As filed with the SEC on ______________. Registration No._______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED
ON FORM N-8B-2
----------
PRUCO LIFE
VARIABLE UNIVERSAL ACCOUNT
(Exact Name of Trust)
PRUCO LIFE INSURANCE COMPANY
(Name of Depositor)
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
(800) 286-7754
(Address and telephone number of principal executive offices)
----------
Thomas C. Castano
Assistant Secretary
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
(Name and address of agent for service)
Copy to:
Jeffrey C. Martin
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
----------
Variable Universal Life Insurance Contracts " Pursuant to Rule 24f-2 under the
Investment Company Act of 1940, the Registrant elects to register an indefinite
amount of securities.
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
The Registrant hereby amends this Registration Statement on such date 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 on such dates as the Commission, action pursuant to
said Section 8(a), may determine.
This filing is being made pursuant to Rules 6c-3 and 6e-3(T) under the
Investment Company Act of 1940.
Registrant elects to be governed by Rules 6e-3(T)(b)(13)(i)(A) under the
Investment Company Act of 1940 with respect to the Contract described in this
Registration Statement.
CROSS REFERENCE SHEET
(as required by Form N-8B-2)
N-8B-2 Item Number Location
- ------------------ --------
1. Cover Page
2. Cover Page
3. Not Applicable
4. Sale of the Contract and Sales Commissions
5. Pruco Life Variable Universal Account
6. Pruco Life Variable Universal Account
7. Not Applicable
8. Not Applicable
9. Litigation and Regulatory Proceedings
10. Introduction and Summary; Voting Rights; Charges
and Expenses; Short-Term Cancellation Right or
"Free Look"; Types of Death Benefit; Changing the
Type of Death Benefit; Riders; Premiums;
Allocation of Premiums; Transfers; Dollar Cost
Averaging; Auto-Rebalancing; How a Contract's Cash
Surrender Value Will Vary; How a Type A (Fixed)
Contract's Death Benefit Will Vary; How a Type B
(Variable) Contract's Death Benefit Will Vary; How
a Type C (Return of Premium) Contract's Death
Benefit Will Vary; Surrender of a Contract;
Withdrawals; Lapse and Reinstatement; Decreases in
Basic Insurance Amount; When Proceeds are Paid;
Contract Loans; Other General Contract Provisions;
Substitution of Fund Shares
11. Introduction and Summary; Pruco Life Variable
Universal Account
12. Cover Page; Introduction and Summary; The Funds;
Sale of the Contract and Sales Commissions
13. Introduction and Summary; The Funds; Charges and
Expenses; Premiums; Allocation of Premiums; Sale
of the Contract and Sales Commissions
14. Introduction and Summary; Detailed Information for
Prospective Contract Owners
15. Introduction and Summary; Premiums; Allocation of
Premiums; Transfers
16. Introduction and Summary; Detailed Information for
Prospective Contract Owners
17. When Proceeds are Paid
18. Pruco Life Variable Universal Account
19. Reports to Contract Owners
N-8B-2 Item Number Location
- ------------------ --------
20. Not Applicable
21. Contract Loans
22. Not Applicable
23. Not Applicable
24. Other General Contract Provisions
25. Pruco Life Insurance Company
26. Introduction and Summary; The Funds; Charges and
Expenses
27. Pruco Life Insurance Company; The Funds
28. Pruco Life Insurance Company; Directors and
Officers
29. Pruco Life Insurance Company
30. Not Applicable
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. Pruco Life Insurance Company
36. Not Applicable
37. Not Applicable
38. Sale of the Contract and Sales Commissions
39. Sale of the Contract and Sales Commissions
40. Not Applicable
41. Sale of the Contract and Sales Commissions
42. Not Applicable
43. Not Applicable
44. Introduction and Summary; The Funds; How a
Contract's Cash Surrender Value Will Vary; How a
Type A (Fixed) Contract's Death Benefit Will Vary;
How a Type B (Variable) Contract's Death Benefit
Will Vary; How a Type C (Return of Premium)
Contract's Death Benefit Will Vary
45. Not Applicable
46. Introduction and Summary; Pruco Life Variable
Universal Account; The Funds
N-8B-2 Item Number Location
- ------------------ --------
47. Pruco Life Variable Universal Account; The Funds
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. Not Applicable
52. Substitution of Fund Shares
53. Tax Treatment of Contract Benefits
54. Not Applicable
55. Not Applicable
56. Not Applicable
57. Not Applicable
58. Not Applicable
59. Financial Statements: Financial Statements of the
Pruco Life Variable Universal Account;
Consolidated Financial Statements of Pruco Life
Insurance Company and its subsidiaries
PART I
INFORMATION REQUIRED IN PROSPECTUS
PROSPECTUS
November 4, 2002
PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT
PruLife Advisor Select
This prospectus describes an individual flexible premium variable universal life
insurance contract (the "Contract") offered by Pruco Life Insurance Company
("Pruco Life," "us," "we," or "our"). Pruco Life is a wholly-owned subsidiary of
The Prudential Insurance Company of America. The Contract provides life
insurance coverage with flexible premium payments, a variety of investment
options, and three types of death benefit options. The Contract may be issued
with a Target Term Rider that could have a significant effect on the performance
of your Contract. For the factors to consider when adding a Target Term Rider to
your Contract, see Riders, page 18.
You may choose to invest your Contract's premiums and its earnings in one or
more of 30 available ProFund VP variable investment options of the Pruco Life
Variable Universal Account (the "Account"):
ProFund VP variable investment options
> ProFund VP Bull > ProFund VP Short OTC
> ProFund VP Small-Cap > ProFund VP Rising Rates Opportunity
> ProFund VP OTC > ProFund VP Basic Materials
> ProFund VP Asia 30 > ProFund VP Biotechnology
> ProFund VP Europe 30 > ProFund VP Consumer Cyclical
> ProFund VP Mid-Cap Value > ProFund VP Consumer Non-Cyclical
> ProFund VP Mid-Cap Growth > ProFund VP Energy
> ProFund VP Small-Cap Value > ProFund VP Financial
> ProFund VP Small-Cap Growth > ProFund VP Healthcare
> ProFund VP U.S. Government Plus > ProFund VP Precious Metals
> ProFund VP Bull Plus > ProFund VP Real Estate
> ProFund VP UltraMid-Cap > ProFund VP Technology
> ProFund VP UltraSmall-Cap > ProFund VP Telecommunications
> ProFund VP UltraOTC > ProFund VP Utilities
> ProFund VP Bear > ProFund VP Money Market
For a complete list of the 30 available ProFund VP variable investment options,
their investment objectives, and their investment adviser, see The Funds, page
8.
This prospectus describes the Contract generally and the Pruco Life Variable
Universal Account (the "Account"). The attached prospectuses for the Funds, and
their related statements of additional information, describe the investment
objectives and the risks of investing in the Funds. Pruco Life may add
additional investment options in the future. Please read this prospectus and
keep it for future reference.
The Securities and Exchange Commission ("SEC") maintains a Web site
(http://www.sec.gov) that contains material incorporated by reference and other
information regarding registrants that file electronically with the SEC.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
The Contract may be purchased through registered representatives located in
banks and other financial institutions. An investment in the Contract is not a
bank deposit and is not insured or guaranteed by the Federal Deposit Insurance
Corporation ("FDIC") or any other governmental agency and may lose value. An
investment is also not a condition to the provision or term of any banking
service or activity. The participating bank is not a registered broker-dealer
and is not affiliated with Pruco Securities Corporation.
Pruco Life Insurance Company
213 Washington Street
Newark, New Jersey 07102-2992
Telephone: (800) 778-2255
PROSPECTUS CONTENTS
Page
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS ...................... 1
INTRODUCTION AND SUMMARY .................................................. 2
Brief Description of the Contract ...................................... 2
Charges ................................................................ 3
Types of Death Benefit ................................................. 6
Life Insurance Definitional Tests ...................................... 6
Premium Payments ....................................................... 6
Refund ................................................................. 6
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, THE PRUCO
LIFE VARIABLE UNIVERSAL ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS
AVAILABLE UNDER THE CONTRACT .............................................. 6
Pruco Life Insurance Company ........................................... 6
The Pruco Life Variable Universal Account .............................. 7
The Funds .............................................................. 8
Voting Rights .......................................................... 11
Which Investment Option Should Be Selected? ............................ 11
DETAILED INFORMATION FOR .................................................. 11
PROSPECTIVE CONTRACT OWNERS ............................................... 11
Charges and Expenses ................................................... 11
Charges After Age 100 .................................................. 16
Allocated Charges ...................................................... 16
Requirements for Issuance of a Contract ................................ 16
Short-Term Cancellation Right or "Free-Look" ........................... 17
Types of Death Benefit ................................................. 17
Changing the Type of Death Benefit ..................................... 17
Riders ................................................................. 18
Contract Date .......................................................... 20
Premiums ............................................................... 20
Allocation of Premiums ................................................. 21
Death Benefit Guarantee ................................................ 21
Transfers .............................................................. 24
How a Contract's Cash Surrender Value Will Vary ........................ 25
How a Type A (Fixed) Contract's Death Benefit Will Vary ................ 25
How a Type B (Variable) Contract's Death Benefit Will Vary ............. 26
How a Type C (Return of Premium) Contract's Death Benefit Will Vary .... 27
Surrender of a Contract ................................................ 28
Withdrawals ............................................................ 28
Lapse and Reinstatement ................................................ 28
Increases in Basic Insurance Amount .................................... 29
Decreases in Basic Insurance Amount .................................... 30
When Proceeds Are Paid ................................................. 30
Living Needs Benefit ................................................... 30
Illustrations of Cash Surrender Values, Death Benefits, and
Accumulated Premiums ................................................... 31
Contract Loans ......................................................... 33
Tax Treatment of Contract Benefits ..................................... 34
Legal Considerations Relating to Sex-Distinct Premiums and Benefits .... 36
Other General Contract Provisions ...................................... 36
Substitution of Fund Shares ............................................ 37
Reports to Contract Owners ............................................. 37
Sale of the Contract and Sales Commissions ............................. 37
State Regulation ....................................................... 38
Experts ................................................................ 38
Litigation and Regulatory Proceedings .................................. 38
Additional Information ................................................. 39
Financial Statements ................................................... 39
DIRECTORS AND OFFICERS .................................................... 42
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF
THE PRUCO LIFE VARIABLE UNIVERSAL ACCOUNT ................................. A1
CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY
AND SUBSIDIARIES .......................................................... B1
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS
Accumulated Net Payments -- The actual premium payments you make, accumulated at
an effective annual rate of 4%, less any withdrawals you make, also accumulated
at an effective annual rate of 4%.
attained age -- The insured's age on the Contract date plus the number of years
since then. For any coverage segment effective after the Contract date, the
insured's attained age is the issue age of that segment plus the length of time
since its effective date.
basic insurance amount -- The amount of life insurance as shown in the Contract,
not including riders. Also referred to as "face amount."
cash surrender value -- The amount payable to the Contract owner upon surrender
of the Contract. It is equal to the Contract Fund minus any Contract debt and
minus any applicable surrender charge. Also referred to in the Contract as "Net
Cash Value."
Contract -- The variable universal life insurance policy described in this
prospectus.
Contract anniversary -- The same date as the Contract date in each later year.
Contract date -- The date the Contract is effective, as specified in the
Contract.
Contract debt -- The principal amount of all outstanding loans plus any interest
accrued thereon.
Contract Fund -- The total amount credited to a specific Contract. On any date
it is equal to the sum of the amounts in all the variable investment options,
and the principal amount of any Contract debt plus any interest earned thereon.
Contract owner -- You. Unless a different owner is named in the application, the
owner of the Contract is the insured.
Contract year -- A year that starts on the Contract date or on a Contract
anniversary. For any coverage segment representing an increase, "Contract year"
is a year that starts on the effective date of the increase (referred to as
"Target year" in the Contract). See Increases in Basic Insurance Amount, page
29.
death benefit -- If the Contract is not in default, this is the amount we will
pay upon the death of the insured, assuming no Contract debt.
Death Benefit Guarantee -- Sufficient premium payments, on an accumulated basis,
will guarantee that your Contract will not lapse and a death benefit will be
paid upon the death of the insured, regardless of investment experience and
assuming no loans. See Death Benefit Guarantee, page 21.
Funds -- The separate ProFund VP portfolios. One or more of the available Funds
may be chosen as an underlying investment for the Contract.
Monthly date -- The Contract date and the same date in each subsequent month.
Pruco Life Insurance Company -- Us, we, our, Pruco Life. The company offering
the Contract.
separate account -- Amounts under the Contract that are allocated to the
variable investment options are held by us in a separate account called the
Pruco Life Variable Universal Account (the "Account"). The separate account is
set apart from all of the general assets of Pruco Life Insurance Company.
Target Term Rider -- A Rider that provides a flexible term insurance benefit to
attained age 100 on the life of the insured.
valuation period -- The period of time from one determination of the value of
the amount invested in a variable investment option to the next. Such
determinations are made when the net asset values of the portfolios of the Funds
are calculated, which is generally at 4:00 p.m. Eastern time on each day during
which the New York Stock Exchange is open.
variable investment options -- The portfolios of the mutual funds available
under this Contract, whose shares are held in the separate account.
you -- The owner of the Contract.
INTRODUCTION AND SUMMARY
This Summary provides a brief overview of the more significant aspects of the
Contract. We provide further detail in the subsequent sections of this
prospectus and in the Contract.
1
Brief Description of the Contract
The Contract is a form of variable universal life insurance. It is based on a
Contract Fund, the value of which changes every day. The chart on the following
page describes how the value of your Contract Fund changes.
A broad objective of the Contract is to provide benefits that will increase in
value if favorable investment results are achieved. You may invest premiums in
one or more of the 30 available ProFund VP variable investment options. Your
Contract Fund value changes every day depending upon the change in the value of
the particular investment options you have selected. These Contracts may be
issued with a Target Term Rider that could have a significant effect on the
performance of your Contract. For the factors to consider when adding a Target
Term Rider to your Contract, see Riders, page 18.
Although the value of your Contract Fund will increase if there is favorable
investment performance in the variable investment options you select, investment
returns in the variable investment options are NOT guaranteed. There is a risk
that investment performance will be unfavorable and that the value of your
Contract Fund will decrease. The risk will be different, depending upon which
investment options you choose. See Which Investment Option Should Be Selected?,
page 11. Variable life insurance contracts are unsuitable as short-term saving
vehicles.
The variable investment options of this Contract were chosen to accommodate
those who plan to use programmed, large, or frequent transfers among the
variable investment options, or "market timing". "Market timing" is the practice
of making frequent and typically large transfers among variable investment
options in response to changes in the outlook for various markets with an
expectation of increasing investment returns. Our other variable life insurance
Contracts are not designed to accommodate such activity. By issuing this
product, we don't in any way endorse or recommend the practice of market timing.
However, we acknowledge that there are those who do believe in this practice and
this product is designed to meet the needs of such persons.
Transfers between the variable investment options in this Contract are subject
to restrictions concerning the time of day by which the transfer request must be
properly received in our Service Office. See Transfers, page 24. Premium
payments, surrender of a contract, withdrawals, and loans are also subject to
time of day restrictions.
The investment strategies of some of the Funds are designed to both positively
and negatively exceed the daily investment results of the relevant benchmark
indices. This Contract is designed for those that can tolerate substantial
volatility in investment results.
We will allow you to designate an investment advisor that you select,
compensate, and supervise, to request transfers between variable investment
options on your behalf. If you choose to have an investment advisor request
transfers on your behalf, we must first receive a proper limited power of
attorney. We may require that your investment advisor provide acceptable
identification before we allow the investment advisor to perform transfers on
your behalf.
It is possible that an investment advisor you select may already sell or
distribute our life insurance Contracts. Even if that is the case, the
investment advisor will be acting under your supervision in providing investment
advice. We are not responsible for the advice provided by the investment advisor
or for any transfers the investment advisor makes.
If you elect to make withdrawals - for example, in order to compensate an
investment advisor - any such withdrawals may result in a reduction in the basic
insurance amount and death benefit of the Contract. The withdrawal will also be
subject to fees as described elsewhere in this prospectus, including surrender
charges. There may also be tax consequences of making withdrawals. See
Withdrawals, page 28.
The replacement of life insurance is generally not in your best interest. In
most cases, if you require additional coverage, the benefits of your existing
contract can be protected by purchasing additional insurance or a supplemental
contract. If you are considering replacing a contract, you should compare the
benefits and costs of supplementing your existing contract with the benefits and
costs of purchasing the Contract described in this prospectus and you should
consult with a qualified tax adviser.
This prospectus may only be offered in jurisdictions in which the offering is
lawful. No person is authorized to make any representations in connection with
this offering other than those contained in this prospectus and in the
prospectuses and statements of additional information for the Funds.
For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1.
3
Charges
The following chart outlines the components of your Contract Fund and the
adjustments which may be made including the maximum charges which may be
deducted from each premium payment and from the amounts held in the designated
investment options. These charges are largely designed to cover insurance costs
and risks as well as sales and administrative expenses.
The maximum charges shown in the following chart, as well as the lower current
charges, are fully described under Charges and Expenses, page 11.
---------------------
Premium Payment
---------------------
|
-------------------------------------------------------------
o less a charge of up to 7.5% of the premiums paid
for taxes attributable to premiums. In California,
Oregon, and Texas this is called a premium based
administrative charge.
o less a charge for sales expenses of up to 6% of
the premiums paid.
-------------------------------------------------------------
|
-----------------------------------------------------------------
Invested Premium Amount
o To be invested in one or more of the 30 ProFund VP variable
investment options.
-----------------------------------------------------------------
|
--------------------------------------------------------------------
Contract Fund
On the Contract Date, the Contract Fund is equal to the invested
premium amount minus any of the charges described below which may be
due on that date. Thereafter, the value of the Contract Fund changes
daily.
--------------------------------------------------------------------
|
--------------------------------------------------------------------------
Pruco Life adjusts the Contract Fund for:
o Addition of any new invested premium amounts.
o Addition of any increase due to investment results of the chosen
variable investment options.
o Addition of guaranteed interest at an effective annual rate of 4% on
the amount of any Contract loan. (Separately, interest charged on
the loan accrues at an effective annual rate of 4.10% or 5%.) See
Contract Loans, page 33.
o Subtraction of any decrease due to investment results of the chosen
variable investment options.
o Subtraction of any amount withdrawn.
o Subtraction of the charges listed below, as applicable.
--------------------------------------------------------------------------
|
--------------------------------------------------------------------------
Daily Charges
o Management fees and expenses are deducted from the Fund assets. See
Underlying Portfolio Expenses chart, below.
o We deduct a daily mortality and expense risk charge, equivalent to
an annual rate of up to 0.45%, from the assets in the variable
investment options.
--------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
Monthly Charges
o We reduce the Contract Fund by a monthly administrative charge of up to
$20 for each contract year; plus an amount of up to $1.12 per $1,000 of
the basic insurance amount for the first five Contract years, zero
thereafter. The amount per $1,000 varies by sex, issue age,
smoker/nonsmoker status, and extra rating class, if any. See Monthly
Deductions from the Contract Fund, page 14.
o For each coverage segment representing an increase in basic insurance
amount, we will deduct $12 per segment for the first two years of the
coverage segment and zero thereafter; plus an amount of up to $1.12 per
$1,000 of the coverage segment for an increase in basic insurance amount
for the first five years from the effective date of the increase and zero
thereafter. The amount per $1,000 varies by the sex, issue age,
smoker/nonsmoker status, extra rating class, if any, and the effective
date of the increase. See Increases in Basic Insurance Amount, page 29 and
Monthly Deductions from the Contract Fund, page 14.
o In either of the instances described above, the highest charge per
thousand is $1.12 and applies to male and female smoker and non-smoker
above age 74 at certain rating classes. The lowest charge per thousand is
$0.03 and applies to female age 0-14, non-smoker at certain rating
classes.
o We deduct a cost of insurance ("COI") charge.
o If the Contract includes riders, we deduct rider charges from the Contract
Fund.
o If the rating class of an insured results in an extra charge, we will
deduct that charge from the Contract Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Possible Additional Charges
o We will deduct a surrender charge if, during the first 10 Contract years
(or during the first 10 years of a coverage segment representing an
increase in basic insurance amount), the Contract lapses, is surrendered,
or the basic insurance amount is decreased (including as a result of a
withdrawal or a death benefit type change). The surrender charge is a
percentage of the Surrender Target Premium. The percentage varies by issue
age. The Surrender Target Premium is equal to the Sales Load Target
Premium at the time the policy (or coverage) is issued less premiums for
riders or extras. The duration of the surrender charge also varies by
issue age. The maximum first year percentage, which applies to issue ages
0-45, is 90% of the Surrender Target Premium and is reduced annually at a
constant rate to zero by the end of the 10th year. For issue ages above
age 45, the percentages are reduced. The surrender charge period is
shorter for Contracts issued to insureds over age 55. See Surrender
Charges, page 15.
o We will assess an administrative charge of up to $25 for any withdrawals.
o We may assess an administrative charge of up to $25 for any change in
basic insurance amount.
o We may assess an administrative charge of up to $25 for any change in the
Target Term Rider coverage amount. See Riders, page 18.
- --------------------------------------------------------------------------------
5
- ------------------------------------------------------------------------------------------------------------------
Underlying Portfolio Expenses
- ------------------------------------------------------------------------------------------------------------------
Investment Total Total
The ProFund VP variable investment options Advisory Other 12b-1 Contractual Actual
Fee Expenses Fees Expenses Expenses*
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Bull (1) 0.75% 1.25% 0.25% 2.25% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Small-Cap (1) 0.75% 1.65% 0.25% 2.65% 2.25%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP OTC 0.75% 0.91% 0.25% 1.91% 1.91%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Asia 30 (2) 0.75% 0.94% 0.25% 1.94% 1.94%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Europe 30 0.75% 0.89% 0.25% 1.89% 1.89%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Mid-Cap Value (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Mid-Cap Growth (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Small-Cap Value (2) 0.75% 0.97% 0.25% 1.97% 1.97%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Small-Cap Growth (2) 0.75% 0.97% 0.25% 1.97% 1.97%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP U.S. Government Plus (2) 0.50% 0.95% 0.25% 1.70% 1.70%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Bull Plus 0.75% 0.94% 0.25% 1.94% 1.94%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP UltraMid-Cap (2) 0.75% 0.97% 0.25% 1.97% 1.97%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP UltraSmall-Cap (1) 0.75% 1.11% 0.25% 2.11% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP UltraOTC 0.75% 0.95% 0.25% 1.95% 1.95%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Bear 0.75% 0.89% 0.25% 1.89% 1.89%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Short OTC (2) 0.75% 0.95% 0.25% 1.95% 1.95%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Rising Rates Opportunity (2) 0.75% 0.95% 0.25% 1.95% 1.95%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Basic Materials (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Biotechnology (1) 0.75% 1.03% 0.25% 2.03% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Consumer Cyclical (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Consumer Non-Cyclical (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Energy (1) 0.75% 1.05% 0.25% 2.05% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Financial (1) 0.75% 1.10% 0.25% 2.10% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Healthcare (1) 0.75% 1.06% 0.25% 2.06% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Precious Metals (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Real Estate (1) 0.75% 0.99% 0.25% 1.99% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Technology (1) 0.75% 1.10% 0.25% 2.10% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Telecommunications (1) 0.75% 1.17% 0.25% 2.17% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Utilities (1) 0.75% 1.05% 0.25% 2.05% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Money Market 0.75% 0.60% 0.25% 1.60% 1.60%
- ------------------------------------------------------------------------------------------------------------------
* Reflects fee waivers, reimbursement of expenses, and expense reductions, if any.
- ------------------------------------------------------------------------------------------------------------------
(1) ProFund Advisors LLC has contractually agreed to waive Investment Advisory
and Management Services Fees and to reimburse other expenses to the extent
Total Annual Operating Expenses, as a percentage of average daily net
assets, exceed 1.98% (2.25% for ProFund VP Small-Cap) through December 31,
2002. After such date, any of the expense limitations may be terminated or
revised. Amounts waived or reimbursed in a particular fiscal year may be
repaid to ProFund Advisors LLC from time to time through the next three
fiscal years to the extent that the repayment will not cause the Fund's
expenses to exceed the stated limit during the respective year. A waiver
or reimbursement lowers the expense ratio and increases overall returns to
the investor.
(2) These Portfolios commenced operations on May 1,2002. "Other Expenses"
shown are based on estimated amounts for the fiscal year ending December
31,2002.
6
The expenses relating to the ProFund VP variable investment options have been
provided to Pruco Life by ProFund Advisors LLC. Pruco Life has not independently
verified them.
Types of Death Benefit
There are three types of death benefit available. You may choose a Contract with
a Type A (fixed) death benefit under which the cash surrender value varies daily
with investment experience, and the death benefit generally remains at the basic
insurance amount you initially chose. However, the Contract Fund may grow to a
point where the death benefit may increase and vary with investment experience.
If you choose a Contract with a Type B (variable) death benefit, the cash
surrender value and the death benefit both vary with investment experience. For
Type A and Type B death benefits, as long as the Contract is in-force, the death
benefit will never be less than the basic insurance amount shown in your
Contract. If you choose a Contract with a Type C (return of premium) death
benefit, the death benefit is increased by the amount of premiums paid into the
Contract, less withdrawals. You may change your Contract's death benefit type
after issue; however, if you choose a Type A or Type B death benefit at issue,
you will not be able to change to a Type C death benefit thereafter. See Types
of Death Benefit, page 17 and Changing the Type of Death Benefit, page 17.
Life Insurance Definitional Tests
In order to qualify as life insurance for Federal tax purposes, the Contract
must adhere to the definition of life insurance under Section 7702 of the
Internal Revenue Code. At issue, the Contract owner chooses one of the following
definition of life insurance tests: (1) Cash Value Accumulation Test or (2)
Guideline Premium Test. Under the Cash Value Accumulation Test, there is a
minimum death benefit to cash value ratio. Under the Guideline Premium Test,
there is a limit to the amount of premiums that can be paid into the Contract,
as well as a minimum death benefit to cash value ratio. For more information,
see Tax Treatment of Contract Benefits, page 34.
Premium Payments
The Contract is a flexible premium contract - there are no scheduled premiums.
Except for the minimum initial premium, and subject to a minimum of $25 per
subsequent payment, you choose the timing and amount of premium payments. The
Contract will remain in-force if the Contract Fund less any applicable surrender
charges is greater than zero and more than any Contract debt. Paying
insufficient premiums, poor investment results, or the taking of loans or
withdrawals from the Contract will increase the possibility that the Contract
will lapse. However, if the accumulated premiums you pay are high enough and
there is no Contract debt, Pruco Life guarantees that your Contract will not
lapse even if investment experience is very unfavorable and the Contract Fund
drops below zero. The length of time that the guarantee against lapse is
available depends on your Contract's death benefit type and the definition of
life insurance test selected at issue. See Premiums, page 20, Death Benefit
Guarantee, page 21 and Lapse and Reinstatement, page 28. Premium payments must
be received at our Service Office ninety minutes prior to any announced closing
of the New York Stock Exchange or they will be applied as of the end of the
valuation period the next business day.
We offer and suggest regular billing of premiums even though you decide when to
make premium payments and, subject to a $25 minimum, in what amounts. You should
discuss your billing options with your Pruco Life representative when you apply
for the Contract. See Premiums, page 20.
Refund
For a limited time, you may return your Contract for a refund in accordance with
the terms of its "Free-Look" provision. See Short-Term Cancellation Right or
"Free-Look," page 17.
GENERAL INFORMATION ABOUT PRUCO LIFE INSURANCE COMPANY, THE PRUCO LIFE
VARIABLE UNIVERSAL ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS
AVAILABLE UNDER THE CONTRACT
Pruco Life Insurance Company
Pruco Life Insurance Company ("Pruco Life") is a stock life insurance company,
organized in 1971 under the laws of the State of Arizona. It is licensed to sell
life insurance and annuities in the District of Columbia, Guam, and in all
7
states except New York. These Contracts are not offered in any state where the
necessary approvals have not been obtained. Pruco Life's consolidated financial
statements begin on page B1 and should be considered only as bearing upon Pruco
Life's ability to meet its obligations under the Contracts.
Pruco Life is a wholly-owned subsidiary of The Prudential Insurance Company of
America ("Prudential"), a New Jersey stock life insurance company that has been
doing business since 1875. Prudential is an indirect wholly-owned subsidiary of
Prudential Financial, Inc. ("Prudential Financial"), a New Jersey insurance
holding company. As Pruco Life's ultimate parent, Prudential Financial exercises
significant influence over the operations and capital structure of Pruco Life
and Prudential. However, neither Prudential Financial, Prudential, nor any other
related company has any legal responsibility to pay amounts that Pruco Life may
owe under the contract or policy.
The Pruco Life Variable Universal Account
We have established a separate account, the Pruco Life Variable Universal
Account (the "Account"), to hold the assets that are associated with the
Contracts. The Account was established on April 17, 1989 under Arizona law and
is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940 as a unit investment trust, which is a type of
investment company. The Account meets the definition of a "separate account"
under the federal securities laws. The Account holds assets that are segregated
from all of Pruco Life's other assets.
Pruco Life is the legal owner of the assets in the Account. Pruco Life will
maintain assets in the Account with a total market value at least equal to the
reserve and other liabilities relating to the variable benefits attributable to
the Account. These assets may not be charged with liabilities which arise from
any other business Pruco Life conducts. In addition to these assets, the
Account's assets may include funds contributed by Pruco Life to commence
operation of the Account and may include accumulations of the charges Pruco Life
makes against the Account. From time to time these additional assets will be
transferred to Pruco Life's general account. Pruco Life will consider any
possible adverse impact the transfer might have on the Account before making any
such transfer.
The obligations to Contract owners and beneficiaries arising under the Contracts
are general corporate obligations of Pruco Life.
The account is currently divided into 30 subaccounts (the "variable investment
options"), each of which invests its assets in shares of the corresponding
ProFund VP portfolios (the "Funds") described below.
Pruco Life may add additional variable investment options in the future. The
Account's financial statements begin on page A1.
8
The Funds
Listed below are the Funds in which the variable investment options invest,
their investment objectives, and investment adviser.
The Funds have a separate prospectus ("Fund prospectus") that is provided with
this prospectus. You should read the Fund prospectus before you decide to
allocate assets to a variable investment option using that Fund. There is no
assurance that the investment objective of any Fund will be met.
ProFund VP variable investment options:
ProFund VP Bull: The investment objective is to seek daily investment results,
before fees and expenses, that correspond to the daily performance of the S&P
500 Index. The investment strategy is to invest its assets in securities and
other financial instruments that ProFund Advisors LLC believes should simulate
the movement of the underlying benchmark index.
ProFund VP Small-Cap: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Russell 2000 Index. The investment strategy is to commit at least 80% of its
assets to investments that, in combination, have investment characteristics
similar to small-capitalization equity securities.
ProFund VP OTC: The investment objective is to seek daily investment results,
before fees and expenses, that correspond to the daily performance of the
NASDAQ-100 Index. The investment strategy is to invest its assets in securities
and other financial instruments that ProFund Advisors LLC believes should
simulate the movement of the underlying benchmark index.
ProFund VP Asia 30: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the ProFunds Asia 30 Index. The investment strategy is to commit at least 80% of
its assets to investments that, in combination, have investment characteristics
similar to the Asian companies represented in the underlying benchmark index.
ProFund VP Europe 30: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the ProFunds Europe 30 Index. The investment strategy is to commit at least 80%
of its assets to investments that, in combination, have investment
characteristics similar to the European companies represented in the underlying
benchmark index.
ProFund VP Mid-Cap Value: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the S&P MidCap 400/BARRA Value Index. The investment strategy is to commit at
least 80% of its assets to investments that, in combination, have investment
characteristics similar to mid-capitalization equity securities.
ProFund VP Mid-Cap Growth: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the S&P MidCap 400/BARRA Growth Index. The investment strategy is to commit at
least 80% of its assets to investments that, in combination, have investment
characteristics similar to mid-capitalization equity securities.
ProFund VP Small-Cap Value: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the S&P SmallCap 600/BARRA Value Index. The investment strategy is to commit at
least 80% of its assets to investments that, in combination, have investment
characteristics similar to small-capitalization equity securities.
ProFund VP Small-Cap Growth: The investment objective is to seek daily
investment results, before fees and expenses, that correspond to the daily
performance of the S&P SmallCap 600/BARRA Growth Index. The investment strategy
is to commit at least 80% of its assets to investments that, in combination,
have investment characteristics similar to small-capitalization equity
securities.
ProFund VP U.S. Government Plus: The investment objective is to seek daily
investment results, before fees and expenses, that correspond to one and one
quarter times (125%) the daily price movement of the most recently issued
30-year U.S. Treasury Bond ("Long Bond"). The investment strategy is to commit
at least 80% of its assets to investments that, in combination, have investment
characteristics similar to the Long Bond.
9
ProFund VP Bull Plus: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to one and a half times
(150%) the daily performance of the S&P 500 Index. The investment strategy is to
invest its assets in securities and other financial instruments that ProFund
Advisors LLC believes should simulate the movement of the underlying benchmark
index.
ProFund VP UltraMid-Cap: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to twice (200%) the daily
performance of the S&P MidCap 400 Index. The investment strategy is to commit at
least 80% of its assets to investments that, in combination, have investment
characteristics similar to mid-capitalization equity securities.
ProFund VP UltraSmall-Cap: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to twice (200%) the daily
performance of the Russell 2000 Index. The investment strategy is to commit at
least 80% of its assets to investments that, in combination, have investment
characteristics similar to small-capitalization equity securities.
ProFund VP UltraOTC: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to twice (200%) the daily
performance of the NASDAQ-100 Index. The investment strategy is to invest its
assets in securities and other financial instruments that ProFund Advisors LLC
believes should track the movement of the Fund's benchmark.
ProFund VP Bear: The investment objective is to seek daily investment results,
before fees and expenses, that correspond to the inverse (opposite) of the daily
performance of the S&P 500 Index. The investment strategy is to invest in
futures contracts, options on futures contracts, options contracts, swaps and
other financial instruments, and engage in short sales in a manner that tracks
the Fund's benchmark. ProFund VP Bear generally does not invest in traditional
securities, such as common stock of operating companies.
ProFund VP Short OTC: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the inverse (opposite) of
the daily performance of the NASDAQ-100 Index. The investment strategy is to
invest in futures contracts, options on futures contracts, options contracts,
swaps and other financial instruments, and engage in short sales in a manner
that tracks the Fund's benchmark. ProFund VP Short OTC generally does not invest
in traditional securities, such as common stock of operating companies.
ProFund VP Rising Rates Opportunity: The investment objective is to seek daily
investment results, before fees and expenses, that correspond to 125% of the
inverse (opposite) of the daily price movement of the most recently issued
30-year U.S. Treasury Bond ("Long Bond"). The investment strategy is to invest
in futures contracts, options on futures contracts, options contracts, swaps and
other financial instruments, and engage in short sales in a manner that tracks
the Fund's benchmark. ProFund VP Rising Rates Opportunity generally does not
invest in traditional securities, such as common stock of operating companies.
ProFund VP Basic Materials: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Dow Jones U.S. Basic Materials Sector Index. The investment strategy is to
commit at least 80% of its assets to investments that, in combination, have
investment characteristics similar to the basic materials companies represented
in the underlying benchmark index.
ProFund VP Biotechnology: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Dow Jones U.S. Index for the Biotechnology Sector. The investment strategy
is to commit at least 80% of its assets to investments that, in combination,
have investment characteristics similar to the biotechnology companies
represented in the underlying benchmark index.
ProFund VP Consumer Cyclical: The investment objective is to seek daily
investment results, before fees and expenses, that correspond to the daily
performance of the Dow Jones U.S. Index for the Consumer Cyclical Sector. The
investment strategy is to commit at least 80% of its assets to investments that,
in combination, have investment characteristics similar to the consumer cyclical
companies represented in the underlying benchmark index.
10
ProFund VP Consumer Non-Cyclical: The investment objective is to seek daily
investment results, before fees and expenses, that correspond to the daily
performance of the Dow Jones U.S. Index for the Consumer Non-Cyclical Sector.
The investment strategy is to commit at least 80% of its assets to investments
that, in combination, have investment characteristics similar to the consumer
non-cyclical companies represented in the underlying benchmark index.
ProFund VP Energy: The investment objective is to seek daily investment results,
before fees and expenses, that correspond to the daily performance of the Dow
Jones U.S. Index for the Energy Sector. The investment strategy is to commit at
least 80% of its assets to investments that, in combination, have investment
characteristics similar to the energy companies represented in the underlying
benchmark index.
ProFund VP Financial: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Dow Jones U.S. Index for the Financial Sector. The investment strategy is to
commit at least 80% of its assets to investments that, in combination, have
investment characteristics similar to the financial companies represented in the
underlying benchmark index.
ProFund VP Healthcare: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Dow Jones U.S. Index for the Healthcare Sector. The investment strategy is
to commit at least 80% of its assets to investments that, in combination, have
investment characteristics similar to the healthcare companies represented in
the underlying benchmark index.
ProFund VP Precious Metals: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Philadelphia Stock Exchange Gold and Silver Sector Index. The investment
strategy is to commit at least 80% of its assets to investments that, in
combination, have investment characteristics similar to the precious metals
companies represented in the underlying benchmark index.
ProFund VP Real Estate: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Dow Jones U.S. Real Estate Index. The investment strategy is to commit at
least 80% of its assets to investments that, in combination, have investment
characteristics similar to the real estate companies represented in the
underlying benchmark index.
ProFund VP Technology: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Dow Jones U.S. Index for the Technology Sector. The investment strategy is
to commit at least 80% of its assets to investments that, in combination, have
investment characteristics similar to the technology companies represented in
the underlying benchmark index.
ProFund VP Telecommunications: The investment objective is to seek daily
investment results, before fees and expenses, that correspond to the daily
performance of the Dow Jones U.S. Index for the Telecommunications Sector. The
investment strategy is to commit at least 80% of its assets to investments that,
in combination, have investment characteristics similar to the
telecommunications companies represented in the underlying benchmark index.
ProFund VP Utilities: The investment objective is to seek daily investment
results, before fees and expenses, that correspond to the daily performance of
the Dow Jones U.S. Index for the Utilities Sector. The investment strategy is to
commit at least 80% of its assets to investments that, in combination, have
investment characteristics similar to the utilities companies represented in the
underlying benchmark index.
ProFund VP Money Market: The investment objective is to seek as high a level of
current income as is consistent with liquidity and preservation of capital. The
investment strategy is to invest in high-quality, short-term money market
instruments.
Each Fund, except for ProFund VP Money Market, may invest in futures contracts
on stock indices, options on futures contracts, and other financial instruments
as a substitute for investing directly in stocks or bonds in order to gain
exposure to the appropriate benchmark index or security. Each Fund may hold U.S.
government securities, including government agency securities, money market
instruments or cash equivalents. In addition, each Fund, except for ProFund VP
Money Market, may borrow money for investment purposes.
ProFund Advisors LLC is the investment advisor and is responsible for the
day-to-day management of the Funds and other business affairs of the Funds.
ProFund Advisors LLC's principal business address is 7501 Wisconsin Ave, Suite
1000, Bethesda, Maryland 20814.
11
Each of the Funds and/or an affiliate of the Funds may compensate Pruco Life
based upon an annual percentage of the average assets held in the Fund by Pruco
Life under the Contracts. These percentages may vary by Fund and reflect
administrative and other services we provide.
Voting Rights
We are the legal owner of the Fund shares associated with the ProFund VP
variable investment options. However, we vote the shares in the Fund according
to voting instructions we receive from Contract owners. We will mail you a
proxy, which is a form you need to complete and return to us to tell us how you
wish us to vote. When we receive those instructions, we will vote all of the
shares we own on your behalf in accordance with those instructions. We will vote
the shares for which we do not receive instructions and shares that we own, in
the same proportion as the shares for which instructions are received. We may
change the way your voting instructions are calculated if it is required by
federal or state regulation. Should the applicable federal securities laws or
regulations, or their current interpretation, change so as to permit Pruco Life
to vote shares of the Funds in its own right, it may elect to do so.
Which Investment Option Should Be Selected?
If you decide to apply for this policy, you should seriously consider engaging
the services of an investment advisor to advise you on the proper use of
investment options as part of an overall asset allocation strategy. The variable
investment options of this Contract were chosen to accommodate those who plan to
use programmed, large, or frequent transfers among the variable investment
options. These strategies have significant risks associated with them. The
principal risk is that you or your investment advisor may misread the various
markets and make ill-advised transfers, thereby resulting in investment results
that are less favorable than they would have been in the absence of such
activity. Also, the potential negative impact of bad decisions is magnified by
the fact that an active investment strategy may involve large amounts and be
concentrated in select markets. There are those who assert that (1) the
frequency of transfers increases the volatility of investment results, and (2)
being "out of the market" as a result of market timing activity has a
significant statistically negative impact on investment results. All of these
risks, as well as all the other risks mentioned below, will be present whether
you direct the transfers yourself or engage the services of an investment
advisor.
The investment strategies of some of the ProFund VP portfolios are designed to
magnify (both positively and negatively) the investment results of the
applicable benchmark index. These "leveraged" Funds are the ProFund VP U.S.
Government Plus, ProFund VP Bull Plus, ProFund VP UltraMid-Cap, ProFund VP
UltraSmall-Cap, ProFund VP UltraOTC and ProFund VP Rising Rates Opportunity. The
investment results of these leveraged Funds are expected to exhibit
significantly greater volatility than the other investment options available
under this Contract. When compared to the universe of open-end mutual funds, the
leveraged Funds are considered to be among the most volatile. The leveraged
investment techniques employed by these Funds (including the borrowing costs
incurred in creating leverage) should cause investors to lose more money in
adverse environments. For example, if the daily objective of a Fund seeks to
double the benchmark index, and the benchmark index suffers a 10% loss in value,
the Fund would be expected to lose approximately 20% of its value before
consideration of the borrowing costs and other fees and expenses. Considering
the borrowing costs and other fees and expenses, the loss would be even greater
than 20%. Similarly, a 10% gain in the benchmark index would be expected to
produce less than a 20% gain in the Fund due to the combined effect of the
leverage and the borrowing costs and other fees and expenses.
None of the ProFund VP portfolios seek to provide correlation with its
respective benchmark over any period of time other than daily. The effect of the
fees and expenses associated with the Funds and the compounding of returns may
cause the performance of these Funds to differ, potentially significantly, from
their benchmarks over time. This is particularly true for the leveraged Funds
due to the multiplier effect of leverage.
In addition to all of the risks mentioned above, there are specific investment
risks associated with the various ProFund VP portfolios (such as Active Trading
Risk, Concentration Risk, Correlation Risk, Swap Counterparty Credit Risk and
Risks of Aggressive Investment Techniques) that are described in detail in the
attached Fund prospectus. You should read the attached Fund prospectus very
carefully before applying for this policy, which qualifies in its entirety the
foregoing summary of the Funds.
DETAILED INFORMATION FOR
PROSPECTIVE CONTRACT OWNERS
Charges and Expenses
12
The total amount invested at any time in the Contract Fund consists of the sum
of the amount credited to the variable investment options and the principal
amount of any Contract loan plus the amount of interest credited to the Contract
upon that loan. See Contract Loans, page 33. Most charges, although not all, are
made by reducing the Contract Fund.
This section provides a more detailed description of each charge that is
described briefly in the chart on page 3.
In several instances we will use the terms "maximum charge" and "current
charge." The "maximum charge," in each instance, is the highest charge that
Pruco Life is entitled to make under the Contract. The "current charge" is the
lower amount that Pruco Life is now charging. If circumstances change, we
reserve the right to increase each current charge, up to the maximum charge,
without giving any advance notice.
Deductions from Premium Payments
(a) We reserve the right to charge up to 7.5% for taxes attributable to
premiums. In California, Oregon, and Texas this is called a premium based
administrative charge. For these purposes, "taxes attributable to
premiums" shall include any federal, state or local income, premium,
excise, business or any other type of tax (or component thereof) measured
by or based upon the amount of premium received by Pruco Life.
This charge is made up of two parts which currently equal a total of 3.75%
of the premiums received.
The first part is a charge for state and local premium taxes. The current
amount for this first part is 2.5% of the premium and is Pruco Life's
estimate of the average burden of state taxes generally. Tax rates vary
from jurisdiction to jurisdiction and generally range from 0% to 5%. The
rate applies uniformly to all contract owners without regard to state of
residence. Pruco Life may collect more for this charge than it actually
pays for state and local premium taxes.
The second part is for federal income taxes measured by premiums, and it
is currently equal to 1.25% of premiums. We believe that this charge is a
reasonable estimate of an increase in its federal income taxes resulting
from a 1990 change in the Internal Revenue Code. It is intended to recover
this increased tax.
(b) We reserve the right to charge up to 6% of premiums paid for sales
expenses in all Contract years. This charge, often called a "sales load",
is deducted to compensate us for the costs of selling the Contracts,
including commissions, advertising and the printing and distribution of
prospectuses and sales literature.
Currently, the charge is equal to 4% of premiums paid up to the amount of
the Sales Load Target Premium and 2% of premiums paid in excess of this
amount for the first 10 Contract years (or the first 10 years of a
coverage segment representing an increase in basic insurance amount); 0%
thereafter. The Sales Load Target Premium may vary from the Target
Premium, depending on the issue age and rating class of the insured, any
extra risk charges, or additional riders. For Contracts issued on an
unrated insured below age 56, the Sales Load Target Premium is generally
equal to what the Target Premium for a Type A Contract would be if the
insured was either in the Nonsmoker or Smoker rating class, and there were
no extra risk charges or riders on the Contract. For Contracts issued on
an unrated insured below age 56 in a more favorable rating class, the
Sales Load Target Premium will be greater than the Target Premium, if
there are no extra risk charges or riders on the Contract. For Contracts
issued on insureds age 56 or greater or with substandard ratings, the
Sales Load Target Premium will generally be less than the Target Premium.
See Premiums, page 20.
Paying more than the Sales Load Target Premium in any of the first 10
Contract years could reduce your total sales load. For example, assume
that a Contract with no riders or extra insurance charges has a Sales Load
Target Premium of $884 and the Contract owner would like to pay 10
premiums. If the Contract owner paid $1,768 (two times the amount of the
Sales Load Target Premium) in every other Contract year up to the ninth
year (i.e. in years 1, 3, 5, 7, 9), the total sales load charge would be
$265.20. If the Contract owner paid $884 in each of the first 10 Contract
years, the total sales load would be $353.60. For additional information,
see Increases in Basic Insurance Amount, page 29.
Attempting to structure the timing and amount of premium payments to
reduce the potential sales load may increase the risk that your Contract
will lapse without value. Delaying the payment of premium amounts to later
years will adversely affect the Death Benefit Guarantee if the accumulated
premium payments do not reach the Death Benefit Guarantee Values shown on
your Contract data pages. See Death Benefit Guarantee, page 21.
13
In addition, there are circumstances where payment of premiums that are
too large may cause the Contract to be characterized as a Modified
Endowment Contract, which could be significantly disadvantageous. See Tax
Treatment of Contract Benefits, page 34.
Deductions from Funds
An investment advisory fee is deducted daily from each Fund at a rate, on an
annualized basis ranging from 0.50% for ProFund VP US Government Plus to 0.75%
for all other Funds. The expenses incurred in conducting the investment
operations of the Funds (such as custodian fees and preparation and distribution
of annual reports) are paid out of the Funds' assets. These expenses vary from
Fund to Fund.
The total expenses of each Fund for the year ended December 31, 2001, expressed
as a percentage of the average assets during the year, are shown below:
- ------------------------------------------------------------------------------------------------------------------
Total Portfolio Expenses
- ------------------------------------------------------------------------------------------------------------------
Investment Total Total
The ProFund VP variable investment options Advisory Other 12b-1 Contractual Actual
Fee Expenses Fees Expenses Expenses*
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Bull (1) 0.75% 1.25% 0.25% 2.25% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Small-Cap (1) 0.75% 1.65% 0.25% 2.65% 2.25%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP OTC 0.75% 0.91% 0.25% 1.91% 1.91%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Asia 30 (2) 0.75% 0.94% 0.25% 1.94% 1.94%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Europe 30 0.75% 0.89% 0.25% 1.89% 1.89%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Mid-Cap Value (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Mid-Cap Growth (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Small-Cap Value (2) 0.75% 0.97% 0.25% 1.97% 1.97%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Small-Cap Growth (2) 0.75% 0.97% 0.25% 1.97% 1.97%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP U.S. Government Plus (2) 0.50% 0.95% 0.25% 1.70% 1.70%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Bull Plus 0.75% 0.94% 0.25% 1.94% 1.94%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP UltraMid-Cap (2) 0.75% 0.97% 0.25% 1.97% 1.97%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP UltraSmall-Cap (1) 0.75% 1.11% 0.25% 2.11% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP UltraOTC 0.75% 0.95% 0.25% 1.95% 1.95%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Bear 0.75% 0.89% 0.25% 1.89% 1.89%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Short OTC (2) 0.75% 0.95% 0.25% 1.95% 1.95%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Rising Rates Opportunity (2) 0.75% 0.95% 0.25% 1.95% 1.95%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Basic Materials (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Biotechnology (1) 0.75% 1.03% 0.25% 2.03% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Consumer Cyclical (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Consumer Non-Cyclical (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Energy (1) 0.75% 1.05% 0.25% 2.05% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Financial (1) 0.75% 1.10% 0.25% 2.10% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Healthcare (1) 0.75% 1.06% 0.25% 2.06% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Precious Metals (2) 0.75% 0.96% 0.25% 1.96% 1.96%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Real Estate (1) 0.75% 0.99% 0.25% 1.99% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Technology (1) 0.75% 1.10% 0.25% 2.10% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Telecommunications (1) 0.75% 1.17% 0.25% 2.17% 1.98%
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Utilities (1) 0.75% 1.05% 0.25% 2.05% 1.98%
- ------------------------------------------------------------------------------------------------------------------
14
- ------------------------------------------------------------------------------------------------------------------
ProFund VP Money Market 0.75% 0.60% 0.25% 1.60% 1.60%
- ------------------------------------------------------------------------------------------------------------------
* Reflects fee waivers, reimbursement of expenses, and expense reductions, if any.
- ------------------------------------------------------------------------------------------------------------------
(1) ProFund Advisors LLC has contractually agreed to waive Investment Advisory
and Management Services Fees and to reimburse other expenses to the extent
Total Annual Operating Expenses, as a percentage of average daily net
assets, exceed 1.98% (2.25% for ProFund VP Small-Cap) through December 31,
2002. After such date, any of the expense limitations may be terminated or
revised. Amounts waived or reimbursed in a particular fiscal year may be
repaid to ProFund Advisors LLC from time to time through the next three
fiscal years to the extent that the repayment will not cause the Fund's
expenses to exceed the stated limit during the respective year. A waiver
or reimbursement lowers the expense ratio and increases overall returns to
the investor.
(2) These Portfolios commenced operations on May 1,2002. "Other Expenses"
shown are based on estimated amounts for the fiscal year ending December
31,2002.
The expenses relating to the ProFund VP variable investment options have been
provided to Pruco Life by ProFund Advisors LLC. Pruco Life has not independently
verified them.
Daily Deduction from the Contract Fund
Each day we deduct a charge from the assets of each of the variable investment
options in an amount equivalent to an effective annual rate of up to 0.45%.
Currently, we charge 0.25%. This charge is intended to compensate Pruco Life for
assuming mortality and expense risks under the Contract. The mortality risk
assumed is that insureds may live for shorter periods of time than Pruco Life
estimated when it determined what mortality charge to make. The expense risk
assumed is that expenses incurred in issuing and administering the Contract will
be greater than Pruco Life estimated in fixing its administrative charges.
Monthly Deductions from the Contract Fund
Pruco Life deducts the following monthly charges proportionately from the dollar
amounts held in each of the chosen investment option[s] or you may select up to
two variable investment options from which we deduct your Contract's monthly
charges. See Allocated Charges, page 16.
(a) An administrative charge based on the basic insurance amount is deducted.
The charge is intended to compensate us for things like processing claims,
keeping records, and communicating with Contract owners. Currently, the
first part of the charge is equal to $20 per Contract for the first two
Contract years and $12.50 per Contract thereafter. Pruco Life reserves the
right, however, to charge up to $20 per Contract for each Contract year.
The second part of this charge is equal to an amount up to $1.12 per
$1,000 of the basic insurance amount for the first five Contract years and
zero thereafter. The amount per $1,000 varies by sex, issue age,
smoker/nonsmoker status, and extra rating class, if any.
If the Contract includes a coverage segment representing an increase in
basic insurance amount, we will deduct $12 per segment for the first two
years of the coverage segment and zero thereafter; plus an amount up to
$1.12 per $1,000 of the coverage segment for an increase in basic
insurance amount for the first five years from the effective date of the
increase and zero thereafter. The amount per $1,000 varies by sex, issue
age, smoker/nonsmoker status, extra rating class, if any, and the
effective date of the increase.
In either of the instances described above, the highest charge per
thousand is $1.12 and applies to male and female smoker and non-smoker
above age 74 at certain rating classes. The lowest charge per thousand is
$0.03 and applies to female age 0-14, non-smoker at certain rating
classes. The amount of the charge that applies to a particular Contract is
shown on the Contract Data pages under the heading "Adjustments to the
Contract Fund."
The following table provides sample per thousand charges:
--------------------------------------------------------------------
Male Male Female Female
Issue Age Non-Smoker Smoker Non-Smoker Smoker
--------------------------------------------------------------------
35 $0.14 $0.23 $0.12 $0.16
--------------------------------------------------------------------
45 $0.24 $0.34 $0.19 $0.28
--------------------------------------------------------------------
55 $0.40 $0.45 $0.31 $0.42
--------------------------------------------------------------------
65 $0.67 $0.76 $0.53 $0.70
--------------------------------------------------------------------
15
(b) A cost of insurance ("COI") charge is deducted. When an insured dies, the
amount payable to the beneficiary (assuming there is no Contract debt) is
larger than the Contract Fund - significantly larger if the insured dies
in the early years of a Contract. The cost of insurance charges collected
from all Contract owners enables Pruco Life to pay this larger death
benefit. The maximum COI charge is determined by multiplying the "net
amount at risk" under a Contract (the amount by which the Contract's death
benefit exceeds the Contract Fund) by maximum COI rates. The maximum COI
rates are based upon the 1980 Commissioners Standard Ordinary ("CSO")
Tables and an insured's current attained age, sex (except where unisex
rates apply), smoker/non-smoker status, and extra rating class, if any. At
most ages, Pruco Life's current COI rates are lower than the maximum
rates. For additional information, see Increases in Basic Insurance
Amount, page 29.
(c) You may add one or more of several riders to the Contract. Some riders are
charged for separately. If you add such a rider to the basic Contract,
additional charges will be deducted. See Riders, page 18.
(d) If an insured is in a substandard risk classification (for example, a
person in a hazardous occupation), additional charges will be deducted.
(e) A charge may be deducted to cover federal, state or local taxes (other
than "taxes attributable to premiums" described above) that are imposed
upon the operations of the Account. In California, Oregon, and Texas this
is called a premium based administrative charge. At present no such taxes
are imposed and no charge is made.
The earnings of the Account are taxed as part of the operations of Pruco
Life. Currently, no charge is being made to the Account for Pruco Life's
federal income taxes, other than the 1.25% charge for federal income taxes
measured by premiums. See Deductions from Premium Payments, page 12. Pruco
Life periodically reviews the question of a charge to the Account for
Company federal income taxes. We may make such a charge in the future for
any federal income taxes that would be attributable to the Contracts.
Surrender Charges
We will assess a surrender charge if, during the first 10 Contract years (or
during the first 10 years of a coverage segment representing an increase in
basic insurance amount), the Contract lapses, is surrendered, or the basic
insurance amount is decreased (including as a result of a withdrawal or a death
benefit type change). The surrender charge is a percentage of the Surrender
Target Premium. The percentage varies by issue age. The Surrender Target Premium
is equal to the Sales Load Target Premium at the time the policy (or coverage)
is issued less premiums for riders or extras. The duration of the surrender
charge also varies by issue age. For all issue ages 0-45, the maximum first year
percentage is 90% of the Surrender Target Premium, and is reduced annually at a
constant rate to zero by the end of the 10th year.
The chart below shows the maximum percentages for all ages at the beginning of
the first Contract year, the rate at which the percentages is reduced annually,
and the end of the last Contract year for which a surrender charge is shown. The
surrender charge is not deducted from the death benefit if the insured should
die during this period. This charge is deducted to cover sales and
administrative costs, such as: the cost of processing applications, conducting
examinations, determining insurability and the insured's rating class, and
establishing records. A schedule showing the maximum surrender charges for a
full surrender occurring during each year for which a surrender charge may be
payable is found in the Contract Data pages of the Contract.
------------------------------------------------------- -------------------------------------------------------
Reduction Reduction
Issue Percentage in To the Issue Percentage in To the
Age at start of percentage end of Age at start of percentage end of
year 1 points each year year 1 points each year
year year
------------------------------------------------------- -------------------------------------------------------
0-45 90.0% 9.00% 10 60 47.5% 6.79% 7
------------------------------------------------------- -------------------------------------------------------
46 87.0% 8.70% 10 61 45.0% 7.50% 6
------------------------------------------------------- -------------------------------------------------------
47 84.0% 8.40% 10 62 42.5% 7.08% 6
------------------------------------------------------- -------------------------------------------------------
48 81.0% 8.10% 10 63 40.0% 8.00% 5
------------------------------------------------------- -------------------------------------------------------
49 78.0% 7.80% 10 64 37.5% 9.37% 4
------------------------------------------------------- -------------------------------------------------------
50 75.0% 7.50% 10 65 35.0% 8.75% 4
------------------------------------------------------- -------------------------------------------------------
51 72.0% 7.20% 10 66 34.0% 8.50% 4
------------------------------------------------------- -------------------------------------------------------
52 69.0% 6.90% 10 67 33.5% 8.37% 4
------------------------------------------------------- -------------------------------------------------------
53 66.0% 6.60% 10 68 33.0% 8.25% 4
------------------------------------------------------- -------------------------------------------------------
16
------------------------------------------------------- -------------------------------------------------------
54 63.0% 6.30% 10 69 32.5% 10.83% 3
------------------------------------------------------- -------------------------------------------------------
55 60.0% 6.00% 10 70 32.0% 10.67% 3
------------------------------------------------------- -------------------------------------------------------
56 57.5% 6.39% 9 71 31.5% 10.50% 3
------------------------------------------------------- -------------------------------------------------------
57 55.0% 6.87% 8 72 31.0% 10.33% 3
------------------------------------------------------- -------------------------------------------------------
58 52.5% 6.56% 8 73 30.5% 10.17% 3
------------------------------------------------------- -------------------------------------------------------
59 50.0% 7.14% 7 74 and 30.0% 10.00% 3
above
------------------------------------------------------- -------------------------------------------------------
We will show a surrender charge threshold for each coverage segment in the
Contract data pages. This threshold amount is the segment's lowest coverage
amount since its effective date. If during the first 10 Contract years (or
during the first 10 years of a coverage segment representing an increase in
basic insurance amount), the basic insurance amount is decreased (including as a
result of a withdrawal or a change in type of death benefit), and the new basic
insurance amount for any coverage segment is below the threshold for that
segment, we will deduct a percentage of the surrender charge for that segment.
The percentage will be the amount by which the new coverage segment is less than
the threshold, divided by the threshold. After this transaction, the threshold
will be updated and a corresponding new surrender charge schedule will also be
determined to reflect that portion of surrender charges deducted in the past.
See Increases in Basic Insurance Amount, page 29 and Decreases in Basic
Insurance Amount, page 30.
Transaction Charges
(a) We currently charge an administrative processing fee equal to $25 in
connection with each withdrawal.
(b) We may charge an administrative processing fee of up to $25 for any change
in basic insurance amount.
(c) We may charge an administrative processing fee of up to $25 for any change
in the Target Term Rider coverage amount for Contracts with this rider.
Charges After Age 100
Beginning on the contract anniversary when the insured reaches attained age 100,
premiums will no longer be accepted and monthly charges will no longer be
deducted from the Contract Fund. You may continue the contract until the
insured's death, or until you surrender the contract for its cash surrender
value. You may continue to make transfers, loans and withdrawals, subject to the
limitations on these transactions described elsewhere. Mortality and expense
risk charges and investment advisory fees will continue to be deducted daily.
Any outstanding loan will remain on the policy, unless repaid, and will continue
to accrue interest.
Allocated Charges
You may choose from which variable investment option(s) we deduct your
Contract's monthly charges. Monthly charges include: (1) monthly administrative
charges, (2) COI charges, (3) any rider charges, and (4) any charge for
substandard risk classification. You may select up to two variable investment
options for the allocation of monthly charges. Allocations must be designated in
whole percentages. For example, 33% can be selected but 33"% cannot. Of course,
the total allocation to the selected variable investment options must equal
100%. See Monthly Deductions from the Contract Fund, page 14.
If there are insufficient funds in one or both of the selected variable
investment options to cover the monthly charges, the selected variable
investment option(s) will be reduced to zero. Any remaining charge will be
deducted from all other variable investment options proportionately to the
dollar amount in each. Furthermore, if you do not specify an allocation of
monthly charges, we will deduct monthly charges proportionately from your
variable investment options.
Requirements for Issuance of a Contract
The Contract may generally be issued on insureds through age 90. Currently, the
minimum face amount is $250,000.
For Contracts with a Target Term Rider, the minimum total face amount (basic
insurance amount plus any Target Term Rider coverage amount combined) is
$250,000. Furthermore, if the Target Term Rider is added to the Contract, the
minimum face amount of the base Contract is $100,000, while the minimum rider
coverage amount is $5,000. See Riders, page 18. Pruco Life may change the
minimum face amounts of the Contracts it will issue.
17
Pruco Life requires evidence of insurability, which may include a medical
examination, before issuing any Contract. Non-smokers are offered the most
favorable cost of insurance rates. We charge a higher cost of insurance rate
and/or an additional amount if an extra mortality risk is involved. These are
the current underwriting requirements. We reserve the right to change them on a
non-discriminatory basis.
Short-Term Cancellation Right or "Free-Look"
Generally, you may return the Contract for a refund within 10 days after you
receive it. Some states allow a longer period of time during which a Contract
may be returned for a refund. You can request a refund by mailing or delivering
the Contract to the representative who sold it or to our Service Office. A
Contract returned according to this provision shall be deemed void from the
beginning. You will then receive a refund of all premium payments made, with no
adjustment for investment experience. However, if applicable law so requires and
you exercise your short-term cancellation right, you will receive a refund of
all premium payments made, plus or minus any change due to investment
experience. For information on how premium payments are allocated during the
"free-look" period, see Allocation of Premiums, page 21.
Types of Death Benefit
You may select either of three types of death benefit at issue. Generally, a
Contract with a Type A (fixed) death benefit has a death benefit equal to the
basic insurance amount. This type of death benefit does not vary with the
investment performance of the investment options you selected, except in certain
circumstances. See How a Type A (Fixed) Contract's Death Benefit Will Vary, page
25. The payment of additional premiums and favorable investment results of the
variable investment options to which the assets are allocated will generally
increase the cash surrender value. See How a Contract's Cash Surrender Value
Will Vary, page 25.
A Contract with a Type B (variable) death benefit has a death benefit which will
generally equal the basic insurance amount plus the Contract Fund. Since the
Contract Fund is a part of the death benefit, favorable investment performance
and payment of additional premiums generally result in an increase in the death
benefit as well as in the cash surrender value. Over time, however, the increase
in the cash surrender value will be less than under a Type A (fixed) Contract.
This is because, given two Contracts with the same basic insurance amount and
equal Contract Funds, generally the cost of insurance charge for a Type B
(variable) Contract will be greater. See How a Contract's Cash Surrender Value
Will Vary, page 25 and How a Type B (Variable) Contract's Death Benefit Will
Vary, page 26. Unfavorable investment performance will result in decreases in
the death benefit and in the cash surrender value. But, as long as the Contract
is not in default, the death benefit may not fall below the basic insurance
amount stated in the Contract.
A Contract with a Type C (return of premium) death benefit has a death benefit
which will generally equal the basic insurance amount plus the total premiums
paid into the Contract, less withdrawals. This death benefit allows the Contract
owner, in effect, to recover the cost of the Contract upon the death of the
insured. Under certain circumstances, it is possible for a Type C Contract's
death benefit to fall below the basic insurance amount. Favorable investment
performance and payment of additional premiums will generally increase the
Contract's cash value. Over time, however, the increase in cash value will be
less than under a Type A (fixed) Contract. See How a Contract's Surrender Value
Will Vary, page 25 and How a Type C (Return of Premium) Contract's Death Benefit
Will Vary, page 27.
In choosing a death benefit type, you should also consider whether you intend to
use the withdrawal feature. Contract owners of Type A (fixed) Contracts should
note that any withdrawal may result in a reduction of the basic insurance amount
and the deduction of any applicable surrender charges. We will not allow you to
make a withdrawal that will decrease the basic insurance amount below the
minimum basic insurance amount. For Type B (variable) and Type C (return of
premium) Contracts, withdrawals will not change the basic insurance amount. See
Withdrawals, page 28.
Changing the Type of Death Benefit
You may change the type of death benefit any time after issue and subject to
Pruco Life's approval. We will increase or decrease the basic insurance amount
so that the death benefit immediately after the change matches the death benefit
immediately before the change. The basic insurance amount after a change may not
be lower than the minimum basic insurance amount applicable to the Contract. See
Requirements for Issuance of a Contract, page 16. We reserve the right to make
an administrative processing charge of up to $25 for any change in the basic
insurance amount, although we do not currently do so. A type change that reduces
the basic insurance amount may
18
result in the assessment of surrender charges. See Charges and Expenses, page
11. Furthermore, if you choose a Type A or Type B death benefit at issue, you
will NOT be able to change to a Type C death benefit after issue.
If you are changing your Contract's type of death benefit from a Type A (fixed)
to a Type B (variable) death benefit, we will reduce the basic insurance amount
by the amount in your Contract Fund on the date the change takes place.
If you are changing from a Type A (fixed) to a Type C (return of premium) death
benefit, we will change the basic insurance amount by subtracting the total
premiums paid on this Contract minus total withdrawals on the date the change
takes effect. This change is only available to Contracts which were issued with
a Type C death benefit and subsequently changed to a Type A death benefit.
If you are changing from a Type B (variable) to a Type A (fixed) death benefit,
we will increase the basic insurance amount by the amount in your Contract Fund
on the date the change takes place.
If you are changing from a Type B (variable) to a Type C (return of premium)
death benefit, we first find the difference between: (1) the amount in your
Contract Fund and (2) the total premiums paid on this Contract minus total
withdrawals, determined on the date the change takes effect. If (1) is larger
than (2), we will increase the basic insurance amount by that difference. If (2)
is larger than (1), we will reduce the basic insurance amount by that
difference. This change is only available to Contracts which were issued with a
Type C death benefit and subsequently changed to a Type B death benefit.
If you are changing from a Type C (return of premium) to a Type A (fixed) death
benefit, we will change the basic insurance amount by adding the total premiums
paid minus total withdrawals to this Contract on the date the change takes
place.
If you are changing from a Type C (return of premium) to a Type B (variable)
death benefit, we first find the difference between: (1) the amount in your
Contract Fund and (2) the total premiums paid on this Contract minus total
withdrawals, determined on the date the change takes effect. If (2) is larger
than (1), we will increase the basic insurance amount by that difference. If (1)
is larger than (2), we will reduce the basic insurance amount by that
difference.
The following chart illustrates the changes in basic insurance amount with each
change of death benefit type described above. The chart assumes a $50,000
Contract Fund and a $300,000 death benefit. For changes to and from a Type C
death benefit, the chart assumes $40,000 in total premiums minus total
withdrawals.
------------------------------------------------------
Basic Insurance Amount
======================================================
FROM TO
------------------------------------------------------
Type A Type B Type C
$300,000 $250,000 $260,000
------------------------------------------------------
Type B Type A Type C
$250,000 $300,000 $260,000
------------------------------------------------------
Type C Type A Type B
$260,000 $300,000 $250,000
------------------------------------------------------
To request a change, fill out an application for change which can be obtained
from your Pruco Life representative or our Service Office. If the change is
approved, we will recompute the Contract's charges and appropriate tables and
send you new Contract data pages. We may require you to send us your Contract
before making the change.
Riders
Contract owners may be able to obtain extra fixed benefits which may require an
additional premium. These optional insurance benefits will be described in what
is known as a "rider" to the Contract. Charges applicable to the riders will be
deducted from the Contract Fund on each Monthly date. The amounts of these
benefits do not depend on the performance of the Account, although they will no
longer be available if the Contract lapses. Certain restrictions may
19
apply and are clearly described in the applicable rider. Your Pruco Life
representative can explain all of these extra benefits further. Also, samples of
the provisions are available from Pruco Life upon written request.
Enhanced Disability Benefit -- The Enhanced Disability Benefit pays certain
amounts into the Contract if the insured is totally disabled, as defined in the
benefit provision.
Target Term Rider -- The Target Term Rider provides a flexible term insurance
benefit to attained age 100 on the life of the insured. You specify the amount
of term rider coverage you desire, up to four times the base Contract's basic
insurance amount. This amount is called the rider coverage amount and is the
maximum death benefit payable under the rider. After issue, while the rider is
in-force, you may increase the rider coverage amount subject to a minimum
increase amount of $25,000 and the underwriting requirements determined by Pruco
Life. The rider coverage amount after the increase cannot exceed four times the
base Contract's basic insurance amount. You may also decrease your rider
coverage amount after issue, subject to a minimum decrease amount of $10,000.
The rider death benefit fluctuates as the base Contract's death benefit changes.
When the Contract Fund has not grown to the point where the base Contract's
death benefit is increased to satisfy the Internal Revenue Code's definition of
life insurance, the rider death benefit equals the rider coverage amount.
However, if the Contract Fund has grown to the point where the base Contract's
death benefit begins to vary as required by the Internal Revenue Code's
definition of life insurance, the rider's death benefit will decrease (or
increase) dollar for dollar as the base Contract's death benefit increases (or
decreases). The rider death benefit will never increase beyond the rider
coverage amount. It is possible, however, for the Contract Fund and,
consequently, the base Contract's death benefit to grow to the point where the
rider death benefit is reduced to zero.
[The following information was depicted as a line chart in the
printed material.]
$500,000 Basic Insurance Amount and $500,000 Target Term Rider
Type A Death Benefit
Policy Year Base Policy Death Benefit Target Death Benefit
1 $ 500,000 $500,000
2 $ 500,000 $500,000
3 $ 500,000 $500,000
4 $ 500,000 $500,000
5 $ 500,000 $500,000
6 $ 500,000 $500,000
7 $ 500,000 $500,000
8 $ 500,000 $500,000
9 $ 500,000 $500,000
10 $ 550,000 $450,000
11 $ 605,000 $395,000
12 $ 665,500 $334,500
13 $ 732,050 $267,950
14 $ 805,255 $194,745
15 $ 885,781 $114,220
16 $1,000,000 $ --
17 $1,100,000 $ --
18 $1,210,000 $ --
19 $1,331,000 $ --
20 $1,464,100 $ --
You should consider the following factors when purchasing a Contract with a
Target Term Rider:
o A Contract with a Target Term Rider will offer higher cash values and
death benefits than an all base policy with the same death benefit if
Pruco Life does not change its current charges. This is because: (1) the
Sales Load Target Premium will be lower for a Contract with a Target Term
Rider than for an all base policy with the same death benefit and this may
result in lower current sales expense charges, (2) the monthly
administrative charge will also be lower for a Contract with a Target Term
Rider than for an all base policy with the same death benefit, and (3) we
currently take lower current Cost of Insurance charges under the Target
Term Rider.
o However, a Contract with a Target Term Rider offers the potential for
lower cash values and death benefits than an all base policy with the same
death benefit if Pruco Life raises its current charges to the maximum
contractual level. This is because guaranteed maximum charges under the
Contract and Target Term Rider are the same except for the per $1,000 of
insurance portion of the monthly administrative charge which extends for
10 years on the rider and only five years on the base Contract. The
surrender charge does not apply to the Target Term Rider.
20
Other factors to consider are:
o The length of the Death Benefit Guarantee available on Contracts with a
Target Term Rider is limited to five years. If it is important to you to
have a Death Benefit Guarantee period longer than five years, you may want
to purchase a Contract without a Target Term Rider. See Death Benefit
Guarantee, page 21.
o The Enhanced Disability Benefit, as described above, is unavailable on
Contracts with a Target Term Rider. If it is important to you to have the
Enhanced Disability Benefit, you may want to purchase a Contract without a
Target Term Rider.
o The Living Needs Benefit does not apply to the portion of the death
benefit that is attributable to a Target Term Rider. If it is important to
you that the Living Needs Benefit applies to the entire death benefit, you
may want to purchase a Contract without a Target Term Rider. See Living
Needs Benefit, page 30.
o The rider coverage amount terminates at the insured's age 100. If it is
important to you that no coverage amount then in effect terminates at the
insured's attained age 100, you may want to purchase a contract without a
Target Term Rider.
Some of the factors outlined above can have effects on the financial performance
of a Contract, including the amount of the Contract's cash value and death
benefit. It is important that you ask your Pruco Life representative to provide
illustrations based on different combinations of base Contract basic insurance
amount and rider coverage amount. You can then discuss with your Pruco Life
representative how these combinations may address your objectives.
Contract Date
When the first premium payment is paid with the application for a Contract, the
Contract date will ordinarily be the later of the application date or the
medical examination date. If the first premium is not paid with the application,
the Contract date will be the date on which the first premium is paid and the
Contract is delivered. Under certain circumstances, we may allow the Contract to
be backdated for the purpose of lowering the insured's issue age, but only to a
date not earlier than six months prior to the application date. This may be
advantageous for some Contract owners as a lower issue age may result in lower
current charges. For a Contract that is backdated, we will credit the initial
premium as of the date of receipt and will deduct any charges due on or before
that date.
Premiums
The Contract is a flexible premium contract. The minimum initial premium is due
on or before the Contract date. It is the premium needed to start the Contract.
There is no insurance under the Contract unless the minimum initial premium is
paid. Thereafter, you decide when to make premium payments and, subject to a $25
minimum, in what amounts. Premiums after the minimum initial premium must be
received at our Service Office ninety minutes prior to any announced closing of
the New York Stock Exchange or they will be applied as of the end of the
valuation period the next business day.
We may require an additional premium if adjustments to premium payments exceed
the minimum initial premium or there are Contract Fund charges due on or before
the payment date. We reserve the right to refuse to accept any payment that
increases the death benefit by more than it increases the Contract Fund. See How
a Type A (Fixed) Contract's Death Benefit Will Vary, page 25, How a Type B
(Variable) Contract's Death Benefit Will Vary, page 26, and How a Type C (Return
of Premium) Contract's Death Benefit Will Vary, page 27. Furthermore, there are
circumstances under which the payment of premiums in amounts that are too large
may cause the Contract to be characterized as a Modified Endowment Contract,
which could be significantly disadvantageous. See Tax Treatment of Contract
Benefits, page 34.
Once the minimum initial premium payment is made, there are no required
premiums. However, there are several types of premiums which are described
below. Understanding them may help you understand how the Contract works.
Target Premiums are premiums that, if paid at the beginning of each
Contract year, will keep the Contract in-force until the insured's age 65,
or if later, during the first 10 Contract years, regardless of investment
performance and assuming no loans or withdrawals (not applicable to
Contracts with the Target Term Rider). If you choose to continue the Death
Benefit Guarantee beyond this period, you will have to begin paying
premiums substantially higher than the Target Premium. However, not all
Contracts offer the Death Benefit Guarantee
21
beyond this period. The length of the Death Benefit Guarantee available to
you depends on your Contract's death benefit type, the definition of life
insurance test selected at issue, and whether the Target Term Rider is on
the Contract. See Death Benefit Guarantee, page 21. When you purchase a
Contract, your Pruco Life representative can tell you the amount[s] of the
Target Premium. For a Contract with no riders or extra risk charges, these
premiums will be level.
It is possible, in some instances, to pay a premium lower than the Target
Premium; the Short-Term Premium. These Short-Term Premiums, if paid at the
beginning of each Contract year, will keep the Contract in-force during
the first five Contract years, regardless of investment performance and
assuming no loans or withdrawals. To continue the Death Benefit Guarantee
beyond this period, you will have to begin paying premiums higher than the
Short-Term Premium. However, not all Contracts offer the Death Benefit
Guarantee beyond five Contract years. The length of the Death Benefit
Guarantee available to you depends on your Contract's death benefit type,
the definition of life insurance test selected at issue, and whether the
Target Term Rider is on the Contract. See Death Benefit Guarantee, page
21. When you purchase a Contract, your Pruco Life representative can tell
you the amount[s] of the Short-Term Premium. As is the case with the
Target Premium, for a Contract with no riders or extra risk charges, these
premiums will be level.
Lifetime Premiums are the premiums that, if paid at the beginning of each
Contract year, will keep the Contract in-force during the lifetime of the
insured, regardless of investment performance and assuming no loans or
withdrawals (not applicable to all Contracts). See Death Benefit
Guarantee, page 21. As is the case with the Target Premium, for a Contract
with no riders or extra risk charges, these premiums will be level. When
you purchase a Contract, your Pruco Life representative can tell you the
amount[s] of the Lifetime Premium.
We can bill you for the amount you select annually, semi-annually, or quarterly.
Because the Contract is a flexible premium contract, there are no scheduled
premium due dates. When you receive a premium notice, you are not required to
pay this amount. The Contract will remain in-force if: (1) the Contract Fund,
less any applicable surrender charges, is greater than zero and more than any
Contract debt or (2) you have paid sufficient premiums, on an accumulated basis,
to meet the Death Benefit Guarantee conditions and Contract debt is not equal to
or greater than the Contract Fund, less any applicable surrender charges. When
you apply for the Contract, you should discuss with your Pruco Life
representative how frequently you would like to be billed (if at all) and for
what amount.
Allocation of Premiums
On the Contract date: (1) we deduct the charge for sales expenses and the charge
for taxes attributable to premiums from the initial premium (In California,
Oregon, and Texas this is called a premium based administrative charge); (2) we
allocate the remainder of the initial premium and any other premium received
during the short-term cancellation right ("free-look") period to the ProFund VP
Money Market investment option; and (3) the first monthly deductions are made.
At the end of the "free-look" period, these funds will be transferred out of the
ProFund VP Money Market investment option and allocated among the variable
investment options according to your most current allocation request. See
Short-Term Cancellation Right or "Free-Look," page 17. If the first premium is
received before the Contract date, there will be a period during which the
Contract owner's initial premium will not be invested.
The charge for sales expenses and the charge for taxes attributable to premiums
also apply to all subsequent premium payments. The remainder will be invested as
of the end of the valuation period in which it is received at our Service
Office, in accordance with the allocation you previously designated. Provided
the Contract is not in default, you may change the way in which subsequent
premiums are allocated by giving written notice to our Service Office or by
telephoning our Service Office, provided you are enrolled to use the Telephone
Transfer System. Premium allocation changes must be received at our Service
Office ninety minutes prior to any announced closing of the New York Stock
Exchange or they will take effect as of the end of the valuation period the next
business day. There is no charge for reallocating future premiums. All
percentage allocations must be in whole numbers. For example, 33% can be
selected but 33"% cannot. Of course, the total allocation to all selected
investment options must equal 100%.
Death Benefit Guarantee
Although you decide what premium amounts you wish to pay, sufficient premium
payments, on an accumulated basis, will guarantee that your Contract will not
lapse and a death benefit will be paid upon the death of the insured. This will
be true even if, because of unfavorable investment experience, your Contract
Fund value drops to zero. Withdrawals may adversely affect the status of the
guarantee. Likewise, a Contract loan will negate any guarantee. See Withdrawals,
page 28, and Contract Loans, page 33. You should consider how important the
Death Benefit
22
Guarantee is to you when deciding what premium amounts to pay into the Contract.
In Maryland, this guarantee is titled "Death Benefit Guarantee To Prevent
Lapse".
At the Contract date and on each Monthly date, during the Death Benefit
Guarantee period shown on your Contract data pages, we calculate your Contract's
"Accumulated Net Payments" as of that date. Accumulated Net Payments equal the
premiums you paid, accumulated at an effective annual rate of 4%, less
withdrawals also accumulated at 4%.
We also calculate Death Benefit Guarantee Values. These are values used solely
to determine if a Death Benefit Guarantee is in effect. These are not cash
values that you can realize by surrendering the Contract, nor are they payable
death benefits. Your Contract data pages contain a table of Death Benefit
Guarantee Values, calculated as of Contract anniversaries. Values for
non-anniversary Monthly dates will reflect the number of months elapsed between
Contract anniversaries.
At each Monthly date, during the Death Benefit Guarantee period shown on your
Contract data pages, we will compare your Accumulated Net Payments to the Death
Benefit Guarantee Value as of that date. If your Accumulated Net Payments equal
or exceed the Death Benefit Guarantee Value and Contract debt does not equal or
exceed the Contract Fund less any applicable surrender charges, then the
Contract is kept in-force, regardless of the amount in the Contract Fund.
Short-Term, Target, and Lifetime Premiums are payments which correspond to the
Death Benefit Guarantee Values shown on your Contract data pages. For example,
payment of the Short-Term Premium at the beginning of each Contract year
guarantees that your Contract will not lapse during the first five Contract
years, assuming no loans or withdrawals. However, payment of the Short-Term
Premium after year five will not assure that your Contract's Accumulated Net
Payments will continue to meet the Death Benefit Guarantee Values. See Premiums,
page 20.
If you want a Death Benefit Guarantee to last longer than five years, you should
expect to pay at least the Target Premium at the start of each Contract year.
Paying the Target Premium at the beginning of each Contract year guarantees your
Contract against lapse until the insured's age 65 or for 10 years after issue,
whichever comes later, assuming no loans or withdrawals. However, payment of the
Target Premium after this Death Benefit Guarantee period, will not assure that
your Contract's Accumulated Net Payments will meet the subsequent, much higher,
Death Benefit Guarantee Values.
If you want a Death Benefit Guarantee to last the lifetime of the insured, then
you should expect to pay at least the Lifetime Premium at the start of each
Contract year. Paying the Lifetime Premium at the beginning of each Contract
year guarantees your Contract against lapse for the insured's lifetime, assuming
no loans or withdrawals.
The following table provides sample Short-Term, Target, and Lifetime Premiums
(to the nearest dollar) for Basic Insurance Amounts and increases dated on or
after May 1, 2002. The examples assume: (1) the insured is a male, Preferred
Best, with no extra risk or substandard ratings; (2) a $250,000 basic insurance
amount; (3) no extra benefit riders have been added to the Contract; and (4) the
Cash Value Accumulation Test has been elected for definition of life insurance
testing.
23
================================================================================
Illustrative Annual Premiums
================================================================================
Age of
insured Type of Short-Term Target Lifetime
at issue Death Benefit Chosen Premium Premium Premium
or
increase
================================================================================
40 Type A (Fixed) $1,125 $2,138 $4,765
- --------------------------------------------------------------------------------
40 Type B (Variable) $1,210 $2,220 $14,185
- --------------------------------------------------------------------------------
40 Type C (Return of Premium) $1,130 N/A N/A
- --------------------------------------------------------------------------------
60 Type A (Fixed) $3,363 $7,158 $12,963
- --------------------------------------------------------------------------------
60 Type B (Variable) $4,415 $7,218 $33,195
- --------------------------------------------------------------------------------
60 Type C (Return of Premium) $4,163 N/A N/A
- --------------------------------------------------------------------------------
80 Type A (Fixed) $16,203 $39,345 $47,235
- --------------------------------------------------------------------------------
80 Type B (Variable) $22,353 $43,980 $83,015
- --------------------------------------------------------------------------------
80 Type C (Return of Premium) N/A N/A N/A
================================================================================
Paying the Short-Term, Target, or Lifetime Premiums at the start of each
Contract year is one way of reaching the Death Benefit Guarantee Values; it is
certainly not the only way. The Death Benefit Guarantee allows considerable
flexibility as to the timing of premium payments. Your Pruco Life representative
can supply sample illustrations of various premium amount and frequency
combinations that correspond to the Death Benefit Guarantee Values.
When determining what premium amounts to pay and the frequency of your payments,
you should consider carefully the value of maintaining the Death Benefit
Guarantee. If you desire the Death Benefit Guarantee until the later of the
insured's age 65 or 10 years after issue, you may prefer to pay at least the
Target Premium in all years, rather than paying the lower Short-Term Premium in
the first five years. If you pay only enough premium to meet the Death Benefit
Guarantee Values in the first five years, you will need to pay more than the
Target Premium at the beginning of the 6th year in order to continue the Death
Benefit Guarantee.
Similarly, if you desire the Death Benefit Guarantee for lifetime protection,
you may prefer to pay generally higher premiums in all years, rather than trying
to make such payments on an as needed basis. For example, if you pay only enough
premium to meet the Death Benefit Guarantee Values until the later of the
insured's age 65 or 10 years after issue, a substantial amount may be required
to meet the subsequent Death Benefit Guarantee Values and continue the
guarantee. In addition, it is possible that the payment required to continue the
guarantee beyond this period could exceed the premium payments allowed to be
paid without causing the Contract to become a Modified Endowment Contract. See
Tax Treatment of Contract Benefits, page 34.
Not all Contracts will have the Death Benefit Guarantee available in all years.
Type A and Type B Contracts with the Cash Value Accumulation Test elected for
definition of life insurance testing will have the Death Benefit Guarantee
available for the lifetime of the insured. However, Type A and Type B Contracts
with the Guideline Premium Test elected for definition of life insurance testing
will have the Death Benefit Guarantee available until the insured's age 65 or 10
years after issue, whichever is later. Furthermore, Type C Contracts with either
the Cash Value Accumulation Test or Guideline Premium Test elected for
definition of life insurance testing, will only have the Death Benefit Guarantee
available for the first five Contract years. Contracts with the Target Term
Rider will also have the Death Benefit Guarantee available for only the first
five Contract years. Your Contract data pages will show Death Benefit Guarantee
Values for the duration available with your Contract. See Types of Death
Benefit, page 17 and Tax Treatment of Contract Benefits, page 34.
24
Transfers
You may transfer amounts from one variable investment option to another variable
investment option without charge. All or a portion of the amount credited to a
variable investment option may be transferred. Transfers will not be made until
the end of the "free-look" period. See Short-Term Cancellation Right or
"Free-Look", page 17.
The request may be in terms of dollars, such as a request to transfer $5,000
from one variable investment option to another, or may be in terms of a
percentage reallocation among variable investment options. In the latter case,
as with premium reallocations, the percentages must be in whole numbers. You may
transfer amounts by proper written notice to our Service Office or by telephone,
provided you are enrolled to use the Telephone Transfer System. You will
automatically be enrolled to use the Telephone Transfer System unless the
Contract is jointly owned or you elect not to have this privilege. Telephone
transfers may not be available on Contracts that are assigned, depending on the
terms of the assignment. See Assignment, page 36.
Any proper transfer request that is received at our Service Office after ninety
minutes prior to any announced closing of the New York Stock Exchange (generally
2:30 Eastern time) and prior to the end of the valuation period that day will
take effect as of the end of the valuation period the next business day. The
"cut-off" time for proper transfer requests we receive that are submitted
electronically to us, using electronic tools and procedures that we require,
will be extended to forty-five minutes prior to any announced closing of the New
York Stock Exchange (generally 3:15 Eastern time). We may set a later cut-off
time for transfers and other financial transactions, but we will tell you if we
do that.
We will use reasonable procedures, such as asking you to provide certain
personal information provided on your application for insurance, to confirm that
instructions given by telephone are genuine. We will not be held liable for
following telephone instructions that we reasonably believe to be genuine. Pruco
Life cannot guarantee that you will be able to get through to complete a
telephone transfer during peak periods such as periods of drastic economic or
market change.
Some Contract owners may use investment advisors or other third parties to make
transfers on their behalf. Activity by such investment advisors or third parties
may result in unusually large transfers which may interfere with our ability or
the ability of the underlying Fund to process transactions. Such activity may
also adversely affect the investment performance of the Funds.
We reserve the right to limit transfers in any Contract year, or to refuse any
of your transfer requests, if:
o we believe that excessive transfers, a specific transfer request, or
a group of transfer requests by an owner or the owner's investment
advisor may have a detrimental effect on the performance of any
investment option or the share prices of any Fund or would be
detrimental to other Contract owners; or
o we are informed by one or more Funds that they intend to restrict
the purchase of portfolio shares because of excessive trading or
because they believe that a specific transfer or group of transfers
would have a detrimental effect on the price of Fund shares.
We may apply the restrictions in a non-discriminatory manner reasonably designed
to prevent transfers that we consider to be disadvantageous to other Contract
owners.
We do not recommend, supervise or select your investment advisor. We are not
responsible for any advice provided by your investment advisor.
To use an investment advisor to effect allocations and transfers among the
investment options, you must:
o notify us in writing of the name of your investment advisor; and
o provide us with a power of attorney approved by us authorizing your
investment advisor to give us asset allocation/transfer
instructions.
There is no assurance that your investment advisor will successfully predict
market fluctuations. In selecting your investment advisor, you should carefully
consider his or her background, experience and reputation.
25
How a Contract's Cash Surrender Value Will Vary
You may surrender the Contract for its cash surrender value (referred to as net
cash value in the Contract). The Contract's cash surrender value on any date
will be the Contract Fund less any applicable surrender charges and less any
Contract debt. See Contract Loans, page 33. The Contract Fund value changes
daily, reflecting: (1) increases or decreases in the value of the variable
investment options; (2) interest credited on any loan; and (3) the daily asset
charge for mortality and expense risks assessed against the variable investment
options. The Contract Fund value also changes to reflect the receipt of premium
payments and the monthly deductions described under Charges and Expenses, page
11. Upon request, Pruco Life will tell you the cash surrender value of your
Contract. It is possible for the cash surrender value of a Contract to decline
to zero because of unfavorable investment performance or outstanding Contract
debt.
The tables on pages T1 through T10 of this prospectus illustrate approximately
what the cash surrender values would be for representative Contracts paying
certain premium amounts, and assuming hypothetical uniform investment results in
the Fund portfolios. Five of the tables assume current charges will be made
throughout the lifetime of the Contract and five of them assume maximum charges
will be made. See Illustrations of Cash Surrender Values, Death Benefits, and
Accumulated Premiums, page 31.
How a Type A (Fixed) Contract's Death Benefit Will Vary
As described earlier, there are three types of death benefit available under the
Contract: (1) Type A, a generally fixed death benefit; (2) Type B, a variable
death benefit; and (3) Type C, a return of premium death benefit. A Type C
(return of premium) death benefit generally varies by the amount of premiums
paid, a Type B (variable) death benefit varies with investment performance, and
a Type A (fixed) death benefit does not vary unless it must be increased to
comply with the Internal Revenue Code's definition of life insurance.
Under a Type A (fixed) Contract, the death benefit is generally equal to the
basic insurance amount. If the Contract is kept in-force for several years,
depending on how much premium you pay, and/or if investment performance is
reasonably favorable, the Contract Fund may grow to the point where Pruco Life
will increase the death benefit in order to ensure that the Contract will
satisfy the Internal Revenue Code's definition of life insurance.
The death benefit under a Type A (fixed) Contract will always be the greater of:
(1) the basic insurance amount; and
(2) the Contract Fund before the deduction of any monthly charges
due on that date, multiplied by the attained age factor that
applies.
A listing of attained age factors can be found on your Contract data pages. The
latter provision ensures that the Contract will always have a death benefit
large enough so that the Contract will be treated as life insurance for tax
purposes under current law. Before the Contract is issued, the Contract owner
may choose between two methods that we use to determine the tax treatment of the
Contract. See Tax Treatment of Contract Benefits, page 34, for a discussion of
these methods and the impact of each on the Contract's values, benefits and tax
status.
The following table illustrates at different ages how the attained age factor
affects the death benefit for different Contract Fund amounts. The table assumes
a $250,000 Type A (fixed) Contract was issued when the insured was a male
nonsmoker, age 35.
Type A (Fixed) Death Benefit
===================================================================================================================
IF THEN
===================================================================================================================
and the Contract the attained age the Contract Fund multiplied by the and the Death
the insured is age Fund is factor is** attained age factor is Benefit is
===================================================================================================================
40 $ 25,000 3.57 89,250 $250,000
40 $ 75,000 3.57 267,750 $267,750*
40 $100,000 3.57 357,000 $357,000*
- -------------------------------------------------------------------------------------------------------------------
26
- -------------------------------------------------------------------------------------------------------------------
60 $ 75,000 1.92 144,000 $250,000
60 $125,000 1.92 240,000 $250,000
60 $150,000 1.92 288,000 $288,000*
- -------------------------------------------------------------------------------------------------------------------
80 $150,000 1.26 189,000 $250,000
80 $200,000 1.26 252,000 $252,000*
80 $225,000 1.26 283,500 $283,500*
===================================================================================================================
* Note that the death benefit has been increased to comply with the Internal Revenue Code's definition of
life insurance.
** Assumes the Contract owner selected the Cash Value Accumulation Test.
===================================================================================================================
This means, for example, that if the insured has reached the age of 60, and the
Contract Fund is $150,000, the death benefit will be $288,000, even though the
basic insurance amount is $250,000. In this situation, for every $1 increase in
the Contract Fund, the death benefit will be increased by $1.92. We reserve the
right to refuse to accept any premium payment that increases the death benefit
by more than it increases the Contract Fund. If we exercise this right, in
certain situations it may result in the loss of the Death Benefit Guarantee.
How a Type B (Variable) Contract's Death Benefit Will Vary
Under a Type B (variable) Contract, while the Contract is in-force, the death
benefit will never be less than the basic insurance amount, but will vary,
immediately after it is issued, with the investment results of the selected
investment options. The death benefit may be increased to ensure that the
Contract will satisfy the Internal Revenue Code's definition of life insurance.
The death benefit under a Type B (variable) Contract will always be the greater
of:
(1) the basic insurance amount plus the Contract Fund before the
deduction of any monthly charges due on that date; and
(2) the Contract Fund before the deduction of any monthly charges
due on that date, multiplied by the attained age factor that
applies.
For purposes of computing the death benefit, if the Contract Fund is less than
zero we will consider it to be zero. A listing of attained age factors can be
found on your Contract data pages. The latter provision ensures that the
Contract will always have a death benefit large enough so that the Contract will
be treated as life insurance for tax purposes under current law. Before the
Contract is issued, the Contract owner may choose between two methods that we
use to determine the tax treatment of the Contract. See Tax Treatment of
Contract Benefits, page 34, for a discussion of these methods and the impact of
each on the Contract's values, benefits and tax status.
The following table illustrates various attained age factors and Contract Funds
and the corresponding death benefits. The table assumes a $250,000 Type B
(variable) Contract was issued when the insured was a male nonsmoker, age 35.
Type B (Variable) Death Benefit
===================================================================================================================
IF THEN
===================================================================================================================
and the Contract the attained age the Contract Fund multiplied by the and the Death
the insured is age Fund is factor is** attained age factor is Benefit is
===================================================================================================================
40 $ 25,000 3.57 89,250 $275,000
40 $ 75,000 3.57 267,750 $325,000
40 $100,000 3.57 357,000 $357,000*
- -------------------------------------------------------------------------------------------------------------------
60 $ 75,000 1.92 144,000 $325,000
60 $125,000 1.92 240,000 $375,000
60 $150,000 1.92 288,000 $400,000
- -------------------------------------------------------------------------------------------------------------------
27
- -------------------------------------------------------------------------------------------------------------------
80 $150,000 1.26 189,000 $400,000
80 $200,000 1.26 252,000 $450,000
80 $225,000 1.26 283,500 $475,000
===================================================================================================================
* Note that the death benefit has been increased to comply with the Internal Revenue Code's definition
of life insurance.
** Assumes the Contract owner selected the Cash Value Accumulation Test.
===================================================================================================================
This means, for example, that if the insured has reached the age of 40, and the
Contract Fund is $100,000, the death benefit will be $357,000, even though the
basic insurance amount is $250,000. In this situation, for every $1 increase in
the Contract Fund, the death benefit will be increased by $3.57. We reserve the
right to refuse to accept any premium payment that increases the death benefit
by more than it increases the Contract Fund. If we exercise this right, in
certain situations it may result in the loss of the Death Benefit Guarantee.
How a Type C (Return of Premium) Contract's Death Benefit Will Vary
Under a Type C (return of premium) Contract, while the Contract is in-force, the
death benefit will vary by the amount of premiums paid, less any withdrawals.
Unlike Type A and Type B Contracts, the death benefit of a Type C Contract may
be less than the basic insurance amount in the event total withdrawals are
greater than total premiums paid. The death benefit may be increased to ensure
that the Contract will satisfy the Internal Revenue Code's definition of life
insurance.
The death benefit under a Type C (return of premium) Contract will always be the
greater of:
(1) the basic insurance amount plus the total premiums paid into the
Contract less any withdrawals; and
(2) the Contract Fund before the deduction of monthly charges due on
that date, multiplied by the attained age factor that applies.
A listing of attained age factors can be found on your Contract data pages. The
latter provision ensures that the Contract will always have a death benefit
large enough so that the Contract will be treated as life insurance for tax
purposes under current law. Before the Contract is issued, the Contract owner
may choose between two methods that we use to determine the tax treatment of the
Contract. See Tax Treatment of Contract Benefits, page 34, for a discussion of
these methods and the impact of each on the Contract's values, benefits and tax
status.
The following table illustrates various attained age factors and Contract Funds
and the corresponding death benefits. The table assumes a $250,000 Type C
(return of premium) Contract was issued when the insured was a male nonsmoker,
age 35.
Type C (Return of Premium) Death Benefit
===================================================================================================================================
IF THEN
===================================================================================================================================
the the Contract Fund
insured and the Contract and the premiums paid the attained age multiplied by the attained and the Death
is age Fund is less any withdrawals is factor is** age factor is Benefit is
===================================================================================================================================
40 $ 25,000 $ 15,000 3.57 89,250 $265,000
40 $ 75,000 $ 60,000 3.57 267,750 $310,000
40 $100,000 $ 80,000 3.57 357,000 $357,000*
- -----------------------------------------------------------------------------------------------------------------------------------
60 $ 75,000 $ 60,000 1.92 144,000 $310,000
60 $125,000 $100,000 1.92 240,000 $350,000
60 $150,000 $125,000 1.92 288,000 $375,000
- -----------------------------------------------------------------------------------------------------------------------------------
80 $150,000 $125,000 1.26 189,000 $375,000
80 $200,000 $150,000 1.26 252,000 $400,000
80 $225,000 $175,000 1.26 283,500 $425,000
===================================================================================================================================
28
================================================================================
* Note that the death benefit has been increased to comply with the Internal
Revenue Code's definition of life insurance.
** Assumes the Contract owner selected the Cash Value Accumulation Test.
================================================================================
This means, for example, that if the insured has reached the age of 40, and the
premiums paid less any withdrawals equals $80,000, the death benefit will be
$357,000, even though the basic insurance amount is $250,000. In this situation,
for every $1 increase in the Contract Fund, the death benefit will be increased
by $3.57. We reserve the right to refuse to accept any premium payment that
increases the death benefit by more than it increases the Contract Fund. If we
exercise this right, in certain situations it may result in the loss of the
Death Benefit Guarantee.
Surrender of a Contract
A Contract may be surrendered for its cash surrender value while the insured is
living. To surrender a Contract, we may require you to deliver or mail the
Contract with a written request in a form that meets Pruco Life's needs, to our
Service Office. The surrender request must be received at our Service Office
ninety minutes prior to any announced closing of the New York Stock Exchange or
it will take effect as of the end of the valuation period the next business day.
Surrender of a Contract may have tax consequences. See Tax Treatment of Contract
Benefits, page 34.
Withdrawals
Under certain circumstances, you may withdraw a portion of the Contract's cash
surrender value without surrendering the Contract. The withdrawal amount is
limited by the requirement that the net cash value after withdrawal may not be
less than or equal to zero after deducting any charges associated with the
withdrawal and an amount that we estimate will be sufficient to cover the
contract fund deductions for two monthly dates following the date of withdrawal.
The amount withdrawn must be at least $100. There is an administrative
processing fee for each withdrawal which is $25. An amount withdrawn may not be
repaid except as a premium subject to the applicable charges. Upon request, we
will tell you how much you may withdraw. The withdrawal request must be received
at our Service Office ninety minutes prior to any announced closing of the New
York Stock Exchange or it will take effect as of the end of the valuation period
the next business day. Withdrawal of the cash surrender value may have tax
consequences. See Tax Treatment of Contract Benefits, page 34.
Whenever a withdrawal is made, the death benefit will immediately be reduced by
at least the amount of the withdrawal. Withdrawals under Type B (variable) and
Type C (return of premium) Contracts, will not change the basic insurance
amount. However, under a Type A (fixed) Contract, the withdrawal may require a
reduction in the basic insurance amount. If a decrease in basic insurance amount
reduces a coverage segment below its surrender charge threshold, a surrender
charge may be deducted. See Charges and Expenses, page 11. No withdrawal will be
permitted under a Type A (fixed) Contract if it would result in a basic
insurance amount of less than the minimum basic insurance amount. See
Requirements for Issuance of a Contract, page 16. It is important to note,
however, that if the basic insurance amount is decreased, there is a possibility
that the Contract might be classified as a Modified Endowment Contract. Before
making any withdrawal which causes a decrease in basic insurance amount, you
should consult with your tax adviser and your Pruco Life representative. See Tax
Treatment of Contract Benefits, page 34.
When a withdrawal is made, the Contract Fund is reduced by the sum of the cash
withdrawn, the withdrawal fee, and any surrender charge. An amount equal to the
reduction in the Contract Fund will be withdrawn proportionally from the
investment options unless you direct otherwise. Withdrawal of the cash surrender
value increases the risk that the Contract Fund may be insufficient to provide
Contract benefits. If such a withdrawal is followed by unfavorable investment
experience, the Contract may go into default. Withdrawals may also affect
whether a Contract is kept in-force under the Death Benefit Guarantee, since
withdrawals decrease your Accumulated Net Payments. See Death Benefit Guarantee,
page 21.
Lapse and Reinstatement
Pruco Life will determine the value of the Contract Fund on each Monthly date.
If the Contract Fund less any applicable surrender charges is zero or less, the
Contract is in default unless it remains in-force under the Death Benefit
Guarantee. See Death Benefit Guarantee, page 21. If the Contract debt ever grows
to be equal to or more than the Contract Fund less any applicable surrender
charges, the Contract will be in default. Should this happen, Pruco Life will
send you a notice of default setting forth the payment which we estimate will
keep the Contract in-force for three months from the date of default. This
payment must be received at our Service Office within the 61-day grace period
after the notice of default is mailed or the Contract will end and have no
value. A Contract that lapses with an outstanding Contract loan may have tax
consequences. See Tax Treatment of Contract Benefits, page 34.
29
A Contract that ended in default may be reinstated within five years after the
date of default if the following conditions are met: (1) renewed evidence of
insurability is provided on the insured; (2) submission of certain payments
sufficient to bring the Contract up to date plus a premium that we estimate will
cover all charges and deductions for the next three months; and (3) any Contract
debt with interest to date must be restored or paid back. If the Contract debt
is restored and the debt with interest would exceed the loan value of the
reinstated Contract, the excess must be paid to us before reinstatement. The
reinstatement date will be the date we approve your request. We will deduct all
required charges from your payment and the balance will be placed into your
Contract Fund. If we approve the reinstatement, we will credit the Contract Fund
with an amount equal to the surrender charge applicable as of the date of
reinstatement.
Increases in Basic Insurance Amount
Subject to state approval and subject to the underwriting requirements
determined by Pruco Life, after the first Contract anniversary, you may increase
the amount of insurance by increasing the basic insurance amount of the
Contract, thus, creating an additional coverage segment.
The following conditions must be met:
(1) you must ask for the change in a form that meets Pruco Life's needs;
(2) the amount of the increase must be at least equal to the minimum
increase in basic insurance amount shown under Contract Limitations
in your Contract data pages;
(3) you must prove to us that the insured is insurable for any increase;
(4) the Contract must not be in default;
(5) we must not be paying premiums into the Contract as a result of the
insured's total disability; and
(6) if we ask you to do so, you must send us the Contract to be
endorsed.
If we approve the change, we will send you new Contract data pages showing the
amount and effective date of the change and the recomputed charges, values and
limitations. If the insured is not living on the effective date, the change will
not take effect. No administrative processing charge is currently being made in
connection with an increase in basic insurance amount. However, we reserve the
right to make such a charge in an amount of up to $25.
The Sales Load Target Premium is calculated separately for each coverage
segment. When premiums are paid, each payment is allocated to each coverage
segment based on the proportion of the Sales Load Target Premium in each segment
to the total Sales Load Target Premiums of all segments. Currently, the sales
load charge for each segment is equal to 4% of the allocated premium paid in
each Contract year up to the Sales Load Target Premium and 2% of allocated
premiums paid in excess of this amount for the first 10 Contract years; 0%
thereafter. See the definition of Contract year for an increase in basic
insurance amount under DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS,
page 1.
Each coverage segment will have its own surrender charge period beginning on
that segment's effective date and its own surrender charge threshold. The
surrender charge threshold is the segment's lowest coverage amount since its
effective date. See Decreases in Basic Insurance Amount, page 30, and Surrender
Charges, page 15.
The COI rates for a coverage segment representing an increase in basic insurance
amount are based upon 1980 CSO Tables, the age at the segment's effective date
and the number of years since then, sex (except where unisex rates apply);
smoker/nonsmoker status, extra rating class, if any, and the effective date of
the increase. The net amount at risk for the whole contract (the death benefit
minus the Contract Fund) is allocated to each coverage segment based on the
proportion of its basic insurance amount to the total of all coverage segments.
In addition, the attained age factor for a Contract with an increase in basic
insurance amount is based on the Insured's attained age for the initial coverage
segment. For a description of attained age factor, see How a Type A (Fixed)
Contract's Death Benefit Will Vary, page 25, How a Type B (Variable) Contract's
Death Benefit Will Vary, page 26, and How a Type C (Return of Premium)
Contract's Death Benefit Will Vary, page 27.
Each Contract owner who elects to increase the basic insurance amount of his or
her Contract will receive a "free-look" right which will apply only to the
increase in basic insurance amount, not the entire Contract. This right is
comparable to the right afforded to a purchaser of a new Contract except that,
any cost of insurance charge for the increase in the basic insurance amount will
be returned to the Contract Fund instead of a refund of premium. See Short-Term
Cancellation Right or "Free-Look", page 17. Generally, the "free-look" right
would have to be exercised no later than 10 days after receipt of the Contract
as increased.
30
An increase in basic insurance amount may cause the Contract to be classified as
a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page 34.
Therefore, before increasing the basic insurance amount, you should consult with
your tax adviser and your Pruco Life representative.
Decreases in Basic Insurance Amount
As explained earlier, you may make a withdrawal. See Withdrawals, page 28. You
also have the option of decreasing the basic insurance amount of your Contract
without withdrawing any cash surrender value at any time after the first
Contract anniversary. Contract owners who conclude that, because of changed
circumstances, the amount of insurance is greater than needed will be able to
decrease their amount of insurance protection, and the monthly deductions for
the cost of insurance. The amount of the decrease must be at least equal to the
minimum decrease in basic insurance amount shown under Contract Limitations in
your Contract data pages.
In addition, the basic insurance amount after the decrease must be at least
equal to the minimum basic insurance amount shown under Contract Limitations in
your Contract data pages. No administrative processing charge is currently being
made in connection with a decrease in basic insurance amount. However, we
reserve the right to make such a charge in an amount of up to $25. See Charges
and Expenses, page 11. If we ask you to, you must send us your Contract to be
endorsed. The Contract will be amended to show the new basic insurance amount,
charges, values in the appropriate tables and the effective date of the
decrease. A decrease will not take effect if the insured is not living on the
effective date.
For Contracts with more than one coverage segment, a decrease in basic insurance
amount will reduce each coverage segment based on the proportion of the coverage
segment amount to the total of all coverage segment amounts in effect just
before the change. Each coverage segment will have its own surrender charge
threshold equal to the segment's lowest coverage amount since its effective
date. If the decrease in basic insurance amount reduces a coverage segment to an
amount equal to or greater than its surrender charge threshold, we will not
impose a surrender charge. However, if the decrease in basic insurance amount
reduces a coverage segment below its threshold, we will subtract the new
coverage segment amount from the threshold amount. We will then multiply the
surrender charge by the lesser of this difference and the amount of the
decrease, divide by the threshold amount, and deduct the result from the
Contract Fund. See Surrender Charges, page 15.
We may decline a reduction if we determine it would cause the Contract to fail
to qualify as "life insurance" for purposes of Section 7702 of the Internal
Revenue Code. In addition, it is important to note that if the basic insurance
amount is decreased, there is a possibility that the Contract will be classified
as a Modified Endowment Contract. See Tax Treatment of Contract Benefits, page
34. Before requesting any decrease in basic insurance amount, you should consult
with your tax adviser and your Pruco Life representative.
When Proceeds Are Paid
Pruco Life will generally pay any death benefit, cash surrender value, loan
proceeds or withdrawal within seven days after all the documents required for
such a payment are received at our Service Office. Other than the death benefit,
which is determined as of the date of death, the amount will be determined as of
the end of the valuation period in which the necessary documents are received at
our Service Office. However, Pruco Life may delay payment of proceeds from the
variable investment option[s] and the variable portion of the death benefit due
under the Contract if the disposal or valuation of the Account's assets is not
reasonably practicable because the New York Stock Exchange is closed for other
than a regular holiday or weekend, trading is restricted by the SEC, or the SEC
declares that an emergency exists.
Living Needs Benefit
The Living Needs Benefit is available on your Contract. The benefit may vary by
state. There is no charge for adding the benefit to a Contract. However, an
administrative charge (not to exceed $150) will be made at the time the Living
Needs Benefit is paid.
Subject to state regulatory approval, the Living Needs Benefit allows you to
elect to receive an accelerated payment of all or part of the Contract's death
benefit, adjusted to reflect current value, at a time when certain special needs
exist. The adjusted death benefit will always be less than the death benefit,
but will generally be greater than the Contract's cash surrender value. One or
both of the following options may be available. A Pruco Life representative
should be consulted as to whether additional options may be available.
31
Terminal Illness Option. This option is available if the insured is diagnosed as
terminally ill with a life expectancy of six months or less. When satisfactory
evidence is provided, Pruco Life will provide an accelerated payment of the
portion of the death benefit selected by the Contract owner as a Living Needs
Benefit. The Contract owner may (1) elect to receive the benefit in a single sum
or (2) receive equal monthly payments for six months. If the insured dies before
all the payments have been made, the present value of the remaining payments
will be paid to the beneficiary designated in the Living Needs Benefit claim
form in a single sum.
Nursing Home Option. This option is available after the insured has been
confined to an eligible nursing home for six months or more. When satisfactory
evidence is provided, including certification by a licensed physician, that the
insured is expected to remain in the nursing home until death, Pruco Life will
provide an accelerated payment of the portion of the death benefit selected by
the Contract owner as a Living Needs Benefit. The Contract owner may (1) elect
to receive the benefit in a single sum or (2) receive equal monthly payments for
a specified number of years (not more than 10 nor less than 2), depending upon
the age of the insured. If the insured dies before all of the payments have been
made, the present value of the remaining payments will be paid to the
beneficiary designated in the Living Needs Benefit claim form in a single sum.
Subject to state approval, all or part of the Contract's death benefit may be
accelerated under the Living Needs Benefit. If the benefit is only partially
accelerated, a death benefit of at least $25,000 must remain under the Contract.
Pruco Life reserves the right to determine the minimum amount that may be
accelerated.
No benefit will be payable if you are required to elect it in order to meet the
claims of creditors or to obtain a government benefit. Pruco Life can furnish
details about the amount of Living Needs Benefit that is available to an
eligible Contract owner, and the effect on the Contract if less than the entire
death benefit is accelerated.
You should consider whether adding this settlement option is appropriate in your
given situation. Adding the Living Needs Benefit to the Contract has no adverse
consequences; however, electing to use it could. With the exception of certain
business-related Contracts, the Living Needs Benefit is excluded from income if
the insured is terminally ill or chronically ill as defined in the tax law
(although the exclusion in the latter case may be limited). You should consult a
qualified tax adviser before electing to receive this benefit. Receipt of a
Living Needs Benefit payment may also affect your eligibility for certain
government benefits or entitlements.
Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums
The following tables (pages T1 through T10) show how a Contract's death benefit
and cash surrender values change with the investment experience of the Account.
They are "hypothetical" because they are based, in part, upon several
assumptions, which are described below. All ten tables assume the following:
o a Contract bought by a 35 year old male, Preferred Best, with no extra
risks or substandard ratings.
o a given premium amount is paid on each Contract anniversary and no loans
are taken.
o the Contract Fund has been invested in equal amounts in each of the 30
Funds.
The first two tables (pages T1 and T2) assume: (1) a Type A (fixed) Contract has
been purchased, (2) a $250,000 basic insurance amount and no riders have been
added to the Contract, and (3) a Cash Value Accumulation Test has been elected
for definition of life insurance testing. See Tax Treatment of Contract
Benefits, page 34 and Types of Death Benefit, page 17. The first table assumes
current charges will continue for the indefinite future while the second table
assumes maximum contractual charges have been made from the beginning. See
Charges and Expenses, page 11.
The third and fourth tables (pages T3 and T4) assume: (1) a Type A (fixed)
Contract has been purchased, (2) a $100,000 basic insurance amount and a
$150,000 Target Term Rider has been added to the Contract, and (3) a Cash Value
Accumulation Test has been elected for definition of life insurance testing. See
Tax Treatment of Contract Benefits, page 34 and Types of Death Benefit, page 17.
The third table assumes current charges will continue for the indefinite future
while the fourth table assumes maximum contractual charges have been made from
the beginning. See Charges and Expenses, page 11.
The next two tables (pages T5 and T6) assume: (1) a Type A (fixed) Contract has
been purchased, (2) a $250,000 basic insurance amount and no riders have been
added to the Contract, and (3) a Guideline Premium Test has been elected for
definition of life insurance testing. See Tax Treatment of Contract Benefits,
page 34 and Types of
32
Death Benefit, page 17. The fifth table assumes current charges will continue
for the indefinite future while the sixth table assumes maximum contractual
charges have been made from the beginning. See Charges and Expenses, page 11.
The tables on pages T7 and T8 assume: (1) a Type B (variable) Contract has been
purchased, (2) a $250,000 basic insurance amount and no riders have been added
to the Contract, and (3) a Cash Value Accumulation Test has been elected for
definition of life insurance testing. See Tax Treatment of Contract Benefits,
page 34 and Types of Death Benefit, page 17. The table on page T7 assumes
current charges will continue for the indefinite future while the table on page
T8 assumes maximum contractual charges have been made from the beginning. See
Charges and Expenses, page 11.
The last two tables (pages T9 and T10) assume: (1) a Type C (return of premium)
Contract has been purchased, (2) a $250,000 basic insurance amount and no riders
have been added to the Contract, and (3) a Cash Value Accumulation Test has been
elected for definition of life insurance testing. See Tax Treatment of Contract
Benefits, page 34 and Types of Death Benefit, page 17. The table on page T9
assumes current charges will continue for the indefinite future while the table
on page T10 assumes maximum contractual charges have been made from the
beginning. See Charges and Expenses, page 11.
Finally, there are three assumptions, shown separately, about the average
investment performance of the portfolios. The first is that there will be a
uniform 0% gross rate of return with the average value of the Contract Fund
uniformly adversely affected by very unfavorable investment performance. The
other two assumptions are that investment performance will be at a uniform gross
annual rate of 6% and 12%. Actual returns will fluctuate from year to year. In
addition, death benefits and cash surrender values would be different from those
shown if investment returns averaged 0%, 6% and 12% but fluctuated from those
averages throughout the years. Nevertheless, these assumptions help show how the
Contract values will change with investment experience.
The first column of the following illustrations (pages T1 through T10) shows the
Contract year. The second column, to provide context, shows what the aggregate
amount would be if the premiums had been invested to earn interest, after taxes,
at 4% compounded annually. The next four columns show the death benefit payable
in each of the years shown for the three different assumed investment returns.
The last four columns show the cash surrender value payable in each of the years
shown for the three different assumed investment returns. The cash surrender
values in the first 10 years reflect the surrender charges that would be
deducted if the Contract were surrendered in those years.
A gross return (as well as the net return) is shown at the top of each column.
The gross return represents the combined effect of investment income and capital
gains and losses, realized or unrealized, of the portfolios before any reduction
is made for investment advisory fees or other Fund expenses. The net return
reflects average total annual expenses of the 30 portfolios of 1.95%, and the
daily deduction from the Contract Fund of 0.25% per year for the tables based on
current charges and 0.45% per year for the tables based on maximum charges.
Thus, assuming current charges, gross returns of 0%, 6% and 12% are the
equivalent of net returns of -2.20%, 3.80% and 9.80%, respectively. Assuming
maximum charges, gross returns of 0%, 6% and 12% are the equivalent of net
returns of -2.40%, 3.60% and 9.60%, respectively. The actual fees and expenses
of the portfolios associated with a particular Contract may be more or less than
1.95% and will depend on which variable investment options are selected. The
death benefits and cash surrender values shown reflect the deduction of all
expenses and charges both from the Funds and under the Contract.
If you are considering the purchase of a variable life insurance contract from
another insurance company, you should not rely upon these tables for comparison
purposes. A comparison between two tables, each showing values for a 35 year old
man, may be useful for a 35 year old man but would be inaccurate if made for
insureds of other ages or sex. Your Pruco Life representative can provide you
with a hypothetical illustration for your own age, sex, and rating class.
33
ILLUSTRATIONS
PRULIFE ADVISOR SELECT
CASH VALUE ACCUMULATION TEST
TYPE A (FIXED) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 BASIC INSURANCE AMOUNT
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS IN ALL YEARS
USING CURRENT CHARGES
Death Benefit (1) Surrender Value (1)
--------------------------------------------------- -----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated --------------------------------------------------- -----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.20% Net) (3.80% Net) (9.80% Net) (-2.20% Net) (3.80% Net) (9.80% Net)
- ----------- ------------- --------------- ---------------- -------------- ------------- ------------- --------------
1 $ 1,794 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
2 $ 3,660 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 87
3 $ 5,600 $ 250,000 $ 250,000 $ 250,000 $ 698 $ 1,048 $ 1,431
4 $ 7,618 $ 250,000 $ 250,000 $ 250,000 $ 1,670 $ 2,240 $ 2,890
5 $ 9,717 $ 250,000 $ 250,000 $ 250,000 $ 2,624 $ 3,471 $ 4,472
6 $ 11,900 $ 250,000 $ 250,000 $ 250,000 $ 3,977 $ 5,169 $ 6,633
7 $ 14,170 $ 250,000 $ 250,000 $ 250,000 $ 5,302 $ 6,922 $ 8,985
8 $ 16,530 $ 250,000 $ 250,000 $ 250,000 $ 6,598 $ 8,731 $ 11,545
9 $ 18,986 $ 250,000 $ 250,000 $ 250,000 $ 7,864 $ 10,596 $ 14,332
10 $ 21,539 $ 250,000 $ 250,000 $ 250,000 $ 9,099 $ 12,517 $ 17,366
15 $ 35,922 $ 250,000 $ 250,000 $ 250,000 $ 14,314 $ 22,591 $ 36,821
20 $ 53,422 $ 250,000 $ 250,000 $ 250,000 $ 18,210 $ 33,887 $ 67,029
25 $ 74,713 $ 250,000 $ 250,000 $ 250,000 $ 20,357 $ 46,173 $ 114,341
30 $ 100,616 $ 250,000 $ 250,000 $ 326,841 $ 20,187 $ 59,082 $ 188,925
35 $ 132,132 $ 250,000 $ 250,000 $ 469,642 $ 17,178 $ 72,386 $ 304,962
40 $ 170,476 $ 250,000 $ 250,000 $ 673,234 $ 9,204 $ 84,713 $ 484,341
45 $ 217,127 $ 0(2) $ 250,000(2) $ 973,272 $ 0(2) $ 94,132(2) $ 760,368
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 44, unless an additional premium payment was made.
Based on a gross return of 6%, the Contract would go into default in
policy year 63, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T1
PRULIFE ADVISOR SELECT
CASH VALUE ACCUMULATION TEST
TYPE A (FIXED) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 BASIC INSURANCE AMOUNT
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS IN ALL YEARS
USING MAXIMUM CHARGES
Death Benefit (1) Surrender Value (1)
---------------------------------------------- --------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated ---------------------------------------------- --------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.40% Net) (3.60% Net) (9.60% Net) (-2.40% Net) (3.60% Net) (9.60% Net)
- ----------- --------------- ----------- ------------ -------------- ------------ ----------- ------------
1 $ 1,794 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
2 $ 3,660 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
3 $ 5,600 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
4 $ 7,618 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 316 $ 730
5 $ 9,717 $ 250,000 $ 250,000 $ 250,000 $ 387 $ 888 $ 1,495
6 $ 11,900 $ 250,000 $ 250,000 $ 250,000 $ 1,185 $ 1,861 $ 2,714
7 $ 14,170 $ 250,000 $ 250,000 $ 250,000 $ 1,925 $ 2,819 $ 3,988
8 $ 16,530 $ 250,000 $ 250,000 $ 250,000 $ 2,608 $ 3,758 $ 5,321
9 $ 18,986 $ 250,000 $ 250,000 $ 250,000 $ 3,229 $ 4,675 $ 6,712
10 $ 21,539 $ 250,000 $ 250,000 $ 250,000 $ 3,786 $ 5,563 $ 8,164
15 $ 35,922 $ 250,000 $ 250,000 $ 250,000 $ 4,664 $ 8,532 $ 15,568
20 $ 53,422 $ 250,000 $ 250,000 $ 250,000 $ 2,761 $ 9,081 $ 24,098
25 $ 74,713 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 4,657 $ 32,660
30 $ 100,616 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 38,160
35 $ 132,132 $ 0(2) $ 0(2) $ 250,000 $ 0(2) $ 0(2) $ 32,485
40 $ 170,476 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0(2)
45 $ 217,127 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 31, unless an additional premium payment was made.
Based on a gross return of 6%, the Contract would go into default in
policy year 31, unless an additional premium payment was made.
Based on a gross return of 12%, the Contract would go into default
in policy year 40, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T2
PRULIFE ADVISOR SELECT
CASH VALUE ACCUMULATION TEST
TYPE A (FIXED) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 TARGET COVERAGE AMOUNT($100,000 BASIC INSURANCE AMOUNT,
$150,000 TARGET TERM RIDER)
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES
Death Benefit (1) Surrender Value (1)
---------------------------------------------- -----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated ---------------------------------------------- -----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.20% Net) (3.80% Net) (9.80% Net) (-2.20% Net) (3.80% Net) (9.80% Net)
- ----------- ------------- -------------- ------------- -------------- ------------- -------------- --------------
1 $ 1,794 $ 250,000 $ 250,000 $ 250,000 $ 220 $ 300 $ 381
2 $ 3,660 $ 250,000 $ 250,000 $ 250,000 $ 1,353 $ 1,581 $ 1,820
3 $ 5,600 $ 250,000 $ 250,000 $ 250,000 $ 2,545 $ 2,992 $ 3,478
4 $ 7,618 $ 250,000 $ 250,000 $ 250,000 $ 3,707 $ 4,448 $ 5,286
5 $ 9,717 $ 250,000 $ 250,000 $ 250,000 $ 4,841 $ 5,952 $ 7,258
6 $ 11,900 $ 250,000 $ 250,000 $ 250,000 $ 6,112 $ 7,675 $ 9,586
7 $ 14,170 $ 250,000 $ 250,000 $ 250,000 $ 7,352 $ 9,455 $ 12,129
8 $ 16,530 $ 250,000 $ 250,000 $ 250,000 $ 8,557 $ 11,291 $ 14,905
9 $ 18,986 $ 250,000 $ 250,000 $ 250,000 $ 9,727 $ 13,183 $ 17,935
10 $ 21,539 $ 250,000 $ 250,000 $ 250,000 $ 10,862 $ 15,133 $ 21,242
15 $ 35,922 $ 250,000 $ 250,000 $ 250,000 $ 15,866 $ 25,706 $ 42,957
20 $ 53,422 $ 250,000 $ 250,000 $ 250,000 $ 19,609 $ 37,669 $ 76,895
25 $ 74,713 $ 250,000 $ 250,000 $ 257,999 $ 21,626 $ 50,794 $ 130,303
30 $ 100,616 $ 250,000 $ 250,000 $ 370,293 $ 21,350 $ 64,782 $ 214,042
35 $ 132,132 $ 250,000 $ 250,000 $ 530,034 $ 18,257 $ 79,510 $ 344,178
40 $ 170,476 $ 250,000 $ 250,000 $ 758,026 $ 10,228 $ 93,821 $ 545,342
45 $ 217,127 $ 0(2) $ 250,000(2) $ 1,094,252 $ 0(2) $ 106,198(2) $ 854,884
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 44, unless an additional premium payment was made.
Based on a gross return of 6%, the Contract would go into default in
policy year 65, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T3
PRULIFE ADVISOR SELECT
CASH VALUE ACCUMULATION TEST
TYPE A (FIXED) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 TARGET COVERAGE AMOUNT($100,000 BASIC INSURANCE AMOUNT,
$150,000 TARGET TERM RIDER)
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CHARGES
Death Benefit (1) Surrender Value (1)
----------------------------------------------- ------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated ----------------------------------------------- ------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.40% Net) (3.60% Net) (9.60% Net) (-2.40% Net) (3.60% Net) (9.60% Net)
- ----------- ------------- -------------- -------------- -------------- ------------ ----------- ------------
1 $ 1,794 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
2 $ 3,660 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 91 $ 232
3 $ 5,600 $ 250,000 $ 250,000 $ 250,000 $ 358 $ 592 $ 851
4 $ 7,618 $ 250,000 $ 250,000 $ 250,000 $ 718 $ 1,076 $ 1,490
5 $ 9,717 $ 250,000 $ 250,000 $ 250,000 $ 1,039 $ 1,540 $ 2,146
6 $ 11,900 $ 250,000 $ 250,000 $ 250,000 $ 1,478 $ 2,147 $ 2,992
7 $ 14,170 $ 250,000 $ 250,000 $ 250,000 $ 1,867 $ 2,729 $ 3,866
8 $ 16,530 $ 250,000 $ 250,000 $ 250,000 $ 2,202 $ 3,282 $ 4,770
9 $ 18,986 $ 250,000 $ 250,000 $ 250,000 $ 2,482 $ 3,802 $ 5,700
10 $ 21,539 $ 250,000 $ 250,000 $ 250,000 $ 2,701 $ 4,281 $ 6,656
15 $ 35,922 $ 250,000 $ 250,000 $ 250,000 $ 3,585 $ 6,839 $ 12,959
20 $ 53,422 $ 250,000 $ 250,000 $ 250,000 $ 1,776 $ 6,996 $ 19,843
25 $ 74,713 $ 0(2) $ 250,000 $ 250,000 $ 0(2) $ 2,041 $ 25,584
30 $ 100,616 $ 0 $ 0(2) $ 250,000 $ 0 $ 0(2) $ 26,010
35 $ 132,132 $ 0 $ 0 $ 250,000 $ 0 $ 0 $ 10,454
40 $ 170,476 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0(2)
45 $ 217,127 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 22, unless an additional premium payment was made.
Based on a gross return of 6%, the Contract would go into default in
policy year 27, unless an additional premium payment was made.
Based on a gross return of 12%, the Contract would go into default
in policy year 37, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T4
PRULIFE ADVISOR SELECT
GUIDELINE PREMIUM TEST
TYPE A (FIXED) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 BASIC INSURANCE AMOUNT
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES
Death Benefit (1) Surrender Value (1)
-------------------------------------------- ---------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated -------------------------------------------- ---------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.20% Net) (3.80% Net) (9.80% Net) (-2.20% Net) (3.80% Net) (9.80% Net)
- ----------- ------------ ------------- ------------- ------------ ------------ -------------- ------------
1 $ 1,794 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
2 $ 3,660 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 87
3 $ 5,600 $ 250,000 $ 250,000 $ 250,000 $ 698 $ 1,048 $ 1,431
4 $ 7,618 $ 250,000 $ 250,000 $ 250,000 $ 1,670 $ 2,240 $ 2,890
5 $ 9,717 $ 250,000 $ 250,000 $ 250,000 $ 2,624 $ 3,471 $ 4,472
6 $ 11,900 $ 250,000 $ 250,000 $ 250,000 $ 3,977 $ 5,169 $ 6,633
7 $ 14,170 $ 250,000 $ 250,000 $ 250,000 $ 5,302 $ 6,922 $ 8,985
8 $ 16,530 $ 250,000 $ 250,000 $ 250,000 $ 6,598 $ 8,731 $ 11,545
9 $ 18,986 $ 250,000 $ 250,000 $ 250,000 $ 7,864 $ 10,596 $ 14,332
10 $ 21,539 $ 250,000 $ 250,000 $ 250,000 $ 9,099 $ 12,517 $ 17,366
15 $ 35,922 $ 250,000 $ 250,000 $ 250,000 $ 14,314 $ 22,591 $ 36,821
20 $ 53,422 $ 250,000 $ 250,000 $ 250,000 $ 18,210 $ 33,887 $ 67,029
25 $ 74,713 $ 250,000 $ 250,000 $ 250,000 $ 20,357 $ 46,173 $ 114,341
30 $ 100,616 $ 250,000 $ 250,000 $ 250,000 $ 20,187 $ 59,082 $ 189,646
35 $ 132,132 $ 250,000 $ 250,000 $ 360,441 $ 17,178 $ 72,386 $ 310,725
40 $ 170,476 $ 250,000 $ 250,000 $ 538,181 $ 9,204 $ 84,713 $ 502,973
45 $ 217,127 $ 0(2) $ 250,000(2) $ 849,728 $ 0(2) $ 94,132(2) $ 809,265
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 44, unless an additional premium payment was made. Based
on a gross return of 6%, the Contract would go into default in
policy year 63, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T5
PRULIFE ADVISOR SELECT
GUIDELINE PREMIUM TEST
TYPE A (FIXED) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 BASIC INSURANCE AMOUNT
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS IN ALL YEARS
USING MAXIMUM CHARGES
Death Benefit (1) Surrender Value (1)
---------------------------------------------- --------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated ---------------------------------------------- --------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.40% Net) (3.60% Net) (9.60% Net) (-2.40% Net) (3.60% Net) (9.60% Net)
- ----------- --------------- ------------- ----------- ------------ ------------ ----------- -----------
1 $ 1,794 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
2 $ 3,660 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
3 $ 5,600 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 0
4 $ 7,618 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 316 $ 730
5 $ 9,717 $ 250,000 $ 250,000 $ 250,000 $ 387 $ 888 $ 1,495
6 $ 11,900 $ 250,000 $ 250,000 $ 250,000 $ 1,185 $ 1,861 $ 2,714
7 $ 14,170 $ 250,000 $ 250,000 $ 250,000 $ 1,925 $ 2,819 $ 3,988
8 $ 16,530 $ 250,000 $ 250,000 $ 250,000 $ 2,608 $ 3,758 $ 5,321
9 $ 18,986 $ 250,000 $ 250,000 $ 250,000 $ 3,229 $ 4,675 $ 6,712
10 $ 21,539 $ 250,000 $ 250,000 $ 250,000 $ 3,786 $ 5,563 $ 8,164
15 $ 35,922 $ 250,000 $ 250,000 $ 250,000 $ 4,664 $ 8,532 $ 15,568
20 $ 53,422 $ 250,000 $ 250,000 $ 250,000 $ 2,761 $ 9,081 $ 24,098
25 $ 74,713 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 4,657 $ 32,660
30 $ 100,616 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 38,160
35 $ 132,132 $ 0(2) $ 0(2) $ 250,000 $ 0(2) $ 0(2) $ 32,485
40 $ 170,476 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0(2)
45 $ 217,127 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 31, unless an additional premium payment was made. Based
on a gross return of 6%, the Contract would go into default in
policy year 31, unless an additional premium payment was made. Based
on a gross return of 12%, the Contract would go into default in
policy year 40, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T6
PRULIFE ADVISOR SELECT
CASH VALUE ACCUMULATION TEST
TYPE B (VARIABLE) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 BASIC INSURANCE AMOUNT
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES
Death Benefit (1) Surrender Value (1)
-------------------------------------------- -------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated -------------------------------------------- -------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.20% Net) (3.80% Net) (9.80% Net) (-2.20% Net) (3.80% Net) (9.80% Net)
- --------- -------------- ----------- ------------ ----------- ------------ ----------- -----------
1 $ 1,794 $ 250,737 $ 250,805 $ 250,874 $ 0 $ 0 $ 0
2 $ 3,660 $ 251,457 $ 251,641 $ 251,834 $ 0 $ 0 $ 84
3 $ 5,600 $ 252,249 $ 252,599 $ 252,982 $ 694 $ 1,044 $ 1,426
4 $ 7,618 $ 253,024 $ 253,594 $ 254,242 $ 1,664 $ 2,233 $ 2,881
5 $ 9,717 $ 253,782 $ 254,626 $ 255,625 $ 2,616 $ 3,460 $ 4,459
6 $ 11,900 $ 254,937 $ 256,125 $ 257,584 $ 3,965 $ 5,153 $ 6,612
7 $ 14,170 $ 256,063 $ 257,678 $ 259,733 $ 5,285 $ 6,900 $ 8,955
8 $ 16,530 $ 257,160 $ 259,285 $ 262,087 $ 6,577 $ 8,701 $ 11,504
9 $ 18,986 $ 258,226 $ 260,946 $ 264,664 $ 7,837 $ 10,557 $ 14,276
10 $ 21,539 $ 259,260 $ 262,661 $ 267,485 $ 9,066 $ 12,466 $ 17,291
15 $ 35,922 $ 264,227 $ 272,435 $ 286,539 $ 14,227 $ 22,435 $ 36,539
20 $ 53,422 $ 268,007 $ 283,459 $ 316,093 $ 18,007 $ 33,459 $ 66,093
25 $ 74,713 $ 269,908 $ 295,040 $ 361,303 $ 19,908 $ 45,040 $ 111,303
30 $ 100,616 $ 269,311 $ 306,342 $ 430,400 $ 19,311 $ 56,342 $ 180,400
35 $ 132,132 $ 265,713 $ 316,429 $ 536,621 $ 15,713 $ 66,429 $ 286,621
40 $ 170,476 $ 257,093 $ 322,380 $ 699,059 $ 7,093 $ 72,380 $ 449,059
45 $ 217,127 $ 0(2) $ 319,885(2) $ 947,296 $ 0(2) $ 69,885(2) $ 697,296
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 43, unless an additional premium payment was made. Based
on a gross return of 6%, the Contract would go into default in
policy year 56, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T7
PRULIFE ADVISOR SELECT
CASH VALUE ACCUMULATION TEST
TYPE B (VARIABLE) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 BASIC INSURANCE AMOUNT
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CHARGES
Death Benefit (1) Surrender Value (1)
--------------------------------------------- ---------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated --------------------------------------------- ---------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.40% Net) (3.60% Net) (9.60% Net) (-2.40% Net) (3.60% Net) (9.60% Net)
- ------- ------------- ------------- ----------- ----------- ------------ ----------- -----------
1 $ 1,794 $ 250,379 $ 250,433 $ 250,488 $ 0 $ 0 $ 0
2 $ 3,660 $ 250,727 $ 250,860 $ 251,000 $ 0 $ 0 $ 0
3 $ 5,600 $ 251,038 $ 251,271 $ 251,529 $ 0 $ 0 $ 0
4 $ 7,618 $ 251,309 $ 251,664 $ 252,075 $ 0 $ 303 $ 714
5 $ 9,717 $ 251,539 $ 252,035 $ 252,637 $ 372 $ 869 $ 1,471
6 $ 11,900 $ 252,136 $ 252,805 $ 253,650 $ 1,164 $ 1,833 $ 2,678
7 $ 14,170 $ 252,674 $ 253,557 $ 254,713 $ 1,897 $ 2,780 $ 3,935
8 $ 16,530 $ 253,153 $ 254,288 $ 255,828 $ 2,570 $ 3,705 $ 5,245
9 $ 18,986 $ 253,569 $ 254,992 $ 256,995 $ 3,180 $ 4,603 $ 6,606
10 $ 21,539 $ 253,919 $ 255,662 $ 258,214 $ 3,724 $ 5,468 $ 8,020
15 $ 35,922 $ 254,508 $ 258,242 $ 265,022 $ 4,508 $ 8,242 $ 15,022
20 $ 53,422 $ 252,486 $ 258,401 $ 272,440 $ 2,486 $ 8,401 $ 22,440
25 $ 74,713 $ 0(2) $ 253,401 $ 278,210 $ 0(2) $ 3,401 $ 28,210
30 $ 100,616 $ 0 $ 0(2) $ 277,360 $ 0 $ 0(2) $ 27,360
35 $ 132,132 $ 0 $ 0 $ 258,980 $ 0 $ 0 $ 8,980
40 $ 170,476 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0(2)
45 $ 217,127 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 23, unless an additional premium payment was made. Based
on a gross return of 6%, the Contract would go into default in
policy year 27, unless an additional premium payment was made. Based
on a gross return of 12%, the Contract would go into default in
policy year 37, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T8
PRULIFE ADVISOR SELECT
CASH VALUE ACCUMULATION TEST
TYPE C (RETURN OF PREMIUM) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 BASIC INSURANCE AMOUNT
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS FOR ALL YEARS
USING CURRENT CHARGES
Death Benefit (1) Surrender Value (1)
------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated -------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.20% Net) (3.80% Net) (9.80% Net) (-2.20% Net) (3.80% Net) (9.80% Net)
- ----------- -------------- ------------ ----------- ------------ ------------ ----------- ------------
1 $ 1,794 $ 251,725 $ 251,725 $ 251,725 $ 0 $ 0 $ 0
2 $ 3,660 $ 253,450 $ 253,450 $ 253,450 $ 0 $ 0 $ 83
3 $ 5,600 $ 255,175 $ 255,175 $ 255,175 $ 691 $ 1,041 $ 1,424
4 $ 7,618 $ 256,900 $ 256,900 $ 256,900 $ 1,658 $ 2,228 $ 2,876
5 $ 9,717 $ 258,625 $ 258,625 $ 258,625 $ 2,607 $ 3,452 $ 4,451
6 $ 11,900 $ 260,350 $ 260,350 $ 260,350 $ 3,953 $ 5,142 $ 6,602
7 $ 14,170 $ 262,075 $ 262,075 $ 262,075 $ 5,270 $ 6,885 $ 8,942
8 $ 16,530 $ 263,800 $ 263,800 $ 263,800 $ 6,557 $ 8,683 $ 11,487
9 $ 18,986 $ 265,525 $ 265,525 $ 265,525 $ 7,813 $ 10,534 $ 14,256
10 $ 21,539 $ 267,250 $ 267,250 $ 267,250 $ 9,036 $ 12,439 $ 17,269
15 $ 35,922 $ 275,875 $ 275,875 $ 275,875 $ 14,155 $ 22,380 $ 36,532
20 $ 53,422 $ 284,500 $ 284,500 $ 284,500 $ 17,841 $ 33,374 $ 66,270
25 $ 74,713 $ 293,125 $ 293,125 $ 293,125 $ 19,494 $ 44,942 $ 112,425
30 $ 100,616 $ 301,750 $ 301,750 $ 320,125 $ 18,302 $ 56,305 $ 185,043
35 $ 132,132 $ 310,375 $ 310,375 $ 460,308 $ 13,417 $ 66,605 $ 298,901
40 $ 170,476 $ 319,000 $ 319,000 $ 660,127 $ 1,827 $ 72,945 $ 474,912
45 $ 217,127 $ 0(2) $ 327,625(2) $ 954,572 $ 0(2) $ 70,485(2) $ 745,759
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 41, unless an additional premium payment was made. Based
on a gross return of 6%, the Contract would go into default in
policy year 55, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T9
PRULIFE ADVISOR SELECT
CASH VALUE ACCUMULATION TEST
TYPE C (RETURN OF PREMIUM) DEATH BENEFIT
MALE PREFERRED BEST ISSUE AGE 35
$250,000 BASIC INSURANCE AMOUNT
ASSUME PAYMENT OF $1,725 ANNUAL PREMIUMS FOR ALL YEARS
USING MAXIMUM CHARGES
Death Benefit (1) Surrender Value (1)
---------------------------------------------- ----------------------------------------------
Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net)
Premiums Annual Investment Return of Annual Investment Return of
End Of Accumulated ---------------------------------------------- ----------------------------------------------
Policy at 4% Interest 0% Gross 6% Gross 12% Gross 0% Gross 6% Gross 12% Gross
Year Per Year (-2.40% Net) (3.60% Net) (9.60% Net) (-2.40% Net) (3.60% Net) (9.60% Net)
- -------- --------------- ------------ ------------ ------------ ------------ ------------ -----------
1 $ 1,794 $ 251,725 $ 251,725 $ 251,725 $ 0 $ 0 $ 0
2 $ 3,660 $ 253,450 $ 253,450 $ 253,450 $ 0 $ 0 $ 0
3 $ 5,600 $ 255,175 $ 255,175 $ 255,175 $ 0 $ 0 $ 0
4 $ 7,618 $ 256,900 $ 256,900 $ 256,900 $ 0 $ 280 $ 691
5 $ 9,717 $ 258,625 $ 258,625 $ 258,625 $ 337 $ 832 $ 1,432
6 $ 11,900 $ 260,350 $ 260,350 $ 260,350 $ 1,111 $ 1,778 $ 2,620
7 $ 14,170 $ 262,075 $ 262,075 $ 262,075 $ 1,823 $ 2,701 $ 3,852
8 $ 16,530 $ 263,800 $ 263,800 $ 263,800 $ 2,470 $ 3,597 $ 5,131
9 $ 18,986 $ 265,525 $ 265,525 $ 265,525 $ 3,049 $ 4,461 $ 6,456
10 $ 21,539 $ 267,250 $ 267,250 $ 267,250 $ 3,556 $ 5,284 $ 7,824
15 $ 35,922 $ 275,875 $ 275,875 $ 275,875 $ 4,017 $ 7,691 $ 14,445
20 $ 53,422 $ 284,500 $ 284,500 $ 284,500 $ 1,236 $ 6,975 $ 21,044
25 $ 74,713 $ 0(2) $ 0(2) $ 293,125 $ 0(2) $ 0(2) $ 25,030
30 $ 100,616 $ 0 $ 0 $ 301,750 $ 0 $ 0 $ 19,885
35 $ 132,132 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0(2)
40 $ 170,476 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
45 $ 217,127 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
(1) Assumes no Contract Loan has been made.
(2) Based on a gross return of 0%, the Contract would go into default in
policy year 22, unless an additional premium payment was made. Based
on a gross return of 6%, the Contract would go into default in
policy year 25, unless an additional premium payment was made. Based
on a gross return of 12%, the Contract would go into default in
policy year 34, unless an additional premium payment was made.
The hypothetical investment rates of return shown above and elsewhere in this
prospectus are illustrative only and should not be deemed a representation of
past or future investment rates of return. Actual rates of return may be more or
less than those shown and will depend on a number of factors including the
investment allocations made by an owner, prevailing interest rates, and rates of
inflation. The death benefit and cash surrender value for a contract would be
different from those shown if the actual rates of return averaged 0%, 6%, 12%
over a period of years, but also fluctuated above or below those averages for
individual contract years. No representations can be made by Pruco Life that
these hypothetical rates of return can be achieved for any one year or sustained
over any period of time.
T10
Contract Loans
You may borrow from Pruco Life an amount up to the current loan value of your
Contract less any existing Contract debt using the Contract as the only security
for the loan. The loan value at any time is equal to 90% of the cash value,
provided the Contract is not in default. The cash value is equal to the Contract
Fund less any surrender charge. A Contract in default has no loan value. The
minimum loan amount you may borrow is $500. The loan request must be received at
our Service Office ninety minutes prior to any announced closing of the New York
Stock Exchange or it will take effect as of the end of the valuation period the
next business day.
Interest charged on a loan accrues daily. Interest is due on each Contract
anniversary or when the loan is paid back, whichever comes first. If interest is
not paid when due, it becomes part of the loan and we will charge interest on
it, too. Except in the case of preferred loans, we charge interest at an
effective annual rate of 5%.
A portion of any amount you borrow on or after the 10th Contract anniversary may
be considered a preferred loan. The maximum preferred loan amount is the total
amount you may borrow minus the total net premiums paid (net premiums equal
premiums paid less total withdrawals, if any). If the net premium amount is less
than zero, we will, for purposes of this calculation, consider it to be zero.
Only new loans borrowed after the 10th Contract anniversary may be considered
preferred loans. Standard loans will not automatically be converted into
preferred loans. Preferred loans are charged interest at an effective annual
rate of 4.10%.
The Contract debt is the amount of all outstanding loans plus any interest
accrued but not yet due. If at any time the Contract debt equals or exceeds the
Contract Fund less any applicable surrender charges, the Contract will go into
default. If the Contract debt equals or exceeds the Contract Fund less any
applicable surrender charges and you fail to keep the Contract in-force, the
amount of unpaid Contract debt will be treated as a distribution and will be
immediately taxable to the extent of gain in the Contract. Reinstatement of the
Contract after lapse will not eliminate the taxable income which we are required
to report to the Internal Revenue Service. See Lapse and Reinstatement, page 28
and Tax Treatment of Contract Benefits " Pre-Death Distributions, page 34.
When a loan is made, an amount equal to the loan proceeds is transferred out of
the Account. Unless you ask us to take the loan amount from specific investment
options and we agree, the reduction will be made in the same proportions as the
value in each variable investment option bears to the total value of the
Contract. While a loan is outstanding, the amount that was so transferred will
continue to be treated as part of the Contract Fund. It will be credited with an
effective annual rate of return of 4%. On each Monthly date, we will increase
the portion of the Contract Fund in the investment options by interest credits
accrued on the loan since the last Monthly date. The net cost of a standard loan
is 1% and the net cost of a preferred loan is 0.10%.
A loan will not cause the Contract to lapse as long as Contract debt does not
equal or exceed the Contract Fund, less any applicable surrender charges. Loans
from Modified Endowment Contracts may be treated for tax purposes as
distributions of income. See Tax Treatment of Contract Benefits, page 34.
Any Contract debt will directly reduce a Contract's cash surrender value and
will be subtracted from the death benefit to determine the amount payable. In
addition, even if the loan is fully repaid, it may have an effect on future
death benefits because the investment results of the selected investment options
will apply only to the amount remaining invested under those options. The longer
the loan is outstanding, the greater the effect is likely to be. The effect
could be favorable or unfavorable. If investment results are greater than the
rate being credited on the amount of the loan while the loan is outstanding,
values under the Contract will not increase as rapidly as they would have if no
loan had been made. If investment results are below that rate, Contract values
will be higher than they would have been had no loan been made.
When you repay all or part of a loan, we will increase the portion of the
Contract Fund in the investment options by the amount of the loan you repay
using the investment allocation for future premium payments as of the loan
payment date, plus interest credits accrued on the loan since the last
transaction date. If loan interest is paid when due, it will not change the
portion of the Contract Fund allocated to the investment options. We reserve the
right to change the manner in which we allocate loan repayments.
34
Tax Treatment of Contract Benefits
This summary provides general information on the federal income tax treatment of
the Contract. It is not a complete statement of what the federal income taxes
will be in all circumstances. It is based on current law and interpretations,
which may change. It does not cover state taxes or other taxes. It is not
intended as tax advice. You should consult your own qualified tax adviser for
complete information and advice.
Treatment as Life InsuranceTreatment as Life Insurance. The Contract must meet
certain requirements to qualify as life insurance for tax purposes. These
requirements include certain definitional tests and rules for diversification of
the Contract's investments. For further information on the diversification
requirements, see Tax Information in the Fund prospectus.
In order to meet the definition of life insurance rules for federal income tax
purposes, the Contract must satisfy one of the two following tests: (1) Cash
Value Accumulation Test or (2) Guideline Premium Test. At issue, the Contract
owner chooses which of these two tests will apply to their Contract. This choice
cannot be changed thereafter.
Under the Cash Value Accumulation Test, the Contract must maintain a minimum
ratio of death benefit to cash value. Therefore, in order to ensure that the
Contract qualifies as life insurance, the Contract's death benefit may increase
as the Contract Fund value increases. The death benefit, at all times, must be
at least equal to the Contract Fund multiplied by the applicable attained age
factor. A listing of attained age factors can be found on your Contract data
pages.
Under the Guideline Premium Test, there is a limit as to the amount of premium
that can be paid into the Contract in relation to the death benefit. In
addition, there is a minimum ratio of death benefit to cash value associated
with this test. This ratio, however, is less than the required ratio under the
Cash Value Accumulation test. Therefore, the death benefit required under this
test is generally lower than that of the Cash Value Accumulation test.
The selection of the definition of life insurance test most appropriate for you
is dependent on several factors, including the insured's age at issue, actual
Contract earnings, and whether or not the Contract is classified as a Modified
Endowment Contract. You should consult your own qualified tax adviser for
complete information and advice with respect to the selection of the definition
of life insurance test.
We believe we have taken adequate steps to insure that the Contract qualifies as
life insurance for tax purposes. Generally speaking, this means that:
o you will not be taxed on the growth of the funds in the Contract,
unless you receive a distribution from the Contract,
o the Contract's death benefit will be income tax free to your
beneficiary.
Although we believe that the Contract should qualify as life insurance for tax
purposes, there are some uncertainties, particularly because the Secretary of
Treasury has not yet issued permanent regulations that bear on this question.
Accordingly, we reserve the right to make changes -- which will be applied
uniformly to all Contract owners after advance written notice -- that we deem
necessary to insure that the Contract will qualify as life insurance.
Pre-Death DistributionsPre-Death Distributions. The tax treatment of any
distribution you receive before the insured's death depends on whether the
Contract is classified as a Modified Endowment Contract.
Contracts Not Classified as Modified Endowment Contracts.
o If you surrender the Contract or allow it to lapse, you will be
taxed on the amount you receive in excess of the premiums you paid
less the untaxed portion of any prior withdrawals. For this purpose,
you will be treated as receiving any portion of the cash surrender
value used to repay Contract debt. In other words, you will
immediately have taxable income to the extent of gain in the
Contract. Reinstatement of the Contract after lapse will not
eliminate the taxable income which we are required to report to the
Internal Revenue Service. The tax consequences of a surrender may
differ if you take the proceeds under an income payment settlement
option.
35
o Generally, you will be taxed on a withdrawal to the extent the
amount you receive exceeds the premiums you paid for the Contract
less the untaxed portion of any prior withdrawals. However, under
some limited circumstances, in the first 15 Contract years, all or a
portion of a withdrawal may be taxed if the Contract Fund exceeds
the total premiums paid less the untaxed portions of any prior
withdrawals, even if total withdrawals do not exceed total premiums
paid.
o Extra premiums for optional benefits and riders generally do not
count in computing the premiums paid for the Contract for the
purposes of determining whether a withdrawal is taxable.
o Loans you take against the Contract are ordinarily treated as debt
and are not considered distributions subject to tax. However, you
should know that the Internal Revenue Service may take the position
that the preferred loan should be treated as a distribution for tax
purposes because of the relatively low differential between the loan
interest rate and Contract's crediting rate. Were the Internal
Revenue Service to take this position, Pruco Life would take
reasonable steps to avoid this result, including modifying the
Contract's loan provisions.
Modified Endowment Contracts.
o The rules change if the Contract is classified as a Modified
Endowment Contract. The Contract could be classified as a Modified
Endowment Contract if premiums in amounts that are too large are
paid or a decrease in the face amount of insurance is made (or a
rider removed). The addition of a rider or an increase in the face
amount of insurance may also cause the Contract to be classified as
a Modified Endowment Contract. You should first consult a qualified
tax adviser and your Pruco Life representative if you are
contemplating any of these steps.
o If the Contract is classified as a Modified Endowment Contract, then
amounts you receive under the Contract before the insured's death,
including loans and withdrawals, are included in income to the
extent that the Contract Fund before surrender charges exceeds the
premiums paid for the Contract increased by the amount of any loans
previously included in income and reduced by any untaxed amounts
previously received other than the amount of any loans excludible
from income. An assignment of a Modified Endowment Contract is
taxable in the same way. These rules also apply to pre-death
distributions, including loans and assignments, made during the
two-year period before the time that the Contract became a Modified
Endowment Contract.
o Any taxable income on pre-death distributions (including full
surrenders) is subject to a penalty of 10 percent unless the amount
is received on or after age 59 1/2, on account of your becoming
disabled or as a life annuity. It is presently unclear how the
penalty tax provisions apply to Contracts owned by businesses.
o All Modified Endowment Contracts issued by us to you during the same
calendar year are treated as a single Contract for purposes of
applying these rules.
Investor Control. Treasury Department regulations do not provide guidance
concerning the extent to which you may direct your investment in the particular
variable investment options without causing you, instead of Pruco Life, to be
considered the owner of the underlying assets. Because of this uncertainty,
Pruco Life reserves the right to make such changes as it deems necessary to
assure that the Contract qualifies as life insurance for tax purposes. Any such
changes will apply uniformly to affected Contract owners and will be made with
such notice to affected Contract owners as is feasible under the circumstances.
Withholding. You must affirmatively elect that no taxes be withheld from a
pre-death distribution. Otherwise, the taxable portion of any amounts you
receive will be subject to withholding. You are not permitted to elect out of
withholding if you do not provide a social security number or other taxpayer
identification number. You may be subject to penalties under the estimated tax
payment rules if your withholding and estimated tax payments are insufficient to
cover the tax due.
Other Tax Considerations. If you transfer or assign the Contract to someone
else, there may be gift, estate and/or income tax consequences. If you transfer
the Contract to a person two or more generations younger than you (or designate
such a younger person as a beneficiary), there may be Generation Skipping
Transfer tax consequences. Deductions for interest paid or accrued on Contract
debt or on other loans that are incurred or continued to purchase
36
or carry the Contract may be denied. Your individual situation or that of your
beneficiary will determine the federal estate taxes and the state and local
estate, inheritance and other taxes due if you or the insured dies.
Business-Owned Life Insurance. If a business, rather than an individual, is the
owner of the Contract, there are some additional rules. Business Contract owners
generally cannot deduct premium payments. Business Contract owners generally
cannot take tax deductions for interest on Contract debt paid or accrued after
October 13, 1995. An exception permits the deduction of interest on policy loans
on Contracts for up to 20 key persons. The interest deduction for Contract debt
on these loans is limited to a prescribed interest rate and a maximum aggregate
loan amount of $50,000 per key insured person. The corporate alternative minimum
tax also applies to business-owned life insurance. This is an indirect tax on
additions to the Contract Fund or death benefits received under business-owned
life insurance policies.
Legal Considerations Relating to Sex-Distinct Premiums and Benefits
The Contract generally employs mortality tables that distinguish between males
and females. Thus, premiums and benefits differ under Contracts issued on males
and females of the same age. However, in those states that have adopted
regulations prohibiting sex-distinct insurance rates, premiums and cost of
insurance charges will be based on male rates, whether the insureds are male or
female. In addition, employers and employee organizations considering purchase
of a Contract should consult their legal advisers to determine whether purchase
of a Contract based on sex-distinct actuarial tables is consistent with Title
VII of the Civil Rights Act of 1964 or other applicable law.
Other General Contract Provisions
Assignment. This Contract may not be assigned if the assignment would violate
any federal, state or local law or regulation prohibiting sex distinct rates for
insurance. Generally, the Contract may not be assigned to an employee benefit
plan or program without Pruco Life's consent. Pruco Life assumes no
responsibility for the validity or sufficiency of any assignment. We will not be
obligated to comply with any assignment unless we receive a copy at our Service
Office.
Beneficiary. You designate and name your beneficiary in the application.
Thereafter, you may change the beneficiary, provided it is in accordance with
the terms of the Contract. Should the insured die with no surviving beneficiary,
the insured's estate will become the beneficiary.
Incontestability. We will not contest the Contract after it has been in-force
during the insured's lifetime for two years from the issue date except when any
change is made in the Contract that requires Pruco Life's approval and would
increase our liability. We will not contest such change after it has been in
effect for two years during the lifetime of the insured.
Misstatement of Age or Sex. If the insured's stated age or sex or both are
incorrect in the Contract, Pruco Life will adjust the death benefits payable and
any amount to be paid, as required by law, to reflect the correct age and sex.
Any such benefit will be based on what the most recent deductions from the
Contract Fund would have provided at the insured's correct age and sex.
Settlement Options. The Contract grants to most owners, or to the beneficiary, a
variety of optional ways of receiving Contract proceeds, other than in a lump
sum. Any Pruco Life representative authorized to sell this Contract can explain
these options upon request.
Suicide Exclusion. Generally, if the insured, whether sane or insane, dies by
suicide within two years from the Contract date, the Contract will end and Pruco
Life will return the premiums paid, less any Contract debt, and less any
withdrawals. Generally, if the insured, whether sane or insane, dies by suicide
after two years from the issue date, but within two years of the effective date
of an increase in the basic insurance amount, we will pay, as to the increase in
amount, no more than the sum of the premiums paid on and after the effective
date of an increase.
37
Substitution of Fund Shares
Although Pruco Life believes it to be unlikely, it is possible that in the
judgment of its management, one or more of the portfolios of the Funds may
become unsuitable for investment by Contract owners because of investment policy
changes, tax law changes, or the unavailability of shares for investment. In
that event, Pruco Life may seek to substitute the shares of another portfolio or
of an entirely different mutual fund. Before this can be done, the approval of
the SEC, and possibly one or more state insurance departments, may be required.
Contract owners will be notified of any such substitution.
Reports to Contract Owners
Once each year, Pruco Life will send you a statement that provides certain
information pertinent to your own Contract. This statement will detail values,
transactions made, and specific Contract data that apply only to your particular
Contract.
You will also be sent annual and semi-annual reports of the Funds showing the
financial condition of the portfolios and the investments held in each
portfolio.
Sale of the Contract and Sales Commissions
Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of
Prudential, acts as the principal underwriter of the Contract. Prusec, organized
in 1971 under New Jersey law, is registered as a broker and dealer under the
Securities Exchange Act of 1934 and is a member of the National Association of
Securities Dealers, Inc. Prusec's principal business address is 751 Broad
Street, Newark, New Jersey 07102-3777. The Contract is sold by registered
representatives of Prusec who are also authorized by state insurance departments
to do so. The Contract may also be sold through other broker-dealers authorized
by Prusec and applicable law to do so. Registered representatives of such other
broker-dealers may be paid on a different basis than described below.
Commissions are based on a premium value referred to as the Commissionable
Target Premium. The Commissionable Target Premium may vary from the Target
Premium, depending on the issue age and rating class of the insured, any extra
risk charges, or additional riders.
Generally, representatives will receive a commission of no more than:
(1) 50% of the premiums received in the first 24 months following the
Contract Date on total premium received since issue up to the
Commissionable Target Premium;
(2) 4% of the premiums received in the first 24 months following the
Contract Date to the extent that the total premium received since
issue exceeds the Commissionable Target Premium;
(3) 4% of the premiums received in years three through 10 on premiums
received up to the Commissionable Target Premium in each policy
year; and
(4) 3% of the premiums received in any of the first 10 policy years to
the extent that premiums in that year exceed the Commissionable
Target Premium.
If the basic insurance amount is increased, representatives will generally
receive a commission of no more than:
(1) 50% of the premiums received up to the Commissionable Target Premium
for the increase received in the first year following the effective
date of the increase;
(2) 4% of the premiums received up to the Commissionable Target Premium
for years two through 10; and
(3) 2% of the premiums received in any of the first 10 years following
the effective date of the increase to the extent that premiums in
that year exceed the Commissionable Target Premium.
Moreover, trail commissions of up to 0.0625% of an amount determined by
averaging the Contract Fund less all outstanding loans as of the first and last
day of each calendar quarter starting with the third Contract year may be paid.
Representatives with less than four years of service may receive compensation on
a different basis. Representatives who meet certain productivity or persistency
standards may be eligible for additional compensation.
38
State Regulation
Pruco Life is subject to regulation and supervision by the Department of
Insurance of the State of Arizona, which periodically examines its operations
and financial condition. It is also subject to the insurance laws and
regulations of all jurisdictions in which it is authorized to do business.
Pruco Life is required to submit annual statements of its operations, including
financial statements, to the insurance departments of the various jurisdictions
in which it does business to determine solvency and compliance with local
insurance laws and regulations.
In addition to the annual statements referred to above, Pruco Life is required
to file with Arizona and other jurisdictions a separate statement with respect
to the operations of all its variable contract accounts, in a form promulgated
by the National Association of Insurance Commissioners.
Experts
The consolidated financial statements of Pruco Life and its subsidiaries as of
December 31, 2001 and 2000 and for each of the three years in the period ended
December 31, 2001 and the financial statements of the Account as of December 31,
2001 and for each of the three years in the period then ended included in this
prospectus have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's
principal business address is 1177 Avenue of the Americas, New York, New York
10036.
Actuarial matters included in this prospectus have been examined by Candace
Woods, MAAA, FSA, Vice President and Actuary of Prudential, whose opinion is
filed as an exhibit to the registration statement.
Litigation and Regulatory Proceedings
We are subject to legal and regulatory actions in the ordinary course of our
businesses, including class actions. Pending legal and regulatory actions
include proceedings specific to our practices and proceedings generally
applicable to business practices in the industries in which we operate. In
certain of these lawsuits, large and/or indeterminate amounts are sought,
including punitive or exemplary damages.
Beginning in 1995, regulatory authorities and customers brought significant
regulatory actions and civil litigation against Pruco Life and Prudential
involving individual life insurance sales practices. In 1996, Prudential, on
behalf of itself and many of its life insurance subsidiaries, including Pruco
Life, entered into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales practices class
action lawsuit covering policyholders of individual permanent life insurance
policies issued in the United States from 1982 to 1995. Pursuant to the
settlements, the companies agreed to various changes to their sales and business
practices controls, to a series of fines, and to provide specific forms of
relief to eligible class members. Virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied.
As of December 31, 2001 Prudential and/or Pruco Life remained a party to
approximately 44 individual sales practices actions filed by policyholders who
"opted out" of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there
were 19 sales practices actions pending that were filed by policyholders who
were members of the class and who failed to "opt out" of the class action
settlement. Prudential and Pruco Life believed that those actions are governed
by the class settlement release and expects them to be enjoined and/or
dismissed. Additional suits may be filed by class members who "opted out" of the
class settlements or who failed to "opt out" but nevertheless seek to proceed
against Prudential and/or Pruco Life. A number of the plaintiffs in these cases
seek large and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple plaintiffs. It
is possible that substantial punitive damages might be awarded in any of these
actions and particularly in an action involving multiple plaintiffs.
Prudential has indemnified Pruco Life for any liabilities incurred in connection
with sales practices litigation covering policyholders of individual permanent
life insurance policies issued in the United States from 1982 to 1995.
Pruco Life's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of Pruco Life in a particular quarterly
or annual
39
period could be materially affected by an ultimate unfavorable resolution of
pending litigation and regulatory matters. Management believes, however, that
the ultimate outcome of all pending litigation and regulatory matters should not
have a material adverse effect on Pruco Life's financial position.
Additional Information
Pruco Life has filed a registration statement with the SEC under the Securities
Act of 1933, relating to the offering described in this prospectus. This
prospectus does not include all the information set forth in the registration
statement. Certain portions have been omitted pursuant to the rules and
regulations of the SEC. The omitted information may, however, be obtained from
the SEC's Public Reference Section at 450 Fifth Street, N.W., Washington, D.C.
20549, or by telephoning (800) SEC-0330, upon payment of a prescribed fee.
To reduce costs, we now generally send only a single copy of prospectuses and
shareholder reports to each household ("householding"), in lieu of sending a
copy to each contract owner that resides in the household. You should be aware
that you can revoke or "opt out" of householding at any time by calling
1-877-778-5008.
Further information may also be obtained from Pruco Life. Its address and
telephone number are set forth on the inside front cover of this prospectus.
Financial Statements
The financial statements of the Account should be distinguished from the
consolidated financial statements of Pruco Life and its subsidiaries, which
should be considered only as bearing upon the ability of Pruco Life to meet its
obligations under the Contracts.
Financial statements for the subaccounts of the Pruco Life Variable Universal
Account offered in connection with PruLife Advisor Select are not available
because those subaccounts have not commenced operations prior to the effective
date of this prospectus.
40
DIRECTORS AND OFFICERS
The directors and major officers of Pruco Life, listed with their principal
occupations during the past 5 years, are shown below.
DIRECTORS OF PRUCO LIFE
JAMES J. AVERY, JR., Vice Chairman and Director - President, Prudential
Individual Life Insurance since 1998; prior to 1998: Senior Vice President,
Chief Actuary and CFO, Prudential Individual Insurance Group.
VIVIAN L. BANTA, President, Chairman, and Director - Executive Vice President,
Individual Financial Services, U.S. Consumer Group since 2000; 1998 to 1999:
Consultant, Individual Financial Services; prior to 1998: Consultant, Morgan
Stanley.
RICHARD J. CARBONE, Director - Senior Vice President and Chief Financial Officer
since 1997.
HELEN M. GALT, Director - Company Actuary, Prudential since 1993.
RONALD P. JOELSON, Director - Senior Vice President, Prudential Asset, Liability
and Risk Management since 1999; prior to 1999: President, Guaranteed Products,
Prudential Institutional.
DAVID R. ODENATH, JR., Director - President, Prudential Investments since 1999;
prior to 1999: Senior Vice President and Director of Sales, Investment
Consulting Group, PaineWebber.
OFFICERS WHO ARE NOT DIRECTORS
SHAUN M. BYRNES, Senior Vice President - Senior Vice President, Director of
Annuities, Prudential Investments since 2001; 2000 to 2001: Senior Vice
President, Director of Research, Prudential Investments; 1999 to 2000: Senior
Vice President, Director of Mutual Funds, Prudential Investments; prior to 1999:
Vice President, Mutual Funds, Prudential Investments.
C. EDWARD CHAPLIN, Treasurer - Senior Vice President and Treasurer, Prudential
since 2000; prior to 2000, Vice President and Treasurer, Prudential.
THOMAS F. HIGGINS, Senior Vice President - Vice President, Annuity Services,
Prudential Individual Financial Services since 1999; 1998 to 1999: Vice
President, Mutual Funds, Prudential Individual Financial Services; prior to
1998: Principal, Mutual Fund Operations, The Vanguard Group.
CLIFFORD E. KIRSCH, Chief Legal Officer and Secretary - Chief Counsel, Variable
Products, Prudential Law Department since 1995.
ANDREW J. MAKO, Executive Vice President - Vice President, Finance, U.S.
Consumer Group since 1999; prior to 1999: Vice President, Business Performance
Management Group.
MELODY C. MCDAID, Senior Vice President - Vice President and Site Executive,
Prudential Financial Services Customer Service Office since 1995.
ESTHER H. MILNES, Senior Vice President - Vice President and Chief Actuary,
Prudential Individual Life Insurance since 1999; prior to 1999: Vice President
and Actuary, Prudential Individual Insurance Group.
JAMES M. O'CONNOR, Senior Vice President and Actuary - Vice President,
Guaranteed Products since 2001; 1998 to 2000: Corporate Vice President,
Guaranteed Products; prior to 1998: Corporate Actuary, Prudential Investments.
SHIRLEY H. SHAO, Senior Vice President and Chief Actuary - Vice President and
Associate Actuary, Prudential since 1996.
42
WILLIAM J. ECKERT, IV, Vice President and Chief Accounting Officer - Vice
President and IFS Controller, Prudential Enterprise Financial Management since
2000; 1999 to 2000: Vice President and Individual Life Controller, Prudential
Enterprise Financial Management; prior to 1999: Vice President, Accounting,
Enterprise Financial Management.
The business address of all directors and officers of Pruco Life is 213
Washington Street, Newark, New Jersey 07102-2992.
Pruco Life directors and officers are elected annually.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-37587
PRUCO LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
Arizona 22-1944557
----------------------------- ---------------------------------
(State or other jurisdiction, (IRS Employer Identification No.)
incorporation or organization)
213 Washington Street, Newark, New Jersey 07102
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 802-3274
-----------------------------------------------------------------
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- ----
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: NONE
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of August 14, 2002. Common stock, par value of $10 per share:
250,000 shares outstanding
================================================================================
PRUCO LIFE INSURANCE COMPANY
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page No.
--------
Cover Page -
Index 2
PART I - Financial Information
------------------------------
Item 1. (Unaudited) Financial Statements
Consolidated Statements of Financial Position
As of June 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations and Comprehensive Income
Three and Six months ended June 30, 2002 and 2001 4
Consolidated Statements of Changes in Stockholder's Equity
Periods ended June 30, 2002 and December 31, 2001 and 2000 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - Other Information
----------------------------
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
Forward-Looking Statement Disclosure
Certain of the statements included in this Quarterly Report on Form 10-Q,
including but not limited to those in the Management's Discussion and Analysis
of Financial Condition and Results of Operations, constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Words such as "expects," "believes," "anticipates," "includes,"
"plans," "assumes," "estimates," "projects," or variations of such words are
generally part of forward-looking statements. Forward-looking statements are
made based on management's current expectations and beliefs concerning future
developments and their potential effects upon Pruco Life Insurance Company ("the
Company"). There can be no assurance that future developments affecting the
Company will be those anticipated by management. These forward-looking
statements are not a guarantee of future performance and involve risks and
uncertainties, and there are certain important factors that could cause actual
results to differ, possibly materially, from expectations or estimates reflected
in such forward-looking statements, including without limitation: general
economic, market and political conditions, including the performance of
financial markets, interest rate fluctuations and the continuing impact of the
events of September 11; volatility in the securities markets; reestimates of our
reserves for future policy benefits and claims; our exposure to contingent
liabilities; catastrophe losses; investment losses and defaults; changes in our
claims-paying or credit ratings; competition in our product lines and for
personnel; fluctuations in foreign currency exchange rates and foreign
securities markets; risks to our international operations; the impact of
changing regulation or accounting practices; adverse litigation results; and
changes in tax law. The Company does not intend, and is under no obligation to,
update any particular forward-looking statement included in this document.
2
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Financial Position (Unaudited)
As of June 30, 2002 and December 31, 2001 (In Thousands)
- --------------------------------------------------------------------------------
June 30, December 31,
2002 2001
-----------------------------------
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 2002: $4,304,687;
2001: $3,935,472) $ 4,414,108 $ 4,024,893
Equity securities - available for sale, at fair value (cost, 2002: $5,138;
2001: $173) 5,331 375
Commercial loans on real estate 7,582 8,190
Policy loans 878,540 874,065
Short-term investments 125,059 215,610
Other long-term investments 87,594 84,342
-----------------------------------
Total investments 5,518,214 5,207,475
Cash and cash equivalents 525,136 374,185
Deferred policy acquisition costs 1,210,029 1,159,830
Accrued investment income 80,960 77,433
Reinsurance recoverable 381,512 300,697
Receivables from affiliates 45,054 33,074
Other assets 39,140 20,134
Separate Account assets 13,723,881 14,920,584
-----------------------------------
TOTAL ASSETS $ 21,523,926 $ 22,093,412
===================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 4,363,024 $ 3,947,690
Future policy benefits and other policyholder liabilities 851,693 808,230
Cash collateral for loaned securities 220,278 190,022
Securities sold under agreement to repurchase 268,055 80,715
Income taxes payable 273,526 266,096
Other liabilities 157,782 228,596
Separate Account liabilities 13,723,881 14,920,584
-----------------------------------
Total liabilities 19,858,239 20,441,933
-----------------------------------
Contingencies (See Footnote 2)
Stockholder's Equity
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding 2,500 2,500
Paid-in-capital 466,748 466,748
Retained earnings 1,149,867 1,147,665
Accumulated other comprehensive income:
Net unrealized investment gains 46,500 34,718
Foreign currency translation adjustments 72 (152)
-----------------------------------
Accumulated other comprehensive income 46,572 34,566
-----------------------------------
Total stockholder's equity 1,665,687 1,651,479
-----------------------------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 21,523,926 $ 22,093,412
===================================
See Notes to Consolidated Financial Statements
3
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three and Six Months Ended June 30, 2002 and 2001 (In Thousands)
- --------------------------------------------------------------------------------
Six months ended Three months ended
June 30, June 30,
2002 2001 2002 2001
------------ ------------- -------------- -------------
REVENUES
Premiums $ 41,266 $ 47,354 $ 22,968 $ 23,936
Policy charges and fee income 258,748 240,330 131,715 121,226
Net investment income 163,796 174,803 82,325 84,493
Realized investment (losses) gains, net (32,306) 307 (26,080) (10,570)
Asset management fees 5,132 3,869 2,880 1,716
Other income 7,633 740 6,425 70
------------ ------------- -------------- -------------
Total revenues 444,269 467,403 220,233 220,871
------------ ------------- -------------- -------------
BENEFITS AND EXPENSES
Policyholders' benefits 116,929 115,490 59,116 58,585
Interest credited to policyholders'
account balances 96,672 98,033 49,486 49,225
General, administrative and other
expenses 231,577 201,061 137,221 97,522
------------ ------------- -------------- -------------
Total benefits and expenses 445,178 414,584 245,823 205,332
------------ ------------- -------------- -------------
(Loss) Income from operations before
income taxes (909) 52,819 (25,590) 15,539
------------ ------------- -------------- -------------
Income tax (benefit) provision (3,116) 11,286 (8,326) 2,645
------------ ------------- -------------- -------------
NET INCOME (LOSS) 2,207 41,533 (17,264) 12,894
------------ ------------- -------------- -------------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities,
net of reclassification adjustment 11,782 9,396 30,928 (7,215)
Foreign currency translation adjustments 224 3,320 219 -
------------ ------------- -------------- -------------
Other comprehensive income (loss) 12,006 12,716 31,147 (7,215)
------------ ------------- -------------- -------------
TOTAL COMPREHENSIVE INCOME $ 14,213 $ 54,249 $ 13,883 $ 5,679
============ ============= ============== =============
See Notes to Consolidated Financial Statements
4
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Changes in Stockholder's Equity (Unaudited)
Periods Ended June 30, 2002 and December 31, 2001 and 2000 (In Thousands)
- --------------------------------------------------------------------------------
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income (loss) equity
--------------- ------------- --------------- ------------------ -----------------
Balance, January 1, 2000 $ 2,500 $ 439,582 $ 1,258,428 $ (30,691) $ 1,669,819
Net income - - 103,496 - 103,496
Contribution from Parent - 27,166 - - 27,166
Change in foreign currency translation
adjustments, net of taxes - - - (993) (993)
Change in net unrealized investment losses,
net of reclassification adjustment and taxes - - - 33,094 33,094
--------------- ------------- --------------- ------------------ -----------------
Balance, December 31, 2000 2,500 466,748 1,361,924 1,410 1,832,582
Net income - - 67,582 - 67,582
Dividends to Parent - - (153,816) -
(153,816)
Policy credits to eligible Policyholders - - (128,025) - (128,025)
Change in foreign currency translation
adjustments, net of taxes - - - 3,168 3,168
Change in net unrealized investment gains,
net of reclassification adjustment and taxes - - - 29,988 29,988
--------------- ------------- --------------- ------------------ -----------------
Balance, December 31, 2001 2,500 466,748 1,147,665 34,566 1,651,479
Net income - - 2,207 - 2,207
Policy credits to eligible Policyholders - - (5) - (5)
Change in foreign currency translation
adjustments, net of taxes - - - 224 224
Change in net unrealized investment losses,
net of reclassification adjustment and taxes - - - 11,782 11,782
--------------- ------------- --------------- ------------------ -----------------
Balance, June 30, 2002 $ 2,500 $ 466,748 $ 1,149,867 $ 46,572 $ 1,665,687
=============== ============= =============== ================== =================
See Notes to Consolidated Financial Statements
5
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2001 and 2000 (In Thousands)
- --------------------------------------------------------------------------------
2002 2001
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,207 $ 41,533
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (34,645) (39,033)
Interest credited to policyholders' account balances 96,672 98,033
Realized investment (gains) losses, net 32,306 (307)
Amortization and other non-cash items (5,284) (12,227)
Change in:
Future policy benefits and other policyholders'
liabilities 43,463 33,903
Accrued investment income (3,527) 5,434
Receivables from affiliates (11,980) 24,651
Policy loans (4,475) (25,851)
Deferred policy acquisition costs (50,199) 19,863
Income taxes payable/receivable 7,430 38,364
Other, net (54,661) (54,544)
--------------- ----------------
Cash Flows From Operating Activities 17,307 129,819
--------------- ----------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 932,838 1,767,648
Equity securities - 274
Commercial loans on real estate 608 536
Payments for the purchase of:
Fixed maturities:
Available for sale (1,332,737) (1,980,148)
Equity securities (4) (176)
Cash collateral for loaned securities, net 30,256 44,630
Securities sold under agreement to repurchase, net 187,340 (39,988)
Other long-term investments (11,787) (2,717)
Short-term investments, net 90,536 103,855
--------------- ----------------
Cash Flows Used In Investing Activities (102,950) (106,086)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 936,679 731,505
Withdrawals (584,106) (647,426)
Cash payments to eligible policyholders (115,979) -
Cash provided to affiliate - (65,636)
--------------- ----------------
Cash Flows From Financing Activities 236,594 18,443
--------------- ----------------
Net increase in Cash and cash equivalents 150,951 42,176
Cash and cash equivalents, beginning of year 374,185 453,071
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 525,136 $ 495,247
=============== ================
Notes to Consolidated Financial Statements
6
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q on the basis of
accounting principles generally accepted in the United States. These interim
financial statements are unaudited but reflect all adjustments which, in the
opinion of management, are necessary to provide a fair presentation of the
consolidated results of operations and financial condition of the Pruco Life
Insurance Company ("the Company"), for the interim periods presented. The
Company is a wholly owned subsidiary of the Prudential Life Insurance Company of
America ("Prudential"), which in turn is a wholly owned subsidiary of Prudential
Financial, Inc. All such adjustments are of a normal recurring nature. The
results of operations for any interim period are not necessarily indicative of
results for a full year. Certain amounts in the Company's prior year
consolidated financial statements have been reclassified to conform with the
current year presentation. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
2. CONTINGENCIES AND LITIGATION
Contingencies
On an ongoing basis, our internal supervisory and control functions review the
quality of our sales, marketing and other customer interface procedures and
practices and may recommend modifications or enhancements. In certain cases, if
appropriate, we may offer customers remediation and may incur charges, including
the cost of such remediation, administrative costs and regulatory fines.
It is possible that the results of operations or the cash flow of the Company in
a particular quarterly or annual period could be materially affected as a result
of payments in connection with the matters discussed above depending, in part,
upon the results of operations or cash flow for such period. Management
believes, however, that the ultimate payments in connection with these matters
should not have a material adverse effect on the Company's financial position.
Litigation
Prudential and the Company are subject to legal and regulatory actions in the
ordinary course of their businesses, including class actions. Pending legal and
regulatory actions include proceedings relating to aspects of the businesses and
operations that are specific to the Company and Prudential and that are typical
of the businesses in which the Company and Prudential operate. Some of these
proceedings have been brought on behalf of various alleged classes of
complaintants. In certain of these matters, the plaintiffs are seeking large
and/or indeterminate amounts, including punitive or exemplary damages.
Beginning in 1995, regulatory authorities and customers brought significant
regulatory actions and civil litigation against the Company and Prudential
involving individual life insurance sales practices. In 1996, Prudential, on
behalf of itself and many of its life insurance subsidiaries including the
Company entered into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales practices class
action lawsuit covering policyholders of individual permanent life insurance
policies issued in the United States from 1982 to 1995. Pursuant to the
settlements, the companies agreed to various changes to their sales and business
practices controls, to a series of fines, and to provide specific forms of
relief to eligible class members. Virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied. While the approval of the class
action settlement is now final, Prudential and the Company remain subject to
oversight and review by insurance regulators and other regulatory authorities
with respect to its sales practices and the conduct of the remediation program.
The U.S. District Court has also retained jurisdiction as to all matters
relating to the administration, consummation, enforcement and interpretation of
the settlements.
As of June 30, 2002, Prudential and/or the Company remained a party to
approximately 40 individual sales practices actions filed by policyholders who
"opted out" of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there
were 17 sales practices actions pending that were filed by policyholders who
were members of the class and who failed to "opt out" of the class action
settlement. Prudential and the Company believe that those actions are governed
by the class settlement release and expects them to be enjoined and/or
dismissed. Additional suits may be filed by class members who "opted out" of the
class settlements or who failed to "opt out" but nevertheless seek to proceed
against Prudential and/or the Company. A number of the plaintiffs in these cases
seek large and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple plaintiffs. It
is possible that substantial punitive damages might be awarded in any of these
actions and particularly in an action involving multiple plaintiffs.
Prudential has indemnified the Company for any liabilities incurred in
connection with sales practices litigation covering policyholders of individual
permanent life insurance policies issued in the United States from 1982 to 1995.
7
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
2. CONTINGENCIES AND LITIGATION (continued)
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially effected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.
3. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with Prudential and
other affiliates. It is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
Expense Charges and Allocations
All of the Company's expenses are allocations or charges from Prudential or
other affiliates. These expenses can be grouped into the following categories:
general and administrative expenses, retail distribution expenses and asset
management fees.
The Company's general and administrative expenses are charged to the Company
using allocation methodologies based on business processes. Management believes
that the methodology is reasonable and reflects costs incurred by Prudential to
process transactions on behalf of the Company. Prudential and the Company
operate under service and lease agreements whereby services of officers and
employees, supplies, use of equipment and office space are provided by
Prudential.
The Company is allocated estimated distribution expenses from Prudential's
retail agency network for both its domestic life and annuity products. The
estimate of allocated distribution expenses is intended to reflect a market
based pricing arrangement. The Company has capitalized the majority of these
distribution expenses as deferred policy acquisition costs.
In accordance with a revenue sharing agreement with Prudential Investments LLC,
which began on February 1, 2002, the Company receives fee income from
policyholder account balances invested in the Prudential Series Funds ("PSF").
These revenues were recorded as "Asset management fees" in the Consolidated
Statements of Operations and Comprehensive Income.
Corporate Owned Life Insurance
The Company has sold three Corporate Owned Life Insurance ("COLI") policies to
Prudential. The cash surrender value included in Separate Accounts was $626.7
million and $647.2 million at June 30, 2002 and December 31, 2001, respectively.
The fees received related to the COLI policies were $4.4 million for both the
periods ending June 30, 2002 and 2001.
8
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Reinsurance
The Company currently has four reinsurance agreements in place with Prudential
and affiliates. Specifically, the Company has a reinsurance Group Annuity
Contract, whereby the reinsurer, in consideration for a single premium payment
by the Company, provides reinsurance equal to 100% of all payments due under the
contract. In addition there are two yearly renewable term agreements in which
the Company may offer and the reinsurer may accept reinsurance on any life in
excess of the Company's maximum limit of retention. The Company is not relieved
of its primary obligation to the policyholder as a result of these reinsurance
transactions. These agreements had no material effect on net income for the
periods ended June 30, 2002 or 2001. The fourth agreement is described below.
On January 31, 2001, the Company transferred all of its assets and liabilities
associated with the Company's Taiwan branch including Taiwan's insurance book of
business to an affiliated Company, Prudential Life Insurance Company of Taiwan
Inc. ("Prudential of Taiwan"), a wholly owned subsidiary of Prudential
Financial, Inc.
The mechanism used to transfer this block of business in Taiwan is referred to
as a "full acquisition and assumption" transaction. Under this mechanism, the
Company is jointly liable with Prudential of Taiwan for two years from the
giving of notice to all obligees for all matured obligations and for two years
after the maturity date of not-yet-matured obligations. Prudential of Taiwan is
also contractually liable, under indemnification provisions of the transaction,
for any liabilities that may be asserted against the Company. The transfer of
the insurance related assets and liabilities was accounted for as a
long-duration coinsurance transaction under accounting principles generally
accepted in the United States. Under this accounting treatment, the insurance
related liabilities remain on the books of the Company and an offsetting
reinsurance recoverable is established.
As part of this transaction, the Company made a capital contribution to
Prudential of Taiwan in the amount of the net equity of the Company's Taiwan
branch as of the date of transfer. In July 2001, the Company dividended its
interest in Prudential of Taiwan to Prudential.
Premiums ceded for the periods ending June 30, 2002 and 2001 from the Taiwan
coinsurance agreement were $37.6 million and $41.3 million, respectively.
Benefits ceded for the periods ending June 30, 2002 and 2001 from the Taiwan
coinsurance agreement were $7.1 million and $6.0 million, respectively.
Included in the reinsurance recoverable balances were affiliated reinsurance
recoverables of $322.6 million and $285.8 million at June 30, 2002 and December
31, 2001, respectively. Of these affiliated amounts, the reinsurance recoverable
related to the Taiwan coinsurance agreement was $297.5 million and $ 260.6
million at June 30, 2002 and December 31, 2001, respectively.
Debt Agreements
In July 1998, the Company established a revolving line of credit facility of up
to $500 million with Prudential Funding LLC, a wholly owned subsidiary of
Prudential. There was no outstanding debt relating to this credit facility as of
June 30, 2002 or December 31, 2001.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the consolidated financial condition of Pruco Life
Insurance Company as of June 30, 2002, compared with December 31, 2001, and its
consolidated results of operations for the six month and three month periods
ended June 30, 2002 and June 30, 2001. You should read the following analysis of
our consolidated financial condition and results of operations in conjunction
with the Company's MD&A and audited Consolidated Financial statements included
in the Company's Report on Form 10-K for the year ended December 31, 2001.
The Company sells interest-sensitive individual life insurance and variable life
insurance, term life insurance, individual variable and fixed annuities, and a
non-participating guaranteed interest contract ("GIC") called Prudential Credit
Enhanced GIC ("PACE") primarily through Prudential's sales force in the United
States. These markets are subject to regulatory oversight with particular
emphasis placed on company solvency and sales practices. These markets are also
subject to increasing competitive pressure as the legal barriers which have
historically segregated the markets of the financial services industry have been
changed through both legislative and judicial processes. Regulatory changes have
opened the insurance industry to competition from other financial institutions,
particularly banks and mutual funds that are positioned to deliver competing
investment products through large, stable distribution channels. The Company
also had marketed individual life insurance through its branch office in Taiwan.
The Taiwan branch was transferred to an affiliated Company on January 31, 2001,
as described in the Notes to the Financial Statements. Beginning February 1,
2001, Taiwan's net income is not included in the Company's results of
operations.
Generally, policyholders who purchase the Company's products have the option of
investing in the Separate Accounts, segregated funds for which investment risks
are borne by the customer, or the Company's portfolio, referred to as the
General Account. The Company earns its profits through policy fees charged
primarily to Separate Account annuity and life policyholders and through the
interest spread for the GIC and certain annuity and individual life products.
Policy charges and fee income consist mainly of three types, sales charges or
loading fees on new sales, mortality and expense charges ("M&E") assessed on
fund balances, and mortality and related charges based on total life insurance
in-force business. Policyholder fund values are affected by net sales (sales
less withdrawals), changes in interest rates and investment returns. The
interest spread represents the difference between the investment income earned
on the Company's investment portfolio that supports the products and the amount
of interest credited to the policyholders' accounts. Products that generate
spread income primarily include the GIC product, general account individual life
insurance products, fixed annuities and the fixed-rate option of variable
annuities.
The Company's Changes in Financial Position and Results of Operations are
described below.
1. Analysis of Financial Condition
From December 31, 2001 to June 30, 2002 there was a decrease of $569 million in
total assets from $22,093 million to $21,524 million. Separate Account assets
declined $1,197 million mainly from market value declines. Fixed maturities
increased by $389 from investing policyholder deposits. Cash and cash
equivalents are $151 million higher than December 31, 2001 as a result of
increased securities lending activities. Reinsurance recoverable increased by
$81 million primarily as a result of a $37 million increase in reserves of the
transferred business of the Taiwan branch and an increase of $40 million
associated with a new reinsurance agreement that reinsures the variable life
insurance policies. The transfer of the Company's Taiwan branch accounted for
using coinsurance accounting requires the establishment of reinsurance
recoverable and the inclusion of the Taiwan branch future policy reserve
liabilities on the Company's statement of financial position.
During this six-month period, liabilities decreased by $584 million from $20,442
million to $19,858 million. Corresponding with the asset change, Separate
Account liabilities decreased by $1,197 million primarily from market value
declines. Other liabilities decreased by $71 million mainly due to the funding
of policy credits to the Separate Account policyholders, which had been accrued
in other liabilities at December 31, 2001. This decrease was partially offset by
an increase in reinsurance payables of $35 million primarily related to the new
variable life reinsurance contract. Policyholder account balances increased by
$415 million primarily from positive net sales (sales less withdrawals) of
annuity products with fixed rate options and the funding of policy credits. A
higher level of securities lending activity increased liabilities by $218
million. Future policy benefits increased $43 million mainly due to an increase
in reserves of the transferred Taiwan business.
10
2. Results of Operations
For the six months ended June 30, 2002 versus 2001
- ---------------------------------------------------
Net Income
Consolidated net income of $2.2 million for the first six months of 2002 was
$39.3 million lower than for the first six months of 2001. The decrease in net
income was caused primarily by an increase in the amortization of deferred
acquisition costs ("DAC") of $34.5 million contained in "General, Administrative
and Other Expenses". The decline in our Separate Account assets resulting from
unfavorable market conditions contributed to the increased amortization of DAC
reflecting a decrease in expected future gross profits. Continued deterioration
in market conditions may result in further increases in the amortization of DAC.
In addition, there was a $32.6 million change in realized investment
(losses)/gains resulting from the realization of losses on fixed maturities and
derivatives. During 2002, there were losses on sales and impairments of fixed
maturities due to credit related issues compared to gains on sales in the prior
year due to the favorable impact of declining interest rates. These items were
partially offset by lower taxes and higher policy charges and fee income, as
described below.
Revenues
Consolidated revenues decreased by $23.1 million, from $467.4 million to $444.3
million. As discussed above, realized losses on investments decreased revenues
by $32.6 million. The decrease consists of $20.3 million of increased credit
related losses on fixed maturities from sales and impairments and $12.3 million
in derivative and other losses. The derivative losses were mainly from Treasury
futures as the Company is in a net short position in a declining interest rate
environment. Net investment income is lower by $11.0 million due to lower yields
available on the reinvestment of fixed maturities and lower interest rates for
short-term investments. The fixed maturity portfolio yield declined from 7.22%
for the period ended June 30, 2001 to 6.63% for the period ended June 30, 2002.
Premiums decreased by $6.1 million mainly due to the transfer of the Taiwan
branch as of January 31, 2001, and the subsequent ceding of premiums which
caused a $7.5 million decline in premiums. This was partially offset by an
increase in domestic life insurance premiums of $2.1 million. The increase in
domestic life premiums was a result of higher term insurance sales and renewals
of the Term Essential and Term Elite products of $21.6 million partially offset
by lower extended term premiums. Extended term policies represent term insurance
the Company issued, under policy provisions to customers who previously had
lapsing variable life insurance with the Company.
These decreases were partially offset by increases in policy charges and fee
income and other income. Policy charges and fee income, consisting primarily of
mortality and expense ("M&E"), loading and other insurance charges assessed on
General and Separate Account policyholder fund balances, increased by $18.4
million. The increase was a result of a $24.6 million increase for domestic
individual life products offset by a $6.2 million decrease for annuity products.
Mortality and sales based loading charges for life products increased as a
result of growth of the in-force business. The in-force business (excluding term
insurance) grew to $61.7 billion at June 30, 2002 from $56.1 billion at June 30,
2001 and $58.7 billion at December 31, 2001. In contrast, annuity fees are
mainly asset based fees which are dependent on the fund balances which are
affected by net sales as well as asset depreciation or appreciation on the
underlying investment funds in which the customer has the option to invest.
Annuity fund balances have declined as a result of unfavorable valuation changes
in the securities market over the past two years. Other income increased $6.9
million primarily from expense allowance recoveries from the new variable life
reinsurance contract.
Benefits and Expenses
Policyholder benefits increased by $1.4 million from increased death and
surrender benefits offset by decreases in reserve provisions for the Taiwan
branch and domestic life insurance reserves. Death benefits were higher by $18.2
million due to higher death claims of $11.8 million consistent with the increase
of the life insurance in-force business and higher guaranteed minimum death
benefits for annuity products of $6.4 million. There were also increased
benefits paid on surrenders of reduced paid up policies of $3.3 million. Taiwan
benefits and reserves were $5.9 million lower due to the transfer of the branch
as of January 31, 2001. Domestic life reserves decreased $14.7 million primarily
as a result of the lower amount of extended term insurance. This was partially
offset by increases for term insurance reserves due to sales and renewals of the
Term Essential and Term Elite products.
Interest credited to policyholder account balances decreased by $1.4 million
despite growth in policyholder account balances as interest crediting rates were
decreased in reaction to the declining investment portfolio yields.
General, administrative, and other expenses increased $30.5 million from the
prior year. The primary reason for the increase is an increase in DAC
amortization of $34.5 million, as described above.
11
For the three months ended June 30, 2002 versus 2001
- ----------------------------------------------------
Net income
Consolidated net income for the three months ended June 30, 2002 is $30.2
million lower than the prior year comparable three-month period. The largest
factor in this decrease is higher DAC amortization of $45.2 million ($29 million
after tax) attributable to unfavorable market conditions.
Revenues
Consolidated revenues of $220.2 are comparable to the prior year as decreases in
realized gains were offset by increases in policy charges and other income.
Realized losses on investments increased by $15.5 million as a result of
increased derivative losses of $11.6 million and credit related sales and
impairments of fixed maturities of $3.9 million. The derivative losses were
mainly from Treasury futures as the Company is in a net short futures position
in a declining interest rate environment. Policy charges and fee income
increased $10.5 million due to an increase from domestic individual life
products of $13.0 million from continued growth of the in-force business
partially offset by a decrease in individual annuity charges due to declining
fund values as a result of the securities market. Other income increased $6.4
million as a result of expense allowance recoveries on the new reinsurance
contract.
Benefits and Expenses
Policyholder benefits are $0.5 million higher due to higher death claims of $8.1
million from growth in the life insurance in-force business and higher minimum
death benefit guarantees for annuity products of $2.1 million. Offsetting this
is a decrease in reserves of $9.7 million from decreases to extended term
premium reserves partially offset by increases for term insurance reserves.
General, administrative and other expenses increased $39.7 million. As mentioned
above, the largest factor was the increase in DAC amortization of $45.2 million.
3. Liquidity and Capital Resources
Principal cash flow sources are investment and fee income, investment maturities
and sales, and premiums and fund deposits. These cash inflows may be
supplemented by financing activities through other Prudential affiliates.
Cash outflows consist principally of benefits, claims and amounts paid to
policyholders in connection with policy surrenders, withdrawals and net policy
loan activity. Uses of cash also include commissions, general and administrative
expenses, and purchases of investments. Liquidity requirements associated with
policyholder obligations are monitored regularly so that the Company can manage
cash inflows to match anticipated cash outflow requirements.
The Company believes that cash flow from operations together with proceeds from
scheduled maturities and sales of fixed maturity investments, are adequate to
satisfy liquidity requirements based on the Company's current liability
structure.
The Company had $21.5 billion of assets at June 30, 2002 compared to $22.1
billion at December 31, 2001, of which $13.7 billion and $14.9 billion were held
in Separate Accounts at June 30, 2002 and December 31, 2001, respectively, under
variable life insurance policies and variable annuity contracts. The remaining
assets consisted primarily of investments and deferred policy acquisition costs.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company's exposure to market risks and the way these risks are managed, are
summarized in Item 7a of the 2001 Form 10K.
12
PART II
Item 2. Changes in Securities and Use of Proceeds.
- --------------------------------------------------
(d) Information required by Item 701(f) of Regulation S-K:
The information below pertains to modified guaranteed annuity contracts
issued by the Company in two distinct variable annuity products,
Discovery Preferred Variable Annuity and Discovery Select Variable
Annuity. However, because the modified guaranteed annuity option of
each of these products is identical, the Company has aggregated the
registration of these securities.
(1) The original effective date of the Registration Statement of
the Company for the Discovery Preferred Variable Annuity on
Form S-1 was declared effective on November 27, 1995
(Registration No. 33-61143). The Discovery Select prospectus
was added through filings under Rule 424 of the Securities Act
of 1993. The registration statement continues to be effective
through annual amendments, the most recent filed April 24,
2001 and declared effective May 1, 2001.
(2) Offering commenced immediately upon effectiveness of the
registration statement.
(3) Not applicable.
(4) (i) The offering has not been terminated.
(ii) The managing underwriter of the offering is
Prudential Investment Management Services LLC.
(iii) Market-Value Adjustment Annuity Contracts (also known as
modified guaranteed annuity contracts).
(iv) Securities registered and sold for the account of the
Company:
Amount registered*: $ 500,000,000
Aggregate price of the offering amount registered: $ 500,000,000
Amount sold*: $ 383,729,442
Aggregate offering price of amount sold to date: $ 383,729,442
* Securities not issued in predetermined units
No securities have been registered for the account of
any selling security holder.
(v) Expenses associated with the issuance of the securities:
Underwriting discounts and commissions** $ 11,312,451
Other expenses** $ 22,610,603
-------------
Total $ 33,923,054
** Amounts are estimated and are paid to affiliated parties.
(vi) Net offering proceeds: $ 349,806,388
(vii) Not applicable.
(viii) Not applicable.
13
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
3(i)(a) The Articles of Incorporation of Pruco Life Insurance Company
(as amended through October 19, 1993) are incorporated by
reference to the initial Registration Statement on Form S-6 of
Pruco Life Variable Appreciable Account as filed July 2, 1996,
Registration No. 333-07451.
3(ii) By-Laws of Pruco Life Insurance Company (as amended through
May 6, 1997) are incorporated by reference to Form 10-Q as
filed by the Company on August 15, 1997.
4(a) Modified Guaranteed Annuity Contract is incorporated by
reference to the Company's Registration Statement on Form S-1,
Registration No. 33-37587 as filed November 2, 1990.
4(b) Market-Value Adjustment Annuity Contract is incorporated by
reference to the Company's registration statement on Form S-3,
Registration No. 33-61143, as filed on April 12, 2002.
(b) Reports on Form 8K
------------------
None
14
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY
(Registrant)
Signature Title Date
- --------- ----- ----
/s/ Andrew J. Mako Executive Vice President August 14, 2002
- ------------------------------- (Authorized Signatory)
Andrew J. Mako
/s/ William J. Eckert, IV Vice President and August 14, 2002
- ------------------------------- Chief Accounting Officer
William J. Eckert, IV (Principal Accounting Officer)
15
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Financial Position
December 31, 2001 and 2000 (In Thousands)
- --------------------------------------------------------------------------------
2001 2000
----------------- -----------------
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 2001: $3,935,472;
2000:$3,552,244) $ 4,024,893 $ 3,561,521
Held to maturity, at amortized cost (fair value, 2000: $320,634) - 324,546
Equity securities - available for sale, at fair value (cost, 2001: $173;
2000: $13,446) 375 10,804
Commercial loans on real estate 8,190 9,327
Policy loans 874,065 855,374
Short-term investments 215,610 202,815
Other long-term investments 84,342 83,738
---------- ------------
Total investments 5,207,475 5,048,125
Cash and cash equivalents 374,185 453,071
Deferred policy acquisition costs 1,159,830 1,132,653
Accrued investment income 77,433 82,297
Reinsurance recoverable 300,697 31,568
Receivables from affiliates 33,074 51,586
Other assets 20,134 29,445
Separate Account assets 14,920,584 16,230,264
---------- ------------
TOTAL ASSETS $22,093,412 $ 23,059,009
=========== ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 3,947,690 $ 3,646,668
Future policy benefits and other policyholder liabilities 808,230 702,862
Cash collateral for loaned securities 190,022 185,849
Securities sold under agreements to repurchase 80,715 104,098
Income taxes payable 266,096 235,795
Other liabilities 228,596 120,891
Separate Account liabilities 14,920,584 16,230,264
---------- ------------
Total liabilities 20,441,933 21,226,427
---------- ------------
Contingencies (See Footnote 12)
Stockholder's Equity
Common stock, $10 par value;
1,000,000 shares, authorized;
250,000 shares, issued and outstanding 2,500 2,500
Paid-in-capital 466,748 466,748
Retained earnings 1,147,665 1,361,924
Accumulated other comprehensive income (loss):
Net unrealized investment gains 34,718 4,730
Foreign currency translation adjustments (152) (3,320)
---------- ------------
Accumulated other comprehensive income 34,566 1,410
---------- ------------
Total stockholder's equity 1,651,479 1,832,582
---------- ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $22,093,412 $ 23,059,009
=========== ============
See Notes to Consolidated Financial Statements
B-1
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Operations and Comprehensive Income
Years Ended December 31, 2001, 2000 and 1999 (In Thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
-------------- --------------- ---------------
REVENUES
Premiums $ 90,868 $ 121,921 $ 98,976
Policy charges and fee income 490,185 474,861 414,425
Net investment income 343,638 337,919 276,821
Realized investment losses, net (60,476) (20,679) (32,545)
Asset management fees 7,897 71,160 60,392
Other income 4,962 2,503 1,397
---------- ----------- -----------
Total revenues 877,074 987,685 819,466
---------- ----------- -----------
BENEFITS AND EXPENSES
Policyholders' benefits 256,080 248,063 205,042
Interest credited to policyholders' account balances 195,966 171,010 136,852
General, administrative and other expenses 382,701 410,684 392,041
---------- ----------- -----------
Total benefits and expenses 834,747 829,757 733,935
---------- ----------- -----------
Income from operations before income taxes 42,327 157,928 85,531
---------- ----------- -----------
Income tax (benefit) provision (25,255) 54,432 29,936
---------- ----------- -----------
NET INCOME 67,582 103,496 55,595
---------- ----------- -----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities, net of
reclassification adjustment 29,988 33,094 (38,266)
Foreign currency translation adjustments 3,168 (993) (742)
---------- ----------- -----------
Other comprehensive income (loss) 33,156 32,101 (39,008)
---------- ----------- -----------
TOTAL COMPREHENSIVE INCOME $ 100,738 $ 135,597 $ 16,587
=========== ============ ===========
See Notes to Consolidated Financial Statements
B-2
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Changes in Stockholder's Equity
Years Ended December 31, 2001, 2000 and 1999 (In Thousands)
- --------------------------------------------------------------------------------
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
Common stock capital earnings income (loss) equity
------------ -------- -------- ------------- --------------
Balance, January 1, 1999 $ 2,500 $ 439,582 $ 1,202,833 $ 8,317 $ 1,653,232
Net income - - 55,595 - 55,595
Change in foreign
currency translation
adjustments, net of taxes - - - (742) (742)
Change in net unrealized
investment losses, net of
reclassification adjustment and
taxes - - - (38,266) (38,266)
--------- ---------- ------------ ------------ -------------
Balance, December 31, 1999 2,500 439,582 1,258,428 (30,691) 1,669,819
Net income - - 103,496 - 103,496
Contribution from Parent - 27,166 - - 27,166
Change in foreign
currency translation
adjustments, net of taxes - - - (993) (993)
Change in net unrealized
investment losses, net of
reclassification adjustment and
taxes - - - 33,094 33,094
--------- ---------- ------------ ------------ -------------
Balance, December 31, 2000
2,500 466,748 1,361,924 1,410 1,832,582
Net income - - 67,582 - 67,582
Policy credits issued to eligible
policyholders - - (128,025) - (128,025)
Dividends to Parent - - (153,816) - (153,816)
Change in foreign currency
translation adjustments, net of
taxes - - - 3,168 3,168
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - 29,988 29,988
--------- ---------- ------------ ------------ -------------
Balance, December 31, 2001 $ 2,500 $ 466,748 $ 1,147,665 $ 34,566 $ 1,651,479
========= ========== ============ ============ =============
See Notes to Consolidated Financial Statements
B-3
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999 (In Thousands)
- --------------------------------------------------------------------------------
2001 2000 1999
-------------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 67,582 $ 103,496 $ 55,595
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (54,970) (72,275) (83,961)
Interest credited to policyholders' account balances 195,966 171,010 136,852
Realized investment losses, net 60,476 20,679 32,545
Amortization and other non-cash items (49,594) (48,141) 75,037
Change in:
Future policy benefits and other policyholders' 105,368 73,340 100,743
liabilities
Accrued investment income 4,864 (13,380) (7,803)
Receivable from/Payable to affiliate 18,512 (24,907) (66,081)
Policy loans (40,645) (63,022) (25,435)
Deferred policy acquisition costs (100,281) (69,868) (201,072)
Income taxes payable/receivable 38,839 90,195 (47,758)
Other, net (38,114) 51,011 18,974
-------------- ----------- ------------
Cash Flows From (Used in) Operating Activities 208,003 218,138 (12,364)
-------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 2,653,798 2,273,789 3,076,848
Held to maturity - 64,245 45,841
Equity securities 482 1,198 5,209
Commercial loans on real estate 1,137 1,182 6,845
Other long-term investments - 15,039 385
Payments for the purchase of:
Fixed maturities:
Available for sale (2,961,861) (2,782,541) (3,452,289)
Held to maturity - - (24,170)
Equity securities (184) (11,134) (5,110)
Other long-term investments (130) (6,917) (39,094)
Cash collateral for loaned securities, net 4,174 98,513 14,000
Securities sold under agreement to repurchase, net (23,383) 82,947 (28,557)
Short-term investments, net (12,766) (118,418) 92,199
-------------- ----------- ------------
Cash Flows Used In Investing Activities (338,733) (382,097) (307,893)
-------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account deposits 1,456,668 2,409,399 3,457,158
Policyholders' account withdrawals (1,313,300) (1,991,363) (3,091,565)
Cash dividend to Parent (26,048) - -
Cash provided to affiliate (65,476) - -
-------------- ----------- ------------
Cash Flows (Used in) From Financing Activities 51,844 418,036 365,593
-------------- ----------- ------------
Net increase in Cash and cash equivalents (78,886) 254,077 45,336
Cash and cash equivalents, beginning of year 453,071 198,994 153,658
-------------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 374,185 $ 453,071 $ 198,994
============== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes (received) paid $ (46,021) $ (14,832) $ 55,144
-------------- ----------- ------------
NON-CASH TRANSACTIONS DURING THE YEAR
Dividend paid with fixed maturities $ 81,952 $ - $ -
-------------- ----------- ------------
Taiwan branch dividend paid with net assets/liabilities $ 45,816 $ - $ -
-------------- ----------- ------------
Policy credits issued to eligible policyholders $ 128,025 $ - $ -
-------------- ----------- ------------
Contribution from Parent $ - $ 27,166 $ -
-------------- ----------- ------------
See Notes to Consolidated Financial Statements
B-4
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS
Pruco Life Insurance Company ("the Company") is a stock life insurance company,
organized in 1971 under the laws of the state of Arizona. The Company is
licensed to sell individual life insurance, variable life insurance, term life
insurance, variable and fixed annuities, and a non-participating guaranteed
interest contract ("GIC") called Prudential Credit Enhanced GIC ("PACE") in the
District of Columbia, Guam and in all states and territories except New York.
The Company also had marketed individual life insurance through its branch
office in Taiwan. The branch office was transferred to an affiliated Company on
January 31, 2001, as described in Footnote 14.
The Company has one wholly owned subsidiary, Pruco Life Insurance Company of New
Jersey ("PLNJ"). PLNJ is a stock life insurance company organized in 1982 under
the laws of the state of New Jersey. It is licensed to sell individual life
insurance, variable life insurance, term life insurance, fixed and variable
annuities only in the states of New Jersey and New York. Another wholly owned
subsidiary, The Prudential Life Insurance Company of Arizona ("PLICA") was
dissolved on September 30, 2000. All assets and liabilities were transferred to
the Company. PLICA had no new business sales in 2000 or 1999.
The Company is a wholly owned subsidiary of The Prudential Insurance Company of
America ("Prudential"), an insurance company founded in 1875 under the laws of
the state of New Jersey. On December 18, 2001 ("the date of demutualization")
Prudential converted from a mutual life insurance company to a stock life
insurance company and became an indirect wholly owned subsidiary of Prudential
Financial, Inc. (the "Holding Company"). The demutualization was completed in
accordance with Prudential's Plan of Reorganization, which was approved by the
Commissioner of the New Jersey Department of Banking and Insurance in October
2001.
Prudential intends to make additional capital contributions to the Company, as
needed, to enable it to comply with its reserve requirements and fund expenses
in connection with its business. Generally, Prudential is under no obligation to
make such contributions and its assets do not back the benefits payable under
the Company's policyholder contracts. During 2000, a capital contribution of
$27.2 million resulted from the forgiveness of an intercompany receivable.
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products, and individual and group annuities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). The Company has extensive transactions and relationships with
Prudential and other affiliates, as more fully described in Footnote 14. Due to
these relationships, it is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, in particular deferred policy acquisition costs ("DAC")
and future policy benefits, and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Investments
Fixed maturities classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the intent and ability to
hold to maturity are stated at amortized cost and classified as "held to
maturity". The amortized cost of fixed maturities is written down to estimated
fair value if a decline in value is considered to be other than temporary.
Unrealized gains and losses on fixed maturities "available for sale", including
the effect on deferred policy acquisition costs and policyholders' account
balances that would result from the realization of unrealized gains and losses
are included in a separate component of equity, "Accumulated other comprehensive
income (loss)", net of income taxes.
Equity securities, available for sale, comprised of common and non-redeemable
preferred stock, are carried at estimated fair value. The associated unrealized
gains and losses, the effects on deferred policy acquisition costs and on
policyholders' account balances that would result from the realization of
unrealized gains and losses, are included in a separate component of equity,
"Accumulated other comprehensive income (loss)", net of income taxes.
B-5
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Commercial loans on real estate are stated primarily at unpaid principal
balances, net of unamortized discounts and an allowance for losses. The
allowance for losses includes a loan specific reserve for impaired loans and a
portfolio reserve for incurred but not specifically identified losses. Impaired
loans include those loans for which it is probable that all amounts due
according to the contractual terms of the loan agreement will not be collected.
Impaired loans are measured at the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the fair value of the
collateral if the loan is collateral dependent. Interest received on impaired
loans, including loans that were previously modified in a troubled debt
restructuring, is either applied against the principal or reported as revenue,
according to management's judgment as to the collectibility of principal.
Management discontinues accruing interest on impaired loans after the loans are
90 days delinquent as to principal or interest, or earlier when management has
serious doubts about collectibility. When a loan is recognized as impaired, any
accrued but uncollectible interest is reversed against interest income of the
current period. Generally, a loan is restored to accrual status only after all
delinquent interest and principal are brought current and, in the case of loans
where the payment of interest has been interrupted for a substantial period, a
regular payment performance has been established. The portfolio reserve for
incurred but not specifically identified losses considers the Company's past
loan loss experience, the current credit composition of the portfolio,
historical credit migration, property type diversification, default and loss
severity statistics and other relevant factors.
Policy loans are carried at unpaid principal balances.
Short-term investments, consisting of highly liquid debt instruments other than
those held in "Cash and cash equivalents," with a maturity of twelve months or
less when purchased, are carried at amortized cost, which approximates fair
value.
Other long-term investments represent the Company's investments in joint
ventures and partnerships in which the Company does not exercise control,
derivatives held for purposes other than trading, and investments in the
Company's own Separate Accounts. Joint ventures and partnerships are recorded
using the equity method of accounting, reduced for other than temporary declines
in value. The Company's investment in the Separate Accounts is carried at
estimated fair value. The Company's net income from investments in joint
ventures and partnerships is generally included in "Net investment income."
Realized investment losses, net are computed using the specific identification
method. Costs of fixed maturity and equity securities are adjusted for
impairments considered to be other than temporary. Impairment adjustments are
included in "Realized investment gains (losses), net." Factors considered in
evaluating whether a decline in value is other than temporary are: 1) whether
the decline is substantial; 2) the Company's ability and intent to retain the
investment for a period of time sufficient to allow for an anticipated recovery
in value; 3) the duration and extent to which the market value has been less
than cost; and 4) the financial condition and near-term prospects of the issuer.
Cash and cash equivalents include cash on hand, amounts due from banks, money
market instruments, and other debt issues with a maturity of three months or
less when purchased.
Deferred policy acquisition costs
The costs that vary with and that are related primarily to the production of new
insurance and annuity business are deferred to the extent that they are deemed
recoverable from future profits. Such costs include commissions, costs of policy
issuance and underwriting, and variable field office expenses. Deferred policy
acquisition costs are subject to recognition testing at the time of policy issue
and recoverability and premium deficiency testing at the end of each accounting
period. Deferred policy acquisition costs, for certain products, are adjusted
for the impact of unrealized gains or losses on investments as if these gains or
losses had been realized, with corresponding credits or charges included in
"Accumulated other comprehensive income (loss)."
Policy acquisition costs related to interest-sensitive and variable life
products and certain investment-type products are deferred and amortized over
the expected life of the contracts (periods ranging from 25 to 30 years) in
proportion to estimated gross profits arising principally from investment
results, mortality and expense margins, and surrender charges based on
historical and anticipated future experience, which is updated periodically. The
effect of changes to estimated gross profits on unamortized deferred acquisition
costs is reflected in "General and administrative expenses" in the period such
estimated gross profits are revised.
B-6
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred policy acquisition costs related to non-participating term insurance
are amortized over the expected life of the contracts in proportion to premium
income. For guaranteed investment contracts, acquisition costs are expensed as
incurred.
Prudential and the Company have offered programs under which policyholders, for
a selected product or group of products, can exchange an existing policy or
contract issued by Prudential or the Company for another form of policy or
contract. These transactions are known as internal replacements. If the new
policies have terms that are substantially similar to those of the earlier
policies, the DAC is retained with respect to the new policies and amortized
over the life of the new policies. If the terms of the new policies are not
substantially similar to those of the former policy, the unamortized DAC on the
surrendered policies is immediately charged to expense.
Securities loaned
Securities loaned are treated as financing arrangements and are recorded at the
amount of cash received as collateral. The Company obtains collateral in an
amount equal to 102% and 105% of the fair value of the domestic and foreign
securities, respectively. The Company monitors the market value of securities
loaned on a daily basis with additional collateral obtained as necessary.
Non-cash collateral received is not reflected in the consolidated statements of
financial position because the debtor typically has the right to redeem the
collateral on short notice. Substantially all of the Company's securities loaned
are with large brokerage firms.
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase are treated as financing
arrangements and are carried at the amounts at which the securities will be
subsequently reacquired, including accrued interest, as specified in the
respective agreements. Assets to be repurchased are the same, or substantially
the same, as the assets transferred and the transferor, through right of
substitution, maintains the right and ability to redeem the collateral on short
notice. The market value of securities to be repurchased is monitored and
additional collateral is obtained, where appropriate, to protect against credit
exposure.
Securities lending and securities repurchase agreements are used to generate net
investment income and facilitate trading activity. These instruments are
short-term in nature (usually 30 days or less). Securities loaned are
collateralized principally by U.S. Government and mortgage-backed securities.
Securities sold under repurchase agreements are collateralized principally by
cash. The carrying amounts of these instruments approximate fair value because
of the relatively short period of time between the origination of the
instruments and their expected realization.
Separate Account Assets and Liabilities
Separate Account assets and liabilities are reported at estimated fair value and
represent segregated funds which are invested for certain policyholders and
other customers. The assets consist of common stocks, fixed maturities, real
estate related securities, and short-term investments. The assets of each
account are legally segregated and are not subject to claims that arise out of
any other business of the Company. Investment risks associated with market value
changes are borne by the customers, except to the extent of minimum guarantees
made by the Company with respect to certain accounts. The investment income and
gains or losses for Separate Accounts generally accrue to the policyholders and
are not included in the Consolidated Statements of Operations and Comprehensive
Income. Mortality, policy administration and surrender charges on the accounts
are included in "Policy charges and fee income".
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life Modified Guaranteed Annuity
Account. The Pruco Life Modified Guaranteed Annuity Account is a non-unitized
Separate Account, which funds the Modified Guaranteed Annuity Contract and the
Market Value Adjustment Annuity Contract. Owners of the Pruco Life Modified
Guaranteed Annuity and the Market Value Adjustment Annuity Contracts do not
participate in the investment gain or loss from assets relating to such
accounts. Such gain or loss is borne, in total, by the Company.
Contingencies
Amounts related to contingencies are accrued if it is probable that a liability
has been incurred and an amount is reasonably estimable. Management evaluates
whether there are incremental legal or other costs directly associated with the
ultimate resolution of the matter that are reasonably estimable and, if so, they
are included in the accrual.
B-7
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Insurance Revenue and Expense Recognition
Premiums from insurance policies are generally recognized when due. Benefits are
recorded as an expense when they are incurred. For traditional life insurance
contracts, a liability for future policy benefits is recorded using the net
level premium method. For individual annuities in payout status, a liability for
future policy benefits is recorded for the present value of expected future
payments based on historical experience.
Amounts received as payment for interest-sensitive life, individual annuities
and guaranteed investment contracts are reported as deposits to "Policyholders'
account balances". Revenues from these contracts reflected as "Policy charges
and fee income" consist primarily of fees assessed during the period against the
policyholders' account balances for mortality charges, policy administration
charges and surrender charges. Benefits and expenses for these products include
claims in excess of related account balances, expenses of contract
administration, interest credited and amortization of deferred policy
acquisition costs.
Premiums, benefits and expenses are stated net of reinsurance ceded to other
companies. Estimated reinsurance recoverables and the cost of reinsurance are
recognized over the life of the reinsured policies using assumptions consistent
with those used to account for the underlying policies.
Foreign Currency Translation Adjustments
Assets and liabilities of the Taiwan branch are translated to U.S. dollars at
the exchange rate in effect at the end of the period. Revenues, benefits and
other expenses are translated at the average rate prevailing during the period.
Cumulative translation adjustments arising from the use of differing exchange
rates from period to period are charged or credited directly to "Other
comprehensive income (loss)." The cumulative effect of changes in foreign
exchange rates are included in "Accumulated other comprehensive income (loss)".
Asset Management Fees
Through December 31, 2000, the Company received asset management fee income from
policyholder account balances invested in The Prudential Series Funds ("PSF"),
which are a portfolio of mutual fund investments related to the Company's
Separate Account products (refer to Note 14). In addition, the Company receives
fees from policyholder account balances invested in funds managed by companies
other than Prudential. Asset management fees are recognized as income as earned.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value of securities or
commodities. Derivative financial instruments used by the Company include swaps,
futures, forwards and option contracts and may be exchange-traded or contracted
in the over-the-counter market. See Note 11 for a discussion of the Company's
use of derivative financial instruments and the related accounting and reporting
treatment for such instruments.
Income Taxes
The Company and its subsidiary are members of the consolidated federal income
tax return of Prudential and file separate company state and local tax returns.
Pursuant to the tax allocation arrangement with Prudential, total federal income
tax expense is determined on a separate company basis. Members with losses
record tax benefits to the extent such losses are recognized in the consolidated
federal tax provision. Deferred income taxes are generally recognized, based on
enacted rates, when assets and liabilities have different values for financial
statement and tax reporting purposes. A valuation allowance is recorded to
reduce a deferred tax asset to that portion that is expected to be realized.
New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--a replacement of FASB Statement No. 125." The Company has adopted
the provisions of SFAS No. 140 relating to transfers and extinguishments of
liabilities which are effective for periods occurring after March 31, 2001. The
adoption did not have an effect on the results of operations of the Company.
B-8
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
Company account for all business combinations in the scope of the statement
using the purchase method. SFAS No. 142 requires that an intangible asset
acquired either individually or with a group of other assets shall initially be
recognized and measured based on fair value. An intangible asset with a finite
life is amortized over its useful life to the reporting entity; an intangible
asset with an indefinite useful life, including goodwill, is not amortized. All
intangible assets shall be tested for impairment in accordance with the
statement. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001; however, goodwill and intangible assets acquired after June 30, 2001
are subject immediately to the nonamortization and amortization provisions of
this statement. As of December 31, 2001, The Company does not have any goodwill
or intangible assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 eliminated the requirement that
discontinued operations be measured at net realizable value or that entities
include losses that have not yet occurred. SFAS No. 144 eliminated the exception
to consolidation for a subsidiary for which control is likely to be temporary.
SFAS No. 144 requires that long-lived assets that are to be disposed of by sale
be measured at the lower of book value or fair value less cost to sell. An
impairment for assets that are not considered to be disposed of is recognized
only if the carrying amounts of long-lived assets are not recoverable and exceed
their fair values. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations and cash flows
that (1) can be distinguished from the rest of the entity and (2) will be
eliminated from the ongoing operations of the entity in a disposal transaction.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, its provisions are to be
applied prospectively.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to the
current year presentation.
B-9
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS
Fixed Maturities and Equity Securities:
The following tables provide additional information relating to fixed maturities
and equity securities as of December 31:
2001
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------- -------------- -------------- --------------
(In Thousands)
Fixed Maturities Available For Sale
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and
Agencies $ 303,606 $ 1,496 $ 1,648 $ 303,454
Foreign Government Bonds 27,332 2,122 - 29,454
Corporate Securities 3,594,386 116,186 28,834 3,681,738
Mortgage-backed Securities 10,148 160 61 10,247
---------- --------- -------- ----------
Total Fixed Maturities Available For Sale $3,935,472 $ 119,964 $ 30,543 $4,024,893
========== ========= ======== ==========
Equity Securities Available For Sale $ 173 $ 220 $ 18 $ 375
========== ========= ======== ==========
2000
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------- ------------ -------------- --------------
(In Thousands)
Fixed Maturities Available For Sale
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and
Agencies $ 309,609 $ 7,888 $ 17 $ 317,480
Foreign Government Bonds 136,133 8,093 520 143,706
Corporate Securities 3,075,023 43,041 49,538 3,068,526
Mortgage-backed Securities 31,479 330 0 31,809
---------- ------- ------- ----------
Total Fixed Maturities Available For Sale $3,552,244 $59,352 $50,075 $3,561,521
========== ======= ======= ==========
Fixed Maturities Held To Maturity
Corporate Securities $ 324,546 $ 1,500 $ 5,412 $ 320,634
---------- ------- ------- ----------
Total Fixed Maturities Held To Maturity $ 324,546 $ 1,500 $ 5,412 $ 320,634
========== ======= ======= ==========
Equity Securities Available For Sale $ 13,446 $ 197 $ 2,839 $ 10,804
========== ======= ======= ==========
B-10
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of fixed maturities, by contractual
maturities at December 31, 2001 is shown below:
Available For Sale
--------------------------------------
Amortized Estimated Fair
Cost Value
--------------- -------------------
(In Thousands)
Due in one year or less $ 802,235 $ 821,790
Due after one year through five years 1,841,097 1,885,535
Due after five years through ten years 1,026,709 1,045,693
Due after ten years 255,283 261,628
Mortgage-backed securities 10,148 10,247
----------- -----------
Total $ 3,935,472 $ 4,024,893
=========== ===========
Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations.
Proceeds from the sale of fixed maturities available for sale during 2001, 2000,
and 1999, were $2,380.4 million, $2,103.6 million, and $2,950.4 million,
respectively. Gross gains of $40.3 million, $15.3 million, $13.1 million, and
gross losses of $47.7 million, $33.9 million, and $31.1 million, were realized
on those sales during 2001, 2000, and 1999, respectively.
Proceeds from the maturity of fixed maturities available for sale during 2001,
2000, and 1999, were $273.4 million, $170.2 million, and $126.5 million,
respectively.
Writedowns for impairments which were deemed to be other than temporary for
fixed maturities were $53.5 million, $12.3 million, and $11.2 million, for the
years 2001, 2000 and 1999, respectively.
Due to the adoption of FAS 133, "Accounting for Derivative Instruments and
Hedging Activities", on January 1, 2001, the entire portfolio of fixed
maturities classified as held to maturity were transferred to the available for
sale category. The aggregate amortized cost of the securities was $324.5
million. Unrealized investment losses of $2.5 million, net of tax were recorded
in "Accumulated Other Comprehensive income (loss)" at the time of transfer.
During 2000, certain securities classified as held to maturity were transferred
to the available for sale portfolio. These actions were taken as a result of a
significant deterioration in credit worthiness. The aggregate amortized cost of
the securities transferred was $6.6 million. Gross unrealized investment losses
of $0.3 million were recorded in "Accumulated Other Comprehensive income (loss)"
at the time of transfer. Prior to transfer, impairments related to these
securities, if any, were included in "realized investment losses, net". During
the year ended December 31, 1999, there were no securities classified as held to
maturity that were transferred. During the years ended December 31, 2001, 2000,
and 1999, there were no securities classified as held to maturity that were
sold.
Commercial Loans on Real Estate
The Company's commercial loans on real estate were collateralized by the
following property types at December 31:
2001 2000
-------------------------- -------------------------
(In Thousands)
Retail Stores $ 4,623 56.4% $ 5,615 60.2%
Industrial Buildings 3,567 43.6% 3,712 39.8%
-------------------------- -------------------------
Net Carrying Value $ 8,190 100.0% $ 9,327 100.0%
========================== =========================
The concentration of commercial loans are in the states of Washington (47%), New
Jersey (44%), and North Dakota (9%).
B-11
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Special Deposits and Restricted Assets
Fixed maturities of $2.9 million and $8.0 million at December 31, 2001 and 2000,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws. Equity securities restricted as to sale were
$.2 million at December 31, 2001 and 2000, respectively.
Other Long-Term Investments
The Company's "Other long-term investments" of $84.3 million and $83.7 million
as of December 31, 2001 and 2000, respectively, are comprised of joint ventures
and limited partnerships, the Company's investment in the Separate Accounts and
certain derivatives for other than trading. Joint ventures and limited
partnerships totaled $35.8 million and $34.3 million at December 31, 2001 and
2000, respectively. The Company's share of net income from the joint ventures
was $1.6 million, $.9 million, and $.3 million, for the years ended December 31,
2001, 2000 and 1999, respectively, and is reported in "Net investment income."
The Company's investment in the Separate Accounts was $44.0 million and $46.9
million at December 31, 2001 and 2000, respectively.
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
2001 2000 1999
---------------- ----------------- ----------------
(In Thousands)
Fixed Maturities - Available For Sale $ 279,477 $ 237,042 $ 188,236
Fixed Maturities - Held To Maturity - 26,283 29,245
Equity Securities - Available For Sale 71 18 -
Commercial Loans On Real Estate 905 1,010 2,825
Policy Loans 48,149 45,792 42,422
Short-Term Investments and Cash Equivalents 24,253 29,582 19,208
Other 6,021 16,539 4,432
---------------- ----------------- ----------------
Gross Investment Income 358,876 356,266 286,368
Less: Investment Expenses (15,238) (18,347) (9,547)
---------------- ----------------- ----------------
Net Investment Income $ 343,638 $ 337,919 $ 276,821
================ ================= ================
Realized investment losses, net including charges for other than temporary
reductions in value, for the years ended December 31, were from the following
sources:
2001 2000 1999
---------------- ----------------- -----------------
(In Thousands)
Fixed Maturities - Available For Sale $ (60,924) $ (34,600) $ (29,192)
Fixed Maturities - Held To Maturity - (212) 102
Equity Securities - Available For Sale (56) 271 392
Derivatives (1,396) 15,039 (1,557)
Other 1,900 (1,177) (2,290)
---------------- ----------------- -----------------
Realized Investment Losses, Net $ (60,476) $ (20,679) $ (32,545)
================ ================= =================
Securities Pledged to Creditors
The Company pledges investment securities it owns to unaffiliated parties
through certain transactions including securities lending, securities sold under
agreements to repurchase, and futures contracts. At December 31, 2001 and 2000,
the carrying value of fixed maturities available for sale pledged to third
parties as reported in the Consolidated Statements of Financial Position were
$265.2 million and $287.8 million, respectively.
B-12
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on securities available for sale are
included in the Consolidated Statements of Financial Position as a component of
"Accumulated other comprehensive income (loss)." Changes in these amounts
include reclassification adjustments to exclude from "Other Comprehensive income
(loss)," those items that are included as part of "Net income" for a period that
also had been part of "Other Comprehensive income (loss)" in earlier periods.
The amounts for the years ended December 31, net of tax, are as follows:
Accumulated
Other
Comprehensive
Income (Loss)
Deferred Deferred Related To Net
Unrealized Policy Policyholders' Income Tax Unrealized
Gains(Losses) Acquisition Account (Liability) Investment
On Investments Costs Balances Benefit Gains(Losses)
------------------ ------------- -------------- ----------- ---------------
(In Thousands)
Balance, January 1, 1999 $ 25,169 $ (13,115) $ 2,680 $ (4,832) $ 9,902
Net investment gains(losses) on
investments arising during the period (138,268) - - 47,785 (90,483)
Reclassification adjustment for
gains(losses) included in net income 28,698 - - (9,970) 18,728
Impact of net unrealized investment
gains(losses) on deferred policy
acquisition costs - 53,407 - (16,283) 37,124
Impact of net unrealized investment
gains(losses) on policyholders' account - - (5,712) 2,077 (3,635)
balances
--------------- ------------ ----------- ---------- ------------
Balance, December 31, 1999 (84,401) 40,292 (3,032) 18,777 (28,364)
Net investment gains(losses) on
investments arising during the period 56,707 - - (21,539) 35,168
Reclassification adjustment for
gains(losses) included in net income 34,329 - - (13,039) 21,290
Impact of net unrealized investment
gains(losses) on deferred policy
acquisition costs - (39,382) - 14,177 (25,205)
Impact of net unrealized investment
gains(losses) on policyholders' account - - 2,877 (1,036) 1,841
balances
--------------- ------------ ----------- ---------- ------------
Balance, December 31, 2000 6,635 910 (155) (2,660) 4,730
Net investment gains(losses) on
investments arising during the period 22,007 - - (7,922) 14,085
Reclassification adjustment for
gains(losses) included in net income 60,980 - - (21,953) 39,027
Impact of net unrealized investment
gains(losses) on deferred policy
acquisition costs - (41,223) - 14,840 (26,383)
Impact of net unrealized investment
gains(losses) on policyholders' account
balances - - 5,092 (1,833) 3,259
--------------- ------------ ----------- ---------- ------------
Balance, December 31, 2001 $ 89,622 $ (40,313) $ 4,937 $ (19,528) $ 34,718
=============== ============ ============ ========== =============
B-13
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs as of and for
the years ended December 31, are as follows:
2001 2000 1999
(In Thousands)
Balance, Beginning of Year $ 1,132,653 $ 1,062,785 $ 861,713
Capitalization of Commissions, Sales and Issue Expenses 295,823 242,322 242,373
Amortization (156,092) (129,049) (96,451)
Change In Unrealized Investment (Gains) Losses (41,223) (39,382) 53,407
Foreign Currency Translation 1,773 (4,023) 1,743
Transfer of Taiwan branch balance to an affiliated company (73,104) - -
------------ --------------- --------------
Balance, End of Year $ 1,159,830 $ 1,132,653 $ 1,062,785
============ =============== ==============
5. POLICYHOLDERS' LIABILITIES
Future policy benefits and other policyholder liabilities at December 31, are as
follows:
2001 2000
-------- ----------
(In Thousands)
Life Insurance - Domestic $500,974 $ 429,825
Life Insurance - Taiwan 260,632 226,272
Individual Annuities 32,423 31,817
Group Annuities 14,201 14,948
-------- ----------
$808,230 $ 702,862
======== ==========
Life insurance liabilities include reserves for death benefits. Annuity
liabilities include reserves for annuities that are in payout status.
The following table highlights the key assumptions generally utilized in
calculating these reserves:
Product Mortality Interest Rate Estimation Method
- -------------------------------- ---------------------------- ---------------- --------------------------
Life Insurance - Domestic Generally rates guaranteed 2.5% to 11.25% Net level premium based
Variable and Interest-Sensitive in calculating cash on non-forfeiture
surrender values interest rate
Life Insurance - Domestic Term Best estimate plus a 6.5% to 6.75% Net level premium plus a
Insurance provision for adverse provision for adverse
deviation deviation
Life Insurance - International Generally the Taiwan 6.25% to 7.5% Net level premium plus a
standard table plus a provision for adverse
provision for adverse deviation.
deviation
Individual Annuities Mortality table varies 6.25% to 11.0% Present value of
based on the issue year of expected future payments
the contract. Current based on historical
table (for 1998 & later experience
issues) is the Annuity
2000 Mortality Table with
certain modifications
Group Annuities 1950 & 1971 Group Annuity 14.75% Present value of
Mortality Table with expected future payments
certain modifications based on historical
experience
B-14
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Policyholders' account balances at December 31, are as follows:
2001 2000
------------------- -------------------
(In Thousands)
Interest-Sensitive Life Contracts $ 1,976,710 $ 1,886,714
Individual Annuities 976,237 859,996
Guaranteed Investment Contracts 994,743 899,958
------------ ------------
$ 3,947,690 $ 3,646,668
============ ============
Policyholders' account balances for interest-sensitive life, individual
annuities, and guaranteed investment contracts are equal to policy account
values plus unearned premiums. The policy account values represent an
accumulation of gross premium payments plus credited interest less withdrawals,
expenses and mortality charges.
Certain contract provisions that determine the policyholder account balances are
as follows:
Product Interest Rate Withdrawal / Surrender Charges
- --------------------------------- ------------------------------------ ------------------------------------
Interest Sensitive Life Contracts 3.0% to 6.75% Various up to 10 years
Individual Annuities 3.0% to 16.0% 0% to 7% for up to 9 years
Guaranteed Investment Contracts 4.32% to 8.03% Subject to market value withdrawal
provisions for any funds withdrawn
other than for benefit responsive
and contractual payments
B-15
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. REINSURANCE
The Company participates in reinsurance, with Prudential and other companies, in
order to provide greater diversification of business, provide additional
capacity for future growth and limit the maximum net loss potential arising from
large risks. Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiary as the primary insurer. Ceded balances would represent a
liability of the Company in the event the reinsurers were unable to meet their
obligations to the Company under the terms of the reinsurance agreements. The
likelihood of a material reinsurance liability reassumed by the Company is
considered to be remote. The affiliated reinsurance agreements, including the
Company's reinsurance of all its Taiwanese business, are described further in
Note 14.
Reinsurance amounts included in the Consolidated Statements of Operations and
Comprehensive Income for the year ended December 31, are as follows:
2001 2000 1999
---------------- ---------------- ----------------
(In Thousands)
Domestic:
Reinsurance premiums ceded - affiliated $ (9,890) $ (7,641) $ (5,630)
Reinsurance premiums ceded - unaffiliated (13,399) (2,475) -
Policyholders' benefits ceded 10,803 3,558 3,140
Taiwan after the transfer:
Reinsurance premiums ceded -affiliated (82,433) - -
Policyholders' benefits ceded-affiliated 12,859 - -
Taiwan before the transfer:
Reinsurance premiums ceded - affiliated (107) (1,573) (1,252)
Reinsurance premiums ceded -unaffiliated (167) (2,830) (1,745)
Policyholders' benefits ceded 71 1,914 1,088
Reinsurance premiums assumed 162 1,671 1,778
Reinsurance recoverables, included in the Company's Consolidated Statements of
Financial Position at December 31, were as follows:
2001 2000
------------------- -----------------
(In Thousands)
Domestic Life Insurance - $ 11,014 $ 8,765
affiliated
Domestic Life Insurance - 14,850 2,037
unaffiliated
Other Reinsurance - affiliated 14,201 14,948
Taiwan Life Insurance-affiliated 260,632 -
Taiwan Life Insurance-unaffiliated - 5,818
----------- ----------
$ 300,697 $ 31,568
=========== ==========
The gross and net amounts of life insurance in force at December 31, were as
follows:
2001 2000 1999
---- ---- ----
(In Thousands)
Life Insurance Face Amount In Force $ 84,317,628 $ 66,327,999 $ 54,954,680
Ceded To Other Companies (25,166,264) (7,544,363) (2,762,319)
------------- ------------ ------------
Net Amount of Life Insurance In Force $ 59,151,364 $ 58,783,636 $ 52,192,361
============= ============ ============
B-16
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company had a non-contributory defined benefit pension plan that covered
substantially all of its Taiwanese employees. The pension plan was transferred
to an affiliate on January 31, 2001 as described in Note 14. This plan was
established as of September 30, 1998 and the projected benefit obligation and
related expenses at December 31, 2000 were not material to the Consolidated
Statements of Financial Position or results of operations for the years
presented. All other employee benefit costs are allocated to the Company by
Prudential in accordance with the service agreement described in Footnote 14.
8. INCOME TAXES
The components of income taxes for the years ended December 31, are as follows:
2001 2000 1999
----------- ------------ -----------
(In Thousands)
Current Tax Expense (Benefit):
U.S. $ (100,946) $ 8,588 $ (14,093)
State and Local 1,866 38 378
Foreign 124 35 15
---------- --------- ----------
Total (98,956) 8,661 (13,700)
---------- --------- ----------
Deferred Tax Expense (Benefit):
U.S. 76,155 43,567 42,320
State and Local (2,454) 2,204 1,316
---------- --------- ----------
Total 73,701 45,771 43,636
---------- --------- ----------
Total Income Tax Expense $ (25,255) $ 54,432 $ 29,936
========== ========== ==========
The income tax expense for the years ended December 31, differs from the amount
computed by applying the expected federal income tax rate of 35% to income from
operations before income taxes for the following reasons:
2001 2000 1999
------------ ----------- -----------
(In Thousands)
Expected Federal Income Tax Expense $ 14,814 $ 55,275 $ 29,936
State and Local Income Taxes (382) 1,457 1,101
Non taxable investment income (38,693) (6,443) (1,010)
Incorporation of Taiwan Branch (1,774) - -
Other 780 4,143 (91)
----------- ----------- -----------
Total Income Tax Expense $ (25,255) $ 54,432 $ 29,936
=========== =========== ===========
B-17
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES (continued)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
2001 2000
---------- ----------
(In Thousands)
Deferred Tax Assets
Insurance Reserves $ 43,317 $ 100,502
State Net Operating Losses 5,642 1,400
Other 9,309 8,610
---------- ----------
Deferred Tax Assets 58,268 110,512
---------- ----------
Deferred Tax Liabilities
Deferred Acquisition Costs 324,082 324,023
Net Unrealized Gains on Securities 32,264 2,389
Investments 20,644 19,577
---------- ----------
Deferred Tax Liabilities 376,990 345,989
---------- ----------
Net Deferred Tax Liability $ 318,722 $ 235,477
========== ==========
Management believes that based on its historical pattern of taxable income, the
Company and its subsidiary will produce sufficient income in the future to
realize its deferred tax assets. Adjustments to the valuation allowance will be
made if there is a change in management's assessment of the amount of the
deferred tax asset that is realizable. At December 31, 2001 and 2000, the
Company and its subsidiary had no federal operating loss carryforwards for tax
purposes. At December 31, 2001 and December 31, 2000, the Company had state
operating loss carryforwards for tax purposes of $369 million and $91 million,
which expire by 2021 and 2020, respectively.
The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1992. The Service has
examined the years 1993 through 1995. Discussions are being held with the
Service with respect to proposed adjustments. Management, however, believes
there are adequate defenses against, or sufficient reserves to provide for such
adjustments. The Service has completed its examination of 1996 and has begun its
examination of 1997 through 2000.
9. STATUTORY NET INCOME AND SURPLUS
The Company is required to prepare statutory financial statements in accordance
with accounting practices prescribed or permitted by the Arizona Department of
Insurance and the New Jersey Department of Banking and Insurance. Statutory
accounting practices primarily differ from GAAP by charging policy acquisition
costs to expense as incurred, establishing future policy benefit liabilities
using different actuarial assumptions and valuing investments, deferred taxes,
and certain assets on a different basis.
Statutory net income (loss) of the Company amounted to $71.5 million, $(50.5)
million, and $(82.3) million for the years ended December 31, 2001, 2000, and
1999, respectively. Statutory surplus of the Company amounted to $728.7 million
and $849.6 million at December 31, 2001 and 2000, respectively.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance ("Codification"), which replaces the current Accounting
Practices and Procedures manual as the NAIC's primary guidance on statutory
accounting as of January 1, 2001. Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
certain areas. The Company has adopted the Codification guidance effective
January 1, 2001. As a result of these changes, the Company reported an increase
to statutory surplus of $88 million, primarily relating to the recognition of
deferred tax assets.
B-18
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using available
market information and by applying valuation methodologies. Considerable
judgment is applied in interpreting data to develop the estimates of fair value.
Estimated fair values may not be realized in a current market exchange. The use
of different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair values. The following methods and
assumptions were used in calculating the estimated fair values (for all other
financial instruments presented in the table, the carrying value approximates
estimated fair value).
Fixed maturities and Equity securities
Estimated fair values for fixed maturities and equity securities, other than
private placement securities, are based on quoted market prices or estimates
from independent pricing services. Generally, fair values for private placement
securities are estimated using a discounted cash flow model which considers the
current market spreads between the U.S. Treasury yield curve and corporate bond
yield curve, adjusted for the type of issue, its current credit quality and its
remaining average life. The estimated fair value of certain non-performing
private placement securities is based on amounts estimated by management.
Commercial loans on real estate
The estimated fair value of the portfolio of commercial loans on real estate is
primarily based upon the present value of the expected future cash flows
discounted at the appropriate U.S. Treasury rate, adjusted for the current
market spread for a similar quality loan.
Policy loans
The estimated fair value of policy loans is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan repayment
patterns.
Investment contracts
For guaranteed investment contracts, estimated fair values are derived using
discounted projected cash flows, based on interest rates being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued. For individual deferred annuities and other deposit
liabilities, fair value approximates carrying value.
Derivative financial instruments
Refer to Note 11 for the disclosure of fair values on these instruments.
B-19
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31:
2001 2000
----------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------------- ----------------- --------------- ---------------
(In Thousands)
Financial Assets:
Fixed Maturities: Available For Sale $ 4,024,893 $ 4,024,893 $ 3,561,521 $ 3,561,521
Fixed Maturities: Held To Maturity - - 324,546 320,634
Equity Securities 375 375 10,804 10,804
Commercial Loans on Real Estate 8,190 10,272 9,327 10,863
Policy Loans 874,065 934,203 855,374 883,460
Short-Term Investments 215,610 215,610 202,815 202,815
Cash and Cash Equivalents 374,185 374,185 453,071 453,071
Separate Account Assets 14,920,584 14,920,584 16,230,264 16,230,264
Financial Liabilities:
Investment Contracts 2,003,265 2,053,259 1,762,794 1,784,767
Cash Collateral for Loaned Securities 190,022 190,022 185,849 185,849
Securities Sold Under Repurchase 80,715 80,715 104,098 104,098
Agreements
Separate Account Liabilities 14,920,584 14,920,584 16,230,264 16,230,264
11. DERIVATIVE AND OFB-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Adoption of Statement of Financial Accounting Standards No. 133
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended, on January 1, 2001. The adoption of this
statement did not have a material impact on the results of operations of the
Company.
Accounting for Derivatives and Hedging Activities
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value of securities or
commodities. Derivative financial instruments used by the Company include swaps,
futures, forwards and option contracts and may be exchange-traded or contracted
in the over-the-counter market. Derivatives may be held for trading purposes or
held for purposes other than trading. All of the Company's derivatives are held
for purposes other than trading.
Derivatives held for purposes other than trading are used to seek to reduce
exposure to interest rates and foreign currency risks associated with assets
held or expected to be purchased or sold, and liabilities incurred or expected
to be incurred. Other than trading derivatives are also used to manage the
characteristics of the Company's asset/liability mix, and to manage the interest
rate and currency characteristics of invested assets.
Derivatives held for purposes other than trading are recognized on the
Consolidated Statements of Financial Position at their fair value. On the date
the derivative contract is entered into, the Company designates the derivative
as either (1) a hedge of the fair value of a recognized asset or liability or
unrecognized firm commitment ("fair value" hedge), (2) a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related to a
recognized asset or liability ("cash flow" hedge), (3) a foreign currency or
cash flow hedge ("foreign currency" hedge), (4) a hedge of a net investment in a
foreign operation, or (5) a derivative that does not qualify for hedge
accounting. As of December 31, 2001, none of the Company's derivatives qualify
for hedge accounting treatment.
B-20
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. DERIVATIVE AND OFB-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
If a derivative does not qualify for hedge accounting, it is recorded at fair
value in "Other long-term investments" or "Other liabilities" in the
Consolidated Statements of Financial Position, and changes in fair value are
included in earnings without considering changes in fair value of the hedged
assets or liabilities. See "Types of Derivative Instruments" for further
discussion of the classification of derivative activity in current earnings.
Types of Derivative Instruments
Interest Rate Swaps
The Company uses interest rate swaps to reduce market risk from changes in
interest rates and to manage interest rate exposures arising from mismatches
between assets and liabilities. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional principal amount. Generally, no cash is exchanged at the outset
of the contract and no principal payments are made by either party. Cash is paid
or received based on the terms of the swap. These transactions are entered into
pursuant to master agreements that provide for a single net payment to be made
by one counterparty at each due date. The fair value of swap agreements is
estimated based on proprietary pricing models or market quotes.
If the criteria for hedge accounting are not met, the swap agreements are
accounted for at fair value with changes in fair value reported in "Realized
investment losses, net" in the Consolidated Statement of Operations. During the
period that interest rate swaps are outstanding, net receipts or payments are
include in" Net investment income" in the Consolidated Statement of Operations.
Futures and Options
The Company uses exchange-traded Treasury futures and options to reduce market
risk from changes in interest rates, and to manage the duration of assets and
the duration of liabilities supported by those assets. In exchange-traded
futures transactions, the Company agrees to purchase or sell a specified number
of contracts, the value of which are determined by the value of designated
classes of Treasury securities, and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts.
The Company enters into exchange-traded futures and options with regulated
futures commissions merchants who are members of a trading exchange. The fair
value of futures and options is based on market quotes.
Treasury futures move substantially in value as interest rates change and can be
used to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of temporarily
reducing the Company's exposure to a market decline than selling fixed income
securities and purchasing a similar portfolio when such a decline is believed to
be over.
If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing financial
instruments are amortized as a yield adjustment over the remaining lives of the
hedged item. Futures that do not qualify as hedges are carried at fair value
with changes in value reported in "Realized investment losses, net."
When the Company anticipates a significant decline in the stock market which
will correspondingly affect its diversified portfolio, it may purchase put index
options where the basket of securities in the index is appropriate to provide a
hedge against a decrease in the value of the equity portfolio or a portion
thereof. This strategy effects an orderly sale of hedged securities. When the
Company has large cash flows which it has allocated for investment in equity
securities, it may purchase call index options as a temporary hedge against an
increase in the price of the securities it intends to purchase. This hedge
permits such investment transactions to be executed with the least possible
adverse market impact.
Option premium paid or received is reported as an asset or liability and
amortized into income over the life of the option. If options meet the criteria
for hedge accounting, changes in their fair value are deferred and recognized as
an adjustment to the hedged item. Deferred gains or losses from the hedges for
interest-bearing financial instruments are recognized as an adjustment to
interest income or expense of the hedged item. If the options do not meet the
criteria for hedge accounting, they are fair valued, with changes in fair value
reported in current period earnings.
B-21
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. DERIVATIVE AND OFB-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
Currency Derivatives
The Company uses currency swaps to reduce market risk from changes in currency
values of investments denominated in foreign currencies that the Company either
holds or intends to acquire and to manage the currency exposures arising from
mismatches between such foreign currencies and the US Dollar.
Under currency swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between one currency and another at a
forward exchange rate and calculated by reference to an agreed principal amount.
Generally, the principal amount of each currency is exchanged at the beginning
and termination of the currency swap by each party. These transactions are
entered into pursuant to master agreements that provide for a single net payment
to be made by one counterparty for payments made in the same currency at each
due date.
If currency swaps are effective as hedges of foreign currency translation and
transaction exposures, gains or losses are recorded in a manner similar to the
hedged item. If currency swaps do not meet hedge accounting criteria, gains or
losses from those derivatives are recognized in "Realized investment (losses)
gains, net."
The table below summarizes the Company's outstanding positions by derivative
instrument types as of December 31, 2001 and 2000. All amounts presented have
been classified as other than trading based on management's intent at the time
of contract and throughout the life of the contract.
Other than Trading Derivatives
December 31, 2001 and 2000
(In Thousands)
2001 2000
--------------------------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
Notional Fair Value Value Notional Fair Value Value
Non-Hedge Accounting
- ---------------------------
Swap Instruments
Interest Rate
Asset $ 9,470 $ 638 $ 638 $ 9,470 $ 327 $ 327
Liability - - - - - -
Currency
Asset 24,785 3,858 3,858 - - -
Liability - - - - - -
Future Contracts
US Treasury Futures
Asset 76,800 394 394 139,800 3,530 3,530
Liability 64,500 238 238 61,900 1,067 1,067
Hedge Accounting
- ---------------------------
Swap Instruments
Currency
Asset - - - 28,326 1,633 2,155
Liability - - - - - -
B-22
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. DERIVATIVE AND OFB-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
Credit Risk
The current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its exposure to
credit risk through the use of various credit monitoring techniques. All of the
net credit exposure for the Company from derivative contracts are with
investment grade counterparties. As of December 31, 2001, 86% of notional
consisted of interest rate derivatives, and 14% of notional consisted of foreign
currency derivatives.
12. CONTINGENCIES AND LITIGATION
Prudential and the Company are subject to legal and regulatory actions in the
ordinary course of their businesses, including class actions. Pending legal and
regulatory actions include proceedings relating to aspects of the businesses and
operations that are specific to the Company and Prudential and that are typical
of the businesses in which the Company and Prudential operate. Some of these
proceedings have been brought on behalf of various alleged classes of
complainants. In certain of these matters, the plaintiffs are seeking large
and/or indeterminate amounts, including punitive or exemplary damages.
Beginning in 1995, regulatory authorities and customers brought significant
regulatory actions and civil litigation against the Company and Prudential
involving individual life insurance sales practices. In 1996, Prudential, on
behalf of itself and many of its life insurance subsidiaries including the
Company entered into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales practices class
action lawsuit covering policyholders of individual permanent life insurance
policies issued in the United States from 1982 to 1995. Pursuant to the
settlements, the companies agreed to various changes to their sales and business
practices controls, to a series of fines, and to provide specific forms of
relief to eligible class members. Virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied. While the approval of the class
action settlement is now final, Prudential and the Company remain subject to
oversight and review by insurance regulators and other regulatory authorities
with respect to its sales practices and the conduct of the remediation program.
The U.S. District Court has also retained jurisdiction as to all matters
relating to the administration, consummation, enforcement and interpretation of
the settlements.
As of December 31, 2001, Prudential and/or the Company remained a party to
approximately 44 individual sales practices actions filed by policyholders who
"opted out" of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there
were 19 sales practices actions pending that were filed by policyholders who
were members of the class and who failed to "opt out" of the class action
settlement. Prudential and the Company believe that those actions are governed
by the class settlement release and expects them to be enjoined and/or
dismissed. Additional suits may be filed by class members who "opted out" of the
class settlements or who failed to "opt out" but nevertheless seek to proceed
against Prudential and/or the Company. A number of the plaintiffs in these cases
seek large and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple plaintiffs. It
is possible that substantial punitive damages might be awarded in any of these
actions and particularly in an action involving multiple plaintiffs.
Prudential has indemnified the Company for any liabilities incurred in
connection with sales practices litigation covering policyholders of individual
permanent life insurance policies issued in the United States from 1982 to 1995.
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.
B-23
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
13. DIVIDENDS
The Company is subject to Arizona law which limits the amount of dividends that
insurance companies can pay to stockholders. The maximum dividend which may be
paid in any twelve month period without notification or approval is limited to
the lesser of 10% of statutory surplus as of December 31 of the preceding year
or the net gain from operations of the preceding calendar year. Cash dividends
may only be paid out of surplus derived from realized net profits. Based on
these limitations, the Company would not be permitted a dividend distribution
until December 29, 2002.
During 2001, the Company received approval from the Arizona Department of
Insurance to pay an extraordinary dividend to Prudential of $108 million.
14. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with Prudential and
other affiliates. It is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
Expense Charges and Allocations
All of the Company's expenses are allocations or charges from Prudential or
other affiliates. These expenses can be grouped into the following categories:
general and administrative expenses, retail distribution expenses and asset
management fees.
The Company's general and administrative expenses are charged to the Company
using allocation methodologies based on business processes. Management believes
that the methodology is reasonable and reflects costs incurred by Prudential to
process transactions on behalf of the Company. Prudential and the Company
operate under service and lease agreements whereby services of officers and
employees (except for those agents employed directly by the Company in Taiwan),
supplies, use of equipment and office space are provided by Prudential. The
Company is allocated estimated distribution expenses from Prudential's retail
agency network for both its domestic life and annuity products. The Company has
capitalized the majority of these distribution expenses as deferred policy
acquisition costs. Beginning April 1, 2000, Prudential and the Company agreed to
revise the estimate of allocated distribution expenses to reflect a market based
pricing arrangement.
In accordance with a profit sharing agreement with Prudential that was in effect
through December 31, 2000, the Company received fee income from policyholder
account balances invested in the Prudential Series Funds ("PSF"). These revenues
were recorded as "Asset management fees" in the Consolidated Statements of
Operations and Comprehensive Income. The Company was charged an asset management
fee by Prudential Global Asset Management ("PGAM") and Jennison Associates LLC
("Jennison") for managing the PSF portfolio. These fees are a component of
"general, administrative and other expenses."
On September 29, 2000, the Board of Directors for the Prudential Series Fund,
Inc. ("PSFI") adopted resolutions to terminate the existing management agreement
between PSFI and Prudential, and has appointed another subsidiary of Prudential
as the fund manager for the PSF. The change was approved by the shareholders of
PSF during early 2001 and effective January 1, 2001. The Company no longer
receives fees associated with the PSF. In addition, the Company will no longer
incur the asset management expense from PGAM and Jennison associated with the
PSF.
Corporate Owned Life Insurance
The Company has sold three Corporate Owned Life Insurance ("COLI") policies to
Prudential. The cash surrender value included in Separate Accounts was $647.2
million and $685.9 million at December 31, 2001 and December 31, 2000,
respectively. The fees received related to the COLI policies were $7.0 million
and $9.6 million for the years ending December 31, 2001 and 2000.
B-24
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. RELATED PARTY TRANSACTIONS (continued)
Reinsurance
The Company currently has four reinsurance agreements in place with Prudential
and affiliates. Specifically, the Company has a reinsurance Group Annuity
Contract, whereby the reinsurer, in consideration for a single premium payment
by the Company, provides reinsurance equal to 100% of all payments due under the
contract. In addition, there are two yearly renewable term agreements in which
the Company may offer and the reinsurer may accept reinsurance on any life in
excess of the Company's maximum limit of retention. The Company is not relieved
of its primary obligation to the policyholder as a result of these reinsurance
transactions. These agreements had no material effect on net income for the
periods ended December 31, 2001 or 2000. The fourth agreement, which is new for
2001, is described in the following paragraphs.
On January 31, 2001, the Company transferred all of its assets and liabilities
associated with the Company's Taiwan branch including Taiwan's insurance book of
business to an affiliated Company, Prudential Life Insurance Company of Taiwan
Inc. ("Prudential of Taiwan"), a wholly owned subsidiary of the Holding Company.
The mechanism used to transfer this block of business in Taiwan is referred to
as a "full acquisition and assumption" transaction. Under this mechanism, the
Company is jointly liable with Prudential of Taiwan for two years from the
giving of notice to all obligees for all matured obligations and for two years
after the maturity date of not-yet-matured obligations. Prudential of Taiwan is
also contractually liable, under indemnification provisions of the transaction,
for any liabilities that may be asserted against the Company. The transfer of
the insurance related assets and liabilities was accounted for as a
long-duration coinsurance transaction under accounting principles generally
accepted in the United States. Under this accounting treatment, the insurance
related liabilities remain on the books of the Company and an offsetting
reinsurance recoverable is established.
As part of this transaction, the Company made a capital contribution to
Prudential of Taiwan in the amount of the net equity of the Company's Taiwan
branch as of the date of transfer. In July 2001, the Company dividended its
interest in Prudential of Taiwan to Prudential.
Premiums and benefits ceded for the period ending December 31, 2001 from the
Taiwan coinsurance agreement were $82.4 million and $12.9 million, respectively.
Debt Agreements
In July 1998, the Company established a revolving line of credit facility of up
to $500 million with Prudential Funding LLC, a wholly owned subsidiary of
Prudential. There is no outstanding debt relating to this credit facility as of
December 31, 2001 or December 31, 2000.
B-25
Report of Independent Accountants
To the Board of Directors and Stockholder of
Pruco Life Insurance Company
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Pruco Life Insurance Company (a wholly-owned subsidiary of The
Prudential Insurance Company of America) and its subsidiary at December 31,
2001 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 21, 2002
B-26
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 WITH RESPECT TO CHARGES
Pruco Life Insurance Company ("Pruco Life") represents that the fees and charges
deducted under the Variable Universal Life Insurance Contracts registered by
this registration statement, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks assumed
by Pruco Life.
UNDERTAKING WITH RESPECT TO INDEMNIFICATION
The Registrant, in conjunction with certain affiliates, maintains insurance on
behalf of any person who is or was a trustee, director, officer, employee, or
agent of the Registrant, or who is or was serving at the request of the
Registrant as a trustee, director, officer, employee or agent of such other
affiliated trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with such trust or
corporation.
Arizona, being the state of organization of Pruco Life, permits entities
organized under its jurisdiction to indemnify directors and officers with
certain limitations. The relevant provisions of Arizona law permitting
indemnification can be found in Section 10-850 et seq. of the Arizona Statutes
Annotated. The text of Pruco Life's By-law, Article VIII, which relates to
indemnification of officers and directors, is incorporated by reference to
Exhibit 3(ii) to its Form 10-Q, SEC File No. 33-37587, filed August 15, 1997.
Insofar as indemnification for liabilities 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.
II-1
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Cross-reference to items required by Form N-8B-2.
The prospectus consisting of XX pages.
The undertaking to file reports.
The representation with respect to charges.
The undertaking with respect to indemnification.
The signatures.
Written consents of the following persons:
1. PricewaterhouseCoopers, LLP
2. Clifford E. Kirsch, Esq.
3. Pamela A. Schiz, FSA, MAAA
The following exhibits:
1. The following exhibits correspond to those required by paragraph A
of the instructions as to exhibits in Form N-8B-2:
A. (1) (a) Resolution of Board of Directors of Pruco Life
Insurance Company establishing the Pruco Life
Variable Universal Account. (Note 5)
(b) Amendment of Separate Account Resolution. (Note 1)
(2) Not Applicable.
(3) Distributing Contracts:
(a) Distribution Agreement between Pruco Securities
Corporation and Pruco Life Insurance Company.
(Note 5)
(b) Proposed form of Agreement between Pruco
Securities Corporation and independent brokers
with respect to the Sale of the Contracts.
(Note 1)
(c) Schedule of Sales Commissions. (Note 1)
(4) Not Applicable.
(5) Variable Universal Life Insurance Contract. (Note 9)
(6) (a) Articles of Incorporation of Pruco Life Insurance
Company, as amended October 19, 1993. (Note 4)
(b) By-laws of Pruco Life Insurance Company, as
amended May 6, 1997. (Note 6)
(7) Not Applicable.
(8) Not Applicable.
(9) Not Applicable.
(10) (a) Application Form for Variable Universal Life
Insurance Contract. (Note 7)
(b) Supplement to the Application for Variable
Universal Life Insurance Contract. (Note 7)
(11) Not Applicable.
(12) Memorandum describing Pruco Life Insurance Company's
issuance, transfer, and redemption procedures for the
Contracts pursuant to Rule 6e-3(T)(b)(12)(iii). (Note 1)
(13) Available Contract Riders and Endorsements.
(a) Rider for Flexible Term Insurance Benefit of Life
of Insured - VL 197B (Note 1)
(b) Rider for Flexible Term Insurance Benefit of Life
of Insured - VL 197B2 (Note 1)
(c) Endorsement providing Type C Death Benefit
Provisions (Note 9)
2. See Exhibit 1.A.(5).
II-2
3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality
of the securities being registered. (Note 1)
4. None.
5. Not Applicable.
6. Opinion and Consent of Pamela A. Schiz, FSA, MAAA, as to actuarial
matters pertaining to the securities being registered. (Note 1)
7. Powers of Attorney.
(a) Vivian L. Banta, Richard J. Carbone, Helen M. Galt (Note 2)
(b) James J. Avery, Jr. (Note 3)
(c) William J. Eckert, IV, Ronald P. Joelson, David R. Odenath,
Jr. (Note 8)
(Note 1) Filed herewith.
(Note 2) Incorporated by reference to Post-Effective Amendment No. 5 to Form
S-6, Registration No. 333-85115, filed June 28, 2001 on behalf of
the Pruco Life Variable Universal Account.
(Note 3) Incorporated by reference to Post-Effective Amendment No. 2 to Form
S-6, Registration No. 333-07451, filed June 25, 1997 on behalf of
the Pruco Life Variable Appreciable Account.
(Note 4) Incorporated by reference to Form S-6, Registration No. 333-07451,
filed July 2, 1996 on behalf of the Pruco Life Variable Appreciable
Account.
(Note 5) Incorporated by reference to Post-Effective Amendment No. 10 to Form
S-6, Registration No. 33-29181, filed April 28, 1997 on behalf of
the Pruco Life Variable Universal Account.
(Note 6) Incorporated by reference to Form 10-Q, Registration No. 33-37587,
filed August 15, 1997 on behalf of the Pruco Life Insurance Company.
(Note 7) Incorporated by reference to Form S-6, Registration No. 333-85115,
filed on August 13, 1999 on behalf of the Pruco Life Variable
Universal Account.
(Note 8) Incorporated by reference to Form N-4, Registration No. 333-52754,
filed on December 26, 2000 on behalf of the Pruco Life Flexible
Premium Variable Annuity Account.
(Note 9) Incorporated by reference to Form S-6, Registration No. 333-49332,
filed November 3, 2000 on behalf of the Pruco Life variable
Universal Account.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant, the
Pruco Life Variable Universal Account, has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, and its seal hereunto affixed and attested, all in the city of
Newark and the State of New Jersey, on this 12th day of September, 2002.
(Seal) Pruco Life Variable Universal Account
(Registrant)
By: Pruco Life Insurance Company
(Depositor)
Attest: /s/ Thomas C. Castano By: /s/ Andrew J. Mako
---------------------------- -----------------------------------
Thomas C. Castano Andrew J. Mako
Assistant Secretary Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated on this 12th day of September, 2002.
Signature and Title
-------------------
/s/ *
- -------------------------------------------
Vivian L. Banta
President, Chairperson, and Director
/s/ *
- -------------------------------------------
William J. Eckert, IV
Vice President and Chief Accounting Officer
/s/* *By: /s/ Thomas C. Castano
- ------------------------------------------- -------------------------
James J. Avery, Jr. Thomas C. Castano
Director (Attorney-in-Fact)
/s/ *
- -------------------------------------------
Richard J. Carbone
Director
/s/ *
- -------------------------------------------
Helen M. Galt
Director
/s/ *
- -------------------------------------------
Ronald P. Joelson
Director
/s/ *
- -------------------------------------------
David R. Odenath, Jr.
Director
II-4
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-6 (the "Registration Statement") of our report
dated February 21, 2002, relating to the consolidated financial statements of
Pruco Life Insurance Company and its subsidiaries, which appears in such
Prospectus.
We also consent to the reference to us under the heading "Experts" in the
Prospectus.
PricewaterhouseCoopers LLP
New York, New York
September 17, 2002
II-5
EXHIBIT INDEX
Consent of PricewaterhouseCoopers LLP, independent accountants.
1.A.(1)(b) Amendment of Separate Account Resolution.
1.A.(3)(b) Proposed form of Agreement between Pruco Securities
Corporation and independent brokers with respect to the Sale
of the Contracts.
1.A.(3)(c) Schedule of Sales Commissions
1.A.(12). Memorandum describing Pruco Life Insurance Company's
issuance, transfer, and redemption procedures for the
Contracts pursuant to Rule 6e-3(T)(b)(12)(iii).
1.A.(13)(a) Rider for Flexible Term Insurance Benefit on Life of Insured
- VL197B.
1.A.(13)(b) Rider for Flexible Term Insurance Benefit on Life of Insured
- VL 197B2.
3. Opinion and Consent of Clifford E. Kirsch, Esq. As to the
legality of the securities being registered.
6. Opinion and Consent of Pamela A. Schiz, MAAA, FSA, as to the
actuarial matters pertaining to the securities being
registered.
II-6