragraph A to the
instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of the Board of Directors of Western Reserve
establishing the Series Account (1)
(2) Not Applicable
(3) Distribution of Policies:
(a) Master Service and Distribution Compliance Agreement (2)
(b) Broker/Dealer Supervisory and Service Agreement (2)
(c) See Exhibit 1.A.(3)(b)(ii)
(4) Not Applicable
(5) Specimen Flexible Premium Variable Life Insurance Policy (6)
(6) (a) Second Amended Articles of Incorporation of Western Reserve (2)
(b) Amended Code of Regulations (By-Laws) of Western Reserve (2)
(7) Not Applicable
(8) (a) Investment Advisory Agreement with the Fund (1)
(b) Sub-Advisory Agreement (1)
(9) Not Applicable
(10) Application for Flexible Premium Variable Life Insurance Policy
(11) Memorandum describing issuance, transfer and redemption procedures(5)
II-6
2. See Exhibit 1.A.(3)
3. Opinion of Counsel as to the legality of the securities being registered (6)
4. No financial statement will be omitted from the Prospectus pursuant to
Instruction 1(b) or (c) of Part I
5. Not Applicable
6. Opinion and consent of Alan Yaeger as to actuarial matters pertaining to the
securities being registered (6)
7. Consent of Thomas E. Pierpan, Esq. (6)
8. Consent of Sutherland, Asbill & Brennan LLP (6)
9. Consent of Ernst & Young LLP (6)
10. Consent of PricewaterhouseCoopers LLP (6)
11. (a) Powers of Attorney (4)
(b) Power of Attorney - James R. Walker (5)
- ----------------------------------------
(1) This exhibit was previously filed on Post-Effective Amendment No. 28 to Form
N-1A Registration Statement dated April 28, 1997 (File No. 33-507) and is
incorporated herein by reference.
(2) This exhibit was previously filed on Post-Effective Amendment No. 11 to Form
N-4 Registration Statement dated April 20, 1998 (File No. 33-49556) and is
incorporated herein by reference.
(3) This exhibit was previously filed on Post-Effective Amendment No. 1 to Form
S-6 Registration Statement dated December 19, 1997 (File No. 333-23359) and
is incorporated herein by reference.
(4) This exhibit was previously filed on Post-Effective Amendment No. 16 to Form
S-6 Registration Statement dated April 21, 1998 (File No. 33-31140) and in
incorporated herein by reference.
(5) This exhibit was previously filed on Post-Effective Amendment No. 13 to Form
S-6 Registration Statement dated December 24, 1996 (File No. 33-31140) and
is incorporated herein by reference.
(6) To be filed by amendment.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant, WRL
Series Life Account, has duly caused this Initial Registration Statement to be
signed on its behalf by the undersigned thereunto duly authorized, and its seal
to be hereunto affixed and attested, all in the City of Largo, County of
Pinellas, Florida on this 27th day of August, 1998.
(SEAL) WRL SERIES LIFE ACCOUNT
-----------------------
Registrant
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
------------------------------
Depositor
ATTEST:
/s/ THOMAS E. PIERPAN By: /s/ JOHN R. KENNEY
- --------------------- -------------------
Thomas E. Pierpan John R. Kenney
Vice President, Assistant Secretary Chairman of the Board,
and Associate General Counsel Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this Initial
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
/s/ JOHN R. KENNEY* August 27, 1998
- -------------------------------
John R. Kenney, Chairman of the
Board, Chief Executive Officer
and President
/s/ ALLAN J. HAMILTON August 27, 1998
- ----------------------------------
Allan J. Hamilton, Vice President,
Treasurer and Controller
/s/ ALAN M. YAEGER August 27, 1998
- ------------------------------
Alan M. Yaeger, Executive Vice
President, Actuary and Chief
Financial Officer*
/s/ PATRICK S. BAIRD August 27, 1998
- --------------------------
Patrick S. Baird, Director ***/
- ------------
*Principal Financial Officer
/s/ JAMES R. WALKER August 27, 1998
- -------------------------
James R. Walker, Director ***/
/s/ LYMAN H. TREADWAY August 27, 1998
- ---------------------------
Lyman H. Treadway, Director ***/
/s/ Jack E. Zimmerman August 27, 1998
- ---------------------------
Jack E. Zimmerman, Director ***/
***/ /s/ THOMAS E. PIERPAN
----------------------------
Signed by: Thomas E. Pierpan
as Attorney-in-fact
Exhibit Index
EXHIBIT DESCRIPTION
NO. OF EXHIBIT
- ------- -----------
1.A(10) Application for Flexible Premium Variable Life Insurance Policy