-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TOKpeq7uan5qW5qkWVjxPTyIxYyrP7hyivea56tHnye77ocKJgJ2HOf2VUqagdlu ABtb++kkm2uT0EQ/LTUL1w== 0000950152-98-009766.txt : 19981228 0000950152-98-009766.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950152-98-009766 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONWIDE VL SEPARATE ACCOUNT-D CENTRAL INDEX KEY: 0001065753 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 311000740 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-6/A SEC ACT: SEC FILE NUMBER: 333-59517 FILM NUMBER: 98774006 BUSINESS ADDRESS: STREET 1: NATIONWIDE LIFE & ANNUTIY INSURANCE CO STREET 2: PO BOX 182008 CITY: COLUMBUS STATE: OH ZIP: 43218-2008 BUSINESS PHONE: 8008603946 MAIL ADDRESS: STREET 1: NATIONWIDE LIFE & ANNUITY INSURANCE CO STREET 2: PO BOX 182008 CITY: COLUMBUS STATE: OH ZIP: 43218-2008 S-6/A 1 NATIONWIDE VL SEPERATE ACCOUNT-D AMNDMT.#1 S-6/A 1 Registration No. 333-59517 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDMENT No. 1 ----------------------------- TO FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 ---------------------------- NATIONWIDE VL SEPARATE ACCOUNT-D (Exact Name of Trust) ---------------------------- NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY One Nationwide Plaza Columbus, Ohio 43215 (Exact Name and Address of Depositor and Registrant) Dennis W. Click Secretary One Nationwide Plaza Columbus, Ohio 43215 (Name and address of Agent for Service) ---------------------------- =============================================================================== Title of securities being registered: Corporate Flexible Premium Variable Universal Life Insurance Policies Approximate date of proposed public offering: (As soon as practicable after the effective date of this Registration Statement. December 22, 1998 (requested). The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall therefore become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine. =============================================================================== REDLINED 1 of 90 2
CROSS REFERENCE TO ITEMS REQUIRED BY FORM N-8B-2 N-8B-2 ITEM CAPTION IN PROSPECTUS 1........................................................Nationwide Life and Annuity Insurance Company The Variable Account 2........................................................Nationwide Life and Annuity Insurance Company 3........................................................Custodian of Assets 4........................................................Distribution of The Policies 5........................................................The Variable Account 6........................................................Not Applicable 7........................................................Not Applicable 8........................................................Not Applicable 9........................................................Legal Proceedings 10........................................................Information About The Policies; How The Cash Value Varies; Right to Exchange for a Fixed Benefit Policy; Reinstatement; Other Policy Provisions 11........................................................Investments of The Variable Account 12........................................................The Variable Account 13........................................................Policy Charges Reinstatement 14........................................................Underwriting and Issuance - Premium Payments Minimum Requirements for Issuance of a Policy 15........................................................Investments of the Variable Account; Premium Payments 16........................................................Underwriting and Issuance - Allocation of Cash Value 17........................................................Surrendering The Policy for Cash 18........................................................Reinvestment 19........................................................Not Applicable 20........................................................Not Applicable 21........................................................Policy Loans 22........................................................Not Applicable 23........................................................Not Applicable 24........................................................Not Applicable 25........................................................Nationwide Life and Annuity Insurance Company 26........................................................Not Applicable 27........................................................Nationwide Life and Annuity Insurance Company 28........................................................Company Management 29........................................................Company Management 30........................................................Not Applicable
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N-8B-2 ITEM CAPTION IN PROSPECTUS 31.........................................................Not Applicable 32.........................................................Not Applicable 33.........................................................Not Applicable 34.........................................................Not Applicable 35.........................................................Nationwide Life and Annuity Insurance Company 36.........................................................Not Applicable 37.........................................................Not Applicable 38.........................................................Distribution of The Policies 39.........................................................Distribution of The Policies 40.........................................................Not Applicable 41(a)......................................................Distribution of The Policies 42.........................................................Not Applicable 43.........................................................Not Applicable 44.........................................................How The Cash Value Varies 45.........................................................Not Applicable 46.........................................................How The Cash Value Varies 47.........................................................Not Applicable 48.........................................................Custodian of Assets 49.........................................................Not Applicable 50.........................................................Not Applicable 51.........................................................Summary of The Policies; Information About The Policies 52.........................................................Substitution of Securities 53.........................................................Taxation of The Company 54.........................................................Not Applicable 55.........................................................Not Applicable 56.........................................................Not Applicable 57.........................................................Not Applicable 58.........................................................Not Applicable 59.........................................................Financial Statements
3 of 90 4 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY P.O. Box 182150 Columbus, Ohio 43218-2150 (800) 547-7548, TDD (800) 238-3035 CORPORATE FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICIES ISSUED BY NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY THROUGH ITS NATIONWIDE VL SEPARATE ACCOUNT-D The life insurance policies offered by this prospectus are corporate flexible premium variable universal life insurance policies (collectively referred to as the "Policies"). The Policies are designed for use by corporations and employers, to provide life insurance coverage and the flexibility to vary the amount and frequency of premium payments. The Policies also may provide a Cash Surrender Value if the Policy is terminated during the lifetime of the Insured. The death benefit and Cash Value of the Policies may vary to reflect the experience of Nationwide VL Separate Account-D (the "Variable Account") or the Fixed Account to which Cash Values are allocated. The Policies described in this prospectus meet the definition of "life insurance" under Section 7702 of the Internal Revenue Code (the "Code"). The Policy Owner may allocate Net Premiums and Cash Value to one or more of the Sub-Accounts and the Fixed Account. The assets of each Sub-Account will be used to purchase, at Net Asset Value, shares of a designated Underlying Mutual Fund in the following series: Dreyfus The Dreyfus Socially Responsible Growth Fund, Inc. Dreyfus Stock Index Fund, Inc. Dreyfus Variable Investment Fund Capital Appreciation Portfolio Disciplined Stock Portfolio International Value Portfolio Limited Term High Income Portfolio* Quality Bond Portfolio Small Company Stock Portfolio 1 5 Morgan Stanley Universal Funds, Inc. Emerging Markets Debt Portfolio Nationwide Separate Account Trust ("NSAT") Capital Appreciation Fund Government Bond Fund Money Market Fund Total Return Fund Nationwide Balanced Fund Nationwide Equity Income Fund Nationwide Global Equity Fund Nationwide High Income Bond Fund* Nationwide Multi Sector Bond Fund Nationwide Select Advisers Mid Cap Fund Nationwide Small Cap Value Fund Nationwide Small Company Fund Nationwide Strategic Growth Fund Nationwide Strategic Value Fund *These Underlying Mutual Funds may invest in lower quality debt securities commonly referred to as junk bonds. The Company may limit the number of Underlying Mutual Funds available to corporate purchasers and employers. NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (THE "COMPANY") GUARANTEES THAT THE DEATH BENEFIT FOR A POLICY WILL NEVER BE LESS THAN THE SPECIFIED AMOUNT STATED ON THE POLICY DATA PAGES AS LONG AS THE POLICY IS IN FORCE. THERE IS NO GUARANTEED CASH SURRENDER VALUE. IF THE CASH SURRENDER VALUE IS INSUFFICIENT TO COVER THE CHARGES UNDER THE POLICY, THE POLICY WILL LAPSE WITHOUT VALUE. THIS PROSPECTUS GENERALLY DESCRIBES ONLY THAT PORTION OF THE CASH VALUE ALLOCATED TO THE VARIABLE ACCOUNT. FOR A BRIEF SUMMARY OF THE FIXED ACCOUNT, SEE "THE FIXED ACCOUNT OPTION." INVESTMENTS IN THESE POLICIES ARE NOT DEPOSITS OR OBLIGATIONS OF, AND ARE NOT GUARANTEED OR ENDORSED BY, ANY ADVISER OF THE UNDERLYING MUTUAL FUNDS, THE U.S. GOVERNMENT, OR ANY BANK OR BANK AFFILIATE. INVESTMENTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. ANY INVESTMENT IN THE POLICY INVOLVES CERTAIN INVESTMENT RISK WHICH MAY INCLUDE THE POSSIBLE LOSS OF PRINCIPAL. THE BENEFITS DESCRIBED IN THIS PROSPECTUS MAY NOT BE AVAILABLE IN EVERY JURISDICTION. PLEASE REFER TO YOUR POLICY FOR SPECIFIC BENEFIT INFORMATION. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE SECURITIES AND EXCHANGE COMMISSION MAINTAINS A WEB SITE, WWW.SEC.GOV, THAT CONTAINS ANY MATERIAL INCORPORATED BY REFERENCE RELATING TO THIS PROSPECTUS. THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. A PROSPECTUS FOR THE UNDERLYING MUTUAL FUND OPTIONS(S) BEING CONSIDERED MUST ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH. THE DATE OF THIS PROSPECTUS IS DECEMBER 23, 1998. 2 6 GLOSSARY OF TERMS ATTAINED AGE- The Insured's age on the Policy Date, plus the number of full years since the Policy Date. ACCUMULATION UNIT- An accounting unit of measure used to calculate the Cash Value of the Variable Account. BENEFICIARY- The person to whom the Death Proceeds are paid. CASH VALUE- The sum of the Policy values in the Variable Account, Fixed Account and any associated value in the Policy Loan Account. CASH SURRENDER VALUE- The Policy's Cash Value, less any Indebtedness under the Policy. CODE- The Internal Revenue Code of 1986, as amended. COMPANY- Nationwide Life and Annuity Insurance Company. DEATH PROCEEDS- The amount of money payable to the Beneficiary if the Insured dies while the Policy is in force prior to the Maturity Date. FIXED ACCOUNT- An investment option which is funded by the General Account of the Company. GENERAL ACCOUNT- All assets of the Company other than those of the Variable Account or in other separate accounts that have been or may be established by the Company. GUIDELINE LEVEL PREMIUM- The amount of level annual premium calculated in accordance with the provisions of the Code. It represents the level annual premiums required to mature the Policy under guaranteed mortality and current expense charges, and an interest rate of 4%. HOME OFFICE- The main office of the Company located in Columbus, Ohio. INDEBTEDNESS- Amounts owed the Company as a result of Policy loans, including both principal and accrued interest. INITIAL PREMIUM- The premium required for coverage to become effective on the Policy Date. It is shown on the Policy Data Page. INSURED- The person whose life is covered by the Policy, and who is named on the Policy Data Page. MATURITY DATE- The Policy Anniversary on or following the Insured's 100th birthday. MONTHLY ANNIVERSARY DAY- The same day as the Policy Date for each succeeding month. NET AMOUNT AT RISK- For any Policy month, the Net Amount at Risk is the death benefit at the beginning of the Policy month minus the Cash Value calculated at the beginning of the Policy month prior to deduction of the base Policy cost of insurance charge. NET ASSET VALUE- The value of one share of an Underlying Mutual Fund at the end of a market day or at the close of the New York Stock Exchange. Net Asset Value is computed by adding the value of all portfolio holdings plus other assets, deducting liabilities and then dividing the result by the number of shares outstanding. NET PREMIUMS- Net Premiums are equal to the actual premiums minus the percent of premium charges. The percent of premium charges are shown on the Policy Data Page. POLICY ANNIVERSARY- The same day and month as the Policy Date for succeeding years. POLICY CHARGES- All deductions made from the value of the Variable Account or the Policy Cash Value. POLICY DATE- The date the provisions of the Policy take effect, as shown on the Policy Data Page. POLICY LOAN ACCOUNT- The portion of the Cash Value which results from Policy Indebtedness. POLICY OWNER- The person designated in the Policy application as the Owner. 3 7 POLICY YEAR- Each year commencing with the Policy Date, and each Policy Anniversary thereafter. SCHEDULED PREMIUM- The Scheduled Premium is shown on the Policy Data Page. SPECIFIED AMOUNT- A dollar amount used to determine the death benefit under a Policy. It is shown on the Policy Data Page. SUB-ACCOUNTS- Separate and distinct divisions of the Variable Account, to which specific Underlying Mutual Fund shares are allocated and for which Accumulation Units are separately maintained. SURRENDER CHARGE- An amount deducted from the Cash Value if the Policy is surrendered. This amount is zero. TARGET PREMIUM- The level annual premium at which the sales load is reduced on a current basis. UNDERLYING MUTUAL FUNDS- The underlying mutual funds which correspond to the Sub-Accounts of the Variable Account. VALUATION DATE- Each day the New York Stock Exchange and the Home Office are open for business or any other day during which there is sufficient degree of trading that the Cash Value might be materially affected. VALUATION PERIOD- A period commencing with the close of business on a Valuation Date and ending at the close of business on the next succeeding Valuation Date. VARIABLE ACCOUNT- Nationwide VL Separate Account-D, a separate investment account of the Company. 4 8 TABLE OF CONTENTS GLOSSARY OF TERMS............................................................................................3 SUMMARY OF THE POLICIES......................................................................................7 Variable Life Insurance.............................................................................7 The Variable Account and its Sub-Accounts...........................................................7 The Fixed Account...................................................................................7 Deductions and Charges..............................................................................7 Premiums............................................................................................8 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY................................................................8 THE VARIABLE ACCOUNT.........................................................................................8 Investments of the Variable Account.................................................................9 Reinvestment........................................................................................9 Transfers...........................................................................................9 Dollar Cost Averaging..............................................................................10 Changes Within the Variable Account................................................................11 Voting Rights......................................................................................11 INFORMATION ABOUT THE POLICIES..............................................................................12 Underwriting and Issuance..........................................................................12 -Minimum Requirements for Issuance of a Policy.....................................................12 -Premium Payments..................................................................................12 Allocation of Net Premium and Cash Value...........................................................12 Short-Term Right to Cancel Policy..................................................................13 POLICY CHARGES..............................................................................................13 Deductions from Premiums...........................................................................13 Deductions from Cash Value.........................................................................13 -Monthly Cost of Insurance.........................................................................13 -Monthly Administrative Charge.....................................................................14 Deductions from the Sub-Accounts...................................................................14 Reduction of Charges (Policy and Sub-Accounts).....................................................14 Expenses of the Underlying Mutual Funds............................................................15 HOW THE CASH VALUE VARIES...................................................................................16 How the Investment Experience is Determined........................................................16 Net Investment Factor..............................................................................16 Determining the Cash Value.........................................................................16 Valuation Periods and Valuation Dates..............................................................17 SURRENDERING THE POLICY FOR CASH............................................................................17 Right to Surrender.................................................................................17 Cash Surrender Value...............................................................................17 Partial Surrenders.................................................................................17 -Preferred Partial Surrenders......................................................................17 -Reduction of the Specified Amount.................................................................17 Maturity Proceeds..................................................................................18 Income Tax Withholding.............................................................................18 POLICY LOANS................................................................................................18 Taking a Policy Loan...............................................................................18 Effect on Investment Performance...................................................................18 Interest...........................................................................................18 Effect on Death Benefit and Cash Value.............................................................19 Repayment..........................................................................................19 HOW THE DEATH BENEFIT VARIES................................................................................19 Calculation of the Death Benefit...................................................................19 Proceeds Payable on Death..........................................................................21 RIGHT OF CONVERSION.........................................................................................21
5 9 CHANGES OF INVESTMENT POLICY................................................................................21 GRACE PERIOD................................................................................................21 REINSTATEMENT...............................................................................................21 THE FIXED ACCOUNT OPTION....................................................................................22 CHANGES IN EXISTING INSURANCE COVERAGE......................................................................22 Specified Amount Increases.........................................................................22 Specified Amount Decreases.........................................................................22 Changes in the Death Benefit Option................................................................23 OTHER POLICY PROVISIONS.....................................................................................23 Policy Owner.......................................................................................23 Beneficiary........................................................................................23 Assignment.........................................................................................23 Incontestability...................................................................................23 Error in Age ......................................................................................24 Suicide............................................................................................24 Nonparticipating Policies..........................................................................24 Riders.............................................................................................24 LEGAL CONSIDERATIONS........................................................................................24 DISTRIBUTION OF THE POLICIES................................................................................24 CUSTODIAN OF ASSETS.........................................................................................25 TAX MATTERS.................................................................................................25 Policy Proceeds....................................................................................25 -Withholding.......................................................................................26 -Non-Resident Aliens...............................................................................26 -Federal Estate and Generation Skipping Transfer Taxes.............................................26 Taxation of the Company............................................................................27 Tax Changes........................................................................................27 THE COMPANY.................................................................................................28 COMPANY MANAGEMENT..........................................................................................28 Directors of the Company...........................................................................28 Executive Officers of the Company..................................................................30 OTHER CONTRACTS ISSUED BY THE COMPANY.......................................................................30 STATE REGULATION............................................................................................30 REPORTS TO POLICY OWNERS....................................................................................31 ADVERTISING.................................................................................................31 YEAR 2000 COMPLIANCE ISSUES.................................................................................31 LEGAL PROCEEDINGS...........................................................................................32 EXPERTS.....................................................................................................32 REGISTRATION STATEMENT......................................................................................32 LEGAL OPINIONS..............................................................................................32 APPENDIX A..................................................................................................33 APPENDIX B..................................................................................................43
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. THE PRIMARY PURPOSE OF THE POLICIES IS TO PROVIDE LIFE INSURANCE PROTECTION FOR THE BENEFICIARY NAMED IN THE POLICY. NO CLAIM IS MADE THAT THE POLICIES ARE IN ANY WAY SIMILAR OR COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. 6 10 SUMMARY OF THE POLICIES VARIABLE LIFE INSURANCE The variable life insurance Policies offered by Nationwide Life and Annuity Insurance Company (the "Company") provide for life insurance coverage on the Insured. The Policies may provide for a Cash Surrender Value which is payable if the Policy is terminated during the Insured's lifetime. The death benefit and Cash Value of the Policies may increase or decrease to reflect the investment performance of the Sub-Accounts or the Fixed Account to which Cash Values are allocated (see "How the Death Benefit Varies"). There is no guaranteed Cash Surrender Value (see "How the Cash Value Varies"). If the Cash Surrender Value is insufficient to pay the Policy Charges, the Policy will lapse without value. Under certain conditions, a Policy may become a modified endowment contract as a result of a material change or a reduction in benefits as defined by the Internal Revenue Code ("Code"). Excess premiums paid may also cause the Policy to become a modified endowment contract. The Company will monitor premiums paid and other policy transactions and will notify the Policy Owner when the Policy's non-modified endowment contract status is in jeopardy (see "Tax Matters"). THE VARIABLE ACCOUNT AND ITS SUB-ACCOUNTS The Company places the Policy's Net Premiums in the Variable Account or the Fixed Account at the time the Policy is issued. The Policy Owner selects the Sub-Accounts or the Fixed Account into which the Cash Value will be allocated. In such states which require a return of premiums to those Policy Owners exercising their short-term right to cancel (see "Short Term Right to Cancel Policy"), Net Premiums will be allocated to the Nationwide Separate Account Trust ("NSAT")- Money Market Fund (for any Net Premiums allocated to a Sub-Account on the application) or the Fixed Account until the expiration of the period in which the Policy Owner may exercise his or her short-term right to cancel the Policy. Assets of each Sub-Account are invested at Net Asset Value in shares of corresponding Underlying Mutual Funds (see "Allocation of Net Premium and Cash Value"). For a description of the Underlying Mutual Fund options and their investment objectives, see "Investments of the Variable Account." THE FIXED ACCOUNT The Fixed Account is funded by the assets of the General Account. Cash Values allocated to the Fixed Account are credited with interest daily at a rate declared by the Company. The interest rate declared is at the Company's sole discretion, but may never be less than an effective annual rate of 3%. The Fixed Account is not available for Policies issued in the State of Texas. Deductions and Charges The Company deducts certain charges from the assets of the Variable Account and the Cash Value of the Policy. These charges are made for administrative and sales expenses, state premium taxes, providing life insurance protection and assuming the mortality and expense risks. For a discussion of any charges imposed by the Underlying Mutual Fund options, see the prospectuses of the respective Underlying Mutual Funds. The Company deducts a sales load from each premium payment received which is guaranteed never to exceed 5.5% of such premium payment during the first seven Policy Years and 2% thereafter. On a current basis, the sales load is 5.5% of the Target Premium plus 3% of premiums in excess of the Target Premium during the first seven Policy Years, and 0% on all premiums thereafter. The Company also deducts from premium payments a tax expense charge of 3.5%, on both a current and guaranteed basis, of all premium payments. This charge reimburses the Company for premium taxes imposed by various state and local jurisdictions and for federal taxes imposed under Section 848 of the Code. The 3.5% tax expense rate consists of the following components: (1) a state premium tax rate of 2.25%; and (2) a federal tax rate of 1.25%. 7 11 The Company also deducts the following charges from the Policy's Cash Value on the Policy Date and each subsequent Monthly Anniversary Day: 1. monthly cost of insurance; plus 2. monthly cost of any additional benefits provided by riders to the Policy; plus 3. an administrative expense charge. This charge is currently $5.00 per month. The charge may be increased at the sole discretion of the Company but is guaranteed not to exceed $10.00 per month. The Company also deducts on a daily basis from the assets of the Variable Account a charge to provide for mortality and expense risks. This charge is guaranteed not to exceed an annual effective rate of 0.75% of the daily net assets of the Variable Account. On a current basis this annual effective rate will be 0.60% in the first through fourth Policy Years, 0.40% in fifth through twentieth Policy Years, and 0.25% thereafter. THERE ARE NO SURRENDER CHARGES. Underlying Mutual Fund shares are purchased at Net Asset Value, which reflects the deduction of investment management fees and certain other expenses. The management fees are charged by each Underlying Mutual Fund's investment adviser for managing the Underlying Mutual Fund and selecting its portfolio of securities. Other Underlying Mutual Fund expenses can include such items as interest expense on loans and contracts with transfer agents, custodians, and other companies that provide services to the Underlying Mutual Fund (see "Expenses of the Underlying Mutual Funds"). PREMIUMS The minimum Initial Premium for which a Policy may be issued is equal to three monthly deductions. A Policy may be issued to an Insured up to age 80. For a limited time, the Policy Owner has the right to cancel the Policy and the Company will refund the amount prescribed by the state in which the Policy was issued (see "Short-Term Right to Cancel Policy"). The Initial Premium is due and will be credited on the Policy Date. Any due and unpaid monthly deductions will be subtracted from the Cash Value at this time. Insurance will not be effective until the Initial Premium is paid. The Initial Premium is shown on the Policy Data Page. Premiums other than the Initial Premium may be made at any time while the Policy is in force. NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY The Company is a stock life insurance company organized under the laws of the State of Ohio in February, 1981. The Company is a member of the "Nationwide Insurance Enterprise" with its Home Office at One Nationwide Plaza, Columbus, Ohio 43215. The Company is a provider of life insurance, annuities and retirement products. It is admitted to do business in 48 states and the District of Columbia (for additional information, see "The Company"). THE VARIABLE ACCOUNT The Variable Account was established by the Company on May 22, 1998. The Company has caused the Variable Account to be registered with the Securities and Exchange Commission as a unit investment trust pursuant to the provisions of the Investment Company Act of 1940 (the "1940 Act"). Such registration does not involve supervision of the management of the Variable Account or of the Company by the Securities and Exchange Commission. The Variable Account is a separate investment account of the Company and as such, is not chargeable with liabilities arising out of any other business the Company may conduct. The Company does not guarantee the investment performance of the Variable Account. The death benefit and Cash Value under the Policy may vary with the investment performance of the investments of the Variable Account (see "How the Death Benefit Varies" and "How Cash Value Varies"). 8 12 Premium payments and Cash Value are allocated within the Variable Account among one or more Sub-Accounts. The assets of each Sub-Account are used to purchase shares of the Underlying Mutual Funds designated by the Policy Owner. Thus, the investment performance of a Policy depends upon the investment performance of the Underlying Mutual Fund options designated by the Policy Owner. INVESTMENTS OF THE VARIABLE ACCOUNT At the time of application, the Policy Owner elects to have the Net Premiums allocated among one or more of the Sub-Accounts and the Fixed Account (see "Allocation of Net Premium and Cash Value"). In such states which require a return of premiums to those Policy Owners exercising their short-term right to cancel (see "Short Term Right to Cancel Policy"), Net Premiums will be allocated to the NSAT-Money Market Fund (for any Net Premiums allocated to a Sub-Account on the application) or the Fixed Account until the expiration of the period in which the Policy Owner may exercise his or her short-term right to cancel the Policy. Any Net Premiums received after this period will be allocated based on the fund allocation factors. No less than 1% of Net Premiums may be allocated to any one Sub-Account or the Fixed Account. The Policy Owner may change the allocation of Net Premiums or may transfer Cash Value from one Sub-Account to another, subject to such terms and conditions as may be imposed by each Underlying Mutual Fund and as set forth in this prospectus (see "Transfers," "Allocation of Cash Value," and "Short-Term Right to Cancel Policy"). Each Underlying Mutual Fund is a registered investment company which receives investment advice from a registered investment adviser. The Underlying Mutual Funds are NOT available to the general public directly. The Underlying Mutual Funds are available as investment options in variable life insurance policies or variable annuity contracts issued by life insurance companies or, in some cases, through participation in certain qualified pension or retirement plans. Some of the Underlying Mutual Funds have been established by investment advisers which manage publicly traded mutual funds having similar names and investment objectives. While some of the Underlying Mutual Funds may be similar to, and may in fact be modeled after, publicly traded mutual funds, purchasers should understand that the Underlying Mutual Funds are not otherwise directly related to any publicly traded mutual fund. Consequently, the investment performance of publicly traded mutual funds and any corresponding Underlying Mutual Funds may differ substantially. A summary of investment objectives and advisers for each Underlying Mutual Fund is contained in an appendix to this prospectus (see "Appendix B - Participating Underlying Mutual Funds"). These Underlying Mutual Funds are available only to serve as the underlying investment for variable annuity and variable life contracts issued through separate accounts of life insurance companies which may or may not be affiliated, also known as "mixed and shared funding." There are certain risks associated with mixed and shared funding, which are disclosed in the Underlying Mutual Funds' prospectuses. A full description of the Underlying Mutual Funds, their investment policies and restrictions, risks and charges are contained in the prospectuses of the respective Underlying Mutual Funds. A prospectus for the Underlying Mutual Fund(s) being considered must accompany this prospectus and should be read in conjunction herewith. A copy of each prospectus may be obtained without charge from the Company by calling 1-800-547-7548, TDD 1-800-238-3035, or by writing P.O. Box 182150, Columbus, Ohio 43218-2150. There can be no assurance that the investment objectives will be achieved. REINVESTMENT The Underlying Mutual Funds have as a policy the distribution of dividends in the form of additional shares (or fractions thereof) of the Underlying Mutual Funds. The distribution of additional shares will not affect the number of Accumulation Units attributable to a particular Policy (see "Allocation of Net Premium and Cash Value"). 9 13 TRANSFERS The Policy Owner may transfer amounts between the Fixed Account and the Sub-Accounts without penalty or adjustment subject to the following requirements. During any Policy Year, the Company reserves the right to restrict such transfers between the Fixed Account and the Sub-Accounts to one transfer per Policy Year. Transfers made from the Fixed Account must be made within 45 days after the end of an interest rate guarantee period (the period of time for which the current interest crediting rate is guaranteed by the Company). The Company reserves the right to restrict the amount transferred from the Fixed Account to 20% of that portion of the Cash Value attributable to the Fixed Account as of the end of the previous Policy Year. Transfers made to the Fixed Account may not be made: (a) prior to the first Policy Anniversary; or (b) within 12 months subsequent to a prior transfer. The Company reserves the right to restrict the amount transferred to the Fixed Account to 20% of that portion of the Cash Value attributable to the Sub-Accounts as of the close of business of the prior Valuation Period. The Company further reserves the right to refuse a transfer to the Fixed Account, in the event the Cash Value attributable to the Fixed Account should be greater than or equal to 30% of the Cash Value. Transfers may be made either in writing or, in states allowing such transfers, by telephone. In states allowing telephone transfers, and if the Policy Owner so elects, the Company will also permit the Policy Owner to utilize the telephone exchange privilege for exchanging amounts among Sub-Account options. The Company will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Such procedures may include any or all of the following: requesting identifying information, such as name, Policy number, Social Security Number, and/or personal identification number; tape recording all telephone transactions; providing written confirmation thereof to both the Policy Owner and any agent of record at the last address of record; or such other procedures as the Company may deem reasonable. Although failure to follow reasonable procedures may result in the Company's liability for any losses due to unauthorized or fraudulent telephone transfers, the Company will not be liable for following instructions communicated by telephone which it reasonably believes to be genuine. Any losses incurred pursuant to actions taken by the Company in reliance on telephone instructions reasonably believed to be genuine will be borne by the Policy Owner. Policy Owners who have entered into a Dollar Cost Averaging agreement with the Company (see "Dollar Cost Averaging") may transfer from the Fixed Account to the Variable Account under the terms of that agreement. Policies described in this prospectus may, in some cases, be sold to individuals who independently utilize the services of a firm or individual engaged in market timing. Generally, such firms or individuals obtain authorization from multiple Policy Owners to make transfers and exchanges among the Sub-Accounts on the basis of perceived market trends. Because of the unusually large transfers of funds associated with some of these transactions, the ability of the Company or Underlying Mutual Funds to process such transactions may be compromised, and the execution of such transactions may possibly disadvantage or work to the detriment of other Policy Owners not utilizing market timing services. Accordingly, the right to exchange Cash Surrender Values among the Sub-Accounts may be subject to modification if such rights are exercised by a market timing firm or any other third party authorized to initiate transfer or exchange transactions on behalf of multiple Policy Owners. THE RIGHTS OF INDIVIDUAL POLICY OWNERS TO EXCHANGE CASH SURRENDER VALUES WILL NOT BE MODIFIED IN ANY WAY WHEN INSTRUCTIONS ARE SUBMITTED DIRECTLY BY THE POLICY OWNER, OR BY THE POLICY OWNER'S REPRESENTATIVE OF RECORD AS AUTHORIZED BY THE EXECUTION OF A VALID NATIONWIDE LIMITED POWER OF ATTORNEY FORM. In modifying such rights, the Company may, among other things, not accept: (1) the transfer or exchange instructions of any agent acting under a power of attorney on behalf of more than one Policy Owner; or (2) the transfer or exchange instructions of individual Policy Owners who have executed pre-authorized transfer or exchange forms which are submitted by market timing firms or other third parties on behalf of more than one Policy Owner at the same time. The Company will not impose any such restrictions or 10 14 otherwise modify exchange rights unless such action is reasonably intended to prevent the use of such rights in a manner that will disadvantage or potentially impair the contract rights of other Policy Owners. DOLLAR COST AVERAGING The Policy Owner may direct the Company to automatically transfer amounts from the NSAT-Money Market Fund or the Fixed Account to any other Sub-Account. Dollar Cost Averaging will occur on a monthly basis or on another frequency permitted by the Company. Dollar Cost Averaging is a long-term investment program which provides for regular, level investments over time. There is no guarantee that Dollar Cost Averaging will result in a profit or protect against loss. To qualify for Dollar Cost Averaging, there must be a minimum total Cash Value, less Policy Indebtedness, of $15,000. The minimum monthly transfer is $100. In addition, Dollar Cost Averaging monthly transfers from the Fixed Account must be equal to or less than 1/30th of the Fixed Account value when the program is requested. Transfers will be processed until either the value in the originating Sub-Account or the Fixed Account is exhausted or the Policy Owner instructs the Home Office to cancel the transfers. The Company reserves the right to discontinue establishing new Dollar Cost Averaging programs. The Company also reserves the right to assess a processing fee for this service. CHANGES WITHIN THE VARIABLE ACCOUNT The Company, may from time to time, create additional Sub-Accounts in the Variable Account. These Sub-Accounts may not be available to all Policy Owners. The Company also has the right to eliminate Sub-Accounts from the Variable Account, to combine two or more investment divisions, or to substitute a new Underlying Mutual Fund for the Underlying Mutual Fund in which a Sub-Account invests. A substitution may become necessary if, in the Company's judgment, an Underlying Mutual Fund no longer suits the purposes of the Policies. This may happen due to a change in laws or regulations, a change in the Underlying Mutual Fund's investment objectives or restrictions, because a fund is no longer available for investment, or for some other reason. In general, the Company may consider substituting an Underlying Mutual Fund in which one of the Sub-Accounts invests under the following circumstances: if a conflict of interest arises with the Underlying Mutual Fund's investment manager or other investors in the same Underlying Mutual Fund; if the personnel of the Underlying Mutual Fund's manager changes in a way the Company deems unfavorable; if the Underlying Mutual Fund's manager does not control risks consistent with the Underlying Mutual Fund's investment objectives and methods; if an Underlying Mutual Fund's investment performance is unsatisfactory over a period of time compared to relevant benchmarks, taking into account the Underlying Mutual Fund's investment objectives and methods; or if an Underlying Mutual Fund's investment manager resigns or otherwise ceases to manage the Underlying Mutual Fund's assets. The approval of Policy Owners is not required for such a substitution, and Policy Owners have no legal right to compel such a substitution. No substitution of securities in the Variable Account may take place without the prior approval of the Securities and Exchange Commission, and under such requirements as it and any state insurance department may impose. Subject to any required regulatory approvals, the Company reserves the right to transfer assets of the Variable Account or of any of the Sub-Accounts to another separate account or Sub-Account, which the Company determines to be associated with the class of policies to which the Policy belongs, to another separate account or investment division. Where permitted by law, the Company reserves the right to: 1. Register or deregister the Variable Account under the Investment Company Act of 1940, subject to the approval of the Securities and Exchange Commission; 2. Operate the Variable Account as a managed separate account or any other form of organization permitted by applicable law; 3. Reserve, restrict, or eliminate any voting rights of Policy Owners, or other persons who have voting rights through the Variable Account; and 11 15 4. Combine the Variable Account with other separate accounts, subject to the approval of the Securities and Exchange Commission. VOTING RIGHTS Voting rights under the Policies apply ONLY with respect to amounts allocated to the Sub-Accounts. In accordance with its view of applicable law, the Company will vote the shares of the Underlying Mutual Funds at regular and special meetings of the shareholders. These shares will be voted in accordance with instructions received from Policy Owners. If the 1940 Act or any regulation thereunder should be amended, or if the present interpretation changes permitting the Company to vote the shares of the Underlying Mutual Funds in its own right, the Company may elect to do so. The Policy Owner is the person who has voting interest under the Policy. The number of Underlying Mutual Fund shares attributable to each Policy Owner is determined by dividing any portion of the Cash Value derived from participation in that Underlying Mutual Fund by the Net Asset Value of one share of that Underlying Mutual Fund. The number of shares which may be voted will be determined as of a date chosen by the Company, but not more than 90 days prior to the meeting of the Underlying Mutual Fund. Voting instructions will be solicited by written communication at least 21 days prior to such meeting. Each person having a voting interest will receive periodic reports relating to the Underlying Mutual Fund, proxy material, and a form with which to give such voting instructions. Underlying Mutual Fund shares to which no timely instructions are received will be voted by the Company in the same proportion as the voting instructions which are received. Notwithstanding contrary Policy Owner voting instructions, the Company may vote Underlying Mutual Fund shares in any manner necessary to enable the Underlying Mutual Fund to: (1) make or refrain from making any change in the investments or investment policies for any of the Underlying Mutual Funds, if required by an insurance regulatory authority; (2) refrain from making any change in the investment policies or any investment adviser or principal underwriter of any portfolio which may be initiated by Policy Owners or the Underlying Mutual Fund's Board of Directors, provided the Company's disapproval of the change is reasonable and, in the case of a change in the investment policies or investment adviser, based on a good faith determination that such change would be contrary to state law or otherwise inappropriate in light of the portfolio's objective and purposes; or (3) enter into or refrain from entering into any advisory agreement or underwriting contract, if required by any insurance regulatory authority. INFORMATION ABOUT THE POLICIES UNDERWRITING AND ISSUANCE - -Minimum Requirements for Issuance of a Policy The Policies are designed to provide life insurance coverage and the flexibility to vary the amount and frequency of premium payments. At issue, the Policy Owner selects the Specified Amount and premium. The minimum Specified Amount is $50,000 ($100,000 in Pennsylvania and New Jersey). Policies may be issued to Insureds who are 80 or younger at the time of issue. Before issuing any Policy, the Company requires satisfactory evidence of insurability which may include a medical examination. - -Premium Payments The Initial Premium for a Policy is payable in full at the Home Office or to an authorized agent. Upon payment of an Initial Premium, temporary insurance may be provided, subject to a maximum amount. The effective date of permanent insurance coverage is dependent upon completion of all underwriting requirements, payment of Initial Premium, and delivery of the Policy while the Insured is still living. Premiums, other than the Initial Premium, may be made at any time while the Policy is in force. Each premium payment must be at least $50. The Company reserves the right to require satisfactory evidence of insurability before accepting any premium payment which results in an increase in the Net Amount at Risk. The Company will refund any portion of any premium payment which is determined to be in excess 12 16 of the premium limit established by law to qualify the Policy as a contract for life insurance. The Company may also require that any existing Policy Indebtedness be repaid prior to accepting any additional premium payments. Additional premium payments or other changes to the contract may jeopardize the Policy's non-modified endowment status. The Company will monitor premiums paid and other policy transactions and will notify the Policy Owner when non-modified endowment contract status is in jeopardy (see "Tax Matters"). ALLOCATION OF NET PREMIUM AND CASH VALUE The designation of investment allocations will be made by the prospective Policy Owner at the time of application for a Policy. The Policy Owner may change the way in which future Net Premiums are allocated by giving written notice to the Company. All percentage allocations and changes must be in whole numbers, and must be at least 1%. The sum of allocations must equal 100%. At the time a Policy is issued, its Cash Value will be determined as if the Policy had been issued and the Initial Premium is invested on the date such premium was received in good order by the Company. In such states which require a return of premiums to those Policy Owners exercising their short-term right to cancel (see "Short-Term Right to Cancel Policy"), Net Premiums will be allocated to the NSAT-Money Market Fund (for any Net Premiums allocated to a Sub-Account on the application) or the Fixed Account until the expiration of the period in which the Policy Owner may exercise his or her short-term right to cancel the Policy. At the expiration of the period in which the Policy Owner may exercise his or her short-term right to cancel the Policy, shares of the Underlying Mutual Funds specified by the Policy Owner are purchased at Net Asset Value for the respective Sub-Account(s). The Policy Owner may change the allocation of Net Premiums or may transfer Cash Value from one Sub-Account to another, subject to such terms and conditions as may be imposed by each Underlying Mutual Fund and as set forth in this prospectus. SHORT-TERM RIGHT TO CANCEL POLICY A Policy may be returned for cancellation within 10 days after the Policy is received, within 45 days after the application for insurance is signed, or within 10 days after the Company mails or delivers a Notice of Right of Withdrawal, whichever is latest. The Policy can be mailed or delivered to the registered representative who sold it, or to the Company. Immediately after such mailing or delivery, the Policy will be deemed void from the beginning. The Company will refund either the total premiums paid or the Cash Value less Indebtedness, as prescribed by the state in which the Policy was issued, within seven days after it receives the Policy. The scope of this right varies by state. POLICY CHARGES DEDUCTIONS FROM PREMIUMS The Company deducts a sales load from each premium payment received which is guaranteed never to exceed 5.5% of such premium payment during the first seven Policy Years and 2% thereafter. On a current basis, the sales load is 5.5% of the Target Premium plus 3% of premiums in excess of the Target Premium during the first seven Policy Years, and 0% on all premiums thereafter. The Target Premium is a premium level based upon a percentage of the Guideline Level Premium. The Target Premium is the level annual premium amount at which the sales load is reduced on a current basis. The Company also deducts from premium payments a tax expense charge of 3.5%, on both a current and guaranteed basis, of all premium payments. This charge reimburses the Company for premium taxes imposed by various state and local jurisdictions and for federal taxes imposed under Section 848 of the Code. The 3.5% tax expense rate consists of the following components: (1) a state premium tax rate of 2.25%; and (2) a federal tax rate of 1.25%. The Company expects to pay an average state premium tax rate of approximately 2.25% of premiums for all states, although such tax rates range by state from 0% to 4%. To reimburse the Company for the payment of state premium taxes associated with the Policies, the Company deducts a charge for state premium taxes equal to 2.25% of all premium payments received. This charge may be more or less than 13 17 the amount actually assessed by the state in which a particular Policy Owner lives. The 1.25% federal tax component is designed to reimburse the Company for expenses incurred from federal taxes imposed under Section 848 of the Code (enacted by the Omnibus Budget Reconciliation Act of 1990). The Company does not expect to make a profit from this charge. DEDUCTIONS FROM CASH VALUE The Company also deducts the following charges from the Policy's Cash Value on the Policy Date and each subsequent Monthly Anniversary Day: 1. monthly cost of insurance charges; plus 2. monthly cost of any additional benefits provided by riders; plus 3. monthly administrative expense charge. These deductions will be charged proportionately to the Cash Value in each Sub-Account and the Fixed Account. - -Monthly Cost of Insurance The monthly cost of insurance charge for each Policy month is determined by multiplying the monthly cost of insurance rate by the Net Amount at Risk. If death benefit Option 1 is in effect and there have been increases in the Specified Amount, then the Cash Value shall first be considered a part of the initial Specified Amount. If the Cash Value exceeds the initial Specified Amount, it shall then be considered a part of the additional increases in Specified Amount resulting from the increases in the order of the increases. Monthly cost of insurance rates will be unisex and will not exceed those guaranteed in the Policy. Guaranteed cost of insurance rates are based on the 1980 Commissioners Standard Ordinary Male Mortality Table, Age Last Birthday, aggregate as to tobacco status (1980 CSO). Guaranteed cost of insurance rates for Policies issued on a substandard basis are based on appropriate percentage multiples of the 1980 CSO. The rate class of an Insured may affect the cost of insurance rate. The Company currently places Insureds into both standard rate classes and substandard rate classes that involve a higher mortality risk. In an otherwise identical Policy, an Insured in the standard rate class will have a lower cost of insurance than an Insured in a rate class with higher mortality risks. The Company may also issue certain Policies on a "non-medical," guaranteed issue, or simplified issue basis to certain categories of individuals. Due to the underwriting criteria established for Policies issued on a non-medical basis, actual rates will be higher than the current cost of insurance rates being charged under Policies that are medically underwritten. - -Monthly Administrative Charge The Company deducts a monthly administrative expense charge to reimburse it for certain expenses related to maintenance of the Policies, accounting and record keeping, and periodic reporting to Policy Owners. This charge is designed only to reimburse the Company for actual administrative expenses. The Company does not expect to recover from this charge any amount in excess of aggregate maintenance expenses. On a current basis, this charge is $5.00 per month in all Policy Years. On a guaranteed basis, this charge is $10.00 per month in all Policy Years. DEDUCTIONS FROM THE SUB-ACCOUNTS The Company assumes certain risks for guaranteeing the mortality and expense charges. The mortality risk assumed under the Policies is that the Insured may not live as long as expected. The expense risk assumed is that the actual expenses incurred in issuing and administering the Policies may be greater than expected. In addition, the Company assumes risks associated with the non-recovery of policy issue, underwriting, and other administrative expenses due to Policies which lapse or are surrendered in the early Policy Years. 14 18 To compensate the Company for assuming these risks associated with the Policies, the Company deducts on a daily basis from the assets of the Variable Account a charge to provide for mortality and expense risks. This charge is guaranteed not to exceed an annual effective rate of 0.75% of the daily net assets of the Variable Account. On a current basis, this rate will be 0.60% during the first through fourth Policy Years, 0.40% during the fifth through twentieth Policy Years, and 0.25% thereafter. To the extent that future levels of mortality and expenses are less than or equal to those expected, the Company may realize a profit from this charge. Unrecovered expenses are borne by the Company's general assets which may include profits, if any, from mortality and expense risk charges. The Company does not currently assess any charge for income taxes incurred by the Company as a result of the operations of the Sub-Accounts (see "Taxation of the Company"). The Company reserves the right to assess a charge for such taxes against the Variable Account if the Company determines that such taxes will be incurred. REDUCTION OF CHARGES (POLICY AND SUB-ACCOUNTS) The Policy is available for purchase by individuals, corporations, and other groups. For group or sponsored arrangements (including employees of the Company and their family members) and for special exchange programs which the Company may make available from time to time, the Company reserves the right to reduce or eliminate the sales load, mortality and expense risk charges, monthly administrative charge, monthly cost of insurance charges, or other charges normally assessed on certain multiple life cases where it is expected that the size or nature of such cases will result in savings of sales, underwriting, administrative, or other costs. Eligibility for, and the amount of, these reductions will be determined by a number of factors, including the number of Insureds, the total premium expected to be paid, total assets under management for the Policy Owner, the nature of the relationship among individual Insureds, the purpose for which the Policies are being purchased, the expected persistency of individual Policies, and any other circumstances which, in the opinion of the Company are rationally related to the expected reduction in expenses. The extent and nature of reductions may change from time to time. Any variations in the charge structure will be determined in a uniform manner reflecting differences in costs of services and not unfairly discriminatory to Policy Owners. EXPENSES OF THE UNDERLYING MUTUAL FUNDS Underlying Mutual Fund shares are purchased at Net Asset Value, which reflects the deduction of investment management fees and certain other expenses. The management fees are charged by each Underlying Mutual Fund's investment adviser for managing the Underlying Mutual Fund and selecting its portfolio of securities. Other Underlying Mutual Fund expenses can include such items as interest expense on loans and contracts with transfer agents, custodians, and other companies that provide services to the Underlying Mutual Fund. The management fees and other expenses for each Underlying Mutual Fund for its most recently completed fiscal year, expressed as a percentage of the Underlying Mutual Fund's average assets, are as follows: 15 19 UNDERLYING MUTUAL FUND ANNUAL EXPENSES (AFTER EXPENSE REIMBURSEMENT)
---------------------------------------------------- Management Other Total Fees Expenses 12b-1 Fees Expenses -------------------------------------------------------------------------------------------------------------------- The Dreyfus Socially Responsible Growth Fund, Inc. 0.75% 0.01% 0.00% 0.76% -------------------------------------------------------------------------------------------------------------------- Dreyfus Stock Index Fund, Inc. 0.25% 0.03% 0.00% 0.28% -------------------------------------------------------------------------------------------------------------------- Dreyfus Variable Investment Fund - Capital Appreciation 0.75% 0.05% 0.00% 0.80% Portfolio -------------------------------------------------------------------------------------------------------------------- Dreyfus Variable Investment Fund - Disciplined Stock Portfolio 0.75% 0.27% 0.00% 1.02% -------------------------------------------------------------------------------------------------------------------- Dreyfus Variable Investment Fund - International Value 1.00% 0.42% 0.00% 1.42% Portfolio -------------------------------------------------------------------------------------------------------------------- Dreyfus Variable Investment Fund - Limited Term High Income 0.65% 0.24% 0.00% 0.89% Portfolio -------------------------------------------------------------------------------------------------------------------- Dreyfus Variable Investment Fund - Quality Bond Portfolio 0.65% 0.10% 0.00% 0.75% -------------------------------------------------------------------------------------------------------------------- Dreyfus Variable Investment Fund - Small Company Stock 0.75% 0.37% 0.00% 1.12% Portfolio -------------------------------------------------------------------------------------------------------------------- Morgan Stanley Universal Funds, Inc. - Emerging Markets Debt 0.04% 1.26% 0.00% 1.30% ------------------------------------------------------------- ----- ----- ----- ----- Portfolio -------------------------------------------------------------------------------------------------------------------- NSAT- Capital Appreciation Fund 0.60% 0.09% 0.00% 0.69% -------------------------------------------------------------------------------------------------------------------- NSAT- Government Bond Fund 0.50% 0.08% 0.00% 0.58% -------------------------------------------------------------------------------------------------------------------- NSAT- Money Market Fund 0.40% 0.08% 0.00% 0.48% -------------------------------------------------------------------------------------------------------------------- NSAT- Total Return Fund 0.60% 0.07% 0.00% 0.67% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Balanced Fund(1) 0.75% 0.15% 0.00% 0.90% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Equity Income Fund(1) 0.80% 0.15% 0.00% 0.95% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Global Equity Fund(1) 1.00% 0.20% 0.00% 1.20% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide High Income Bond Fund(1) 0.80% 0.15% 0.00% 0.95% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Multi-Sector Bond Fund(1) 0.75% 0.15% 0.00% 0.90% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Select Advisers Mid Cap Fund(1) 1.05% 0.15% 0.00% 1.20% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Small Cap Value Fund(1) 0.90% 0.15% 0.00% 1.05% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Small Company Fund 1.00% 0.11% 0.00% 1.11% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Strategic Growth Fund(1) 0.90% 0.10% 0.00% 1.00% -------------------------------------------------------------------------------------------------------------------- NSAT- Nationwide Strategic Value Fund(1) 0.90% 0.10% 0.00% 1.00% --------------------------------------------------------------------------------------------------------------------
16 20 (1)The investment advisers for the indicated Underlying Mutual Funds have voluntarily agreed to reimburse a portion of the management fees and/or other expenses resulting in a reduction of total expenses. Absent any partial reimbursement, "Management Fees" and "Other Expenses" would have been 0.80% and 1.26% for Morgan Stanley Universal Funds, Inc. - Emerging Markets Debt Portfolio, 0.75% and 4.15% for NSAT- Nationwide Balanced Fund, 0.80% and 4.83% for NSAT- Nationwide Equity Income Fund, 1.00% and 1.84% for NSAT- Nationwide Global Equity Fund, 0.80% and 1.38% for NSAT- Nationwide High Income Bond Fund, 0.75% and 3.66% for NSAT- Nationwide Multi-Sector Bond Fund, 1.05% and 2.26% for NSAT- Nationwide Select Advisers Mid Cap Fund, 0.90% and 5.41% for NSAT- Nationwide Small Cap Value Fund, 0.90% and 5.43% for NSAT- Nationwide Strategic Growth Fund, 0.90% and 4.64% for NSAT- Nationwide Strategic Value Fund. The Underlying Mutual Fund expenses shown above are assessed at the Underlying Mutual Fund level and are not direct charges against the Variable Account or reductions in Cash Value. These Underlying Mutual Fund expenses are taken into consideration in computing each Underlying Mutual Fund's Net Asset Value, which is the share price used to calculate the Variable Account's unit value. The management fees and other expenses are more fully described in the prospectuses for each individual Underlying Mutual Fund. The information relating to the Underlying Mutual Fund expenses was provided by the Underlying Mutual Fund and was not independently verified by the Company. HOW THE CASH VALUE VARIES On any date during the Policy Year, the Cash Value equals the Cash Value on the preceding Valuation Date, plus any Net Premium applied since the previous Valuation Date, minus any partial surrenders, plus or minus any investment results, and less any Policy Charges. There is no guaranteed Cash Value. The Cash Value will vary with the investment experience of the Variable Account and/or the daily crediting of interest in the Fixed Account and Policy Loan Account, depending on the allocation of Cash Value by the Policy Owner. HOW THE INVESTMENT EXPERIENCE IS DETERMINED The Cash Value in each Sub-Account is converted to Accumulation Units of that Sub-Account. The conversion is accomplished by dividing the amount of Cash Value allocated to a Sub-Account by the value of an Accumulation Unit for the Sub-Account of the Valuation Period during which the allocation occurs. The value of an Accumulation Unit for each Sub-Account was arbitrarily set initially at $10 when the Underlying Mutual Fund shares in that Sub-Account were available for purchase. The value for any subsequent Valuation Period is determined by multiplying the Accumulation Unit value for each Sub-Account for the immediately preceding Valuation Period by the net investment factor for the Sub-Account during the subsequent Valuation Period. The value of an Accumulation Unit may increase or decrease from Valuation Period to Valuation Period. The number of Accumulation Units will not change as a result of investment experience. NET INVESTMENT FACTOR The net investment factor for any Valuation Period is determined by dividing (a) by (b) and subtracting (c) from the result where: (a) is the net of: (1) the Net Asset Value per share of the Underlying Mutual Fund held in the Sub-Account determined at the end of the current Valuation Period; and 17 21 (2) the per share amount of any dividend or income distributions made by the Underlying Mutual Fund held in the Sub-Account if the ex-dividend date occurs during the current Valuation Period. (b) is the Net Asset Value per share of the Underlying Mutual Fund held in the Sub-Account determined at the end of the immediately preceding Valuation Period. (c) is a factor representing the daily mortality and expense risk charge deducted from the Variable Account. Such factor is guaranteed not to exceed an annual effective rate of 0.75% of the daily net assets of the Variable Account. On a current basis, this annual effective rate will be 0.60% during the first through fourth Policy Years, 0.40% during the fifth through twentieth Policy Years, and 0.25% thereafter. The net investment factor may be greater or less than one; therefore, the value of an Accumulation Unit may increase or decrease. It should be noted that changes in the net investment factor may not be directly proportional to changes in the Net Asset Value of Underlying Mutual Fund shares, because of the deduction for mortality and expense risk charge. DETERMINING THE CASH VALUE The sum of the value of all Accumulation Units attributable to the Policy and amounts credited to the Fixed Account and the Policy Loan Account is the Cash Value. The number of Accumulation Units credited to each Sub-Account is determined by dividing the net amount allocated to the Sub-Account by the Accumulation Unit value for the Sub-Account for the Valuation Period during which the premium is received by the Company. In the event part or all of the Cash Value is surrendered, or charges or deductions are made against the Cash Value, an appropriate number of Accumulation Units from the Variable Account and an appropriate amount from the Fixed Account will be deducted in the same proportion that the Policy Owner's interest in the Variable Account and the Fixed Account bears to the total Cash Value. The Cash Value in the Fixed Account and the Policy Loan Account is credited with interest daily at an effective annual rate which the Company periodically declares. The annual effective rate will never be less than 3%. Upon request, the Company will inform the Policy Owner of the then applicable rates for each account. VALUATION PERIODS AND VALUATION DATES A Valuation Period is the period commencing at the close of business on a Valuation Date and ending at the close of business for the next succeeding Valuation Date. A Valuation Date is each day that the New York Stock Exchange and the Home Office are open for business or any other day during which there is sufficient degree of trading that the current Cash Value might be materially affected. 18 22 SURRENDERING THE POLICY FOR CASH RIGHT TO SURRENDER The Policy Owner may surrender the Policy in full at any time while the Insured is living and receive its Cash Surrender Value. The cancellation will be effective as of the date the Company receives a proper written request for cancellation and the Policy. Such written request must be signed. Where permitted, the Company will require the signature to be guaranteed by a member firm of the New York, American, Boston, Midwest, Philadelphia or Pacific Stock Exchange, or by a commercial bank or a savings and loan, which is a member of the Federal Deposit Insurance Corporation. In some cases, the Company may require additional documentation of a customary nature. CASH SURRENDER VALUE The Cash Surrender Value increases or decreases daily to reflect the investment experience of the Variable Account and the daily crediting of interest in the Fixed Account and the Policy Loan Account. The Cash Surrender Value equals the Policy's Cash Value, next computed after the date the Company receives a proper written request for surrender and the Policy, minus any charges, Indebtedness or other deductions due on that date, plus 3% of the current year's premium in excess of the Target Premium if that date occurs during the first two Policy Years. PARTIAL SURRENDERS After the Policy has been in force for one year, the Policy Owner may request a partial surrender. Partial surrenders will be permitted only if they satisfy the following requirements: 1. the minimum partial surrender is $500; 2. the partial surrender may not reduce the Specified Amount to less than $50,000; 3. after the partial surrender, the Cash Surrender Value is greater than $500 or an amount equal to three times the current monthly deduction, if higher; and 4. after the partial surrender, the Policy continues to qualify as life insurance. When a partial surrender is made, the Cash Value will be reduced by the amount of the partial surrender. Further, the Specified Amount will be reduced by the amount necessary to prevent any increase to the Net Amount at Risk, unless the Policy Owner elects to have the partial surrender be treated as a preferred partial surrender (any such reduction to the Specified Amount will be done in the manner as set forth below). - -Preferred Partial Surrenders A partial surrender may be considered a preferred partial surrender if the following conditions are met: (1) such surrender occurs before the 15th Policy Anniversary; and (2) the surrender amount plus the amount of any previous preferred Policy surrenders in that same Policy Year does not exceed 10% of the Cash Surrender Value as of the beginning of the Policy Year. - -Reduction of the Specified Amount When a partial surrender is made, in addition to the Cash Value being reduced by the amount of the partial surrender, the Specified Amount also is reduced, except for a preferred partial surrender. The reduction to the Specified Amount will be made in the following order: (1) against the most recent increase in the Specified Amount; (2) against the next most recent increases in the Specified Amount in succession; and (3) against the Specified Amount under the original application. MATURITY PROCEEDS The Maturity Date is the Policy Anniversary on or next following the Insured's 100th birthday. The maturity proceeds will be payable to the Policy Owner on the Maturity Date provided the Policy is still in force. The maturity proceeds will be equal to the amount of the Policy's Cash Value, less any Indebtedness. 19 23 INCOME TAX WITHHOLDING Federal law requires the Company to withhold income tax from any portion of surrender proceeds that is subject to tax, unless the Policy Owner advises the Company, in writing, not to withhold. If the Policy Owner requests that the Company not withhold taxes, or if the taxes withheld are insufficient, the Policy Owner may be liable for payment of an estimated tax. The Policy Owner should consult his or her tax advisor. In certain employer-sponsored life insurance arrangements, including equity split dollar arrangements, participants may be required to report for income tax purposes, one or more of the following: (1) the value each year of the life insurance protection provided; (2) an amount equal to any employer-paid premiums; or (3) some or all of the amount by which the current value exceeds the employer's interest in the Contract. Participants should consult with the sponsor or the administrator of the plan and/or with their personal tax or legal advisor to determine the tax consequences, if any, of their employer-sponsored life insurance arrangements. POLICY LOANS TAKING A POLICY LOAN Policy Owners may request a loan at any time while the Policy is in force. Maximum Policy Indebtedness is limited to 90% of the Cash Value in the Sub-Accounts plus 100% of the Cash Value in the Fixed Account plus 100% of the Cash Value in the Policy Loan Account. The Company will not grant a loan for an amount less than $500 (unless otherwise required by state law). Should the Death Proceeds become payable, the Policy be surrendered, or the Policy mature while a loan is outstanding, the amount of Policy Indebtedness will be deducted from the death benefit, Cash Surrender Value, or the maturity value, respectively. Any request for a Policy loan must be in written form satisfactory to the Company. The request must be signed. Where permitted, the Company will require the signature to be guaranteed by a member firm of the New York, American, Boston, Midwest, Philadelphia or Pacific Stock Exchange; or by a commercial bank or a savings and loan which is a member of the Federal Deposit Insurance Corporation. Certain Policy loans may result in currently taxable income and tax penalties (see "Tax Matters"). A Policy Owner considering the use of Policy loans in connection with his or her retirement income plan should consult his or her personal tax adviser regarding potential tax consequences that may arise if necessary payments are not made to keep the Policy from lapsing. The amount of such payments necessary to prevent the Policy from lapsing would increase with age (see "Tax Matters"). EFFECT ON INVESTMENT PERFORMANCE When a loan is made, an amount equal to the amount of the loan is transferred from the Variable Account to the Policy Loan Account. If the assets relating to a Policy are held in more than one Sub-Account, withdrawals from Sub-Accounts will be made in proportion to the assets in each Sub-Account at the time of the loan. Policy loans will be transferred from the Fixed Account only when insufficient amounts are available in the Sub-Accounts. The amount taken out of the Variable Account will not be affected by the Variable Account's investment experience while the loan is outstanding. INTEREST On a current and guaranteed basis, any Cash Value allocated to the Policy Loan Account will be credited with an annual effective rate of 3.0% in Policy Years 2 and thereafter. The loan interest rate is guaranteed to not exceed 3.75% per year for all Policy loans. On a current basis, the loan interest rate is 3.6% in Policy Years one through four, 3.4% in Policy Years five through twenty, and 3.25% thereafter. In the event that it is determined that such loans will be treated, as a result of the differential between the interest crediting rate and the loan interest rate, as taxable distributions under any applicable ruling, regulation, or court decision, the Company retains the right to increase the net cost (by decreasing the interest crediting rate) on all subsequent Policy loans to an amount that would result in the transaction being treated as a 20 24 loan under federal tax law. If this amount is not prescribed by such ruling, regulation, or court decision, the amount will be that which the Company considers to be more likely to result in the transaction being treated as a loan under federal tax law. Amounts transferred to the Policy Loan Account will earn interest daily from the date of transfer. The earned interest is transferred from the Policy Loan Account to the Variable Account or the Fixed Account on each Policy Anniversary, at the time a new loan is requested, or at the time of loan repayment. It will be allocated according to the Underlying Mutual Fund allocation factors in effect at the time of the transfer. Interest is charged daily and is payable at the end of each Policy Year or at the time of loan repayment. Unpaid interest will be added to the existing Policy Indebtedness as of the due date and will be charged interest at the same rate as the rest of the Indebtedness. Whenever the total Policy Indebtedness exceeds the Cash Value, the Company will send a notice to the Policy Owner and the assignee, if any. The Policy will terminate without value 61 days after the mailing of the notice unless a sufficient repayment is made during that period. A repayment is sufficient if it is large enough to reduce the total Policy Indebtedness to an amount equal to the total Cash Value plus an amount sufficient to continue the Policy in force for 3 months. EFFECT ON DEATH BENEFIT AND CASH VALUE A Policy loan, whether or not repaid, will have a permanent effect on the death benefit and Cash Value because the investment results of the Variable Account or the Fixed Account will apply only to the non-loaned portion of the Cash Value. The longer the loan is outstanding, the greater the effect is likely to be. Depending on the investment results of the Variable Account or the Fixed Account while the loan is outstanding, the effect could be favorable or unfavorable. REPAYMENT All or part of the Indebtedness may be repaid at any time while the Policy is in force during the Insured's lifetime. Any payment intended as a loan repayment, rather than a premium payment, must be identified as such. Loan repayments will be credited to the Sub-Accounts and the Fixed Account in proportion to the Underlying Mutual Fund allocation factors in effect at the time of the repayment. Each repayment may not be less than $50. The Company reserves the right to require that any loan repayments resulting from Policy loans transferred from the Fixed Account must be first allocated to the Fixed Account. HOW THE DEATH BENEFIT VARIES CALCULATION OF THE DEATH BENEFIT At issue, the Policy Owner selects the Specified Amount, death benefit option, and definition of life insurance (Guideline Premium/Cash Value Corridor Test or the Cash Value Accumulation Test) pursuant to Section 7702 of the Code. While the Policy is in force, the death benefit will never be less than the Specified Amount. The death benefit may vary with the Cash Value of the Policy, which depends on investment performance. The Policy Owner may choose one of three death benefit options. Under Option 1, the death benefit will be the greater of the Specified Amount or the applicable percentage of Cash Value. Under Option 1, the amount of the death benefit will ordinarily not change for several years to reflect the investment performance and may not change at all. If investment performance is favorable, the amount of the death benefit may increase. To see how and when investment performance will begin to affect death benefits, please see the illustrations. Under Option 2, the death benefit will be the greater of the Specified Amount plus the Cash Value as of the date of death, or the applicable percentage of Cash Value and will vary directly with the investment performance. Under Option 3, the death benefit is the greater of: (a) the applicable percentage of the Cash Value (see Table below) as of the date of death; or (b) the Specified Amount plus the lesser of either: (i) the maximum 21 25 increase amount shown on the Policy, or (ii) the amount of all premium payments and interest accrued at the Option 3 interest rate as shown in the Policy, accumulated up to the date of death, less any partial surrenders and applicable interest accrued at the Option 3 interest rate as shown in the Policy. Once elected, Option 3 is irrevocable. The "applicable percentage" for the Guideline Premium/Cash Value Corridor Test is in the table below: APPLICABLE PERCENTAGE OF CASH VALUE TABLE
Attained Percentage Attained Percentage Attained Percentage Age of Cash Value Age of Cash Value Age of Cash Value 0-40 250% 60 130% 80 105% 41 243% 61 128% 81 105% 42 236% 62 126% 82 105% 43 229% 63 124% 83 105% 44 222% 64 122% 84 105% 45 215% 65 120% 85 105% 46 209% 66 119% 86 105% 47 203% 67 118% 87 105% 48 197% 68 117% 88 105% 49 191% 69 116% 89 105% 50 185% 70 115% 90 105% 51 178% 71 113% 91 104% 52 171% 72 111% 92 103% 53 164% 73 109% 93 102% 54 157% 74 107% 94 101% 55 150% 75 105% 95 101% 56 146% 76 105% 96 101% 57 142% 77 105% 97 101% 58 138% 78 105% 98 101% 59 134% 79 105% 99 101%
The "applicable percentage" for the Cash Value Accumulation Test is the table below:
Attained Percentage Attained Percentage Attained Percentage Age of Cash Value Age of Cash Value Age of Cash Value 44 292.29% 72 141.69% 45 283.37% 73 139.10% 18 667.85% 46 274.79% 74 136.66% 19 648.73% 47 266.55% 75 134.38% 20 630.14% 48 258.61% 76 133.56% 21 611.94% 49 250.98% 77 132.83% 22 594.06% 50 243.65% 78 132.18% 23 576.45% 51 236.59% 79 131.58% 24 559.07% 52 229.82% 80 131.04% 25 541.95% 53 223.34% 81 130.55% 26 525.08% 54 217.13% 82 130.12% 27 508.52% 55 211.19% 83 127.37% 28 492.32% 56 205.51% 84 124.75% 29 476.49% 57 200.06% 85 122.27% 30 461.08% 58 194.84% 86 119.90% 31 446.10% 59 189.84% 87 117.63% 32 431.57% 60 185.03% 88 115.44% 33 417.50% 61 180.43% 89 113.31% 34 403.89% 62 176.02% 90 112.35% 35 390.73% 63 171.81% 91 111.38%
22 26 APPLICABLE PERCENTAGE OF CASH VALUE TABLE (continued)
Attained Percentage Attained Percentage Attained Percentage Age of Cash Value Age of Cash Value Age of Cash Value 36 378.03% 64 167.80% 92 110.38% 37 365.79% 65 163.98% 93 109.32% 38 354.01% 66 160.34% 94 108.18% 39 342.67% 67 156.86% 95 106.94% 40 331.77% 68 153.54% 96 105.62% 41 321.30% 69 150.37% 97 104.27% 42 311.24% 70 147.33% 98 102.99% 43 301.57% 71 144.44% 99 100.00%
In the event the Policy Owner has a substandard rating, the preceding percentages will differ. PROCEEDS PAYABLE ON DEATH The actual Death Proceeds payable on the Insured's death will be the death benefit as described above, less any Policy Indebtedness and less any unpaid Policy Charges. Under certain circumstances, the Death Proceeds may be adjusted (see "Incontestability," "Error in Age," and "Suicide"). RIGHT OF CONVERSION The Policy Owner may, at any time, upon written request to the Company within 24 months of the Policy Date, make an irrevocable, one-time election to transfer all Sub-Account Cash Values to the Fixed Account. The Right of Conversion provision is subject to state availability. CHANGES OF INVESTMENT POLICY The Company may materially change the investment policy of the Variable Account. The Company must inform the Policy Owners and obtain all necessary regulatory approvals. Any change must be submitted to the various state insurance departments which may disapprove it if deemed detrimental to the interests of the Policy Owners or if it renders the Company's operations hazardous to the public. If a Policy Owner objects, the Policy Owner may elect to transfer all Sub-Account Cash Values to the Fixed Account. No transfer charges will be assessed. The Policy Owner has the later of 60 days (6 months in Pennsylvania) from the date of the investment policy change or 60 days (6 months in Pennsylvania) from being informed of such change to make this conversion. The Company will not require evidence of insurability for this conversion. The new policy will not be affected by the investment experience of any separate account. The new policy will be for an amount of insurance not exceeding the death benefit of the Policy converted on the date of such conversion. GRACE PERIOD If the Cash Surrender Value on a Monthly Anniversary Day is not sufficient to cover the current Policy Charges, a grace period of 61 days from the Monthly Anniversary Day will be allowed for the payment of a premium equal to three times the current monthly deduction. The Company will send a notice at the start of the grace period to the Policy Owner's address as indicated on the application or the last address specified. If the required premium is not paid by the end of the grace period, the Policy will terminate without value. If the Insured dies during the grace period, the Company will pay the Death Proceeds. REINSTATEMENT If the grace period ends and the Policy Owner has neither paid the required premium nor surrendered the Policy for its Cash Surrender Value, the Policy Owner may reinstate the Policy by: 1. submitting a written request at any time within 3 years after the end of the grace period and prior to the Maturity Date; 23 27 2. providing evidence of insurability satisfactory to the Company; 3. paying sufficient premium to cover all Policy Charges that were due and unpaid during the grace period; 4. paying sufficient premium to keep the Policy in force for 3 months from the date of reinstatement; and 5. paying or reinstating any Indebtedness against the Policy which existed at the end of the grace period. The effective date of a reinstated Policy will be the Monthly Anniversary Day on or next following the date the application for reinstatement is approved by the Company. If the Policy is reinstated, the Cash Value on the date of reinstatement, but prior to applying any premiums or loan repayments received, will be set equal to the Cash Value at the end of the grace period. Unless the Policy Owner has provided otherwise, all amounts will be allocated based on the Underlying Mutual Fund allocation factors in effect at the start of the grace period. THE FIXED ACCOUNT OPTION Under exemptive and exclusionary provisions, interests in the General Account have not been registered under the Securities Act of 1933 and the General Account has not been registered as an investment company under the Investment Company Act of 1940 (the "1940 Act"). Accordingly, neither the General Account nor any interests therein is subject to the provisions of these Acts, and the Company has been advised that the staff of the SEC has not reviewed the disclosures in this prospectus relating to the Fixed Account option. Disclosures regarding the General Account may, however, be subject to certain generally applicable provisions of the federal securities laws concerning the accuracy and completeness of statements made in prospectuses. As explained earlier, a Policy Owner may elect to allocate or transfer all or part of the Cash Value to the Fixed Account and the amount allocated or transferred becomes part of the General Account. The General Account consists of all assets of the Company other than those in the Variable Account and in other separate accounts that have been or may be established by the Company. Subject to applicable law, the Company has sole discretion over the investment of the assets of the General Account, and Policy Owners do not share in the investment experience of those assets. The Company guarantees that the part of the Cash Value invested in the Fixed Account will accrue interest daily at an effective annual rate that the Company declares periodically. The Fixed Account crediting rate will not be less than an effective annual rate of 3%. Upon request, the Company will inform a Policy Owner of the then applicable rate. The Company is not obligated to credit interest at a higher rate. The Fixed Account is not available for Policies issued in the State of Texas. CHANGES IN EXISTING INSURANCE COVERAGE The Policy Owner may request certain changes in the insurance coverage under the Policy. Any request must be in writing and received at the Home Office. No change will take effect unless the Cash Surrender Value, after the change, is sufficient to keep the Policy in force for at least 3 months. SPECIFIED AMOUNT INCREASES After the first Policy Year, the Policy Owner may request an increase to the Specified Amount. Any increase will be subject to the following conditions: 1. the request must be applied for in writing; 2. satisfactory evidence of insurability must be provided; 3. the increase must be for a minimum of $10,000; 4. the Cash Surrender Value is sufficient to continue the Policy in force for at least 3 months; and 5. age limits are the same as for a new issue. 24 28 Any approved increase will have an effective date of the Monthly Anniversary Day on or next following the date the Company approves the supplemental application, unless a different date is requested by the Policy Owner. The Company reserves the right to limit the number of Specified Amount increases to one each Policy Year. SPECIFIED AMOUNT DECREASES After the first Policy Year, the Policy Owner may also request a decrease to the Specified Amount. Any approved decrease will be effective on the Monthly Anniversary Day on or next following the date the Company receives the request. Any such decrease will reduce insurance in the following order: 1. against insurance provided by the most recent increase; 2. against the next most recent increases successively; and 3. against insurance provided under the original application. The Company reserves the right to limit the number of Specified Amount decreases to one each Policy Year. The Company will refuse a request for a decrease which would: 1. reduce the Specified Amount to less than $50,000 ($100,000 in New Jersey and Pennsylvania); or 2. disqualify the Policy as a contract for life insurance. CHANGES IN THE DEATH BENEFIT OPTION After the first Policy Year, the Policy Owner may elect to change the death benefit option under the Policy from either Option 1 to Option 2, or from Option 2 to Option 1. Initial elections to Option 3 are irrevocable. Accordingly, such changes to or from Option 3 are not permitted. Only one change of death benefit option is permitted per Policy Year. The effective date of such change will be the Monthly Anniversary Day following the date such change is approved by the Company. In order for any such change in the death benefit option to become effective, the Cash Surrender Value, after such change, must be sufficient to keep the Policy in force for at least three months subsequent to said change. The Company will adjust the Specified Amount such that the Net Amount at Risk remains constant. Any such change which would result in the Specified Amount being reduced to an amount in which the total premiums paid exceed the premium limit required by applicable state law to qualify the Policy as a contract for life insurance will not be permitted. OTHER POLICY PROVISIONS POLICY OWNER While the Insured is living, all rights in this Policy are vested in the Policy Owner named in the application or as subsequently changed, subject to assignment, if any. The Policy Owner may name a contingent Policy Owner or a new Policy Owner while the Insured is living. Any change must be in a written form satisfactory to the Company and recorded at the Home Office. Once recorded, the change will be effective when signed. The change will not affect any payment made or action taken by the Company before it was recorded. The Company may require that the Policy be submitted for endorsement before making a change. If the Policy Owner is other than the Insured, names no contingent Policy Owner, and dies before the Insured, the Policy Owner's rights in this Policy belong to the Policy Owner's estate. BENEFICIARY The Beneficiary(ies) will be as named in the application or as subsequently changed, subject to assignment, if any. 25 29 The Policy Owner may name a new Beneficiary while the Insured is living. Any change must be in a written form satisfactory to the Company and recorded at the Home Office. Once recorded, the change will be effective when signed. The change will not affect any payment made or action taken by the Company before it was recorded. If any Beneficiary predeceases the Insured, that Beneficiary's interest passes to any surviving Beneficiary(ies), unless otherwise provided. Multiple Beneficiaries will be paid in equal shares, unless otherwise provided. If no named Beneficiary survives the Insured, the Death Proceeds will be paid to the Policy Owner or the Policy Owner's estate. ASSIGNMENT While the Insured is living, the Policy Owner may assign his or her rights in the Policy. The assignment must be in writing, signed by the Policy Owner and recorded by the Home Office. Any assignment will not affect any payments made or actions taken by the Company before it was recorded. The Company is not responsible for any assignment not submitted for recording, nor is the Company responsible for the sufficiency or validity of any assignment. The assignment will be subject to any Indebtedness owed to the Company before it was recorded. INCONTESTABILITY The Company will not contest payment of the Death Proceeds based on the initial Specified Amount after the Policy has been in force during the Insured's lifetime for 2 years from the Policy Date. For any increase in Specified Amount requiring evidence of insurability, the Company will not contest payment of the Death Proceeds based on such an increase after it has been in force during the Insured's lifetime for 2 years from its effective date. ERROR IN AGE If the age of the Insured has been misstated, the affected benefits will be adjusted. The amount of the death benefit will be (1) multiplied by (2) and then the result added to (3), where: 1. is the amount of the death benefit at the time of the Insured's death reduced by the amount of the Cash Value at the time of the Insured's death; 2. is the ratio of the monthly cost of insurance applied in the Policy month of death and the monthly cost of insurance that should have been applied at the true age in the Policy month of death; and 3. is the Cash Value at the time of the Insured's death. SUICIDE If the Insured dies by suicide, while sane or insane, within two years from the Policy Date, the Company will pay no more than the sum of the premiums paid, less any Indebtedness. If the Insured dies by suicide, while sane or insane, within two years from the date an application is accepted for an increase in the Specified Amount, the Company will pay no more than the amount paid for such additional benefit. NONPARTICIPATING POLICIES These are nonparticipating Policies on which no dividends are payable. These Policies do not share in the profits or surplus earnings of the Company. RIDERS A rider may be added as an addition to the Policy. Riders currently include: 1. Base Insured Term Rider; 2. Change of Insured Rider; and 3. Additional Protection Rider. Rider availability varies by state. 26 30 LEGAL CONSIDERATIONS On July 6, 1983, the U.S. Supreme Court held in Arizona Governing Committee v. Norris that certain annuity benefits provided by employers' retirement and fringe benefit programs may not vary between men and women on the basis of sex. This decision applies only to benefits derived from premiums made on or after August 1, 1983. The Policies offered by this prospectus are based upon actuarial tables which distinguish between men and women and thus the Policies provide different benefits to men and women of the same age. Accordingly, employers and employee organizations should consider, in consultation with legal counsel, the impact of Norris on any employment related insurance or benefit program before purchasing this Policy. DISTRIBUTION OF THE POLICIES The Policies will be sold by licensed insurance agents in those states where the Policies may lawfully be sold. Such agents will be registered representatives of broker dealers registered under the Securities Exchange Act of 1934 who are members of the National Association of Securities Dealers, Inc. ("NASD"). The Policies will be distributed by the General Distributor, Nationwide Advisory Services, Inc. ("NAS"). NAS is a corporation which was organized under the laws of the State of Ohio on April 8, 1965. NAS is both a broker-dealer and registered investment adviser. As such, it is the principal underwriter for several open-end investment companies and for a number of separate accounts issued by the Company and Nationwide Life Insurance Company to fund the benefits of variable insurance and annuity policies. NAS also currently acts as the investment adviser and/or administrator for the mutual fund portfolios sold through NAS's registered representatives and for some of the mutual fund portfolios which act as underlying investment options for the variable insurance and annuity policies issued by the Company or Nationwide Life Insurance Company. NAS acts as general distributor for the Nationwide Multi-Flex Variable Account, Nationwide DC Variable Account, Nationwide DCVA-II, Nationwide Variable Account-II, Nationwide Variable Account-5, Nationwide Variable Account-6, Nationwide Variable Account-8, Nationwide Variable Account-9, Nationwide VA Separate Account-A, Nationwide VA Separate Account-B, Nationwide VA Separate Account-C, Nationwide VL Separate Account-A, Nationwide VL Separate Account-B, Nationwide VL Separate Account-C, Nationwide VL Separate Account-D, Nationwide VLI Separate Account-2, Nationwide VLI Separate Account-3, Nationwide VLI Separate Account-4, Nationwide VLI Separate Account-5, NACo Variable Account and the Nationwide Variable Account, all of which are separate investment accounts of the Company or its affiliates. NAS is a wholly owned subsidiary of the Company. NAS also acts as principal underwriter for the Nationwide Investing Foundation, Nationwide Separate Account Trust, Financial Horizons Investment Trust, Nationwide Investing Foundation II, Nationwide Investing Foundation III, and Nationwide Asset Allocation Trust, which are open-end management investment companies. Gross first year commissions plus any expense allowance payments made by the Company on the sale of these Policies distributed by the General Distributor will not exceed 40% of the Target Premium plus 5% of any excess premium payments in year one and 25% of the Target Premium plus 5% on the excess premium in years two through four. Gross renewal commissions paid at the beginning of Policy Year five and beyond by the Company will not exceed 2.5% of actual premium payments plus an annual effective rate of 0.20%, paid quarterly, of the Cash Value as of the end of the prior quarter. CUSTODIAN OF ASSETS The Company serves as the custodian of the assets of the Variable Account. 27 31 TAX MATTERS POLICY PROCEEDS Section 7702 of the Code provides that if certain tests are met, a policy will be treated as a life insurance policy for federal tax purposes. The Company will monitor compliance with these tests. The Policy should thus receive the same federal income tax treatment as fixed benefit life insurance. As a result, the Death Proceeds payable under a Policy are excludable from gross income of the Beneficiary under Section 101 of the Code. Section 7702A of the Code defines modified endowment contracts as those policies issued or materially changed on or after June 21, 1988 on which the total premiums paid during the first seven years exceed the amount that would have been paid if the policy provided for paid up benefits after seven level annual premiums (see "Information about the Policies"). The Code provides that taxation of surrenders, partial surrenders, loans, collateral assignments and other pre-death distributions from modified endowment contracts (other than certain distributions to terminally ill individuals) are subject to federal income taxes a manner similar to the way annuities are taxed. Modified endowment contract distributions are defined by the Code as amounts not received as an annuity and are taxable to the extent the cash value of the policy exceeds, at the time of distribution, the premiums paid into the policy. A 10% tax penalty generally applies to the taxable portion of such distributions unless the policy owner is over age 59 1/2 or disabled or the distribution is part of an annuity to the policy owner as defined in the Code. Under certain circumstances, certain distributions made under a policy on the life of a "terminally ill individual", as that term is defined in the Code, are excludable from gross income. The Policies offered by this prospectus may or may not be issued as modified endowment contracts. The Company will monitor premiums paid and will notify the Policy Owner when the Policy's non-modified endowment status is in jeopardy. If a Policy is not a modified endowment contract, a cash distribution during the first 15 years after a Policy is issued which causes a reduction in death benefits may still become fully or partially taxable to the Policy Owner pursuant to Section 7702(f)(7) of the Code. The Policy Owner should carefully consider this potential effect and seek further information before initiating any changes in the terms of the Policy. Under certain conditions, a Policy may become a modified endowment as a result of a material change or a reduction in benefits as defined by Section 7702A(c) of the Code. In addition to meeting the tests required under Section 7702, Section 817(h) of the Code requires that the investments of separate accounts such as the Variable Account be adequately diversified. Regulations under 817(h) provide that a variable life policy that fails to satisfy the diversification standards will not be treated as life insurance unless such failure was inadvertent, is corrected, and the policy owner or the company pays an amount to the IRS. The amount will be based on the tax that would have been paid by the policy owner if the income, for the period the policy was not diversified, had been received by the policy owner. If the failure to diversify is not corrected in this manner, the policy owner will be deemed the owner of the underlying securities and taxed on the earnings of his or her account. Representatives of the IRS have suggested, from time to time, that the number of underlying mutual funds available or the number of transfer opportunities available under a variable product may be relevant in determining whether the product qualifies for the desired tax treatment. No formal guidance has been issued in this area. Should the Secretary of the Treasury issue additional rules or regulations limiting the number of underlying mutual funds, transfers between underlying mutual funds, exchanges of underlying mutual funds or changes in investment objectives of underlying mutual funds such that the Policy would no longer qualify as life insurance under Section 7702 of the Code, the Company will take whatever steps are available to remain in compliance. The Company will monitor compliance with these regulations and, to the extent necessary, will change the objectives or assets of the Sub-Account investments to remain in compliance. A total surrender or cancellation of the Policy by lapse or the maturity of the Policy on its Maturity Date may have adverse tax consequences. If the amount received by the Policy Owner plus total Policy 28 32 Indebtedness exceeds the premiums paid into the Policy, the excess generally will be treated as taxable income, regardless of whether or not the Policy is a modified endowment contract. - - Withholding Distributions of income from a modified endowment contract are subject to federal income tax withholding; however, the recipient may elect not to have the withholding taken from the distribution. A distribution of income from a modified endowment contract may be subject to mandatory back-up withholding (which cannot be waived). The mandatory back-up withholding rate is 31% of the income that is distributed and will arise of no taxpayer identification number is provided to the Company, or if the IRS notifies the Company that back-up withholding is required. - - Non-Resident Aliens Pre-death distributions from modified endowment contracts of income to nonresident aliens ("NRAs") are generally subject to federal income tax and tax withholding at a statutory rate of 30% of the amount of income that is distributed. The Company is required to withhold such amount from the distribution and remit it to the IRS. Distributions to certain NRAs may be subject to lower, or in certain instances zero, tax and withholding rates, if the United States has entered into an applicable treaty. However, in order to obtain the benefits of such treaty provisions, the NRA must give to the Company sufficient proof of his or her residency and citizenship in the form and manner prescribed by the IRS. In addition, the NRA must obtain an individual taxpayer identification number from the IRS, and furnish that number to the Company prior to the distribution. If the Company does not have the proper proof of citizenship or residency and a proper individual taxpayer identification number prior to any distribution, the Company will be required to withhold 30% of the income, regardless of any treaty provision. A pre-death distribution may not be subject to withholding where the recipient sufficiently establishes to the Company that such payment is effectively connected to the recipient's conduct of a trade or business in the United States and that such payment is includable in the recipient's gross income for United States federal income tax purposes. Any such distributions may be subject to back-up withholding at the statutory rate (currently 31%) if no taxpayer identification number, or an incorrect taxpayer identification number, is provided. - - Federal Estate and Generation-Skipping Transfer Taxes The federal estate tax is integrated with the federal gift tax under a unified tax rate schedule. In general, in 1998, an estate of less than $625,000 (inclusive of certain pre-death gifts) will not incur a federal estate tax liability. In addition, an unlimited marital deduction may be available for federal estate tax purposes, for certain amounts that pass to the surviving spouse. The death benefit will generally be included in such Insured's federal gross estate if: (1) the Death Proceeds were payable to or for the benefit of such Insured's estate; or (2) such Insured held any "incident of ownership" in the Policy at death or at any time within three years of death. An incident of ownership is, in general, any right that may be exercised by the Policy, such as the right to borrow on the Policy, or the right to name a new Beneficiary. If the Policy Owner (whether or not he or she is an Insured) transfers ownership of the Policy to another person, such transfer may be subject to a federal gift tax. In addition, if such Policy Owner transfers the Policy to someone two or more generations younger than the Policy Owner, the transfer may be subject to the federal generation-skipping transfer tax ("GSTT"), the taxable amount being the value of the Policy. Similarly, if the Beneficiary is two or more generations younger than an Insured, the payment of the Death Proceeds at the death of such Insured may be subject to the GSTT. Pursuant to regulations recently promulgated by the U.S. Treasury Department, the Company may be required to withhold a portion of the Death Proceeds and pay them directly to the IRS as the GSTT liability. The GSTT provisions generally apply to the same transfers that are subject to estate or gift taxes. The tax rate is a flat rate equal to the maximum estate tax rate (currently 55%), and there is a provision for an aggregate $1 million exemption. Due to the complexity of these rules, the Policy Owner should consult 29 33 with counsel and other competent advisors regarding these taxes. State and local estate, inheritance income and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Policy Owner or Beneficiary. A Policy Owner should consult with a competent tax adviser for specific information regarding the applicability of such taxes. TAXATION OF THE COMPANY The Company is taxed as a life insurance company under the Code. The Variable Account will not be taxed separately from the Company as a "regulated investment company" under Sub-chapter M of the Code. Investment income and realized capital gains on the assets of the Variable Account are reinvested and taken into account in determining the value of Accumulation Units. As a result, such investment income and realized capital gains are automatically applied to increase reserves under the Policies. Under Ohio law, in general, variable account assets are immune from the claims of the general creditors of the Company to the extent of the reserves and other policy liabilities. The Company does not initially expect to incur any federal income tax liability that would be chargeable to the Variable Account. Based upon these expectations, no charge is currently being made against the Variable Account for federal income taxes. If, however, the Company determines that on a separate company basis such taxes may be incurred, it reserves the right to assess a charge for such taxes against the Variable Account. The Company may also incur state and local taxes (in addition to premium taxes) in several states. At present, these taxes are not significant. If they increase, however, charges for such taxes may be made. TAX CHANGES The foregoing discussion, which is based on the Company's understanding of federal tax laws as they are currently interpreted by the IRS, is general and is not intended as tax advice. In the recent past, the Code has been subjected to numerous amendments and changes, and it is reasonable to believe that it will continue to be revised. The United States Congress has, in the past, considered numerous legislative proposals that, if enacted, could change the tax treatment of the Policies. It is reasonable to believe that such proposals and other proposals may be enacted into law. In addition, the U.S. Treasury Department may amend existing regulations, issue new regulations, or adopt new interpretations of existing law that may be at variance with its current positions on these matters. In addition, current state law (which is not discussed herein), and future amendments to state law, may affect the tax consequences of the Policy. If the Policy Owner, Insured, Beneficiary, or other person receiving any benefit or interest in or from the Policy is not both a resident and citizen of the United States, there may be a tax imposed by a foreign country, in addition to any tax imposed by the United States. The foreign law (including regulations, rulings, and case law) may change and impose additional taxes on the Policy, the death benefit, or other distributions and/or ownership of the Policy, or a treaty may be amended and all or part of the favorable treatment may be eliminated. Any or all of the foregoing may change from time to time without any notice, and the tax consequences arising out of a Policy may be changed retroactively. There is no way of predicting if, when, and to what extent any such change may take place. No representation is made as to the likelihood of the continuation of these current laws, interpretations, and policies. The foregoing is a general explanation as to certain tax matters pertaining to insurance policies. It is not intended to be legal or tax advice, and should not take the place of your independent legal, tax and/or financial advisor. THE COMPANY The life insurance business, which includes product lines in health insurance, annuities and retirement products is the only business in which the Company is engaged. 30 34 The Company markets its Policies through independent insurance brokers, general agents, and registered representatives of registered NASD broker-dealer firms. The Company, in common with other insurance companies, is subject to regulation and supervision by the regulatory authorities of the states in which it is licensed to do business. A license from the state insurance department is a prerequisite to the transaction of insurance business in that state. In general, all states have statutory administrative powers. Such regulation relates, among other things, to licensing of insurers and their agents, the approval of policy forms, the methods of computing reserves, the form and content of statutory financial statements, the amount of policyholders' and stockholders' dividends, and the type of distribution of investments permitted. The Company operates in the highly competitive field of life insurance. There are approximately 2,300 stock, mutual and other types of insurers in the life insurance business in the United States, and a large number of them compete with the registrant in the sale of insurance policies. As is customary in insurance company groups, employees are shared with the other insurance companies in the group. In addition to its direct salaried employees, the Company shares employees with Nationwide Mutual Insurance Company and Nationwide Mutual Fire Insurance Company. The Company serves as depositor for Nationwide VL Separate Account-A, Nationwide VL Separate Account-B, Nationwide VL Separate Account-C, Nationwide VL Separate Account-D, Nationwide VA Separate Account-A, Nationwide VA Separate Account-B, and Nationwide VA Separate Account-C, each of which is a registered investment company. The Company does not presently own or lease any materially important physical properties when its property holdings are viewed in relation to its total assets. The Company shares the Home Office, other facilities and equipment with Nationwide Mutual Insurance Company. COMPANY MANAGEMENT Nationwide Life and Annuity Insurance Company, together with Nationwide Mutual Insurance Company, Nationwide Mutual Fire Insurance Company, Nationwide Indemnity Company, Nationwide Life Insurance Company, Nationwide Property and Casualty Insurance Company, National Casualty Company, Scottsdale Indemnity Company and Nationwide General Insurance Company and their affiliated companies comprise the Nationwide Insurance Enterprise. The companies comprising the Nationwide Insurance Enterprise have substantially common boards of directors and officers. Nationwide Financial Services, Inc. is the sole shareholder of Nationwide Life.
DIRECTORS OF THE COMPANY DIRECTORS OF THE DEPOSITOR NAME AND POSITIONS AND OFFICERS WITH PRINCIPAL OCCUPATION PRINCIPAL BUSINESS ADDRESS DEPOSITOR Lewis J. Alphin Director Farm Owner and Operator (1) 519 Bethel Church Road Mount Olive, NC 28365 A. I. Bell Director Farm Owner and Operator (1) 4121 North River Road West Zanesville, OH 43701 Keith W. Eckel Director Partner, Fred W. Eckel Sons; President, 1647 Falls Road Eckel Farms, Inc. (1) Clarks Summit, PA 18411 Willard J. Engel Director Retired General Manager, Lyon County 301 East Marshall Street Co-operative Oil Company (1) Marshall, MN 44691
31 35
DIRECTORS OF THE DEPOSITOR NAME AND POSITIONS AND OFFICERS WITH PRINCIPAL OCCUPATION PRINCIPAL BUSINESS ADDRESS DEPOSITOR Fred C. Finney Director Owner and Operator, Moreland Fruit Farm; 1558 West Moreland Road Operator, Melrose Orchard (1) Wooster, OH 44691 Charles L. Fuellgraf, Jr. Director Chief Executive Officer, Fuellgraf 600 South Washington Street Electric Company (1) Butler, PA 16001 Joseph J. Gasper President and Chief President and Chief Operating Officer, One Nationwide Plaza Operating Officer and Nationwide Life Insurance Company and Columbus, OH 43215 Director Nationwide Life and Annuity Insurance Company (2) Dimon R. McFerson Chairman and Chief Chairman and Chief Executive One Nationwide Plaza Executive Officer-Nationwide Insurance Enterprise (2) Columbus, OH 43215 Officer-Nationwide Insurance Enterprise and Director David O. Miller Chairman of the Board and President, Owen Potato Farm, Inc.; 115 Sprague Drive Director Partner, M&M Enterprises (1) Hebron, OH 43025 Yvonne L. Montgomery Director Senior Vice President-General Manager Suite 1600 Southern Customer Operations for U.S. 2859 Paces Ferry Road Customer Operations, Xerox Corporation (2) Atlanta, GA 30339 James F. Patterson Director Vice President, Pattersons, Inc.; 8765 Mulberry Road President, Patterson Farms, Inc. (1) Chesterland, OH 44026 Arden L. Shisler Director President and Chief Executive Officer, K&B 1356 North Wenger Road Transport, Inc. (1) Dalton, OH 44618 Robert L. Stewart Director Owner and Operator Sunnydale Farms and 88740 Fairview Road Mining (1) Jewett, OH 43986 Nancy C. Thomas Director Farm Owner and Operator, Da-Ma-Lor Farms 10835 Georgetown Street NE (1) Louisville, OH 44641 Harold W. Weihl Director Farm Owner and Operator, Weihl Farms (1) 14282 King Road Bowling Green, OH 43402
1) Principal Occupation for last 5 years 2) Prior to assuming this current position, held other executive management positions with the same or affiliated companies. Each of the directors is a director of the other major insurance affiliates of the Nationwide Insurance Enterprise, except Mr. Gasper who is a director only of the Company and Nationwide Life Insurance Company. Messrs. McFerson and Gasper are directors of Nationwide Advisory Services, Inc., a registered broker-dealer. 32 36 Messrs. McFerson, Miller, Patterson, Shisler and Fuellgraf are directors of Nationwide Financial Services, Inc. Messrs. Fuellgraf, McFerson, Ms. Thomas and Mr. Weihl are trustees of Nationwide Investing Foundation, and Nationwide Investing Foundation III, registered investment companies. Messrs. McFerson, Gasper and Woodward are trustees of Nationwide Separate Account Trust and Nationwide Asset Allocation Trust, registered investment companies. Mr. McFerson is trustee of Financial Horizons Investment Trust and Nationwide Investing Foundation II, registered investment companies. Mr. Engel is a director of Western Cooperative Transport.
EXECUTIVE OFFICERS OF THE COMPANY OFFICERS OF THE DEPOSITOR OFFICES OF THE DEPOSITOR NAME AND PRINCIPAL BUSINESS ADDRESS Robert A. Oakley Executive Vice President-Chief Financial Officer One Nationwide Plaza Columbus, OH 43215 Robert J. Woodward, Jr. Executive Vice President-Chief Investment Officer One Nationwide Plaza Columbus, OH 43215 W. Sidney Druen Senior Vice President and General Counsel and Assistant One Nationwide Plaza Secretary Columbus, OH 43215 Harvey S. Galloway, Jr. Senior Vice President and Chief Actuary, Health and Annuities One Nationwide Plaza Columbus, OH 43215 Richard A. Karas Senior Vice President - Sales and Financial Services One Nationwide Plaza Columbus, OH 43215 Susan A. Wolken Senior Vice President - Life Company Operations One Nationwide Plaza Columbus, OH 43215 Matthew S. Easley Vice President-Life Marketing and Administrative Services One Nationwide Plaza Columbus, OH 43215 Timothy E. Murphy Vice President-Strategic Marketing One Nationwide Plaza Columbus, OH 43215 R. Dennis Noice Vice President Retail Operations One Nationwide Plaza Columbus, OH 43215 Joseph P. Rath Vice President-Product and Market Compliance One Nationwide Plaza Columbus, OH 43215
33 37 OTHER CONTRACTS ISSUED BY THE COMPANY The Company does presently and will, from time to time, offer variable contracts and policies with benefits which vary in accordance with the investment experience of a separate account of the Company. STATE REGULATION The Company is subject to the laws of Ohio governing insurance companies and to regulation by the Ohio Insurance Department. An annual statement in a prescribed form is filed with the Insurance Department each year covering the operation of the Company for the preceding year and its financial condition as of the end of such year. Regulation by the Insurance Department includes periodic examination to determine the Company's contract liabilities and reserves so that the Insurance Department may certify the items are correct. The Company's books and accounts are subject to review by the Insurance Department at all times and a full examination of its operations is conducted periodically by the National Association of Insurance Commissioners. Such regulation does not, however, involve any supervision of management or investment practices or policies. In addition, the Company is subject to regulation under the insurance laws of other jurisdictions in which it may operate. REPORTS TO POLICY OWNERS The Company will mail to the Policy Owner, at the address specified on the application or any address provided subsequent to the application, an annual statement showing the amount of the current death benefit, the Cash Value, Cash Surrender Value, premiums paid and monthly charges deducted since the last report, amounts invested in the Fixed Account and in the Variable Account and in each Sub-Account, and any Policy Indebtedness. The Company also shall send Policy Owners annual and semi-annual reports containing all applicable information and financial statements, or their equivalent, which must be sent to Underlying Mutual Fund shareholders as required by the rules under the 1940 Act. In addition, Policy Owners will receive statements of significant transactions, such as changes in Specified Amount, changes in death benefit option, changes in future premium allocation, transfers among Sub-Accounts, premium payments, loans, loan repayments, reinstatement and termination. ADVERTISING The Company is ranked and rated by independent financial rating services, including Moody's, Standard & Poor's and A.M. Best Company. The purpose of these ratings is to reflect the financial strength or claims-paying ability of the Company. The ratings are not intended to reflect the investment experience or financial strength of the Variable Account. The Company may advertise these ratings from time to time. In addition, the Company may include in certain advertisements, endorsements in the form of a list of organizations, individuals or other parties which recommend the Company or the Contracts. Furthermore, the Company may occasionally include in advertisements comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets, or discussions of alternative investment vehicles and general economic conditions. YEAR 2000 COMPLIANCE ISSUES The Company has developed and implemented a plan to address issues related to the Year 2000. The problem relates to many existing computer systems using only two digits to identify a year in a date field. These systems were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer systems could fail or create erroneous results when processing information dated after December 31, 1999. Like many organizations, the Company is required to renovate or replace many computer systems so that the systems will function properly after December 31, 1999. The Company has completed an inventory and assessment of all computer systems and has developed a plan to renovate or replace all applications that were identified as not Year 2000 compliant. As of the end of July 1998, the Company has renovated 97% of all applications that required renovation. Testing of the renovated programs is in process, including running each application with the 34 38 date moved forward to Year 2000. The Company expects to complete the testing of all renovated applications by the end of 1998. For applications being replaced, the Company anticipates all replacement systems to be in place and functioning by the end of 1998. Contingency plans are substantially completed which identify actions to be taken should the Company's renovation and replacement strategies fall behind schedule. The Company is also completing an inventory and assessment of all vendor products. As of the end of July 1998, 83% of products had been assessed and 69% were Year 2000 compliant. The Company is certifying that each vendor product is Year 2000 compliant. At the end of July 1998, 24% of vendor products that were identified as Year 2000 compliant had been certified. The Company anticipates having all vendor products assessed and certified by the end of 1998. Any vendor products that can not be certified as Year 2000 compliant will be replaced or eliminated. In addition to resolving internal Year 2000 readiness issues, the Company is working with all external organizations (business partners) to assess Year 2000 issues associated with the exchange of electronic data. The Company has completed an inventory and assessment of all interfaces with business partners and is in the process of testing those interfaces. The Company has also initiated plans to survey producer business partners to ascertain their Year 2000 readiness. Operating expenses in 1997 and in the first six months of 1998 include approximately $45 million and $22.6 million, respectively, for technology projects, including costs related to Year 2000. In the second half of 1998, the Company anticipates spending an amount comparable to expense for the first half of 1998. At this time, no significant Year 2000 costs are anticipated in 1999. Management does not anticipate that the completion of Year 2000 renovation and replacement activities will result in a reduction in operating expenses. Rather, personnel and resources currently allocated to Year 2000 issues will be assigned to other technology-related projects. These expenses do not have an effect on the assets of the Variable Account and are not charged through to the Contract Owner. LEGAL PROCEEDINGS There are no material legal proceedings, other than ordinary routine litigation incidental to the business to which the Company and the Variable Account are parties or to which any of their property is the subject. The General Distributor, Nationwide Advisory Services, Inc., is not engaged in any litigation of any material nature. From time to time the Company is a party to litigation and arbitration proceedings in the ordinary course of its business, none of which is expected to have a material adverse effect on the Company. EXPERTS The audited financial statements and schedules have been included herein in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. REGISTRATION STATEMENT A Registration Statement has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the Policies offered hereby. This prospectus does not contain all the information set forth in the Registration Statement and amendments thereto and exhibits filed as a part thereof, to all of which reference is hereby made for further information concerning the Variable Account, the Company, and the Policies offered hereby. Statements contained in this prospectus as to the content of Policies and other legal instruments are summaries. For a complete statement of the terms thereof, reference is made to such instruments as filed. 35 39 LEGAL OPINIONS Legal matters in connection with the Policies described herein are being passed upon by Druen, Dietrich, Reynolds & Koogler, One Nationwide Plaza, Columbus, Ohio 43215. All the members of such firm are employed by the Nationwide Mutual Insurance Company. 36 40 APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES, AND DEATH BENEFITS The illustrations in this prospectus have been prepared to help show how values under the Policies change with investment performance. The illustrations illustrate how Cash Values, Cash Surrender Values and death benefits under a Policy would vary over time if the hypothetical gross investment rates of return were a uniform annual effective rate of either 0%, 6% or 12%. If the hypothetical gross investment rate of return averages 0%, 6% or 12% over a period of years, but fluctuates above or below those averages for individual years, the Cash Values, Cash Surrender Values and death benefits may be different. For hypothetical returns of 0% and 6%, the illustrations also illustrate when the Policies would go into default, at which time additional premium payments would be required to continue the Policy in force. The illustrations also assume there is no Policy Indebtedness, no additional premium payments are made, no Cash Values are allocated to the Fixed Account, and there are no changes in the Specified Amount or death benefit option. The amounts shown for the Cash Value, Cash Surrender Value and death benefit as of each Policy Anniversary reflect the fact that the net investment return on the assets held in the Sub-Accounts is lower than the gross return. This is due to the daily charges made against the assets of the Sub-Accounts for assuming mortality and expense risks. Beginning in the third Policy Year, Cash Surrender Value equals Cash Value less Indebtedness, or other deductions. In Policy Years one and two only, Cash Surrender Value equals Cash Value less Indebtedness or other deductions increased by 3% of the current premium in excess of Target Premium. The guaranteed mortality and expense risk charges for Policy Years one through four are equivalent to an annual effective rate of 0.75% of the daily net asset value of the Variable Account. The current mortality and expense risk charges for Policy Years one through four are equivalent to an annual effective rate of 0.60% of the daily net assets of the Variable Account. The current mortality and expense risk charges for Policy Years five through twenty are equivalent to an annual effective rate of 0.40% of the daily net assets of the Variable Account. The current mortality and expense risk charges for Policy Years twenty-one and beyond are equivalent to an annual effective rate of 0.25% of the daily net assets of the Variable Account. In addition, the net investment returns also reflect the deduction of Underlying Mutual Fund investment advisory fees and other expenses which are equivalent to an annual effective rate of 0.90% of the daily net assets of the Variable Account. This effective rate is based on the average of the fund expenses for the preceding year for all Underlying Mutual Fund options available under the policy as of March 13, 1998. Considering current charges for mortality and expense risks and Underlying Mutual Fund expenses, gross annual rates of return of 0%, 6% and 12% correspond to net investment experience at constant annual rates of -1.50%, 4.50% and 10.50%, for Policy Years one through four, and rates of -1.30%, 4.70% and 10.70%, for Policy Years five through twenty, and rates of -1.15%, 4.85% and 10.85%, for Policy Years twenty-one and beyond. Considering guaranteed charges for mortality and expense risks and Underlying Mutual Fund expenses, gross annual rates of return of 0%, 6% and 12% correspond to net investment experience at constant annual rates of -1.65%, 4.35% and 10.35%, for all Policy Years. The illustrations also reflect the fact that the Company makes monthly charges for providing insurance protection. Current values reflect current cost of insurance charges and guaranteed values reflect the maximum cost of insurance charges guaranteed in the Policy. The values shown are for Policies which are issued as standard. Policies issued on a substandard basis would result in lower Cash Values and Death benefits than those illustrated. The illustrations also reflect the fact that the Company deducts a sales load from each premium payment received guaranteed not to exceed 5.5% of each premium payment for the first seven Policy Years and 2% thereafter. On a current basis, the sales load is 5.5% of the Target Premium plus 3% of premiums in excess of the Target Premium in the first seven Policy Years, and 0% on all premiums thereafter. The Company also deducts a tax expense charge of 3.5%, both current and guaranteed, from all premium payments. The illustrations also reflect the fact that the Company deducts a charge for state premium 37 41 taxes at a rate of 2.25% and for federal tax at a rate of 1.25% (imposed under Section 848 of the Code) of all premium payments. In addition, the illustrations reflect the fact that the Company deducts a monthly administrative charge at the beginning of each Policy Month. This monthly administrative expense charge is currently $5.00 per month and guaranteed not to exceed $10.00. The illustrations also reflect the fact that no charges for federal or state income taxes are currently made against the Variable Account. If such a charge is made in the future, it will require a higher gross investment return than illustrated in order to produce the net after-tax returns shown in the illustrations. Upon request, the Company will furnish a comparable illustration based on the proposed Insured's age, smoking classification, rating classification and premium payment requested. 38 42 $100,000 ANNUAL PREMIUM FOR FIRST 7 YEARS $1,703,050 SPECIFIED AMOUNT CASH VALUE ACCUMULATION TEST UNISEX: REGULAR ISSUE/NONTOBACCO PREFERRED, AGE 45 DEATH BENEFIT OPTION 1 CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PREMIUMS PAID PLUS CASH CASH CASH POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 105,000 87,786 89,929 1,703,050 93,212 95,354 1,703,050 98,639 100,782 1,703,050 2 215,250 173,990 176,133 1,703,050 190,334 192,477 1,703,050 207,332 209,475 1,703,050 3 331,013 258,969 258,969 1,703,050 291,904 291,904 1,703,050 327,522 327,522 1,703,050 4 452,563 342,694 342,694 1,703,050 398,092 398,092 1,703,050 460,407 460,407 1,703,050 5 580,191 425,967 425,967 1,703,050 510,080 510,080 1,703,050 608,516 608,516 1,703,050 6 714,201 508,108 508,108 1,703,050 627,380 627,380 1,703,050 772,363 772,363 1,881,786 7 854,911 589,184 589,184 1,703,050 750,216 750,216 1,774,935 952,732 952,732 2,254,069 8 897,656 577,278 577,278 1,703,050 781,428 781,428 1,795,878 1,049,061 1,049,061 2,410,953 9 942,539 565,129 565,129 1,703,050 813,828 813,828 1,817,521 1,154,975 1,154,975 2,579,406 10 989,666 552,688 552,688 1,703,050 847,440 847,440 1,839,962 1,271,389 1,271,389 2,760,439 11 1,039,150 539,943 539,943 1,703,050 882,327 882,327 1,863,298 1,399,358 1,399,358 2,955,163 12 1,091,107 526,847 526,847 1,703,050 918,524 918,524 1,887,568 1,539,999 1,539,999 3,164,698 13 1,145,662 513,383 513,383 1,703,050 956,098 956,098 1,912,769 1,694,584 1,694,584 3,390,184 14 1,202,945 499,505 499,505 1,703,050 995,094 995,094 1,938,841 1,864,473 1,864,473 3,632,740 15 1,263,093 485,021 485,021 1,703,050 1,035,455 1,035,455 1,965,603 2,050,949 2,050,949 3,893,316 16 1,326,247 469,833 469,833 1,703,050 1,077,198 1,077,198 1,993,140 2,255,544 2,255,544 4,173,433 17 1,392,560 453,822 453,822 1,703,050 1,120,339 1,120,339 2,021,316 2,479,917 2,479,917 4,474,266 18 1,462,188 436,818 436,818 1,703,050 1,164,863 1,164,863 2,050,275 2,725,803 2,725,803 4,797,686 19 1,535,297 418,637 418,637 1,703,050 1,210,755 1,210,755 2,080,198 2,995,078 2,995,078 5,145,844 20 1,612,062 399,103 399,103 1,703,050 1,258,023 1,258,023 2,110,837 3,289,824 3,289,824 5,519,995 21 1,692,665 380,192 380,192 1,703,050 1,309,635 1,309,635 2,147,409 3,620,457 3,620,457 5,936,464 22 1,777,298 361,292 361,292 1,703,050 1,363,911 1,363,911 2,186,758 3,985,915 3,985,915 6,390,617 23 1,866,163 341,267 341,267 1,703,050 1,420,297 1,420,297 2,227,878 4,387,832 4,387,832 6,882,754 24 1,959,471 319,592 319,592 1,703,050 1,478,645 1,478,645 2,270,311 4,829,068 4,829,068 7,414,551 25 2,057,445 296,056 296,056 1,703,050 1,539,010 1,539,010 2,314,055 5,313,360 5,313,360 7,989,169 26 2,160,317 270,400 270,400 1,703,050 1,601,437 1,601,437 2,359,397 5,844,752 5,844,752 8,611,073 27 2,268,333 242,377 242,377 1,703,050 1,666,004 1,666,004 2,406,210 6,427,770 6,427,770 9,283,628 28 2,381,750 211,669 211,669 1,703,050 1,732,764 1,732,764 2,455,153 7,067,266 7,067,266 10,013,609 29 2,500,837 177,875 177,875 1,703,050 1,801,760 1,801,760 2,506,068 7,768,491 7,768,491 10,805,194 30 2,625,879 140,522 140,522 1,703,050 1,873,019 1,873,019 2,559,668 8,537,076 8,537,076 11,666,768
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY $5.00 ADMINISTRATIVE EXPENSE CHARGE ALL THE TIME. CURRENT VALUES REFLECT A PREMIUM CHARGE OF 9% OF TARGET PREMIUM AND 6.5% OF EX- CESS-OF-TARGET PREMIUM FOR THE FIRST 7 YEARS AND 3.5% OF ALL PREMIUM FROM EIGHTH YEAR AND ON. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 39 43 $100,000 ANNUAL PREMIUM FOR FIRST 7 YEARS $1,703,050 SPECIFIED AMOUNT CASH VALUE ACCUMULATION TEST UNISEX: NONTOBACCO, AGE 45 DEATH BENEFIT OPTION 1 GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN Premiums Paid Plus Cash Cash Cash Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 105,000 83,858 86,000 1,703,050 89,106 91,248 1,703,050 94,357 96,500 1,703,050 2 215,250 166,199 168,342 1,703,050 181,945 184,087 1,703,050 198,326 200,468 1,703,050 3 331,013 247,061 247,061 1,703,050 278,717 278,717 1,703,050 312,964 312,964 1,703,050 4 452,563 326,469 326,469 1,703,050 379,626 379,626 1,703,050 439,449 439,449 1,703,050 5 580,191 404,454 404,454 1,703,050 484,902 484,902 1,703,050 579,107 579,107 1,703,050 6 714,201 481,028 481,028 1,703,050 594,775 594,775 1,703,050 733,316 733,316 1,786,652 7 854,911 556,200 556,200 1,703,050 709,497 709,497 1,703,050 901,980 901,980 2,133,995 8 897,656 539,922 539,922 1,703,050 733,836 733,836 1,703,050 986,652 986,652 2,267,525 9 942,539 523,086 523,086 1,703,050 758,771 758,771 1,703,050 1,078,886 1,078,886 2,409,476 10 989,666 505,593 505,593 1,703,050 784,294 784,294 1,703,050 1,179,290 1,179,290 2,560,475 11 1,039,150 487,328 487,328 1,703,050 810,395 810,395 1,711,393 1,288,511 1,288,511 2,721,077 12 1,091,107 468,181 468,181 1,703,050 837,069 837,069 1,720,176 1,407,260 1,407,260 2,891,919 13 1,145,662 448,065 448,065 1,703,050 864,327 864,327 1,729,172 1,536,345 1,536,345 3,073,611 14 1,202,945 426,821 426,821 1,703,050 892,141 892,141 1,738,248 1,676,566 1,676,566 3,266,621 15 1,263,093 404,256 404,256 1,703,050 920,467 920,467 1,747,323 1,828,760 1,828,760 3,471,536 16 1,326,247 380,153 380,153 1,703,050 949,252 949,252 1,756,400 1,993,813 1,993,813 3,689,153 17 1,392,560 354,265 354,265 1,703,050 978,442 978,442 1,765,306 2,172,670 2,172,670 3,919,931 18 1,462,188 326,231 326,231 1,703,050 1,007,955 1,007,955 1,774,101 2,366,221 2,366,221 4,164,785 19 1,535,297 295,662 295,662 1,703,050 1,037,711 1,037,711 1,782,892 2,575,413 2,575,413 4,424,817 20 1,612,062 262,148 262,148 1,703,050 1,067,657 1,067,657 1,791,422 2,801,292 2,801,292 4,700,289 21 1,692,665 225,251 225,251 1,703,050 1,097,750 1,097,750 1,799,981 3,044,996 3,044,996 4,992,880 22 1,777,298 184,506 184,506 1,703,050 1,127,968 1,127,968 1,808,472 3,307,782 3,307,782 5,303,367 23 1,866,163 139,405 139,405 1,703,050 1,158,308 1,158,308 1,816,922 3,591,044 3,591,044 5,632,912 24 1,959,471 89,294 89,294 1,703,050 1,188,748 1,188,748 1,825,203 3,896,216 3,896,216 5,982,250 25 2,057,445 33,297 33,297 1,703,050 1,219,230 1,219,230 1,833,235 4,224,700 4,224,700 6,352,259 26 2,160,317 (*) (*) (*) 1,249,651 1,249,651 1,841,110 4,577,785 4,577,785 6,744,450 27 2,268,333 (*) (*) (*) 1,279,878 1,279,878 1,848,528 4,956,693 4,956,693 7,158,952 28 2,381,750 (*) (*) (*) 1,309,724 1,309,724 1,855,748 5,362,403 5,362,403 7,597,989 29 2,500,837 (*) (*) (*) 1,339,039 1,339,039 1,862,469 5,796,012 5,796,012 8,061,673 30 2,625,879 (*) (*) (*) 1,367,727 1,367,727 1,869,136 6,258,808 6,258,808 8,553,287
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY $10.00 ADMINISTRATIVE EXPENSE CHARGE ALL THE TIME. GUARANTEED VALUES REFLECT A PREMIUM CHARGE OF 9% OF PREMIUM FOR THE FIRST 7 YEARS AND 5.5% OF PREMIUM FROM EIGHTH YEAR AND ON. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 40 44 $100,000 ANNUAL PREMIUM FOR FIRST 7 YEARS $1,703,050 SPECIFIED AMOUNT CASH VALUE ACCUMULATION TEST UNISEX: REGULAR ISSUE/NONTOBACCO PREFERRED, AGE 45 DEATH BENEFIT OPTION 2 CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN Premiums Paid Plus Cash Cash Cash Policy Interest Cash Surrender Death Cash Surrender Death Cash Surrender Death Year at 5% Value Value Benefit Value Value Benefit Value Value Benefit 1 105,000 87,587 89,730 1,790,637 93,000 95,143 1,796,050 98,415 100,558 1,801,465 2 215,250 173,348 175,491 1,876,398 189,626 191,769 1,892,676 206,555 208,698 1,909,605 3 331,013 257,648 257,648 1,960,698 290,389 290,389 1,993,439 325,795 325,795 2,028,845 4 452,563 340,430 340,430 2,043,480 395,392 395,392 2,098,442 457,208 457,208 2,160,258 5 580,191 422,441 422,441 2,125,491 505,707 505,707 2,208,757 603,133 603,133 2,306,183 6 714,201 502,957 502,957 2,206,007 620,742 620,742 2,323,792 764,156 764,156 2,467,206 7 854,911 582,021 582,021 2,285,071 740,741 740,741 2,443,791 941,909 941,909 2,644,959 8 897,656 568,009 568,009 2,271,059 768,746 768,746 2,471,796 1,035,437 1,035,437 2,738,487 9 942,539 553,650 553,650 2,256,700 797,516 797,516 2,500,566 1,138,373 1,138,373 2,841,423 10 989,666 538,882 538,882 2,241,932 827,019 827,019 2,530,069 1,251,650 1,251,650 2,954,700 11 1,039,150 523,701 523,701 2,226,751 857,281 857,281 2,560,331 1,376,362 1,376,362 3,079,412 12 1,091,107 508,057 508,057 2,211,107 888,277 888,277 2,591,327 1,513,665 1,513,665 3,216,715 13 1,145,662 491,938 491,938 2,194,988 920,027 920,027 2,623,077 1,664,887 1,664,887 3,367,937 14 1,202,945 475,298 475,298 2,178,348 952,509 952,509 2,655,559 1,831,439 1,831,439 3,568,376 15 1,263,093 457,889 457,889 2,160,939 985,495 985,495 2,688,545 2,014,515 2,014,515 3,824,154 16 1,326,247 439,600 439,600 2,142,650 1,018,886 1,018,886 2,721,936 2,215,474 2,215,474 4,099,292 17 1,392,560 420,303 420,303 2,123,353 1,052,554 1,052,554 2,755,604 2,435,861 2,435,861 4,394,780 18 1,462,188 399,807 399,807 2,102,857 1,086,303 1,086,303 2,789,353 2,677,377 2,677,377 4,712,452 19 1,535,297 377,915 377,915 2,080,965 1,119,918 1,119,918 2,822,968 2,941,868 2,941,868 5,054,423 20 1,612,062 354,459 354,459 2,057,509 1,153,198 1,153,198 2,856,248 3,231,375 3,231,375 5,421,925 21 1,692,665 331,815 331,815 2,034,865 1,189,821 1,189,821 2,892,871 3,556,134 3,556,134 5,830,993 22 1,777,298 309,431 309,431 2,012,481 1,228,216 1,228,216 2,931,266 3,915,097 3,915,097 6,277,075 23 1,866,163 285,878 285,878 1,988,928 1,266,997 1,266,997 2,970,047 4,309,873 4,309,873 6,760,466 24 1,959,471 260,563 260,563 1,963,613 1,305,557 1,305,557 3,008,607 4,743,268 4,743,268 7,282,813 25 2,057,445 233,317 233,317 1,936,367 1,343,688 1,343,688 3,046,738 5,218,954 5,218,954 7,847,220 26 2,160,317 203,933 203,933 1,906,983 1,381,135 1,381,135 3,084,185 5,740,903 5,740,903 8,458,073 27 2,268,333 172,244 172,244 1,875,294 1,417,665 1,417,665 3,120,715 6,313,561 6,313,561 9,118,676 28 2,381,750 138,026 138,026 1,841,076 1,452,977 1,452,977 3,156,027 6,941,693 6,941,693 9,835,685 29 2,500,837 101,002 101,002 1,804,052 1,486,695 1,486,695 3,189,745 7,630,457 7,630,457 10,613,203 30 2,625,879 60,857 60,857 1,763,907 1,518,384 1,518,384 3,221,434 8,385,385 8,385,385 11,459,468
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY $5.00 ADMINISTRATIVE EXPENSE CHARGE ALL THE TIME. CURRENT VALUES REFLECT A PREMIUM CHARGE OF 9% OF TARGET PREMIUM AND 6.5% OF EX- CESS-OF-TARGET PREMIUM FOR THE FIRST 7 YEARS AND 3.5% OF ALL PREMIUM FROM EIGHTH YEAR AND ON. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 41 45 $100,000 ANNUAL PREMIUM FOR FIRST 7 YEARS $1,703,050 SPECIFIED AMOUNT CASH VALUE ACCUMULATION TEST UNISEX: NONTOBACCO, AGE 45 DEATH BENEFIT OPTION 2 GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PREMIUMS PAID PLUS CASH CASH CASH POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 105,000 83,557 85,700 1,786,607 88,787 90,930 1,791,837 94,020 96,163 1,797,070 2 215,250 165,271 167,414 1,868,321 180,921 183,063 1,883,971 197,201 199,344 1,900,251 3 331,013 245,138 245,138 1,948,188 276,510 276,510 1,979,560 310,447 310,447 2,013,497 4 452,563 323,137 323,137 2,026,187 375,652 375,652 2,078,702 434,740 434,740 2,137,790 5 580,191 399,247 399,247 2,102,297 478,447 478,447 2,181,497 571,159 571,159 2,274,209 6 714,201 473,415 473,415 2,176,465 584,965 584,965 2,288,015 720,863 720,863 2,423,913 7 854,911 545,570 545,570 2,248,620 695,263 695,263 2,398,313 885,107 885,107 2,588,157 8 897,656 526,118 526,118 2,229,168 714,448 714,448 2,417,498 964,905 964,905 2,667,955 9 942,539 505,932 505,932 2,208,982 733,374 733,374 2,436,424 1,051,785 1,051,785 2,754,835 10 989,666 484,904 484,904 2,187,954 751,909 751,909 2,454,959 1,146,349 1,146,349 2,849,399 11 1,039,150 462,912 462,912 2,165,962 769,892 769,892 2,472,942 1,249,240 1,249,240 2,952,290 12 1,091,107 439,851 439,851 2,142,901 787,177 787,177 2,490,227 1,361,187 1,361,187 3,064,237 13 1,145,662 415,652 415,652 2,118,702 803,645 803,645 2,506,695 1,483,028 1,483,028 3,186,078 14 1,202,945 390,163 390,163 2,093,213 819,081 819,081 2,522,131 1,615,599 1,615,599 3,318,649 15 1,263,093 363,198 363,198 2,066,248 833,230 833,230 2,536,280 1,759,783 1,759,783 3,462,833 16 1,326,247 334,557 334,557 2,037,607 845,804 845,804 2,548,854 1,916,534 1,916,534 3,619,584 17 1,392,560 304,026 304,026 2,007,076 856,484 856,484 2,559,534 2,086,887 2,086,887 3,789,937 18 1,462,188 271,273 271,273 1,974,323 864,816 864,816 2,567,866 2,271,839 2,271,839 3,998,663 19 1,535,297 235,970 235,970 1,939,020 870,321 870,321 2,573,371 2,472,261 2,472,261 4,247,592 20 1,612,062 197,810 197,810 1,900,860 872,516 872,516 2,575,566 2,689,005 2,689,005 4,511,881 21 1,692,665 156,505 156,505 1,859,555 870,914 870,914 2,573,964 2,922,935 2,922,935 4,792,736 22 1,777,298 111,789 111,789 1,814,839 865,022 865,022 2,568,072 3,175,182 3,175,182 5,090,769 23 1,866,163 63,414 63,414 1,766,464 854,341 854,341 2,557,391 3,447,084 3,447,084 5,407,096 24 1,959,471 11,048 11,048 1,714,098 838,260 838,260 2,541,310 3,740,017 3,740,017 5,742,422 25 2,057,445 (*) (*) (*) 815,993 815,993 2,519,043 4,055,327 4,055,327 6,097,589 26 2,160,317 (*) (*) (*) 786,536 786,536 2,489,586 4,394,251 4,394,251 6,474,050 27 2,268,333 (*) (*) (*) 748,671 748,671 2,451,721 4,757,963 4,757,963 6,871,926 28 2,381,750 (*) (*) (*) 700,900 700,900 2,403,950 5,147,401 5,147,401 7,293,353 29 2,500,837 (*) (*) (*) 641,662 641,662 2,344,712 5,563,620 5,563,620 7,738,439 30 2,625,879 (*) (*) (*) 569,479 569,479 2,272,529 6,007,855 6,007,855 8,210,335
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY $10.00 ADMINISTRATIVE EXPENSE CHARGE ALL THE TIME. GUARANTEED VALUES REFLECT A PREMIUM CHARGE OF 9% OF PREMIUM FOR THE FIRST 7 YEARS AND 5.5% OF PREMIUM FROM EIGHTH YEAR AND ON. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 42 46 $38,872.05 ANNUAL PREMIUM FOR 20 YEARS $1,703,050 SPECIFIED AMOUNT GUIDELINE PREMIUM AND CORRIDOR TEST UNISEX: GUARANTEED ISSUE/NONTOBACCO, AGE 45 DEATH BENEFIT OPTION 1 CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PREMIUMS PAID PLUS CASH CASH CASH POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 40,816 31,065 31,374 1,703,050 33,063 33,372 1,703,050 35,063 35,372 1,703,050 2 83,672 60,300 60,609 1,703,050 66,205 66,514 1,703,050 72,355 72,663 1,703,050 3 128,671 87,990 87,990 1,703,050 99,708 99,708 1,703,050 112,409 112,409 1,703,050 4 175,921 114,855 114,855 1,703,050 134,318 134,318 1,703,050 156,280 156,280 1,703,050 5 225,532 141,515 141,515 1,703,050 170,769 170,769 1,703,050 205,142 205,142 1,703,050 6 277,625 167,891 167,891 1,703,050 209,040 209,040 1,703,050 259,399 259,399 1,703,050 7 332,321 193,822 193,822 1,703,050 249,065 249,065 1,703,050 319,495 319,495 1,703,050 8 389,753 220,728 220,728 1,703,050 292,471 292,471 1,703,050 387,752 387,752 1,703,050 9 450,056 246,871 246,871 1,703,050 337,607 337,607 1,703,050 463,166 463,166 1,703,050 10 513,375 272,461 272,461 1,703,050 384,776 384,776 1,703,050 546,767 546,767 1,703,050 11 579,859 297,401 297,401 1,703,050 434,002 434,002 1,703,050 639,430 639,430 1,703,050 12 649,668 321,318 321,318 1,703,050 485,066 485,066 1,703,050 741,944 741,944 1,703,050 13 722,967 344,184 344,184 1,703,050 538,075 538,075 1,703,050 855,521 855,521 1,703,050 14 799,931 365,931 365,931 1,703,050 593,117 593,117 1,703,050 981,530 981,530 1,703,050 15 880,743 386,483 386,483 1,703,050 650,293 650,293 1,703,050 1,121,547 1,121,547 1,703,050 16 965,596 405,708 405,708 1,703,050 709,684 709,684 1,703,050 1,277,385 1,277,385 1,703,050 17 1,054,691 423,596 423,596 1,703,050 771,496 771,496 1,703,050 1,450,526 1,450,526 1,856,673 18 1,148,242 439,981 439,981 1,703,050 835,849 835,849 1,703,050 1,641,423 1,641,423 2,068,193 19 1,246,469 454,691 454,691 1,703,050 902,907 902,907 1,703,050 1,851,857 1,851,857 2,296,303 20 1,349,608 467,579 467,579 1,703,050 972,901 972,901 1,703,050 2,083,849 2,083,849 2,542,296 21 1,417,089 443,589 443,589 1,703,050 1,008,939 1,008,939 1,703,050 2,302,456 2,302,456 2,762,947 22 1,487,943 419,516 419,516 1,703,050 1,047,290 1,047,290 1,703,050 2,544,383 2,544,383 3,027,816 23 1,562,341 395,360 395,360 1,703,050 1,088,104 1,088,104 1,703,050 2,812,159 2,812,159 3,318,348 24 1,640,458 371,121 371,121 1,703,050 1,131,538 1,131,538 1,703,050 3,108,589 3,108,589 3,637,049 25 1,722,480 346,116 346,116 1,703,050 1,177,473 1,177,473 1,703,050 3,436,508 3,436,508 3,986,349 26 1,808,604 318,911 318,911 1,703,050 1,225,583 1,225,583 1,703,050 3,798,740 3,798,740 4,368,551 27 1,899,035 289,234 289,234 1,703,050 1,276,107 1,276,107 1,703,050 4,199,685 4,199,685 4,745,645 28 1,993,986 256,754 256,754 1,703,050 1,329,318 1,329,318 1,703,050 4,643,768 4,643,768 5,154,582 29 2,093,686 221,055 221,055 1,703,050 1,385,539 1,385,539 1,703,050 5,135,998 5,135,998 5,598,238 30 2,198,370 181,622 181,622 1,703,050 1,445,151 1,445,151 1,703,050 5,682,084 5,682,084 6,079,830
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY $5.00 ADMINISTRATIVE EXPENSE CHARGE ALL THE TIME. CURRENT VALUES REFLECT A PREMIUM CHARGE OF 9% OF TARGET PREMIUM AND 6.5% OF EX- CESS-OF-TARGET PREMIUM FOR THE FIRST 7 YEARS AND 3.5% OF ALL PREMIUM FROM EIGHTH YEAR AND ON. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 43 47 $38,872.05 ANNUAL PREMIUM FOR 20 YEARS $1,703,050 SPECIFIED AMOUNT GUIDELINE PREMIUM AND CORRIDOR TEST UNISEX: NONTOBACCO, AGE 45 DEATH BENEFIT OPTION 1 GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PREMIUMS PAID PLUS CASH CASH CASH POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 40,816 28,953 29,262 1,703,050 30,875 31,184 1,703,050 32,800 33,109 1,703,050 2 83,672 57,073 57,382 1,703,050 62,724 63,033 1,703,050 68,613 68,921 1,703,050 3 128,671 84,353 84,353 1,703,050 95,578 95,578 1,703,050 107,746 107,746 1,703,050 4 175,921 110,772 110,772 1,703,050 129,455 129,455 1,703,050 150,531 150,531 1,703,050 5 225,532 136,312 136,312 1,703,050 164,381 164,381 1,703,050 197,344 197,344 1,703,050 6 277,625 160,923 160,923 1,703,050 200,353 200,353 1,703,050 248,576 248,576 1,703,050 7 332,321 184,546 184,546 1,703,050 237,363 237,363 1,703,050 304,661 304,661 1,703,050 8 389,753 208,457 208,457 1,703,050 276,821 276,821 1,703,050 367,594 367,594 1,703,050 9 450,056 231,213 231,213 1,703,050 317,349 317,349 1,703,050 436,577 436,577 1,703,050 10 513,375 252,752 252,752 1,703,050 358,956 358,956 1,703,050 512,278 512,278 1,703,050 11 579,859 273,002 273,002 1,703,050 401,647 401,647 1,703,050 595,456 595,456 1,703,050 12 649,668 291,904 291,904 1,703,050 445,454 445,454 1,703,050 687,005 687,005 1,703,050 13 722,967 309,430 309,430 1,703,050 490,449 490,449 1,703,050 787,984 787,984 1,703,050 14 799,931 325,482 325,482 1,703,050 536,655 536,655 1,703,050 899,565 899,565 1,703,050 15 880,743 339,936 339,936 1,703,050 584,092 584,092 1,703,050 1,023,110 1,023,110 1,703,050 16 965,596 352,654 352,654 1,703,050 632,791 632,791 1,703,050 1,160,217 1,160,217 1,703,050 17 1,054,691 363,484 363,484 1,703,050 682,799 682,799 1,703,050 1,312,778 1,312,778 1,703,050 18 1,148,242 372,177 372,177 1,703,050 734,119 734,119 1,703,050 1,481,780 1,481,780 1,867,043 19 1,246,469 378,481 378,481 1,703,050 786,796 786,796 1,703,050 1,667,181 1,667,181 2,067,304 20 1,349,608 382,144 382,144 1,703,050 840,927 840,927 1,703,050 1,870,592 1,870,592 2,282,123 21 1,417,089 345,962 345,962 1,703,050 857,475 857,475 1,703,050 2,053,501 2,053,501 2,464,201 22 1,487,943 306,230 306,230 1,703,050 873,030 873,030 1,703,050 2,253,775 2,253,775 2,681,993 23 1,562,341 262,469 262,469 1,703,050 887,447 887,447 1,703,050 2,473,052 2,473,052 2,918,201 24 1,640,458 214,065 214,065 1,703,050 900,528 900,528 1,703,050 2,713,114 2,713,114 3,174,343 25 1,722,480 160,197 160,197 1,703,050 911,986 911,986 1,703,050 2,975,894 2,975,894 3,452,036 26 1,808,604 99,762 99,762 1,703,050 921,424 921,424 1,703,050 3,263,480 3,263,480 3,753,002 27 1,899,035 31,330 31,330 1,703,050 928,322 928,322 1,703,050 3,579,619 3,579,619 4,044,969 28 1,993,986 (*) (*) (*) 931,993 931,993 1,703,050 3,927,578 3,927,578 4,359,611 29 2,093,686 (*) (*) (*) 931,653 931,653 1,703,050 4,311,237 4,311,237 4,699,248 30 2,198,370 (*) (*) (*) 926,448 926,448 1,703,050 4,735,269 4,735,269 5,066,738
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY $10.00 ADMINISTRATIVE EXPENSE CHARGE ALL THE TIME. GUARANTEED VALUES REFLECT A PREMIUM CHARGE OF 9% OF PREMIUM FOR THE FIRST 7 YEARS AND 5.5% OF PREMIUM FROM EIGHTH YEAR AND ON. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 44 48 $38,872.05 ANNUAL PREMIUM FOR 20 YEARS $1,703,050 SPECIFIED AMOUNT GUIDELINE PREMIUM AND CORRIDOR TEST UNISEX: GUARANTEED ISSUE/NONTOBACCO, AGE 45 DEATH BENEFIT OPTION 2 CURRENT VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PREMIUMS PAID PLUS CASH CASH CASH POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 40,816 30,986 31,295 1,734,036 32,978 33,287 1,736,028 34,973 35,282 1,738,023 2 83,672 60,014 60,323 1,763,064 65,889 66,198 1,768,939 72,008 72,317 1,775,058 3 128,671 87,338 87,338 1,790,388 98,961 98,961 1,802,011 111,557 111,557 1,814,607 4 175,921 113,695 113,695 1,816,745 132,934 132,934 1,835,984 154,641 154,641 1,857,691 5 225,532 139,716 139,716 1,842,766 168,533 168,533 1,871,583 202,386 202,386 1,905,436 6 277,625 165,335 165,335 1,868,385 205,733 205,733 1,908,783 255,154 255,154 1,958,204 7 332,321 190,373 190,373 1,893,423 244,418 244,418 1,947,468 313,281 313,281 2,016,331 8 389,753 216,165 216,165 1,919,215 286,080 286,080 1,989,130 378,860 378,860 2,081,910 9 450,056 240,978 240,978 1,944,028 329,026 329,026 2,032,076 450,742 450,742 2,153,792 10 513,375 265,043 265,043 1,968,093 373,543 373,543 2,076,593 529,834 529,834 2,232,884 11 579,859 288,231 288,231 1,991,281 419,562 419,562 2,122,612 616,757 616,757 2,319,807 12 649,668 310,068 310,068 2,013,118 466,650 466,650 2,169,700 711,828 711,828 2,414,878 13 722,967 330,488 330,488 2,033,538 514,774 514,774 2,217,824 815,829 815,829 2,518,879 14 799,931 349,381 349,381 2,052,431 563,846 563,846 2,266,896 929,572 929,572 2,632,622 15 880,743 366,614 366,614 2,069,664 613,756 613,756 2,316,806 1,053,936 1,053,936 2,756,986 16 965,596 381,985 381,985 2,085,035 664,310 664,310 2,367,360 1,189,813 1,189,813 2,892,863 17 1,054,691 395,450 395,450 2,098,500 715,471 715,471 2,418,521 1,338,361 1,338,361 3,041,411 18 1,148,242 406,756 406,756 2,109,806 766,977 766,977 2,470,027 1,500,632 1,500,632 3,203,682 19 1,246,469 415,641 415,641 2,118,691 818,548 818,548 2,521,598 1,677,783 1,677,783 3,380,833 20 1,349,608 421,878 421,878 2,124,928 869,918 869,918 2,572,968 1,871,123 1,871,123 3,574,173 21 1,417,089 391,612 391,612 2,094,662 885,762 885,762 2,588,812 2,046,617 2,046,617 3,749,667 22 1,487,943 361,693 361,693 2,064,743 902,373 902,373 2,605,423 2,241,108 2,241,108 3,944,158 23 1,562,341 332,117 332,117 2,035,167 919,787 919,787 2,622,837 2,456,653 2,456,653 4,159,703 24 1,640,458 302,881 302,881 2,005,931 938,044 938,044 2,641,094 2,695,531 2,695,531 4,398,581 25 1,722,480 273,121 273,121 1,976,171 956,298 956,298 2,659,348 2,959,354 2,959,354 4,662,404 26 1,808,604 241,108 241,108 1,944,158 972,756 972,756 2,675,806 3,248,976 3,248,976 4,952,026 27 1,899,035 206,654 206,654 1,909,704 987,111 987,111 2,690,161 3,566,960 3,566,960 5,270,010 28 1,993,986 169,532 169,532 1,872,582 998,999 998,999 2,702,049 3,916,109 3,916,109 5,619,159 29 2,093,686 129,462 129,462 1,832,512 1,007,977 1,007,977 2,711,027 4,299,461 4,299,461 6,002,511 30 2,198,370 86,095 86,095 1,789,145 1,013,512 1,013,512 2,716,562 4,720,314 4,720,314 6,423,364
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY $5.00 ADMINISTRATIVE EXPENSE CHARGE ALL THE TIME. CURRENT VALUES REFLECT A PREMIUM CHARGE OF 9% OF TARGET PREMIUM AND 6.5% OF EX- CESS-OF-TARGET PREMIUM FOR THE FIRST 7 YEARS AND 3.5% OF ALL PREMIUM FROM EIGHTH YEAR AND ON. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 45 49 $38,872.05 ANNUAL PREMIUM FOR 20 YEARS $1,703,050 SPECIFIED AMOUNT GUIDELINE PREMIUM AND CORRIDOR TEST UNISEX: NONTOBACCO, AGE 45 DEATH BENEFIT OPTION 2 GUARANTEED VALUES
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PREMIUMS PAID PLUS CASH CASH CASH POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 40,816 28,842 29,151 1,731,892 30,757 31,066 1,733,807 32,676 32,984 1,735,726 2 83,672 56,738 57,047 1,759,788 62,354 62,663 1,765,404 68,206 68,514 1,771,256 3 128,671 83,669 83,669 1,786,719 94,791 94,791 1,797,841 106,847 106,847 1,809,897 4 175,921 109,598 109,598 1,812,648 128,052 128,052 1,831,102 148,865 148,865 1,851,915 5 225,532 134,493 134,493 1,837,543 162,121 162,121 1,865,171 194,554 194,554 1,897,604 6 277,625 158,285 158,285 1,861,335 196,943 196,943 1,899,993 244,199 244,199 1,947,249 7 332,321 180,889 180,889 1,883,939 232,447 232,447 1,935,497 298,099 298,099 2,001,149 8 389,753 203,545 203,545 1,906,595 269,957 269,957 1,973,007 358,065 358,065 2,061,115 9 450,056 224,777 224,777 1,927,827 308,002 308,002 2,011,052 423,074 423,074 2,126,124 10 513,375 244,489 244,489 1,947,539 346,480 346,480 2,049,530 493,519 493,519 2,196,569 11 579,859 262,569 262,569 1,965,619 385,268 385,268 2,088,318 569,812 569,812 2,272,862 12 649,668 278,923 278,923 1,981,973 424,257 424,257 2,127,307 652,426 652,426 2,355,476 13 722,967 293,494 293,494 1,996,544 463,366 463,366 2,166,416 741,920 741,920 2,444,970 14 799,931 306,138 306,138 2,009,188 502,423 502,423 2,205,473 838,817 838,817 2,541,867 15 880,743 316,682 316,682 2,019,732 541,212 541,212 2,244,262 943,661 943,661 2,646,711 16 965,596 324,936 324,936 2,027,986 579,491 579,491 2,282,541 1,057,028 1,057,028 2,760,078 17 1,054,691 330,695 330,695 2,033,745 616,987 616,987 2,320,037 1,179,537 1,179,537 2,882,587 18 1,148,242 333,637 333,637 2,036,687 653,292 653,292 2,356,342 1,311,742 1,311,742 3,014,792 19 1,246,469 333,444 333,444 2,036,494 687,980 687,980 2,391,030 1,454,253 1,454,253 3,157,303 20 1,349,608 329,819 329,819 2,032,869 720,618 720,618 2,423,668 1,607,756 1,607,756 3,310,806 21 1,417,089 286,351 286,351 1,989,401 712,454 712,454 2,415,504 1,732,516 1,732,516 3,435,566 22 1,487,943 239,507 239,507 1,942,557 699,715 699,715 2,402,765 1,865,750 1,865,750 3,568,800 23 1,562,341 189,039 189,039 1,892,089 681,893 681,893 2,384,943 2,008,006 2,008,006 3,711,056 24 1,640,458 134,614 134,614 1,837,664 658,361 658,361 2,361,411 2,159,793 2,159,793 3,862,843 25 1,722,480 75,763 75,763 1,778,813 628,322 628,322 2,331,372 2,321,523 2,321,523 4,024,573 26 1,808,604 11,844 11,844 1,714,894 590,757 590,757 2,293,807 2,493,459 2,493,459 4,196,509 27 1,899,035 (*) (*) (*) 544,434 544,434 2,247,484 2,675,713 2,675,713 4,378,763 28 1,993,986 (*) (*) (*) 487,839 487,839 2,190,889 2,868,176 2,868,176 4,571,226 29 2,093,686 (*) (*) (*) 419,396 419,396 2,122,446 3,070,731 3,070,731 4,773,781 30 2,198,370 (*) (*) (*) 337,611 337,611 2,040,661 3,283,401 3,283,401 4,986,451
(1) NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY $10.00 ADMINISTRATIVE EXPENSE CHARGE ALL THE TIME. GUARANTEED VALUES REFLECT A PREMIUM CHARGE OF 9% OF PREMIUM FOR THE FIRST 7 YEARS AND 5.5% OF PREMIUM FROM EIGHTH YEAR AND ON. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN BE MADE BY THE COMPANY OR THE TRUST THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 46 50 APPENDIX B PARTICIPATING UNDERLYING MUTUAL FUNDS The Company may limit the number of Underlying Mutual Funds available to corporate purchasers and employers. A summary of investment objectives is contained in the descriptions of each Underlying Mutual Fund below. More detailed information may be found in the current prospectus for each Underlying Mutual Fund. Such a prospectus for the Underlying Mutual Fund(s) being considered should accompany this prospectus and should be read in conjunction herewith. A copy of each prospectus may be obtained without charge from Nationwide Life and Annuity Insurance Company, P.O. Box 182150, Columbus, Ohio, 43218-2150, 1-800-547-7548 (TDD 1-800-238-3035). THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. The Dreyfus Socially Responsible Growth Fund, Inc. is an open-end, diversified, management investment company incorporated under Maryland law on July 20, 1992 and commenced operations on October 7, 1993. The Fund offers its share only as investment vehicles for variable annuity and variable life insurance products of insurance companies. The Dreyfus Corporation serves as the Fund's investment adviser. NCM Capital Management Group, Inc. serves as the Fund's sub-investment adviser and provides day-to-day management of the Fund's portfolio. Investment Objective: Capital growth through equity investment in companies that, in the opinion of the Fund's advisers, not only meet traditional investment standards, but which also show evidence that they conduct their business in a manner that contributes to the enhancement of the quality of life in America. Current income is secondary to the primary goal. DREYFUS STOCK INDEX FUND, INC. The Dreyfus Stock Index Fund, Inc. ("Fund") is an open-end, non-diversified, management investment company incorporated under Maryland law on January 24, 1989 and commenced operations on September 29, 1989. The Fund offers its shares only as investment vehicles for variable annuity and variable life insurance products of insurance companies. The Dreyfus Corporation ("Dreyfus") serves as the Fund's manager, while Mellon Equity Associates, an affiliate of Dreyfus, serves as the Fund's index manager. Dreyfus is a wholly-owned subsidiary of Mellon Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank Corporation. Investment Objective: To provide investment results that correspond to the price and yield performance of publicly traded common stocks in the aggregate, as represented by the Standard & Poor's 500 Composite Stock Price Index. The Fund is neither sponsored by nor affiliated with Standard & Poor's Corporation. DREYFUS VARIABLE INVESTMENT FUND Dreyfus Variable Investment Fund ("Fund") is an open-end, management investment company. It was organized as an unincorporated business trust under the laws of the Commonwealth of Massachusetts on October 29, 1986 and commenced operations on August 31, 1990. The Fund offers its shares only as investment vehicles for variable annuity and variable life insurance products of insurance companies. The Dreyfus Corporation ("Dreyfus") serves as the Fund's manager. -CAPITAL APPRECIATION PORTFOLIO Investment Objective: The Portfolio's primary investment objective is to provide long-term capital growth consistent with the preservation of capital; current income is a secondary investment objective. This Portfolio invests primarily in the common stocks of domestic and foreign issuers. -DISCIPLINED STOCK PORTFOLIO Investment Objective: The Portfolio's investment objective is to provide investment results that are greater than the total return performance of publicly-traded common stocks in the aggregate, as 47 51 represented by the Standard & Poor's 500 Composite Stock Price Index. This Series will use quantitative statistical modeling techniques to construct a portfolio in an attempt to achieve its investment objective, without assuming undue risk relative to the broad stock market. -INTERNATIONAL VALUE PORTFOLIO Investment Objective: The Portfolio's investment objective is long-term capital growth. This Series invests primarily in a portfolio of publicly-traded equity securities of foreign issuers which would be characterized as "value" companies according to criteria established by Dreyfus. -LIMITED TERM HIGH INCOME PORTFOLIO Investment Objective: The Portfolio's investment objective is to maximize total return, consisting of capital appreciation and current income. This Series seeks to achieve its objective by investing up to all of its assets in a portfolio of lower rated fixed-income securities that, under normal market conditions, have an effective duration of three and one-half years or less and an effective average portfolio maturity of four years or less. INVESTMENTS IN LOWER RATED FIXED-INCOME SECURITIES ARE SUBJECT TO A GREATER RISK OF LOSS OF PRINCIPAL AND NON-PAYMENT OF INTEREST. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE SERIES. -QUALITY BOND PORTFOLIO Investment Objective: The Portfolio's investment objective is to provide the maximum amount of current income to the extent consistent with the preservation of capital and the maintenance of liquidity. This Series invests principally in debt obligations of corporations, the U.S. Government and its agencies and instrumentalities, and U.S. major banking institutions. -SMALL COMPANY STOCK PORTFOLIO Investment Objective: The Portfolio's investment objective is to provide investment results that are greater than the total return performance of publicly-traded common stocks in the aggregate, as represented by the Russell 2500tradement Index. This Series invests primarily in a portfolio of equity securities of small- to medium-sized domestic issuers, while attempting to maintain volatility and diversification similar to that of the Russell 2500trademark Index. 48 52 MORGAN STANLEY UNIVERSAL FUNDS, INC. Morgan Stanley Universal Funds, Inc. is a mutual fund designed to provide investment vehicles for variable annuity contracts and variable life insurance policies and for certain tax-qualified investors. Its Emerging Markets Debt Portfolio is managed by Morgan Stanley Asset Management, Inc. -EMERGING MARKETS DEBT PORTFOLIO Investment Objective: High total return by investing primarily in dollar and non-dollar denominated fixed income securities of government and government-related issuers located in emerging market 50 53 countries, which securities provide a high level of current income, while at the same time holding the potential for capital appreciation if the perceived creditworthiness of the issuer improves due to improving economic, financial, political, social or other conditions in the country in which the issuer is located. 51 54 NATIONWIDE SEPARATE ACCOUNT TRUST Nationwide Separate Account Trust ("NSAT") is a diversified open-end management investment company created under the laws of Massachusetts. NSAT offers shares in the funds listed below, each with its own investment objectives. Shares of NSAT will be sold primarily to life insurance company separate accounts to fund the benefits under variable life insurance policies and variable annuity contracts issued by life insurance companies. The assets of NSAT are managed by Nationwide Advisory Services, Inc. ("NAS"), a wholly-owned subsidiary of Nationwide Life Insurance Company. -CAPITAL APPRECIATION FUND Investment Objective: Long-term growth by primarily investing in a diversified portfolio of the common stock of companies which the NAS determines have a better-than-average potential for sustained capital growth over the long term. -GOVERNMENT BOND FUND Investment Objective: As high a level of income as is consistent with the preservation of capital by investing in a diversified portfolio of securities issued or backed by the U.S. Government, its agencies or instrumentalities. -MONEY MARKET FUND Investment Objective: As high a level of current income as is considered consistent with the preservation of capital and liquidity by investing primarily in money market instruments. -TOTAL RETURN FUND Investment Objective: Capital growth by investing in common stocks of companies that NAS believes will have above-average earnings or otherwise provide investors with above-average potential for capital appreciation. To maximize this potential, NAS may also utilize from time to time, securities convertible into common stock, warrants and options to purchase such stocks. 52 55 SUBADVISED NSAT FUNDS -NATIONWIDE BALANCED FUND Subadviser: Salomon Brothers Asset Management, Inc. Investment Objective: Primarily seeks above-average income compared to a portfolio entirely invested in equity securities. The Fund's secondary objective is to take advantage of opportunities for growth of capital and income. The Fund seeks its objective primarily through investments in a broad variety of securities, including equity securities, fixed-income securities and short term obligations. Under normal market conditions, it is anticipated that the Fund will invest at least 40% of the Fund's total assets in equity securities and at least 25% in fixed-income senior securities. The Fund's subadviser, Salomon Brothers Asset Management, Inc., will have discretion to invest in the full range of maturities of fixed-income securities. Generally, most of the Fund's long-term debt investments will consist of "investment grade" securities, but the Fund may invest up to 20% of its net assets in non-convertible fixed-income securities rated below investment grade or determined by the subadviser to be of comparable quality. These securities are commonly known as junk bonds. In addition, the Fund may invest an unlimited amount in convertible securities rated below investment grade. -NATIONWIDE EQUITY INCOME FUND Subadviser: Federated Investment Counseling Investment Objective: Seeks above average income and capital appreciation by investing at least 65% of its assets in income-producing equity securities. Such equity securities include common stocks, preferred stocks, and securities (including debt securities) that are convertible into common stocks. The portion of the Fund's total assets invested in each type of equity security will vary according to the Fund's subadviser's assessment of market, economic conditions and outlook. -NATIONWIDE GLOBAL EQUITY FUND Subadviser: J. P. Morgan Investment Management Inc. Investment Objective: To provide high total return from a globally diversified portfolio of equity securities. Total return will consist of income plus realized and unrealized capital gains and losses. The Fund seeks its investment objective through country allocation, stock selection and management of currency exposure. Under normal market conditions, J.P. Morgan Investment Management Inc., intends to keep the Fund essentially fully invested with at least 65% of the value of its total assets in equity securities consisting of common stocks and other securities with equity characteristics such as preferred stocks, warrants, rights, convertible securities, trust certificates, limited partnership interests and equity participations. The Fund's primary equity instruments are the common stock of companies based in the developed countries around the world. The assets of the Fund will ordinarily be invested in the securities of at least five different countries. -NATIONWIDE HIGH INCOME BOND FUND Subadviser: Federated Investment Counseling Investment Objective: Seeks to provide high current income by investing primarily in a professionally managed, diversified portfolio of fixed income securities. To meet its objective, the Fund intends to invest at least 65% of its assets in lower-rated fixed income securities such as preferred stocks, bonds, debentures, notes, equipment lease certificates and equipment trust certificates which are rated BBB or lower by Standard & Poor's or Fitch Investors Service or Baa or lower by Moody's (or if not rated, are determined by the Fund's subadviser to be of a comparable quality). Such investments are commonly referred to as "junk bonds." For a further discussion of lower-rated securities, please see the "High Yield Securities" section of the Fund's prospectus. 53 56 -NATIONWIDE MULTI SECTOR BOND FUND Subadviser: Salomon Brothers Asset Management, Inc. with Salomon Brothers Asset Management Limited Investment Objective: Primarily seeks a high level of current income. Capital appreciation is a secondary objective. The Fund seeks to achieve its objectives by investing in a globally diverse portfolio of fixed-income investments and by giving the subadviser, Salomon Brothers Asset Management, Inc. broad discretion to deploy the Fund's assets among certain segments of the fixed-income market that the subadviser believes will best contribute to achievement of the Fund's investment objectives. The Fund reserves the right to invest predominantly in securities rated in medium or lower categories, or as determined by the subadviser to be of comparable quality, commonly referred to as "junk bonds." Although the subadviser has the ability to invest up to 100% of the Fund's assets in lower-rated securities, the subadviser does not anticipate investing in excess of 75% of the Fund's assets in such securities. The Subadviser has entered into a subadvisory agreement with its London based affiliate, Salomon Brothers Asset Management Limited, pursuant to which the subadviser has delegated to Salomon Brothers Asset Management Limited responsibility for management of the Fund's investments in non-dollar denominated debt securities and currency transactions. -NATIONWIDE SELECT ADVISERS MID CAP FUND Subadvisers: First Pacific Advisors, Inc., Pilgrim Baxter & Associates, Ltd., and Rice, Hall, James & Associates Investment Objective: Capital appreciation by investing primarily in equity securities of medium-sized companies (market capitalization between $500 million and $7 billion). Under normal market conditions, the Fund will invest in equity securities consisting of common stock, preferred stock and securities convertible into common stocks, including convertible preferred stock and convertible bonds. NAS has chosen the Fund's subadvisers because they utilize a number of different investment styles. In utilizing these different styles, NAS hopes to increase prospects for investment return and to reduce market risk and volatility. -NATIONWIDE SMALL CAP VALUE FUND Subadviser: The Dreyfus Corporation Investment Objective: Capital appreciation through investment in a diversified portfolio of equity securities of companies with a median market capitalization of approximately $1 billion. Under normal market conditions, at least 75% of the Fund's total assets will be invested in equity securities of companies with market capitalizations at the time of purchase of between $200 million and $2.5 billion. The Fund will invest in equity securities of domestic and foreign issuers characterized as "value" companies according to criteria established by The Dreyfus Corporation, the Fund's subadviser. -NATIONWIDE SMALL COMPANY FUND Subadvisers: The Dreyfus Corporation, Neuberger & Berman, L.P., Lazard Asset Management, Strong Capital Management, Inc. and Warburg Pincus Asset Management, Inc. Investment Objective: Long-term growth of capital by investing primarily in equity securities of domestic and foreign companies with market capitalizations of less than $1 billion at the time of purchase. The subadvisers were chosen because they utilize a number of different investment styles when investing in small company stocks. By utilizing different investment styles, NAS hopes to increase prospects for investment return and to reduce market risk and volatility. 54 57 -NATIONWIDE STRATEGIC GROWTH FUND Subadviser: Strong Capital Management Inc. Investment Objective: Capital growth by investing primarily in equity securities that the Fund's subadviser believes have above-average growth prospects. The Fund will generally invest in companies whose earnings are believed to be in a relatively strong growth trend, and to a lesser extent, in companies in which significant further growth is not anticipated but whose market value is thought to be undervalued. Under normal market conditions, the Fund will invest at least 65% of its total assets in equity securities, including common stocks, preferred stocks, and securities convertible into common or preferred stocks, such as warrants and convertible bonds. The Fund may invest up to 35% of its total assets in debt obligations, including intermediate- to long-term corporate or U.S. Government debt securities. -NATIONWIDE STRATEGIC VALUE FUND Subadviser: Strong Capital Management Inc./Schafer Capital Management Inc. Investment Objective: Primarily long-term capital appreciation; current income is a secondary objective. The Fund seeks to meet its objectives by investing in securities which are believed to offer the possibility of increase in value, primarily common stocks of established companies having a strong financial position and a low stock market valuation at the time of purchase in relation to investment value. Other than considered appropriate for cash reserves, the Fund will generally maintain a fully invested position in common stocks of publicly held companies, primarily in stocks of companies listed on a national securities exchange or other equity securities (common stock or securities convertible into common stock). Investments may also be made in debt securities which are convertible into common stocks and in warrants or other rights to purchase common stock, which in such case are considered equity securities by the Fund. Strong Capital Management, Inc. has subcontracted with Schafer Capital Management, Inc. to subadvise the Fund. 55 58 (NATIONWIDE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Statements of Income (Unaudited) ($000's omitted)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- REVENUES Policy charges $ 8,658 $ 2,968 $ 20,649 $ 7,407 Life insurance premiums 4 173 36 337 Net investment income 2,844 2,778 8,316 8,687 Realized gains (losses) on investments -- (326) 606 (958) Other income 291 264 873 792 -------- -------- -------- -------- 11,797 5,857 30,480 16,265 -------- -------- -------- -------- BENEFITS AND EXPENSES Interest credited to policyholder account balances 1,319 1,013 3,264 2,856 Other benefits and claims 243 271 (16) 623 Amortization of deferred policy acquisition costs 1,299 1,075 3,283 3,085 Other operating expenses 2,145 3,185 7,316 6,289 -------- -------- -------- -------- 5,006 5,544 13,847 12,853 -------- -------- -------- -------- Income before federal tax expense 6,791 313 16,633 3,412 Federal tax expense 2,376 85 5,828 1,208 -------- -------- -------- -------- Net income $ 4,415 $ 228 $ 10,805 $ 2,204 ======== ======== ======== ========
See accompanying notes to unaudited financial statements. 56 59
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Balance Sheets ($000's omitted) (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1997 1998 ------------------ ------------------ ASSETS Investments: Securities available-for-sale, at fair value: Fixed maturity securities (cost $825,702 in 1998; $779,969 in 1997) $ 857,492 $ 796,919 Equity securities (cost $14,621 in 1998; $11,704 in 1997) 18,559 14,767 Mortgage loans on real estate, net 258,287 218,852 Real estate, net 2,263 2,824 Policy loans 312 215 Short-term investments 23,969 18,968 ------------------ ------------------ 1,160,882 1,052,545 ------------------ ------------------ Cash - 5,163 Accrued investment income 11,833 10,778 Deferred policy acquisition costs 42,305 30,087 Other assets 9,562 15,624 Assets held in Separate Accounts 1,250,856 891,101 ------------------ ------------------ $ 2,475,438 $ 2,005,298 ================== ================== LIABILITIES AND SHAREHOLDER'S EQUITY Future policy benefits and claims $ 1,102,369 $ 986,191 Other liabilities 7,499 29,426 Liabilities related to Separate Accounts 1,250,856 891,101 ------------------ ------------------ 2,360,724 1,906,718 ------------------ ------------------ Shareholder's equity: Common stock, $40 par value. Authorized, issued and outstanding 66,000 shares 2,640 2,640 Additional paid-in capital 52,960 52,960 Retained earnings 46,617 35,812 Accumulated other comprehensive income 12,497 7,168 ------------------ ------------------ 114,714 98,580 ------------------ ------------------ $ 2,475,438 $ 2,005,298 ================== ==================
See accompanying notes to unaudited financial statements. 57 60
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Statements of Shareholder's Equity (Unaudited) Nine Months Ended September 30, 1998 and 1997 ($000's omitted) ACCUMULATED OTHER ADDITIONAL COMPREHENSIVE TOTAL COMMON PAID-IN RETAINED INCOME SHAREHOLDER'S STOCK CAPITAL EARNINGS EQUITY ----------- -------------------------- ----------------- ---------------- 1997 BALANCE, JANUARY 1, 1997 $ 2,640 $ 52,960 $ 25,209 $ 3,228 $ 84,037 Comprehensive income: Net income - - 2,204 - 2,204 Unrealized net gains on securities available-for-sale arising during the period - - - 2,870 2,870 ---------------- Total comprehensive income 5,074 ----------- ------------- ------------ ----------------- ---------------- BALANCE, SEPTEMBER 30, 1997 $ 2,640 $ 52,960 $ 27,413 $ 6,098 $ 89,111 =========== ============= ============ ================= ================ 1998 BALANCE, JANUARY 1, 1998 $ 2,640 $ 52,960 $ 35,812 $ 7,168 $ 98,580 Comprehensive income: Net income - - 10,805 - 10,805 Unrealized net gains on securities available-for-sale arising during the period - - - 5,329 5,329 ---------------- Total comprehensive income 16,134 ----------- ------------- ------------ ----------------- ---------------- BALANCE, SEPTEMBER 30, 1998 $ 2,640 $ 52,960 $ 46,617 $ 12,497 $ 114,714 =========== ============= ============ ================= ================
See accompanying notes to unaudited financial statements. 58 61
NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 1998 and 1997 ($000's omitted) 1998 1997 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 10,805 $ 2,204 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to policyholder account balances 3,264 2,856 Capitalization of deferred policy acquisition costs (23,019) (9,067) Amortization of deferred policy acquisition costs 3,283 3,085 Amortization and depreciation (356) 1,060 Realized (gains) losses on investments, net (606) 958 Increase in accrued investment income (1,055) (2,376) Decrease in other assets 6,062 32,510 Increase in policy liabilities and funds withheld on coinsurance agreement with affiliate 89,667 190,047 Decrease in other liabilities (23,923) (8,663) Other, net (421) - --------------- --------------- Net cash provided by operating activities 63,701 212,614 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of securities available-for-sale 93,610 65,683 Proceeds from sale of securities available-for-sale 11,257 - Proceeds from maturity of securities held to maturity - - Proceeds from repayments of mortgage loans on real estate 16,608 5,003 Proceeds from sale of real estate 707 - Proceeds from repayments of policy loans and sale of other invested assets 72 55 Cost of securities available-for-sale acquired (153,602) (223,084) Cost of mortgage loans on real estate acquired (55,590) (47,162) Cost of real estate acquired (3) (11) Policy loans issued and other invested assets acquired (169) (101) Short-term investments, net (5,001) (4,012) --------------- --------------- Net cash used in investing activities (92,111) (203,629) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in investment product and universal life insurance product account balances 46,924 4,713 Decrease in investment product and universal life insurance product account balances (23,677) (9,817) --------------- --------------- Net cash provided by (used in) financing activities 23,247 (5,104) --------------- --------------- Net (decrease) increase in cash (5,163) 3,881 Cash, beginning of period 5,163 4,296 --------------- --------------- Cash, end of period $ - $ 8,177 =============== ===============
See accompanying notes to unaudited financial statements. 59 62 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Unaudited Financial Statements Nine Months Ended September 30, 1998 (1) Basis of Presentation --------------------- The accompanying unaudited financial statements of Nationwide Life and Annuity Insurance Company (the Company) have been prepared in accordance with generally accepted accounting principles, which differ from statutory accounting practices prescribed or permitted by regulatory authorities, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. The financial information included herein reflects all adjustments (all of which are normal and recurring in nature) which are, in the opinion of management, necessary for a fair presentation of financial position and results of operations. Operating results for all periods presented are not necessarily indicative of the results that may be expected for the full year. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 1997. (2) Comprehensive Income -------------------- Pursuant to the Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income", the Consolidated Statements of Shareholder's Equity include a new measure called "Comprehensive Income". Comprehensive Income includes net income as well as certain items that are reported directly within a separate component of shareholder's equity that bypass net income. Currently, the Company's only component of Other Comprehensive Income is unrealized gains (losses) on securities available-for-sale. The related before and after federal tax amounts are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED ($000's omitted) SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------------------------------------------------- ------------------------------- 1998 1997 1998 1997 --------------- --------------- --------------- --------------- Unrealized gains on securities available-for-sale arising during the period: Gross $ 13,928 $ 8,373 $ 15,296 $ 7,253 Adjustment to deferred policy acquisition (7,660) (4,641) (7,517) (3,848) costs Related federal tax expense (2,194) (1,306) (2,178) (1,192) --------------- --------------- --------------- --------------- Net 4,074 2,426 5,601 2,213 --------------- --------------- --------------- --------------- Reclassification adjustment for net (gains) losses on securities available-for-sale realized during the period: Gross - 326 (419) 1,011 Related federal tax expense (benefit) - (114) 147 (354) --------------- --------------- --------------- --------------- Net - 212 (272) 657 --------------- --------------- --------------- --------------- Total Other Comprehensive Income $ 4,074 $ 2,638 $ 5,329 $ 2,870 =============== =============== =============== ===============
60 63 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Unaudited Financial Statements, Continued (3) Accounting Pronouncements ------------------------- On January 1, 1998 the Company adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 superseded FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise." FAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and selected information about operating segments in interim financial reports. FAS 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of FAS 131 did not affect results of operations or financial position, nor did it affect the manner in which the Company defines its operating segments. The segment information required for interim periods is included in note 4. In March 1998, The American Institute of Certified Public Accountant's Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance intended to standardize accounting practices for costs incurred to develop or obtain computer software for internal use. Specifically, SOP 98-1 provides guidance for determining whether computer software is for internal use and when costs incurred for internal use software are to be capitalized. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998 with earlier application encouraged. The adoption of SOP 98-1, planned for the first quarter of 1999, is not expected to have a material impact on the Company's financial statements. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. Contracts that contain embedded derivatives, such as certain insurance contracts, are also addressed by the Statement. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999 with earlier application permitted. The Company is currently evaluating the impact of this Statement on results of operations and financial condition. (4) Segment Disclosures ------------------- The Company uses differences in products as the basis for defining its reportable segments. The Company reports three product segments: Variable Annuities, Fixed Annuities and Life Insurance. The Variable Annuities segment consists of annuity contracts that provide the customer with the opportunity to invest in mutual funds managed by independent investment managers and the Company, with investment returns accumulating on a tax-deferred basis. The Company's variable annuity products consist almost entirely of flexible premium deferred variable annuity contracts. The Fixed Annuities segment consists of annuity contracts that generate a return for the customer at a specified interest rate, fixed for a prescribed period, with returns accumulating on a tax-deferred basis. Such contracts consist of single premium deferred annuities, flexible premium deferred annuities and single premium immediate annuities. The Fixed Annuities segment includes the fixed option under variable annuity contracts. The Life Insurance segment consists of insurance products, including variable universal life insurance and corporate-owned life insurance products, that provide a death benefit and may also allow the customer to build cash value on a tax-deferred basis. 61 64 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Unaudited Financial Statements, Continued In addition to the product segments, the Company reports corporate revenue and expenses, investments and related investment income supporting capital not specifically allocated to its product segments and all realized gains and losses on investments in a Corporate and Other segment. The following table summarizes the financial results of the Company's business segments for the three months ended September 30, 1998 and 1997.
VARIABLE FIXED LIFE CORPORATE ($000's omitted) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL ------------------------------------ --------------- --------------- --------------- ------------------------------ 1998 Operating revenue (1) $ 4,596 $ 2,528 $ 3,240 $ 1,433 $ 11,797 Benefits and expenses 1,049 2,230 1,727 - 5,006 --------------- --------------- --------------- -------------- --------------- Operating income (loss) before federal income tax 3,547 298 1,513 1,433 6,791 Realized gains on investments - - - - - --------------- --------------- --------------- -------------- --------------- Income before federal tax expense $ 3,547 $ 298 $ 1,513 $ 1,433 $ 6,791 =============== =============== =============== ============== =============== 1997 Operating revenue (1) $ 2,550 $ 1,918 $ 47 $ 1,668 $ 6,183 Benefits and expenses 2,717 2,631 196 - 5,544 --------------- --------------- --------------- -------------- --------------- Operating income before federal income tax (167) (713) (149) 1,668 639 Realized losses on investments - - - (326) (326) --------------- --------------- --------------- -------------- --------------- Income (loss) before federal tax expense $ (167) $ (713) $ (149) $ 1,342 $ 313 =============== =============== =============== ============== =============== ---------- (1) Excludes realized gains and losses on investments.
62 65 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Unaudited Financial Statements, Continued
The following table summarizes the financial results of the Company's business segments for the nine months ended September 30, 1998 and 1997. VARIABLE FIXED LIFE CORPORATE ($000's omitted) ANNUITIES ANNUITIES INSURANCE AND OTHER TOTAL ------------------------------------ --------------- --------------- --------------- -------------- --------------- 1998 Operating revenue (1) $ 12,092 $ $ 6,200 $ 4,574 $ 29,874 7,008 Benefits and expenses 6,599 4,927 2,321 - 13,847 --------------- --------------- --------------- -------------- --------------- Operating income before federal income tax 5,493 2,081 3,879 4,574 16,027 Realized gains on investments - - - 606 606 --------------- --------------- --------------- -------------- --------------- Income before federal tax expense $ 5,493 $ 2,081 $ 3,879 $ 5,180 $ 16,633 =============== =============== =============== ============== =============== Assets as of period end $ 1,245,121 $ 1,104,526 $ 62,385 $ 63,406 $ 2,475,438 =============== =============== =============== ============== =============== 1997 Operating revenue (1) $ $ $ $ 5,204 $ 17,223 6,285 5,589 145 Benefits and expenses 3,546 8,948 359 - 12,853 --------------- --------------- --------------- -------------- --------------- Operating income (loss) before federal income tax 2,739 (3,359) (214) 5,204 4,370 Realized losses on investments - - - (958) (958) --------------- --------------- --------------- -------------- --------------- Income before federal tax expense $ 2,739 $ (3,359) $ (214) $ 4,246 $ 3,412 =============== =============== =============== ============== =============== Assets as of period end $ 852,534 $ 949,251 $ 2,633 $ 90,306 $ 1,894,724 =============== =============== =============== ============== =============== ---------- (1) Excludes realized gains and losses on investments.
63 66 1 INDEPENDENT AUDITORS' REPORT The Board of Directors Nationwide Life and Annuity Insurance Company: We have audited the accompanying balance sheets of Nationwide Life and Annuity Insurance Company, a wholly owned subsidiary of Nationwide Life Insurance Company, as of December 31, 1997 and 1996, and the related statements of income, shareholder's equity and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nationwide Life and Annuity Insurance Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Columbus, Ohio January 30, 1998 2 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Balance Sheets December 31, 1997 and 1996 ($000's omitted)
Assets 1997 1996 ------ ---------- ------------ Investments: Securities available-for-sale, at fair value: Fixed maturity securities $ 796,919 $ 648,076 Equity securities 14,767 12,254 Mortgage loans on real estate, net 218,852 150,997 Real estate, net 2,824 1,090 Policy loans 215 126 Short-term investments 18,968 492 ---------- ---------- 1,052,545 813,035 ---------- ---------- Cash 5,163 4,296 Accrued investment income 10,778 9,189 Deferred policy acquisition costs 30,087 16,168 Other assets 15,624 37,482 Assets held in Separate Accounts 891,101 486,251 ---------- ---------- $2,005,298 $1,366,421 ========== ========== Liabilities and Shareholder's Equity ------------------------------------ Future policy benefits and claims $ 986,191 $ 80,720 Funds withheld under coinsurance agreement with affiliate -- 679,571 Other liabilities 29,426 35,842 Liabilities related to Separate Accounts 891,101 486,251 ---------- ---------- 1,906,718 1,282,384 ---------- ---------- Commitments (notes 6 and 7) Shareholder's equity: Common stock, $40 par value. Authorized, issued and outstanding 66,000 shares 2,640 2,640 Additional paid-in capital 52,960 52,960 Retained earnings 35,812 25,209 Unrealized gains on securities available-for-sale, net 7,168 3,228 ---------- ---------- 98,580 84,037 ---------- ---------- $2,005,298 $1,366,421 ========== ==========
See accompanying notes to finanacial statements. 3 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Statements of Income Years ended December 31, 1997, 1996 and 1995 ($000's omitted)
1997 1996 1995 ---- ---- ---- Revenues: Investment product and universal life insurance product policy charges $ 11,244 $ 6,656 $ 4,322 Traditional life insurance premiums 363 246 674 Net investment income 11,577 51,045 49,108 Realized losses on investments (246) (3) (702) Other income 1,057 -- -- -------- -------- -------- 23,995 57,944 53,402 -------- -------- -------- Benefits and expenses: Interest credited to policyholder account balances 3,948 34,711 33,276 Other benefits and claims 433 813 904 Amortization of deferred policy acquisition costs 1,402 7,380 5,508 Other operating expenses 1,860 7,247 6,567 -------- -------- -------- 7,643 50,151 46,255 -------- -------- -------- Income before federal income tax expense 16,352 7,793 7,147 Federal income tax expense 5,749 2,707 2,373 -------- -------- -------- Net income $ 10,603 $ 5,086 $ 4,774 ======== ======== ========
See accompanying notes to finanacial statements. 4 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Statements of Shareholder's Equity Years ended December 31, 1997, 1996 and 1995 ($000's omitted)
Unrealized gains (losses) Additional on securities Total Common paid-in Retained available-for- shareholder's stock capital earnings sale, net equity ----- ------- -------- --------- ------ December 31, 1994 $2,640 $52,960 $15,349 $(3,703) $ 67,246 Net income -- -- 4,774 -- 4,774 Unrealized gains on securities available- for-sale, net -- -- -- 8,157 8,157 ------ ------- ------- ------- -------- December 31, 1995 2,640 52,960 20,123 4,454 80,177 Net income -- -- 5,086 -- 5,086 Unrealized losses on securities available- for-sale, net -- -- -- (1,226) (1,226) ------ ------- ------- ------- -------- December 31, 1996 2,640 52,960 25,209 3,228 84,037 Net income -- -- 10,603 -- 10,603 Unrealized gains on securities available- for-sale, net -- -- -- 3,940 3,940 ------ ------- ------- ------- -------- December 31, 1997 $2,640 $52,960 $35,812 $ 7,168 $ 98,580 ====== ======= ======= ======= ========
See accompanying notes to finanacial statements. 5 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 ($000's omitted)
1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $ 10,603 $ 5,086 $ 4,774 Adjustments to reconcile net income to net cash provided by operating activities: Interest credited to policyholder account balances 3,948 34,711 33,276 Capitalization of deferred policy acquisition costs (20,099) (19,987) (6,754) Amortization of deferred policy acquisition costs 1,402 7,380 5,508 Commission and expense allowances under coinsurance agreement with affiliate -- 26,473 -- Amortization and depreciation 250 1,721 878 Realized losses on invested assets, net 246 3 702 Increase in accrued investment income (1,589) (725) (423) Decrease (increase) in other assets 21,858 (32,539) 62 Increase (decrease) in policy liabilities and funds withheld on coinsurance agreement with affiliate 228,898 (7,101) 627 (Decrease) increase in other liabilities (7,488) 23,198 1,427 --------- --------- -------- Net cash provided by operating activities 238,029 38,220 40,077 --------- --------- -------- Cash flows from investing activities: Proceeds from maturity of securities available-for-sale 95,366 73,966 41,729 Proceeds from sale of securities available-for-sale 30,431 2,480 3,070 Proceeds from maturity of fixed maturity securities held-to-maturity -- -- 11,251 Proceeds from repayments of mortgage loans on real estate 15,199 10,975 8,673 Proceeds from sale of real estate -- -- 655 Proceeds from repayments of policy loans 67 23 50 Cost of securities available-for-sale acquired (267,899) (179,671) (79,140) Cost of fixed maturity securities held-to maturity acquired -- -- (8,000) Cost of mortgage loans on real estate acquired (84,736) (57,395) (18,000) Cost of real estate acquired (13) -- (10) Policy loans issued (155) (55) (66) Short-term investments, net (18,476) 4,352 (4,479) --------- --------- -------- Net cash used in investing activities (230,216) (145,325) (44,267) --------- --------- -------- Cash flows from financing activities: Increase in investment product and universal life insurance product account balances 6,952 200,575 46,247 Decrease in investment product and universal life insurance product account balances (13,898) (89,174) (42,057) --------- --------- -------- Net cash (used in) provided by financing activities (6,946) 111,401 4,190 --------- --------- -------- Net increase in cash 867 4,296 -- Cash, beginning of year 4,296 -- -- --------- --------- -------- Cash, end of year $ 5,163 $ 4,296 $ ========= ========= ========
See accompanying notes to finanacial statements. 6 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements December 31, 1997, 1996 and 1995 ($000's omitted) (1) Organization and Description of Business Nationwide Life and Annuity Insurance Company (the Company) is a wholly owned subsidiary of Nationwide Life Insurance Company (NLIC). The Company sells primarily fixed and variable rate annuities through banks and other financial institutions. In addition, the Company sells universal life insurance and other interest-sensitive life insurance products and is subject to competition from other financial services providers throughout the United States. The Company is subject to regulation by the Insurance Departments of states in which it is licensed, and undergoes periodic examinations by those departments. (2) Summary of Significant Accounting Policies The significant accounting policies followed by the Company that materially affect financial reporting are summarized below. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles, which differ from statutory accounting practices prescribed or permitted by regulatory authorities. An Annual Statement, filed with the Department of Insurance of the State of Ohio (the Department), is prepared on the basis of accounting practices prescribed or permitted by the Department. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company has no material permitted statutory accounting practices. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. The most significant estimates include those used in determining deferred policy acquisition costs, valuation allowances for mortgage loans on real estate and real estate investments and the liability for future policy benefits and claims. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. (a) Valuation of Investments and Related Gains and Losses The Company is required to classify its fixed maturity securities and equity securities as either held-to-maturity, available-for-sale or trading. Fixed maturity securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity and are stated at amortized cost. Fixed maturity securities not classified as held-to-maturity and all equity securities are classified as available-for-sale and are stated at fair value, with the unrealized gains and losses, net of adjustments to deferred policy acquisition costs and deferred federal income tax, reported as a separate component of shareholder's equity. The adjustment to deferred policy acquisition costs represents the change in amortization of deferred policy acquisition costs that would have been required as a charge or credit to operations had such unrealized amounts been realized. The Company has no fixed maturity securities classified as held-to-maturity or trading as of December 31, 1997 or 1996. 7 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued Mortgage loans on real estate are carried at the unpaid principal balance less valuation allowances. The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review by portfolio managers. The measurement of impaired loans is based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the fair value of the collateral, if the loan is collateral dependent. Loans in foreclosure and loans considered to be impaired are placed on non-accrual status. Interest received on non-accrual status mortgage loans on real estate is included in interest income in the period received. Real estate is carried at cost less accumulated depreciation and valuation allowances. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Realized gains and losses on the sale of investments are determined on the basis of specific security identification. Estimates for valuation allowances and other than temporary declines are included in realized gains and losses on investments. (b) Revenues and Benefits Investment Products and Universal Life Insurance Products: Investment products consist primarily of individual variable and fixed annuities. Universal life insurance products include universal life insurance, variable universal life insurance and other interest-sensitive life insurance policies. Revenues for investment products and universal life insurance products consist of net investment income, asset fees, cost of insurance, policy administration and surrender charges that have been earned and assessed against policy account balances during the period. Policy benefits and claims that are charged to expense include interest credited to policy account balances and benefits and claims incurred in the period in excess of related policy account balances. Traditional Life Insurance Products: Traditional life insurance products include those products with fixed and guaranteed premiums and benefits and consist primarily of certain annuities with life contingencies. Premiums for traditional life insurance products are recognized as revenue when due. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the life of the contract. This association is accomplished by the provision for future policy benefits and the deferral and amortization of policy acquisition costs. (c) Deferred Policy Acquisition Costs The costs of acquiring new business, principally commissions, certain expenses of the policy issue and underwriting department and certain variable sales expenses have been deferred. For investment products and universal life insurance products, deferred policy acquisition costs are being amortized with interest over the lives of the policies in relation to the present value of estimated future gross profits from projected interest margins, asset fees, cost of insurance, policy administration and surrender charges. For years in which gross profits are negative, deferred policy acquisition costs are amortized based on the present value of gross revenues. Deferred policy acquisition costs are adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale as described in note 2(a). (d) Separate Accounts Separate Account assets and liabilities represent contractholders' funds which have been segregated into accounts with specific investment objectives. The investment income and gains or losses of these accounts accrue directly to the contractholders. The activity of the Separate Accounts is not reflected in the statements of income and cash flows except for the fees the Company receives. 8 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued (e) Future Policy Benefits Future policy benefits for investment products in the accumulation phase, universal life insurance and variable universal life insurance policies have been calculated based on participants' contributions plus interest credited less applicable contract charges. (f) Federal Income Tax The Company files a consolidated federal income tax return with Nationwide Mutual Insurance Company (NMIC). The members of the consolidated tax return group have a tax sharing agreement which provides, in effect, for each member to bear essentially the same federal income tax liability as if separate tax returns were filed. The Company utilizes the asset and liability method of accounting for income tax. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized. (g) Reinsurance Ceded Reinsurance revenues ceded and reinsurance recoveries on benefits and expenses incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported on a gross basis. (h) Statements of Cash Flows The Company routinely invests its available cash balances in highly liquid, short-term investments with affiliated companies. See note 11. As such, the Company had no cash balance as of December 31, 1995. (i) Recently Issued Accounting Pronouncements Statement of Financial Accounting Standards No. 130 - Reporting Comprehensive Income was issued in June 1997 and is effective for fiscal years beginning after December 15, 1997. The statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. Comprehensive income includes all changes in equity during a period except those resulting from investments by shareholders and distributions to shareholders and includes net income. Comprehensive income would be reported in addition to earnings amounts currently presented. The Company will adopt the statement and begin reporting comprehensive income in the first quarter of 1998. (j) Reclassification Certain items in the 1996 and 1995 financial statements have been reclassified to conform to the 1997 presentation. 9 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued (3) Investments The amortized cost, gross unrealized gains and losses and estimated fair value of securities available-for-sale as of December 31, 1997 and 1996 were:
Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ---- ----- ------ ---------- December 31, 1997: Fixed maturity securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 5,923 $ 109 $ (27) $ 6,005 Obligations of states and political subdivisions 267 5 -- 272 Debt securities issued by foreign governments 6,077 57 (1) 6,133 Corporate securities 482,478 10,964 (509) 492,933 Mortgage-backed securities 285,224 6,458 (106) 291,576 -------- -------- --------- -------- Total fixed maturity securities 779,969 17,593 (643) 796,919 Equity securities 11,704 3,063 -- 14,767 -------- -------- --------- -------- $791,673 $ 20,656 $ (643) $811,686 ======== ======== ========= ======== December 31, 1996: Fixed maturity securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 3,695 $ 7 $ (78) $ 3,624 Obligations of states and political subdivisions 269 -- (2) 267 Debt securities issued by foreign governments 6,129 133 (8) 6,254 Corporate securities 393,371 5,916 (1,824) 397,463 Mortgage-backed securities 236,839 4,621 (992) 240,468 -------- -------- --------- -------- Total fixed maturity securities 640,303 10,677 (2,904) 648,076 Equity securities 10,854 1,540 (140) 12,254 -------- -------- --------- -------- $651,157 $ 12,217 $ (3,044) $660,330 ======== ======== ========= ========
The amortized cost and estimated fair value of fixed maturity securities available-for-sale as of December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated cost fair value ---- ---------- Fixed maturity securities available-for-sale: Due in one year or less $ 31,421 $ 31,623 Due after one year through five years 231,670 235,764 Due after five years through ten years 175,633 180,174 Due after ten years 56,021 57,782 -------- -------- 494,745 505,343 Mortgage-backed securities 285,224 291,576 -------- -------- $779,969 $796,919 ======== ========
10 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued The components of unrealized gains on securities available-for-sale, net, were as follows as of December 31:
1997 1996 ---- ---- Gross unrealized gains $20,013 $ 9,173 Adjustment to deferred policy acquisition costs (8,985) (4,207) Deferred federal income tax (3,860) (1,738) ------- ------- $ 7,168 $ 3,228 ======= =======
An analysis of the change in gross unrealized gains (losses) on securities available-for-sale and fixed maturity securities held-to-maturity follows for the years ended December 31:
1997 1996 1995 ---- ---- ---- Securities available-for-sale: Fixed maturity securities $ 9,177 $(8,764) $30,647 Equity securities 1,663 249 1,283 Fixed maturity securities held-to-maturity -- -- 3,941 ------- ------- ------- $10,840 $(8,515) $35,871 ======= ======= =======
Proceeds from the sale of securities available-for-sale during 1997, 1996 and 1995 were $30,431, $2,480 and $3,070, respectively. During 1997, gross gains of $825 ($181 and $64 in 1996 and 1995, respectively) and gross losses of $1,124 (none and $6 in 1996 and 1995, respectively) were realized on those sales. See note 11. During 1995, the Company transferred fixed maturity securities classified as held-to-maturity with amortized cost of $2,000 to available-for-sale securities due to evidence of a significant deterioration in the issuer's creditworthiness. The transfer of those fixed maturity securities resulted in a gross unrealized loss of $600. As permitted by the Financial Accounting Standards Board's Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, issued in November 1995, the Company transferred all of its fixed maturity securities previously classified as held-to-maturity to available-for-sale. As of December 14, 1995, the date of transfer, the fixed maturity securities had amortized cost of $77,405, resulting in a gross unrealized gain of $1,709. The Company had no investments in mortgage loans on real estate considered to be impaired as of December 31, 1997. The recorded investment of mortgage loans on real estate considered to be impaired as of December 31, 1996 was $955, for which the related valuation allowance was $184. During 1997, the average recorded investment in impaired mortgage loans on real estate was approximately $386 ($964 in 1996) and no interest income was recognized on those loans ($16 in 1996), which is equal to interest income recognized using a cash-basis method of income recognition. Activity in the valuation allowance account for mortgage loans on real estate is summarized for the years ended December 31:
1997 1996 ---- ---- Allowance, beginning of year $ 934 $750 (Reductions) additions charged to operations (53) 184 Direct write-downs charged against the allowance (131) -- ----- ---- Allowance, end of year $ 750 $934 ===== ====
11 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued Real estate is presented at cost less accumulated depreciation of $153 as of December 31, 1997 ($108 as of December 31, 1996) and valuation allowances of $229 as of December 31, 1997 ($229 as of December 31, 1996). The Company has no investments which were non-income producing for the twelve month periods preceding December 31, 1997 and 1996. An analysis of investment income by investment type follows for the years ended December 31:
1997 1996 1995 ---- ---- ---- Gross investment income: Securities available-for-sale: Fixed maturity securities $53,491 $40,552 $35,093 Equity securities 375 598 713 Fixed maturity securities held-to-maturity -- -- 4,530 Mortgage loans on real estate 14,862 9,991 9,106 Real estate 318 214 273 Short-term investments 899 507 348 Other 90 57 41 ------- ------- ------- Total investment income 70,035 51,919 50,104 Less: Investment expenses 1,386 874 996 Net investment income ceded (note 11) 57,072 -- -- ------- ------- ------- Net investment income $11,577 $51,045 $49,108 ======= ======= =======
An analysis of realized gains (losses) on investments, net of valuation allowances, by investment type follows for the years ended December 31:
1997 1996 1995 ---- ---- ---- Fixed maturity securities available-for-sale $(299) $ 181 $(822) Mortgage loans on real estate 53 (184) 110 Real estate and other -- -- 10 ----- ----- ----- $(246) $ (3) $(702) ===== ===== =====
Fixed maturity securities with an amortized cost of $3,383 and $3,403 as of December 31, 1997 and 1996, respectively, were on deposit with various regulatory agencies as required by law. (4) Future Policy Benefits The liability for future policy benefits for investment contracts has been established based on policy terms, interest rates and various contract provisions. The average interest rate credited on investment product policies was approximately 5.1%, 5.6% and 5.6% for the years ended December 31, 1997, 1996 and 1995, respectively. 12 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued (5) Federal Income Tax The Company's current federal income tax liability was $806 and $7,914 as of December 31, 1997 and 1996, respectively. The tax effects of temporary differences that give rise to significant components of the net deferred tax asset (liability) as of December 31, 1997 and 1996 are as follows:
1997 1996 ---- ---- Deferred tax assets: Future policy benefits $ 13,168 $ 1,070 Liabilities in Separate Accounts 8,080 5,311 Mortgage loans on real estate and real estate 336 407 Other assets and other liabilities 48 3,836 -------- ------- Total gross deferred tax assets 21,632 10,624 -------- ------- Deferred tax liabilities: Fixed maturity securities 7,186 3,268 Deferred policy acquisition costs 6,159 2,131 Equity securities 1,072 490 Other 7,892 -- -------- ------- Total gross deferred tax liabilities 22,309 5,889 -------- ------- $ (677) $ 4,735 ======== =======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the total gross deferred tax assets will not be realized. All future deductible amounts can be offset by future taxable amounts or recovery of federal income tax paid within the statutory carryback period. The Company has determined that valuation allowances are not necessary as of December 31, 1997, 1996 and 1995 based on its analysis of future deductible amounts. Federal income tax expense for the years ended Decmber 31 was as follows:
1997 1996 1995 ---- ---- ---- Currently payable $2,458 $ 9,612 $2,012 Deferred tax expense (benefit) 3,291 (6,905) 361 ------ ------- ------ $5,749 $ 2,707 $2,373 ====== ======= ======
Total federal income tax expense for the years ended December 31, 1997, 1996 and 1995 differs from the amount computed by applying the U.S. federal income tax rate to income before tax as follows:
1997 1996 1995 ------------------ ---------------- ---------------- Amount % Amount % Amount % ------------------ ---------------- ---------------- Computed (expected) tax expense $5,723 35.0 $2,728 35.0 $2,501 35.0 Tax exempt interest and dividends received deduction -- (0.0) (175) (2.3) (150) (2.1) Other, net 26 (0.2) 154 2.0 22 0.3 ------ ---- ------ ---- ------ ---- Total (effective rate of each year) $5,749 35.2 $2,707 34.7 $2,373 33.2 ====== ==== ====== ==== ====== ====
Total federal income tax paid was $9,566, $2,335 and $1,314 during the years ended December 31, 1997, 1996 and 1995, respectively. 13 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued (6) Fair Value of Financial Instruments The following disclosures summarize the carrying amount and estimated fair value of the Company's financial instruments. Certain assets and liabilities are specifically excluded from the disclosure requirements of financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair value of a financial instrument is defined as the amount at which the financial instrument could be exchanged in a current transaction between willing parties. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. Many of the Company's assets and liabilities subject to the disclosure requirements are not actively traded, requiring fair values to be estimated by management using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments. Although insurance contracts, other than policies such as annuities that are classified as investment contracts, are specifically exempted from the disclosure requirements, estimated fair value of policy reserves on life insurance contracts is provided to make the fair value disclosures more meaningful. The tax ramifications of the related unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. The following methods and assumptions were used by the Company in estimating its fair value disclosures: Fixed maturity and equity securities: The fair value for fixed maturity securities is based on quoted market prices, where available. For fixed maturity securities not actively traded, fair value is estimated using values obtained from independent pricing services or, in the case of private placements, is estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. The fair value for equity securities is based on quoted market prices. Mortgage loans on real estate: The fair value for mortgage loans on real estate is estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Fair value for mortgages in default is the estimated fair value of the underlying collateral. Policy loans, short-term investments and cash: The carrying amount reported in the balance sheets for these instruments approximates their fair value. Separate Account assets and liabilities: The fair value of assets held in Separate Accounts is based on quoted market prices. The fair value of liabilities related to Separate Accounts is the amount payable on demand, which includes certain surrender charges. Investment contracts: The fair value for the Company's liabilities under investment type contracts is disclosed using two methods. For investment contracts without defined maturities, fair value is the amount payable on demand. For investment contracts with known or determined maturities, fair value is estimated using discounted cash flow analysis. Interest rates used are similar to currently offered contracts with maturities consistent with those remaining for the contracts being valued. 14 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued Policy reserves on life insurance contracts: The estimated fair value is the amount payable on demand. Also included are disclosures for the Company's limited payment policies, which the Company has used discounted cash flow analyses similar to those used for investment contracts with known maturities to estimate fair value. Commitments to extend credit: Commitments to extend credit have nominal value because of the short-term nature of such commitments. See note 7. Carrying amount and estimated fair value of financial instruments subject to disclosure requirements and policy reserves on life insurance contracts were as follows as of December 31:
1997 1996 ------------------------ ----------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------------------------ ----------------------- Assets: Investments: Securities available-for-sale: Fixed maturity securities $796,919 $796,919 $648,076 $648,076 Equity securities 14,767 14,767 12,254 12,254 Mortgage loans on real estate, net 218,852 229,881 150,997 152,496 Policy loans 215 215 126 126 Short-term investments 18,968 18,968 492 492 Cash 5,163 5,163 4,296 4,296 Assets held in Separate Accounts 891,101 891,101 486,251 486,251 Liabilities Investment contracts 980,263 950,105 75,417 72,262 Policy reserves on life insurance contracts 5,928 6,076 5,303 5,390 Liabilities related to Separate Accounts 891,101 868,056 486,251 471,125
(7) Risk Disclosures The following is a description of the most significant risks facing life insurers and how the Company mitigates those risks: Legal/Regulatory Risk: The risk that changes in the legal or regulatory environment in which an insurer operates will result in increased competition, reduced demand for a company's products, or create additional expenses not anticipated by the insurer in pricing its products. The Company mitigates this risk by operating throughout the United States, thus reducing its exposure to any single jurisdiction, and also by employing underwriting practices which identify and minimize the adverse impact of this risk. Credit Risk: The risk that issuers of securities owned by the Company or mortgagors on mortgage loans on real estate owned by the Company will default or that other parties which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining credit and collection policies and by providing for any amounts deemed uncollectible. 15 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued Interest Rate Risk: The risk that interest rates will change and cause a decrease in the value of an insurer's investments. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company mitigates this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and/or by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to borrow funds or sell assets prior to maturity and potentially recognize a gain or loss. Financial Instruments with Off-Balance-Sheet Risk: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business through management of its investment portfolio. These financial instruments include commitments to extend credit in the form of loans. These instruments involve, to varying degrees, elements of credit risk in excess of amounts recognized on the balance sheets. Commitments to fund fixed rate mortgage loans on real estate are agreements to lend to a borrower, and are subject to conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a deposit. Commitments extended by the Company are based on management's case-by-case credit evaluation of the borrower and the borrower's loan collateral. The underlying mortgage property represents the collateral if the commitment is funded. The Company's policy for new mortgage loans on real estate is to lend no more than 75% of collateral value. Should the commitment be funded, the Company's exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amounts of these commitments less the net realizable value of the collateral. The contractual amounts also represent the cash requirements for all unfunded commitments. Commitments on mortgage loans on real estate of $61,200 extending into 1998 were outstanding as of December 31, 1997. The Company also had $4,000 of commitments to purchase fixed maturity securities as of December 31, 1997. Significant Concentrations of Credit Risk: The Company grants mainly commercial mortgage loans on real estate to customers throughout the United States. The Company has a diversified portfolio with no more than 29% (31% in 1996) in any geographic area and no more than 3% (5% in 1996) with any one borrower as of December 31, 1997. As of December 31, 1997 37% (42% in 1996) of the remaining principal balance of the Company's commercial mortgage loan portfolio financed apartment building properties. (8) Pension Plan The Company is a participant, together with other affiliated companies, in a pension plan covering all employees who have completed at least one year of service. Benefits are based upon the highest average annual salary of a specified number of consecutive years of the last ten years of service. The Company funds an allocation of pension costs accrued for employees of affiliates whose work efforts benefit the Company. Effective January 1, 1995, the plan was amended to provide enhanced benefits for participants who met certain eligibility requirements and elected early retirement no later than March 15, 1995. The entire cost of the enhanced benefit was borne by NMIC and certain of its property and casualty insurance company affiliates. Effective December 31, 1995, the Nationwide Insurance Companies and Affiliates Retirement Plan was merged with the Farmland Mutual Insurance Company Employees' Retirement Plan and the Wausau Insurance Companies Pension Plan to form the Nationwide Insurance Enterprise Retirement Plan (the Retirement Plan). Immediately prior to the merger, the plans were amended to provide consistent benefits for service after January 1, 1996. These amendments had no significant impact on the accumulated benefit obligation or projected benefit obligation as of December 31, 1995. Pension costs charged to operations by the Company during the years ended December 31, 1997, 1996 and 1995 were $257, $189 and $214, respectively. 16 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued The net periodic pension cost for the Retirement Plan as a whole for the years ended December 31, 1997 and 1996 and for the Nationwide Insurance Companies and Affiliates Retirement Plan as a whole for the year ended December 31, 1995 follows:
1997 1996 1995 ---- ---- ---- Service cost (benefits earned during the period) $ 77,303 $ 75,466 $ 64,524 Interest cost on projected benefit obligation 118,556 105,511 95,283 Actual return on plan assets (327,965) (210,583) (249,294) Net amortization and deferral 196,366 101,795 143,353 --------- --------- --------- $ 64,260 $ 72,189 $ 53,866 ========= ========= =========
Basis for measurements, net periodic pension cost:
1997 1996 1995 ---- ---- ---- Weighted average discount rate 6.50% 6.00% 7.50% Rate of increase in future compensation levels 4.75% 4.25% 6.25% Expected long-term rate of return on plan assets 7.25% 6.75% 8.75%
Information regarding the funded status of the Retirement Plan as a whole as of December 31, 1997 and 1996 follows:
1997 1996 ---- ---- Accumulated benefit obligation: Vested $1,547,462 $1,338,554 Nonvested 13,531 11,149 ---------- ---------- $1,560,993 $1,349,703 ========== ========== Net accrued pension expense: Projected benefit obligation for services rendered to date $2,033,761 $1,847,828 Plan assets at fair value 2,212,848 1,947,933 ---------- ---------- Plan assets in excess of projected benefit obligation 179,087 100,105 Unrecognized prior service cost 34,658 37,870 Unrecognized net gains (330,656) (201,952) Unrecognized net asset at transition 33,337 37,158 ---------- ---------- $ (83,574) $ (26,819) ========== ==========
Basis for measurements, funded status of plan:
1997 1996 ---- ---- Weighted average discount rate 6.00% 6.50% Rate of increase in future compensation levels 4.25% 4.75%
Assets of the Retirement Plan are invested in group annuity contracts of NLIC and Employers Life Insurance Company of Wausau, an affiliate. 17 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued (9) Postretirement Benefits Other Than Pensions In addition to the defined benefit pension plan, the Company, together with other affiliated companies, participates in life and health care defined benefit plans for qualifying retirees. Postretirement life and health care benefits are contributory and generally available to full time employees who have attained age 55 and have accumulated 15 years of service with the Company after reaching age 40. Postretirement health care benefit contributions are adjusted annually and contain cost-sharing features such as deductibles and coinsurance. In addition, there are caps on the Company's portion of the per-participant cost of the postretirement health care benefits. These caps can increase annually, but not more than three percent. The Company's policy is to fund the cost of health care benefits in amounts determined at the discretion of management. Plan assets are invested primarily in group annuity contracts of NLIC. The Company elected to immediately recognize its estimated accumulated postretirement benefit obligation (APBO), however, certain affiliated companies elected to amortize their initial transition obligation over periods ranging from 10 to 20 years. The Company's accrued postretirement benefit expense as of December 31, 1997 and 1996 was $891 and $840, respectively, and the net periodic postretirement benefit cost (NPPBC) for 1997, 1996 and 1995 was $94, $78 and $66, respectively. Information regarding the funded status of the plan as a whole as of December 31, 1997 and 1996 follows:
1997 1996 ---- ---- Accrued postretirement benefit expense: Retirees $ 93,327 $ 92,954 Fully eligible, active plan participants 31,580 23,749 Other active plan participants 112,951 83,986 --------- --------- Accumulated postretirement benefit obligation 237,858 200,689 Plan assets at fair value 69,165 63,044 --------- --------- Plan assets less than accumulated postretirement benefit obligation (168,693) (137,645) Unrecognized transition obligation of affiliates 1,481 1,654 Unrecognized net gains 1,576 (23,225) --------- --------- $(165,636) $(159,216) ========= =========
The amount of NPPBC for the plan as a whole for the years ended December 31, 1997, 1996 and 1995 was as follows:
1997 1996 1995 ---- ---- ---- Service cost (benefits attributed to employee service during the year) $ 7,077 $ 6,541 $ 6,235 Interest cost on accumulated postretirement benefit obligation 14,029 13,679 14,151 Actual return on plan assets (3,619) (4,348) (2,657) Amortization of unrecognized transition obligation of affiliates 173 173 2,966 Net amortization and deferral (528) 1,830 (1,619) ------- ------- ------- $17,132 $17,875 $19,076 ======= ======= =======
18 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued Actuarial assumptions used for the measurement of the APBO as of December 31, 1997, 1996 and 1995 and the NPPBC for 1997, 1996 and 1995 were as follows:
1997 1996 1995 ---- ---- ---- APBO: Discount rate 6.70% 7.25% 6.75% Assumed health care cost trend rate: Initial rate 12.13% 11.00% 11.00% Ultimate rate 6.12% 6.00% 6.00% Uniform declining period 12 Years 12 Years 12 Years NPPBC: Discount rate 7.25% 6.65% 8.00% Long term rate of return on plan assets, net of tax 5.89% 4.80% 8.00% Assumed health care cost trend rate: Initial rate 11.00% 11.00% 10.00% Ultimate rate 6.00% 6.00% 6.00% Uniform declining period 12 Years 12 Years 12 Years
For the plan as a whole, a one percentage point increase in the assumed health care cost trend rate would increase the APBO as of December 31, 1997 by $410 and the NPPBC for the year ended December 31, 1997 by $46. (10) Regulatory Risk-Based Capital and Dividend Restriction Ohio, the Company's state of domicile, imposes minimum risk-based capital requirements that were developed by the NAIC. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level risk-based capital, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The Company exceeds the minimum risk-based capital requirements. The statutory capital shares and surplus of the Company as reported to regulatory authorities as of December 31, 1997, 1996 and 1995 was $74,820, $71,390 and $54,978, respectively. The statutory net income of the Company as reported to regulatory authorities for the years ended December 31, 1997, 1996 and 1995 was $7,446, $670 and $8,023, respectively. The Company is limited in the amount of shareholder dividends it may pay without prior approval by the Department. As of December 31, 1997, the maximum amount available for dividend payment from the Company to its shareholder without prior approval of the Department was $7,482. The Company currently does not expect such regulatory requirements to impair its ability to pay operating expenses and stockholder dividends in the future. 19 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued (11) Transactions With Affiliates The Company leases office space from NMIC and certain of its subsidiaries. For the years ended December 31, 1997, 1996 and 1995, the Company made lease payments to NMIC and its subsidiaries of $703, $410 and $287, respectively. Pursuant to a cost sharing agreement among NMIC and certain of its direct and indirect subsidiaries, including the Company, NMIC provides certain operational and administrative services, such as sales support, advertising, personnel and general management services, to those subsidiaries. Expenses covered by this agreement are subject to allocation among NMIC, the Company and other affiliates. Amounts allocated to the Company were $2,564, $2,682 and $2,596 in 1997, 1996 and 1995, respectively. The allocations are based on techniques and procedures in accordance with insurance regulatory guidelines. Measures used to allocate expenses among companies include individual employee estimates of time spent, special cost studies, salary expense, commissions expense and other methods agreed to by the participating companies that are within industry guidelines and practices. The Company believes these allocation methods are reasonable. In addition, the Company does not believe that expenses recognized under the inter-company agreements are materially different than expenses that would have been recognized had the Company operated on a stand alone basis. Amounts payable to NMIC from the Company under the cost sharing agreement were $4,981 and $2,275 as of December 31, 1997 and 1996, respectively. Effective December 31, 1996, the Company entered into an intercompany reinsurance agreement with NLIC whereby certain inforce and subsequently issued fixed individual deferred annuity contracts are ceded on a 100% coinsurance with funds withheld basis. On December 31, 1997, the agreement was amended to a modified coinsurance basis. Under modified coinsurance agreements, invested assets and liabilities for future policy benefits are retained by the ceding company and net investment earnings on the invested assets are paid to the assuming company. Under terms of the Company's agreement, the investment risk associated with changes in interest rates is borne by NLIC. Risk of asset default is retained by the Company, although a fee is paid by NLIC to the Company for the Company's retention of such risk. The agreement will remain inforce until all contract obligations are settled. The ceding of risk does not discharge the original insurer from its primary obligation to the contractholder. The Company believes that the terms of the modified coinsurance agreement are consistent in all material respects with what the Company could have obtained with unaffiliated parties. Amounts ceded to NLIC in 1997 are included in NLIC's results of operations for 1997 and include premiums of $300,617, net investment income of $57,072 and benefits, claims and other expenses of $343,426. Under the 100% coinsurance with funds withheld agreement, the Company recorded a liability equal to the amount due to NLIC as of December 31, 1996 for $679,571, which represents the future policy benefits of the fixed individual deferred annuity contracts ceded. In consideration for the initial inforce business reinsured, NLIC paid the Company $26,473 in commission and expense allowances which were applied to the Company's deferred policy acquisition costs as of December 31, 1996. No significant gain or loss was recognized as a result of the agreement. During 1997, the Company sold fixed maturity securities available-for-sale at fair value of $27,253 to NLIC. The Company recognized a $693 gain on the transactions. The Company and various affiliates entered into agreements with Nationwide Cash Management Company (NCMC), an affiliate, under which NCMC acts as common agent in handling the purchase and sale of short-term securities for the respective accounts of the participants. Amounts on deposit with NCMC were $18,968 and $492 as of December 31, 1997 and 1996, respectively, and are included in short-term investments on the accompanying balance sheets. Certain annuity products are sold through an affiliated company. Total commissions paid to the affiliate for the three years ended December 31, 1997 were $8,053, $14,644 and $5,949, respectively. 20 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY (a wholly owned subsidiary of Nationwide Life Insurance Company) Notes to Financial Statements, Continued (12) Segment Information The Company has three product segments: Variable Annuities, Fixed Annuities and Life Insurance. The Variable Annuities segment consists of annuity contracts that provide the customer with the opportunity to invest in mutual funds managed by an affiliated company and independent investment managers, with the investment returns accumulating on a tax-deferred basis. The Fixed Annuities segment consists of annuity contracts that generate a return for the customer at a specified interest rate, fixed for a prescribed period, with returns accumulating on a tax-deferred basis. The Fixed Annuities segment also includes the fixed option under the Company's variable annuity contracts. The Life Insurance segment consists of insurance products that provide a death benefit and may also allow the customer to build cash value on a tax-deferred basis. In addition, the Company reports corporate expenses and investments, and the related investment income supporting capital not specifically allocated to its product segments in a Corporate and Other segment. In addition, all realized gains and losses are reported in the Corporate and Other segment. The following table summarizes the revenues and income (loss) before federal income tax expense for the years ended December 31, 1997, 1996 and 1995 and assets as of December 31, 1997, 1996 and 1995, by segment.
1997 1996 1995 ---- ---- ---- Revenues: Variable Annuities $ 9,950 $ 4,591 $ 2,927 Fixed Annuities 7,752 51,643 50,056 Life Insurance 182 165 185 Corporate and Other 6,111 1,545 234 ----------- ----------- --------- $ 23,995 $ 57,944 $ 53,402 =========== =========== ========= Income (loss) before federal income tax expense: Variable Annuities $ 7,267 $ 1,094 $ 1,196 Fixed Annuities 3,202 5,156 5,633 Life Insurance (228) (1) (381) Corporate and Other 6,111 1,544 699 ----------- ----------- --------- $ 16,352 $ 7,793 $ 7,147 =========== =========== ========= Assets: Variable Annuities $ 925,021 $ 503,111 $ 267,097 Fixed Annuities 989,116 787,682 643,313 Life Insurance 2,228 2,597 2,665 Corporate and Other 88,933 73,031 54,507 ----------- ----------- --------- $ 2,005,298 $ 1,366,421 $ 967,582 =========== =========== =========
67 PART II - OTHER INFORMATION CONTENTS OF REGISTRATION STATEMENT This Form S-6 Registration Statement comprises the following papers and documents: The facing sheet. Cross-reference to items required by Form N-8B-2. The prospectus consisting of 83 pages. Representations and Undertakings. The Signatures. Accountants' Consent The following exhibits required by Forms N-8B-2 and S-6: 1. Power of Attorney dated May 22, 1998. Filed previously with this Registration Statement and incorporated by reference (333-59517). 2. Resolution of the Depositor's Board of Filed previously with this Directors authorizing the establishment Registration Statement and of the Registrant, adopted May 22, 1998 incorporated by reference (333-59517). 3. Distribution Contracts Underwriting or Distribution of contracts between the Registrant and Principal Underwriter - Filed previously in connection with Registration Statement (SEC file No. 33-86408) on November 14, 1994 and hereby incorporated by reference. 4. Form of Security Copy attached hereto. 5. Articles of Incorporation of Depositor Filed previously with this Registration Statement and incorporated by reference (333-59517). 6. Application form of Security Filed previously with this Registration Statement and incorporated by reference (333-59517). 7. Opinion of Counsel Filed previously with this Registration Statement and incorporated by reference (333-59517). 68 REPRESENTATIONS AND UNDERTAKINGS The Registrant and the Company hereby make the following representations and undertakings: (a) This filing is made pursuant to Rules 6c-3 and 6e-3(T) under the Investment Company Act of 1940 (the "Act"). The Registrant and the Company elect to be governed by Rule 6e-3(T)(b)(13)(i)(A) under the Act with respect to the Policies described in the prospectus. The Policies have been designed in such a way as to qualify for the exemptive relief from various provisions of the Act afforded by Rule 6e-3(T). (b) Paragraph (b) (13) (iii) (F) of Rule 6e-3(T) is being relied on for the deduction of the mortality and expense risk charges ("risk charges") assumed by the Company under the Policies. The Company represents that the risk charges are within the range of industry practice for comparable policies and reasonable in relation to all of the risks assumed by the issuer under the Policies. Actuarial memoranda demonstrating the reasonableness of these charges are maintained by the Company, and will be made available to the Securities and Exchange Commission (the "Commission") on request. (c) The Company has concluded that there is a reasonable likelihood that the distribution financing arrangement of the separate account will benefit the separate account and the Contract Holders and will keep and make available to the Commission on request a memorandum setting forth the basis for this representation. (d) The Company represents that the separate account will invest only in management investment companies which have undertaken to have a board of directors, a majority of whom are not interested persons of the Company, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. (e) Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the Registrant hereby undertakes to file with the Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. (f) The fees and charges deducted under the Policy in the aggregate are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company. 69 INDEPENDENT AUDITORS' CONSENT The Board of Directors of Nationwide Life and Annuity Insurance Company: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the Prospectus. KPMG Peat Marwick LLP Columbus, Ohio July 21, 1998 70 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, NATIONWIDE VL SEPARATE ACCOUNT-D, has caused this Pre-Effective Amendment No.1 to be signed on its behalf by the undersigned thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the city of Columbus, and state of Ohio, on this 22nd day of December 1998. NATIONWIDE VL SEPARATE ACCOUNT-D -------------------------------------- (Registrant) (Seal) NATIONWIDE LIFE AND ANNUITY Attest: INSURANCE COMPANY ------------------------------------- (Depositor) GLENN W. SODEN By: JOSEPH P. RATH - ------------------------------- ------------------------------------- Glenn W. Soden Joseph P. Rath Assistant Secretary Vice President - Product and Market Compliance Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No.1 has been signed below by the following persons in the capacities indicated on the 22nd day of December, 1998. SIGNATURE TITLE LEWIS J. ALPHIN Director - -------------------------------- Lewis J. Alphin A. I. BELL Director - -------------------------------- A. I. Bell KEITH W. ECKEL Director - -------------------------------- Keith W. Eckel WILLARD J. ENGEL Director - -------------------------------- Willard J. Engel FRED C. FINNEY Director - -------------------------------- Fred C. Finney CHARLES L. FUELLGRAF, JR. Director - -------------------------------- Charles L. Fuellgraf, Jr. JOSEPH J. GASPER President and Chief - -------------------------------- Operating Office and Director Joseph J. Gasper DIMON R. McFERSON Chairman and Chief Executive Officer - --------------------------------Nationwide Insurance Enterprise and Director Dimon R. McFerson DAVID O. MILLER Chairman of the Board and Director - -------------------------------- David O. Miller YVONNE L. MONTGOMERY Director - -------------------------------- Yvonne L. Montgomery ROBERT A. OAKLEY Executive Vice President- - -------------------------------- Chief Financial Officer Robert A. Oakley JAMES F. PATTERSON Director By/s/JOSEPH P. RATH - -------------------------------- ------------------- James F. Patterson Joseph P. Rath Attorney-in-Fact ARDEN L. SHISLER Director - -------------------------------- Arden L. Shisler ROBERT L. STEWART Director - -------------------------------- Robert L. Stewart NANCY C. THOMAS Director - -------------------------------- Nancy C. Thomas HAROLD W. WEIHL Director - -------------------------------- Harold W. Weihl
EX-4 2 EXHIBIT 4 1 Exhibit 4 ------------------------------------------------------------ [NATIONWIDE LOGO] NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY Home Office: Two Nationwide Plaza Columbus, Ohio 43218-2150 ------------------------------------------------------------ PLEASE READ YOUR POLICY CAREFULLY This Policy is a legal contract between the Owner (you, your) and Nationwide Life and Annuity Insurance Company (we, our, us, the Company). INSURING AGREEMENT: We issue this Policy in consideration of your application and the payment of the Initial Premium. We agree to pay the Death Proceeds to the Beneficiary upon receiving proof that the Insured has died while this Policy is in force and before the Maturity Date. We agree to pay the Maturity Proceeds to you if the Insured is living on the Maturity Date. You and we are bound by the conditions and provisions of this Policy. - -------------------------------------------------------------------------------- The Surrender Value of this Policy will vary from day to day. It may increase or decrease depending on the investment experience of the Policy. Refer to the Nonforfeiture Provisions on page 11 for details. There is no guaranteed Surrender Value. The amount or duration of the death benefit will be variable and depend on the investment experience of the Policy. The death benefit will never be less than the Specified Amount as long as your Policy is in force. Refer to the Death Benefit Provisions on page 9 for details. - -------------------------------------------------------------------------------- RIGHT TO EXAMINE POLICY You may return this Policy to us within (1) 10 days after you get it, or (2) 45 days after you sign the application, or (3) 10 days after we mail or deliver the Notice of Withdrawal Right, whichever is latest. The Policy, with a written request for cancellation, must be mailed or delivered to our Home Office or to the agent who sold it to you. The returned Policy will be treated as if we never issued it, and we will pay you the amount specified by the laws of the state in which the Policy was issued. - -------------------------------------------------------------------------------- If you have any questions about your Policy or need additional insurance service, contact your agent or write to our Home Office. /s/ Dennis W. Blick /s/ Joseph J. Gasfer Secretary President Signed at our Home Office on the Policy Date. CORPORATE FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY - Adjustable Death Benefit - Flexible premiums payable during Insured's lifetime until the Maturity Date - Death Proceeds payable at Insured's death prior to the Maturity Date - Maturity Proceeds payable on the Maturity Date - Not eligible for dividends - Investment experience reflected in benefits 2 CONTENTS Page Annual Report.............................................................7 Assignment................................................................8 Beneficiary...............................................................8 Cash Surrender Value......................................................4 Cash Value...............................................................11 Death Benefit.............................................................9 Definitions...............................................................4 Error in Age..............................................................6 Exchange of Policy Provisions............................................15 Fixed Account............................................................17 Grace Period..............................................................9 Incontestability..........................................................6 Insured...................................................................5 Insuring Agreement........................................................1 Loan.....................................................................14 Monthly Cost of Insurance................................................12 Nonforfeiture............................................................11 Optional Modes of Settlement.............................................17 Ownership.................................................................8 Partial Surrender........................................................13 Policy Data Page..........................................................3 Premium...................................................................8 Reinstatement.............................................................9 Suicide...................................................................6 Termination...............................................................7 Transfers................................................................17 Valuation of Assets......................................................15 Variable Account Provisions..............................................16 3 DEFINITIONS ATTAINED AGE: Attained Age is the Issue Age plus the number of full years since the Policy Date. BENEFICIARY: The Beneficiary is the person to whom the Death Proceeds are paid. The Beneficiary is named in the application, unless changed. CASH SURRENDER VALUE: The Cash Surrender Value of your Policy on any date is the Cash Value minus any Indebtedness. CASH VALUE: Your Policy's Cash Value is the sum of the cash value in each Subaccount, the Fixed Account, and the Policy Loan Account. Refer to the Nonforfeiture Provision for details. COMPANY: The Company is the Nationwide Life and Annuity Insurance Company. "We," "our", and "us" refer to the Company. CONTINGENT BENEFICIARY: The Contingent Beneficiary will become the Beneficiary if the named Beneficiary dies prior to the date of the death of the Insured. The Contingent Beneficiary is named in the application, unless changed. CONTINGENT OWNER: The Contingent Owner will become the Owner if the named Owner dies prior to the date of the death of the Insured. The Contingent Owner is named in the application, unless changed. DEATH PROCEEDS: The Death Proceeds are the amount of money payable to the Beneficiary if the Insured dies while your Policy is in force prior to the Maturity Date. Refer to the Death Benefit Provisions for details. FIXED ACCOUNT: A Fixed Account is an investment option which is funded by the General Account of the Company. FUND: A Fund is the underlying mutual fund in which Subaccount assets are invested. There is a Fund that corresponds to each Subaccount in a Variable Account. The Funds are listed on the Policy Data Page with the corresponding Subaccounts. GENERAL ACCOUNT: The General Account is made up of all of our assets other than those held in any separate investment account. HOME OFFICE: The Home Office of the Company is at Two Nationwide Plaza, Columbus, Ohio. INDEBTEDNESS: Indebtedness is any amount you owe us as a result of a policy loan. Indebtedness consists of principal amount plus accrued interest. INITIAL INVESTMENT DATE: The Initial Investment Date is the later of the Policy Date or the date we receive the Initial Premium at our Home Office. INITIAL PREMIUM: The Initial Premium is the premium required for coverage to become effective on the Policy Date. It is shown on the Policy Data Page. 4 INSURED: The Insured is the person whose life is covered by this insurance Policy and is named in the application. INTEREST RATE GUARANTEE PERIOD: The Interest Rate Guaranteed Period for each transfer to the Fixed Account is that period of time for which the current interest crediting rate is guaranteed by the Company. ISSUE AGE: Issue Age is the Insured's age on the last birthday on or before the Policy Date. It is shown on the Policy Data Page. MATURITY DATE: The Maturity Date is the Policy Anniversary on or next following the Insured's 100th birthday. MATURITY PROCEEDS: Maturity Proceeds are the amount of money payable to you on the Maturity Date if your Policy is still in force. The Maturity Proceeds will be equal to the amount of the Cash Value, less any Indebtedness. MONTHLY ANNIVERSARY DAY: The Monthly Anniversary Day is the same day as the Policy Date for each succeeding month. NET AMOUNT AT RISK: The Net Amount At Risk on a Monthly Anniversary Day is the death benefit on that Monthly Anniversary Day minus the Cash Value calculated on that Monthly Anniversary Day prior to deduction of the base policy cost of insurance charge. On any other day the Net Amount At Risk is the death benefit on that day minus the Cash Value on that day. NET PREMIUM: The Net Premium is equal to the actual premium minus the percent of premium charge. The percent of premium charge is shown on the Policy Data Page. The Company may at its sole discretion apply a lower percent of premium charge. OWNER: The Owner has all rights under this Policy and is named in the application unless later changed and endorsed on this Policy. "You" or "your" refer to the Owner of this Policy. POLICY ANNIVERSARY: The Policy Anniversary is the same day and month as the Policy Date for each succeeding year. POLICY DATE: The Policy Date is the date the provisions of this Policy take effect. It is shown on the Policy Data Page. Policy years and policy months are measured from the Policy Date. POLICY LOAN ACCOUNT: The Policy Loan Account is that portion of the Cash Value which results from policy loans. PROCEEDS: The Proceeds are the amount payable on the Maturity Date, on the surrender of this Policy prior to the Maturity Date, or on the death of the Insured while this Policy is in force. SEC: SEC is the Securities and Exchange Commission. SPECIFIED AMOUNT: The Specified Amount is a dollar amount used to determine the death benefit of your Policy. It is shown on the Policy Data Page. 5 SUBACCOUNT: A Subaccount is a part of the Variable Account. The assets in each Subaccount are invested exclusively in a specified corresponding Fund. The Subaccounts are listed on the Policy Data Page. VALUATION DAY: A Valuation Day is each day that the New York Stock Exchange is open for trading except for customary holidays observed by us. VALUATION PERIOD: A Valuation Period is the interval of time between a Valuation Day and the next Valuation Day. VARIABLE ACCOUNT: One or more Variable Accounts are named on the Policy Data Page. Each is a separate investment account of the Company. GENERAL POLICY PROVISIONS ENTIRE CONTRACT: The entire contract consists of this Policy, any attached riders or endorsements, and the attached copy of any written application, including any written supplemental applications. No agent, registered representative, or other person may change this Policy or waive any of its provisions. Any agreement to alter this Policy must be in writing, signed by our President or Secretary and attached to or endorsed on your Policy. We will not be bound by any promise or representations made by any agent or other persons. APPLICATION: All statements made in an application are considered representations and not warranties. In issuing this Policy, we have relied on the statements made in any application to be true and complete. No such statement will be used to void the Policy or to deny a claim unless that statement is a material misrepresentation. INCONTESTABILITY: We will not contest payment of the Death Proceeds based on the initial Specified Amount after this Policy has been in force during the Insured's lifetime for 2 years from the Policy Date. For any increase in Specified Amount requiring evidence of insurability, we will not contest payment of the Death Proceeds based on such an increase after it has been in force during the Insured's lifetime for 2 years from its effective date. SUICIDE: If the Insured commits suicide, while sane or insane, within 2 years from the Policy Date, we will not pay the Death Proceeds normally payable on the Insured's death. Instead, we will pay the Beneficiary an amount equal to all premiums paid prior to the Insured's death, less any Indebtedness, and less any partial surrenders. For any increase in Specified Amount requiring evidence of insurability, if the Insured commits suicide, while sane or insane, within 2 years from the effective date of any such increase, we will not pay the Death Proceeds associated with such an increase. Instead, our liability with respect to such an increase will be limited to its cost. ERROR IN AGE: If the age of the Insured has been misstated, the death benefit or Cash Value will be adjusted. The adjusted death benefit will be (1) multiplied by (2) and then the result added to (3) where: 1. is the Net Amount At Risk at the time of the Insured's death; 2. is the ratio of the monthly cost of insurance applied in the policy month of death and the monthly cost of insurance that should have been applied at the true age in the policy month of death; and 3. is the Cash Value at the time of the Insured's death. The adjusted Cash Value will be recalculated from the Policy Date using cost of insurance charges based on the correct age. 6 PAYMENT OF PROCEEDS: Unless an optional mode of settlement is elected, the Death Proceeds will be paid in one sum to the Beneficiary. Unless an optional mode of settlement is elected, any Proceeds payable on the Maturity Date or upon surrender of this Policy will be paid in one sum to you. POSTPONEMENT OF PAYMENTS: We will normally pay any amount payable on maturity, complete or partial surrender, or policy loan within seven days after we receive your written request. We will normally pay any Death Proceeds within seven days after we receive proof of death and any other information we may reasonably require to pay a claim. However, such payments may be postponed if: 1. the New York Stock Exchange is closed (except for customary holiday closings); or 2. the SEC requires trading be restricted or declares an emergency; or 3. the SEC lets us defer payments for the protection of our Policy Owners; or 4. policy values are being withdrawn from the Fixed Account. EFFECTIVE DATE OF COVERAGE: The effective date of coverage of any person insured under your Policy is as follows: 1. the Policy Date is the effective date for all coverage provided in the original application; 2. for any increase or addition to coverage, the effective date will be the Monthly Anniversary Day on or next following the date we approve the supplemental application unless you request a different date; and 3. for any insurance that has been reinstated, the effective date is the Monthly Anniversary Day on or next following the date we approve the application for reinstatement. TERMINATION: All coverage under your Policy will terminate when any one of the following events occurs: 1. you request in writing that the coverage terminate; 2. the Insured dies; 3. the Policy matures; 4. the Grace Period ends; or 5. you surrender the Policy for its Cash Surrender Value. ANNUAL REPORT: We will send you a report at least once a year which shows the current Cash Value, Cash Surrender Value, amount of insurance, premiums paid, all charges since the last report and outstanding policy Indebtedness. The report will also include any other information required by laws and regulations, both federal and state. We will mail this report to you at your address in the application or another address you specify. ILLUSTRATION OF BENEFITS AND VALUES: We will provide an illustrative projection of future benefits and values under this Policy at any time. Your written request and payment of a service fee set by us at the time of the request will be required. NONPARTICIPATION: This is a nonparticipating Policy on which no dividends are payable. Your Policy will not share in our profits or surplus earnings. CURRENCY: Any money we pay, or that is paid to us, must be in United States currency. SIGNATURE GUARANTEE: For your protection, a request for a surrender, policy loan, or a change in ownership must be signed. The Company may require the signature to be guaranteed by a member firm of the New York, American, Boston, Midwest, Philadelphia, or Pacific Stock Exchange, or by a commercial bank 7 (not a savings bank), which is a member of the Federal Deposit Insurance Corporation. In some cases, the Company may require additional documentation of a customary nature. OWNER, BENEFICIARY AND ASSIGNMENT PROVISIONS OWNER: While the Insured is living, all rights in your Policy belong to you. Your rights in your Policy belong to your estate if you die before the Insured dies and there is no Contingent Owner. You may name a Contingent Owner or a new Owner at any time while the Insured is living. If a new Owner is named, any earlier designation is automatically revoked. Any change must be in a written form satisfactory to us and recorded at our Home Office. Once recorded, the change will take effect as of the date you signed it. It will not affect any payment made or any action taken by us before it was recorded. We may require that you send us your Policy for endorsement before making a change. BENEFICIARY: The Beneficiary and Contingent Beneficiary on the Policy Date are named in the application. More than one Beneficiary or Contingent Beneficiary may be named. If more than one Beneficiary is alive when the Insured dies, we will pay them in equal shares, unless you have specified otherwise. If any Beneficiary dies before the Insured, that Beneficiary's interest will be paid to any surviving Beneficiaries or Contingent Beneficiaries according to their respective interests, unless you have specified otherwise. If no Beneficiary is living at the Insured's death, we will consider you or your estate to be the Beneficiary. While the Insured is living, you may change any Beneficiary or Contingent Beneficiary. Any change must be in a written form satisfactory to us and recorded at our Home Office. Once recorded, the change will take effect as of the date you signed it. It will not affect any payment made or action taken by us before it was recorded. We may require that you send us your Policy for endorsement before making a change. ASSIGNMENT: While the Insured is living, you may assign any or all rights under your Policy. We will not be bound by any assignment unless it is in a written form acceptable to us and is recorded at our Home Office. An assignment will not affect any payments made or actions taken by us before we record it. We will not be responsible for the sufficiency or validity of any assignment. The assignment will be subject to any Indebtedness owed to us before it was recorded. The interest of any Beneficiary will be subject to the rights of any assignee of record at our Home Office. PREMIUM PROVISIONS PREMIUM PAYMENTS: The Initial Premium is due on the Policy Date. It will be credited on the Initial Investment Date. Any due and unpaid monthly deductions will be subtracted from the Cash Value at this time. Insurance will not be effective until the Initial Premium is paid. The Initial Premium is shown on the Policy Data Page. Premiums other than the Initial Premium may be paid at any time while your Policy is in force subject to the limits described below. Planned Premium payment reminder notices will be furnished upon request. We will send them according to the premium mode shown on the Policy Data Page. You may pay the premiums to us at our Home Office or to an authorized agent. Premium receipts will be furnished upon request. LIMITS: Each premium payment must be at least $50. Additional premium payments may be made at any time while your Policy is in force. However, we reserve the right to require satisfactory evidence of insurability before accepting any additional premium payment which results in any increase in the net amount at risk. Also, we will refund any portion of any premium payment which is determined to be in excess of the 8 premium limit established by law to qualify your Policy as a contract for life insurance. We may also require that any existing Policy Indebtedness is repaid prior to accepting any additional premium payments. GRACE PERIOD PROVISIONS GRACE PERIOD: If the Cash Surrender Value on a Monthly Anniversary Day is not sufficient to cover the current monthly deduction, a Grace Period will be allowed for the payment of a premium of at least 4 times the current monthly deduction. We will send you a notice at the start of the Grace Period, at your address in the application or another address you specify, stating the amount of premium required. The Grace Period will end 61 days after the day we mail you the notice. If you do not pay the required amount by the end of the Grace Period, this Policy will terminate without value. If Death Proceeds become payable during the Grace Period, we will pay them. REINSTATEMENT: If the Grace Period has ended and you have not paid the required premium and have not surrendered your Policy for its Cash Surrender Value, you may reinstate your Policy if you: 1. submit a written request at any time within 3 years after the end of the Grace Period and prior to the Maturity Date; 2. provide evidence of insurability satisfactory to us; 3. pay sufficient premium to cover all monthly deductions that were due and unpaid during the Grace Period; 4. pay sufficient premium to keep the Policy in force for 3 months from the date of reinstatement; and 5. pay or reinstate any Indebtedness against the Policy which existed at the end of the Grace Period. The effective date of a reinstated Policy will be the Monthly Anniversary Day on or next following the date the application for reinstatement is approved by us. If your Policy is reinstated, the Cash Value on the date of reinstatement, but prior to applying any premiums or loan repayments, will be set equal to the Cash Value at the end of the Grace Period. Unless you have specified otherwise, all amounts will be allocated based on the Fund allocation factors in effect at the start of the Grace Period. DEATH BENEFIT PROVISIONS DEATH BENEFIT: If the Insured dies while the Policy is in force prior to the Maturity Date, your Policy will provide a death benefit. The death benefit will be determined in accordance with one of the following options, whichever is in effect on the date of the Insured's death. The current option in effect is shown on the Policy Data Page. Option 1 The death benefit will be the greater of: 1. the Specified Amount on the date of death; or 2. the applicable percentage of the Cash Value on the date of death. Option 2 The death benefit will be the greater of: 1. the Specified Amount plus the Cash Value on the date of death; or 2. the applicable percentage of the Cash Value on the date of death. 9 Option 3 The death benefit will be the greater of: 1. (a) plus (b) where: a. is the Specified Amount on the date of death; and b. is the greater of zero and the lesser of (i) and (ii) where: (i) is the Option 3 maximum increase shown on the Policy Data Page; and (ii) is all premium payments accumulated to the date of death at the Option 3 interest rate shown on the Policy Data Page less any partial surrenders accumulated to the date of death at the Option 3 interest rate shown on the Policy Data Page; or 2. the applicable percentage of the Cash Value on the date of death. For any Death Benefit option, the applicable percentages of Cash Value are shown on the Policy Data Page. DEATH PROCEEDS: The actual amount of money payable to the Beneficiary if the Insured dies while your Policy is in force prior to the Maturity Date is called the Death Proceeds. The Death Proceeds equals: 1. the death benefit provided by your Policy; plus 2. any insurance on the Insured's life that may be provided by riders to your Policy; minus 3. any Indebtedness; and minus 4. any due and unpaid monthly deductions accruing during a Grace Period. We will pay the Death Proceeds to the Beneficiary after we receive at our Home Office proof of death satisfactory to us and such other information as we may reasonably require. The Death Proceeds will be adjusted under certain conditions. Refer to the Incontestability, Suicide, and Error in Age Provisions. DEATH BENEFIT OPTION CHANGES: After the first Policy year, you may change the death benefit option under your Policy from Option 1 to Option 2 or from Option 2 to Option 1. You may not make a change from or to Option 3. We will adjust the Specified Amount such that the Net Amount At Risk remains constant. The effective date of change will be the Monthly Anniversary Day on or next following the date we approve the request for change. Only one change of option is permitted in a policy year. We will refuse a death benefit option change which would reduce the Specified Amount to a level where the total premiums already paid exceeds the premium limit established by law to qualify your Policy as a contract for life insurance. In order for a death benefit option change to become effective, the Cash Surrender Value, after the change, must be sufficient to keep the Policy in force for at least 3 months. SPECIFIED AMOUNT INCREASES: At any time after the first policy year, you may request an increase in Specified Amount. Your request must be in writing to our Home Office on our official forms. Any increase shall be subject to the following conditions: 1. you must provide evidence of insurability satisfactory to us; 2. the increase must be for a minimum of $10,000; and 3. the Cash Surrender Value is sufficient to keep this Policy in force for at least 3 months. An approved increase will have an effective date of the Monthly Anniversary Day on or next following the date we approve the supplemental application unless you request a different date. We reserve the right to limit the number of increases in Specified Amount to one each policy year. SPECIFIED AMOUNT DECREASES: At any time after the first policy year, you may request a decrease in the Specified Amount. Any decrease will be effective on the Monthly Anniversary Day on or next following our receipt of your request unless you request a different date. Any such decrease shall reduce insurance in the following order: 1. against insurance provided by the most recent increase; 2. against the next most recent increases successively; and 10 3. against insurance provided under the original application. We reserve the right to limit the number of decreases in the Specified Amount to one each policy year. We will refuse a request for a decrease which would: 1. reduce the Specified Amount to less than the minimum Specified Amount shown on the Policy Data Page; or 2. disqualify this Policy as a contract for life insurance. NONFORFEITURE PROVISIONS CASH VALUE: The Cash Value of your Policy is the sum of the Cash Value in each Subaccount, the Fixed Account, and the Policy Loan Account. The Cash Value in each Subaccount on the Initial Investment Date is equal to the portion of the Net Premium allocated to the Subaccount minus a pro-rata monthly deduction for the month following the Policy Date. The Cash Value in each Subaccount on each subsequent Valuation Day is equal to (1) plus (2) plus (3) minus (4) minus (5) minus (6) where: 1. is the Cash Value in the Subaccount on the preceding Valuation Day multiplied by its net investment factor for the current Valuation Period; 2. is any Net Premiums or other amounts allocated to the Subaccount during the current Valuation Period; 3. is any amounts transferred to the Subaccount during the current Valuation Period; 4. is any amounts transferred from the Subaccount during the current Valuation Period; 5. is the portion of any monthly deductions which are due and charged to the Subaccount during the current Valuation Period; and 6. is any partial surrender amounts allocated to the Subaccount during the current Valuation Period. The Cash Value in the Policy Loan Account is zero, unless you take a policy loan. If you take a policy loan, then the Cash Value in the Policy Loan Account on the loan date is equal to the amount of the loan. The loan amount is transferred from a Variable Account in proportion to the Cash Value in each Subaccount on the date of the loan. Loan amounts will be transferred from the Fixed Account only when insufficient amounts are available in the Variable Subaccounts. The Cash Value in the Policy Loan Account on each subsequent Valuation Day is equal to (1) plus (2) plus (3) minus (4) minus (5) where: 1. is the Cash Value in the Policy Loan Account on the preceding Valuation Day; 2. is any interest credited during the current Valuation Period; 3. is any amounts transferred to the Policy Loan Account because of additional policy loans and any due and unpaid loan interest during the current Valuation Period; 4. is the amount of any loan repayments you make during the current Valuation Period; and 5. is any amount of interest transferred from the Policy Loan Account to a Variable Account or the Fixed Account during the current Valuation Period. The Cash Value in the Fixed Account is zero unless some or all of the Cash Value is allocated to the Fixed Account. The Cash Value in the Fixed Account on the Initial Investment Date is equal to the portion of the Net Premium allocated to the Fixed Account minus a pro-rata monthly deduction for the month following the Policy Date. The Cash Value in the Fixed Account on each subsequent Valuation Day is equal to (1) plus (2) plus (3) minus (4) minus (5) minus (6) where: 1. is the Cash Value in the Fixed Account on the preceding Valuation Day; 2. is any interest credited during the current Valuation Period; 3. is any Net Premiums or other amounts allocated to the Fixed Account during the current Valuation Period; 4. is any amounts transferred from the Fixed Account during the current Valuation Period; 11 5. is the portion of any monthly deductions which are due and charged to the Fixed Account during the current Valuation Period; and 6. is any partial surrender amounts allocated to the Fixed Account during the current Valuation Period. MONTHLY DEDUCTION: The monthly deduction for each policy month shall be calculated as: 1. the monthly cost of insurance; plus 2. the monthly cost of any additional benefits provided by Riders; plus 3. the monthly expense and risk charges. These charges will not exceed the maximum monthly policy expense and risk charges shown on the Policy Data Page. The monthly deduction will be charged proportionately to the Cash Values in each Subaccount and the Fixed Account. MONTHLY COST OF INSURANCE: A deduction will be made on the Policy Date and each Monthly Anniversary Day for the monthly cost of insurance. The monthly cost of insurance for each policy month is determined by multiplying the monthly cost of insurance rate by the Net Amount At Risk. The monthly cost of insurance rate is described under the Cost of Insurance Rates Provision. If there have been increases in the Specified Amount, then the Cash Value shall be first considered a part of the initial Specified Amount. If the Cash Value exceeds the initial Specified Amount, it shall then be considered a part of the increases in Specified Amount in the order of the increases. COST OF INSURANCE RATES: A separate monthly cost of insurance rate is used to obtain the monthly cost of insurance for the Insured's initial Specified Amount and each increase in Specified Amount. Each rate is based on the Insured's Issue Age, smoking class, underwriting class, and any substandard rating at the time the initial Specified Amount or increase took effect and on the duration since that time. Monthly cost of insurance rates will be determined by us from time to time, based on our expectations as to future experience. Any change in cost of insurance rates will be on a uniform basis for insureds of the same Issue Age, smoking class, underwriting class, and any substandard rating whose policies have been in force for the same length of time. These rates will never be greater than the guaranteed maximum monthly cost of insurance rates shown on the Policy Data Page. The basis for these guaranteed maximum cost of insurance rates is shown in the Basis of Computation on the Policy Data Page. INTEREST CREDITING: Any Cash Value allocated to the Policy Loan Account will be credited interest daily. The guaranteed minimum annual effective rate is shown on the Policy Data Page. Interest in excess of the minimum guaranteed rate may be used. Any Cash Value allocated to the Fixed Account will be credited interest daily. The guaranteed minimum annual effective rate is shown on the Policy Data Page. Interest in excess of the minimum guaranteed may be credited. Where required, we have filed our method for determining current interest rates with the Insurance Department of the state in which this Policy was delivered. MINIMUM LEGAL VALUES: The cash surrender, loan and other values in your Policy are at least as large as those set by law in the state where it is delivered. Where required, we have given the insurance regulator a detailed statement of how we compute values and benefits. CONTINUATION OF INSURANCE: If the premium payments are not made, insurance coverage under this Policy and any benefits provided by Rider will be continued in force. Such coverage will be continued as provided in the Grace Period Provision. This provision will not continue the Policy beyond the Maturity Date nor continue any Rider beyond the date for its termination, as provided in the Rider. 12 COMPLETE SURRENDER: Your Policy may be surrendered for its Cash Surrender Value at any time while it is in force. You must submit a written request on a form acceptable to us. We may also require the return of your Policy. The date of surrender will be the date we receive your written request at our Home Office. The Cash Surrender Value will be determined as of the end of the Valuation Period during which your request is received. All coverage will end on the date of surrender. PARTIAL SURRENDER: A partial surrender may be made at any time after the first policy year while this Policy is in force. You must submit a written request. We may also require that this Policy be sent to us. We reserve the right to limit the number of partial surrenders in a policy year to one. We reserve the right to deduct a fee from the partial surrender amount. The maximum fee is shown on the Policy Data Page. When a partial surrender is made, we will reduce the Cash Value by the partial surrender amount. Unless the partial surrender is a preferred partial surrender, as defined below, we will also reduce the Specified Amount by the amount necessary to prevent an increase in the Net Amount At Risk. Any such decrease will reduce Specified Amount in the following order: 1. against the Specified Amount provided by the most recent increase; 2. against the Specified Amount provided by other increases in succession; and 3. against the Specified Amount under the original application. A preferred partial surrender is a partial surrender that meets these conditions: 1. it occurs before the 15th Policy Anniversary; and 2. its amount, plus the amount of any prior preferred policy surrenders in the same Policy Year, does not exceed 10% of the Cash Surrender Value as of the beginning of the Policy Year. Unless you specify otherwise, we will allocate partial surrenders among the Subaccounts in proportion to the Cash Value in each Subaccount as of the partial surrender date. Partial surrenders will be transferred from the Fixed Account only when insufficient amounts are available in the Variable Subaccounts. The amount of any partial surrender is subject to the following conditions: 1. the minimum partial surrender is $500; 2. the maximum amount of a partial surrender is the Cash Surrender Value less the greater of $500 or three monthly deductions; and 3. a partial surrender may not reduce the Specified Amount to less than the minimum Specified Amount shown on the Policy Data Page. In addition, the partial surrender will be allowed only if after the surrender, this Policy continues to qualify as a contract for life insurance. CHANGES IN POLICY COST FACTORS: Changes in cost of insurance rates, credited interest rates or other Policy expense charges will be by class and will be based on changes in future expectations for factors such as: 1. investment earnings; 2. mortality; 3. persistency; 4. expenses; and 5. taxes Any changes will be determined in accordance with the procedures on file, if required, with the insurance regulator in the state in which this Policy was delivered 13 LOAN PROVISIONS POLICY LOAN: You may request a loan at any time while your Policy is in force. The loan must be requested in writing on a form acceptable to us. The amount of the loan and all existing Indebtedness may not be more than the maximum loan value as of the loan date. The loan date is the date we process the loan. The minimum loan amount is $500. The loan will be made upon the sole security of the Policy and proper assignment of your Policy to us. MAXIMUM LOAN VALUE: The maximum loan value is (1) plus (2) plus (3) on the loan date where: 1. is 90% of the Cash Value in any Subaccount of the Variable Account; 2. is 100% of the Cash Value in the Fixed Account; and 3. is 100% of the Cash Value in the Policy Loan Account. LOAN INTEREST: The loan interest rate is shown on the Policy Data Page. Interest is charged daily and payable at the end of each policy year. Unpaid interest will be added to the existing Indebtedness as of the due date and will be charged interest at the same rate as the rest of the loan. Interest less than the maximum guaranteed may be charged. LOAN REPAYMENT: All or part of a loan may be repaid to us at any time while your Policy is in force during the Insured's lifetime. The minimum repayment is $50. Any payment intended as a loan repayment, rather than a premium payment, must be identified as such. Any Indebtedness that exists at the end of the Grace Period may not be repaid unless this Policy is reinstated. EFFECT OF LOAN: When you take a loan, we will transfer an amount equal to the policy loan from a Variable Subaccount or the Fixed Account to the Policy Loan Account. Any loan interest that becomes due and unpaid will also be so transferred. Amounts transferred to the Policy Loan Account will earn interest daily from the date of transfer. When you repay part or all of a loan, we will transfer an amount equal to the amount you repay from the Policy Loan Account to a Subaccount or the Fixed Account. We reserve the right to require that any loan repayments resulting from loans transferred from the Fixed Account must be allocated to the Fixed Account. Unless you specify otherwise, we will allocate loans among the Subaccounts in proportion to the Cash Value in each Subaccount as of the loan date. Loan Amounts will be transferred from the Fixed Account only when insufficient amounts are available in the Variable Subaccounts. Any loan interest which becomes due and is unpaid will be transferred to the Policy Loan Account in proportion to the Cash Values in each Subaccount and the Fixed Account. Unless specified, loan repayments will be allocated among the Subaccounts using the Fund allocation factors in effect on the date of the repayment subject to any other restrictions the Company may impose. Since the amount you borrow is removed from a Variable Subaccount or the Fixed Account, a loan will have a permanent effect on any death benefit and Cash Surrender Value of this Policy. The effect may be favorable or unfavorable. This is true whether you repay the loan or not. If not repaid, Indebtedness will reduce the amount of any Death Proceeds or Maturity Proceeds. If the total Indebtedness ever equals or exceeds the Cash Value, your Policy will terminate without value, as described in the Grace Period Provision. 14 EXCHANGE OF POLICY PROVISIONS RIGHT OF EXCHANGE: During the first 24 months from the Policy Date, you have an unconditional right to move all of the Cash Value in the Variable Subaccounts to the Fixed Account. Once all of the Cash Value is in the Fixed Account, the Policy will not be affected by the investment experience of any separate account. EXCHANGE AT OTHER TIMES: After 24 months from the Policy Date, you may exchange this Policy for a new Policy, subject to our approval. You must furnish any evidence of insurability we require and pay all costs associated with the exchange. VALUATION OF ASSETS IN A VARIABLE ACCOUNT DETERMINING INVESTMENT RESULTS: The Cash Value will change with a change in the investment results of the Subaccounts. An index called an accumulation unit value measures changes in a Subaccount's investment experience. Each Subaccount has its own accumulation unit value. For each Subaccount, the accumulation unit value was initially set at $10.00. The accumulation unit value for a Subaccount in each subsequent Valuation Period is equal to (1), multiplied by (2), where: 1. is the Subaccount's accumulation unit value for the preceding Valuation Period; and 2. is the Subaccount's net investment factor for the subsequent Valuation Period. A net investment factor is defined below. Because the net investment factor may be greater than or less than one, the accumulation unit value may increase or decrease from one Valuation Period to the next; however, the accumulation unit value remains constant throughout a Valuation Period. NET INVESTMENT FACTOR: The net investment factor for a Subaccount for a Valuation Period is obtained by dividing (1) by (2) and subtracting (3) from the result, where: 1. is the net of: (a) the net asset value per share of the Fund held in the Subaccount at the end of the current Valuation Period; plus (b) the per share amount of any dividend and capital gains distributions made by the Fund held in the Subaccount if the "ex-dividend" date occurs during the current Valuation Period; plus or minus (c) a per share charge or credit for taxes reserved for, if any, which is determined by the Company to have resulted from the investment operations of the Subaccount. 2. is the net of: (a) the net asset value per share of the Fund held in the Subaccount determined as of the end of the immediately preceding Valuation Period; plus or minus (b) the per share charge or credit for taxes reserved for in the immediately preceding Valuation Period. 3. is a daily Mortality and Expenses Risk Charge multiplied by the number of days in the current Valuation Period. The Mortality and Expenses Risk Charge is shown on the Policy Data Page. 15 VARIABLE ACCOUNT PROVISIONS VARIABLE ACCOUNT: A Variable Account is a separate investment account of the Company. One or more are named on the Policy Data Page. A Variable Account is also subject to the laws of Ohio. We own the assets of any Variable Account; we keep them separate from the assets of our General Account. We maintain assets which are at least equal to the reserves and other liabilities of a Variable Account. Such assets will not be charged with liabilities that arise from any other business we conduct. We may transfer to our General Account assets which exceed the reserves and other liabilities of a Variable Account. We will determine the value of the assets in a Variable Account at the end of each Valuation Day. SUBACCOUNTS: A Variable Account may have several Subaccounts. We list them on the Policy Data Page. You determine, using Fund allocation factors, how Net Premiums will be allocated among the Subaccounts. You may choose to allocate nothing to a particular Subaccount. Any allocation you make must be at least 1%; you may not choose a fractional percent. The sum of the Fund allocation factors must equal 100%. In states that require a full refund of premiums during the "Right to Examine Policy" period, Net Premiums will be allocated to a Subaccount that invests in a money market Fund or to the Fixed Account. The day following at the end of this period, the Cash Value in that Subaccount will be transferred to the Variable Subaccounts according to your chosen Fund allocation factors. Also, any subsequent Net Premiums will be allocated according to your chosen factors. Fund allocation factors during and immediately after the "Right to Examine Policy" period, are shown on the Policy Data Page. After the "Right to Examine Policy" period has expired, you may transfer amounts among the Subaccounts. Transfers will take effect on the date your written request is received at our Home Office, subject to any restrictions imposed by a Fund. You may change the allocation for future Net Premiums at any time while your Policy is in force. To do so, you must notify us in writing in a form that meets our approval. The change will take effect on the date we receive your written request at our Home Office. Income and realized and unrealized gains and losses from assets in each Subaccount are credited to, or charged against, the Subaccount. This is without regard to income, gains, or losses in our other Subaccounts, separate investment accounts, or our General Account. CHANGES OF FUND: A Fund might, in our judgment, become unsuitable for investment by a Subaccount. This might happen because of a change in investment policy, a change in the laws or regulations, the shares are no longer available for investment, or for some other reason. If that occurs, we have the right to substitute another Fund. But we would first notify you and seek approval from the SEC and the Superintendent of Insurance of the State of Ohio. We would also get any other required approvals. OTHER CHANGES: To the extent permitted by applicable laws and regulations (including any order of the SEC), we may make changes as follows: 1. A Variable Account may be operated as a management company under the Investment Company Act of 1940, or in any other form permitted by law, if we deem it to be in the best interest of the Policy Owners. 2. A Variable Account may be deregistered under the Investment Company Act of 1940 in the event registration is no longer required. 3. A Variable Account may be combined with other separate investment accounts. 4. The provisions of this and other policies may be modified to comply with any other applicable federal or state laws. 16 In the event of such changes, we may make appropriate endorsement on this and other policies having an interest in a Variable Account and take other actions as may be necessary to effect such a change. FIXED ACCOUNT PROVISIONS FIXED ACCOUNT: The Fixed Account is funded by the General Account of the Company. The Fixed Account is credited with interest as described under the Nonforfeiture Provisions. In addition to allocating your Net Premiums to one or more of the Subaccounts described above, you may direct all or part of your Net Premiums into the Fixed Account. RIGHT TO TRANSFER: You may transfer amounts between the Fixed Account and the Subaccounts, subject to the limits below, without penalty or adjustment. We reserve the right to limit the number of transfers between the Fixed Account and the Subaccounts during any policy year to one. Transfers from the Fixed Account must be made with 45 days after the end of an Interest Rate Guarantee Period. We reserve the right to limit the amount transferred from the Fixed Account during a Policy Year to 20% of that portion of the Cash Value attributable to the Fixed Account at the end of the prior Policy Year. Transfers to the Fixed Account may not be made prior to the first Policy Anniversary or within 12 months or any prior transfer. We reserve the right to restrict the amount transferred to the Fixed Account to 20% of that portion of the Cash Value attributable to the Subaccounts at the end of the prior Valuation Period. We reserve the right to refuse transfers to the Fixed Account if the Fixed Account is greater than or equal to 30% of the Cash Value. RIGHT OF CONVERSION: At any time upon written request within 24 months of the Policy Date, you may elect to irrevocably transfer all Subaccount Cash Values to the Fixed Account. No transfer charge will be assessed. OPTIONAL MODES OF SETTLEMENT PROVISIONS Proceeds may be paid in a lump sum. Optional modes of settlement are also available. After the Proceeds are applied under such optional modes, any amounts payable are paid from our General Account and will not be affected by the investment experience of any separate investment account. One or a combination of settlement options may be chosen. A settlement option may be chosen only if the total amount placed under the option is at least $2,000.00 and each payment is at least $20.00. A settlement option election may be changed at any time by proper written request to our Home Office. Once recorded, it will become effective on the date it was requested. We may require proof of the age of any person to be paid under a settlement option. While this Policy is in force, you may choose or change settlement options at any time. If no settlement option has been chosen prior to the Insured's death, the Beneficiary may choose one. A change of Beneficiary automatically revokes any option in effect. When Proceeds become payable under any option, a Settlement Contract is issued in exchange for this Policy. The new contract's effective date is the date of the Insured's death or the date this Policy is surrendered. Settlement option payments are not assignable. To the extent allowed by law, settlement option payments are not subject to the claims of creditors or to legal process. Under Options 2, 3, 4, and 5, payments will be made at the beginning of each 12, 6, 3, or 1 month interval beginning on the effective date of the Settlement Contract. Under Option 1 and 6, payments will be made at the end of every 12, 6, 3, or 1 month interval from the Settlement Contract's effective date. Under Options 1, 2, and 4, withdrawal of any outstanding balance may be made by written request to our Home Office. No amount left with us under Options 3, 5, or 6 may be withdrawn. 17 Options 1, 2, 4, and the guaranteed period of Option 3, provide for payment of interest at a guaranteed minimum interest rate of 2 1/2% per year, compounded annually. Any interest to be paid in excess of this rate will be determined once a year. 1. INTEREST INCOME: The Proceeds remain with us to earn interest. This interest may be left to accumulate or be paid periodically as stated above. 2. INCOME FOR A FIXED PERIOD: Proceeds remaining with us will be paid over a specified number of years (not exceeding 30 years). Each payment consists of a portion of the Proceeds plus a portion of the interest credited on the outstanding balance. The amount payable monthly for each $1,000 left with us will be at least the amount shown in the Option 2 Table. 3. LIFE INCOME WITH PAYMENTS GUARANTEED: Payments are made for a guaranteed period of 10, 15, or 20 years, and thereafter for the remainder of a payee's lifetime. The amount payable monthly for each $1,000 left with us is shown in the Option 3 Table, according to the payee's age on the effective date of the option. 4. FIXED INCOME FOR VARYING PERIODS: The Proceeds may be left on deposit with us at interest with payments of a fixed amount being paid at specified intervals until principal and interest have been exhausted. The last payment will be for the balance only. The total amount payable each year may not be less than 5% of the original proceeds. (i.e., not less than $50 per annum of each $1,000 of original proceeds.) 5. JOINT AND SURVIVOR LIFE INCOME: Equal payments will be made for the longer of the lives of two named payees. In other words, when one payee dies, the same payment continues to be paid for the remainder of the surviving payee's life. We will furnish values for other age combinations (than those shown in Option 5 Table) upon request. 6. ALTERNATE LIFE INCOME: We will use the Proceeds to purchase an annuity. The amount payable will be 102% of our current individual immediate annuity purchase rate on the effective date of the Settlement Contract. We reserve the right to change our current annuity rates at any time. However, once this option has been selected and the Settlement Contract issued, any revision in rates will not affect payment to a payee or payees. Upon request, we will quote the amount currently payable under this settlement option. 18 TABLES FOR SETTLEMENT OPTIONS Monthly Installments for each $1,000 of Proceeds OPTION 2 Option 2 - Income for a Fixed Period
-------------------------- --------------------------- --------------------------- --------------------------- Number of Years Specified Amount of Each Installment Number of Years Specified Amount of Each Installment -------------------------- --------------------------- --------------------------- --------------------------- 1 $84.28 16 $6.30 2 42.66 17 6.00 3 28.79 18 5.73 4 21.86 19 5.49 5 17.70 20 5.27 6 14.93 21 5.08 7 12.95 22 4.90 8 11.47 23 4.74 9 10.32 24 4.60 10 9.39 25 4.46 11 8.64 26 4.34 12 8.02 27 4.22 13 7.49 28 4.12 14 7.03 29 4.02 15 6.64 30 3.93 -------------------------------------------------------------------------------------------------------------- Annual, semi-annual or quarterly payments are 11.865, 5.969 and 2.994 respectively times the monthly installments --------------------------------------------------------------------------------------------------------------
Monthly Installments for each $1,000 of Proceeds OPTION 3 Option 3 - Life Income with Payments Guaranteed --------------------------------------------------------------------------------------------------------------- Guaranteed Guaranteed Guaranteed Age of Payee Period Age of Payee Period Age of Payee Period -------------------- ------------------- ------------------- Last Birthday Years Last Birthday Years Last Birthday Years --------------------------------------------------------------------------------------------------------------- Unisex 10 15 20 Unisex 10 15 20 Unisex 10 15 20 --------------------------------------------------------------------------------------------------------------- 5 & Under 2.49 2.49 2.48 30 2.84 2.83 2.83 55 3.94 3.89 3.81 6 2.49 2.49 2.48 31 2.86 2.86 2.85 56 4.01 3.96 3.87 7 2.49 2.49 2.48 32 2.89 2.89 2.88 57 4.09 4.03 3.93 8 2.49 2.49 2.48 33 2.92 2.91 2.91 58 4.17 4.10 3.99 9 2.49 2.49 2.48 34 2.95 2.94 2.93 59 4.26 4.18 4.06 10 2.49 2.49 2.48 35 2.98 2.97 2.96 60 4.35 4.26 4.12 11 2.50 2.50 2.50 36 3.01 3.00 2.99 61 4.44 4.34 4.19 12 2.51 2.51 2.51 37 3.04 3.03 3.02 62 4.54 4.42 4.25 13 2.53 2.53 2.52 38 3.07 3.07 3.05 63 4.65 4.51 4.32 14 2.54 2.54 2.54 39 3.11 3.10 3.09 64 4.76 4.60 4.39 15 2.55 2.55 2.55 40 3.15 3.14 3.12 65 4.87 4.70 4.45 16 2.57 2.57 2.56 41 3.19 3.17 3.16 66 4.99 4.80 4.52 17 2.58 2.58 2.58 42 3.23 3.21 3.19 67 5.12 4.90 4.59 18 2.60 2.60 2.59 43 3.27 3.25 3.23 68 5.26 5.00 4.65 19 2.61 2.61 2.61 44 3.31 3.30 3.27 69 5.40 5.10 4.71 20 2.63 2.63 2.63 45 3.36 3.34 3.31 70 5.54 5.20 4.77 21 2.65 2.65 2.64 46 3.41 3.39 3.36 71 5.69 5.31 4.83 22 2.67 2.66 2.66 47 3.46 3.43 3.40 72 5.85 5.41 4.88 23 2.69 2.68 2.68 48 3.51 3.48 3.44 73 6.01 5.52 4.94 24 2.70 2.70 2.70 49 3.56 3.53 3.49 74 6.18 5.62 4.98 25 2.72 2.72 2.72 50 3.62 3.59 3.54 75 6.35 5.71 5.03 26 2.75 2.75 2.74 51 3.68 3.64 3.59 76 6.53 5.81 5.06 27 2.77 2.77 2.76 52 3.74 3.70 3.64 77 6.71 5.90 5.10 28 2.79 2.79 2.78 53 3.80 3.76 3.70 78 6.89 5.99 5.13 29 2.81 2.81 2.81 54 3.87 3.82 3.75 79 7.07 6.07 5.16 80 & Over 7.25 6.14 5.18 --------------------------------------------------------------------------------------------------------------- If the income payable for a specific guaranteed period is equal to that for other guaranteed periods the longer period will be deemed to have been elected ---------------------------------------------------------------------------------------------------------------
Monthly Installments for each $1,000 of Proceeds OPTION 5 Option 5 - Joint & Survivor Life Income --------------------------------------------------------------------------------------------------------------- Participant 50 55 60 65 70 Spouse --------------------------------------------------------------------------------------------------------------- 50 3.02 3.15 3.26 3.35 3.39 55 3.15 3.32 3.47 3.59 3.67 60 3.26 3.47 3.67 3.85 4.00 65 3.35 3.59 3.85 4.12 4.37 70 3.39 3.67 4.00 4.37 4.75 ---------------------------------------------------------------------------------------------------------------
19 NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY ENDORSEMENTS (Endorsements may be made only by the Company at the Home Office) 20 [NATIONWIDE LOGO] NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY CORPORATE FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY - Adjustable Death Benefit - Flexible premiums payable during Insured's lifetime until the Maturity Date - Death Proceeds payable at Insured's death prior to the Maturity Date - Maturity Proceeds payable on the Maturity Date - Not eligible for dividends - Investment experience reflected in benefits -----END PRIVACY-ENHANCED MESSAGE-----