0001193125-10-061903.txt : 20120706 0001193125-10-061903.hdr.sgml : 20120706 20100319165450 ACCESSION NUMBER: 0001193125-10-061903 CONFORMED SUBMISSION TYPE: CORRESP PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20100319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHL VARIABLE INSURANCE CO /CT/ CENTRAL INDEX KEY: 0001031223 IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: CORRESP BUSINESS ADDRESS: STREET 1: C/O PHOENIX LIFE INSURANCE COMPANY STREET 2: ONE AMERICAN ROW CITY: HARTFORD STATE: CT ZIP: 06116 BUSINESS PHONE: 8604035788 MAIL ADDRESS: STREET 1: ONE AMERICAN ROW STREET 2: C/O PHOENIX LIFE INSURANCE COMPANY CITY: HARTFORD STATE: CT ZIP: 06116 FORMER COMPANY: FORMER CONFORMED NAME: PHL VARIABLE SEPARATE ACCOUNT MVA1 DATE OF NAME CHANGE: 19970123 CORRESP 1 filename1.htm PHL VARIABLE INSURANCE CO /CT/
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[Sutherland Letterhead]

March 19, 2010

Mr. Min S. Oh

Attorney

Office of Insurance Products

Division of Investment Management

U.S. Securities and Exchange Commission

100 F Street, NE

Washington, D.C. 20549-4644

VIA EDGAR

 

  RE: PHL Variable Insurance Company

Pre-Effective Amendment No. 2 (the “Amendment”)

To Registration Statement on Form S-1 (File No. 333-161382)

(the “Registration Statement”) for

Phoenix Guaranteed Income Edge Contingent Annuity Certificates

Dear Mr. Oh:

We have assisted our client, PHL Variable Insurance Company (“PHL Variable” or the “Company”), in revising the prospectus included in the above-referenced filing relating to certain contingent annuity certificates (the “Certificates”), to respond to the comments provided by the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) that were received by the Company on February 16, 2010. We understand that the Staff’s comments were provided after review of the draft prospectus included in a correspondence filing made by the Company dated January 14, 2010.

Page numbers referenced in this response relate to the prospectus included in the Amendment filed via EDGAR on March 19, 2010. Unless otherwise noted in this letter, capitalized terms have the same meaning as in the revised prospectus in the Amendment.

 

1. Defined Terms

The definitions remain problematic as to those terms which use the table at the end of the prospectus for a page reference. First, it is unhelpful for the prospectus to suggest as it does at the top of page 4 that an investor should understand the difference between “terms that are unique to this product” and “terms which may have special meaning but are more commonly understood”.

 

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Secondly, as has been pointed out before, it is unhelpful to require that an investor go through multiple pages to understand how a term is defined. The staff reiterates its request that the registrant deletes the table with respect to defined phrases not described at their first use and in its place describes the defined term the first time it is used, or revises the table completely to include the definition.

RESPONSE: We have advised the Company to return to the same general format the Staff found acceptable when the initial version of the Certificate was registered and the prospectus reviewed multiple times by the Staff. The prospectus now states thatCertain terms used in this prospectus have specific and important meanings. We have capitalized these terms, and explained what each term means the first time it is used in this prospectus. To help you locate the explanation of a defined term in case you need to refer back to that explanation as you read through this prospectus, there is a list in the back of this prospectus of all of the defined terms and the page on which the meaning of each term is first explained. In short, the prospectus has been revised to explain each defined term the first time the term is used (although in a very limited number of circumstances, reference is made to the fact that the term may be more fully explained later in the prospectus; we believe that even in these cases, the definition initially provided gives the reader enough context to understand clearly the meaning of the term). With respect to the listing of the terms at the back of the prospectus, we believe that as revised the list provides readers with an appropriate and useful tool to conveniently locate the page of the prospectus on which each defined term is first explained.

With respect to those terms that are described where they are first used, the staff finds these descriptions satisfactory with the following exceptions. The meaning of the phrases Cure Period and Liquidation Period remain garbled, because it is unclear to what assets they apply. For example, the Summary section beginning on page 4 fails to note how long an investor has to convert assets existing in an account at the time the certificate is purchased, as opposed to “additional cash contributions” or “newly contributed investments.” As another, inasmuch as “assets” could reasonably be construed to include “cash,” it is unclear when references to assets do or do not include references to cash for purposes of understanding what period applies to what asset. As a third example, the Cure Period and the Liquidation Period are on one occasion referred to as “the ten day period” or the “thirty day period” and on other occasions those durations are qualified by the use of the word “currently.”

The use of these phrases in the prospectus must be clarified and done so simply and consistently. Please explain in plain English in one place in the beginning what period applies to what assets, distinguishing (where applicable) in the same location between initial cash investments initial non cash investments, pre-existing cash investments, pre-existing noncash investments, subsequent cash contributions and subsequent noncash contributions. Once this is done, there is no need for and only potential confusion in reiterating the duration of these periods or to put them in quotes on subsequent occasions. The distinction we seek to clarify should be made

 

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throughout the prospectus. See, e.g., page 5 (carry over paragraph). The need for consistency applies to other terms as well. For example, “Account” is used on front cover page but defined until first paragraph of summary on page 4. Also note use of term in lower case in last sentence of first paragraph on page 15.

RESPONSE: As a threshold matter, we note that the Investors Edge Certificate that is the subject of the offering being registered in the Registration Statement will be offered in conjunction with Investors Capital’s Investor Protector Program and generally cannot be purchased and added to a pre-existing Investor Protector Program. Accordingly, no disclosure is need regarding “pre-existing” assets in the prospectus. We note additionally that the previous version of the Certificate registered with the Commission was designed with the anticipation that some advisory clients would make non-cash contributions to their advisory account, and that in some cases, such assets might not conform to the requirements of the mandatory Model Portfolios. Therefore, the certificate included the concept of a “Liquidation Period” to permit the disposition of such assets. Importantly, however, with respect to Investors Capital’s Investor Protector Program in conjunction with which the Certificate will be offered, the decision was made by Investors Capital to accept only cash contributions. Therefore, there is no need in the current product for a “Liquidation Period” and the prospectus has been revised to clarify that all contributions must be in cash, which will then be appropriately invested in the Model Portfolio selected by the Certificate purchaser.

In this regard, there are only two ways a Certificate owner’s assets held in his or her Account can fall outside the range permitted for a particular asset or sub-asset class – the Certificate owner’s Financial Advisor could re-allocate the assets so that they no longer comport with the required ranges of the Model Portfolio selected by the owner, or market movements could cause the amount of assets in a particular asset class to increase or decrease with the result that the amount of those assets no longer falls within the required range for that asset or sub-asset class. In either case, the “Termination” section of the Certificate provides that the discrepancy must be cured within 5 days or the certificate terminates. Under the Company’s current administrative procedures and as disclosed in the prospectus, an extra 5 days is permitted, for a resulting 10-day period referred to in the prospectus as the “Cure Period.” To add the certainty requested by the Staff with respect to the Cure Period, although this extension of the Cure Period was voluntary, the Company has removed the modifier “currently” from the discussion of the length of the Cure Period and eliminated references to its length after first use of the term.

Finally, the prospectus was revised to clarify the term “Account”; when the advisory account is being referred to, the prospectus employs the term “Investor Protection Program,” and where reference is made to the brokerage account in which a Certificate owner’s assets will be held, the revised prospectus uses the term “Account.”

 

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2. Summary – How Does the Income Edge Work? (page 4)

a) The prospectus states that the beginning Retirement Income Base may be different from the opening Account Value if the value of the investments in the Account has changed, “including if fees related to [the] Account have been withdrawn or [the] Certificate Effective Date was delayed due to incomplete information in [the] application or enrollment form.” Please clarify what other events could result in such event.

RESPONSE: The prospectus has been significantly revised to expand and clarify the distinction between the process of applying for and being issued a Certificate, as opposed to applying for and being approved to participate in the Investor Protection Program. We believe this change alone should address much of the apparent confusion. Additionally, the prospectus has been revised to disclose clearly why and under what circumstances a Certificate purchaser’s initial Retirement Income Base may differ from the purchaser’s initial Account Value, including reference to the fact that market movement, Withdrawals, and Additional Contributions during the “Application Period,” a new defined term that refers to the period described above, can occur during this period.

Additionally, the prospectus has been revised at the beginning of the second bullet of “How Does the Income Edge Work?” to reflect a recent design change where purchase of a Certificate is mandatory for investors who elect to participate in the Investor Protector Program. However, as disclosed in the prospectus, a Certificate may be cancelled upon request of the Certificate owner at any time.

b) The same subsection notes that the Retirement Income Base is equal to Account Value as of the close of the business day immediately prior to the day the registrant issues the certificate. Please clarify how a delay in the Certificate Effective Date could lead to a difference between the Retirement Income Base and Account since the timing of the measurement of the base is tied to the date the certificate is issued, not when the application is submitted.

RESPONSE: As noted above, this section of the prospectus has been significantly revised and we believe the revisions address the Staff’s comments and concerns noted above.

c) Please clarify that certificates are issued on a business day on which PHL Variable is also open.

RESPONSE: The prospectus has been revised to make the requested clarification.

 

3. Summary – Example (page 5)

It is unclear from the example what is the nature and the amounts of fees and expenses that are used and what are excluded (e.g., underlying fund fees). Please make this explicit.

 

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RESPONSE: The prospectus has been revised to clarify that the example, which is purely hypothetical, assumes that any fees withdrawn do not result in a Withdrawal for purposes of the Certificate. We believe this assumption is appropriate and consistent with the purpose of the example, which is to show the gradual liquidation of the assets in a hypothetical Account by Withdrawals and assumed poor market performance such that lifetime payments under the Certificate would be triggered. The concepts of “Withdrawals,” which does include certain fees, and “Excess Withdrawals” are explained in the page of the Summary immediately above the narrative preceding the hypothetical example.

 

4. Summary – How is the Income Edge fee percentage for my certificate determined? (page 6)

a) The prospectus states that the fee percentage may change “between enrollment and the Certificate Effective Date.” Please clarify what opportunity will be given an investor to reject investment in a certificate based on such a change. In addition, please clarify in this subsection that the change will be under the maximum listed in the subsection.

RESPONSE: As noted, a new defined term has been added to the prospectus to refer to the period between applying for a Certificate or participation in the Investor Protector Program, as the case may be, and issuance of a Certificate and opening of an Account, respectively. The prospectus has also been revised to explain why and under what circumstances fees may change during this “Application Period,” how an applicant may obtain information during this period about current fees, and that once a Certificate is issued, the Certificate owner should review the Certificate to determine the fees applicable with respect to that Certificate. The prospectus also reiterates that the fees charged will never exceed the maximum fee disclosed in the prospectus. Disclosure has been added to the prospectus to clarify that a purchaser can cancel his Certificate at any time, but that any fees already deducted in accordance with the disclosed fee payment cycle will not be refunded. No special opportunity to reject a certificate due to a changed fee is provided, nor do we believe one is required.

b) For clarity, please revise the prospectus to make clear whether enrollment refers to the completion of the application. If it doesn’t, make clear what the term means. Please also make conforming changes based on this comment throughout the prospectus.

RESPONSE: In certain states, the Company is required by state insurance law to use an application. Where no requirement for an application exists, the Company may choose to use an enrollment form to obtain the information necessary to determine whether to issue a Certificate. The prospectus has been revised to clarify that references to “Application” in the prospectus are intended to include reference to enrollment forms.

 

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5. Summary – Additional fees related to your Account (page 7)

a) The subsection notes that mutual funds have their own fees and charges “which are reflected in the share price at which shares are bought for [the] Account.” This disclosure makes sense with respect to front end loads, but does not appear to address how annual fund fees are handled. Please clarify the extent to which an investor pays any annual fund fees or expenses on amounts invested in funds held in an Account. If there are any such fund fees or expenses, please clarify the extent to which such fees and expenses are considered withdrawals for purposes of the Excess Withdrawal provisions. Please make conforming change, as applicable, throughout the prospectus (see, e.g., pages 21 and 24).

RESPONSE: The prospectus has been significantly revised to specify with particularity all of the different fees and charges that may apply in connection with the investment of the assets in an Account in underlying funds, and the fact that none of these fees are considered Withdrawals for purposes of the Certificate.

b) The prospectus notes that withdrawals from the Account of up to two percent of account value to pay the Investor Protection Program Fee “will not reduce [the] Retirement Income Base.” Please clarify whether the entirety of a withdrawal that in total exceeds two percent will reduce the Retirement Income Base or whether only the excess over two percent will reduce the Retirement Income Base and provide an example demonstrating its operation.

RESPONSE: The prospectus has been revised to clarify that only the portion of the amount of aggregate Withdrawals to pay the Investor Protector Program Fee and the Financial Advisor consulting fee that exceeds 2.00% of Account Value in a particular calendar year is considered a Withdrawal for purposes of the Certificate. The example requested by the Staff has been added to the prospectus in the section captioned “Additional Fees related to your Investor Protection Program and the Funds Held in your Account” on page 8.

c) Please revise the Risk Factors – Income Edge Fee subsection to make clear (a) that the IPP fee and the financial advisory fee are separate charges from the Income Edge fee that could on their own exceed two percent of account value, and (b) that withdrawals to pay these fees that (either in total or to the extent of the excess) exceed two percent will reduce the Retirement Income Base.

RESPONSE: (a) The prospectus has been revised to clarify that the Investor Protector Program Fee and the Financial Advisor Fee are separate charges from the Income Edge fee and that they could, separately or together, exceed 2.00% of Account Value.

(b) Withdrawals in excess of the 2.00% per calendar year allowed for payment of the Investor Protector Program Fee and the Financial Advisor Fee consulting fee do not necessarily reduce the Retirement Income Base. The disclosure notes that these excess fees are considered Withdrawals. Since all Withdrawals before the Retirement Income

 

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Date constitute Excess Withdrawals, deduction of such excess fees prior to that date would reduce the Retirement Income Base; however, the deduction of such excess fees would not reduce the Retirement Income Base on or after the Retirement Income Date if, in combination with other Withdrawals in a calendar year, only the Retirement Income Amount, or some lesser amount, was withdrawn. The prospectus already contains clear and adequate disclosure about this aspect of the Certificates, and we believe additional disclosure in this section is unnecessary.

d) The prospectus indicates on 6 that the Income Edge fee is not payable once the Account value falls to zero. The subsection on the additional fees does not state whether the additional fees also are not payable in this circumstance. Please revise the prospectus to clarify this matter.

RESPONSE: The requested disclosure has been added in the first sentence of the section “Additional Fees Related to your Investors Protector Program and the Funds Held in your Account” on page 8 of the prospectus.

 

6. Risk Factors – Investment Restrictions (page 7)

a) The prospectus defines “Permitted Ranges” in this subsection as limits on the permitted type of investments, which are shown in “About the Account” section. The subsection then states that an Account could fail to be invested “in accordance with the Permitted Ranges for a variety of reasons . . .”. The first four bullet points clearly deal with a failure to satisfy the arithmetic limits described in the “About the Account” section. However, it is unclear whether the last two bullets are intended to describe objective events or instead decisions that lie within the discretion of the financial advisor without any resulting violation of those arithmetic limits.

If it is the latter, the prospectus must make clear the fact that obligations under the certificate can be jeopardized without a violation of those limits. For clarity, the prospectus should also avoid using the phrase “in accordance with” or similar phrases (such as “in compliance with”) to refer to a set of events that include those that do not result in a failure to satisfy the stated arithmetic limits. This will require making conforming changes throughout the prospectus (see, e.g., page 18).

RESPONSE: The last two sub-bullets that previously appeared in that section were intended to address decisions that could result in a violation of the arithmetic limits (e.g., customizing a portfolio that does not comply with those limits). For clarity, we have combined those sub-bullets into one bulleted section that appears later in the discussion of “Investment Limitations.” We believe it is now clear that one risk of the investment limitations is the fact that they may not always result in a portfolio that is satisfactory to or appropriate for a particular investor, and a resulting Withdrawal from or closure of an Account affects the Income Edge. We have also made the sub-bullet regarding Investors Capital discontinuing the Model Portfolios into its own bullet and moved it so that it appears later in the section.

 

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If the latter two bullets are instead intended to describe decisions that have necessarily resulted in actions that violate those arithmetic limits, please revise the two bullet points to describe what those actions are.

RESPONSE: Please refer to the response above.

b) The subsection states that the registrant will notify an investor “whose Account is no longer in compliance with the Permitted Ranges of this circumstance ….” Please clarify how long before the registrant takes adverse action will notice be provided to the investor. Please also reiterate this obligation to notify and the requested clarification elsewhere in the prospectus as appropriate (see e.g., the first full paragraph on page 22).

RESPONSE: The prospectus has been clarified throughout that PHL Variable will provide a Certificate owner whose Account assets are no longer in compliance with the applicable investment limitations, 30 days notice prior to terminating the Certificate. During this time, the Certificate holder can assess his options, which would include choosing a different eligible Model Portfolio, if available, choosing a different insurance contract, or choosing the Lifetime Payment Option.

c) The subsection states in the bold section that the certificate does not require that the investor be warned regarding potentially adverse consequences affecting the Retirement Income Base. Since the prospectus affirmatively states that notice will be nonetheless provided, please clarify supplementally what is intended by this statement and what consequence, e.g., rights under state law, result.

RESPONSE: The Company will provide notice to a Certificate owner when his Account assets do not comply with the applicable investment limitations, as he may be able to preserve certain rights with respect to the Certificate by acting prior to termination and the violation of the investment limitations is likely outside his control. However, the Company does not have a contractual obligation nor was the product priced to permit PHL Variable to notify a Certificate owner of Withdrawals or other Account activity that could affect the Retirement Income Base. Additionally, the Company believes that notification of such events, which could be frequent, and often promptly cured, could potentially be confusing to Certificate owners. The prospectus provides extensive disclosure about the effect of Withdrawals and Account activity that could affect the Retirement Income Base, discloses that notification of Account activity that could affect the Retirement Income Base is not provided, and cautions a purchaser to carefully monitor activity in his Account. Finally, it is important to note that the Company does provide notice to Certificate owners of changes in the Retirement Income Base and/or Retirement Income Amount resulting from certain Account transactions.

 

7. Risk Factors – Regulatory Protections (page 12)

a) The subsection states that the registrant intends to treat Income Edge payments as paid under a fixed annuity that is not registered with and therefore would not be

 

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governed by the federal securities laws. Given the lack of direct guidance the registrant has noted, it is misleading to simply indicate that these payments are as a legal matter to be considered made under an instrument separate from the Income Edge certificate that is or is not governed by the federal securities laws, and it is also misleading to suggest that the registrant’s intent on how to treat them bears in some way on that question. Please delete the sentence.

RESPONSE: The sentence has been deleted as requested.

 

8. The Income Edge Certificate (page 12)

For the third paragraph of the preamble, please make the following changes to enhance readability.

 

   

Please revise the phrase “transaction is due” (e.g., “transaction occurs”).

 

   

Please delete “on various dates.”

 

   

Please replace “transactions” with “transaction and/or events.”

 

   

Please add “withdrawals and contributions” at the end of the paragraph.

RESPONSE: The requested changes have been made.

 

9. About the Model Portfolios (page 15)

a) The subsection states that each Model Portfolio is subject to maximum and minimum allocations. For clarity, please note here that these ranges are those required to qualify for the benefits offered by the certificate, that a financial advisor may choose in the best interests of an investor to customize for that investor a portfolio that does not satisfy these ranges, and that such a choice would jeopardize those benefits.

RESPONSE: The requested disclosure has been added.

b) The subsection notes that any registered mutual fund or ETF that the registrant has agreed to may be included in the Model Portfolios. Please provide the names of those funds and ETF’s or clarify supplementally the legal basis for not providing them in the prospectus.

RESPONSE: The names of the funds and ETFs eligible for inclusion are not included in the prospectus, nor do we believe it is necessary or appropriate to include them. Under the federal securities laws, a Certificate purchaser is required to receive a prospectus that contains full and fair disclosure about the security being purchased – in this case, the

 

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Certificate. The Certificate prospectus is not intended to and does not offer the Investor Protector Program nor the funds included in the Model Portfolios. In this regard, the prospectus states that the Investor Protector Program and the Model Portfolios can be offered only by Investors Capital, a registered investment adviser, and that PHL Variable is not an investment adviser. Investors Capital retains the discretion to use any or all of the funds (including exchange traded funds) it has proposed and PHL Variable has accepted in accordance with the Permitted Ranges. Finally, unlike a fund-of-funds, the Model Portfolios are not intended to be investment companies under the Investment Company Act of 1940, and leading an investor to such a conclusion by identifying the eligible funds in the Certificate prospectus would certainly not be a result the Company or the Staff desires.

 

10. The Current Permitted Ranges for the Model Portfolios (page 16)

a) Please revise the prospectus for the following discrepancies.

 

   

Please insert “companies” in lieu of “securities” in the second to last sentence of footnote 1.

 

   

Please reconcile the use of the term “Mid cap” and the description of the market capitalization size in footnote 7 with the wording of the other two “Small Cap” asset classes described in footnotes 8 and 9.

 

   

Please reconcile the list of the countries making up the MSCI EAFE Index provided in footnote 12 and 13 with that provided in footnote 14, i.e., former has New Zealand while latter has Luxembourg.

RESPONSE: The prospectus has been revised for the discrepancies noted.

 

11. How Will Investors Capital Manage Your Investments and What Happens if Your Account is Managed in a Manner Unacceptable to Us (page 18)

These two subsections indicate that use of an “investment vehicle” by Investors Capital in a Model Portfolio that has not been approved by the registrant can cause the Model Portfolio not to be “eligible,” unless the registrant accepts the investment vehicle. Please clarify whether this refers to a fund. Please also clarify whether this means that such a decision by Investors Capital can result in termination of the benefits under the certificate, and, if so, please make the necessary changes throughout the prospectus including, in particular, the list of events on page 8. Please also clarify what cure provisions and notice rights attach to this event in the latter section, in the Summary and in the Risk Factors. Please also note the risk that accepting the new investment vehicle could also be an event that triggers a change in fees in the Summary and Risk Factors sections and throughout the prospectus as necessary (see, e.g., page 20).

 

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RESPONSE: The requested clarifications have been made. The prospectus has also been revised to clarify that the requisite asset allocation within the Permitted Ranges can be satisfied only by using Permitted Funds or, when allowed, cash. The prospectus has been revised to add a definition of “Permitted Funds” on page 9.

 

12. What Happens if Your Contributions or Withdrawals . . .? (page 18)

a) The subsection states that additional cash contributions made after the Certificate Effective Date “must be allowed as cash ….” The list of asset categories in the Permitted Ranges section does not include cash. In addition, the following subsection on “What Happens If the Value of Your Account is Too Low . . .?” indicates that a 100% investment in cash is “outside of the Permitted Ranges.” Please revise the prospectus to clarify the ambiguity.

RESPONSE: As noted, the Investor Protector Program permits only cash Contributions, and these Contributions must then be either allowed to remain as cash in the Model Portfolio the Certificate owner has elected, or be invested in accordance with the Permitted Ranges, using Permitted Funds, for the Model Portfolio. In this regard, the prospectus has been revised to define the term “Permitted Funds” to include cash when allowed by the applicable Permitted Ranges. Currently, Contributions are permitted to remain in cash only in the U.S. Shorter Duration HQ asset class. Accordingly, the prospectus has been revised to add the modifier “cash” to the asset class “U. S. Shorter Duration HQ.” Additionally, the prospectus has been revised to state explicitly that the permissibility for an Account equal to or less than $10,000 to be held solely in cash is an exception to the Permitted Ranges requirements that otherwise apply.

b) In the third sentence of the last paragraph, please clarify why “proceeds” would be returned as opposed to the contributed additional investments.

RESPONSE: Since the concept of the “Liquidation Period” has been removed from the prospectus, the language referenced has been eliminated.

 

13. What Happens If the Value of Your Account is Too Low . . .? (page 19)

a) The subsection states that the investments in an Account might not be able to be maintained within the Permitted Ranges if the Account value is equal to or less than $10,000. Please clarify why this could be the case.

RESPONSE: The requested clarification has been made.

b) The subsection states that, where Account value has fallen below $10,000, Investors Capital has the right to convert all assets to cash while maintaining the certificate in force and charging the Income Edge fee for the Model Portfolio previously held. Please clarify whether the investor will be notified of the conversion to cash and of the right to convert the assets instead to the Lifetime Payment Option.

 

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RESPONSE: The prospectus has been clarified, in the referenced section, that any liquidation of Account assets would be reflected on statements from the Account custodian. The Company would not provide notice of the right to elect the Lifetime Payment Option in such an event. As with other fluctuations in Account value, an Account of equal to or less than $10,000 held all in cash could remain open and accept Additional Contributions, or could be reduced to zero under the terms of the Certificate and the Company would then be contractually obligated to make lifetime income payments.

c) Please be clear in this disclosure and in second paragraph under “How Do You Structure Withdrawals From Your Account?” on page 22 when referring to “after” the Retirement Income Date, i.e., should be “on or after” the Retirement Income Date, and in second sentence of the paragraph on page 22 still need to confirm whether it should state “equal to or less than” rather than just “less than.”

RESPONSE: The requested clarifications have been made.

d) Please clarify how the inability to value a security and the consequent valuation placed on that security as described on page 31 affects the operation of the $10,000 account value test described on pages 19 and 22.

RESPONSE: We believe that the referenced language is more appropriate for accounts that hold individual securities. As described in the prospectus, the Model Portfolios will be comprised exclusively of mutual funds (including ETFs) and cash. Accordingly, the referenced language has been eliminated.

 

14. Why Will Your Income Edge Terminate . . . ? (page 19)

The section states that the registrant does not provide investment advice to an investor in connection with the Income Edge. Please reconcile this with the statement on page 14 that representatives of the registrant who are licensed to talk about whether the Income Edge is appropriate and to answer questions will under certain circumstances be available to speak with investors.

RESPONSE: Properly licensed representatives of the Company affiliated with a broker-dealer may discuss the Certificate but may not provide investment advice regarding the Model Portfolios. At this time, the Company does not expect that the Certificate will be sold by representatives other than those affiliated with Investors Capital Corporation and its affiliated insurance agency. Accordingly, the prospectus has been revised to delete the reference to representatives of PHL Variable in this context.

 

15. Withdrawals From Your Account (page 21)

a) The section states that dividends, capital gains or other accretions that are not reinvested in accordance with the Permitted Ranges are considered a withdrawal.

 

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As noted earlier, it is unclear whether cash balances are in accordance with the Permitted Ranges and, therefore, whether an uninvested cash dividend or other cash accretion credited to the account but not withdrawn from the account would nonetheless be considered a withdrawal. Please clarify this ambiguity.

RESPONSE: The prospectus has been revised to clarify that cash dividends must be invested in accordance with the investment limitations within the Cure Period.

b) In the fourth full sentence on page 23, please clarify that these are “withdrawals that are counted toward your “Retirement Income Base”, not “Retirement Income Amount.” Please also be clear as to what day the “then current Retirement Income Base” is calculated in determining the Retirement Income Amount for January 1. Given the disclosure in the first paragraph on page 13, it appears this would be the prior “business day”.

RESPONSE: In this context, it would appear that reference to the Retirement Income Amount is correct. The disclosure refers to withdrawals that can, in total, equal the Retirement Income Amount. However, the prospectus has been revised to clarify the date used to determine the “then current Retirement Income Base.”

 

16. How Do You Know How Much You Have Left to Withdraw . . .? (page 23) The subsection states that the registrant will send out a notice each year as to how much can be withdrawn without reducing the Retirement Income Base and that an investor can contact the registrant by phone to find out how much the investor has left to withdraw without reducing that base. The subsection then states how the registrant calculates the “maximum withdrawal.” Please clarify what is the date on which Account value is measured for purposes of calculating this amount (e.g., the date on which the phone call is made, the date the notice is sent, etc.)

RESPONSE: The prospectus has been revised to make the requested clarification and the information in this paragraph has been reordered to achieve additional clarity in this regard.

 

17. The Importance of Managing Your Withdrawals (page 25)

This subsection (and the first full paragraph on page 22) notes that there is no cure provision for reductions in the Retirement Income Base due to withdrawals. Please highlight these in bold and include this statement in bold in the Risk Factors – Withdrawals subsection.

RESPONSE: The requested revisions have been made to the prospectus.

 

18. Retirement Income Amount (page 25)

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26. For example, please reconcile the last sentence of the second example on page 26 and second line of Example 1 on page 27 with the bottom of page 4 where examples state the Retirement Income Base is equal to the Account value on the Certificate Effective Date but page 4 indicates otherwise.

RESPONSE: The prospectus has been revised throughout to make the requested clarifications that the Retirement Income Base is the Account value on the Certificate Effective Date.

b) For the examples of additional contributions beginning on page 27, please also provide an example of the impact of withdrawals on contributions made prior to the Retirement Income Date.

RESPONSE: The requested example has been added.

c) Please note typo in last line of Example 2 ending on page 28, and for better understanding and consistency, please include a line item for “Amount of Retirement Income Amount remaining for withdrawal” in Example 3 as was provided in Example 2.

RESPONSE: The prospectus has been revised to add the requested line item in Example 3 and a colon to the last line of Example 2.

d) In paragraph following Example 3 on page 29, please confirm accuracy of second sentence, i.e., only contributions of cash or also investments?

RESPONSE: The lack of reference to other investments would appear to be consistent with the elimination of the “Liquidation Period” concept. We note as well the deletion of the reference to the “Annual Optional Increase” that had appeared in this sentence as it was erroneous in this context.

 

19. Increases From Additional Contributions to Your Account (page 26)

a) The subsection states that increases to the Retirement Income Base will be limited to an amount that equals “cumulative cash contributions made to the Account after the Certificate Effective Date (including the current contributions less cumulative withdrawals that have not reduced the Retirement Income Base less cumulative increases in the Retirement Income Base as a result of additional contributions (excluding the current contributions). This appears to have the effect of allowing a contribution to increase the Retirement Income Base only to the extent that aggregate contributions up to that point are in excess of aggregate compliant withdrawals made up to that point. If this is the case, please state this clearly in plain English.

Please also note this effect in plain English in the third bullet point in the Summary – How Does the Income Edge Work subsection and in the Risks – Increases to Your Retirement Income Base subsection. In addition, please make clear in Examples 2 and 3 that the examples are intended in part to demonstrate this effect.

 

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RESPONSE: This section, and the “Summary-How Does the Income Edge Work” and “Risks-Increases to Your Retirement Income Base” sections, have been revised to state the effect you note. The language has also been simplified to the extent possible.

Separately, while this subsection states that additional contributions are limited in this fashion by “withdrawals that have not reduced the Retirement Income Base,” the seventh sentence of the third bullet in the Risks – Withdrawals in subsection that states that “any withdrawal, including a withdrawal …on or after the Retirement Income Date” could have this effect. Please reconcile these two statements.

RESPONSE: These statements here and throughout the prospectus have been reconciled to clarify that withdrawals that do not reduce the Retirement Income Base when taken (e.g. not Excess Withdrawals) reduce the effect of additional contributions on the Retirement Income Base.

b) Other sections refer to making “contributions” that result in increases to the Retirement Income Base (see “Increases To Your Retirement Income Base” on page 9); however, it may be useful to define contributions in that context as including both cash and investments.

RESPONSE: In light of the elimination of the “Liquidation Period” concept, this disclosure refers only to cash.

 

20. Determining Whether an Income Edge is Right for You (page 31)

a) Please state prominently in this section that even if payments are made under the certificate, those payments could be less than the amounts an investor will pay for the Income Edge fee, the Investors Protector Program Fee, the Financial Advisor Fee and any applicable annual underlying fund fees. Please also note in the Lifetime Income Payments subsection on page 8 that the risk of receiving less than the fees paid is heightened given the Investors Protector Program Fee, the Financial Advisor Fee and any applicable annual underlying fund fees that must also be paid.

RESPONSE: The requested disclosure has been added.

b) Please clarify added disclosure in the first sentence of first paragraph and please note typo in revised last sentence.

RESPONSE: The added disclosure has been clarified and the typographical error corrected.

c) Please also insert “on or” in second line at top of page 31.

 

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RESPONSE: The requested revision has been made.

 

21. Additional Examples

Please provide additional examples for the following circumstances:

a) Effect on the Retirement Income Base of additional contributions where there have been both compliant and noncompliant withdrawals.

RESPONSE: New example 4 in section 7, “Increases to Your Retirement Income Base,” has been added to page 33 of the prospectus.

b) Aggregate withdrawals in excess of the Retirement Income Amount but below the RMD.

RESPONSE: An example has been added to the discussion of “Excess Withdrawals” within the “Risk Factors” section. An additional example exists in the subsection “What If You Want to Purchase an Income Edge For Your Individual Retirement Account (IRA)” in section 1, “Purchasing an Income Edge.”

c) Effect on the Retirement Income Base of fees aggregating in excess of two percent of Account value.

RESPONSE: An example has been added to the subsection “Additional Fees Related to your Investor Protector Program and the Funds Held in your Account” to the Summary on page 8 of the prospectus.

 

22. Stylistic Changes

Please make the following changes to enhance readability:

a) Please make the subheadings consistent. Sometimes italicized subheadings following major section headings (e.g., Summary), sometimes they don’t (e.g., Risk Factors). In certain sections, the subheadings are numbered (e.g., The Income Edge Certificate section), while in others they are not.

RESPONSE: The subheadings have been standardized and numerical references added to certain subheadings.

b) Please break up the third bullet point of the “How Does the Income Edge Work” subsection starting on page 4 into separate sub-bullets. Please combine the sixth and tenth sentences as they are largely redundant and highlight the sentence in bold.

 

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RESPONSE: The requested changes have been made and this disclosure reordered within the subsection.

c) Each of the bullet points in the “Asset Allocation Strategies Eligible for the Income Edge” subsection should be moved to a more appropriate subsection. The first bullet should be moved to the Lifetime Income Payments subsection. The second bullet point is largely redundant to the Investment Restrictions subsection and should be deleted, with any non-redundant sections incorporated as necessary into that subsection. The third bullet point should be moved to the Income Edge Fee subsection. The last bullet point should be moved to the Withdrawals subsection.

RESPONSE: The requested changes have been made.

d) Please break up the first paragraph of the “Increases From Additional Contributions to Your Account” subsection on page 26 into several paragraphs.

RESPONSE: The requested change has been made.

Please note that the prospectus also contains other changes for clarity and consistency and to enhance readability. Additionally, the Income Edge certificate will be a required purchase at the time the Investor Protector Program is elected and an Account is opened. Accordingly, certain disclosure has been adjusted to clarify that the purchase is not optional at that time. The Company intends to complete this registration statement with the necessary incorporation of the PHL Variable Annual Report on Form 10-K, as soon as available. The Company will submit an additional pre-effective amendment for that purpose and to update financial information included in the prospectus when that report has been filed via EDGAR and will make the necessary “Tandy representations” at that time.

We appreciate your time in reviewing this filing. If you should have any questions with regard to this filing, please contact the undersigned at 202.383.0590 or Kate Johnson at 860.403.6486.

Sincerely,

 

/s/ W. Thomas Conner

W. Thomas Conner
Cc:   Mary K. (Kate) Johnson
  Counsel

 

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Phoenix Guaranteed Income Edge®

An Insurance Guarantee Issued by

PHL Variable Insurance Company

and available to clients of Investors Capital Advisory Services

The Phoenix Guaranteed Income Edge® (“Income Edge”) described in this prospectus is an insurance certificate offered to investment advisory clients of Investors Capital Advisory Services (“Investors Capital”) whose investments are managed under the Investor Protector Program, an advisory program offered by Investors Capital. Subject to certain conditions, the Income Edge guarantees predictable lifetime income payments regardless of the actual performance or value of the client’s assets managed under the Investor Protector Program.

This prospectus provides important information that a prospective purchaser of an Income Edge should know before purchasing. Please retain this prospectus for future reference.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The Income Edge is issued by PHL Variable Insurance Company (“PHL Variable”). It is not a bank deposit guaranteed by any bank or by the Federal Deposit Insurance Corporation or any other government agency. A purchase of the Income Edge is subject to certain risks. Please see the “Risk Factors” section on page 9.

The Income Edge is novel and innovative. The Internal Revenue Service has issued a ruling to PHL Variable Insurance Company indicating that the Income Edge certificate will be treated as an annuity contract under the Internal Revenue Code. In addition, the Internal Revenue Service has also issued rulings concerning the tax treatment to an individual investor relative to the certificate and the investor’s assets covered by the certificate. These rulings provide, in substance, that the certificate will be treated as an annuity contract and that the income tax treatment of the assets is unaffected by the existence of Income Edge. You should consult a tax advisor before purchasing your Income Edge. See “Taxation of the Income Edge” at page 39 for a discussion of the tax consequences of the Income Edge.

PHL Variable will offer the Income Edge through its affiliate, Phoenix Equity Planning Corporation (“PEPCO”), which is the principal underwriter. The Income Edge is offered only to investment advisory clients of Investors Capital. Prospective purchasers may apply to purchase an Income Edge only through Investors Capital Corporation, the registered broker-dealer firm of which Investors Capital is a part. Investors Capital Corporation has entered into a selling agreement with PEPCO in order to offer the Income Edge to investment advisory clients of Investors Capital.

 

LOGO   PHL Variable Insurance Company
 

One American Row

PO Box 5056

Hartford, CT 06102-5056

LOGO   Tel. 800/866-0753

 

Prospectus dated March      , 2010

 

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TABLE OF CONTENTS

 

Heading   Page

 

Phoenix Guaranteed Income Edge

  4

Summary of the Certificate

  4
1.  

How Does the Income Edge Work?

  5
2.  

What Does the Income Edge Cost?

  7
3.  

How is the Income Edge Fee Percentage for my Certificate Determined?

  7
4.  

Additional Fees Related to your Investor Protector Program and the Funds Held in your Account

  8

Incorporation of Certain Documents by Reference

  9

Risk Factors

  9

The Income Edge Certificate

  14
1.  

Purchasing an Income Edge

  14
 

How Do You Purchase an Income Edge?

  14
 

What If You Want to Purchase an Income Edge For Your Individual Retirement Account?

  15
2.  

How Does Your Income Edge Work?

  15
3.  

Investors Capital and the Model Portfolios

  16
 

About Investors Capital

  16
 

About the Investor Protector Program

  16
 

About the Model Portfolios

  17
 

The Current Permitted Ranges for the Model Portfolios

  18
 

How Does the Income Edge Relate to Your Account?

  20
 

How Will Investors Capital Manage Your Investments in the Account if You Purchase an Income Edge?

  20
 

What Happens if Your Account is Managed in a Manner Unacceptable to Us?

  20
 

What Happens if Your Additional Contributions, Withdrawals or Other Actions Cause the Investments in Your Account to Fall Outside the Permitted Ranges?

  21
 

What Happens if the Value of Your Account is Too Low for Investors Capital to Invest Within the Permitted Ranges?

  21
 

Why Will Your Guarantee Terminate if Investors Capital Does Not Manage Your Account Within the Permitted Ranges?

  21
4.  

Annual Income Edge Fee

  22
5.  

Withdrawals From Your Account

  24
 

How Do You Structure Withdrawals From Your Account?

  24
 

How Do You Know When You Have Reached Your “Retirement Income Date” and Can Start Taking Permissible Withdrawals That Will Not Reduce the Potential Benefit of Your Income Edge?

  24
 

How Much Should You Withdraw From Your Account Each Year?

  25
 

How Do You Know Calculate How Much You Have Left to Withdraw in Any Calendar Year Without Reducing Your Retirement Income Base?

  25
 

Withdrawals Prior to the Retirement Income Date

  26
 

Withdrawals On or After the Retirement Income Date

  27
 

The Importance of Managing Your Withdrawals

  27
 

The Importance of Considering When to Start Making Withdrawals

  27
6.  

Retirement Income Amount

  28
 

How is Your “Retirement Income Amount” Calculated?

  28
 

Can Your Retirement Income Amount Decrease?

  28
 

Can Your Retirement Income Amount Increase?

  28
7.  

Increases in Your Retirement Income Base

  28
 

Increases From Additional Contributions to Your Account

  29
 

Increases as a Result of the Annual Optional Increase

  34
8.  

Income Edge Payments On or After the Retirement Income Date

  35
 

If Your Account Value is Reduced to $0 as a Result of Withdrawals Within the Limits of the Income Edge and/or Poor Investment Performance, How Are Your Continuing Income Payments Calculated?

  35
 

What if You Die Before Your Account Investments Are Reduced to $0?

  35

General Information

  36

Determining Whether an Income Edge Is Right for You

  36

Divorce of Joint Spousal Owners of an Income Edge

  36

Termination of the Income Edge

  38

 

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Heading   Page

 

Miscellaneous Provisions

  38
 

Periodic Communications to Income Edge certificate owners

  38
 

Amendments to an Income Edge certificate

  39
 

Assignment

  39

Taxation of the Income Edge

  39
 

Non-Qualified Income Edge

  39
 

Qualified Income Edge

  40

About PHL Variable

  43

The Phoenix Companies, Inc.—Legal Proceedings about Company Subsidiaries

  43

Distribution Arrangements

  44

Legal Matters

  44

Experts

  44

Annual Statements

  44

Table of Cross References for Defined Terms

  45

Selected Financial Data for PHL Variable

  46

Supplementary Financial Information for PHL Variable

  46

Appendix A: Lifetime Payment Option

  50
 

Misstatements

  50
 

Taxation of the Lifetime Payment Option

  50

 

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Phoenix Guaranteed Income Edge

 

Certain terms used in this prospectus have specific and important meanings. We have capitalized these terms, and explained what each term means when it is first used in this prospectus. To help you locate the explanation of a defined term in case you need to refer back to that explanation as you read through this prospectus, there is a list in the back of this prospectus of all of the defined terms and the page on which the meaning of each term is first explained.

“We” or “us” means PHL Variable. “You” or “your” means the owner (or, if applicable, the joint spousal owners) of an Income Edge certificate described in this prospectus.

A group annuity contract will be issued to Investors Capital Holdings, Ltd., a Delaware holding company which is the parent of Investors Capital Corporation, and, in Massachusetts, subject to state approval, a group annuity contract will be issued to Investors Capital Corporation for certificates issued in Massachusetts. Phoenix Guaranteed Income Edge certificates are issued under such group contract(s) to investment advisory clients of Investors Capital who participate in the Investor Protector Program.

It is important for you to understand how the Income Edge works and your rights and obligations under the Income Edge. We have tried to anticipate some of the questions you may have when reading the prospectus. You will find these questions and corresponding explanations throughout the prospectus.

Summary of the Income Edge

 

The following is a summary of the Income Edge. You should read the entire prospectus.

The Income Edge is an insurance certificate (“insurance certificate” is another term for “insurance policy”). The Income Edge is designed to provide income protection to investment advisory clients of Investors Capital whose assets are managed under the Investor Protector Program.

Through the Investor Protector Program, Investors Capital currently offers four asset allocation strategies. Investments from various asset categories, such as stocks, bonds, and cash, comprise model portfolios corresponding to the directive of the asset allocation strategies. For example, an asset allocation strategy could require a model portfolio to contain 40% equity investments and 60% fixed income investments to achieve particular objectives regarding factors including risk versus return and current income versus investment growth. There are currently four model portfolios corresponding to the four asset allocation strategies available through the Investor Protector Program (we refer to these models in this prospectus as the “Model Portfolios”). To participate in the Investor Protector Program, you are required to purchase an Income Edge certificate.

The amount you initially invest in the Investor Protector Program, as well as any subsequent investments you are permitted to make, will be invested in accordance with the asset allocation strategy corresponding to the Model Portfolio you choose. (Each investment you make under the Investor Protector Program must be in cash and is called a “Contribution.” If you make Contributions after your initial Contribution, these are referred to in this prospectus as “Additional Contributions.”) Your Contributions will be invested in shares of mutual funds, including exchange traded funds or “ETFs” (see “About the Model Portfolios” later in this prospectus for a description of ETFs). Your fund shares together with any cash or cash equivalent investments (collectively, these are referred to in this prospectus as the “assets”) will be held in a brokerage account for the Investor Protection Program at a financial institution. This brokerage account is referred to in this prospectus as your “Account.” The value of the assets in your Account is referred to as your “Account Value” in this prospectus. The Income Edge is designed for Investors Capital clients who intend to use the assets in their Account as the basis for a withdrawal program to provide income payments for retirement or other long-term purposes.

Investors Capital offers the Investor Protector Program through affiliated and unaffiliated registered investment advisor representatives (“Financial Advisors”). The Financial Advisors assist clients in analyzing whether the Account is appropriate in light of a client’s financial situation and in determining which asset allocation strategy is appropriate for the client. You may purchase the certificate only through a Financial Advisor or, if your Financial Advisor is not permitted to provide you with advice regarding the Income Edge under state laws and regulations relating to insurance agents, through a representative of Investors Capital’s affiliated insurance agency.

Subject to certain conditions, the Income Edge ensures predictable lifetime income payments by providing continuing income payments if your Account Value is reduced to $0 by withdrawals (if such withdrawals are limited in accordance with the terms of the Income Edge certificate) and/or poor investment performance while you (or, if you have purchased the Income Edge to provide income payments for the lives of you and your spouse, the “Spousal Income Guarantee,” you or your spouse) are living. The conditions to which the Income Edge is subject include the requirement to invest Account assets in accordance with the investment limitations for the Model Portfolio you selected. Additionally, withdrawals from the Account must be limited in accordance with the terms of the Income Edge certificate. The sale, transfer or exchange of assets out of your Account to provide an amount of cash you request or that is requested on your behalf, or to pay the Investor Protector Program Fee and the Financial Advisor Fee (these two

 

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fees are defined in the paragraph immediately below) when these fees, separately or together, exceed 2.00% of your Account Value in any calendar year, are “Withdrawals” for the purposes of the Income Edge.

There is an annual fee for the Income Edge. The Income Edge fee is in addition to the fee that you pay to have your assets managed under the Investor Protector Program (the “Investor Protector Program Fee”) and the fee that you pay to your individual Financial Advisor (the “Financial Advisor Fee”). There is a $100,000 minimum investment required to participate in the Investor Protector Program.

1. How Does the Income Edge Work?

The Income Edge provides continuing lifetime income payments if your Account Value is reduced to $0 by Withdrawals (within the limits of the certificate) and/or poor investment performance while you (or, if you have purchased the Spousal Income Guarantee, you or your spouse) are living.

 

v  

It is important to note that the Income Edge has no cash value. Rather, you own the assets in your Account. The assets in your Account are shares of registered mutual funds, including ETFs, which are valued in accordance with applicable law each day the New York Stock Exchange is open for regular trading. Each such day is a “Business Day” for purposes of the Income Edge.

 

v  

The Income Edge certificate is an insurance policy we offer that is separate and distinct from the Investor Protector Program offered by Investors Capital. Accordingly, you and your Financial Advisor must complete two different sets of paperwork, including completing and signing an application form (the “Application”) and reviewing and signing certain disclosure documents. (In some states, you are not required to complete an application form for the Income Edge; instead, we use an “enrollment form” to obtain the information we need to determine whether to issue you an Income Edge certificate. When we refer to the “Application” in this prospectus, we intend for that term to include the applicable enrollment form in states where an enrollment form is used instead of an Application.)

After we receive your Application, we review it to ensure it contains all necessary information and then evaluate the information to decide whether to issue you an Income Edge. This process is referred to in this prospectus as the “Application Process.” If after the Application Process we issue an Income Edge to you, the Business Day we issue your certificate is the “Certificate Effective Date.” We issue certificates on every Business Day, except when we are closed on a particular Business Day.

On the Certificate Effective Date we establish a “Retirement Income Base” for you that is then used to determine the amount of benefits, if any, you will receive under your Income Edge. The amount of your initial Retirement Income Base is your Account Value on the Certificate Effective Date. Typically, you and your Financial Advisor fill out the necessary paperwork and submit the Application for the Income Edge to us at the same time the separate application is submitted to Investors Capital to participate in the Investor Protector Program. If Investors Capital reviews and approves your application to participate in the Investor Protector Program and invests your initial Contribution that establishes your initial Account Value before we complete the Application Process for your Income Edge certificate, your initial Account Value may be different than the amount of your initial Retirement Income Base due to intervening changes in the Account Value because of market performance and/or Additional Contributions to, or Withdrawals from, your Account.

Your Income Edge certificate could be issued after your initial Account Value is calculated due to the following reasons:

 

   

information in your Application for the Income Edge is incomplete and the Application Process is delayed while we attempt to obtain the missing information,

 

   

the amount of your Account Value exceeds $5 million and therefore we require additional time to approve your Application for an Income Edge certificate, or

 

   

you previously had an Income Edge related to your Account that you chose to terminate, and you then applied for and we issued a new Income Edge related to your Account. You must wait at least 90 days from the date you terminated an Income Edge to apply for a new Income Edge related to the same Account.

 

v  

The amount of your Retirement Income Base may change over time based on the amount and timing of Withdrawals; it may also change depending on whether you make Additional Contributions to your Account, or do not decline an Annual Optional Increase (this feature, which is more fully described below, is provided by the Income Edge on each anniversary of the Certificate Effective Date, referred to in this prospectus as the “Certificate Anniversary Date,” and, in certain circumstances will increase the Retirement Income Base to equal the current Account Value). The effect of each of these factors on the Retirement Income Base is further described in later sections of this prospectus, including “Withdrawals from Your Account,” “Increases from Additional Contributions to Your Account” and “Increases As A Result of the Annual Optional Increase,” respectively.

 

v  

There are certain restrictions regarding the amount and timing of Withdrawals. Withdrawals may also have tax consequences.

 

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v  

As described below, in addition to reducing your Account Value, certain Withdrawals may reduce the amount of benefits, if any, you will receive under your Income Edge or cause it to terminate. These withdrawals are called “Excess Withdrawals.” The following withdrawals are considered “Excess Withdrawals:”

 

   

Any Withdrawal before the “Retirement Income Date,” which is the later of the Certificate Effective Date or your 65th birthday (or, if you own your certificate jointly with your spouse, the younger spouse’s 65th birthday);

 

   

Any Withdrawal in excess of an amount we call the “Retirement Income Amount” during any calendar year on or after the Retirement Income Date. Your Retirement Income Amount is 5% of your Retirement Income Base. If your certificate was issued as a traditional Individual Retirement Account or “IRA” and the required minimum distribution is a greater amount, withdrawing the required minimum distribution amount from your Account will not be considered an Excess Withdrawal. (See “Taxation of the Income Edge” for information about the required minimum distribution.)

 

v  

Excess Withdrawals may reduce the amount of benefits, if any, you will receive under your Income Edge for the following reason:

 

   

Excess Withdrawals reduce the Retirement Income Base in the same proportion as the Account Value is reduced by the Withdrawal. As a result, when the Account Value is less than the Retirement Income Base at the time of an Excess Withdrawal,the dollar amount by which the Retirement Income Base is reduced will be greater than the dollar amount by which the Account Value is reduced. Excess Withdrawals that reduce your Account Value to $0 will cause your Income Edge to terminate.

 

v  

Withdrawals that are not Excess Withdrawals and accordingly do not decrease the Retirement Income Base when taken may limit the increase to your Retirement Income Base that would otherwise result from Additional Contributions to your Account. Prior to the Retirement Income Data, you cannot take any Withdrawals without reducing the Retirement Income Base. As a result, additional Contributions you make to your Account prior to the Retirement Income Date will increase the Retirement Income Base dollar for dollar. On or after the Retirement Income Date, Withdrawals that do not reduce the Retirement Income Base when taken, (e.g. not Excess Withdrawals) including a Withdrawal of the Retirement Income Amount, may reduce the amount of an increase to the Retirement Income Base resulting from a subsequent Additional Contribution, and any such Withdrawal may impact more than one subsequent Additional Contribution. (See “Increases to Your Retirement Income Base” later in this prospectus.)

 

v  

To obtain the maximum potential benefit from your Income Edge under your specific circumstances, you should consider whether to wait until the Retirement Income Date to begin taking Withdrawals and thereafter limit your annual Withdrawals to your Retirement Income Amount, or required minimum distribution, if greater, during any calendar year. We will send you a notice each year showing your Retirement Income Amount and, if applicable, your required minimum distribution. For purposes of calculating the Retirement Income Amount in the annual notices, we assume that the amount of the Investor Protector Program Fee and the Financial Advisor Fee in total does not exceed 2.00% of your current Account Value, in which case the deduction of such fees from your Account Value would not be considered a Withdrawal. If the assets withdrawn to pay the Investor Protector Program Fee and your Financial Advisor Fee, separately or together, exceed 2.00% of the Account Value in a calendar year, the amount in excess of 2.00% of Account Value in a calendar year is a Withdrawal and, depending on your circumstances, all or a portion of such fee(s) could be an Excess Withdrawal that would immediately reduce your Retirement Income Base and will reduce the Retirement Income Amount in subsequent years, assuming the Retirement Income Base does not increase prior to the time the Retirement Income Amount is recalculated.

 

v  

Withdrawals from an Account that is an IRA may be subject to Federal tax consequences. You should consult a tax advisor before taking any Withdrawal from your IRA.

 

v  

In the event that your Account Value is reduced to $0 by Withdrawals on or after the Retirement Income Date (within the limits of the certificate) and/or poor investment performance, before or after the Retirement Income Date, PHL Variable will provide you with lifetime income payments in the amount of 5% of the Retirement Income Base each calendar year, until you (or, if you have purchased the Spousal Income Guarantee, you and your spouse) die.

 

v  

Lifetime income payments under your Income Edge are “contingent” because they are triggered only if Withdrawals (within the limits of the certificate) and/or poor investment performance, reduce your Account Value to $0 within your lifetime (or, if you have purchased the Spousal Income Guarantee, you and your spouse’s lifetimes). If this contingency does not occur, you will never receive any payments from us and your Income Edge will have no value.

Example:

A hypothetical illustration of how the Income Edge works is provided below. Detailed examples using specific assumptions about fees and patterns of Withdrawals and/or Additional Contributions are provided throughout this prospectus.

This illustration makes the following assumptions:

 

   

Your Account is not an IRA. You are 55 years old. You will be the sole owner of the Account. Your Income Edge is issued on the same Business Day that your initial Account Value was calculated so that your Retirement Income Base equals your Account Value on the Certificate Effective Date. On the Certificate Effective Date your Account Value is $500,000, so your Retirement Income Base will equal $500,000. You do not make Additional Contributions to your Account after the Certificate Effective Date.

 

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You wait ten years until you reach your Retirement Income Date to make any requests for Withdrawals from the Account. There are no other Withdrawals (as that term is defined for purposes of the Income Edge) from the Account during this ten-year period. Your Account Value appreciates over this ten-year period, but because you do not make any Additional Contributions to your Account and you reject the Annual Optional Increase that would otherwise occur on any Certificate Anniversary Date, your Retirement Income Base remains at $500,000. You begin taking annual Withdrawals from your Account in the amount of $25,000, which is your Retirement Income Amount under the Income Edge. (In any calendar year on or after the Retirement Income Date, your Retirement Income Amount is equal to 5% of your Retirement Income Base and represents the maximum amount that may be withdrawn in that calendar year without reducing your Retirement Income Base.) You continue to take annual Withdrawals from your Account of $25,000 a year until you are 85 years old, by which time you have completely liquidated your Account due to the combined impact of the annual Withdrawal of the Retirement Income Amount and a prolonged market downturn. Although your Account Value has been reduced to $0, your annual income payments of $25,000 continue because we begin paying you lifetime income payments equal to your Retirement Income Amount of 5% of the Retirement Income Base. These payments continue until your death which, for purposes of this illustration, is assumed to be at age 95.

LOGO

The sample illustration above uses age 55 as the age at purchase. You should note that a younger Income Edge purchaser (i.e., one who is under the age of 65) will pay more in Income Edge fees over the lifetime of the certificate for the same potential benefits received by an older Income Edge purchaser.

2. What Does the Income Edge Cost?

When you purchase your Income Edge you are required to pay the annual Income Edge fee that is payable, quarterly in advance, to us on the first day of each calendar quarter. The deduction of your Income Edge fee from your Account Value is not considered a Withdrawal for purposes of the Income Edge. When you purchase a certificate, the Income Edge fee is charged to your Account on the Certificate Effective Date, prorated based on the number of days remaining in the calendar quarter. Investors Capital will deduct the Income Edge fee from your Account on a pro-rata basis from the Account investments. The Investor Protector Program Fee and the Financial Advisor Fee for the quarter in which you begin participating in the Investor Protector Program and your Account is established are assessed quarterly in advance (see “Additional Fees Related to your Investor Protector Program and the Funds Held in your Account” below). There are two versions of the Income Edge: the Individual Income Guarantee and the Spousal Income Guarantee. If you and your spouse jointly purchase an Income Edge, you will be charged the fee for the Spousal Income Guarantee, which is generally higher than the fee for the Individual Income Guarantee. The Income Edge fee is payable for so long as your certificate is in effect and your Account Value is greater than $0.

3. How is the Income Edge Fee Percentage for my Certificate Determined?

Generally, the Income Edge fee (which is calculated on the Certificate Effective Date and then on the first day of each calendar quarter as a percentage of the Retirement Income Base on the date of calculation) depends on the asset allocation strategy and the corresponding Model Portfolio you have chosen for your Account and which version of the Income Edge, individual or spousal, you have. Your Account can be invested in accordance with only one Model Portfolio at any one time.

The guaranteed maximum Income Edge fee percentage for each Model Portfolio, on an annual basis, is shown below:

 

Investor Protector Program Model Portfolios   Individual Income Guarantee
Fee Percentage as a Percentage of
Retirement Income Base
    Spousal Income Guarantee
Fee Percentage as a Percentage of
Retirement Income Base
 

Conservative

  3.00   3.00

Conservative/Balanced

  3.00   3.00

Balanced

  3.00   3.00

Growth

  3.00   3.00

You should assume that the guaranteed maximum fee percentage will be charged unless we are offering a lower fee percentage at the time you elect the certificate. You will receive information about any lower fee percentages available when you begin the

 

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Application Process for your certificate. The applicable Income Edge fee percentage may change during your Application Process; that is, the amount of the income Edge fee percentage may increase during the period between when you begin the Application Process by completing and submitting an application and the Business Day on which we approve your Application and issue the certificate (i.e., the Certificate Effective Date). Accordingly, you should review the schedule page of your certificate to see the Income Edge fee percentage that will apply at issue. This fee percentage will be shown on the schedule page and will not exceed the maximum fee of 3.00%. If you are dissatisfied with the Income Edge fee percentage applicable to your certificate at any time, you may cancel the certificate by notifying us in writing. Income Edge fees are paid quarterly in advance and we will not refund any fee already taken in accordance with that schedule should you decide to cancel the certificate. If you cancel an Income Edge certificate, you cannot apply for a new Income Edge certificate related to the same Account for 90 days following cancellation of the earlier certificate.

PHL Variable could decide to change the current Income Edge fee percentage for a Model Portfolio at its discretion, including for reasons relating to the amount of risk it undertakes providing the guarantee under the Income Edge such as if it accepts certain changes in the Model Portfolios proposed by Investors Capital. Any change in the current Income Edge fee percentage would apply to certificates issued after the date of the change and, as described below, certain transactions may change the Income Edge fee percentage that applies to your certificate at certain points in time. The Income Edge fee percentage will never exceed the maximum fee of 3.00%. You can obtain information about the Income Edge fee percentages that may be in effect at any time by contacting your Financial Advisor, or Investors Capital at 1-866-377-4559, or by contacting PHL Variable at the number shown on the front of this prospectus.

Your Income Edge fee percentage will be reset if you make an Additional Contribution, do not decline the Annual Optional Increase, or transfer your Account Value to be invested in accordance with a different Model Portfolio. Any new Income Edge fee percentage following one of those transactions will be based, fully or in part, on the Income Edge fee percentage currently in effect for the Model Portfolio in accordance with which your Account assets are invested immediately following the transaction. The new Income Edge fee percentage will apply on the first day of the following calendar quarter unless another Additional Contribution or transfer were to occur, or the Annual Optional Increase was applied to your certificate during the quarter, in which case the Income Edge fee percentage will be reset again.

 

   

In the case of an Additional Contribution, the reset Income Edge fee percentage will be a weighted average of the Income Edge fee percentage that applied to your certificate prior to the Additional Contribution and the Income Edge fee percentage in effect for the Model Portfolio in accordance with which your Account assets are invested at the time of the Additional Contribution.

 

   

Following an Annual Optional Increase, the reset Income Edge fee percentage will be a weighted average of the Income Edge fee percentage that applied to your certificate prior to the Annual Optional Increase and the Income Edge fee percentage in effect for the Model Portfolio in accordance with which your Account assets are invested at the time of the Annual Optional Increase.

 

   

In the case of a transfer, the reset Income Edge fee percentage will be the Income Edge fee percentage in effect for the Model Portfolio in accordance with which your Account assets are invested following the transfer.

For a complete description of the annual Income Edge fee including the effect of transfers, Additional Contributions, and the Annual Optional Increase on the fee percentage you will be charged, see “Annual Income Edge Fee” later in this prospectus.

4. Additional Fees Related to your Investor Protector Program and the Funds Held in your Account

In addition to the Income Edge fees, while your Account Value is greater than $0, the Investor Protector Program Fee, the Financial Advisor Fee, and certain fees associated with the underlying mutual funds and ETFs held in your Account will be deducted from your Account Value, unless you designate another method of payment. The Investor Protector Program Fee is the fee you agree to pay Investors Capital for managing your Account. This fee covers management of the applicable Model Portfolio and trading/custodial costs. The Investor Protector Program Fee would also be charged for your Account in the absence of the Income Edge certificate. The Financial Advisor Fee is the fee charged by your Financial Advisor for providing you with general investment advice and would also be deducted from your Account Value in the absence of the Income Edge.

Amounts deducted from your Account Value that do not exceed 2.00% of your Account Value each calendar year to pay the Investor Protector Program Fee and/or Financial Advisor Fee will not reduce your Retirement Income Base. If the Investor Protector Program Fee and your Financial Advisor Fee, separately or together, exceed 2.00% of your Account Value in any calendar year, the deduction of these fees from your Account Value in excess of 2.00% in any calendar year will be considered a Withdrawal. Withdrawals can reduce your Retirement Income Base. See “Risk Factors, Withdrawals” and “Withdrawals” later in this prospectus.

 

For example, assume your Account Value is $500,000 and, in a particular calendar year, fees in the amount of 2.50% of your Account Value are deducted from your Account Value for your Financial Advisor Fee and Investor Protector Program Fee.

Fees paid from Account Value: 2.50% x $500,000 = $12,500

Fees paid from Account Value that are not treated as a Withdrawal: 2.00% x $500,000 = $10,000

Fees paid from Account Value that are treated as a Withdrawal: $12,500 - $10,000 = $2,500 in excess fees

In this example, 0.50% of fees (2.50% - 2.00%) or $2,500 will be treated as a Withdrawal from your Account that may reduce the Retirement Income Base.

 

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Additionally, the mutual funds that comprise the Model Portfolios have management fees and operating expenses. You do not pay these fees and expenses directly. Instead they are reflected in each fund’s net asset value and in the price at which shares are purchased for your Account. Funds may also have other fees and charges deducted from the amount invested upon purchase or from the proceeds from the sale of fund shares upon redemption, or periodic fees deducted from the value of fund shares. These fees and charges are not considered Withdrawals for purposes of your Income Edge.

Incorporation of Certain Documents by Reference

 

The Securities and Exchange Commission (“SEC”) allows us to “incorporate by reference” information that we file with the SEC into this prospectus, which means that incorporated documents are considered part of this prospectus. We can disclose important information to you by referring you to those documents. This prospectus incorporates by reference our Annual Report on Form 10-K for the year ended December 31, 200     (File Number 333-20277), and the definitive proxy statement filed by the Phoenix Companies, Inc. pursuant to Regulation 14A on March     , 2010 (File Number 001-16517). These documents contain information about our financial results and other matters for the applicable periods.

You may request a copy of any documents incorporated by reference in this prospectus and any accompanying prospectus supplement (including any exhibits that are specifically incorporated by reference in them), at no cost, by writing to PHL Variable at: Investor Relations, One American Row, P.O. Box 5056, Hartford, CT 06102-5056, or telephoning PHL Variable at 800-490-4258. You may also access the incorporated documents at the following web pages: https://www.phoenixwm.phl.com/public/products/regulatory/index.jsp and the “Investor Relations” page of The Phoenix Companies, Inc. website at www.phoenixwm.com.

PHL Variable electronically files its Annual Report on Form 10-K, as well its Quarterly Reports on Form 10-Q, with the SEC. The Phoenix Companies, Inc. electronically files its proxy statement with the SEC. The SEC maintains a website that contains reports, information statements, and other information regarding issuers that file electronically with the SEC; the address of the website is http://www.sec.gov. The public may also read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Risk Factors

 

1. Investment Limitations

 

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The assets in your Account must be invested in accordance with the investment limitations for one of the four Model Portfolios to be covered by the Income Edge. Your Income Edge will terminate if the assets in your Account do not comply with these investment limitations.

Each Model Portfolio is subject to limits on the permitted types of asset or sub-asset classes (such as Mid Cap US Equity) and the minimum and maximum percentage of total portfolio value permitted to be invested in each permitted asset or sub-asset class. We call these limits “Permitted Ranges.” The Permitted Ranges for the four Model Portfolios currently available with the certificate are shown in the later section of this prospectus called “The Current Permitted Ranges for the Model Portfolios.” Additionally, Investors Capital has proposed and PHL Variable has agreed that certain specific mutual funds can be used in the Model Portfolios. These specific mutual funds and cash, when held in accordance with the Permitted Ranges, are the “Permitted Funds.” These Permitted Ranges, and the requirement to use only Permitted Funds, apply to all assets in the Model Portfolios unless Investors Capital proposes a change to the Permitted Ranges or the Permitted Funds and that change is accepted by PHL Variable. See “Investors Capital and the Model Portfolios” later in this prospectus for information about the Permitted Ranges and the types of Permitted Funds. The assets in your Account could fail to satisfy these investment limitations for a variety of reasons, including reasons you, Investors Capital, or PHL Variable do not control. These reasons include:

 

   

you making an Additional Contribution to your Account that is not allowed as cash within the Permitted Ranges or that is not invested within the Permitted Ranges using Permitted Funds for the Model Portfolio you have elected for your Account,

 

   

Investors Capital investing the assets in your Account outside the Permitted Ranges and/or Permitted Funds, and failing to bring the Account assets in line with the Permitted Ranges and/or the Permitted Funds within ten Business Days after we provide notice thereof to Investors Capital (this period is called the “Cure Period” in this prospectus; please note that the “Termination” section of your certificate provides five Business Days as the Cure Period, but under our administrative procedures we permit ten Business Days), and

 

   

changes in the value of Account assets that cause an Account to fail to satisfy the Permitted Ranges for the chosen Model Portfolio and Investors Capital’s failure to bring the investments in line with the Permitted Ranges within the Cure Period. Changes in the value of Account assets can occur when the value of the fund shares held in your Account increases or decreases due to market movement, when additional fund shares or cash are credited to your Account as dividends, or when fund shares are liquidated to pay fees, or to satisfy Withdrawals you request.

 

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Regardless of the reason, if at any time 100% of your Account assets are not invested in accordance with the Permitted Ranges, using only Permitted Funds, for your chosen Model Portfolio, your Income Edge will be at risk of terminating unless Investors Capital brings the assets in line with the investment limitations for the Model Portfolio within the Cure Period. We will notify an Income Edge certificate holder whose Account is no longer in compliance with the Permitted Ranges using only Permitted Funds of this circumstance and options by mailing a notification to the certificate holder’s address on our records at least 30 days prior to terminating the certificate.

 

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You and/or your Financial Advisor may decide to reduce or eliminate assets in your Account that could terminate or reduce the benefit of your Income Edge. This may happen if when reviewing the assets in your Account, your Financial Advisor consistent with his or her fiduciary duty to you would be required to consider changes in market conditions, such as a significant increase in the volatility of equity securities making a Model Portfolio with heavier allocation to equities inappropriate for an investor with a lower risk tolerance, and changes in your financial condition, such as an immediate need for cash, and may decide that these changes require adjustment or termination of the assets in your Account. You should carefully consider before purchasing an Income Edge certificate that:

 

   

if you withdraw your total Account Value prior to the Retirement Income Date, your Income Edge will terminate.

 

   

if, on or after the Retirement Income Date, you withdraw your total Account Value, your Income Edge will terminate unless your Retirement Income Amount is greater than your Account Value.

 

   

if you make Withdrawals from your Account in any amount prior to your Retirement Income Date, or, in an amount that exceeds the Retirement Income Amount in any calendar year on or after your Retirement Income Date, you will reduce your Retirement Income Base and the potential benefit of the Income Edge in the future.

See “Withdrawals” later in this prospectus.

 

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Investors Capital may discontinue offering the Model Portfolios in its discretion, in which case there may not be a portfolio eligible for coverage under the Income Edge.

 

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The asset allocation strategies underlying the Model Portfolios eligible for Income Edge are designed to provide steady returns that limit both upside and downside potential thereby minimizing the risk to PHL Variable that your Account Value will be reduced to $0 before you die, and that PHL Variable would therefore be obligated to begin making lifetime income payments to you (subject to the conditions described in this prospectus). Accordingly, a significant risk against which the Income Edge protects, i.e., that your Account Value will be reduced to $0 by Withdrawals (within the limits of the certificate) and/or poor investment performance and that you live beyond the age when your Account Value is reduced to $0, may be minimal.

 

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Because the asset allocation strategies and the limits on the amount of Withdrawals you may make annually without reducing your Retirement Income Base lessen the risk that your Account Value will be reduced to $0 while you are still alive, there is a low probability that we are required to make any payments to you under your Income Edge.

 

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The Investor Protector Program restricts transfers of Account Value to other Model Portfolios to once every 90 days. As a result, if you become dissatisfied with a Model Portfolio and wish to reallocate your Account assets in accordance with a different Model Portfolio, you may have to wait to do so. Additionally, you may only invest in one Model Portfolio at any one time.

2. Lifetime Income Payments

 

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The Income Edge is designed to protect you from outliving the assets in your Account. If you terminate the Income Edge, or if you (or if you have elected the Spousal Income Guarantee, you and your spouse) die before your Account Value is reduced to $0 by Withdrawals (within the limits of the certificate) and/or poor investment performance, neither you nor your estate will receive any payments from us under your Income Edge, nor will your Income Edge provide for any cash value build-up for income payments.

 

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If your Account Value is reduced to $0 by Withdrawals (within the limits of the certificate) and/or poor investment performance while you, or if you have purchased the Spousal Income Guarantee, you and/or your spouse are living, and you therefore receive lifetime income payments from us under your Income Edge, there is a risk that the total amount of the lifetime income payments you receive will be less than the total Income Edge fees you have paid. Since you must also pay fees for the assets in your Account to be covered by the Income Edge, namely the Investor Protector Program Fee, the Financial Advisor Fee, and any fees charged directly by the funds or ETFs used in the Model Portfolio you have elected, the risk that such fees could exceed the total amount of lifetime income payments we could be obligated to pay under the terms of the certificate is increased.

3. Tax Consequences

 

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The Income Edge is novel and innovative. The Internal Revenue Service has issued a ruling to PHL Variable Insurance Company indicating that the Income Edge certificate will be treated as an annuity contract under the Internal Revenue Code. In addition, the Internal Revenue Service has also issued rulings concerning the tax treatment to an individual investor relative to the certificate

 

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and to Account assets. These rulings provide, in substance, that the certificate will be treated as an annuity contract and that the income tax treatment of the Account is unaffected by the existence of Income Edge. Accordingly, we will treat any Income Edge payments made to you after your Account Value has been reduced to $0 as ordinary income to you that is taxable to the extent provided under the income tax rules for annuities. See “Taxation of the Income Edge” later in this prospectus.

4. Financial Strength of PHL Variable Insurance Company

 

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The Income Edge is not a separate account product. This means that the assets at PHL Variable Insurance Company supporting the Income Edge are not held in a segregated account for the exclusive benefit of Income Edge certificate owners and are not insulated from the claims of PHL Variable’s third party creditors. Your lifetime income payments (if any) will be paid from our general account and, therefore, are subject to our claims paying ability. Under Connecticut law, life insurance companies, including PHL Variable, are required to hold a specified amount of reserves in order to meet the contractual obligations of their general account to contract owners. State insurance regulators also require life insurance companies to maintain a minimum amount of capital, which acts as a cushion in the event that the insurer suffers a financial impairment, based on the inherent risks in the insurer’s operations. These risks include those associated with losses that an insurer could incur as the result of its own investment of its general account assets, which could include bonds, mortgages, general real estate investments, and stocks. If your Account Value is reduced to $0 such that lifetime income payments would be due under the terms of the certificate and, at that time, PHL Variable’s general account was not able to make the lifetime income payments provided by the certificate, you would be treated as a general creditor of PHL Variable and may not obtain the benefit from the certificate. No fees paid for the certificate would be refunded.

The financial strength of PHL Variable Insurance Company is currently rated by four nationally recognized statistical rating organizations (“NRSRO”). These NRSROs are A.M. Best, S&P, Moody’s and Fitch (we do not provide nonpublic information to Fitch). The NRSRO ratings are not specific to the Income Edge certificate and your lifetime income payments, if any, and may change over time. Useful information about PHL Variable’s financial strength, including our current financial strength ratings and information on our general account portfolio of investments can be found on our website (www.Phoenixwm.com). Additionally, you may obtain information on our financial condition and our financial strength ratings by reviewing our reports to the SEC on Forms 10-K, 10-Q and 8-K, as well as the definitive proxy statement filed with the SEC by the Phoenix Companies, Inc., including those reports which are incorporated by reference into this prospectus. See “Incorporation of Certain Documents by Reference,” previously in this prospectus. PHL Variable’s financial strength ratings do not apply to the Account or to any investments held in the Account.

5. Increases To Your Retirement Income Base

 

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Your Retirement Income Base does not automatically increase when the assets (e.g. fund shares) in your Account appreciate in value. Your Retirement Income Base only increases if you make Additional Contributions to your Account (and have not made any Withdrawals from your Account that did not immediately reduce your Retirement Income Base) or you do not decline the Annual Optional Increase on a Certificate Anniversary Date (and potentially thereafter pay higher Income Edge fees). Therefore, there is a risk that your Retirement Income Base will not increase while you own your Income Edge. See “Increases in Your Retirement Income Base” later in this prospectus.

6. Withdrawals

 

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If you make any Withdrawals from your Account before your Retirement Income Date, or you make Withdrawals on or after your Retirement Income Date that exceed your Retirement Income Amount (or, if your certificate was issued as a traditional IRA, the required minimum distribution, if greater), the amount of lifetime income payments that you could receive under your Income Edge, if any, may be reduced. We consider these Withdrawals “Excess Withdrawals”. Accordingly, Withdrawals must be carefully managed to avoid decreasing the amount of your Retirement Income Base and Retirement Income Amount or causing a termination of your Income Edge that may not be in your best interest. However, due to the long-term nature of the Income Edge, there is a risk that you may need funds prior to your Retirement Income Date, or in an amount in excess of your Retirement Income Amount (or, if your certificate was issued as a traditional IRA, the required minimum distribution, if greater), on or after your Retirement Income Date, and that if you do not have sources of income other than your Account available, you may need to make Withdrawals from your Account that will reduce the amount of any lifetime income payments you may receive under your Income Edge. You should carefully monitor your Retirement Income Base at all times as well as the amount of any Withdrawals. You may call Investors Capital at 1-866-377-4559 for information about your Retirement Income Base and Retirement Income Amount.

 

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As noted above, you may have certain needs for Withdrawals from your Account. Additionally, you may choose to take Withdrawals from your Account if you become dissatisfied with the asset allocation strategies and/or Model Portfolios available, or you may choose to take Withdrawals for other reasons. Regardless of the reason, if these Withdrawals are Excess Withdrawals, the amount of lifetime income payments that you could receive under your Income Edge, if any, may be reduced. See “Withdrawals from Your Account” later in this prospectus. In addition, such Withdrawals may have tax consequences. See “Taxation of the Income Edge” later in this prospectus for a discussion of the tax consequences of the Income Edge.

 

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You may take Withdrawals from your Account at any time and in any amount. As with any investment account, you must liquidate investments to provide for Withdrawals and Withdrawals may have tax consequences. As described below, certain Withdrawals can negatively affect your Income Edge or cause it to terminate. We call these Withdrawals “Excess Withdrawals.” The following Withdrawals are considered “Excess Withdrawals:”

 

   

Any Withdrawal before the “Retirement Income Date”, which is the later of the Certificate Effective Date or your 65th birthday (or, if you own your certificate jointly with your spouse, the younger spouse’s 65th birthday);

 

   

Any Withdrawal in excess of the Retirement Income Amount during any calendar year on or after the Retirement Income Date. Your Retirement Income Amount is 5% of your Retirement Income Base. If your certificate was issued as a traditional IRA and the required minimum distribution is a greater amount, withdrawing the required minimum distribution amount from your Account will not be considered an Excess Withdrawal.

For example, assume your certificate was issued as a traditional IRA and you are currently over 70 1/2 years old so your IRA has a required minimum distribution. In a given calendar year, assume your Retirement Income Amount is $25,000 and your required minimum distribution attributable to your Account Value is $35,000. You make a Withdrawal of $30,000. Even though the Withdrawal exceeds the Retirement Income Amount, it is less than the required minimum distribution so it does not affect your Retirement Income Base. See “Taxation of the Income Edge” for information about the required minimum distribution;

 

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Excess Withdrawals negatively affect your certificate in the following ways:

 

   

Excess Withdrawals reduce the Retirement Income Base. Excess Withdrawals reduce the Retirement Income Base in the same proportion as the Account Value is reduced by the Withdrawal. As a result, when the Account Value is less than the Retirement Income Base at the time an Excess Withdrawal is taken, the Retirement Income Base will be reduced by more than the dollar amount of the Withdrawal.

 

   

Excess Withdrawals that reduce your Account Value to $0 will cause your Income Edge to terminate. Stated differently, if any Withdrawal prior to the Retirement Income Date reduces your Account Value to $0, your Retirement Income Base reduces to $0 and your Income Edge will terminate. If a Withdrawal after the Retirement Income Date in excess of the Retirement Income Amount, or for certificates issued as traditional IRAs, the required minimum distribution, if greater, reduces your Account Value to $0, your Retirement Income Base will be reduced to $0 and your Income Edge will terminate.

 

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Withdrawals from your Account can also limit the increase to your Retirement Income Base that would otherwise result from Additional Contributions to your Account. Additional Contributions prior to the Retirement Income Date will increase the Retirement Income Base dollar for dollar. On or after the Retirement Income Date, Withdrawals that do not reduce the Retirement Income Base when taken (e.g. not Excess Withdrawals), including a Withdrawal of the Retirement Income Amount, may reduce the amount of an increase to the Retirement Income Base resulting from a subsequent Additional Contribution to the Account and any such Withdrawal may impact more than one subsequent Additional Contribution. See “Increases to Your Retirement Income Base” later in this prospectus.

 

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As noted, deductions from your Account Value to pay the amount of the Investor Protector Program Fee and/or Financial Advisor Fee that separately or together exceeds 2.00% in any calendar year are Withdrawals for purposes of the Income Edge. See “Summary, Additional Fees Related to Your Account” earlier in this prospectus for an example. The Investor Protector Program Fee is the fee charged for the Account and would be charged even in the absence of the Income Edge certificate. For more information on the Investor Protector Program fee, please see the Part II to the Investors Capital Form ADV. The Part II may be obtained by writing to Investors Capital at 230 Broadway, Lynnfield, MA 01940 or by calling 1-866-377-4559. The Financial Advisor Fee is the asset-based fee paid to your Financial Advisor for providing you general investment advice and would be charged even in the absence of the Income Edge certificate. Deductions from Account Value for the portion of these fees that exceeds 2.00% of Account Value in any calendar year before the Retirement Income Date are Excess Withdrawals. Deductions from Account Value for the portion of these fees that exceeds 2.00% of Account Value in any calendar year on or after the Retirement Income Date will be Excess Withdrawals if the cumulative amount of Withdrawals, including these deductions, in a calendar year exceeds the Retirement Income Amount in that calendar year. Any Excess Withdrawals reduce the Retirement Income Base.

 

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You should note that there is no provision under the Income Edge to cure any decrease in the amount of your Retirement Income Base and Retirement Income Amount due to Withdrawals.

 

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Your certificate does not require us to warn you or provide you with notice regarding potentially adverse consequences that may be associated with any Withdrawals or other factors affecting your Account Value. You should consider your ability to monitor factors affecting your Account Value, such as deductions to pay the Investor Protector Program Fee and the Financial Advisor Fee and Withdrawals you schedule or request before you purchase the Income Edge, and should carefully monitor that activity after you purchase the certificate.

 

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On or after the Retirement Income Date, the longer you wait to start making Withdrawals from your Account, the less likely it is that you will benefit from your Income Edge because of decreasing life expectancy. Conversely, the longer you wait to begin

 

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making Withdrawals, the more opportunities you will have to take advantage of any appreciation of your Account Value by not declining an Annual Optional Increase and locking in a higher Retirement Income Base (not declining an Annual Optional Increase may increase your Retirement Income Base and result in a higher Income Edge fee). You should, of course, carefully consider when to begin making Withdrawals, but there is a risk that you will not begin making Withdrawals at the most financially beneficial time for you.

 

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If, on or after the Retirement Income Date, you make Withdrawals in an aggregate amount less than the entire Retirement Income Amount in any calendar year, you ARE NOT permitted to increase the Retirement Income Amount by the amount not withdrawn in the prior calendar year in the next calendar year.

Timing Issues

 

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As noted above, when you first purchase your Income Edge, the Retirement Income Base is set to your Account Value on the Business Day on which your Income Edge Application Process is completed, which must occur on a Business Day on which we are also open for business. The determination of your Retirement Income Base may be delayed if your Application is incomplete, or your Account Value is greater than $5,000,000, in which case our administrative rules require additional review prior to acceptance. There is a risk that the value of your initial contribution into your Account will decrease before the Certificate Effective Date and therefore your Retirement Income Base will be less than the dollar amount of your initial contribution to the Account due to the differences in the timing of the Account opening and Application Process. See “How does the Income Edge Work?” previously in this prospectus.

 

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Additional Contributions made to your Account after the Certificate Effective Date must be allowed to remain as cash in the Model Portfolio you have elected or be invested in accordance with the Permitted Ranges for Model Portfolio you have elected by the end of the Cure Period.

 

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If you purchase an Income Edge and your Account Value decreases to $0 solely due to poor market performance prior to the Retirement Income Date, we are not required to begin making lifetime payments (if any) to you until one month after your Retirement Income Date. If you (or, if you have purchased the Spousal Income Guarantee, both you and your surviving spouse) die before the Retirement Income Date, your Income Edge will terminate and you will receive no lifetime income payments from us and your Income Edge will terminate without any value.

Income Edge Fee and other Account Fees

 

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There is a risk that the Income Edge fee percentage that will be applied to any increases in your Retirement Income Base resulting from Additional Contributions to your Account and/or the Annual Optional Increase will be a higher percentage than your current Income Edge fee percentage. There is a risk that the Income Edge fee for your certificate could increase if you choose to transfer your Account assets so they are invested in accordance with a different Model Portfolio than you previously elected and/or you do not decline an Annual Optional Increase or make an Additional Contribution that results in an increase to your Retirement Income Base. The Income Edge fee for your certificate could increase if we increase the Income Edge fee percentage for a Model Portfolio or if Investors Capital proposes a change in the Permitted Ranges and/or Permitted Funds for a Model Portfolio that PHL Variable accepts but that also causes PHL Variable to increase the Income Edge fee percentage for the affected Model Portfolio. In either case, any increased fee percentage would only apply to your certificate if you have elected the affected Model Portfolio for your Account and make an Additional Contribution to your Account or do not decline an Annual Optional Increase, or if you transfer your Account assets so they are invested in accordance with the affected Model Portfolio. You should carefully consider the possibility of an increased Income Edge fee before you purchase an Income Edge. The Income Edge fee percentage will not exceed 3.00% of the Retirement Income Base annually. See “How is the Income Edge Fee Percentage for my Certificate Determined” previously in this prospectus and “Annual Income Edge Fee” later in this prospectus.

 

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Additionally, other fees apply to your Account and there is a risk that the deduction of these fees from your Account could negatively impact the potential benefit of the Income Edge. If the Investor Protector Program Fee and the Financial Advisor Fee, separately or together, exceed 2.00% of Account Value in a calendar year, deductions from Account Value for the portion of these fees that exceeds this amount will be considered Withdrawals for the purposes of the Income Edge. It is possible these fees, which are separate from the Income Edge fee, could exceed 2.00%. See “Additional Fees Related to your Account” earlier in this prospectus, and “Withdrawals” later in this prospectus.

Divorce

 

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Two spouses legally married under federal law may purchase the Spousal Income Guarantee version of the Income Edge to provide predictable lifetime income payments for the lives of both spouses by providing continuing income payments if the investments in the spouses’ jointly-owned Account are reduced to $0 by withdrawals (within the limits of the certificate) and/or poor investment performance before both spouses die. There is a risk that if two spouses purchase a Spousal Income Guarantee version of the Income Edge and subsequently determine to obtain a divorce, such divorce could result in a loss of part or all of the income protection provided to each spouse by the Income Edge prior to the divorce. See “Divorce of Joint Spousal Owners of an Income Edge” later in this prospectus.

 

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Regulatory Protections

 

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The Income Edge certificates are the subject of a registration statement filed with the SEC in accordance with the Securities Act of 1933 (the “Securities Act”) and the offering of the Income Edge certificates must be conducted in accordance with the requirements of the Securities Act. We are also subject to applicable periodic reporting and other requirements imposed by the Securities Exchange Act of 1934.

 

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We are not an investment adviser and do not provide investment advice to you in connection with your Income Edge. Therefore, we are not governed by the Investment Advisers Act of 1940 (the “Advisers Act”), and the protections provided by the Advisers Act are not applicable with respect to our sale of the Income Edge to you. Investors Capital is an investment adviser registered with the SEC and subject to the Advisers Act. Your Financial Advisor may also be subject to the Advisers Act if he or she is in the business of providing investment advice for a fee.

Using Your Account as Collateral for a Loan

 

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The assets in your Account are owned by you, not by us. We have no control over any of the assets in your Account and you may sell such assets at any time in your complete and sole discretion and without any permission from us. The assets in your Account are not subject to our creditors, although they can be directly attached by your creditors. In addition, you may pledge the assets in your Account as collateral for a loan. In the case of such a pledge, if the assets in your Account decrease in value, your creditor may be able to liquidate assets in your Account to pay the loan. Any such liquidation may constitute a Withdrawal from your Account and reduce your Retirement Income Base. Using the assets in your Account as collateral for a loan, therefore, may reduce the future benefit of your Income Edge or cause your Income Edge to terminate.

The Income Edge Certificate

 

The Income Edge is offered to advisory clients of Investors Capital whose Account assets are managed under the Investor Protector Program. The Income Edge is designed for Investors Capital clients who intend to use the assets in their Account as the basis for a withdrawal program to provide income payments for retirement or other long-term purposes.

Subject to certain conditions, the Income Edge ensures predictable lifetime income payments regardless of the actual performance or value of your Account, by providing continuing income payments if your Account Value is reduced to $0 by Withdrawals (within the limits of the certificate) and/or poor investment performance. There are limitations on the amount and timing of Withdrawals, which are discussed below. There is an annual fee for the Income Edge which is deducted from your Account quarterly in advance.

The certificate provides for certain transactions and/or events to occur. If any such transaction affects your Retirement Income Base or your Retirement Income Amount, such as certain Additional Contributions and/or Withdrawals, we use the Account Value as of the close of business for the Business Day immediately preceding the day the transaction or event occurs in calculating the changed Retirement Income Base or Retirement Income Amount. If we are not open for business on a day when a transaction or event occurs for your certificate and that transaction or event changes your Retirement Income Amount, we can advise you of the new amount as of the next Business Day we are open for business and we will provide you with notice of this amount.

When lifetime income payments will begin depends on whether or not you have reached the Retirement Income Date at the time your Account Value is reduced to $0. If your Account Value is reduced to $0 prior to the Retirement Income Date solely as a result of poor investment performance, monthly payments will commence one month following the Retirement Income Date. If your Account Value equals $0 on or after the Retirement Income Date as a result of Withdrawals (within the limits of the certificate) and/or poor investment performance, monthly payments will commence one month following the date your Account Value reduces to $0.

 

1. Purchasing an Income Edge

 

How Do You Purchase An Income Edge?

You purchase an Income Edge when you choose the Investor Protector Program. If you had a certificate with your Account and chose to terminate it, you must wait at least 90 days following the termination to purchase another certificate on the same Account. You, or, if you intend to elect the Spousal Income Guarantee, you and your spouse, must be younger than age 85 to purchase the Income Edge. You may apply to purchase an Income Edge by completing an Application. An Application for an Income Edge covering an Account over $5 million is subject to additional review by us before we issue a certificate. We may determine not to issue an Income Edge for any reason, at our sole discretion. If your Application Process is successfully completed, we will issue an Income Edge certificate to you describing your rights and obligations. The Income Edge certificate is in the form of an individual certificate provided under a group annuity contract issued by PHL Variable to Investors Capital Holdings, Ltd., the parent of Investors Capital Corporation. In Massachusetts, subject to state approval, certificates will be issued under a group annuity contract issued by PHL Variable to Investors Capital Corporation. The Income Edge is not available in all states.

 

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There are two versions of the Income Edge: the Individual Income Guarantee and the Spousal Income Guarantee.

 

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The Individual Income Guarantee provides predictable lifetime income payments to you regardless of the actual performance or value of your Account assets by providing continuing income payments if the assets in your Account are reduced to $0 by Withdrawals (within the limits of the certificate) and/or poor investment performance before you die.

 

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The Spousal Income Guarantee provides predictable lifetime income payments for both you and your spouse by providing continuing income payments if the assets in your Account are reduced to $0 by Withdrawals (within the limits of the certificate) and/or poor market performance before both you and your spouse die.

 

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When you apply to purchase an Income Edge, you must indicate whether you want the Individual Income Guarantee or the Spousal Income Guarantee.

 

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Any owner of the Income Edge must be an owner of the Account.

 

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If you elect the Individual Income Guarantee, there can be only one owner of the Income Edge and that owner must be a natural person, unless the Income Edge is purchased by an IRA. For purposes of the Individual Income Guarantee, the Retirement Income Date is the later of your Certificate Effective Date or your 65th birthday.

 

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If you elect the Spousal Income Guarantee, both owners must be married spouses as defined under Federal tax law. Federal law defines “spouse” under the Defense of Marriage Act, as a man or a woman legally joined. Under this Act, neither individuals married under State or foreign laws that permit a marriage between two men or two women nor individuals participating in a civil union or other like status are spouses for any federal purposes, including provisions of the Internal Revenue Code. The age of the younger spouse is used to determine when and if lifetime income payments will be paid under the Income Edge. Accordingly, the Retirement Income Date is the later of the Certificate Effective Date or the younger spouse’s 65th birthday. For example, if on the Certificate Effective Date, one spouse is age 40, while the other spouse is age 60, the Retirement Income Date would be approximately twenty-five years from the Certificate Effective Date (the youngest spouse’s 65th birthday). In the event that the younger spouse dies before his or her 65th birthday, then the Retirement Income Date will be the older spouse’s 65th birthday. If the older spouse has already reached his or her 65th birthday, then the date of the younger spouse’s death will be set as the Retirement Income Date.

What If You Want to Purchase an Income Edge For Your Individual Retirement Account (IRA)?

You may purchase the Qualified Income Edge and select the Individual Income Guarantee for your IRA.

 

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A Qualified Income Edge is an Income Edge certificate owned by an IRA. The Qualified Income Edge is available for traditional and Roth IRAs (collectively, “IRA Accounts”).

 

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If the Income Edge certificate is purchased in connection with an IRA, you must designate the natural person for whom the IRA is established for the benefit of the Income Edge for purposes of determining Income Edge benefits. The Retirement Income Date for the Qualified Income Edge is the later of the Certificate Effective Date or the date when the natural person for whom the IRA is established reaches age 65. The Qualified Income Edge is held within the IRA Account for the benefit of the natural person for whom the IRA is established.

 

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For a Qualified Income Edge, in a traditional IRA, the required minimum distribution (RMD) for the IRA will include the value of the Qualified Income Edge. In some cases, the RMD for the Account covered by the Income Edge may be more than 5% of the Retirement Income Base. If so, Withdrawals from your Account, to meet RMD requirements will not be be treated as Excess Withdrawals and, accordingly, will not reduce your Retirement Income Base. For example, assume that the Account Value covered by Income Edge is $100,000; based on your age, the RMD related to the Account Value covered by the Income Edge is computed as $5,000. This amount can be Withdrawn from the Account Value even if this $5,000 exceeds 5% of your Retirement Income Base. The RMD for traditional IRA Accounts will be calculated as of January 1 following the later of the Certificate Effective Date and the date the owner turns the age 70 1/2. Prior to the date the RMD is first calculated, the RMD is equal to $0. The RMD will be based on the Account Value on the previous December 31st. See “Taxation of the Income Edge” for information about the required minimum distribution.

 

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The Spousal Income Guarantee is not available for an IRA Account.

 

2. How Does Your Income Edge Work?

 

Your Retirement Income Base will equal your Account Value on your Certificate Effective Date. Additional Contributions you make to your Account after the Certificate Effective Date must be allowed to remain as cash in the Model Portfolio you have elected, or be invested in accordance with the Permitted Ranges, using only Permitted Funds, for the Model Portfolio you have elected by the end of the Cure Period. Your Retirement Income Base may or may not increase as a result of Additional Contributions to your Account or the Annual Optional Increase. See “Increases in Retirement Income Base” later in this prospectus. Increases to your Retirement Income Base may increase the Income Edge Fee you will pay. See “Income Edge Fee” later in this prospectus.

 

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On or after your Retirement Income Date, you may withdraw your Retirement Income Amount, or if your certificate was issued as a traditional IRA, your RMD, if greater, without reducing your Retirement Income Base. Of course, you may always make Withdrawals from your Account before your Retirement Income Date, or in excess of your Retirement Income Amount or, if your certificate was issued as a traditional IRA, your RMD, if greater, on or after the Retirement Income Date, but these Withdrawals are considered Excess Withdrawals under the Income Edge and, accordingly, will reduce your Retirement Income Base and your Retirement Income Amount. Additionally, any Withdrawal that is not an Excess Withdrawal, including a Withdrawal of the Retirement Income Amount on or after the Retirement Income Date, will reduce the amount by which your Retirement Income Base would otherwise increase as a result of Additional Contributions to the Account and such Withdrawals may affect more than one subsequent Additional Contribution. See “How Do You Structure Withdrawals From Your Account?” later in this prospectus.

In the event that your Account Value is reduced to $0 by withdrawals (within the limits of the certificate) and/or poor investment performance on or after your Retirement Income Date, we will pay the Retirement Income Amount after your Account Value reduces to $0 until you (or, if you have purchased the Spousal Income Guarantee, you and your spouse) die. Under no circumstances would the payments continue to your heir or estate.

 

3. Investors Capital and the Account

 

About Investors Capital

Investors Capital is an investment management company that is registered as an investment adviser with the SEC. Investors Capital provides investment advisory services in all 50 states and, as of December 31, 2009, managed approximately $975 million in client assets. Investors Capital provides portfolio management services to individuals, trusts, corporate entities, employee benefit plans, and institutional clients.

Investors Capital will offer the Investor Protector Program only through affiliated and unaffiliated registered investment advisor representatives (“Financial Advisors”), although Investors Capital may engage other third parties to identify individuals who may be interested in investing in Accounts. The Financial Advisors assist clients in analyzing whether the Investor Protector Program is an appropriate investment advisory program and determining which investment style is appropriate for the client’s Account. Certain Financial Advisors may not be permitted to provide you with advice regarding the Income Edge due to state laws and regulations relating to insurance agents. However, these Financial Advisors are permitted to arrange for you to discuss the Income Edge with representatives of Investors Capital Corporation’s affiliated insurance agency who are licensed to talk about whether the Income Edge is appropriate for you and to answer your questions. If you purchase the Income Edge, Pershing, LLC, the custodian for your Account, will provide client statements concerning Account activity, strategy and performance to your Financial Advisor, while we will send you notices solely related to the Income Edge.

About the Investor Protector Program

The Investor Protector Program is a discretionary managed account that leverages the expertise and knowledge of Investors Capital’s investment policy committee to actively manage specific portfolios comprised of mutual funds, including ETFs. While Investors Capital has a variety of investment strategies across the risk/return spectrum, the Investor Protector Program currently offers four Model Portfolios eligible for coverage under the certificates. Each of the Model Portfolios represents a different level of expected risk and return and correlates to one of the four asset allocations strategies described below. You may participate in only one of the four Model Portfolios eligible for the Income Edge at any one time, but may transfer your total Account Value from funds meeting the investment limitations of one Model Portfolio to another under the terms of the Investor Protector Program. You should know that you may only make such transfers once in each 90-day period and that transferring from funds meeting the investment limitations of one Model Portfolio to another may affect the fee you will pay for your certificate. You may not purchase the Income Edge in connection with a brokerage account the assets of which are managed in accordance with any portfolio that is not a Model Portfolio.

Investors Capital serves as the portfolio manager for the Model Portfolios and determines the asset allocation and specific mutual funds, including ETFs for each Model Portfolio based on a determination about each fund manager’s performance in the specific investment discipline that fits the allocation strategy. Your Financial Advisor will assist you in selecting the Model Portfolio appropriate for your circumstances. Your participation in the Investor Protector Program is governed by the ICAS Client Agreement you signed with Investors Capital. You enter into this agreement in order to open your Account. In the ICAS Client Agreement, you authorize Investors Capital to provide investment advisory services to you, including the selection of the Model Portfolio in accordance with which your Account assets will be managed. Investors Capital, as portfolio manager to the Model Portfolios, maintains your Account by arranging for the execution of trades in your Account, placing orders for the purchase, sale or redemption of shares of the mutual funds, including ETFs, in accordance with the Permitted Ranges and Permitted Funds for the Model Portfolio you have selected, and periodically rebalances those assets. The assets are held by the custodian for your Account, which is Pershing, LLC. Investors Capital has arranged with the custodian to provide certain services to the Accounts, including custody of Account assets, provision of Account statements, and deduction of fees for the Investor Protector Program and other fees due under your ICAS Client Agreement. For more detailed information regarding the Investor Protector Program please refer to Investors Capital’s Form ADV Part II, which may be obtained by writing to Investors Capital at 230 Broadway, Lynnfield, MA 01940 or by calling 1-866-377-4559.

 

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About the Model Portfolios

The Model Portfolios invest in mutual funds, including ETFs, and do not hold individual securities. An “ETF” is a type of pooled investment vehicle that invests in the securities of other issuers and the shares of which, unlike a traditional mutual fund, are traded on an exchange in secondary markets. An ETF may be a fund that holds a portfolio of common stocks designed to track the performance of a particular securities index, or a portfolio of bonds that may be designed to track a bond index. Each share of an ETF represents an undivided ownership interest in the portfolio held by an ETF.

The Model Portfolios currently eligible for coverage under the Income Edge are constructed to correspond to one of four asset allocation strategies, each of which has a percentage investment in equities and a percentage investment in fixed income investments corresponding to a target level of return and an expected level of risk associated with those investment percentages.

 

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The Investor Protector Conservative Model Portfolio is intended to consist of 40% equity investments and 60% fixed income investments. This Model Portfolio is intended for those investors concerned with capital preservation and a more conservative risk profile given the lower exposure to equities. The Investor Protector Conservative Model Portfolio is the least aggressive Model Portfolio in the Investor Protector Program.

 

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The Investor Protector Conservative/Balanced Model Portfolio is intended to consist of 50% equity investments and 50% fixed income investments. This Model Portfolio is intended for those investors concerned with capital preservation, but who would like equal exposure to both fixed income and equity securities for a greater return potential as compared to the Investor Protector Conservative model. Given the increased equity exposure, the Investor Protector Conservative/Balanced model is slightly more aggressive than the Investor Protector Conservative Model Portfolio.

 

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The Investor Protector Balanced Model Portfolio is intended to consist of 60% equity investments and 40% fixed income investments. The Investor Protector Balanced Model Portfolio has a greater allocation to equities as compared to fixed income securities. This model is intended for those investors who seek the greater growth potential offered by the increased equity exposure but desire the reduced volatility historically delivered by fixed income investments. Given this increased exposure to equities, the Investor Protector Balanced Model Portfolio will have a more aggressive posture as compared to the Investor Protector Conservative and Investor Protector Conservative/Balanced Model Portfolios.

 

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The Investor Protector Growth Model Portfolio is intended to consist of 70% equity investments and 30% fixed income investments. This Model Portfolio is intended for those investors who want the greatest growth potential of the four models offered. Although a higher allocation to equities suggests increased volatility, historically such a position has delivered greater long-term returns. The Investor Protector Growth model is the most aggressive Model Portfolio in the Investor Protector Program.

Each Model Portfolio is subject to maximum and minimum allocations to funds and ETFs investing primarily in various types of investments, i.e., asset classes and sub-asset classes. These limitations are the Permitted Ranges. To construct the Model Portfolios, Investors Capital selects qualifying ETFs and other mutual funds within these asset classes in compliance with the Permitted Ranges. Subject to the Permitted Ranges, Investors Capital may include any registered mutual fund or ETF in the Model Portfolios that has been agreed to by PHL Variable on a risk and/or cost assessment basis; however, none of these funds will be affiliated with Investors Capital or PHL Variable. Any fund or ETF that has been accepted for use in a Model Portfolio is a Permitted Fund. To learn more about the specific funds included in a Model Portfolio, you may contact Investors Capital at 1-866-377-4559. Additionally, the custodian for your Account will send regular brokerage statements to you that will reflect the underlying fund holdings in the Investor Protector Model Portfolio you have selected.

The Income Edge is available only with portfolios that satisfy the Permitted Ranges using only Permitted Funds. You should note that your Financial Advisor, in keeping with his fiduciary duty to manage your investments in your best interest, may choose to customize a portfolio for you that does not satisfy the Permitted Ranges or does not use only Permitted Funds and this choice may cause the certificate to terminate.

 

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The Current Permitted Ranges for the Model Portfolios

The current Permitted Ranges are set forth in the following table. Investors Capital (subject to our right to reject any proposed change that would subject us to material additional risk or costs) may make changes to these Permitted Ranges in the future, in which case your Account’s allocations may have to be reallocated accordingly. We will inform you of any such change in writing.

 

Style Allocation    Investor Protector
Conservative
    Investor Protector
Conservative/
Balanced
    Investor Protector
Balanced
    Investor Protector
Growth
 
     40% equities
60% fixed income
    50% equities
50% fixed income
    60% equities
40% fixed income
    70% equities
30% fixed income
 

Asset and Sub-asset Classes:
these are comprised of individual
funds, including exchange traded
funds, and are not individual
investments.

   Permitted Ranges     Permitted Ranges     Permitted Ranges     Permitted Ranges  
  

Min

   

Max

   

Min

   

Max

   

Min

   

Max

   

Min

   

Max

 

Large Cap US Equity

   15   31   18   38   21   45   26   55

Core1

   0   31   0   38   0   45   0   55

Value Tilt2

   0   23   0   29   0   35   0   42

Growth Tilt3

   0   10   0   11   0   12   0   14

Mid Cap US Equity

   0   16   3   20   6   24   7   29

Core4

   0   16   0   20   0   24   0   29

Value Tilt5

   0   12   0   15   0   18   0   22

Growth Tilt6

   0   4   0   5   0   6   0   7

Small Cap US Equity

   1   12   3   15   5   18   8   22

Core7

   0   12   0   15   0   18   0   22

Value Tilt8

   0   10   0   12   0   14   0   17

Growth Tilt9

   0   4   0   4   0   4   0   5

US REITs*10

   0   5   0   5   0   5   0   5

Commodities*11

   0   5   0   5   0   5   0   5

International Equity**

   1   16   5   20   9   24   11   29

Core EAFE12

   0   16   0   20   0   24   0   29

Non-EAFE Developed Markets13***

   0   8   0   9   0   10   0   13

Non-EAFE Emerging Markets14***

   0   8   0   9   0   10   0   13

Fixed Income

   55   70   45   60   35   50   25   40

US Core Fixed Income15

   0   70   0   60   0   50   0   40

US Shorter duration HQ/cash16

   0   70   0   60   0   50   0   40

US Longer duration HQ17

   0   51   0   43   0   35   0   28

US Corporates HQ18

   0   51   0   43   0   35   0   28

US High Yield19 *

   0   5   0   5   0   5   0   5

International20 *

   0   5   0   5   0   5   0   5

Inflation Protected21*

   0   5   0   5   0   5   0   5

Overall Equity

   30   45   40   55   50   65   60   75

Overall Fixed

   55   70   45   60   35   50   25   40

 

* Max of 15% aggregate among all of the asset and sub-asset classes denoted by asterisk

 

** At least 50% of International must be Core EAFE

 

*** Max of 3% in any individual country

 

1

“Large Cap U.S. Equity Core” – An asset class that represents domestic equities that has equal allocation to both value and growth stocks, generally represented by a broad-based index such as the S&P 500® Index or the Russell 1000® Index. The S&P 500® Index is a free-float market capitalization-weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. The index is unmanaged and not available for direct investment. The Russell 1000® measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest companies based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.

 

2

“Large Cap U.S. Equity Value Tilt” – represents holdings with a bias toward U.S. companies with large market capitalizations (typically $10 billion or more). These securities have the potential for long-term capital appreciation and are generally considered to be undervalued relative to a major unmanaged stock index based on price-to-current earnings, book value, asset value, or other factors. In aggregate, the securities within this asset class will generally have below-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified large-cap asset class.

 

3

“Large Cap U.S. Equity Growth Tilt” – represents holdings with a bias toward U.S. companies with large market capitalizations (typically $10 billion or more). These securities have the potential for long-term capital appreciation and are generally defined as securities with expected long-term earnings growth rates significantly

 

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higher than the earnings growth rates of the stocks represented in a major unmanaged stock index. In aggregate, the securities within this asset class will generally have above-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified large-cap asset class.

 

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“Mid Cap U.S. Equity Core” – An asset class that represents domestic equities that has equal allocation to both value and growth mid cap stocks which are securities that tend to have market capitalizations above $2 billion up to $10 billion. Mid cap stocks are generally represented by a broad-based index such as the Russell Mid Cap® Index. The Russell Midcap Index is a subset of the Russell 1000® Index and represents approximately 27% of the total market capitalization of the Russell 1000 companies.

 

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“Mid Cap U.S. Value Tilt” – represents holdings with a bias toward U.S. companies with mid-cap market capitalizations (typically more than $2 billion up to $10 billion). These securities have the potential for long-term capital appreciation and are generally considered to be undervalued relative to a major unmanaged stock index based on price-to-current earnings, book value, asset value, or other factors. In aggregate, the securities within this asset class will generally have below-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified mid-cap asset class.

 

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“Mid Cap U.S. Growth Tilt” – represents holdings with a bias toward U.S. companies with mid-cap market capitalizations (typically more than $2 billion up to $10 billion). These securities have the potential for long-term capital appreciation and are generally defined as companies with expected long-term earnings growth rates significantly higher than the earnings growth rates of the stocks represented in a major unmanaged stock index. In aggregate, the securities within this asset class will generally have above-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified mid-cap asset class.

 

7

“Small Cap U.S. Equity Core” – An asset class that represents domestic equities that has equal allocation to both value and growth mid cap stocks which are companies that tend to have market capitalizations that are typically $2 billion or less. Small cap stocks are generally represented by a broad-based index such as the Russell 2000® Index. The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000® Index is a subset of the Russell 3000® Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest companies based on a combination of market capitalization and current index membership.

 

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“Small Cap U.S. Equity Value Tilt” – represents holdings with a bias toward U.S. companies with small market capitalizations (typically $2 billion or less). These securities have the potential for long-term capital appreciation and are generally considered to be undervalued relative to a major unmanaged stock index based on price-to-current earnings, book value, asset value, or other factors. In aggregate, the securities within this asset class will generally have below-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified small-cap asset class.

 

9

“Small Cap U.S. Equity Growth Tilt” – represents holdings with a bias toward U.S. companies with small market capitalizations (typically $2 billion or less). These securities have the potential for long-term capital appreciation and are generally defined as companies with expected long-term earnings growth rates significantly higher than the earnings growth rates of the stocks represented in a major unmanaged stock index. In aggregate, the securities within this asset class will generally have above-average price-to-earnings ratios, price-to-book ratios, and three-year earnings growth figures compared to the average of the U.S. diversified small-cap asset class.

 

10

“US REITs” – In order to operate as a REIT, a publicly traded company must receive at least 75% of its annual gross income from real estate rents, mortgage interest or other qualifying income; have at least 75% of the company’s annual assets consisting of rental real estate, real estate mortgages or other qualifying commercial real estate; and the company must distribute annually at least 90% of its taxable income to its shareholders. The risk-return profile of US REITs (Real Estate Investment Trusts) is represented by the FTSE NAREIT Equity Index, which is an unmanaged index generally considered to be representative of the North American Real Estate segment of the market, including all tax qualified REITs with common shares traded on the New York Stock Exchange, American Stock Exchange, or NASDAQ National Market List.

 

11

“Commodities” – An asset class that generally invests in securities of companies principally engaged in basic resources and agricultural products such as iron ore, crude oil, coal, ethanol, salt, sugar, coffee beans, soybeans, aluminum, copper, rice, wheat, gold, silver and platinum.

 

12

“International Equity Core EAFE” – An asset class that is generally comprised of securities with primary trading markets outside of the United States in developed international markets. As of December 31, 2009 the MSCI EAFE Index consisted of the following 21 developed market country indices from which securities may be selected: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden. Switzerland, and the United Kingdom. The risk-return profile of Core EAFE is represented by the MSCI EAFE Index (Europe, Australasia, Far East), which is an unmanaged, free float adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

 

13

“International Equity Non-EAFE Developed Markets” – An asset class that is generally comprised of securities with primary trading markets outside of the United States in developed international markets not contained the 21 countries cited in the MSCI EAFE index. (Those MSCI EAFE countries are Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom).

 

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“International Equity Non-EAFE Emerging Markets” – An asset class that is generally comprised of securities with primary trading markets in developing countries outside of the U.S. that have low standards of democratic governments, free market economies, industrialization, social programs, and human rights guarantees for its citizens. In addition, these developing/emerging countries are not contained in the MSCI EAFE Index (European, Australasian, and Far Eastern markets). As of December 31, 2009, the MSCI EAFE Index consisted of the following 21 developed market country indices from which securities may be selected: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden. Switzerland, and the United Kingdom.

 

15

“US CORE Fixed Income” – An asset class that is generally comprised of securities made up of United States dollar denominated Treasuries, government-related securities, and investment grade United States corporate securities. All issues have at least one year to maturity with intermediate indices including bonds with maturities up to 10 years and long term indices composed of bonds with maturities longer than ten years.

 

16

“US Shorter Duration HQ” Fixed Income – This asset class is generally comprised of securities made up of United States dollar denominated Treasuries, government-related securities, and investment grade United States corporate securities. The duration of these bonds is typically between 1 year and 5 years. Duration is a measure of how the price of a bond changes in response to interest rate changes. This asset class also includes United States currency or cash.

 

17

“US Longer Duration HQ” Fixed Income – This asset class is generally comprised of securities made up of United States dollar denominated Treasuries, government-related securities, and investment grade United States corporate securities. The duration of theses bonds is typically longer than 10 years. Duration is a measure of how the price of a bond changes in response to interest rate changes.

 

18

“US Corporates HQ” Fixed Income – This category is composed of corporate bonds which are debt obligations of specific corporations. Bonds in this category are rated by either Moody's or S&P as having very high to the highest quality rating a bond can get – specifically “A” to “AAA” – with "AAA" bonds offering the best quality with the smallest risk of default.

 

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19

“US High Yield” Fixed Income – An asset class that is generally comprised of fixed income securities that have below investment grade credit ratings and carry higher risks, but generally offer higher yields than investment-grade bonds.

 

20

“International” Fixed Income – An asset class that is generally comprised of securities made up of non-U.S. dollar denominated Treasuries, international government-related securities, and investment grade international corporate securities.

 

21

“Inflation Protected” Fixed Income – An asset class that invests in a special type of Treasury note or bond that offers protection from inflation. With an inflation protected bond, the coupon payments and underlying principal are automatically increased to compensate for inflation as measured by the consumer price index (CPI). Inflation protected bonds are considered a very conservative investment in that the growth of an investors purchasing power is guaranteed. Because of this safety feature, Inflation Protected Bonds offer a lower relative return as compared to other fixed income offerings.

For more detailed information regarding the Investor Protector Program, please refer to Investors Capital’s Form ADV, Part II which may be obtained by writing to Investors Capital at 230 Broadway, Lynnfield, MA 01940 or by calling 1-866-377-4559.

How Does the Income Edge Relate to Your Account?

The Income Edge is designed for clients participating in the Investor Protector Program who intend to use the investments in their Account as a basis for a withdrawal program to provide income payments for retirement or other long-term purposes.

The Income Edge provides insurance protection relating to your Account by ensuring that regardless of how your investments actually perform or the actual value of your assets in your Account when you begin your withdrawal program from your Account, you can have predictable lifetime income payments, subject to certain limitations described herein.

How Will Investors Capital Manage Your Investments in the Account If You Purchase an Income Edge?

Investors Capital constructs the Model Portfolios based on long-term, forward-looking assumptions for asset class allocation, risk/return and correlation, using extensive capital markets research developed by its advisory team. These portfolios employ a strategic asset allocation approach, implemented utilizing a combination of passive and active investments. The firm constructs its Model Portfolios using a multi-fund, multi-manager approach. Each fund is sub-advised by institutional caliber investment managers who are strictly focused on a given investment style, and who have been selected through Investors Capital’s extensive research and manager review. Ongoing due diligence is conducted to ensure managers/funds continue to adhere to Investors Capital’s investment oversight standards.

As you have granted Investors Capital discretion over your Account, Investors Capital may, from time to time, make various types of changes which might lead to changes in your Account. For example, Investors Capital may adjust the assets in a certificate holder’s Account to any extent it deems appropriate, in the best interest of an Income Edge certificate holder, including by changing the specific funds used and by making investments within and outside the Permitted Ranges. Investors Capital may do so at its discretion, and does not require certificate holder approval. For instance, Investors Capital may change the specific funds used within the Model Portfolio in an attempt to achieve more effective tracking to an index, or make an allocation to a specific sector or investment style. Similarly, Investors Capital may rebalance your Account periodically, as needed, to keep it aligned with the desired investment objective and changing market conditions.

Investors Capital may propose an adjustment to the composition of a Model Portfolio, including a change in the Permitted Ranges percentages and/or Permitted Funds that PHL Variable may accept for purposes of the certificate. However, such a change may also cause PHL Variable to change the Income Edge fee percentage for the affected Model Portfolio. The new fee would apply to your certificate as of your initial investment in the affected Model Portfolio following the change, or if your Account is already invested in accordance with the affected Model Portfolio, upon making an additional contribution to the Account or exercising the Annual Optional Increase. You would receive notice of any such fee change.

What Happens if Your Account is Managed in a Manner Unacceptable to Us?

In order for your Income Edge to stay in effect, your Account must be invested at all times in accordance with one of the four Model Portfolios eligible for the Income Edge described above. A Model Portfolio must continue to meet the Permitted Ranges , using only the Permitted Funds, for it to remain eligible. Changes to a Model Portfolio that cause it to fall outside the Permitted Ranges or use of a fund that is not a Permitted Fund within a Model Portfolio will result in termination of the Income Edge for an Account invested in accordance with that Model Portfolio unless the necessary change in the Permitted Ranges or use of the proposed fund is accepted by PHL Variable and the Account assets continue to be invested in accordance with the applicable Permitted Ranges, using only Permitted Funds. If PHL Variable does not accept a proposed change, then the Income Edge for owners of any affected Accounts will be at risk of terminating, unless the Model Portfolios are brought back into accordance with the Permitted Ranges, using only Permitted Funds, during the Cure Period. We will notify an Income Edge certificate holder whose Account is no longer in compliance with the Permitted Ranges, using only Permitted Funds, of this circumstance and options by mailing a notification to the certificate holder’s address on our records at least 30 days prior to terminating the certificate. An Income Edge certificate holder whose Account is not in compliance with the Permitted Ranges, using only Permitted Funds, may choose a different Model Portfolio for investment of Account assets, if available, or may choose to liquidate the Account and apply the resulting amount to another annuity with guaranteed benefits, including any such annuity then offered by PHL Variable or its affiliates. Additionally, at any time while a certificate is in effect, the Income Edge certificate holder can elect to close the Account and apply the Account value to

 

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the Lifetime Payment Option. See “Lifetime Payment Option” later in this prospectus. Liquidating Account assets may have adverse tax consequences and you should consult with your tax advisor.

What Happens if Your Additional Contributions or Withdrawals or Other Actions Cause the Investments in Your Account to Fall Outside the Permitted Ranges?

Changes you make to your Account, including Additional Contributions and Withdrawals, may temporarily cause the assets in your Account to fall outside of the Permitted Ranges. For example, if you request a Withdrawal of $100,000 from your Account, Investors Capital first must sell securities that are worth $100,000 in order to raise cash for your Withdrawal. At this point in time the assets in your Account may fall outside of the Permitted Ranges due to the higher percentage of cash held in the Account. In addition, after you withdraw the $100,000 in cash, the remaining assets in your Account might not be within the Permitted Ranges and Investors Capital may need to rebalance the assets in your Account. If you make Additional Contributions after the Certificate Effective Date, these Contributions must be allowed to remain as cash in the Model Portfolio you have elected, or be invested in accordance with the Permitted Ranges for Model Portfolio you have elected during the Cure Period. In addition to changes you make that cause your Account to fall outside the Permitted Ranges, a circumstance outside our control may make Investors Capital unable to maintain the Model Portfolios for your Account.

If the assets in your Account fall outside of the Permitted Ranges using only Permitted Funds, for any reason, your Income Edge will be at risk of terminating. In the event of an extraordinary circumstance where Investors Capital is not able to rebalance your Account within the Permitted Ranges using only Permitted Funds during the Cure Period, PHL Variable reserves the right, in its discretion, to extend the Cure Period. We will notify an Income Edge certificate holder whose Account is no longer in compliance with the Permitted Ranges, using only Permitted Funds, of this circumstance and options by mailing a notification to the certificate holder’s address on our records at least 30 days prior to terminating the certificate.

You will receive confirmations of the securities transactions in your Account from the custodian and notices from us reflecting changes to the Retirement Income Base and Retirement Income Amount, if any, due to additional cash contributions and/or the Annual Optional Increase.

What Happens if the Value of Your Account is Too Low for Investors Capital to Invest Within the Permitted Ranges?

If your Account Value is equal to or less than $10,000, the assets in your Account might not be able to be maintained within the Permitted Ranges. This could occur if funds in the Model Portfolios apply minimum investment requirements and your Account cannot meet those requirements. If your Account Value has decreased to a value of $10,000 or less, Investors Capital may choose to liquidate the assets held in your Account and your Account will hold only cash (any such liquidation would be reflected on Account statements you receive from the Account custodian). In this event, we permit an exception to the requirement that your Account comply with the Permitted Ranges using only Permitted Funds. If your Account has decreased to a value of $10,000 or less and is comprised solely of cash, your Income Edge will not terminate. This exception does not change other terms of the certificate and they will remain in force. For example,

 

   

You will continue to be charged the Income Edge fee for the Model Portfolio in accordance with which your Account was last invested while holding investments other than cash.

 

   

If you have reached or passed the Retirement Income Date, you will be able to withdraw the Retirement Income Amount without negatively affecting the Retirement Income Base and, if your Account Value is less than the amount of your Retirement Income Amount remaining for Withdrawal in the calendar year, you can withdraw the entire Account Value and we will be obligated to make lifetime income payments. If your Account goes to $0 due to Withdrawals that are not Excess Withdrawals and/or poor investment performance, we will be obligated to make lifetime income payments See “Annual Income Payments” later in this prospectus.

 

   

You could elect the Lifetime Payment Option while your Account Value is greater than $0.

 

   

Should you contribute cash to the Account that increases the Account Value to more than $10,000, the Account Value would again be required to be invested in accordance with one of the Model Portfolios within the Cure Period.

Why Will Your Income Edge Terminate if Your Account is Not Managed Within the Permitted Ranges?

We would not be able to offer the Income Edge if we could not require that your Account be managed within the Permitted Ranges, using only Permitted Funds. In order for us to be able to provide the Income Edge for a reasonable fee, we need to know that your Account will be managed within certain constraints—otherwise our risks would be too high for us to be able to make the Income Edge available to you.

In this respect, the Model Portfolios eligible for the Income Edge are designed to provide steady returns while minimizing the risk that your Account Value will be reduced to $0 before you die.

 

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Accordingly, the risk against which the Income Edge protects may be minimal. Likewise, based on historical returns, if you stay invested in the markets for a long period of time, then the likelihood of your Account Value being reduced to $0 solely because of poor performance may diminish. You should take into consideration the amount of time you expect to have assets in the Account in deciding if the Income Edge is appropriate for you. Of course, past performance is no guarantee of future performance and historical trends may not continue.

We are not an investment adviser and do not provide investment advice to you in connection with your Income Edge. For more information about Investors Capital and the Investor Protector Program, you should talk to your registered representative or Financial Advisor and review Investors Capital’s Form ADV, Part II, Client Brochure which may be obtained by writing to Investors Capital at 230 Broadway, Lynnfield, MA 01940 or by calling 1-866-377-4559.

 

4. Annual Income Edge Fee

 

The Income Edge fee will be deducted from your Account Value while your certificate is in effect and your Account Value is greater than $0. The Income Edge fee is calculated quarterly as a percentage of the Retirement Income Base on the date of the calculation, and will vary, and may be reset to a higher percentage, as a result of certain transactions described below. Increases to the Retirement Income Base will increase the dollar amount of the Income Edge fee, assuming the applicable Income Edge fee percentage has not decreased. If your Retirement Income Base does not change, your Income Edge fee percentage and the dollar amount of your Income Edge fee will not change unless you have an Annual Optional Increase, transfer Account assets to be invested in accordance with a different Model Portfolio, or make an Additional Contribution. In addition, the Income Edge fee percentage for the Spousal Income Guarantee may be higher than the Income Edge fee percentage for the Individual Income Guarantee and the Income Edge fee percentage may vary from Model Portfolio to Model Portfolio.

PHL Variable may decide to increase the Income Edge fee percentage for a Model Portfolio, or may accept a change to the Permitted Ranges and/or Permitted Funds proposed by Investors Capital that would cause PHL Variable to increase the Income Edge fee percentage due to the additional risk to PHL Variable presented by such a change. The Income Edge fee will never exceed 3.00%. Alternatively, PHL Variable may decrease Income Edge fee percentages. If you hold an Income Edge certificate when we change a fee percentage, the fee percentage for your certificate will change as a result of any of the circumstances described below. Any change in your Income Edge fee percentage will apply beginning on the first day of the calendar quarter following the fee change.

 

v  

If you make Additional Contributions to the Account, your Income Edge fee percentage will be calculated as a weighted average fee percentage, based on the increase in your Retirement Income Base as a result of the Contribution and the Income Edge fee percentage in effect for the Model Portfolio in accordance with which your Account is invested at that time. The new weighted average fee percentage applies to the new Retirement Income Base, which reflects the Additional Contributions. For an example of how your Additional Contributions may affect your Income Edge fee, see the example entitled “Additional Contributions” in the box below.

 

v  

If you have an Annual Optional Increase, your Income Edge fee percentage will be calculated as a weighted average fee percentage. This weighted average fee percentage will be determined based on the fee percentage(s) that applied prior to the Annual Optional Increase, which will be applied to the Retirement Income Base prior to the Annual Optional Increase, and the Income Edge fee percentage in effect for the Model Portfolio in accordance with which your Account is invested at the time of the Annual Optional Increase, which will be applied to the amount of the increase to the Retirement Income Base as a result of the Annual Optional Increase. For an example of how the Annual Optional Increase may affect your Income Edge fee, see the example entitled “Annual Optional Increase” in the box below.

 

v  

If you transfer your Account Value so that it is invested in accordance with a different eligible Model Portfolio (transfers among Model Portfolios must be 100% of Account Value to be permitted under the certificate), your new Income Edge fee percentage will be the Income Edge fee percentage in effect for the Model Portfolio to which you transferred. For an example of how transfers may affect your Income Edge fee, see the example entitled “Transfers” in the box below. Only one transfer is allowed in any 90-day period.

These examples show the effect of certain transactions on the calculation of the Income Edge fee percentage. The fee percentages shown in these examples are hypothetical only and do not represent the Income Edge fee percentages that will apply to your certificate at any point. You can obtain the fee percentages in effect at any time by contacting your Financial Advisor or Investors Capital, or by contacting PHL Variable at the number shown on the front of this prospectus. Certain rules affect the fees for all certificates. See “For all certificates” following these examples.

 

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Example: Additional Contributions

Assume your Retirement Income Base is equal to $250,000 and the Income Edge fee percentage currently in effect for your Income Edge is 1.40%. Assume further that you make an Additional Contribution of $50,000 to your Account and the Income Edge fee percentage in effect for the Model Portfolio in accordance with which your Account is invested at the time of the contribution is equal to 1.75%. The Retirement Income Base increases to $300,000 as a result of the Additional Contribution.

The weighted average Income Edge fee percentage is equal to the current Income Edge fee percentage multiplied by the Retirement Income Base before the Additional Contribution (1.40% x $250,000) plus the new Income Edge fee percentage multiplied by the amount the Retirement Income Base increased as a result of the Additional Contribution (1.75% x $50,000) divided by the new Retirement Income Base ($300,000). The result is 1.46%. We will use the new weighted average fee percentage of 1.46% to calculate your Income Edge fee at the beginning of the next quarter and thereafter, assuming no other changes to your Account that may change the fee again.

 

Example: Annual Optional Increase

Assume your Retirement Income Base is equal to $250,000 and the Income Edge fee percentage currently in effect for your Income Edge is 1.40%. Assume further your Account Value is currently $300,000, you exercise the Annual Optional Increase on your Certificate Anniversary Date and the Income Edge fee percentage in effect for the Model Portfolio in accordance with which your Account is currently invested is equal to 1.75%. The Retirement Income Base increases to $300,000 as a result of the Annual Optional Increase (an increase of $50,000).

The weighted average Income Edge fee percentage is equal to the current Income Edge fee percentage multiplied by the Retirement Income Base before the Annual Optional Increase (1.40% x $250,000) plus the new Income Edge fee percentage multiplied by the amount the Retirement Income Base increased as a result of the Annual Optional Increase (1.75% x $50,000) divided by the new Retirement Income Base ($300,000). The result is 1.46%. We will use the new weighted average fee percentage of 1.46% to calculate your Income Edge fee at the beginning of the next quarter and thereafter, assuming no other changes to your Account that may change the fee again.

 

Example: Transfers

Assume your Account is invested in accordance with a particular Model Portfolio and the Income Edge fee percentage currently in effect for your certificate is 1.40%. You choose to transfer 100% of your Account Value so it is invested in accordance with a different Model Portfolio. The Income Edge fee percentage then in effect for that Model Portfolio is 2.00%. We will use the new Income Edge fee percentage of 2.00% to calculate your Income Edge fee at the beginning of the next quarter and thereafter, assuming no other changes to your Account that may change the fee again.

For all certificates:

 

v  

Your first Income Edge fee is charged on the Certificate Effective Date and is prorated based on the number of days remaining in the calendar quarter.

 

v  

If your certificate has a transaction that causes the Income Edge fee percentage to be reset (e.g. a transfer, Annual Optional Increase, or Additional Contribution), the reset Income Edge fee percentage will first be used to calculate your Income Edge fee on the first day of the next calendar quarter next following that transaction, unless the Income Edge fee percentage is reset again due to one or more of the above activities.

 

v  

The Income Edge fee will be paid quarterly from your Account. The sale or transfer of assets in your Account to pay the Income Edge fee will not be treated as a Withdrawal. The Income Edge fee is paid quarterly in advance and we will not refund any portion of pre-paid Income Edge fees to you if your certificate is terminated for any reason.

You should carefully consider how a change in fee percentage applicable to an Additional Contribution, the Annual Optional Increase or transfer of Account Value to be invested in accordance with a different Model Portfolio will impact your total Income Edge fee before making Additional Contributions, determining not to reject the Annual Optional Increase, or, transferring to a different Model Portfolio. In the event that your Income Edge fee percentage increases, assuming your Retirement Income Base has not decreased, the total Income Edge fee will increase and the increase could be significant. You should also be aware that if you intend to purchase the Income Edge in order to be able to make Additional Contributions, accept Annual Optional Increases, or, make transfers of Account Value to be invested in accordance with other Model Portfolios, you will not be able to determine in advance what the total fee will be after such transactions because the fee percentage may vary from time to time. After you make an Additional Contribution, accept the Annual Optional Increase, or make a transfer that changes your fee percentage, we will notify you in writing of your fee percentage. Also, you may call Investors Capital toll free at 1-866-377-4559 for information about your Income Edge fee percentage at any time.

 

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5. Withdrawals From Your Account

 

Definition of “Withdrawal”

The term “Withdrawal” is an important term for you to understand because Withdrawals can impact the amount of your Retirement Income Base and Retirement Income Amount and, therefore, the amount of guaranteed lifetime income payments you may receive in accordance with the terms of your Income Edge. A Withdrawal is defined as (i) the sale or transfer of assets out of your Account, other than for any fees imposed directly or indirectly by the funds held in your Account either periodically, or upon their purchase or redemption and the Income Edge fee; (ii) the sale, exchange or transfer of Account assets to pay the Investor Protector Program Fee and/or the Financial Advisor Fee in excess of 2.00% of your Account Value in any calendar year; or (iii) dividends, capital gains or other accretions with respect to assets in your Account, whether distributed as fund shares or cash, that are not reinvested in your Account in accordance with the Permitted Ranges within the Cure Period and instead are transferred out of your Account. However, the sale, exchange or transfer of Account assets to pay for the Income Edge fee, and the Investor Protector Program Fee and the Financial Advisor Fee up to and including 2.00% of your Account Value in any calendar year will not be treated as a Withdrawal. Please note that any deduction to pay any portion of your Investor Protector Program Fee and/or Financial Advisor Fee in excess of 2.00% of your Account Value in any calendar year, will be treated as a Withdrawal for purposes of the certificate.

Two types of Withdrawals can affect the certificate: Excess Withdrawals and other Withdrawals. Any Withdrawals before the Retirement Income Date and any Withdrawals in excess of the Retirement Income Amount (or, if your certificate was issued as a traditional IRA, the RMD, if greater) on or after the Retirement Income Date are Excess Withdrawals that will reduce your Retirement Income Base, which can reduce the benefit of your Income Edge. Excess Withdrawals can also terminate your certificate. See “Withdrawals Prior to the Retirement Income Date” and “Withdrawals On or After the Retirement Income Date” later in this section. Withdrawals taken on or after the Retirement Income Date that are not Excess Withdrawals can reduce the amount of the increase to the Retirement Income Base that would otherwise result from subsequent Additional Contributions to the Account and such Withdrawals can affect more than one subsequent Additional Contribution. See ‘‘Increases from Additional Contributions to Your Account” later in this prospectus.

There is no provision under the Income Edge certificate to cure any decrease in the amount of your Retirement Income Base and Retirement Income Amount due to Withdrawals. You should carefully monitor your Retirement Income Base as well as the amount of any Withdrawals. You may call Investors Capital at 1-866-377-4559 for information about your Retirement Income Base and your available Retirement Income Amount.

How Do You Structure Withdrawals From Your Account?

The Income Edge is designed for investment advisory clients who intend to use the investments in their Account as the basis for a withdrawal program to provide income payments for retirement or other long-term purposes.

You may make Withdrawals from your Account at any time and in any amount you choose. However, any Withdrawals before the Retirement Income Date and any Withdrawals in excess of the Retirement Income Amount (or, if your certificate was issued as a traditional IRA, the RMD, if greater) on or after the Retirement Income Date are Excess Withdrawals and will reduce your Retirement Income Base, which will reduce the potential benefit of your Income Edge. To obtain the maximum potential benefit from your Income Edge under your specific circumstances, you should consider waiting until the Retirement Income Date when your Retirement Income Amount becomes available to begin Withdrawals and thereafter limit your annual Withdrawals to an amount not in excess of the Retirement Income Amount.

As noted above, prior to the Retirement Income Date, you cannot take any Withdrawals from your Account without reducing the potential benefit of your Income Edge. If, on or after your Retirement Income Date, your Account Value is less than or equal to your Retirement Income Amount (or, if your certificate was issued as a traditional IRA, your RMD, if greater), including for any Account with a value equal to or less than $10,000 which holds only cash (see “What Happens if the Value of Your Account is Too Low for Investors Capital to Invest Within the Permitted Ranges” previously in this prospectus), you may make a Withdrawal for the full Account Value and reduce your Account Value to $0 and then lifetime income payments will commence one month following the date your Account Value reduces to $0. However, if, on or after your Retirement Income Date, you make a Withdrawal of your entire Account Value and the cumulative amount of Withdrawals you have made in that calendar year (including the current Withdrawal) exceeds your Retirement Income Amount (or, for certificates issued as traditional IRAs, the RMD, if greater) resulting in an Excess Withdrawal, including for any Account with a value equal to or less than $10,000 which holds only cash, your Account Value will reduce to $0 and your Income Edge will terminate without value.

How Do You Know When You Have Reached Your “Retirement Income Date” and Can Start Taking Withdrawals That Will Not Reduce the Potential Benefit of Your Income Edge?

As noted, to get the maximum benefit from your Income Edge, you should wait until your Retirement Income Date to begin taking Withdrawals from your Account. Your specific Retirement Income Date depends on whether you purchased your Income Edge with the Individual Income Guarantee or the Spousal Income Guarantee.

 

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v  

If you purchased your Income Edge with the Individual Income Guarantee (including an IRA Account), your Retirement Income Date is the later of the Certificate Effective Date or your 65th birthday.

 

v  

If you purchased your Income Edge with the Spousal Income Guarantee, your Retirement Income Date is the later of the Certificate Effective Date or the younger spouse’s 65th birthday.

 

v  

If you purchased your Income Edge with the Spousal Income Guarantee, and either you or your spouse die prior to the Retirement Income Date, we will recalculate the Retirement Income Date to be the later of:

 

  i. the date of the deceased spouse’s death; or

 

  ii.

the surviving spouse’s 65th birthday.

 

v  

If your 65th birthday occurs on a day on which we are not open for business, we can advise you of your Retirement Income Amount, calculated based on the Retirement Income Base in effect as of your 65th birthday, on the next Business Day on which we are open for business and then you can make a Withdrawal of the Retirement Income Amount.

We will send you a notice on your Retirement Income Date to advise you that your Retirement Income Amount has become available with the amount of your Retirement Income Amount.

How Much Should You Withdraw From Your Account Each Year?

To get the maximum benefit from your Income Edge, you should wait until the Retirement Income Date when your Retirement Income Amount becomes available and withdraw no more than your Retirement Income Amount each calendar year (unless your certificate was issued as a traditional IRA and your RMD is greater than the Retirement Income Amount, in which case you can withdraw that greater amount). The Retirement Income Amount represents the maximum amount you may withdraw each calendar year without reducing the benefit of the Income Edge. Prior to your Retirement Income Date, your Retirement Income Amount is $0. This means that prior to your Retirement Income Date, any Withdrawal you make will reduce your Income Edge benefit. On your Retirement Income Date, your Retirement Income Amount is 5% of your Retirement Income Base, pro rated based on the number of days until the following January 1st. In determining the amount you may withdraw without reducing the benefit of the Income Edge, you should keep in mind that fees taken from your Account Value, other than (1) Income Edge fees, (2) the Investor Protector Program Fee and/or your Financial Advisor Fee (when these fees, separately or together, do not exceed 2.00% of your Account Value in any calendar year), and (3) fees applied by the mutual funds or ETFs held in your Account, are Withdrawals that are counted toward your Retirement Income Amount. As a result, if the cumulative amount of these fees and any Withdrawals you request exceeds your Retirement Income Amount (or, if your certificate was issued as a traditional IRA, your RMD, if greater) in any calendar year, your Retirement Income Base will be reduced in the same proportion as these Excess Withdrawal(s) reduced your Account Value. Since Excess Withdrawals reduce your Retirement Income Base in the same proportion as your Account Value is reduced by the Excess Withdrawal, when the Account Value is less than the Retirement Income Base at the time of an Excess Withdrawal, the dollar amount by which the Retirement Income Base is reduced will be greater than the dollar amount by which the Account Value is reduced. Excess Withdrawals that reduce your Account Value to $0 will cause your Income Edge to terminate.

Your Retirement Income Amount is recalculated as of January 1st of each subsequent calendar year and will be equal to 5% of the Retirement Income Base as of January 1st. If your certificate was issued as a traditional IRA and your RMD is greater than the Retirement Income Amount, that greater amount can be withdrawn without reducing your Retirement Income Base. If Excess Withdrawals have reduced your Retirement Income Base during the calendar year, your Retirement Income Amount calculated as of the following January 1st will be lower than it otherwise would have been (assuming your Retirement Income Base does not increase prior to that January 1st). The Retirement Income Amount is also recalculated when you make an Additional Contribution or when your Retirement Income Base increases as a result of the Annual Optional Increase.

How Do You Know How Much You Have Left to Withdraw in Any Calendar Year Without Reducing Your Retirement Income Base?

Before the Retirement Income Date, your Retirement Income Amount is $0, so you may not take any Withdrawals before the Retirement Income Date without reducing your Retirement Income Base. On and after the Retirement Income Date, we send you a notice following January 1st each year your certificate is in effect showing your Retirement Income Amount for that calendar year. For purposes of calculating the Retirement Income Amount in the annual notices, we assume that the amount of the Investor Protector Program Fee and the Financial Advisor Fee in total do not exceed 2.00% of your current Account Value, in which case the deduction of such fees from your Account Value would not be considered a Withdrawal. If the assets withdrawn to pay the Investor Protector Program Fee and your Financial Advisor Fee, separately or together, exceed 2.00% of the Account Value in a calendar year, the amount in excess of 2.00% of Account Value in a calendar year is a Withdrawal and, depending on your circumstances, all or a portion of such fee(s) could be an Excess Withdrawal that would immediately reduce your Retirement Income Base and will reduce the Retirement Income Amount in subsequent years, assuming the Retirement Income Base does not increase prior to the time the Retirement Income Amount is recalculated.

 

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Also, at any time in a calendar year on or after the Retirement Income Date, you can find out how much you have left to withdraw in that calendar year without reducing your Retirement Income Base by contacting Investors Capital at 1-866-377-4559. The amount quoted will be the remaining amount available for the particular calendar year as of the date you inquire and will assume that the Investor Protector Program Fee and the Financial Advisor Fee that will be withdrawn from the Account Value in that particular calendar year will not, in total, exceed 2.00%. We calculate this remaining amount as follows:

 

   

Non-Qualified Income Edge (a certificate not issued in connection with an IRA): We reduce your Retirement Income Amount in effect on the date you inquire, which equals 5% of the Retirement Income Base on that Business Day, by all previous Withdrawals you have made in the same calendar year, including any portion of the Investor Protector Program Fee and /or Financial Advisor Fee deducted from the Account Value in excess of 2.00% of your Account Value in the calendar year. If the resulting number is zero or negative, you have no amount remaining to withdraw without reducing the Retirement Income Base.

 

   

Qualified Income Edge: We reduce the greater of the RMD or your Retirement Income Amount in effect on the date you inquire (your Retirement Income Amount equals 5% of the Retirement Income Base) on that Business Day, by all previous Withdrawals made during the same calendar year including any portion of the Investor Protector Program Fee and/or Financial Advisor Fee deducted from the Account in excess of 2.00% of your Account Value in the calendar year. If the resulting number is zero or negative, you have no amount remaining to withdraw without reducing the Retirement Income Base.

Withdrawals Prior to the Retirement Income Date

Prior to the Retirement Income Date, your Retirement Income Amount is $0 and your Retirement Income Base will be reduced by any Withdrawal in the same proportion as your Account Value (immediately prior to the Withdrawal) is reduced by the Withdrawal and, if your Account Value is then less than your Retirement Income Base, the Withdrawal will reduce your Retirement Income Base by more than the Withdrawal amount. If you make a Withdrawal of your entire Account Value, your Retirement Income Base will be reduced to $0 and your Income Edge certificate and the guarantee it provides will terminate.

 

Example: with Withdrawals Prior to the Retirement Income Date

Assume that on the Certificate Effective Date, you are age 60, your Account Value is $500,000, and your Retirement Income Base equals $500,000. Assume you make a Withdrawal of $25,000 from your Account and your Account Value immediately prior to such Withdrawal is $500,000. Your Account Value is reduced by the amount of the Withdrawal. Because you make the Withdrawal before your Retirement Income Date, your Retirement Income Base would be reduced in the same proportion that the Withdrawal reduced your Account Value. Your Account Value was reduced by 5%, and accordingly, your Retirement Income Base is reduced by 5%, from $500,000 to $475,000.

Now assume you make another Withdrawal of $25,000 from your Account. The following describes the effect of this Withdrawal when poor market performance has decreased your Account Value prior to the Withdrawal (e.g. “Down-Market Situation”) and good market performance has increased your Account Value prior to the Withdrawal (e.g. “Up-Market Situation”).

Down-Market Situation. Assume also that your Account Value has decreased, based on poor market performance, from $475,000 to $450,000 immediately prior to the Withdrawal. In this situation, the $25,000 Withdrawal would reduce the Retirement Income Base by more than $25,000 because the Withdrawal was taken after a market decline. Your Account Value would decrease from $450,000 to $425,000 as a result of the Withdrawal. Again, your Retirement Income Base would be reduced in the same proportion that the Withdrawal reduced your Account Value ($25,000 divided by $450,000) or 5.56%. Therefore, your Retirement Income Base as a result of the Withdrawal would be reduced from $475,000 to $448,590 ($475,000 x 0.0556 = $26,410 and $475,000—$26,410 = $448,590).

Up-Market Situation. Assume that your Account Value has increased, based on good market performance, from $475,000 to $525,000 from the first Certificate Anniversary Date to the second Certificate Anniversary Date. In this situation, the $25,000 Withdrawal would reduce the Retirement Income Base by less than $25,000 because the Withdrawal was taken after a market increase. Your Account Value would decrease to $500,000 as a result of the Withdrawal. Your Retirement Income Base would be reduced in the same proportion that the Withdrawal reduced your Account Value ($25,000 divided by $525,000) or 4.76%. Therefore, your Retirement Income Base as a result of the Withdrawal would be reduced from $475,000 to $452,390 ($475,000 x 0.0476 = $22,610 and $475,000 - $22,610 = $452,390).

Assume that your Account Value is now $425,000. You make a Withdrawal of $425,000 from your Account (the amount of your entire Account Value). Your Account Value would decrease to $0. Your Retirement Income Base would be reduced in the same proportion that the Withdrawal reduced your Account Value, or 100%. Therefore, your Retirement Income Base after the Withdrawal would be $0 and your Income Edge would terminate without value.

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Withdrawals On or After the Retirement Income Date

On or after your Retirement Income Date, your Retirement Income Base will not be reduced by Withdrawals if the cumulative amount of Withdrawals in a calendar year is less than or equal to your Retirement Income Amount or, if your certificate was issued as a traditional IRA, the RMD, if greater. If a Withdrawal causes the cumulative Withdrawals to exceed the Retirement Income Amount, or the RMD amount, if applicable, in that calendar year, the Withdrawal amounts in excess of the applicable amount will be considered Excess Withdrawals. You should be aware that certain fees other than the Income Edge fee, the Investor Protector Program Fee, and the Financial Advisor Fee are periodically deducted automatically from your Account Value. These fees may include wire transfer fees, IRA maintenance fees, and mail courier fees. Unlike the Investor Protector Program Fee and Financial Advisor Fee (when those fees, separately or together, do not exceed 2.00% of your Account Value in any calendar year), and the Income Edge fee, these fees may be treated as Withdrawals under your Income Edge for purposes of determining whether cumulative Withdrawals in a calendar year exceed the Retirement Income Amount in that calendar year. In other words, depending on the amount of cumulative Withdrawals you have made in a calendar year, the deduction of these fees may result in Excess Withdrawals. Each Excess Withdrawal will reduce the Retirement Income Base in the same proportion as the Account Value is reduced by the Excess Withdrawal; and, if your Account Value is then less than your Retirement Income Base, the Excess Withdrawal will reduce your Retirement Income Base by more than the Withdrawal amount. Any fees imposed by the funds and ETFs held in your Account, either periodically, or upon the purchase or redemption of fund shares are not considered a Withdrawal for the purposes of the certificate.

 

Example: with Allowable Withdrawal Followed by Excess Withdrawal taken on or after the Retirement Income Date

Assume that you are over age 65, your Retirement Income Base equals $500,000, your Retirement Income Amount equals $25,000, and you had made no prior Withdrawals during the current calendar year. Assume that you make a Withdrawal of $25,000 from your Account and that your Account Value prior to the Withdrawal is $500,000. Your Account Value would decrease to $475,000 as a result of the Withdrawal, and because your cumulative Withdrawals did not exceed your Retirement Income Amount, your Retirement Income Base would remain at $500,000.

Assume that later that calendar year, you withdraw an additional $25,000 from your Account and that your Account Value prior to the Withdrawal is $475,000. Your Account Value would decrease to $450,000 as a result of the second Withdrawal. Your cumulative Withdrawals for the calendar year are now $50,000, which exceeds your Retirement Income Amount of $25,000. The Excess Withdrawal of $25,000 reduced your Account Value by ($25,000 ÷ $475,000) or 5.26%, and accordingly, your Retirement Income Base is reduced by 5.26%, from $500,000 to $473,700.

Your Retirement Income Base on the first Business Day following the next January 1 is still equal to $473,700. Therefore, your Retirement Income Amount is recalculated as 5% of $473,700 or $23,685.

If you make a Withdrawal of your entire Account Value and the cumulative amount of Withdrawals you have made in that calendar year (including the current Withdrawal) exceeds your Retirement Income Amount or RMD, as applicable, your Retirement Income Base is reduced to $0 (because it is reduced in the same proportion as the Withdrawal reduced your Account Value, or 100%) and your Income Edge will terminate without value.

The Importance of Managing Your Withdrawals

The foregoing discussion of Withdrawals illustrates how important it is to carefully manage your Withdrawals to avoid adversely impacting the amount of your Retirement Income Base and Retirement Income Amount or causing a termination of your Income Edge that may not be in your best interest. You should carefully consider whether you may need to make Withdrawals before the Retirement Income Date or in excess of the Retirement Income Amount or RMD, as applicable, on or after the Retirement Income Date. If you believe you may have such a need, you should have other sources of liquidity to avoid having to make these types of Withdrawals. Your Income Edge does not require us to warn you or provide you with notice regarding potentially adverse consequences that may be associated with any Withdrawals or other factors affecting your Account Value. You should consider your ability to monitor factors affecting your Account Value, such as fee Withdrawals and Withdrawals you schedule or request before you purchase the Income Edge, and then should carefully monitor that activity after you purchase the certificate. There is no provision under the Income Edge to cure any decrease in the amount of your Retirement Income Base and Retirement Income Amount due to Withdrawals.

The Importance of Considering When to Start Making Withdrawals

You may start making Withdrawals from your Account at any time. However, any Withdrawals reduce your Account Value. Additionally, as discussed above, Withdrawals from your Account may reduce your Retirement Income Base and correspondingly, your Retirement Income Amount. As discussed, you should wait until on or after the Retirement Income Date to begin making Withdrawals. However, you should understand that the longer you wait after such date to start making Withdrawals from your Account, the less likely you will be to benefit from your Income Edge because of decreasing life expectancy. On the other hand, the longer you wait to begin making Withdrawals from your Account, the more likely you will be to benefit from the opportunity to take advantage of investment gains (if any) in your Account in a particular year through the Annual Optional Increase by locking in a higher Retirement Income Base. You should carefully consider when to begin making Withdrawals from your Account.

 

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Investors Capital will administer your requests for Withdrawals from your Account. We will receive information periodically from Investors Capital concerning your Account Value and transactions processed in your Account. We will track your Account Value and transactions in your Account to calculate the amount of your Retirement Income Base and Retirement Income Amount, if any, on an ongoing basis. Additionally, we will notify you if your Retirement Income Base or Retirement Income Amount has changed as a result of transactions in your Account. You may contact Investors Capital at 1-866-377-4559 for information about your Account and amounts related to your certificate.

 

6. Retirement Income Amount

 

How is Your “Retirement Income Amount” Calculated?

Your Retirement Income Amount is first calculated on your Retirement Income Date using your Retirement Income Base value as of the close of business on the immediately preceding Business Day. If your Retirement Income Date is January 1, your Retirement Income Amount will be equal to 5% of the Retirement Income Base as of the close of the Business Day immediately preceding January 1, or, if your certificate was issued as an IRA and the RMD is greater, the RMD amount will be available as a Withdrawal that will not reduce the Retirement Income Base. Your Retirement Income Amount is pro rated based on the number of days from your Retirement Income Date until the following January 1. For example, if your Retirement Income Base as of January 1 is $250,000, this amount does not change prior to the following July 1, and your Retirement Income Date is on the following July 1, your Retirement Income Amount is calculated on July 1 as $6,301 for the remainder of the year (5% x $250,000 x 184/365). Your Retirement Income Amount is recalculated as of January 1 of each year and will be equal to 5% of the Retirement Income Base. If your certificate was issued as a traditional IRA and the RMD is greater than the Retirement Income Amount, that greater amount can be withdrawn without reducing the Retirement Income Base. As a practical matter, since January 1, is not a Business Day, your Retirement Income Amount calculated as of January 1 is not available as a Withdrawal that will not reduce the Retirement Income Base until the first Business Day following January 1st.

Can Your Retirement Income Amount Decrease?

The Retirement Income Amount is recalculated as of January 1 of each year as 5% of the then-existing Retirement Income Base. Therefore, if your Retirement Income Base decreased during the prior calendar year, your Retirement Income Amount will decrease as of the next January 1. If your certificate was issued as a traditional IRA and the RMD is greater than the Retirement Income Amount, that greater amount can be withdrawn without reducing the Retirement Income Base.

Can Your Retirement Income Amount Increase?

Since your Retirement Income Amount is a percentage of the Retirement Income Base, your Retirement Income Amount that becomes available to you on and after the Retirement Income Date can be higher than it would otherwise be if your Retirement Income Base increases at any time, both before, and on and after your Retirement Income Date. Your Retirement Income Amount will increase as a result of increases to your Retirement Income Base, if any, from Additional Contributions you make to your Account and/or as a result of an Annual Optional Increase that increases your Retirement Income Base. Assuming the Income Edge fee percentage for your certificate has not decreased, increases to the Retirement Income Base will increase the amount of Income Edge fee you will be charged. If your certificate was issued as a traditional IRA and your RMD is greater than the Retirement Income Amount in a particular calendar year, that greater amount can be withdrawn from Account Value without reducing the Retirement Income Base.

 

7. Increases in Your Retirement Income Base

 

At your Certificate Effective Date, your Retirement Income Base is equal to your Account Value. Your Account Value on any date is the aggregate value of the assets in your Account as determined from time to time in accordance with applicable law by Investors Capital.

 

Example: New Account

Assume you open your Account with an initial contribution of $500,000, purchase an Income Edge, and your Certificate Effective Date is the Business Day on which you opened your Account. Your Retirement Income Base is $500,000 on the Certificate Effective Date.

 

Example: Existing Account

Assume instead that you opened your Account five years ago with an initial contribution of $500,000. Assume further that you applied to purchase an Income Edge one week ago when your Account Value was equal to $595,000 but the Application Process was not complete until today. Your Account Value today is $600,000. Your Retirement Income Base is equal to $600,000, or the Account Value on the Certificate Effective Date.

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Increases From Additional Contributions To Your Account

Your Retirement Income Base may increase each time you make an Additional Contribution to your Account. If you make an Additional Contribution to your Account and this Additional Contribution is not allowed to remain as cash in the Model Portfolio you selected, then this Additional Contribution will not be eligible for the Income Edge until it is invested in accordance with the Permitted Ranges and in Permitted Funds which must occur within the Cure Period.

 

   

Additional Contributions prior to the Retirement Income Date-If, prior to the Retirement Income Date, you make an Additional Contribution to your Account and that Additional Contribution is invested in accordance with the Permitted Ranges and in Permitted Funds for the Model Portfolio you selected within the Cure Period, we will increase your Retirement Income Base by the amount of that most recent Additional Contribution dollar for dollar.

 

   

Additional Contributions on or after the Retirement Income Date-If you make an Additional Contribution to your Account on or after the Retirement Income Date and that Additional Contribution is invested in accordance with the Permitted Ranges for the Model Portfolio you selected within the Cure Period, we will determine whether this Additional Contribution will increase your Retirement Income Base. An Additional Contribution will increase your Retirement Income Base only after Withdrawals that have not reduced the Retirement Income Base have been exceeded by the amount of prior Additional Contributions to the Account. To determine the amount by which an Additional Contribution will increase your Retirement Income Base, we compare the total of all Additional Contributions you have made to your Account after the Certificate Effective Date (including the current Additional Contribution) to the sum of

1) all Withdrawals from your Account that did not reduce your Retirement Income Base and

2) all increases to the Retirement Income Base resulting from previous Additional Contributions.

We will increase your Retirement Income Base by the amount by which your total Additional Contributions exceeds the sum of 1 and 2 above.

As described above, Withdrawals that do not reduce your Retirement Income Base when taken will reduce or eliminate increases to the Retirement Income Base from subsequent Additional Contributions, and could reduce or eliminate the effect of more than one subsequent Additional Contribution.

If the Retirement Income Base increases as a result of an Additional Contribution to your Account, your Retirement Income Amount will increase by a proportionate amount based on the number of days remaining until the following January 1. (This does not affect the maximum amount you can withdraw if your certificate was issued as a traditional IRA and your RMD remains greater than the increased Retirement Income Amount.) The increase to the Retirement Income Amount equals 5% multiplied by the amount the Retirement Income Base increased (as a result of the Additional Contribution) multiplied by the number of days until the following January 1 and divided by 365. As of first Business Day following January 1, we can advise you of your Retirement Income Amount and you can make a Withdrawal of your Retirement Income Amount.

Additional Contributions that increase your Retirement Income Base will increase the Income Edge fee amount, assuming the Income Edge fee percentage has not decreased. If we have increased the Income Edge fee percentage for the Model Portfolio you have elected for your Account, and you make an Additional Contribution to your Account, that increased fee percentage will apply to a portion of your Retirement Income Base. See “Annual Income Edge Fee” previously in this prospectus. Under certain circumstances, Additional Contributions in your Account will not increase your Retirement Income Base and you should consult with your Investors Capital representative to determine whether making Additional Contributions to the Account is appropriate under your particular circumstances.

The following example shows the effect of Additional Contributions on the Retirement Income Base prior to the Retirement Income Date.

 

Example 1: with Additional Contributions and Withdrawal (Prior to the Retirement Income Date)

Certificate Effective Date (07/01/2010)

Retirement Income Date (10/15/2012)

The Retirement Income Base (RIB) is set equal to the Account Value on the Certificate Effective Date. The Retirement Income Amount (RIA) is set equal to zero since the Retirement Income Date has not yet been reached.

Account Value on 07/01/2010: $1,000,000

Retirement Income Base on 07/01/2010: $1,000,000

Retirement Income Amount on 07/01/2010: $0

Additional Contribution

You make an Additional Contribution of $50,000 on 10/01/2010.

The RIB increases as a result of the Additional Contribution dollar for dollar since the Retirement Income Date has not yet been reached.

The RIA remains equal to zero since the Retirement Income Date has not yet been reached.

Retirement Income Base on 10/01/2010: $1,000,000 + $50,000 = $1,050,000

Retirement Income Amount on 10/01/2010: $0

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Withdrawal

You make a Withdrawal of $20,000 on 10/15/2010 and your Account Value is $1,000,000 at that time.

The RIB decreases as a result of the Withdrawal because the Retirement Income Amount is zero.

Retirement Income Base on 10/15/2010: $1,050,000

Account Value is reduced 2.00% as a result of the Withdrawal ($20,000 ÷ $1,000,000)

New Retirement Income Base on 10/15/2010: $1,050,000 x (1 – 0.02) = $1,029,000

The RIA remains equal to zero since the Retirement Income Date has not yet been reached.

Additional Contribution

You make an Additional Contribution of $60,000 on 10/29/2010.

The RIB increases as a result of the Additional Contribution dollar for dollar since the Retirement Income Date has not yet been reached.

The RIA remains equal to zero since the Retirement Income Date has not yet been reached.

Retirement Income Base on 10/29/2010: $1,029,000 + $60,000 = $1,089,000

Retirement Income Amount on 10/29/2010: $0

The following examples show the effect of Additional Contributions to the Account on the Retirement Income Base and Retirement Income Amount when you have reached your Retirement Income Date.

 

Example 1: with Additional Contributions (On or after the Retirement Income Date)

Certificate Effective Date (07/01/2010)

The Retirement Income Base (RIB) is set equal to the Account Value on the Certificate Effective Date. You have reached your Retirement Income Date so you have a Retirement Income Amount (RIA) and this amount is set equal to 5% of the RIB, prorated based on the number of calendar days until the following January 1.

Account Value on 07/01/2010: $1,000,000

Retirement Income Base on 07/01/2010: $1,000,000

Retirement Income Amount on 07/01/2010: 5% x $1,000,000 x (184 / 365) = $25,205

Additional Contribution

You make an Additional Contribution of $50,000 on 10/01/2010.

The RIB increases as a result of the Additional Contribution. The RIA is increased by an amount equal to 5% multiplied by the amount the Retirement Income Base increased, prorated based on the number of calendar days until the following January 1

(A) Cumulative Additional Contributions: $50,000

(B) Cumulative Withdrawals (that have not reduced RIB): $0

(C) Cumulative Increases to RIB as a result of prior Additional Contributions: $0

Retirement Income Base Increase: (A) – (B) – (C) = $50,000 – $0 – $0 = $50,000

Retirement Income Base on 10/01/2010: $1,000,000 + $50,000 = $1,050,000

Retirement Income Amount Increase: 5% x $50,000 x (92 / 365) = $630

Retirement Income Amount on 10/01/2010: $25,205 + $630 = $25,835

Additional Contribution

You make an Additional Contribution of $60,000 on 10/29/2010.

The RIB increases as a result of the Additional Contribution. The RIA is increased by an amount equal to 5% multiplied by the amount the Retirement Income Base increased, prorated based on the number of calendar days until the following January 1

(D) Cumulative Additional Contributions: $110,000

(E) Cumulative Withdrawals (that have not reduced RIB): $0

(F) Cumulative Increases to RIB as a result of prior Additional Contributions: $50,000

Retirement Income Base Increase: (D) – (E) – (F) = $110,000 – $0 – $50,000 = $60,000

Retirement Income Base on 10/29/2010: $1,050,000 + $60,000 = $1,110,000

Retirement Income Amount Increase: 5% x $60,000 x (64 / 365) = $526

Retirement Income Amount on 10/29/2010: $25,835 + $526 = $26,362

 

Example 2: with Additional Contributions and Withdrawal (On or after the Retirement Income Date)

Certificate Effective Date (07/01/2010)

The Retirement Income Base (RIB) is set equal to the Account Value on the Certificate Effective Date. You have reached your Retirement Income Date so you have a Retirement Income Amount (RIA) and this amount is set equal to 5% of the RIB, prorated based on the number of calendar days until the following January 1.

Account Value on 07/01/2010: $1,000,000

Retirement Income Base on 07/01/2010: $1,000,000

Retirement Income Amount on 07/01/2010: 5% x $1,000,000 x (184 / 365) = $25,205

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Additional Contribution

You make an Additional Contribution of $50,000 on 10/01/2010.

The RIB increases by the full amount of the Additional Contribution because you have not made any Withdrawals that have not reduced the RIB. The RIA is increased by an amount equal to 5% multiplied by the amount the Retirement Income Base increased, prorated based on the number of calendar days until the following January 1

(A) Cumulative Additional Contributions: $50,000

(B) Cumulative Withdrawals (that have not reduced RIB): $0

(C) Cumulative Increases to RIB as a result of prior Additional Contributions: $0

Retirement Income Base Increase: (A) – (B) – (C) = $50,000 – $0 – $0 = $50,000

Retirement Income Base on 10/01/2010: $1,000,000 + $50,000 = $1,050,000

Retirement Income Amount Increase: 5% x $ 50,000 x (92 / 365) = $630

Retirement Income Amount on 10/01/2010: $25,205 + $630 = $25,835

Withdrawal

You make a Withdrawal of $20,000 on 10/15/2010.

The RIB does not change because cumulative Withdrawals in the calendar year do not exceed the RIA.

Retirement Income Base on 10/15/2010: $1,050,000

Retirement Income Amount on 10/15/2010: $25,835

Amount of RIA remaining for Withdrawal in 2010: $25,835 – $20,000=$5,835

Additional Contribution

You make an Additional Contribution of $60,000 on 10/29/2010.

The RIB increases as a result of the Additional Contribution, but not by the full amount of the Additional Contribution because there was a prior Withdrawal that did not reduce the RIB. The RIA is increased by an amount equal to 5% multiplied by the amount the Retirement Income Base increased, prorated based on the number of calendar days until the following January 1

(D) Cumulative Additional Contributions: $110,000

(E) Cumulative Withdrawals (that have not reduced RIB): $20,000

(F) Cumulative Increases to RIB as a result of prior Additional Contributions: $50,000

Retirement Income Base Increase: (D) – (E) – (F) = $110,000 – $20,000 – $50,000 = $40,000

Retirement Income Base on 10/29/2010: $1,050,000 + $40,000 = $1,090,000

Retirement Income Amount Increase: 5% x $40,000 x (64 / 365) = $351

Retirement Income Amount on 10/29/2010: $25,835 + $351 = $26,186

Amount of RIA remaining for Withdrawal in 2010: $5,835 + $351= $6,186

 

Example 3: with Withdrawals and an Additional Contribution That Does Not Increase the Retirement Income Base (On or after the Retirement Income Date)

Certificate Effective Date (07/01/2010)

The Retirement Income Base (RIB) is set equal to the Account Value on the Certificate Effective Date. You have reached your Retirement Income Date so you have a Retirement Income Amount (RIA) and this amount is set equal to 5% of the RIB, prorated based on the number of calendar days until the following January 1.

Account Value on 07/01/2010: $1,000,000

Retirement Income Base on 07/01/2010: $1,000,000

Retirement Income Amount on 07/01/2010: 5% x $1,000,000 x (184/365) = $25,205

Additional Contribution that increases the RIB

You make an Additional Contribution of $50,000 on 10/01/2010.

The RIB increases by the full amount of the Additional Contribution. The RIA is increased by an amount equal to 5% multiplied by the amount the Retirement Income Base increased, prorated based on the number of calendar days until the following January 1.

(A) Cumulative Additional Contributions: $50,000

(B) Cumulative Withdrawals (that have not reduced RIB): $0

(C) Cumulative Increases to RIB as a result of prior Additional Contributions: $0

Retirement Income Base Increase: (A) – (B) – (C) = $50,000 – $0 – $0 = $50,000

Retirement Income Base on 10/01/2010: $1,000,000 + $50,000 = $1,050,000

Retirement Income Amount Increase: 5% x $50,000 x (92/365) = $630

Retirement Income Amount on 10/01/2010: $25,205 + $630 = $25,835

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Withdrawal

You make a Withdrawal of $20,000 on 10/15/2010.

The RIB does not change because cumulative Withdrawals in the calendar year do not exceed the RIA.

Retirement Income Base on 10/15/2010: $1,050,000

Retirement Income Amount on 10/15/2010: $25,835

Amount of RIA remaining for Withdrawal in 2010: $25,835 – $20,000 = $5,835

Additional Contribution that does not increase the RIB

You make an Additional Contribution of $5,000 on 10/29/2010.

The RIB and RIA do not increase as a result of the Additional Contribution, since the cumulative Additional Contributions have not yet exceeded cumulative Withdrawals that have not reduced the RIB and other increases to the RIB as a result of prior Additional Contributions.

(D) Cumulative Additional Contributions: $55,000

(E) Cumulative Withdrawals (that have not reduced RIB): $20,000

(F) Cumulative Increases to RIB as a result of prior Additional Contributions: $50,000

Retirement Income Base Increase: (D) – (E) – (F) = $55,000 – $20,000 – $50,000 = $ – 15,000. Since this amount is less than zero, it does not increase the RIB. Although the result is negative, the RIB will never decrease as a result of an Additional Contribution.

Retirement Income Base on 10/29/2010: $1,050,000 + $0 = $1,050,000

Retirement Income Amount on 10/29/2010: $25,835 + $0 = $25,835

Amount of RIA remaining for withdrawal in 2010: $5,835

Additional Contribution that does not increase the RIB

You make another Additional Contribution of $5,000 on 11/15/2010.

The RIB and RIA do not increase as a result of the Additional Contribution, since the cumulative Additional Contributions have not yet exceeded cumulative withdrawals that have not reduced the RIB and other increases to the RIB as a result of prior Additional Contributions.

(G) Cumulative Additional Contributions: $60,000

(H) Cumulative Withdrawals (that have not reduced RIB): $20,000

(I) Cumulative Increases to RIB as a result of prior Additional Contributions: $50,000

Retirement Income Base Increase: (G) – (H) – (I) = $60,000 – $20,000 – $50,000 = $ – 10,000. Since this amount is less than zero, it does not increase the RIB. Although the result is negative, the RIB will never decrease as a result of an Additional Contribution.

Retirement Income Base on 11/15/2010: $1,050,000 + $0 = $1,050,000

Retirement Income Amount on 11/15/2010: $25,835 + $0 = $25,835

Amount of RIA remaining for withdrawal in 2010: $5,835

Additional Contribution that increases the RIB by a partial amount

You make another Additional Contribution of $15,000 on 12/01/2010.

The RIB increases as a result of the Additional Contribution, but not by the full amount of the Additional Contribution, as it is partially offset by a previous Withdrawal that did not reduce the RIB. The RIA is increased by an amount equal to 5% multiplied by the amount the Retirement Income Base increased, prorated based on the number of calendar days until the following January 1.

(J) Cumulative Additional Contributions: $75,000

(K) Cumulative Withdrawals (that have not reduced RIB): $20,000

(L) Cumulative Increases to RIB as a result of prior Additional Contributions: $50,000

Retirement Income Base Increase: (J) – (K) – (L) = $75,000 – $20,000 – $50,000 = $5,000

Retirement Income Base on 12/01/2010: $1,050,000 + $5,000 = $1,055,000

Retirement Income Amount Increase: 5% x $5,000 x (31 / 365) = $21

Retirement Income Amount on 12/01/2010: $25,835 + $21 = $25,856

Amount of RIA remaining for withdrawal in 2010: $5,835 + $21 = $5,856

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Example 4: with Additional Contributions, Withdrawal within the RIA followed by Excess Withdrawal (On or after the Retirement Income Date)

Certificate Effective Date (07/01/2010)

The RIB is set equal to the Account Value on the Certificate Effective Date. The RIA is set equal to 5% of the RIB, prorated based on the number of calendar days until the following January 1.

Account Value on 07/01/2010: $1,000,000

Retirement Income Base on 07/01/2010: $1,000,000

Retirement Income Amount on 07/01/2010: 5% x $1,000,000 x (184 / 365) = $25,205

Additional Contribution

You make an Additional Contribution of $50,000 on 10/01/2010.

The RIB increases as a result of the Additional Contribution because you have not made any Withdrawals that have not reduced the RIB. The RIA is increased by an amount equal to 5% multiplied by the amount the Retirement Income Base increased, prorated based on the number of calendar days until the following January 1

(A) Cumulative Additional Contributions: $50,000

(B) Cumulative Withdrawals (that have not reduced RIB): $0

(C) Cumulative Increases to RIB as a result of prior Additional Contributions: $0

Retirement Income Base Increase: (A) – (B) – (C) = $50,000 – $0 – $0 = $50,000

Retirement Income Base on 10/01/2010: $1,000,000 + $50,000 = $1,050,000

Retirement Income Amount Increase: 5% x $50,000 x (92 / 365) = $630

Retirement Income Amount on 10/01/2010: $25,205 + $630 = $25,835

Withdrawal within the RIA

You make a Withdrawal of $20,000 on 10/15/2010.

The RIB does not change because cumulative Withdrawals in the calendar year do not exceed the RIA.

Amount of RIA remaining for Withdrawal in 2010: $25,835 – $20,000 = $5,835

Withdrawal causing an Excess Withdrawal because a portion of the Withdrawal causes cumulative Withdrawals in the year to exceed the RIA

You make a Withdrawal of $30,000 on 10/29/2010.

Your Account Value is $1,000,000

The RIB decreases as a result of the Withdrawal because cumulative Withdrawals for the calendar year ($20,000 = $30,000 = $50,000) exceed the RIA ($25,835).

Retirement Income Base on 10/29/2010: $1,050,000

Of the $30,000 Withdrawal, $5,835 is considered within the RIA and $24,165 is considered an Excess Withdrawal.

Your Account Value is reduced to $994,165 as a result of the Withdrawal within the RIA ($1,000,000 – $5,835).

Your Account Value is further reduced to $970,000 as a result of the Excess Withdrawal ($994,165 – $24,165).

Your Account Value immediately prior to the Excess Withdrawal is reduced 2.43% as a result of the Excess Withdrawal ($24,165 ÷ $994,165 = 2.43%).

New Retirement Income Base on 10/29/2010: $1,050,000 x (1 – 0.0243) = $1,024,485

Amount of RIA remaining for Withdrawal in 2010: $5,835 – $5,835 = $0.

Additional Contribution

You make an Additional Contribution of $60,000 on 11/29/2010.

The RIB increases as a result of the Additional Contribution, but not by the full amount of the Additional Contribution because there were prior withdrawals of $25,835 that did not reduce the RIB ($20,000 on 10/15/2010 and $5,835 on 10/29/2010).

The RIA is increased by an amount equal to 5% multiplied by the amount the Retirement Income Base increased, prorated based on the number of calendar days until the following January 1

(D) Cumulative Additional Contributions: $110,000

(E) Cumulative Withdrawals (that have not reduced RIB): $25,835

(F) Cumulative Increases to RIB as a result of prior Additional Contributions: $50,000

Retirement Income Base Increase: (D) – (E) – (F) = $110,000 – $25,835 – $50,000 = $34,165

Retirement Income Base on 11/29/2010: $1,024,485 + $34,165 = $1,058,650

Retirement Income Amount Increase: 5% x $34,165 x (33 / 365) = $154

Retirement Income Amount on 11/29/2010: $25,835 + $154 = $25,989

Amount of RIA remaining for Withdrawal in 2010: $0 + $154 = $154

It is important to understand that your Account Value may increase for reasons other than Additional Contributions you may make to your Account, such as realized or unrealized investment gains or the reinvestment of dividends. Increases in your Account Value other than increases resulting from Additional Contributions you make to your Account do not increase your Retirement Income Base.

 

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Example:

Assume that on the Certificate Effective Date of your Income Edge, your Retirement Income Base equals $500,000. Assume further that by your first Certificate Anniversary Date, your Account Value has grown to $510,000 because your investments have appreciated. The increase in your Account Value because of the appreciation of your investments would not increase your Retirement Income Base to $510,000 (unless, as discussed below, the Annual Optional Increase has been applied). Instead, your Retirement Income Base remains $500,000.

Increases as a Result of the Annual Optional Increase

The Annual Optional Increase is an Income Edge feature. You may use the Annual Optional Increase to periodically increase your Retirement Income Base which, in turn, will increase your Retirement Income Amount, and your lifetime income payments (if any). On your Certificate Anniversary Date, if the Account Value is greater than your Retirement Income Base, and you have not declined the Annual Optional Increase, we will increase your Retirement Income Base to equal your Account Value.

Approximately 30 days prior to each Certificate Anniversary Date, you will be notified that you are approaching the Annual Optional Increase. We must be notified in writing at least 7 days prior to the Certificate Anniversary Date if you do not want to have the Annual Optional Increase. If you take no action in the time specified in our notice, we will apply the Annual Optional Increase (assuming your Account Value is then greater than your Retirement Income Base) and your Retirement Income Base will increase on your Certificate Anniversary Date. An increase in the Income Edge fee percentage may result from accepting the Annual Optional Increase and, unless your Income Edge fee percentage has decreased, your fee amount will increase as a result of the increased Retirement Income Base. Therefore, the fees you pay may increase if you take no action in response to a notice regarding the Annual Optional Increase.

When we apply the Annual Optional Increase, you will have immediate access to the proportionate increase to the Retirement Income Amount. This proportionate increase to the Retirement Income Amount is equal to 5% multiplied by the amount by which the Retirement Income Base increased as a result of the Annual Optional Increase multiplied by the number of days until the following January 1 and divided by 365. As of the first Business Day following January 1, we can advise you of your Retirement Income Amount and you can make a Withdrawal of your Retirement Income Amount.

If the Account Value on your Certificate Anniversary Date is less than your Retirement Income Base, your Retirement Income Base will not increase and, as a result, your Income Edge fee will not change.

 

Example: with appreciation

Assume that on the Certificate Effective Date, your Retirement Income Base is equal to $500,000. Assume further that by your first Certificate Anniversary Date, your Account Value has grown to $520,000 because your assets have appreciated and you have not made any withdrawals from your Account. If you do not notify us that you do not want to have that Annual Optional Increase, your Retirement Income Base will automatically increase on that Certificate Anniversary Date to $520,000 and your Retirement Income Amount will be recalculated.

 

Example: with Contributions plus appreciation and no Withdrawals in an up market

Assume that on the Certificate Effective Date, your Retirement Income Base is equal to $500,000. Assume further that by your first Certificate Anniversary Date, your Account Value has increased to $520,000 because your Account has appreciated, and further assume that you have not made any withdrawals from your Account. If you do not notify us that you do not want to have that Annual Optional Increase, your Retirement Income Base will automatically increase on that Certificate Anniversary Date to $520,000.

Now, assume that by your second Certificate Anniversary Date, your Account Value has increased to $540,000 because your Account assets have appreciated, and further assume that you have not made any withdrawals from your Account. Assume that on the second Certificate Anniversary Date, you make an Additional Contribution to your Account in the amount of $50,000. We will increase your Retirement Income Base on that Certificate Anniversary Date to $590,000 and will recalculate your Retirement Income Amount unless you have notified us that you do not want to have that Annual Optional Increase.

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Example: with Contributions plus appreciation and Withdrawals in an up market

Assume that on the Certificate Effective Date, your Retirement Income Base is equal to $500,000. Assume further that by your first Certificate Anniversary Date, your Account Value has increased to $520,000 because your Account has appreciated, and assume that you have not made any Withdrawals from your Account. If you do not notify us that you do not want to have that Annual Optional Increase, your Retirement Income Base will automatically increase on that anniversary date to $520,000.

Assume further that after the first Certificate Anniversary Date but before the second Certificate Anniversary Date, you make a Withdrawal from your Account in the amount of $25,000. Assume that on the second Certificate Anniversary Date, you make an Additional Contribution of $50,000. As a result of the Additional Contribution, your Retirement Income Base will increase by the amount of cumulative Additional Contributions to your Account ($50,000) less the amount of cumulative Withdrawals from your Account that have not decreased the Retirement Income Base ($25,000) less the cumulative amount by which your Retirement Income Base has been increased by Additional Contributions not including the current Additional Contribution ($0). Therefore, your Retirement Income Base will increase by $25,000 to $545,000 and will recalculate your Retirement Income Amount unless you have notified us that you do not want to have that Annual Optional Increase.

 

8. Income Edge Payments

 

If and when your Account Value is reduced to $0 as a result of Withdrawals from your Account within the limits of your Income Edge certificate on or after the Retirement Income Date and/or poor investment performance before, or on or after the Retirement Income Date, we will provide you with continuing income payments. The income payments under the Income Edge certificate are provided through a lifetime fixed payout annuity. The Income Edge is treated under state insurance law as an annuity contract.

 

Example

Assume that you purchased your Income Edge with an Individual Income Guarantee at age 50 and your initial Retirement Income Base was $500,000. Because of increases to your Retirement Income Base, the Retirement Income Base had grown to $1,000,000 by the time you reached your Retirement Income Date at age 65, at which time you began to take annual Withdrawals of $50,000 per calendar year (which is your Retirement Income Amount, i.e. 5% of your Retirement Income Base). You do not take Withdrawals during any calendar year that exceed $50,000, but because of poor investment performance, your Account Value is reduced to $0 by age 80. At that time, we begin lifetime fixed income payments of $50,000 each year for the rest of your life.

If Your Account Value Is Reduced to $0 as a Result Of Withdrawals Within the Limits of the Income Edge and/or Poor Investment Performance, How Are Your Continuing Income Payments Calculated?

At the time your Account Value equals $0, your Account will be closed.

We will provide you with continuing income payments in the form of lifetime income payments that will continue until you die, or, if you purchased the Spousal Income Guarantee, until both you and your surviving spouse die. The annual amount of income payments we will pay to you is equal to 5% of the Retirement Income Base on the date your Account Value reduces to $0 as a result of Withdrawals (within the limits of the certificate) and/or poor investment performance. We will make monthly payments (if any) equal to one-twelfth of the annual payment amount unless you request an alternative payment frequency. You may request an annual lump sum payment. Your payment will begin as follows:

 

v  

If your Account Value equals $0 on or after the Retirement Income Date as a result of Withdrawals (within the limits of the certificate) and/or poor investment performance, monthly payments will commence one month following the date your Account Value reduces to $0.

 

Example

Assume your Retirement Income Date is the same as your Certificate Effective Date. Assume that your Retirement Income Base is equal to $250,000 on your 10th Certificate Anniversary Date and your Retirement Income Amount is 5% of your Retirement Income Base. Therefore, your Retirement Income Amount is equal to 5% of $250,000 or $12,500. Your Account Value is equal to $10,000. You make a Withdrawal of $10,000 on your 10th Certificate Anniversary Date and your Account Value is reduced to $0 as a result of this Withdrawal. Monthly lifetime income payments equal to 1/12 of $12,500 or $1,041.67 will begin one month following the date your Account Value reduced to $0 and will continue until you die.

 

v  

If your Account Value is reduced to $0 prior to the Retirement Income Date as a result of poor investment performance, monthly payments will commence one month following the Retirement Income Date.

What if You Die Before Your Account Investments Are Reduced to $0?

The lifetime income payments under your Income Edge are “contingent” because they are triggered only when Withdrawals (within the limits of the certificate), and/or poor investment performance, reduce your Account Value to $0 within your lifetime (or if

 

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the Spousal Income Guarantee has been elected, within your and your spouse’s lifetime). But, if these contingencies do not occur within your lifetime or you die before your Account assets are reduced to $0, then the guarantee terminates without value and we make no payments under the Income Edge. Any remaining Account assets will be distributed to your spouse or to your testamentary heirs. To notify PHL Variable that your spouse has died, please call us at the number shown on the front of this prospectus.

General Information

 

Determining Whether an Income Edge Is Right for You

It is important to understand that the Income Edge does not protect the actual value of the assets in your Account and that the Income Edge fee, the Investor Protector Program Fee, your Financial Advisor Fee and any other fees associated with the discretionary managed account reduce your Account Value. For example, if you invest $500,000 in your Account, and your Account Value has dropped to $400,000 on the Retirement Income Date, we are not required to add $100,000 to your Account. Rather, the Income Edge provides that when you have reached the Retirement Income Date, you may begin withdrawing guaranteed lifetime annual income payments of $25,000 (5% of the Retirement Income Base, or $500,000), rather than $20,000 (5% of your Account Value, or $400,000) annually from your Account, and if these withdrawals decrease your Account to $0, then we are required in accordance with the terms of the Income Edge to pay you annual income payments equal to your Retirement Income Amount for the rest of your life if you have the Individual Income Guarantee, or for the lives of you and your spouse if you have the Spousal Income Guarantee. Also, since the Income Edge fee, the Investor Protector Program Fee and the Financial Advisor Fee are deducted from your Account Value, that value will be lower than it would otherwise be in the absence of the Income Edge and the Investor Protector Program. It is also possible that, should your Account Value be reduced to $0 and we make lifetime income payments to you, the total amount of payments you receive from us could be less than the total of the Income Edge fees, the Investor Protector Program Fees, the Financial Advisor Fees and the fees associated with the mutual funds included in the program.

It is also important to understand that even after you have reached the Retirement Income Date and start taking Withdrawals from your Account, those Withdrawals are made first from your own assets in your Account. We are required to start using our own money to make continuing lifetime income payments to you only when and if your Account Value is $0 because of Withdrawals (within the limits of the certificate) and/or poor investment performance. We limit our risk under the Income Edge in this regard by limiting the amount you may withdraw each year from your Account (without reducing your Retirement Income Base) to your current Retirement Income Amount. If your investment return on your Account over time is sufficient to generate gains that can sustain systematic or periodic Withdrawals equal to or greater than the Retirement Income Amount, then your Account Value will never be reduced to $0 and payments under your Income Edge will never begin.

There are many variables, however, other than average annual return on your Account that will determine whether your assets in your Account without the Income Edge would have generated enough gain over time to sustain systematic or periodic Withdrawals equal to your Retirement Income Amount that you would have received if you had purchased the Income Edge. Your Account Value may have declined over time before the Retirement Income Date, which means that your assets would have to produce an even greater return after the Retirement Income Date to make up for the investment losses before that date. Moreover, studies have shown that individual years of negative annual average investment returns can have a disproportionate impact on the ability of your retirement investments to sustain systematic withdrawals over an extended period, depending on the timing of the poor investment returns.

Of course, even if your Account assets (assuming no Income Edge certificate is purchased) do not generate sufficient gains after the date you begin to take income withdrawals to support systematic or periodic Withdrawals equal to the Retirement Income Amount you would have received with the Income Edge and your actual Account Value declines over time, your Account Value may not be fully reduced to $0 for a number of years. If you (or if you have purchased the Spousal Income Guarantee, you and your spouse) die before your assets are reduced to $0, the strategy of liquidating your retirement assets through a program of systematic withdrawals without the protection provided by the Income Edge will have proved to be an effective one. However, studies indicate that lifespans are generally continuing to increase, and therefore, while everyone wants to live a long life, funding retirement through systematic withdrawals presents the risk of outliving those withdrawals. The Income Edge is designed to protect you against the risk of living too long, commonly known as “longevity risk.”

Finally, to be eligible for the Income Edge you are required to maintain your Account in Permitted Funds that comply with the Permitted Ranges for a Model Portfolio. As a result, you may be assuming a more conservative or different investment strategy than you otherwise would and may not gain the benefit of investment gains produced by other investments.

Divorce of Joint Spousal Owners of an Income Edge

 

As discussed in “Purchasing an Income Edge” earlier in this prospectus, spouses may purchase the Spousal Income Guarantee version of the Income Edge to provide predictable lifetime income payments for both spouses by providing continuing income payments if the assets in the spouses’ jointly-owned Account are reduced to $0 by Withdrawals (within the limits of the certificate)

 

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and/or poor investment performance before both spouses die. If spouses purchase a Spousal Income Guarantee Income Edge and subsequently determine to obtain a divorce, the divorce will require certain modifications to be made to, or may result in the complete termination of, the Income Edge certificate, as described below.

Divorce Occurring Before Account Value Is Reduced to $0

If an Income Edge certificate is owned jointly by spouses, in the event of a divorce that becomes final before the Account Value is reduced to $0, the spouses may request that the Income Edge certificate continue in effect, subject to certain modifications as discussed below. The spouses must provide written notice to PHL Variable, acceptable to PHL Variable, stating whether the terms of the divorce provide for (i) the spouses to divide the assets in the Account into two new Accounts, (ii) one spouse to remain the sole owner of the Account, or (iii) both spouses to remain owners of the existing account.

If the Former Spouses Divide the Account into Two New Accounts. If the former spouses provide us with notice that they will divide the assets in the Account between two new Accounts and complete new Applications for Income Edge, the jointly-owned spousal Income Edge certificate will be converted to two individually-owned Income Edge certificates each providing the Individual Income Edge guarantee, one for each of the two new Accounts. The current Income Edge fee applicable to individually-owned Income Edge certificates on the Certificate Effective Date will be charged. We will allocate the Retirement Income Base from the original Account between the two new Accounts owned by each former spouse, as agreed by the former spouses or as directed by any valid, applicable court order. Until we receive such notice, we will continue to treat both former spouses as the owners of the Account and we will continue to charge the Income Edge fee applicable to jointly-owned spousal Income Edge certificates until we have received notice that the spouses are divorced.

However, effective as of the date of the divorce, the Income Edge certificate will no longer be a “spousal” jointly owned certificate and the certificate will generally terminate upon the first owner’s death if such death occurs before we receive notice of the divorce and division of the assets of the Account and the certificate is converted into two individually-owned certificates; provided, however, if such death occurs before we receive notice of the divorce, but we are provided with written evidence that, in our sole discretion, establishes that prior to the first former spouse’s death, the assets in the Account were legally divided either (i) by operation of applicable state law (e.g., laws of community property states) or (ii) pursuant to a court mandated property settlement that sets forth precisely how the former spouses’ Account assets are to be divided, rather than terminating the Income Edge certificate, we will convert the jointly-owned certificate into an individually-owned Income Edge certificate for the Account of the surviving former spouse. We will allocate the Retirement Income Base applicable to the original Account to the certificate for the Account of the surviving spouse, in accordance with such applicable law or property settlement, as the case may be. The portion of the Retirement Income Base from the original Account that is attributable to the deceased former spouse under such applicable state law or property settlement will be reduced to zero and the Income Edge certificate will be terminated as to the assets in the Account attributable to the deceased former spouse, as of the date of such deceased former spouse’s death.

Former spouses that divide their Account into two new Accounts and request that their Income Edge be converted to two individual Income Edge certificates should be aware that the two new Accounts must be invested in accordance with a Model Portfolio and that their rights and obligations under the new certificates will be the same as under the individually-owned Income Edge certificate generally.

One Former Spouse Remains the Sole Owner of the Account. If the former spouses notify us that only one of the former spouses will remain an owner of the Account, which was previously owned by the former spouses, and the spouse retaining the Account completes a new Application for Income Edge, the jointly-owned spousal Income Edge certificate will be terminated and an individually-owned certificate providing the Individual Income Guarantee will be issued to the sole owner. Until we receive such notice and the Application Process is complete, we will continue to treat both former spouses as the owners of the Account and we will continue to charge the Spousal Income Guarantee fee percentage in effect for the certificate. After we receive such notice and the Application Process is complete, the Individual Income Guarantee fee percentage will apply and the Retirement Income Base and Retirement Income Amount in effect at the time the Spousal Income Guarantee certificate was terminated will apply. See “What does the Income Edge cost?,” previously in this prospectus. However, effective as of the date of the divorce, upon the death of the former spouse who is to remain the sole owner of the Account, the Income Edge certificate will terminate, even if such death occurs before we receive notice that the former spouse is to remain the sole owner of the Account. The Income Edge fee will not be charged after the date of death of such former spouse.

The former spouse that remains the owner of the Account and to whom a new individually-owned Income Edge is issued in the circumstances described above should be aware that the Account must remain invested in accordance with a Model Portfolio and that the former spouse’s rights and obligations under the new Income Edge certificate will be the same as under an individually-owned Income Edge certificate generally.

Both Former Spouses Remain Joint Owners of the Account. If the former spouses provide us with notice that they are to remain the joint owners of the Account, the Spousal Income Guarantee will terminate and the Individual Income Guarantee will not be available for the Account.

 

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Divorce occurring on or after the Account Value is reduced to $0

If an Income Edge certificate is jointly-owned by spouses, in the event of a divorce that becomes final on or after the Account Value is reduced to $0, we will split the income payments according to any written notice of divorce received by us. Prior to our receipt of the written notice of divorce, we will make any income payments due under the Income Edge in the manner prescribed by the former spouses pursuant to the terms of the certificate.

Termination of the Income Edge

 

Voluntary Termination. You may terminate your Income Edge at any time in accordance with notification requirements. No amount of Income Edge fees will be returned to you and your Income Edge will terminate without value. If you decide to terminate your Income Edge, your Account Value will remain unchanged. You may not apply for a new Income Edge certificate for 90 days after the voluntary termination.

Cancellation

Once you purchase your Income Edge, you can only cancel it by (i) notifying us in writing that you no longer want the Income Edge and to stop payment of the Income Edge fees from your Account, (ii) closing or transferring your Account or (iii) liquidating all of the assets in your Account. If you elect to terminate your certificate, you cannot purchase a certificate again for 90 days following the termination.

Automatic Termination. Your Income Edge will automatically terminate upon any of the following events:

Death of an Owner

   

If you purchased the Income Edge with the Individual Income Guarantee, your Income Edge will terminate upon your death or, if the Income Edge was purchased with an IRA, the death of the natural person for whom the IRA was established.

 

   

If you purchased the Income Edge with the Spousal Income Guarantee, upon the death of the first owner to die, the surviving spouse may continue the Income Edge. The Income Edge certificate will terminate upon death of the surviving spouse.

Excess Withdrawals

   

If your Retirement Income Base is reduced to $0 by Excess Withdrawals, your Income Edge will terminate.

Lifetime Payment Option

   

The Lifetime Payment Option is an option that allows you, at any time, to liquidate all of the assets in your Account and apply the proceeds to purchase a lifetime fixed immediate annuity contract from us. Your annuity payments will never be less than those calculated in accordance with the annuity rates guaranteed in the Income Edge. Your Income Edge certificate will terminate if you elect the Lifetime Payment Option. For more information on the Lifetime Payment Option, see Appendix A.

Non-Compliance with Investment Limitations

   

Each Model Portfolio must meet certain investment limitations for those asset allocation strategies designated for use with the Income Edge certificate, which, in certain circumstances, if exceeded, may result in the termination of your Income Edge certificate. We will notify an Income Edge certificate holder whose Account is no longer in compliance with the Permitted Ranges, using only Permitted Funds, by sending a notice to the certificate holder’s address on our records at least 30 days prior to terminating the certificate. A certificate holder whose Account is not in compliance with the Permitted Ranges using only Permitted Funds may choose to invest the Account Value in accordance with another Model Portfolio, if available, or to liquidate the Account and apply the resulting amount to another annuity with guaranteed benefits, including any such annuities then offered by PHL Variable or its affiliates. Liquidating Account investments may have tax consequences and you should consult with your tax advisor. Additionally, at any time while a certificate is in effect, the certificate holder can apply the Account Value to the Lifetime Payment Option. See “Lifetime Payment Option,” Appendix A to this prospectus.

For more information regarding the termination of the Income Edge certificate under such circumstances, see “What Happens if Your Account is Managed in a Manner Unacceptable to Us?” in this prospectus.

Miscellaneous Provisions

 

Periodic Communications to Income Edge Owners

The custodian for your Account will provide your periodic statements describing Account information such as transaction summaries, capital gains and losses, and trade confirmations. We will provide periodic notices, including an Income Edge Fee Deduction Notice, Income Edge Adjustment Notice, notices regarding the Annual Optional Increase, and Income Edge Termination Notice, as well as annual information including the Income Edge Anniversary Notice and Income Edge January 1 Notice. The Income Edge Fee Deduction Notice will confirm the withdrawal of Income Edge fees from the Account. The Income Edge Adjustment Notice confirms the following: any Withdrawal before the Retirement Income Date, an Excess Withdrawal on or after the Retirement Income

 

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Date, Additional Contributions that increase the Retirement Income Base, and when the Retirement Income Amount is calculated as a result of the client reaching the Retirement Income Date. The Income Edge Anniversary Notice confirms the Retirement Income Date, the Retirement Income Base, the Retirement Income Amount, the Calendar Yearly-to-Date Withdrawals, the Calendar Year Remaining Amount (if on or after the Retirement Income Date), the Certificate Anniversary, and the Income Edge Fee Percentage. The Income Edge Termination Notice confirms the termination of the Income Edge without value. The Income Edge January 1 Notice confirms the Retirement Income Date, the Retirement Income Base, and the Retirement Income Amount (only after the Retirement Income Date). Your Income Edge Fee Deduction Notice will identify the amount of the fee deducted from your Account for the Income Edge. Investors Capital will deduct the Income Edge fee from your Account on a pro rata basis from the Account assets and this deduction, including the amount of the deduction taken from each particular asset will be shown on your Account statement from the custodian.

Amendments to an Income Edge certificate

The group annuity contract under which Income Edge certificates are issued, the Income Edge certificate itself may be amended to conform to changes in applicable law or interpretations of applicable law. Any changes in the Income Edge certificate and/or the group annuity contract under which it is issued may need to be approved by certain state insurance departments. You will receive written notice of such changes in the Income Edge certificate and certificate owners will receive notice of changes to the Income Edge contract affecting the rights of certificate owners.

Assignment

You may not assign your interest in your Income Edge certificate without our prior written approval.

Taxation of the Income Edge

 

The following is a general discussion based on current interpretations of current Federal income tax law and is not intended as individual tax advice. This discussion does not cover every situation and does not address all possible circumstances. This discussion does not address the tax treatment of transactions involving assets held in your Account except insofar as the Income Edge itself may be relevant to the tax treatment of such transactions. Further, no attempt is made to consider any applicable state tax or other tax laws, or to address any federal estate, or state and local estate, inheritance and other tax consequences of the Income Edge. You should also be aware that the tax laws may change, possibly with retroactive effect. Specifically, we cannot guarantee the income tax status of any contract either currently or in the future. No representation is made regarding the likelihood of continuation of the federal income tax laws or the current interpretations by the Internal Revenue Service (“IRS”). You should consult your own tax advisor regarding the potential tax implications of the Income Edge in light of your particular circumstances.

From time to time, there are regulatory or legislation proposals or changes that do or could impact the taxation of annuity contracts and IRAs; if enacted, these changes could be retroactive. At this time, we do not have any specific information about any pending proposals that could affect this annuity. We reserve the right to make changes to the annuity to assure that it continues to qualify as an annuity for federal income tax purposes. For the purposes of this Section the term “policyholder” or “taxpayer” means you, the certificate holder.

Income Edge may be issued either in connection with an Individual Retirement Account (IRA Account), in which case it is referred to as Qualified Income Edge, or independent of any IRA, in which case it is referred to as Non-Qualified Income Edge. Different tax rules apply to Qualified Income Edge and Non-Qualified Income Edge, and the tax rules applicable to the Qualified Income Edge vary according to the type of IRA and the terms and conditions of the plan.

Non-Qualified Income Edge

Treatment of Income Edge as Annuity Contract. The Internal Revenue Service has issued a ruling to PHL Variable indicating that the Income Edge certificate will be treated as an annuity contract under the Internal Revenue Code. In addition, the Internal Revenue Service has also issued rulings to an individual investor concerning the tax treatment relative to the certificate and to Account assets. These rulings provide, in substance, that the certificate will be treated as an annuity contract and that the income tax treatment of the Account is unaffected by the existence of Income Edge. Specifically, the IRS rulings indicate that (1) the Income Edge certificate will not prevent an investor/ certificate holder from currently deducting losses in the Account; (2) the Income Edge certificate does not impact the holding period of assets in the Account, which is relevant in determining whether gains or losses in the Account are taxed as “capital assets” as well as the tax treatment of dividends earned on assets in the Account; and (3) the Income Edge certificate and Account assets will not, either at the time of issuance of the certificate or subsequently, be viewed as components of a tax straddle, which would impact timing of gain or loss recognition.

In order to be treated as an annuity for Federal tax purposes, the annuity must contain certain provisions prescribing distributions that must be made when an owner of the contract dies. These provisions are in section 72(s) of the Internal Revenue Code. We believe that by its terms the Income Edge satisfies these requirements. In all events, we will administer the Non-Qualified Income Edge to comply with these Federal tax requirements.

 

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Your Account. Based on rulings received from the Internal Revenue Service, the tax treatment of transactions involving the assets in your Account including redemptions, dispositions and distributions with respect to such assets, will be the same as such treatment would be in the absence of the Income Edge certificate. (The tax treatment of such transactions is beyond the scope of this prospectus. You should consult a tax advisor for further information about the tax treatment of assets covered by the Income Edge.) Thus, based on the rulings received, we believe that 1) distributions and dividends on your Account will not be treated as payments under the Income Edge, (2) amounts received on redemption or disposition of your assets in your Account will be treated as amounts realized on a sale or exchange of such assets rather than as distributions under the Income Edge; and (3) the purchase of a Non-Qualified Income Edge will not cause either (a) loss of the benefit of any preferential income tax rates that may be applicable to dividends paid on assets in your Account otherwise constituting “qualified dividend income” or (b) under the “straddle” rules, suspension of the holding period for purposes of determining eligibility for long-term capital gains treatment of any gains, or potential deferral of losses, when assets in your Account are sold or exchanged. The tax consequences could change in the future due to changes in the tax laws or regulations. Although the exact nature of any such possible change is speculative, one possibility is that there may be an increase in the rate applicable to qualified dividend income. Alternatively, the special rate applicable to such income could be eliminated entirely, resulting in dividends being taxed at ordinary income rates. A possible change in the straddle rules is a modification to the scope of those rules, with the result that transactions in an Account not subject to the straddle rules under current law would become subject to the loss deferral and other limitations applicable to straddles. In addition, the tax rate applicable to gains or losses in the Account may be changed in the future. You should consult your own tax advisor as to the tax consequences, if any, of the Income Edge under these rules and other relevant tax provisions, both at the time of initial purchase and in subsequent years.

Payments After Account Value is Reduced to $0. Lifetime income payments beginning if and when your Account Value has been reduced to $0 are amounts received as an annuity. These payments will be treated in part as taxable ordinary income and in part as non-taxable recovery of the aggregate Income Edge certificate fees you have previously paid (your “investment in the contract”) until you recover all of your investment in the contract. (The ratio of taxable-income to recovery of investment amounts will depend on your life expectancy at the time you begin recovering payments). After you recover all of your investment in the contract, payments will be taxable in full as ordinary income.

Payment of the Income Edge Fee from Account investments. The redemption or disposition of assets in your Account to pay the Income Edge fee will be treated as amounts realized on the sale or exchange of such assets generating taxable gains and/or losses as a result of such sale or exchange, and therefore you will not be able to apply the proceeds from such a redemption or disposition to pay the Income Edge Fee on a tax-free or tax-deferred basis. You should consult a tax advisor for further information. The payment of the Income Edge Fee is not a distribution from the Income Edge certificate.

Qualified Income Edge

The Income Edge may be used with traditional IRA Accounts and Roth IRA Accounts (collectively, “IRA Accounts”). The Qualified Income Edge is not available as an Individual Retirement Annuity (IRA Annuity). Internal Revenue Code (“Code”) Sections 408 and 408A permit eligible individuals to contribute to an Individual Retirement Arrangement known as an “IRA” or “Roth IRA.” These IRAs are subject to limitations on the amount that may be contributed, the persons who may be eligible and on the time when distributions may commence.

The tax rules applicable to a Qualified Income Edge vary according to the type of IRA Account and the terms and conditions of the IRA Account. No attempt is made here to provide more than general information about the use of the Qualified Income Edge with an IRA Account. Participants under such IRA Account, as well as beneficiaries, are cautioned that the rights of any person to any benefits under such IRA Account may be subject to the terms and conditions of the IRA Accounts themselves or limited by applicable law, regardless of the terms and conditions of the Qualified Income Edge.

We reserve the right to discontinue offering the Income Edge to new certificate holders that plan to use the Income Edge with IRA Accounts. The Qualified Income Edge is available only with respect to the IRA Account for which the Qualified Income Edge is purchased.

The Qualified Income Edge is intended for purchase by the trustee or custodian of IRA Accounts. The Income Edge is owned by the IRA itself.

We are not responsible for determining whether the Qualified Income Edge complies with the terms and conditions of, or applicable law governing, any IRA Account. You are responsible for making that determination. Similarly, we are not responsible for administering any applicable tax or other legal requirements applicable to the IRA Account. You or a service provider for the IRA Account are responsible for determining that distributions, beneficiary designations, investment restrictions, charges and other transactions under the Qualified Income Edge are consistent with the terms and conditions of the plan and applicable law.

IRA Accounts may be subject to required minimum distribution rules. The value of the guarantee provided by the Qualified Income Edge may have to be taken into account in determining your required minimum distributions under the IRA Account. Withdrawals from your Account taken to meet required minimum distribution requirements, in proportion to the value of your Account to your overall IRA Account balance, will be deemed to be within the certificate limits for Income Edge and will not reduce your Retirement

 

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Income Base. If you pay the Income Edge fee for a Qualified Income Edge with proceeds from your IRA Account, that payment will not be a “distribution” from your IRA Account for purposes of the Code. If you pay the Income Edge fee for a Qualified Income Edge from other assets outside your IRA Account, the Income Edge fee may have tax consequences and also may be treated as an additional contribution to your IRA Account. You should consult a tax advisor for further information.

Under Section 3405 of the Internal Revenue Code taxable distributions eligible to be rolled over generally will be subject to 20 percent income tax withholding. Mandatory withholding can be avoided only if the employee arranges for a direct rollover to another qualified pension or profit-sharing plan or to an IRA. The mandatory withholding rules apply to all taxable distributions from qualified plans except (a) distributions required under the Code, (b) substantially equal distributions made over the life (or life expectancy) of the employee, or for a term certain of 10 years or more and (c) the portion of distributions not includable in gross income (i.e., return of after-tax contributions).

Individual Retirement Accounts. Code Sections 408 and 408A permit eligible individuals to contribute to an individual retirement program known as an “IRA” or “Roth IRA”. These IRAs are subject to limitations on the amount that may be contributed, the persons who may be eligible and on the time when distributions may commence. In addition, distributions from certain other types of qualified plans may be placed on a tax-deferred basis into an IRA.

Tax on Certain Distributions Relating to IRA Accounts

Each payment from the Qualified Income Edge held by an IRA is treated in part as taxable ordinary income and in part as non-taxable recovery of the after-tax (if any) amounts previously invested in the IRA (“basis”). After you recover all of your basis, payments will be taxable in full. For most certificate holders, there is no basis or after-tax investment in the IRA and as such, the entire Qualified Income Edge payment is taxable. A payment from a Qualified Income Edge held by a Roth IRA may be non-taxable, provided that specified conditions are met. Roth IRA certificate holders should consult a tax advisor to determine if the payment will be taxable.

Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion of certain early distributions from IRA Accounts. To the extent amounts are not includable in gross income because they have been properly rolled over to another IRA or to another eligible qualified plan, no tax penalty will be imposed. As of January, 2009, the tax penalty will not apply to the following: (a) distributions made on or after the date on which the taxpayer reaches age 59 1/2; (b) distributions following the death or disability of the taxpayer (for this purpose disability is as defined in section 72(m)(7) of the Code); (c) distributions that are part of substantially equal periodic payments made not less frequently than annually for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of such taxpayer and his or her designated beneficiary; (e) distributions made to the taxpayer to the extent such distributions do not exceed the amount allowable as a deduction under Code section 213 to the taxpayer for amounts paid during the taxable year for medical care; (f) distributions made to an alternate payee pursuant to a qualified domestic relations order; (g) distributions from an IRA for the purchase of medical insurance (as described in section 213(d)(1)(D) of the Code) for the taxpayer and spouse and dependents if the certain conditions are met; (h) distributions from IRAs for first-time home purchase expenses (maximum $10,000) or certain qualified educational expenses of the taxpayer, spouse, children or grandchildren; and (i) distributions from retirement plans to individuals called to active military. Please note that future legislation or regulations may modify the conditions under which distributions may be received from an IRA without tax penalty.

Generally, required minimum distributions (RMDs) from an IRA must commence no later than April 1 of the calendar year following the year in which the taxpayer attains age 70 1/2. The RMDs are determined based on a period not exceeding the life expectancy of the taxpayer or the joint lives or life expectancies of the taxpayer and his or her designated beneficiary. There are no RMDs relating to a Roth IRA as long as the original taxpayer is alive. There are after-death RMDs for both IRAs and Roth IRAs. The amount of the lifetime RMD may be different than the amount of the after-death RMDs. If the RMDs are not made, a 50% penalty tax is imposed as to the amount not distributed.

The amount that must be distributed is based on Code rules that take into consideration the taxpayer’s age, marital status, and account balance, the value of the Account, including the actuarial value of the Income Edge certificate. An individual is required to take distributions from all of his or her retirement accounts; however, if the individual has two or more accounts, the total amount of RMDs can be taken from one of the multiple accounts. For example, if the individual has a traditional IRA with custodian A and a separate IRA with custodian B, the individual will have an RMD amount relating to each of these retirement vehicles. Depending on the terms of IRA A and IRA B, the individual may take the total of two RMDs from either or both of the two IRAs. Withdrawals from your Account taken to meet RMDs, in proportion to the value of your Account to your overall IRA Account balance, will be deemed to be within the certificate limits for Income Edge and will not reduce your Retirement Income Base. While the total amount of your RMD for your entire IRA includes the value of this annuity, only the portion of the RMD allocable to this annuity may be withdrawn without impact to your Retirement Income Base.

If you pay the Income Edge fee for a Qualified Income Edge with proceeds from your IRA Account, that payment will not be a “distribution” from your IRA Account for purposes of the Code. If you pay the Income Edge fee for a Qualified Income Edge from other assets outside your IRA Account, the Income Edge fee may have tax consequences and also may be treated as an additional contribution to your IRA Account. You should consult a tax advisor for further information.

 

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Withholding. Payments from both Qualified Income Edge and Non-Qualified Income Edge will generally be subject to Federal and State information reporting and tax withholding for the taxpayer’s Federal income tax liability. We are required to file information returns with the IRS and state taxation authorities in the event that there is a distribution from your contract that may have tax consequences and in certain other circumstances. In order to comply with our requirements, from time to time, we request certain information, including social security number or tax identification number and current name and address. We are not responsible for information reporting and tax withholding in relation to the underlying Account, either an IRA or otherwise. Our obligation only relates to amounts from your Income Edge annuity.

In addition to information reporting, we are also required to withhold federal income taxes on the taxable portion of any amounts received unless there is a valid election out of withholding. United States citizens can generally elect not to have tax withheld from such payments, as long as the recipient provides an accurate social security number or tax identification number and the Internal Revenue Service has otherwise not required such withholding. Purchasers of a Non-Qualified Income Edge who are not United States citizens will generally be subject to Federal withholding on taxable distributions from their Income Edge at a 30% rate, unless a lower treaty rate applies. In addition, purchasers who are not United States citizens or residents may be subject to state and/or municipal taxes and taxes that may be imposed by the purchaser’s country of citizenship or residence. Prospective purchasers of a Non-Qualified Income Edge who are not United States citizens or residents are advised to consult with a qualified tax adviser regarding U.S. Federal, state, and foreign taxation with respect to the purchase of a Income Edge.

Regardless of whether the certificate holder/taxpayer elects out of withholding, the certificate holder remains liable for payment of federal income taxes on the taxable portion of any amounts received under Income Edge. There may be penalties if the withholding or estimated tax payments are insufficient. Certain states also require withholding of state income taxes on the taxable portion of amounts received. State laws differ regarding the procedure by which these amounts are computed and the extent to which a policyholder can elect out of withholding.

Seek Tax Advice. The above description of federal income tax consequences Income Edge is only a brief summary meant to alert you to the issues and is not intended as tax advice. Any person considering the purchase of an Income Edge in connection with an IRA Account should first consult a qualified tax advisor, with regard to the suitability of the Income Edge for the IRA Account.

 

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About PHL Variable

 

Our executive and administrative office is located at One American Row, Hartford, Connecticut, 06103-2899.

PHL Variable is a stock life insurance company. It was incorporated in Connecticut on July 15, 1981 and is a wholly owned subsidiary of Phoenix Life Insurance Company (“Phoenix”) through its holding company, PM Holdings, Inc. Phoenix is a life insurance company, which is wholly owned by The Phoenix Companies, Inc. (“PNX”), which is a manufacturer of insurance, annuity and investment products and services. PNX was organized in Connecticut in 1851 and in connection with its merger in 1992 with Home Life Insurance Company, Phoenix redomiciled to New York.

On June 25, 2001, the effective date of its demutualization, Phoenix converted from a mutual life insurance company to a stock life insurance company and became a wholly owned subsidiary of PNX. In addition, on June 25, 2001, PNX completed its initial public offering (IPO).

The following chart illustrates our corporate structure as of January 1, 2010.

LOGO

The Phoenix Companies, Inc.—Legal Proceedings about Company Subsidiaries

 

We are regularly involved in litigation and arbitration, both as a defendant and as a plaintiff. The litigation and arbitration naming us as a defendant ordinarily involves our activities as an insurer, employer, investor or investment advisor. It is not feasible to predict or determine the ultimate outcome of all legal or arbitration proceedings or to provide reasonable ranges of potential losses. Based on current information, we believe that the outcomes of our litigation and arbitration matters are not likely, either individually or in the aggregate, to have a material adverse effect on our financial condition. However, given the large or indeterminate amounts sought in certain of these matters and the inherent unpredictability of litigation and arbitration, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our results of operations or cash flows in particular quarterly or annual periods.

State regulatory bodies, the Securities and Exchange Commission (“SEC”), Financial Industry Regulatory Authority, or FINRA, the IRS and other regulatory bodies regularly make inquiries of us and, from time to time, conduct examinations or investigations concerning our compliance with laws and regulations related to, among other things, our insurance and broker-dealer subsidiaries, securities offerings and registered products. We endeavor to respond to such inquiries in an appropriate way and to take corrective action if warranted.

For example, in the fourth quarter of 2008, the State of Connecticut Insurance Department initiated the on-site portion of a routine financial examination of the Connecticut domiciled life insurance subsidiaries of Phoenix Life Insurance Company for the five year period ending December 31, 2008.

Regulatory actions may be difficult to assess or quantify, may seek recovery of indeterminate amounts, including punitive and treble damages, and the nature and magnitude of their outcomes may remain unknown for substantial periods of time. It is not feasible to predict or determine the ultimate outcome of all pending inquiries, investigations, legal proceedings and other regulatory actions, or to provide reasonable ranges of potential losses. Based on current information, we believe that the outcomes of our regulatory matters are not likely, either individually or in the aggregate, to have a material adverse effect on our financial condition. However, given the large or indeterminate amounts sought in certain of these actions and the inherent unpredictability of regulatory matters, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on our results of operation or cash flows in particular quarterly or annual periods.

 

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Distribution Arrangements

 

We have entered into a distribution agreement with our affiliate, PEPCO, for the distribution of the Income Edge certificate. PEPCO and PHL Variable have entered into a selling agreement with Investors Capital Corporation for the sale of the certificates. We do not pay cash or any other compensation to PEPCO for sales of the Income Edge certificates. We do cover certain expenses related to its operating and other expenses, including the following sales expenses: compensation and bonuses for PEPCO’s management team, advertising expenses, and other expenses of distributing the certificates. PEPCO’s management team also may be eligible for non-cash compensation items that we may provide jointly with PEPCO. Non-cash compensation items include conferences, seminars and the cost of attending (including travel lodging and meals), entertainment, merchandise and other similar items.

PEPCO’s principal executive offices are located at 610 W. Germantown Pike, Suite 460, Plymouth Meeting, Pennsylvania, 19462. PEPCO is registered as a broker-dealer with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as well as the securities commissions in the states in which it operates, and is a member of the Financial Industry Regulatory Authority, or (“FINRA”).

As noted above, PEPCO and PHL Variable have entered into a selling agreement with Investors Capital Corporation for the sale of the Income Edge certificates. Investors Capital Corporation receives no commissions or any other cash or non-cash compensation from PEPCO and PHL Variable for the sale of the Income Edge. PHL Variable and PEPCO intend to provide training to registered representatives of Investors Capital Corporation with regard to the sale of Income Edge certificate, but will not pay for or reimburse Investors Capital Corporation for any training and education expenses incurred by Investors Capital Corporation nor will they provide any items of value to Investors Capital Corporation in connection with the sale of the certificates.

We pay third parties not affiliated with Investors Capital or PHL Variable for wholesale distribution activities related to the certificates. These payments will not exceed 0.10% of the Retirement Income Base for certificates with Account Value greater than $0. We intend to recoup sales expenses through Income Edge fees or from our general account.

Legal Matters

 

Kathleen A. McGah, Vice President and Assistant Secretary, PHL Variable has provided opinions regarding the status of Income Edge under the federal securities laws and state insurance and securities laws. Laurie D. Lewis, Counsel, Phoenix Life Insurance Company, has provided opinions regarding the federal tax status of Income Edge.

Experts

 

The financial statements of PHL Variable Insurance Company incorporated in this prospectus by reference to the Annual Report on Form 10-K for the year ended December 31, 200_ have been so incorporated [incorporation and accounting experts disclosure to be added by amendment]

Annual Statements

 

At least once a year prior to the date lifetime income payments begin, we will send you a statement containing information about your Income Edge.

 

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Table of Cross References for Defined Terms

 

The following is a listing of defined terms and the page numbers of the page on which the definition of each term may be found.

 

Term

   

 

Account

  4

Account Value

  4

Additional Contribution

  4

Annual Optional Increase

  5

Application

  5

Application Process

  5

Certificate Anniversary Date

  5

Certificate Effective Date

  5

Cure Period

  9

Excess Withdrawal

  6

Financial Advisor

  4

Financial Advisor Fee

  5

Income Edge

  1

Individual Income Guarantee

  7

Individual Retirement Account (“IRA”)

  6

Investor Protector Program Fee

  5

Lifetime Payment Option

  38

Model Portfolios

  4

Non-Qualified Income Edge

  26

Permitted Funds

  9

Permitted Ranges

  9

Qualified Income Edge

  15

Retirement Income Amount

  6

Retirement Income Base

  5

Retirement Income Date

  6

Spousal Income Guarantee

  4

Withdrawal

  5

 

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Selected Financial Data of PHL Variable

[TO BE UPDATED BY AMENDMENT]

 

Selected Financial Data

The following selected financial data should be read in conjunction with the financial statements and related notes for PHL Variable, which are incorporated by reference into this prospectus.

Annual Data

 

    Year Ended December 31,  
($ in thousands)   2009    2008     2007     2006     2005  
          

REVENUES:

          

Premiums

     $ 15,098      $ 18,602      $ 13,575      $ 9,521   

Insurance and investment product fees

       361,354        263,298        180,779        109,270   

Net Investment Income

       90,963        109,607        129,325        154,374   

Net realized investment gains (losses):

          

Total other-than-temporary impairment (“OTTI”) losses

                              

Portion of OTTI losses recognized in other comprehensive income

                              
                                  

Net OTTI losses recognized in earnings

       (52,057     (3,287     (411     (2,651

Net realized investment gains (losses), excluding OTTI losses

       (119,998     (3,756     (2,049     (7,918
                                  

Total realized investment gains (losses)

       (172,055     (7,043     (2,460     (10,569
                                  

Total revenues

       295,360        384,464        321,219        262,596   
                                  

BENEFITS AND EXPENSES:

          

Policy benefits

       218,415        168,395        154,951        130,279   

Policy acquisition cost amortization

       262,132        120,041        93,342        80,402   

Other operating expenses

       97,504        83,601        65,388        50,493   
                                  

Total benefits and expenses

       578,051        372,037        313,681        261,174   
                                  

Income (loss) before income taxes

       (282,691     12,427        7,538        1,422   

Applicable income tax (expense) benefit

       87,497        (1,122     (1,070     2,801   
                                  

Net income (loss)

     $ (195,194   $ 11,305      $ 6,468      $ 4,223   
                                  
    Year Ended December 31,  
    2009    2008     2007     2006     2005  

Total assets

     $ 5,493,954      $ 6,437,891      $ 5,849,199      $ 5,978,919   
                                  

Supplementary Financial Information of PHL Variable

[TO BE UPDATED BY AMENDMENT]

 

 

Accounting Change

In April 2009, the FASB issued FSP FAS 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2”), which changes the application of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). The FSP addresses how to evaluate whether an impairment is other than temporary, and modifies the existing requirement from the intent and ability to hold a security, to an assessment of whether it is more likely than not that PHL Variable will be required to sell the security before recovery. Additionally, the guidance provides for the separation of another-than-temporary impairment into an amount attributable to credit loss, recognized in earnings, and an amount attributable to other factors, recognized in other comprehensive income. FSP FAS 115-2 was optional for adoption for periods ending after March 15, 2009. We elected to adopt this guidance for the quarter ending March 31, 2009. The cumulative effect of our adoption was $4,613 thousand after offsets and is reflected in stockholder’s equity. The cumulative effect resulted in a decrease to accumulated deficit of $5,838 thousand after offsets, which includes an adjustment of $2,900 thousand to the deferred tax valuation allowance, and an increase to accumulated other comprehensive loss of $1,225 thousand after offsets.

Effective April 1, 2008, we changed our method of accounting for the cost of certain of our long duration reinsurance contracts accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 113, Accounting and Reporting for

 

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Reinsurance of Short-Duration and Long-Duration Contracts (“SFAS 113”). In conjunction with this change, we also changed our method of accounting for the impact of reinsurance costs on deferred acquisition costs. SFAS 113 requires us to amortize the estimated cost of reinsurance over the life of the underlying reinsured contracts. Under our previous method, we recognized reinsurance recoveries as part of the net cost of reinsurance and amortized this balance over the estimated lives of the underlying reinsured contracts in proportion to estimated gross profits (“EGPs”) consistent with the method used for amortizing deferred policy acquisition costs. Under the new method, reinsurance recoveries are recognized in the same period as the related reinsured claim. In conjunction with this change, we also changed our policy for determining EGPs relating to these contracts to include the effects of reinsurance, where previously these effects had not been included.

Supplementary Financial Information

 

Selected Unaudited Quarterly Financial Data:   Quarter Ended  
($ in thousands)   Mar 31,     June 30,     Sept 30,  
Income Statement Data   2009  
     

REVENUES

     

Premiums

  $ 5,492      $ 3,944      $ 2,744   

Insurance and investment product fees

    96,286        97,666        108,873   

Net investment income

    20,271        21,949        18,138   

Net realized investment gains (losses):

     

Total other-than-temporary impairment (“OTTI”) losses

           (14,653     (8,158

Portion of OTTI losses recognized in other comprehensive income

           6,348        5,783   
                       

Net OTTI losses recognized in earnings

    (8,054     (8,305     (2,375

Net realized investment gains (losses), excluding OTTI losses

    10,112        (8,412     5,090   
                       

Total realized investment gains (losses)

    2,058        (16,717     2,715   
                       

Total revenues

    124,107        106,842        132,470   
                       

BENEFITS AND EXPENSES

     

Policy benefits

    55,025        76,808        59,340   

Policy acquisition cost amortization

    38,590        6,198        36,082   

Other operating expenses

    35,685        33,265        31,823   
                       

Total benefits and expenses

    129,300        116,271        127,245   
                       

Income (loss) before income taxes

    (5,193     (9,429     5,225   

Applicable income tax (expense) benefit

    1,154        (762     (838
                       

Net income (loss)

  $ (4,039   $ (10,191   $ 4,387   
                       

COMPREHENSIVE INCOME

     

Net income (loss)

  $ (4,039   $ (10,191   $ 4,387   
                       

Net unrealized gains (losses)

    (1,095     23,559        19,361   

Portion of OTTI losses recognized in other comprehensive income

           (1,585     (3,759
                       

Other comprehensive income (loss)

    (1,095     21,974        15,602   
                       

Comprehensive income (loss)

  $ (5,134   $ 11,783      $ 19,989   
                       

ADDITIONAL PAID-IN CAPITAL

     

Capital contribution from parent

  $ 20,000      $ 45,000      $   

RETAINED EARNINGS

     

Cumulative effect of FSP FAS 115-2

    5,838                 

Net income (loss)

    (4,039     (10,191     4,387   

ACCUMULATED OTHER COMPREHENSIVE LOSS:

     

Cumulative effect of FSP FAS 115-2

    (1,225              

OTHER COMPREHENSIVE INCOME

     

Other comprehensive income (loss)

    (1,095     21,974        15,602   
                       

Change in stockholder’s equity

    19,479        56,783        19,989   

Stockholder’s equity, beginning of period

    532,441        551,920        608,703   
                       

Stockholder’s equity, end of period

  $ 551,920      $ 608,703      $ 628,692   
                       

 

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Selected Unaudited Quarterly Financial Data:   Quarter Ended  
($ in thousands)   Mar 31,     June 30,     Sept 30,     Dec 31,  
Income Statement Data   2008  
       

REVENUES

       

Premiums

  $ (643   $ 5,314      $ 5,423      $ 5,004   

Insurance and investment product fees

    83,865        87,717        93,554        96,218   

Net investment income

    24,321        22,990        22,510        21,142   

Net realized investment gains (losses):

       

Total other-than-temporary impairment (“OTTI”) losses

                           

Portion of OTTI losses recognized in other comprehensive income

                           
                               

Net OTTI losses recognized in earnings

    (6,948     (5,388     (6,241     (33,480

Net realized investment gains (losses), excluding OTTI losses

    (13,081     7,077        (22,149     (91,845
                               

Total realized investment gains (losses)

    (20,029     1,689        (28,390     (125,325
                               

Total revenues

    87,514        117,710        93,097        (2,961
                               

BENEFITS AND EXPENSES

       

Policy benefits

    51,015        43,573        51,774        72,053   

Policy acquisition cost amortization

    24,537        38,755        46,553        152,307   

Other operating expenses

    28,101        25,707        21,117        22,579   
                               

Total benefits and expenses

    103,653        108,035        119,424        246,939   
                               

Income (loss) before income taxes

    (16,139     (9,675     (26,327     (249,900

Applicable income tax (expense) benefit

    7,109        (3,360     9,853        73,895   
                               

Net income (loss)

  $ (9,030   $ 6,315      $ (16,474   $ (176,005
                               

COMPREHENSIVE INCOME

       

Net income (loss)

  $ (9,030   $ (6,315   $ (16,474   $ (176,005
                               

Net unrealized gains (losses)

    (5,639     (2,620     (6,746     (25,135

Portion of OTTI losses recognized in other comprehensive income

                           
                               

Other comprehensive income (loss)

    (5,639     (2,620     (6,746     (25,135
                               

Comprehensive income (loss)

  $ (14,669   $ 3,695      $ (23,220   $ 19,989   
                               

ADDITIONAL PAID-IN CAPITAL

       

Capital contribution from parent

  $ 42,000      $ 31,000      $      $ 96,934   

RETAINED EARNINGS

       

Net income (loss)

    (9,030     6,315        (16,474     (176,005

OTHER COMPREHENSIVE INCOME

       

Other comprehensive income (loss)

    (5,639     (2,620     (6,746     (25,135
                               

Change in stockholder’s equity

    27,331        34,696        (23,220     (104,206

Stockholder’s equity, beginning of period

    597,840        625,171        659,867        636,647   
                               

Stockholder’s equity, end of period

  $ 625,171      $ 659,867      $ 636,647      $ 532,441   
                               

 

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Selected Unaudited Quarterly Financial Data:   Quarter Ended  
($ in thousands)   Mar 31,     June 30,     Sept 30,     Dec 31,  
Income Statement Data   2007  
       

REVENUES

       

Premiums

  $ 3,179      $ 2,882      $ 4,199      $ 8,342   

Insurance and investment product fees

    54,301        59,410        67,356        82,231   

Net investment income

    27,894        27,192        27,609        26,912   

Net realized investment gains (losses):

       

Total other-than-temporary impairment (“OTTI”) losses

                           

Portion of OTTI losses recognized in other comprehensive income

                           
                               

Net OTTI losses recognized in earnings

    (500            (421     (2,366

Net realized investment gains (losses), excluding OTTI losses

    330        359        (1,566     (2,879
                               

Total realized investment gains (losses)

    (170     359        (1,987     (5,245
                               

Total revenues

    85,204        89,843        97,177        112,240   
                               

BENEFITS AND EXPENSES

       

Policy benefits

    35,676        36,481        43,140        53,098   

Policy acquisition cost amortization

    25,263        26,923        27,895        39,960   

Other operating expenses

    17,086        20,424        20,640        25,451   
                               

Total benefits and expenses

    78,025        83,828        91,675        118,509   
                               

Income (loss) before income taxes

    7,149        6,015        5,502        (6,269

Applicable income tax (expense) benefit

    (2,340     (1,863     466        2,615
                               

Net income (loss)

  $ 4,839      $ 4,152      $ 5,968      $ (3,654
                               

COMPREHENSIVE INCOME

       

Net income (loss)

  $ 4,839      $ 4,152      $ 5,968      $ (3,654
                               

Net unrealized gains (losses)

    935        (5,206     (2,410     (2,414
                               

Other comprehensive income (loss)

    935        (5,206     (2,410     (2,414
                               

Comprehensive income (loss)

  $ 5,774      $ (1,054   $ 3,558      $ (6,068
                               

ADDITIONAL PAID-IN CAPITAL

       

Capital contribution from parent

  $      $ 25,000      $ 24,984      $   

RETAINED EARNINGS

       

Adjustment for initial application of FIN 48

    (1,000                     

Cumulative effect of retrospective application of change in accounting

           (5,451            5,451   

Net income (loss)

    4,839        4,152        5,968        (3,654

OTHER COMPREHENSIVE INCOME

       

Other comprehensive income (loss)

    935        (5,206     (2,410     (2,414
                               

Change in stockholder’s equity

    4,774        18,495        28,542        (617

Stockholder’s equity, beginning of period

    546,646        551,420        569,915        598,457   
                               

Stockholder’s equity, end of period

  $ 551,420      $ 569,915      $ 598,457      $ 597,840   
                               

 

49


Table of Contents

Appendix A

Lifetime Payment Option

 

At any time before your Account Value reduces to $0, you may elect the Lifetime Payment Option. If you elect the Lifetime Payment Option, you must terminate your Account, liquidate all of the assets in your Account, and apply the proceeds to purchase a separate, supplemental lifetime fixed immediate annuity contract from us. The payments under the supplemental contract will not be less than those calculated by multiplying the value of the proceeds by the rates guaranteed in your Income Edge certificate. These payments are not the same as payments that might commence after your Account value reduces to $0 had you not elected the Lifetime Payment Option. If you elect the Lifetime Payment Option, your Income Edge will terminate. The annuity payment rate used to calculate the payment amount will not be less than the rate based on the 2000 Individual Annuity Mortality Table with a 10 year age set back and an interest rate of 2.5%. The 10 year age set back reflects the improved mortality for insureds. Your payments would be higher under the 2000 Individual Annuity Mortality Table if there were no 10 year age set back. You should consult with your Investors Capital affiliated representative before you decide to select this Lifetime Payment Option. It may be more appropriate to maintain your Account and not terminate the Income Edge. If you elect the Lifetime Payment Option, your Account will be closed and your investment advisory agreement with Investors Capital with respect to the Investor Protector Program will terminate.

Misstatements

If you misstate your sex or age for the Lifetime Payment Option, we will reduce the level of payments and/or suspend the payments until the overpayment is repaid to us because of the misstatement of age or sex. For example, if you are male and misrepresent that you are female, and also misrepresent that you are younger than you actually are, your level of payments should have been lower than your actual payments based on the 2000 Individual Annuity Mortality Table. In this case, we may either readjust your level of payments and/or suspend the payments until the overpayment is repaid to us.

Taxation of the Lifetime Payment Option

Non-Qualified Income Edge

   

Liquidation of Account Assets to Purchase the Lifetime Payment Option. The liquidation of your Account assets to purchase a supplemental lifetime fixed immediate annuity contract from us under the Lifetime Payment Option will be a taxable event. Application of the proceeds to purchase the Lifetime Payment Option provided under a Non-Qualified Income Edge is not a tax-deferred transaction.

 

   

Taxation of Distributions From the Lifetime Payment Option. If you exercise your right to liquidate your Account and to apply the proceeds to purchase a supplemental lifetime fixed immediate annuity contract from us under the Lifetime Payment Option, we believe that such annuity contract will be treated as an annuity contract for tax purposes and distributions therefrom will be taxed as annuity distributions. Thus, distributions from the annuity contract will be taxed as ordinary income to the extent that the value is more than your investment in the contract (discussed further below). Any amounts you receive if you pledge or assign your annuity as security for a loan will also be treated as distributions and taxed as distributions. Annuity payments should generally be treated in part as taxable ordinary income and in part as non-taxable recovery of your investment in the contract. After you recover all of your investment in the contract, annuity payments will be taxable in full as ordinary income. Distributions from an annuity contract are generally subject to withholding for the recipient’s U.S. Federal income tax liability. Recipients who are U.S. citizens can generally elect, however, not to have tax withheld from distributions.

If you exercise your right to liquidate your Account and apply all of the proceeds to the Lifetime Payment Option, your investment in the contract should be equal to the Account Value applied to the Lifetime Payment Option plus, while not free from doubt, the aggregate Income Edge Fees you previously paid under your Non-Qualified Income Edge. With respect to the inclusion of the aggregate Income Edge Fees you previously paid under your Non-Qualified Income Edge in your investment in the contract for the Lifetime Payment Option, it is possible that the IRS may take the position that the aggregate Income Edge Fees you previously paid under your Non-Qualified Income Edge do not constitute part of your investment in the contract when you have elected the Lifetime Payment Option, on the theory that such charges do not constitute amounts paid for the Lifetime Payment Option.

While for tax reporting purposes we currently intend to include any aggregate Income Edge Fees you previously paid for your Non-Qualified Income Edge in the investment in the contract should you elect the Lifetime Payment Option, you should consult a tax advisor on this matter as it is not free from doubt.

 

50


Table of Contents

Qualified Income Edge

   

Liquidation of Account investments to Purchase the Lifetime Payment Option. The liquidation of your Account within your IRA Account to purchase a supplemental lifetime fixed immediate annuity contract from us under the Lifetime Payment Option will not be a taxable event as long as specified Internal Revenue Code requirements are satisfied.

 

   

Taxation of Distributions from the Lifetime Payment Option. Distributions paid to you from your IRA Account, including distributions pursuant to the Lifetime Payment Option, will be taxable under the rules applicable to your IRA Account. You should consult a tax advisor for further information.

 

51

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