-----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, J7ohuvCfR/f8HR6hs7UzjouBIIwwfxLaDhqYF0SyIMLOTkeDQRz4/J9M7EmmZWiD qxbyMAntkVFYOjEmLJLIbg== 0001047469-99-020880.txt : 19990518 0001047469-99-020880.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-020880 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT CENTRAL INDEX KEY: 0000742277 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 333-59103 FILM NUMBER: 99625519 BUSINESS ADDRESS: STREET 1: 720 E WISCONSIN AVE CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4142711444 MAIL ADDRESS: STREET 1: 720 EAST WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 497 1 497 April 30, 1999 NORTHWESTERN MUTUAL LIFE-Registered Trademark- The Quiet Company-Registered Trademark- Northwestern Mutual Variable Joint Life Flexible Premium Variable Joint Life Insurance Policy Insurance Payable on Second Death This prospectus describes seven new investment divisions which we expect to be available on June 30, 1999. We have filed an amendment to the Policy form with the insurance commissioner of your state to include these new divisions. If you own a Policy issued before the date when the new divisions become available in your state, we will send you an amendment to your Policy soon after that date. Please read the prospectus for more information. Northwestern Mutual Series Fund, Inc. and Russell Insurance Funds The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 (414) 271-1444 PLANNING ACCOMPLISHMENTS SUCCESS COMMITMENT PROSPERITY GOALS INTENTIONS STRUCTURE PROSPECTUSES CONTENTS FOR THIS PROSPECTUS
Page ---- Prospectus................................................................ 1 Summary................................................................... 2 Variable Life Insurance............................................... 2 The Account and its Divisions......................................... 2 The Policy............................................................ 2 Availability Limitations............................................ 2 Premiums............................................................ 2 Death Benefit....................................................... 2 Cash Value.......................................................... 2 Deductions and Charges.............................................. 2 From Premiums..................................................... 2 From Policy Value................................................. 2 From Surrender Proceeds........................................... 3 From the Mutual Funds............................................. 3 The Northwestern Mutual Life Insurance Company, Northwestern Mutual Variable Life Account, Northwestern Mutual Series Fund, Inc. and Russell Insurance Funds........................................... 4 Northwestern Mutual Life.............................................. 4 The Account........................................................... 4 The Funds............................................................. 4 Northwestern Mutual Series Fund, Inc................................. 4 Small Cap Growth Stock Portfolio.................................... 4 Aggressive Growth Stock Portfolio................................... 5 International Equity Portfolio...................................... 5 Index 400 Stock Portfolio........................................... 5 Growth Stock Portfolio.............................................. 5 Growth and Income Stock Portfolio................................... 5 Index 500 Stock Portfolio........................................... 5 Balanced Portfolio.................................................. 5 High Yield Bond Portfolio........................................... 5 Select Bond Portfolio............................................... 5 Money Market Portfolio.............................................. 5 Russell Insurance Funds.............................................. 5 Multi-Style Equity Fund............................................. 6 Aggressive Equity Fund.............................................. 6 Non-U.S. Fund....................................................... 6 Real Estate Securities Fund......................................... 6 Core Bond Fund...................................................... 6 Detailed Information About the Policy..................................... 6 Premiums.............................................................. 6 Death Benefit......................................................... 7 Death Benefit Options............................................... 7 Choice of Tests for Tax Purposes.................................... 7 Death Benefit Changes............................................... 8 Allocations to the Account............................................ 8 Deductions and Charges................................................ 8 Deductions from Premiums............................................ 8 Page ---- Charges against the Policy Value...................................... 8 Surrender Charge...................................................... 9 Expenses of the Fund.................................................. 9 Cash Value................................................................ 9 Policy Loans.............................................................. 10 Withdrawals of Cash Value................................................. 10 Termination and Reinstatement............................................. 10 Right to Return Policy................................................ 11 Other Policy Provisions............................................... 11 Owner............................................................. 11 Beneficiary....................................................... 11 Incontestability.................................................. 11 Suicide........................................................... 11 Misstatement of Age or Sex........................................ 11 Collateral Assignment............................................. 11 Deferral of Determination and Payment............................. 11 Dividends......................................................... 11 Voting Rights......................................................... 12 Substitution of Fund Shares and Other Changes......................... 12 Reports................................................................... 12 Distribution of the Policies.............................................. 12 Tax Considerations........................................................ 13 General............................................................... 13 Life Insurance Qualification.......................................... 13 Tax Treatment of Life Insurance....................................... 13 Modified Endowment Contracts.......................................... 13 Estate and Generation Skipping Taxes.................................. 14 Other Tax Considerations.............................................. 15 Other Information......................................................... 15 Management............................................................ 15 Regulation............................................................ 17 Year 2000 Issues...................................................... 17 Legal Proceedings..................................................... 18 Registration Statement................................................ 18 Experts............................................................... 18 Financial Statements...................................................... 19 Report of Independent Accountants (for the two years ended December 31, 1998)............................ 19 Financial Statements of the Account (for the two years ended December 31, 1998)............................ 20 Financial Statements of Northwestern Mutual Life (for the three years ended December 31, 1998)..................................................... 26 Report of Independent Accountants (for the three years ended December 31, 1998).......................... 39 Appendix A................................................................ 40 Appendix B................................................................ 49
PROSPECTUS NORTHWESTERN MUTUAL VARIABLE JOINT LIFE FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY INSURANCE PAYABLE ON SECOND DEATH This prospectus describes the Variable Joint Life Policy (the "Policy") offered by The Northwestern Mutual Life Insurance Company. The Policy provides life insurance coverage on two insureds with a death benefit payable on the second death while the policy is in force. The Policy offers flexible premium payments, sixteen investment funding options and a choice of three death benefit options. The investment options correspond to the eleven Portfolios of Northwestern Mutual Series Fund, Inc. and the five Funds which comprise the Russell Insurance Funds. The prospectuses for these mutual funds, attached to this prospectuses, describe the investment objectives for all of the Portfolios and Funds. The values provided by the Policy vary daily depending on investment results. These values are not guaranteed. The Portfolios and Funds present varying degrees of investment risk. You may return your Policy for a limited period of time. See "Right to Return Policy", p. 11. IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING INSURANCE WITH A VARIABLE LIFE INSURANCE POLICY. SEE DEDUCTIONS AND CHARGES AND CASH VALUE. THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES FOR NORTHWESTERN MUTUAL SERIES FUND, INC. AND THE RUSSELL INSURANCE FUNDS WHICH ARE ATTACHED HERETO, AND SHOULD BE RETAINED FOR FUTURE REFERENCE. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -- 1 SUMMARY THE FOLLOWING SUMMARY PROVIDES A BRIEF OVERVIEW OF THE POLICY. IT OMITS DETAILS WHICH ARE INCLUDED ELSEWHERE IN THIS PROSPECTUS AND THE ATTACHED MUTUAL FUND PROSPECTUSES AND IN THE TERMS OF THE POLICY. VARIABLE LIFE INSURANCE Variable life insurance is cash value life insurance and is similar in many ways to traditional fixed benefit life insurance. Both kinds of life insurance provide an income tax-free death benefit and a cash value that grows tax- deferred. Variable life insurance allows the policyowner to direct the premiums, after certain deductions, among a range of investment options. The variable life insurance death benefit and cash value vary to reflect the performance of the selected investments. THE ACCOUNT AND ITS DIVISIONS Northwestern Mutual Variable Life Account is the investment vehicle for the Policies. The Account has sixteen divisions. You determine how net premiums are to be apportioned. We invest the assets of each division in a corresponding Portfolio of Northwestern Mutual Series Fund, Inc. or one of the Russell Insurance Funds. The eleven Portfolios of Northwestern Mutual Series Fund, Inc. are the Small Cap Growth Stock Portfolio, Aggressive Growth Stock Portfolio, International Equity Portfolio, Index 400 Stock Portfolio, Growth Stock Portfolio, Growth and Income Stock Portfolio, Index 500 Stock Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and Money Market Portfolio. The five Russell Insurance Funds are the Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Real Estate Securities Fund, and Core Bond Fund. For additional information about the funds see the attached prospectuses. THE POLICY AVAILABILITY LIMITATIONS The Variable Joint Life Policy is available for two insureds each between ages 20 and 85. The minimum Specified Amount of insurance is $1,000,000, or $500,000 if the older insured's issue age is age 50 or older. PREMIUMS You may pay premiums at any time and in any amounts, within limits, but additional premiums will be required to keep the Policy in force if values become insufficient to pay current charges. DEATH BENEFIT The Policy offers a choice of three death benefit options: - - SPECIFIED AMOUNT (OPTION A) - - SPECIFIED AMOUNT PLUS POLICY VALUE (OPTION B) - - SPECIFIED AMOUNT PLUS PREMIUMS PAID (OPTION C) In each case, the death benefit will be at least the amount needed to meet federal income tax requirements for life insurance. You select the Specified Amount when you purchase the Policy. You may increase or decrease the Specified Amount, within limits and subject to conditions, after a Policy is issued. The amount of the death benefit is not guaranteed. CASH VALUE The cash value of a Policy is not guaranteed and varies daily to reflect investment experience. A Policy may be surrendered for its cash value. The Policy also includes loan and withdrawal provisions. DEDUCTIONS AND CHARGES FROM PREMIUMS - - Deduction of 3.6% for local, state and federal taxes attributable to premiums - - Sales load of 6.4% up to the Target Premium in Policy years 1-10, and 2.4% of all other premiums. The Target Premium is described under "Premiums", on page 6. FROM POLICY VALUE - - Cost of insurance charge deducted monthly, is based on the net amount at risk, Policy duration, and the issue age, sex and risk classification of the insured persons. Current charges are based on our experience. Maximum charges are based on the 1980 CSO Mortality Tables. - - Monthly mortality and expense risk charge. This consists of two components: (1) THE INVESTED ASSETS COMPONENT--The current charge is at the annual rate of .45% (0.0375% monthly rate) of the Policy Value less any Policy debt. The maximum charge is at the annual rate of .90% (0.075% monthly rate). (2) THE SPECIFIED AMOUNT COMPONENT--The charge is based on the Specified Amount and the issue ages of the insured persons, and applies during the first 10 Policy years. The range on an annual basis is from 4 CENTS per $1,000 of initial Specified Amount if both insured persons are issue age 25 or younger, up to $1.72 per $1,000 of initial Specified Amount if both insured persons are issue age 72 or older. - - Monthly administrative charge. The current charge is $5.00. The maximum charge is $7.50. - - Monthly underwriting and issue charge. The charge is based on the Specified Amount and risk classification of the insured persons. It applies during the first 10 Policy years. The range is from 1.5 CENTS to 3.5 CENTS per $1,000 of initial Specified Amount, with a maximum monthly charge of $75 to $175. - - Deferred sales charge deducted monthly. The charge is 7.5% (0.625% monthly rate) of premiums paid during the first Policy year up to the Target -- 2 Premium. During the first Policy year the monthly deduction is based on cumulative premiums paid to date up to the Target Premium. The charge applies during the first 10 Policy years. - - Charge for expenses and taxes associated with the Policy loan, if any. The aggregate charge is at the current annual rate of .90% (0.075% monthly rate) of the Policy debt during the first ten Policy years and .35% (.029167%) thereafter. - - Any transaction charges that may result from a withdrawal, a transfer, a change in the Specified Amount or a change in the death benefit option. We are currently waiving these charges. The maximum charge is $250 for death benefit option changes and $25 for each of the other transactions. FROM SURRENDER PROCEEDS - - A surrender charge equal to 50% of the premiums actually paid during the first Policy year or the Target Premium, whichever is less. Beginning with the second Policy year, the surrender charge decreases by the same dollar amount month by month to zero at the end of the tenth Policy year. FROM THE MUTUAL FUNDS - - A daily charge for investment advisory and other services provided to the mutual funds. The total expenses vary by Portfolio or Fund and currently fall in an approximate range of .21% to 2.37% of assets on an annual basis. The following table shows the annual expenses for each of the Portfolios and Funds, as a percentage of the average net assets, based on 1998 operations. Expenses for the Portfolios and Funds which were not in operation during 1998 are estimated NORTHWESTERN MUTUAL SERIES FUND, INC.
INVESTMENT PORTFOLIO ADVISORY FEE OTHER EXPENSES TOTAL EXPENSES - ---------------------------- ---------------- --------------- -------------- Small Cap Growth Stock*..... .80% .46% 1.26% Aggressive Growth Stock..... .52% .00% .52% International Equity........ .67% .09% .76% Index 400 Stock*............ .25% .23% .48% Growth Stock................ .45% .01% .46% Growth and Income Stock..... .57% .01% .58% Index 500 Stock............. .20% .01% .21% Balanced.................... .30% .00% .30% High Yield Bond............. .49% .01% .50% Select Bond................. .30% .00% .30% Money Market................ .30% .00% .30%
*Small Cap Growth Stock and Index 400 Stock Portfolios Northwestern Mutual Investment Services. I.I.C. (NMIS), investment adviser to Northwestern Mutual Series Fund, Inc., has voluntarily agreed to waive a portion of its advisory fee, up to the full amount of that fee, equal to the amount by which total operating expenses exceed (1) 0.92% of the Small Cap Growth Stock Portfolio's average daily net assets on an annual basis, and (2) 0.35% of the Index 400 Stock Portfolio's average daily net assets. In addition, NMIS has voluntarily agreed to reimburse each of these portfolios for all remaining expenses after fee waivers which exceed (1) 0.92% in the case of the Small Cap Growth Stock Portfolio, and (2) 0.35% in the case of the Index 400 Stock Portfolio, of the average daily net assets on an annual basis. This waiver and reimbursement, in each case, may be revised or eliminated at any time without notice to shareholders. Operating expenses are based on average net assets expected to be invested during the period ending on December 31, 1999. During the course of this period, expenses may be more or less than the amounts shown. RUSSELL INSURANCE FUNDS
INVESTMENT FUND ADVISORY FEE* OTHER EXPENSES* TOTAL EXPENSES - --------------------------- --------------- --------------- -------------- Multi-Style Equity Fund.... 0.78% 0.43% 1.21% Aggressive Equity Fund..... 0.95% 0.72% 1.67% Non-U.S. Fund.............. 0.95% 1.42% 2.37% Real Estate Securities Fund...................... 0.85% 0.30% 1.15% Core Bond Fund............. 0.60% 0.68% 1.28%
*Multi-Style Equity Fund Frank Russell Investment Company's (FRIC's) advisor, Frank Russell Investment Management Company (FRIMCo) has voluntarily agreed to waive a portion of its 0.78% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 0.92% of the Fund's average daily net assets on an annual basis. FRIMCo has voluntarily agreed to reimburse the Fund for all remaining expenses after fee waivers which exceed 0.92% of the average daily net assets on an annual basis. This waiver may be revised or eliminated at any time without notice to shareholders. Taking the fee waivers into account, the actual annual total operating expenses were 0.92% of the average net assets of the Multi-Style Fund. Aggressive Equity Fund FRIMCo has voluntarily agreed to waive a portion of its 0.95% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 1.25% of the Fund's average daily net assets on an annual basis. FRIMCo has voluntarily agreed to reimburse the Fund for all remaining expenses after fee waivers which exceed 1.25% of the average daily net assets on an annual basis. This waiver may be revised or eliminated at any time without notice to shareholders. Taking the fee waivers into account, the actual annual total operating expenses were 1.25% of the average net assets of the Aggressive Equity Fund. Non-U.S. Fund FRIMCo has voluntarily agreed to waive a portion of its 0.95% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 1.30% of the Fund's average daily net assets on an annual basis. FRIMCo has voluntarily agreed to reimburse the Fund for all remaining expenses after fee waivers which exceed 1.30% of the average daily net assets on an annual basis. This waiver may be revised or eliminated at any time without notice to shareholders. Taking the fee waivers into account, the actual annual total operating expenses were 1.30% of the average net assets of the Non-U.S. Fund. Real Estate Securities Fund FRIMCo has voluntarily agreed to waive a portion of its .85% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed 1.15% of the Fund's average daily net assets on an annual basis. FRIMCo has voluntarily agreed to reimburse the Fund for all remaining expenses after fee waivers which exceed 1.15% of the average daily net assets on an annual basis. This waiver may be revised or eliminated at any time without notice to shareholders. Operating expenses are based on average net assets expected to be invested during the year ending December 31, 1999. During the course of this period, expenses may be more or less than the amount shown. Core Bond Fund FRIMCo has voluntarily agreed to waive a portion of its 0.60% management fee, up to the full amount of that fee, equal to the amount by which the Fund's total operating expenses exceed .80% of the Fund's average daily net assets on an annual basis. FRIMCo has voluntarily agreed to reimburse the Fund for all remaining expenses after fee waivers which exceed .80% of the average daily net assets on an annual basis. This waiver may be revised or eliminated at any time without notice to shareholders. Taking the fee waivers into account, the actual annual total operating expenses were .80% of the average net assets of the Core Bond Fund. -- 3 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT, NORTHWESTERN MUTUAL SERIES FUND, INC. AND RUSSELL INSURANCE FUNDS NORTHWESTERN MUTUAL LIFE The Northwestern Mutual Life Insurance Company is a mutual life insurance company organized by a special act of the Wisconsin Legislature in 1857. It is the nation's fourth largest life insurance company, based on total assets in excess of $77 billion on December 31, 1998, and is licensed to conduct a conventional life insurance business in the District of Columbia and in all states of the United States. Northwestern Mutual Life sells life and disability insurance policies and annuity contracts through its own field force of approximately 6,000 full time producing agents. The Internal Revenue Service Employer Identification Number of Northwestern Mutual Life is 39-0509570. "We" in this prospectus means Northwestern Mutual Life. THE ACCOUNT We established Northwestern Mutual Variable Life Account by action of our Trustees on November 23, 1983, in accordance with the provisions of Wisconsin insurance law. Under Wisconsin law the income, gains and losses, realized or unrealized, of the Account are credited to or charged against the assets of the Account without regard to our other income, gains or losses. We use the Account only for variable life insurance policies, including other variable life insurance policies which are described in other prospectuses. The Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940. This registration does not involve supervision of management or investment practices or policies. The Account has sixteen divisions. All of the assets of each division are invested in shares of the corresponding Portfolio or Fund described below. THE FUNDS NORTHWESTERN MUTUAL SERIES FUND, INC. Northwestern Mutual Series Fund, Inc. is a mutual fund of the series type registered under the Investment Company Act of 1940 as an open-end diversified management investment company. The Account buys shares of each Portfolio at their net asset value without any sales charge. The investment adviser for the Fund is Northwestern Mutual Investment Services, LLC ("NMIS"), our wholly-owned subsidiary. The investment advisory agreements for the respective Portfolios provide that NMIS will provide services and bear certain expenses of the Fund. For providing investment advisory and other services and bearing Fund expenses, the Fund pays NMIS a fee at an annual rate which ranges from .20% of the aggregate average daily net assets of the Index 500 Stock Portfolio to a maximum of .67% for the International Equity Portfolio, based on 1998 asset size. Other expenses borne by the Portfolios range from 0% for the Select Bond, Money Market and Balanced Portfolios to .09% for the International Equity Portfolio. We provide the people and facilities NMIS uses in performing its investment advisory functions and we are a party to the investment advisory agreement. NMIS has retained J.P. Morgan Investment Management, Inc. and Templeton Investment Counsel, Inc. under investment sub-advisory agreements to provide investment advice to the Growth and Income Stock Portfolio and the International Equity Portfolio. The investment objectives and types of investments for each of the eleven Portfolios of the Fund are set forth below. There can be no assurance that the Portfolios will realize their objectives. For more information about the investment objectives and policies, the attendant risk factors and expenses see the attached prospectus for Northwestern Mutual Series Fund, Inc. SMALL CAP GROWTH STOCK PORTFOLIO. The investment objective of the Small Cap Growth Stock Portfolio is long-term growth of capital. The Portfolio will seek to -- 4 achieve this objective primarily by investing in the common stocks of companies which can reasonably be expected to increase sales and earnings at a pace which will exceed the growth rate of the U.S. economy over an extended period.--WE EXPECT THE SMALL CAP GROWTH STOCK PORTFOLIO TO BE AVAILABLE FOR USE WITH THE POLICIES BEGINNING ON JUNE 30, 1999. AGGRESSIVE GROWTH STOCK PORTFOLIO. The investment objective of the Aggressive Growth Stock Portfolio is to achieve long-term appreciation of capital primarily by investing in the common stocks of companies which can reasonably be expected to increase their sales and earnings at a pace which will exceed the growth rate of the nation's economy over an extended period. INTERNATIONAL EQUITY PORTFOLIO. The investment objective of the International Equity Portfolio is long-term capital growth. It pursues its objective through a flexible policy of investing in stocks and debt securities of companies and governments outside the United States. INDEX 400 STOCK PORTFOLIO. The investment objective of the Index 400 Stock Portfolio is to achieve investment results that approximate the performance of the Standard & Poor's MidCap 400 Index ("S&P 400 Index"). The Portfolio will attempt to meet this objective by investing in stocks included in the S&P 400 Index.--WE EXPECT THE INDEX 400 STOCK PORTFOLIO TO BE AVAILABLE FOR USE WITH THE POLICIES BEGINNING ON JUNE 30, 1999. GROWTH STOCK PORTFOLIO. The investment objective of the Growth Stock Portfolio is long-term growth of capital; current income is secondary. The Portfolio will seek to achieve this objective by selecting investments in companies which have above average earnings growth potential. GROWTH AND INCOME STOCK PORTFOLIO. The investment objective of the Growth and Income Stock Portfolio is long-term growth of capital and income. Ordinarily the Portfolio pursues its investment objectives by investing primarily in dividend-paying common stock. INDEX 500 STOCK PORTFOLIO. The investment objective of the Index 500 Stock Portfolio is to achieve investment results that approximate the performance of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index"). The Portfolio will attempt to meet this objective by investing in stocks included in the S&P 500 Index. Stocks are generally more volatile than debt securities and involve greater investment risks. BALANCED PORTFOLIO. The investment objective of the Balanced Portfolio is to realize as high a level of long-term total rate of return as is consistent with prudent investment risk. The Balanced Portfolio will invest in common stocks and other equity securities, bonds and money market instruments. Investment in the Balanced Portfolio necessarily involves the risks inherent in stocks and debt securities of varying maturities, including the risk that the Portfolio may invest too much or too little of its assets in each type of security at any particular time. HIGH YIELD BOND PORTFOLIO. The investment objective of the High Yield Bond Portfolio is to achieve high current income and capital appreciation by investing primarily in fixed income securities that are rated below investment grade by the major rating agencies. SELECT BOND PORTFOLIO. The primary investment objective of the Select Bond Portfolio is to provide as high a level of long-term total rate of return as is consistent with prudent investment risk. A secondary objective is to seek preservation of shareholders' capital. The Select Bond Portfolio will invest primarily in debt securities. The value of debt securities will tend to rise and fall inversely with the rise and fall of interest rates. MONEY MARKET PORTFOLIO. The investment objective of the Money Market Portfolio is to realize maximum current income consistent with liquidity and stability of capital. The Money Market Portfolio will invest in money market instruments and other debt securities with maturities generally not exceeding one year. The return produced by these securities will reflect fluctuations in short-term interest rates. RUSSELL INSURANCE FUNDS The Russell Insurance Funds also comprise a mutual fund of the series type registered under the Investment Company Act of 1940 as an open-end diversified management investment company. The Account buys shares of each of the Russell Insurance Funds at their net asset value without any sales charge. The assets of each of the Russell Insurance Funds are invested by one or more investment management organizations researched and recommended by Frank Russell Company ("Russell"), and an affiliate of -- 5 Russell, Frank Russell Investment Management Company ("FRIMCo"). FRIMCo also advises, operates and administers the Russell Insurance Funds. Russell is our majority-owned subsidiary. The investment objectives and types of investments for each of the five Russell Insurance Funds are set forth below. There can be no assurance that the Funds will realize their objectives. A table showing the expense ratios for each of the Russell Insurance Funds is included in the Summary above, at page 3. For more information about the investment objectives and policies, the attendant risk factors and expenses see the attached prospectus for the Russell Insurance Funds. WE EXPECT THE RUSSELL INSURANCE FUNDS TO BE AVAILABLE FOR USE WITH THE POLICIES BEGINNING ON JUNE 30, 1999. MULTI-STYLE EQUITY FUND. The investment objective of the Multi-Style Equity Fund is to provide income and capital growth by investing principally in equity securities. The Multi-Style Equity Fund invests primarily in common stocks of medium and large capitalization companies. These companies are predominately US-based, although the Fund may invest a limited portion of its assets in non-US firms from time to time. AGGRESSIVE EQUITY FUND. The investment objective of the Aggressive Equity Fund is to provide capital appreciation by assuming a higher level of volatility than is ordinarily expected from Multi-Style Equity Fund by investing in equity securities. The Aggressive Equity Fund invests primarily in common stocks of small and medium capitalization companies. These companies are predominately US-based, although the Fund may invest in non-US firms from time to time. NON-U.S. FUND. The investment objective of the Non-U.S. Fund is to provide favorable total return and additional diversification for US investors by investing primarily in equity and fixed-income securities of non-US companies, and securities issued by non-US governments. The Non-U.S. Fund invests primarily in equity securities issued by companies domiciled outside the United States and in depository receipts, which represent ownership of securities of non-US companies. REAL ESTATE SECURITIES FUND. The investment objective of the Real Estate Securities Fund is to generate a high level of total return through above average current income, while maintaining the potential for capital appreciation. The Fund seeks to achieve its objective by concentrating its investments in equity securities of issuers whose value is derived primarily from development, management and market pricing of underlying real estate properties. CORE BOND FUND. The investment objective of the Core Bond Fund is to maximize total return, through capital appreciation and income, by assuming a level of volatility consistent with the broad fixed-income market, by investing in fixed-income securities. The Core Bond Fund invests primarily in fixed-income securities. In particular, the Fund holds debt securities issued or guaranteed by the US government, or to a lesser extent by non-US governments, or by their respective agencies and instrumentalities. It also holds mortgage-backed securities, including collateralized mortgage obligations. The Fund also invests in corporate debt securities and dollar-denominated obligations issued in the US by non-US banks and corporations (Yankee Bonds). A majority of the Fund's holdings are US dollar-denominated. From time to time the Fund may invest in municipal debt obligations. - -------------------------------------------------------------------------------- DETAILED INFORMATION ABOUT THE POLICY PREMIUMS The Policy permits you to pay premiums at any time before the Policy anniversary that is nearest the 95th birthday of the younger insured and in any amounts within the limits described in this section. We use the Specified Amount you select when you purchase the Policy to determine the minimum initial premium. The minimum initial premium varies with the issue age and sex of the insured persons. We calculate a Target Premium when the Policy is issued and we use the Target Premium in determining the sales load, commissions, surrender charge and other expense charges during the first 10 Policy years. The Target Premium is based on a survivorship whole life premium, assuming a 4% gross investment return, for the initial Specified Amount and the issue age, sex -- 6 and risk classification of the insured persons. For example, for a male and female, both in the best risk classification and both issue age 55, the Target Premium is $18.58 per $1,000 of initial Specified Amount. The Target Premium will never exceed $100 per $1,000 of initial Specified Amount for any issue age, sex and risk classification combination. After a Policy is issued, there are no minimum premiums, except that we will not accept a premium of less than $25. The Policy will remain in force during the lifetime of at least one of the insured persons so long as the cash value is sufficient to pay the monthly cost of insurance charge and other current charges. The Policy sets no maximum on premiums, but we will accept a premium that would increase the net amount at risk only if the insurance, as increased, will be within our issue limits, the insureds meet our insurability requirements and we receive the premium prior to the anniversary nearest the older insured's 85th birthday. If you have elected the Guideline Premium/Cash Value Corridor Test, we will not accept a premium if it would disqualify the Policy as life insurance for federal income tax purposes. We will accept a premium, however, even if it would cause the Policy to be classified as a modified endowment contract. See "Choice of Tests for Tax Purposes", p. 7 and "Tax Considerations", p. 13. DEATH BENEFIT DEATH BENEFIT OPTIONS The death benefit is payable on the second death while the Policy is in force. The Policy provides for three death benefit options: SPECIFIED AMOUNT (OPTION A) You select the Specified Amount when you purchase the Policy. SPECIFIED AMOUNT PLUS POLICY VALUE (OPTION B) The Policy Value is the cumulative amount invested, adjusted for investment results, reduced by the charges for insurance and other expenses. SPECIFIED AMOUNT PLUS PREMIUMS PAID (OPTION C) The selected death benefit option will be in effect before the Policy anniversary nearest the 100th birthday of the younger insured, and the death benefit will be equal to the Policy Value after that date. Under any of the Options, or on or after the Policy anniversary nearest the 100th birthday of the younger insured, we will increase the death benefit if necessary to meet the definitional requirements for life insurance for federal income tax purposes as discussed below. CHOICE OF TESTS FOR TAX PURPOSES A Policy must satisfy one of two testing methods to qualify as life insurance for federal income tax purposes. You may choose either the Guideline Premium/Cash Value Corridor Test or the Cash Value Accumulation Test. Both tests require the Policy to meet minimum ratios, or multiples, of death benefit to the Policy Value. The minimum multiple decreases as the age of the insured persons advances. You make the choice of testing methods when you purchase a Policy and it may not be changed. For the Guideline Premium/Cash Value Corridor Test the minimum multiples of death benefit to the Policy Value are shown in the following table. The attained age of the younger insured is used even if the younger insured is no longer living. GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST MULTIPLES YOUNGER INSURED AGE
ATTAINED POLICY ATTAINED POLICY AGE VALUE % AGE VALUE % - -------------- ------------- -------------- ------------- 40 or under... 250 61............ 128 41............ 243 62............ 126 42............ 236 63............ 124 43............ 229 64............ 122 44............ 222 65............ 120 45............ 215 66............ 119 46............ 209 67............ 118 47............ 203 68............ 117 48............ 197 69............ 116 49............ 191 70............ 115 50............ 185 71............ 113 51............ 178 72............ 111 52............ 171 73............ 109 53............ 164 74............ 107 54............ 157 75-90......... 105 55............ 150 91............ 104 56............ 146 92............ 103 57............ 142 93............ 102 58............ 138 94............ 101 59............ 134 95 or over.... 100 60............ 130
For the Cash Value Accumulation Test the minimum multiples of death benefit to the Policy Value are calculated using net single premiums based on the attained age of both insureds and the Policy's underwriting classification, using a 4% interest rate. -- 7 The Guideline Premium/Cash Value Corridor Test generally has lower minimum multiples than the Cash Value Accumulation Test, usually resulting in better cash value accumulation for a given amount of premium. But the Guideline Premium/Cash Value Corridor Test limits the amount of premium that may be paid in each Policy year. The Cash Value Accumulation Test has no such annual limitation, and allows more premium to be paid during the early Policy years. DEATH BENEFIT CHANGES After we issue a Policy you may change the death benefit option, or increase or decrease the Specified Amount, subject to our approval. Changes are subject to insurability requirements and issue limits. We will not permit a change if it results in a Specified Amount less than the minimum for a new Policy that we would issue on that date. A change in the death benefit option, or an increase or decrease in the Specified Amount, will be effective on the monthly processing date next following receipt of a written request at our Home Office. Administrative charges of up to $250 for a change in the death benefit option, and up to $25 for each of more than one change in the Specified Amount in a Policy year, may apply. We will deduct any such charges from the Policy Value. We are currently waiving these charges. A change in the death benefit option, or an increase or decrease in the Specified Amount, may have important tax effects. See "Tax Considerations", p. 13. The cost of insurance charge will increase if a change results in a larger net amount at risk. See "Charges against the Policy Value," p. 8. ALLOCATIONS TO THE ACCOUNT We place the initial net premium in the Account on the Policy date. Net premiums you pay thereafter are placed in the Account on the date we receive them at our Home Office. Net premiums are premiums less the deductions from premiums. See "Deductions from Premiums", below. We invest premiums we place in the Account prior to the initial allocation date in the Money Market Division of the Account. The initial allocation date will be one day after the end of the period during which the policyowner has the right to return the Policy, based on the applicable state laws. See "Right to Return Policy", p. 11. On the initial allocation date we invest the amount in the Money Market Division in the Account divisions as you have directed in the application for the Policy. You may change the allocation for future net premiums at any time by written request and the change will be effective for premiums we place in the Account thereafter. Allocation must be in whole percentages. You may transfer accumulated amounts from one division of the Account to another. Transfers are effective on the date we receive a written request at our Home Office. We reserve the right to charge a fee of up to $25, to cover administrative costs of transfers, if there are more than twelve transfers in a Policy year. We are currently waiving these fees. DEDUCTIONS AND CHARGES DEDUCTIONS FROM PREMIUMS We deduct a charge for taxes attributable to premiums from each premium. The total amount of this deduction is 3.6% of the premium. Of this amount 2.35% is for state premium taxes. Premium taxes vary from state to state and currently range from .5% to 3.5% of life insurance premiums. The 2.35% rate is an average. The tax rate for a particular state may be lower, higher, or equal to the 2.35% deduction. We do not expect to profit from this charge. The remainder of the deduction, 1.25% of each premium, is for federal income taxes measured by premiums. We believe that this charge does not exceed a reasonable estimate of our federal income taxes attributable to the treatment of deferred acquisition costs. We may change the charge for taxes to reflect any changes in the law. We deduct a charge for sales costs from each premium. The charge is 6.4% of premiums paid during each of the first ten Policy years up to the Target Premium and 2.4% of all other premiums. The Target Premium is based on the Specified Amount and the issue age, sex and risk classification of the insured persons. To the extent that sales expenses exceed the amounts deducted, we will pay the expenses from our other assets. These assets may include, among other things, any gain realized from the monthly charge against the Policy Value for the mortality and expense risks we have assumed, as described below. CHARGES AGAINST THE POLICY VALUE We deduct a cost of insurance charge from the Policy Value on each monthly processing date. We determine the amount by multiplying the net amount at risk by the cost of -- 8 insurance rate. The net amount at risk is equal to the death benefit currently in effect less the Policy Value. The cost of insurance rate reflects the policy duration, and the issue age, sex and risk classification of the insured persons. The maximum cost of insurance rates are included in the Policy. We also deduct from the Policy Value a monthly charge for the mortality and expense risks we have assumed. This charge includes the invested assets component and the Specified Amount component. The maximum amount of the invested assets component is equal to an annual rate of .90% (0.075% monthly rate) of the Policy Value. Currently the charge is equal to an annual rate of .45% (0.0375% monthly rate) of the Policy Value. The Specified Amount component is based on the Specified Amount and the issue ages of the insured persons, and applies during the first 10 Policy years. The range on an annual basis is from 4 CENTS per $1,000 of initial Specified Amount if both insured persons are issue age 25 or younger, up to $1.72 per $1,000 of initial Specified Amount if both insured persons are issue age 72 or older. A table of rates and an example are included in Appendix B, p. 49. The mortality risk is that insureds may not live as long as we estimated. The expense risk is that expenses of issuing and administering the Policies may exceed the estimated costs. We will realize a gain from this charge to the extent it is not needed to provide benefits and pay expenses under the Policies. There is a monthly administrative charge of not more than $7.50. Currently this charge will be $5. This charge is for administrative expenses, including costs of premium collection, processing claims, keeping records and communicating with Policyowners. We do not expect to profit from this charge. There is a monthly underwriting and issue charge based on the Specified Amount and the risk classification of the insureds. This charge applies during the first 10 Policy years. The range is from 1.5 CENTS to 3.5 CENTS per $1000 of initial Specified Amount, with a maximum monthly charge of $75 to $175. We deduct a monthly deferred sales charge. The charge is 7.5% (0.625% monthly rate) of premiums paid during the first Policy year up to the Target Premium. During the first Policy year the monthly deduction is based on cumulative premiums paid to date up to the Target Premium. The charge applies during the first 10 Policy years. This charge is for sales expenses. We make a charge for the expenses and taxes associated with the Policy debt, if any. The aggregate charge is at the current annual rate of 0.90% (0.075% monthly rate) of the Policy debt for the first ten Policy years and 0.35% (0.029167% monthly rate) thereafter. The Policy provides for transaction fees to be deducted from the Policy Value on the dates on which transactions take place. These charges are $25 for changes in the Specified Amount, withdrawals or transfers of assets among the divisions of the Account if more than twelve transfers take place in a Policy year. The fee for a change in the death benefit option is $250. Currently we are waiving all of these fees. We will apportion deductions from the Policy Value among the divisions of the Account in proportion to the amounts invested in the divisions. SURRENDER CHARGE We will deduct a surrender charge from the Policy proceeds if you surrender the Policy during the first ten Policy years. During the first Policy year the surrender charge is equal to 50% of the premiums actually paid during the first Policy year or 50% of the Target Premium, whichever is less. The Target Premium, and therefore the maximum surrender charge, depends on the issue age, sex and risk classification of the insured persons. For example, for a male and female, both in the best risk classification and both issue age 55, the maximum surrender charge, where the Target Premium or more is paid and the Policy is surrendered during the first Policy year, would be $9.29 per $1,000 of initial Specified Amount. The surrender charge will never exceed $50 per $1,000 of initial Specified Amount for any issue age, sex and risk classification combination. Beginning with the second Policy year the surrender charge decreases by the same dollar amount month by month to zero at the end of the tenth Policy year. No surrender charge applies to a withdrawal of cash value. EXPENSES OF THE FUNDS The investment performance of each division of the Account reflects all expenses borne by the corresponding Portfolio or Fund. The expenses are summarized above on page 4. See the attached mutual fund prospectuses for more information about those expenses. CASH VALUE You may surrender a Policy for the cash value at any time during the lifetime of at least one of the insured persons. The cash value for the Policy will change -- 9 daily in response to investment results. No minimum cash value is guaranteed. The cash value is equal to the Policy Value, reduced by the surrender charge and reduced by any Policy debt outstanding. We determine the cash value for a Policy at the end of each valuation period. Each business day, together with any non-business days before it, is a valuation period. A business day is any day on which the New York Stock Exchange is open for trading. In accordance with the requirements of the Investment Company Act of l940, we may also determine the cash value for a Policy on any other day on which there is sufficient trading in securities to materially affect the value of the securities held by the Portfolios or Funds. POLICY LOANS You may borrow up to 90% of the Policy Value less the surrender charge on the date of the loan, using the Policy as security. If a Policy loan is already outstanding, the maximum amount for any new loan is reduced by the amount already borrowed. Interest on a Policy loan accrues and is payable on a daily basis at an annual effective rate of 5%. We add unpaid interest to the amount of the loan. If the amount of the loan plus the surrender charge equals or exceeds the Policy Value on a monthly processing date, the Policy will enter the grace period. See "Termination and Reinstatement", below. We will send you a notice at least 61 days before the termination date. The notice will show how much you must pay to keep the Policy in force. We will take the amount of a Policy loan from the Account divisions in proportion to the amounts in the divisions. We will transfer the amounts withdrawn to our general account and credit them on a daily basis with an annual earnings rate equal to the 5% Policy loan interest rate. A Policy loan, even if you repay it, will have a permanent effect on the Policy Value because the amounts borrowed will not participate in the Account's investment results while the loan is outstanding. The effect may be either favorable or unfavorable depending on whether the earnings rate credited to the loan amount is higher or lower than the rate credited to the unborrowed amount left in the Account. You may repay a Policy loan, and any accrued interest outstanding, in whole or in part, at any time. We will credit payments as of the date we receive them and we will transfer those amounts from our general account to the Account divisions, in proportion to the premium allocation in effect, as of the same date. A Policy loan may have important tax consequences. See "Tax Considerations", p. 13. WITHDRAWALS OF CASH VALUE You may make a withdrawal of cash value. A withdrawal may not reduce the loan value to less than any Policy debt outstanding. The loan value is 90% of the Policy Value less the surrender charge. Following a withdrawal the remaining cash value must be at least three times the current monthly charges for the cost of insurance and other expenses. The minimum amount for withdrawals is $250. We permit up to four withdrawals in a Policy year. An administrative charge of up to $25 may apply, but we are currently waiving this charge. A withdrawal of cash value decreases the death benefit by the same amount. If the death benefit for a Policy has been increased to meet the federal tax requirements for life insurance, the decrease in the death benefit caused by a subsequent withdrawal will be larger than the amount of the withdrawal. If Option A or Option C is in effect a withdrawal of cash value will reduce the Specified Amount by the amount of the withdrawal. Following a withdrawal the remaining death benefit must be at least the minimum amount that we would currently issue. We will take the amount withdrawn from cash value from the Account divisions in proportion to the amounts in the divisions. The Policy makes no provision for repayment of amounts withdrawn. A withdrawal of cash value may have important tax consequences. See "Tax Considerations", p. 13. TERMINATION AND REINSTATEMENT If the cash value is less than the monthly charges for the cost of insurance and other expenses on any monthly processing date, we allow a grace period of 61 days for the payment of sufficient premium to keep the Policy in force. The grace period begins on the date we send you a notice. The notice will state the minimum amount of premium required to keep the Policy in force and the date by which you must pay the premium. The Policy will terminate with no value unless you pay the required amount before the grace period expires. After a Policy has terminated, it may be reinstated within three years. The insureds must provide satisfactory evidence of insurability. The minimum amount of premium required for reinstatement will be the monthly charges that were due when the Policy terminated plus the charges for three more months. -- 10 Reinstatement of a Policy will be effective on the first monthly processing date after an application for reinstatement is received at our Home Office, subject to our approval. Any Policy debt that was outstanding when the Policy terminated will also be reinstated. The Policy Value when a Policy is reinstated is equal to the premium paid, after the deduction for taxes and sales load, plus any Policy debt, less the sum of all monthly charges for the cost of insurance and other expenses for the grace period and for the current month. We will allocate the Policy Value, less any Policy debt, among the Account divisions based on the allocation for premiums currently in effect. A Policy may not be reinstated after the Policy has been surrendered for its cash value or if either of the insured persons has died after the end of the grace period. See "Tax Considerations", p. 13, for a discussion of the tax effects associated with termination and reinstatement of a Policy. RIGHT TO RETURN POLICY You may return a Policy within 10 days (or later where required by state law) after you receive the Policy. In some states you may return the Policy within 45 days after you have signed the application for insurance. You may mail or deliver the Policy to the agent who sold it or to our Home Office. If you return it, we will consider the Policy void from the beginning. We will refund the sum of the amounts deducted from the premium paid plus the Policy Value less any Policy debt on the date the returned Policy is received. In some states, the amount we refund will not be less than the premium you paid. OTHER POLICY PROVISIONS OWNER. The owner is identified in the Policy. The owner may exercise all rights under the Policy while at least one of the insured persons is living. Ownership may be transferred to another. We must receive a written proof of the transfer at our Home Office. "You" in this prospectus means the owner or prospective purchaser of a Policy. BENEFICIARY. The beneficiary is the person to whom the death benefit is payable. The beneficiary is named in the application. After we issue the Policy you may change the beneficiary in accordance with the Policy provisions. INCONTESTABILITY. We will not contest a Policy after it has been in force during the lifetime of at least one insured for two years from the date of issue or two years from the effective date of a reinstatement. We will not contest an increase in the amount of insurance that was subject to insurability requirements after the increased amount has been in force during the lifetime of at least one insured for two years from the date of issuance of the increase. SUICIDE. If either insured dies by suicide within one year from the date of issue, the amount payable under the Policy will be limited to the premiums paid, less the amount of any Policy debt and withdrawals. If either insured dies by suicide within one year of the date of issuance of an increase in the amount of insurance, which was subject to insurability requirements, the amount payable with respect to the increase will be limited to the amounts charged for the cost of insurance and other expenses attributable to the increase. MISSTATEMENT OF AGE OR SEX. If the age or sex of either of the insureds has been misstated, we will adjust the charges for cost of insurance and other expenses under a Policy to reflect the correct age and sex of both insured persons. COLLATERAL ASSIGNMENT. You may assign a Policy as collateral security. We are not responsible for the validity or effect of a collateral assignment and will not be deemed to know of an assignment before receipt of the assignment in writing at our Home Office. DEFERRAL OF DETERMINATION AND PAYMENT. We will ordinarily pay Policy benefits within seven days after we receive all required documents at our Home Office. However, we may defer determination and payment of benefits during any period when it is not reasonably practicable to value securities because the New York Stock Exchange is closed or an emergency exists or the Securities and Exchange Commission, by order, permits deferral for the protection of Policyowners. DIVIDENDS. The Policies will share in divisible surplus to the extent we determine annually. Since we do not expect the Policies to contribute to divisible surplus, we do not expect to pay any dividends. -- 11 VOTING RIGHTS We are the owner of the shares of both mutual funds in which all assets of the Account are invested. As the owner of the shares we will exercise our right to vote the shares to elect directors of the mutual funds, to vote on matters required to be approved or ratified by mutual fund shareholders under the Investment Company Act of 1940 and to vote on any other matters that may be presented to any mutual fund shareholders' meeting. However, we will vote the mutual fund shares held in the Account in accordance with instructions from owners of the Policies. We will vote any shares of the mutual funds held in our general account in the same proportions as the shares for which we have received voting instructions. If the applicable laws or regulations change so as to permit us to vote the shares in our own discretion, we may elect to do so. The number of mutual fund shares for each division of the Account for which the owner of a Policy may give instructions is determined by dividing the amount of the Policy Value apportioned to that division, if any, by the per share value for the corresponding Portfolio or Fund. The number will be determined as of a date we choose, but not more than 90 days before the shareholders' meeting. Fractional votes are counted. We will solicit voting instructions with written materials at least 14 days before the meeting. We will vote shares as to which we receive no instructions in the same proportion as the shares as to which we receive instructions. We may, if required by state insurance officials, disregard voting instructions which would require mutual fund shares to be voted for a change in the sub- classification or investment objectives of a Portfolio or Fund, or to approve or disapprove an investment advisory agreement for either of the mutual funds. We may also disregard voting instructions that would require changes in the investment policy or investment adviser for either a Portfolio or a Fund, provided that we reasonably determine to take this action in accordance with applicable federal law. If we disregard voting instructions, we will include a summary of the action and reasons therefor in the next semiannual report to the owners of the Policies. SUBSTITUTION OF FUND SHARES AND OTHER CHANGES If, in our judgment, a Portfolio or Fund becomes unsuitable for continued use with the Policies because of a change in investment objectives or restrictions, shares of another Portfolio or Fund or another mutual fund may be substituted. Any substitution of shares will be subject to any required approval of the Securities and Exchange Commission, the Wisconsin Commissioner of Insurance or other regulatory authority. We have also reserved the right, subject to applicable federal and state law, to operate the Account or any of its divisions as a management company under the Investment Company Act of 1940, or in any other form permitted, or to terminate registration of the Account if registration is no longer required, and to change the provisions of the Policies to comply with any applicable laws. REPORTS At least once each Policy year you will receive a statement showing the death benefit, cash value, Policy Value and any Policy loan, including loan interest. This report will show the apportionment of invested assets among the Account divisions. You will also receive annual and semiannual reports for the Account and both of the mutual funds, including financial statements. DISTRIBUTION OF THE POLICIES We sell the Policies through individuals who, in addition to being licensed life insurance agents of Northwestern Mutual Life, are registered representatives of Northwestern Mutual Investment Services, LLC ("NMIS"), our wholly-owned subsidiary. NMIS is a registered broker-dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers. NMIS was organized in 1968 and is a Wisconsin limited liability company. Its address is 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. The Internal Revenue Service Employer Identification Number of NMIS is 39-0509570. Commissions paid to the agents will not exceed 40% of the premium up to the Target Premium for the first year, 6% of the premium up to the Target Premium during Policy years 2-10, and 2.75% of all other premium. Agents also receive commissions equal to -- 12 .10% of Policy Value less Policy debt in Policy years 6 and later. General agents and district agents who are registered representatives of NMIS and have supervisory responsibility for sales of the Policies receive commission overrides and other compensation. TAX CONSIDERATIONS GENERAL The following discussion provides a general description of federal income tax considerations relating to the Policy. The discussion is based on current provisions of the Internal Revenue Code ("Code") as currently interpreted by the Internal Revenue Service. We do not intend this discussion as tax advice. The discussion is not exhaustive, it does not address the likelihood of future changes in federal income tax law or interpretations thereof, and it does not address state or local tax considerations which may be significant in the purchase and ownership of a Policy. LIFE INSURANCE QUALIFICATION Section 7702 of the Code defines life insurance for federal income tax purposes. The Code provides two alternative tests for determining whether the death benefit is a sufficient multiple of the Policy Value. See "Choice of Tests for Tax Purposes", p. 7. We have designed the Policy to comply with these rules. We will return premiums that would cause a Policy to be disqualified as life insurance. Section 817(h) of the Code authorizes the Secretary of the Treasury to set standards for diversification of the investments underlying variable life insurance policies. Final regulations have been issued pursuant to this authority. Failure to meet the diversification requirements would disqualify the Policies as life insurance for purposes of Section 7702 of the Code. We intend to comply with these requirements. The Treasury Department, in connection with the diversification requirements, stated that it expected to issue guidance about circumstances where a policyowner's control of separate account assets would cause the policyowner, and not the life insurance company, to be treated as the owner of those assets. These guidelines have not been issued. If the owner of a Policy were treated as the owner of the Fund shares held in the Account, the income and gains related to those shares would be included in the owner's gross income for federal income tax purposes. We believe that we own the assets of the Account under current federal income tax law. We believe that the Policies comply with the provisions of Sections 7702 and 817(h) of the Code, but the application of these rules is not entirely clear. We may make changes in the Policies if necessary to qualify the Policies as life insurance for tax purposes. TAX TREATMENT OF LIFE INSURANCE While a Policy is in force, increases in the Policy Value as a result of investment experience are not subject to federal income tax until there is a distribution as defined by the Code. The death benefit received by a beneficiary will not be subject to federal income tax. Unless the Policy is a modified endowment contract, as described below, we believe that a loan received under a Policy will be construed as indebtedness of the owner and no part of the loan will be treated as a distribution subject to current federal income tax. Interest paid by owners of the Policies will ordinarily not be deductible. As a general rule, the proceeds from a withdrawal of cash value will be taxable only to the extent that the withdrawal exceeds the basis of the Policy. The basis of the Policy is generally equal to the premiums paid less any amounts previously received as tax-free distributions. In certain circumstances, a withdrawal of cash value during the first 15 Policy years may be taxable to the extent that the cash value exceeds the basis of the Policy. This means that the amount withdrawn may be taxable even if that amount is less than the basis of the Policy. In addition, if a Policy terminates while a Policy loan is outstanding, the cancellation of the loan and accrued interest will be treated as a distribution from the Policy and may be taxable under these rules. Special tax rules may apply when ownership of a Policy is transferred. You should seek qualified tax advice if you plan a transfer of ownership. MODIFIED ENDOWMENT CONTRACTS A Policy will be classified as a modified endowment contract if the cumulative premium paid during the first seven Policy years exceeds a defined "seven-pay" limit. The seven-pay limit is based on a hypothetical life insurance policy issued on the same insured person and for the same initial death benefit which, under specified conditions (which include the absence of expense and administrative charges) will be fully paid for after seven level annual payments. A Policy will be treated -- 13 as a modified endowment contract unless cumulative premiums paid under the Policy, at all times during the first seven Policy years, are less than or equal to the cumulative seven-pay premiums which would have been paid under the hypothetical policy on or before such times. Whenever there is a "material change" under a Policy, it will generally be treated as a new contract for purposes of determining whether the Policy is a modified endowment contract, and subjected to a new seven-pay period and a new seven-pay limit. The new seven-pay limit would be determined taking into account the Policy Value of the Policy at the time of such change. A materially changed Policy would be considered a modified endowment contract if it failed to satisfy the new seven-pay limit. A material change could occur as a result of a change in the death benefit option, a change in the Specified Amount, and certain other changes. If the benefits are reduced during the lifetime of either insured, for example, by requesting a decrease in the Specified Amount or, in some cases, by making a withdrawal of cash value, the seven-pay premium limit will be redetermined based on the reduced level of benefits and applied retroactively for purposes of the seven-pay test. If the premiums previously paid are greater than the calculated seven-pay premium level limit, the Policy will become a modified endowment contract. A life insurance policy which is received in exchange for a modified endowment contract will also be considered a modified endowment contract. If a Policy is a modified endowment contract, any distribution from the Policy will be taxed on a gain-first basis. Distributions for this purpose include a loan (including any increase in the loan amount to pay interest on an existing loan or an assignment or a pledge to secure a loan) or a withdrawal of cash value. Any such distributions will be considered taxable income to the extent the cash value exceeds the basis in the Policy. For modified endowment contracts, the basis would be increased by the amount of any prior loan under the Policy that was considered taxable income. For purposes of determining the taxable portion of any distribution, all modified endowment contracts issued by Northwestern Mutual Life to the same policyowner (excluding certain qualified plans) during any calendar year are to be aggregated. The Secretary of the Treasury has authority to prescribe additional rules to prevent avoidance of gain-first taxation on distributions from modified endowment contracts. A 10% penalty tax will apply to the taxable portion of a distribution from a modified endowment contract. The penalty tax will not, however, apply to distributions (i) to taxpayers 59 1/2 years of age or older, (ii) in the case of a disability (as defined in the Code) or (iii) received as part of a series of substantially equal periodic annuity payments for the life (or life expectancy) of the taxpayers or the joint lives (or joint life expectancies) of the taxpayer and his beneficiaries. If a Policy is surrendered, the excess, if any, of the Policy Value over the basis of the Policy will be subject to federal income tax and, unless one of the above exceptions applies, the 10% penalty tax. The exceptions generally do not apply to life insurance policies owned by corporations or other entities. If a Policy terminates while there is a Policy loan, the cancellation of the loan and accrued loan interest will be treated as a distribution to the extent not previously treated as such and could be subject to tax, including the penalty tax, as described under the above rules. If a Policy becomes a modified endowment contract, distributions that occur during the Policy year it becomes a modified endowment contract and any subsequent Policy year will be taxed as described in the two preceding paragraphs. In addition, distributions from a Policy within two years before it becomes a modified endowment contract will be subject to tax in this manner. This means that a distribution made from a Policy that is not a modified endowment contract could later become taxable as a distribution from a modified endowment contract. The Secretary of the Treasury has been authorized to prescribe rules which would treat similarly other distributions made in anticipation of a policy becoming a modified endowment contract. ESTATE AND GENERATION SKIPPING TAXES The amount of the death benefit will generally be includible in the owner's estate for federal estate tax purposes if the last surviving insured owned the Policy. If the owner is not the last surviving insured, the fair market value of the Policy is includible in the owner's estate. The federal estate tax and gift tax are integrated under a unified rate schedule which effectively excludes estates of less than $625,000 from federal estate taxes. The exclusion will be increased in several steps to $1 million in the year 2006 under current law. In addition, an unlimited marital deduction permits -- 14 deferral of federal estate and gift taxes until the death of the surviving spouse. If ownership of the Policy is transferred to a person two or more generations younger than the owner, the value of the Policy may be taxable. Individuals are generally allowed an aggregate generation skipping tax exemption of $1 million. You should consult a qualified tax adviser if you contemplate transfer of ownership to grandchildren. OTHER TAX CONSIDERATIONS The Policy permits the owner to exchange the Policy for two policies, one on the life of each insured, if a change in the federal estate tax law results in the repeal of the unlimited marital deduction or a 50% or greater reduction in the estate tax rate. The Internal Revenue Service has ruled with respect to one taxpayer that such a transaction would be treated as a non-taxable exchange. If not, such a split of the Policy could result in the recognition of taxable income. Depending on the circumstances, the exchange of a Policy, a change in the death benefit option, a Policy loan, a withdrawal of cash value, a change in ownership or an assignment of the Policy may have federal income tax consequences. In addition, federal, state and local transfer, estate, inheritance, and other tax consequences of Policy ownership, premium payments and receipt of Policy proceeds depend on the circumstances of each Policyowner or beneficiary. If you contemplate any such transaction, you should consult a qualified tax adviser. - -------------------------------------------------------------------------------- OTHER INFORMATION MANAGEMENT Northwestern Mutual Life is managed by a Board of Trustees. The Trustees and senior officers of Northwestern Mutual Life and their positions including Board committee memberships, and their principal occupations, as of the date of this prospectus, are listed below. Unless otherwise indicated, the business address of each Trustee and senior officer is c/o The Northwestern Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. TRUSTEES
NAME PRINCIPAL OCCUPATION DURING LAST FIVE YEARS - --------------------------------------------- ------------------------------------------------------------------------------ R. Quintus Anderson (A)...................... Chairman, Aarque Capital Corporation since 1997; prior thereto, Chairman, The Aarque Companies, 111 West Second Street, P.O. Box 310, Jamestown, NY 14702-0310 (diversified metal products manufacturing) Edward E. Barr (HR).......................... Chairman, Sun Chemical Corporation, 222 Bridge Plaza South, Fort Lee, New Jersey 07024 (graphic arts) since 1998; prior thereto, President and Chief Executive Officer. President and Chief Executive Officer, DIC Americas, Inc., Fort Lee, NJ Gordon T. Beaham, III (OT)................... Chairman of the Board and President, Faultless Starch/Bon Ami Company, 1025 West Eighth Street, Kansas City, MO 64101 (consumer products manufacturer) Robert C. Buchanan (A, E, F)................. President and Chief Executive Officer, Fox Valley Corporation, 100 West Lawrence Street, P.O. Box 727, Appleton, WI 54911 (manufacturer of gift wrap and writing paper) Robert E. Carlson (E)........................ Executive Vice President of Northwestern Mutual Life George A. Dickerman (AM)..................... Chairman Emeritus, Spalding Sports Worldwide, 425 Meadow Street, P.O. Box 901, Chicopee, MA 01021-0901 (manufacturer of sporting equipment) since 1999; Chairman of the Board from 1998 to 1999; prior thereto, President
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NAME PRINCIPAL OCCUPATION DURING LAST FIVE YEARS - --------------------------------------------- ------------------------------------------------------------------------------ Pierre S. du Pont (AM)....................... Attorney, Richards, Layton and Finger, P.O. Box 551, 1 Rodney Square, Wilmington, DE 19899 James D. Ericson (AM, E, F. HR, OT).......... President and Chief Executive Officer of Northwestern Mutual Life J. E. Gallegos (A)........................... Attorney at Law; President, Gallegos Law Firm, 460 St. Michaels Drive, Building 300, Santa Fe, NM 87505 Stephen N. Graff (E, F, OT).................. Retired Partner, Arthur Andersen LLP (public accountants). Address: 805 Lone Tree Road, Elm Grove, WI 53122-2014 Patricia Albjerg Graham (HR)................. Professor, Graduate School of Education, Harvard University, 420 Gutman, Cambridge, MA 02138. President, The Spencer Foundation (social and behavioral sciences) Stephen F. Keller (HR)....................... Attorney. Former Chairman, Santa Anita Realty Enterprises since 1997; prior thereto, Chairman. Address: 101 South Las Palmas Avenue, Los Angeles, CA 90004 Barbara A. King (AM)......................... President, Landscape Structures, Inc., Rt 3, 601 - 7th Street South, Delano, MN 55328 (manufacturer of playground equipment) J. Thomas Lewis (HR)......................... Attorney (retired), 228 St. Charles Avenue, Suite 1024, New Orleans, LA 70130, since 1998; prior thereto, Attorney, Monroe & Lemann, New Orleans, LA Daniel F. McKeithan, Jr. (E, F, HR).......... President, Tamarack Petroleum Company, Inc., 777 East Wisconsin Avenue, Milwaukee, WI 53202 (operator of oil and gas wells); President, Active Investor Management, Inc., Milwaukee, WI Guy A. Osborn (E, F, OT)..................... Retired Chairman of Universal Foods Corporation, 433 East Michigan Street, Milwaukee, WI 53202 since 1997; prior thereto, Chairman and Chief Executive Officer Timothy D. Proctor (A)....................... Director, Worldwide Human Resources of Glaxo Wellcome plc, Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex UB60NN, United Kingdom, since 1998. Senior Vice President Human Resources, General Counsel & Secretary from 1994 to 1998 (pharmaceuticals) Donald J. Schuenke (AM, E, F)................ Retired; Chairman of Northwestern Mutual Life H. Mason Sizemore, Jr. (AM).................. President and Chief Operating Officer, The Seattle Times, Fairview Avenue North and John Street, P.O. Box 70, Seattle, WA 98109 (publishing) Harold B. Smith (OT)......................... Chairman, Executive Committee, Illinois Tool Works, Inc., 3600 West Lake Avenue, Glenview, IL 60025-5811 (engineered components and industrial systems and consumables) Sherwood H. Smith, Jr. (AM).................. Chairman of the Board of Carolina Power & Light, 411 Fayetteville Street Mall, P.O. Box 1551, Raleigh, NC 27602, since 1997; prior thereto, Chairman of the Board and Chief Executive Officer John E. Steuri (OT).......................... Chairman, Advanced Thermal Technologies, 2102 Riverfront Drive, Suite 120, Little Rock, AR 72202-1747 since 1997 (heating, air-conditioning and humidity control). Retired since 1996 as Chairman and Chief Executive Officer of ALLTEL Information Services, Inc., Little Rock, AR (application software) John J. Stollenwerk (AM, E, F)............... President and Chief Executive Officer, Allen-Edmonds Shoe Corporation, 201 East Seven Hills Road, P.O. Box 998, Port Washington, WI 53074-0998
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NAME PRINCIPAL OCCUPATION DURING LAST FIVE YEARS - --------------------------------------------- ------------------------------------------------------------------------------ Barry L. Williams (HR)....................... President and Chief Executive Officer of Williams Pacific Ventures, Inc., 100 First Street, Suite 2350, San Francisco, CA 94105-2634 (venture capital) Kathryn D. Wriston (A)....................... Director of various corporations. Address: c/o Shearman & Sterling, 599 Lexington Avenue, Room 1126, New York, NY 10022 A -- Member, Audit Committee F -- Member, Finance Committee AM -- Member, Agency and Marketing Committee HR -- Member, Human Resources and Public Policy Committee OT -- Member, Operations and Technology Committee E -- Member, Executive Committee
SENIOR OFFICERS (OTHER THAN TRUSTEES)
POSITION WITH NAME NORTHWESTERN MUTUAL LIFE - ------------------------ ----------------------------------- John M. Bremer Executive Vice President, General Counsel and Secretary Peter W. Bruce Executive Vice President Edward J. Zore Executive Vice President Deborah A. Beck Senior Vice President William H. Beckley Senior Vice President Mark G. Doll Senior Vice President Richard L. Hall Senior Vice President William C. Koenig Senior Vice President and Chief Actuary Donald L. Mellish Senior Vice President Mason G. Ross Senior Vice President John E. Schlifske Senior Vice President Leonard F. Stecklein Senior Vice President Frederic H. Sweet Senior Vice President Dennis Tamcsin Senior Vice President Walter J. Wojcik Senior Vice President Gary E. Long Vice President and Controller
REGULATION We are subject to the laws of Wisconsin governing insurance companies and to regulation by the Wisconsin Commissioner of Insurance. We file an annual statement in a prescribed form with the Department of Insurance on or before March 1 in each year covering operations for the preceding year and including financial statements. Regulation by the Wisconsin Insurance Department includes periodic examination to determine solvency and compliance with insurance laws. We are also subject to the insurance laws and regulations of the other jurisdictions in which we are licensed to operate. YEAR 2000 ISSUES Since early 1996 we have been preparing for the computer requirements associated with the approaching turn of the century. We completed assessment of internal systems in 1996. As of the date of this prospectus the necessary system changes are substantially complete. System testing is in process and we expect testing of all critical systems to be completed during the first six months of 1999. The work on these computer systems extends to software packages we purchase from vendors. In addition, we have been communicating formally with -- 17 our business partners to identify and assess potential exposure that could result from their failure to address these computer issues on a timely basis. Each of our departments has prepared a contingency plan. We and our business partners bear all of the costs of identifying and resolving the computer systems issues associated with the year 2000. These costs will have no effect on the performance of the Account. The Policies permit charges for administrative expenses to be increased up to the guaranteed maximum rates. However, we do not expect our costs for year 2000 compliance to have any significant effect on the benefits or values provided by the Policies. We believe that our computer systems will be ready for the year 2000 well in advance of the deadline. By their nature, however, the issues in this area carry the risk of unforeseen problems, both at Northwestern Mutual Life and at all the other sites where supporting functions and interaction take place. There can be no assurance that these problems will not have a material adverse impact on the operations of Northwestern Mutual Life and the Account. LEGAL PROCEEDINGS We are engaged in litigation of various kinds which in our judgment is not of material importance in relation to its total assets. There are no legal proceedings pending to which the Account is a party. REGISTRATION STATEMENT We have filed a registration statement with the Securities and Exchange Commission, Washington, D.C under the Securities Act of 1933, as amended, with respect to the Policies. This prospectus does not contain all the information set forth in the registration statement. A copy of the omitted material is available from the main office of the SEC in Washington, D.C. upon payment of the prescribed fee. Further information about the Policies is also available from the Home Office of Northwestern Mutual Life. The address and telephone number are on the cover of this prospectus. EXPERTS The financial statements of Northwestern Mutual Life as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 and of the Account as of December 31, 1998 and for each of the two years in the period ended December 31, 1998 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. Actuarial matters included in this prospectus have been examined by William C. Koenig, F.S.A., Senior Vice President and Chief Actuary of Northwestern Mutual Life. His opinion is filed as an exhibit to the registration statement. -- 18 [LOGO] REPORT OF INDEPENDENT ACCOUNTANTS To The Northwestern Mutual Life Insurance Company and Policyowners of Northwestern Mutual Variable Life Account In our opinion, the accompanying combined statement of assets and liabilities and the related combined and separate statements of operations and changes in equity present fairly, in all material respects, the financial position of Northwestern Mutual Variable Life Account and Aggressive Growth Stock Division, International Equity Division, Growth Stock Division, Growth and Income Stock Division, Index 500 Stock Division, Balanced Division, High Yield Bond Division, Select Bond Division, and the Money Market Division thereof at December 31, 1998, the results of each of their operations and the changes in each of their equity for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of The Northwestern Mutual Life Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included direct confirmation of the number of shares owned at December 31, 1998 with Northwestern Mutual Series Fund, Inc., provide a reasonable basis for the opinion expressed above. [SIG] Milwaukee, Wisconsin January 25, 1999 -- 19 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT FINANCIAL STATEMENTS DECEMBER 31, 1998 STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS) ASSETS Investments at Market Value: Northwestern Mutual Series Fund, Inc. Aggressive Growth Stock 34,420 shares (cost $102,404).............. $ 119,230 International Equity 46,760 shares (cost $73,163)............... 78,416 Growth Stock 29,383 shares (cost $49,267)............... 66,025 Growth and Income Stock 43,428 shares (cost $60,081)............... 70,528 Index 500 Stock 58,115 shares (cost $126,062).............. 191,141 Balanced 71,092 shares (cost $108,217).............. 158,110 High Yield Bond 15,509 shares (cost $16,804)............... 14,516 Select Bond 10,143 shares (cost $12,181)............... 12,669 Money Market 39,300 shares (cost $39,300)............... 39,300 $ 749,935 --------- Due from Sale of Fund Shares.................................. 95 Due from Northwestern Mutual Life Insurance Company........... 328 --------- Total Assets.................................................. $ 750,358 --------- --------- LIABILITIES Due to Northwestern Mutual Life Insurance Company........... $ 95 Due on Purchase of Fund Shares.............................. 328 --------- Total Liabilities....................................... 423 --------- EQUITY (NOTE 8) Variable Life Policies Issued Before October 11, 1995....... 392,772 Variable Complife Policies Issued On or After October 11, 1995....................................................... 356,862 Variable Executive Life Policies Issued On or After March 2, 1998....................................................... 301 --------- Total Equity............................................ 749,935 --------- Total Liabilities and Equity............................ $ 750,358 --------- ---------
The Accompanying Notes are an Integral Part of the Financial Statements -- 20 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT STATEMENT OF OPERATIONS AND CHANGES IN EQUITY (IN THOUSANDS)
AGGRESSIVE GROWTH INTERNATIONAL EQUITY COMBINED STOCK DIVISION DIVISION ----------------------------- ----------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1998 1997 1998 1997 ------------- ------------- ------------- ------------- ------------- ------------- INVESTMENT INCOME Dividend Income............... $ 24,922 $ 24,262 $ 3,287 $3,345 $ 3,591 $ 1,286 Mortality and Expense Risks... 2,755 1,788 424 271 308 197 Taxes......................... 1,178 767 181 116 132 85 ------------- ------------- ------------- ------------- ------------- ------------- Net Investment Income......... 20,989 21,707 2,682 2,958 3,151 1,004 ------------- ------------- ------------- ------------- ------------- ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments............... 4,332 4,871 523 231 284 203 Unrealized Appreciation (Depreciation) of Investments During the Period.................... 68,780 42,532 4,928 5,109 (1,424) 2,358 ------------- ------------- ------------- ------------- ------------- ------------- Net Gain (Loss) on Investments............... 73,112 47,403 5,451 5,340 (1,140) 2,561 ------------- ------------- ------------- ------------- ------------- ------------- Increase in Equity Derived from Investment Activity.................. 94,101 69,110 8,133 8,298 2,011 3,565 ------------- ------------- ------------- ------------- ------------- ------------- EQUITY TRANSACTIONS Policyowners' Net Deposits.................. 258,672 170,672 30,145 21,502 20,672 12,656 Policy Loans, Surrenders, and Death Benefits........ (37,427) (23,728) (6,454) (4,003) (4,327) (2,787) Mortality and Other (net)... (39,611) (28,427) (5,193) (3,791) (3,785) (2,368) Transfers from Other Divisions................. 133,775 86,366 20,371 19,008 15,743 14,866 Transfers to Other Divisions................. (133,773) (86,366) (6,419) (4,091) (5,013) (2,149) ------------- ------------- ------------- ------------- ------------- ------------- Increase in Equity Derived from Equity Transactions.... 181,636 118,517 32,450 28,625 23,290 20,218 ------------- ------------- ------------- ------------- ------------- ------------- Net Increase in Equity........ 275,737 187,627 40,583 36,923 25,301 23,783 EQUITY Beginning of Year........... 474,198 286,571 78,647 41,724 53,116 29,333 ------------- ------------- ------------- ------------- ------------- ------------- End of Year................. $749,935 $474,198 $119,230 $78,647 $78,417 $53,116 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements --- 21 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT STATEMENT OF OPERATIONS AND CHANGES IN EQUITY (IN THOUSANDS)
GROWTH & INCOME INDEX 500 GROWTH STOCK DIVISION STOCK DIVISION STOCK DIVISION ----------------------------- ----------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1998 1997 1998 1997 ------------- ------------- ------------- ------------- ------------- ------------- INVESTMENT INCOME Dividend Income............... $ 956 $ 1,413 $ 537 $ 7,776 $ 4,530 $ 2,579 Mortality and Expense Risks... 211 105 234 120 671 395 Taxes......................... 91 45 100 52 287 169 ------------- ------------- ------------- ------------- ------------- ------------- Net Investment Income......... 654 1,263 203 7,604 3,572 2,015 ------------- ------------- ------------- ------------- ------------- ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments............... 143 172 220 173 1,125 2,375 Unrealized Appreciation (Depreciation) of Investments During the Period.................... 10,533 4,151 10,574 (1,823) 31,738 17,772 ------------- ------------- ------------- ------------- ------------- ------------- Net Gain (Loss) on Investments............... 10,676 4,323 10,794 (1,650) 32,863 20,147 ------------- ------------- ------------- ------------- ------------- ------------- Increase in Equity Derived from Investment Activity.................. 11,330 5,586 10,997 5,954 36,435 22,162 ------------- ------------- ------------- ------------- ------------- ------------- EQUITY TRANSACTIONS Policyowners' Net Deposits.................. 12,991 7,334 14,771 7,537 29,665 19,733 Policy Loans, Surrenders, and Death Benefits........ (2,859) (1,314) (2,902) (1,842) (8,924) (5,039) Mortality and Other (net)... (2,494) (1,329) (2,847) (1,457) (5,367) (4,127) Transfers from Other Divisions................. 16,839 8,851 17,225 10,673 37,076 20,024 Transfers to Other Divisions................. (2,015) (1,341) (3,106) (1,104) (5,443) (3,783) ------------- ------------- ------------- ------------- ------------- ------------- Increase in Equity Derived from Equity Transactions.... 22,462 12,201 23,141 13,807 47,007 26,808 ------------- ------------- ------------- ------------- ------------- ------------- Net Increase in Equity........ 33,792 17,787 34,138 19,761 83,442 48,970 EQUITY Beginning of Year........... 32,233 14,446 36,389 16,628 107,699 58,729 ------------- ------------- ------------- ------------- ------------- ------------- End of Year................. $66,025 $32,233 $70,527 $36,389 $191,141 $107,699 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements --- 22 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT STATEMENT OF OPERATIONS AND CHANGES IN EQUITY (IN THOUSANDS)
BALANCED DIVISION HIGH YIELD BOND DIVISION SELECT BOND DIVISION ----------------------------- ----------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1998 1997 1998 1997 ------------- ------------- ------------- ------------- ------------- ------------- INVESTMENT INCOME Dividend Income............... $ 8,344 $ 5,105 $ 1,489 $1,370 $ 743 $ 436 Mortality and Expense Risks... 681 558 53 29 51 35 Taxes......................... 292 239 22 12 22 15 ------------- ------------- ------------- ------------- ------------- ------------- Net Investment Income......... 7,371 4,308 1,414 1,329 670 386 ------------- ------------- ------------- ------------- ------------- ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments............... 1,893 1,655 47 26 97 36 Unrealized Appreciation (Depreciation) of Investments During the Period.................... 14,317 15,262 (1,828) (531) (58) 234 ------------- ------------- ------------- ------------- ------------- ------------- Net Gain (Loss) on Investments............... 16,210 16,917 (1,781) (505) 39 270 ------------- ------------- ------------- ------------- ------------- ------------- Increase in Equity Derived from Investment Activity.................. 23,581 21,225 (367) 824 709 656 ------------- ------------- ------------- ------------- ------------- ------------- EQUITY TRANSACTIONS Policyowners' Net Deposits.................. 17,811 15,394 3,490 1,922 2,004 1,820 Policy Loans, Surrenders, and Death Benefits........ (8,879) (7,260) (690) (349) (620) (311) Mortality and Other (net)... (3,232) (3,395) (641) (339) (250) (560) Transfers from Other Divisions................. 7,905 4,266 5,399 3,276 3,951 2,000 Transfers to Other Divisions................. (5,398) (4,734) (1,476) (425) (2,217) (756) ------------- ------------- ------------- ------------- ------------- ------------- Increase in Equity Derived from Equity Transactions.... 8,207 4,271 6,082 4,085 2,868 2,193 ------------- ------------- ------------- ------------- ------------- ------------- Net Increase in Equity........ 31,788 25,496 5,715 4,909 3,577 2,849 EQUITY Beginning of Year........... 126,322 100,826 8,801 3,892 9,092 6,243 ------------- ------------- ------------- ------------- ------------- ------------- End of Year................. $158,110 $126,322 $14,516 $8,801 $12,669 $9,092 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- MONEY MARKET DIVISION ----------------------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1998 1997 ------------- ------------- INVESTMENT INCOME Dividend Income............... $ 1,445 $ 952 Mortality and Expense Risks... 122 78 Taxes......................... 51 34 ------------- ------------- Net Investment Income......... 1,272 840 ------------- ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments............... -- -- Unrealized Appreciation (Depreciation) of Investments During the Period.................... -- -- ------------- ------------- Net Gain (Loss) on Investments............... -- -- ------------- ------------- Increase in Equity Derived from Investment Activity.................. 1,272 840 ------------- ------------- EQUITY TRANSACTIONS Policyowners' Net Deposits.................. 127,123 82,774 Policy Loans, Surrenders, and Death Benefits........ (1,772) (823) Mortality and Other (net)... (15,802) (11,061) Transfers from Other Divisions................. 9,266 3,402 Transfers to Other Divisions................. (102,686) (67,983) ------------- ------------- Increase in Equity Derived from Equity Transactions.... 16,129 6,309 ------------- ------------- Net Increase in Equity........ 17,401 7,149 EQUITY Beginning of Year........... 21,899 14,750 ------------- ------------- End of Year................. $39,300 $21,899 ------------- ------------- ------------- -------------
The Accompanying Notes are an Integral Part of the Financial Statements --- 23 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 1 -- Northwestern Mutual Variable Life Account (the "Account") is registered as a unit investment trust under the Investment Company Act of 1940 and is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") used to fund variable life insurance policies. NOTE 2 -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below. NOTE 3 -- All assets of each Division of the Account are invested in shares of the corresponding Portfolio of Northwestern Mutual Series Fund, Inc. (the "Fund"). The shares are valued at the Fund's offering and redemption price per share. The Fund is a diversified open-end investment company registered under the Investment Company Act of 1940. NOTE 4 -- Dividend income from the Fund is recorded on the record date of the dividends. Transactions in Fund shares are accounted for on the trade date. The basis for determining cost on sale of Fund shares is identified cost. Purchases and sales of Fund shares for the year ended December 31, 1998 by each Division are shown below:
PURCHASES SALES ------------ ------------ Aggressive Growth Division....... $ 36,381,397 $ 1,248,015 International Equity Division.... 27,429,118 990,001 Growth Stock Division............ 23,393,892 279,458 Growth & Income Stock Division....................... 24,059,882 715,896 Index 500 Stock Division......... 52,625,759 2,046,627 Balanced Division................ 20,647,579 5,068,597 High Yield Bond Division......... 8,131,249 635,946 Select Bond Division............. 5,351,461 1,813,834 Money Market Division............ 47,332,350 29,930,945
NOTE 5 -- A deduction for mortality and expense risks is determined daily and paid to Northwestern Mutual. Generally, for Variable Life policies issued before October 11, 1995, and Variable Complife policies issued on or after October 11, 1995 the deduction is at an annual rate of .50% and .60%, respectively, of the net assets of the Account. A deduction for the mortality and expense risks for the Variable Executive Life policies issued on or after March 3, 1998 is determined monthly at an annual rate of .75% of the amount invested in the Account for the Policy for the first ten Policy years, and .30% thereafter. The mortality risk is that insureds may not live as long as estimated. The expense risk is that expenses of issuing and administering the policies may exceed the estimated costs. Certain deductions are also made from the annual, single or other premiums before amounts are allocated to the Account. These deductions are for (1) sales load, (2) administrative expenses, (3) taxes and (4) a risk charge for the guaranteed minimum death benefit. Additional mortality costs are deducted from the policy annually and are paid to Northwestern Mutual to cover the cost of providing insurance protection. This cost is actuarially calculated based upon the insured's age, the 1980 Commissioners Standard Ordinary Mortality Table and the amount of insurance provided under the policy. NOTE 6 -- Northwestern Mutual is taxed as a "life insurance company" under the Internal Revenue Code. The variable life insurance policies which are funded in the Account are taxed as part of the operations of Northwestern Mutual. Policies provide that a charge for taxes may be made against the assets of the Account. Generally, for Variable Life policies issued before October 11, 1995, Northwestern Mutual charges the Account at an annual rate of .20% of the Account's net assets and reserves the right to increase, decrease or eliminate the charge for taxes in the future. Generally, for Variable Complife policies issued on or after October 11, 1995, and for Variable Executive Life policies issued on or after March 3, 1998, there is no charge being made against the assets of the Account for federal income taxes, but Northwestern Mutual reserves the right to charge for taxes in the future. NOTE 7 -- The Account is credited for the policyowners' net annual premiums at the respective policy anniversary dates regardless of when policyowners actually paid their premiums. Northwestern Mutual's equity represents any unpaid portion of net annual premiums. This applies to Variable Life and Variable Complife policies only. -- 24 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS) DECEMBER 31, 1998 NOTE 8 -- Equity Values by Division are shown below:
VARIABLE LIFE POLICIES ISSUED BEFORE OCTOBER 11, 1995 EQUITY OF: ------------------------ TOTAL POLICYOWNERS NML EQUITY ------------- --------- --------- Aggressive Growth Stock Division......................................................... $ 42,391 $ 3,793 $ 46,184 International Equity Division............................................................ 32,539 3,074 35,613 Growth Stock Division.................................................................... 22,888 1,510 24,398 Growth and Income Stock Division......................................................... 26,309 1,808 28,117 Index 500 Stock Division................................................................. 95,615 4,943 100,558 Balanced Division........................................................................ 134,029 5,006 139,035 High Yield Bond Division................................................................. 4,916 428 5,344 Select Bond Division..................................................................... 6,911 417 7,328 Money Market Division.................................................................... 5,918 277 6,195 ------------- --------- --------- $ 371,516 $ 21,256 $ 392,772 ------------- --------- --------- ------------- --------- ---------
VARIABLE COMPLIFE POLICIES ISSUED ON OR AFTER OCTOBER 11, 1995 EQUITY OF: ------------------------ TOTAL POLICYOWNERS NML EQUITY ------------- --------- --------- Aggressive Growth Stock Division........................................................ $ 54,132 $ 18,846 $ 72,978 International Equity Division........................................................... 31,302 11,492 42,794 Growth Stock Division................................................................... 30,575 11,026 41,601 Growth and Income Stock Division........................................................ 30,515 11,841 42,356 Index 500 Stock Division................................................................ 65,609 24,890 90,499 Balanced Division....................................................................... 14,142 4,909 19,051 High Yield Bond Division................................................................ 6,565 2,594 9,159 Select Bond Division.................................................................... 4,161 1,171 5,332 Money Market Division................................................................... 13,154 19,938 33,092 ------------- --------- --------- $ 250,155 $ 106,707 $ 356,862 ------------- --------- --------- ------------- --------- ---------
VARIABLE EXECUTIVE LIFE POLICIES ISSUED ON OR AFTER MARCH 2, 1998 ------------------------- TOTAL EQUITY ------------------------- Aggressive Growth Stock Division...................................................................... $ 67 International Equity Division......................................................................... 10 Growth Stock Division................................................................................. 25 Growth and Income Stock Division...................................................................... 55 Index 500 Stock Division.............................................................................. 84 Balanced Division..................................................................................... 24 High Yield Bond Division.............................................................................. 13 Select Bond Division.................................................................................. 9 Money Market Division................................................................................. 14 ----- $ 301 ----- -----
-- 25 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IN MILLIONS) The following financial statements of Northwestern Mutual should be considered only as bearing upon the ability of Northwestern Mutual Life to meet its obligations under the Policies.
DECEMBER 31, --------------------- 1998 1997 --------- --------- ASSETS Bonds......................................... $ 34,888 $ 32,359 Common and preferred stocks................... 6,576 6,524 Mortgage loans................................ 12,250 10,835 Real estate................................... 1,481 1,372 Policy loans.................................. 7,580 7,163 Other investments............................. 1,839 2,026 Cash and temporary investments................ 1,275 572 Due and accrued investment income............. 827 795 Other assets.................................. 1,313 1,275 Separate account assets....................... 9,966 8,160 --------- --------- Total assets.............................. $ 77,995 $ 71,081 --------- --------- --------- --------- LIABILITIES AND SURPLUS Reserves for policy benefits.................. $ 51,815 $ 47,343 Policy benefit and premium deposits........... 1,709 1,624 Policyowner dividends payable................. 2,870 2,640 Interest maintenance reserve.................. 606 461 Asset valuation reserve....................... 1,994 1,974 Income taxes payable.......................... 1,161 1,043 Other liabilities............................. 3,133 3,735 Separate account liabilities.................. 9,966 8,160 --------- --------- Total liabilities......................... 73,254 66,980 Surplus....................................... 4,741 4,101 --------- --------- Total liabilities and surplus............. $ 77,995 $ 71,081 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. -- 26 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 --------- --------- --------- REVENUE Premium income................................ $ 8,021 $ 7,294 $ 6,667 Net investment income......................... 4,536 4,171 3,836 Other income.................................. 922 861 759 --------- --------- --------- Total revenue............................. 13,479 12,326 11,262 --------- --------- --------- BENEFITS AND EXPENSES Benefit payments to policyowners and beneficiaries................................ 3,602 3,329 2,921 Net additions to policy benefit reserves...... 4,521 4,026 3,701 Net transfers to separate accounts............ 564 566 579 --------- --------- --------- Total benefits............................ 8,687 7,921 7,201 Operating expenses............................ 1,297 1,138 1,043 --------- --------- --------- Total benefits and expenses............... 9,984 9,059 8,244 --------- --------- --------- Gain from operations before dividends and taxes... 3,495 3,267 3,018 Policyowner dividends............................. 2,869 2,636 2,341 --------- --------- --------- Gain from operations before taxes................. 626 631 677 Income tax expense................................ 301 356 452 --------- --------- --------- Net gain from operations.......................... 325 275 225 Net realized capital gains........................ 484 414 395 --------- --------- --------- Net income................................ $ 809 $ 689 $ 620 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. -- 27 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CHANGES IN SURPLUS (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 ------- ------- ------- BEGINNING OF YEAR BALANCE......................... $4,101 $3,515 $2,786 Net income...................................... 809 689 620 Increase (decrease) in net unrealized gains..... (147) 576 295 Increase in investment reserves................. (20) (526) (176) Other, net...................................... (2) (153) (10) ------- ------- ------- Net increase in surplus......................... 640 586 729 ------- ------- ------- END OF YEAR BALANCE............................... $4,741 $4,101 $3,515 ------- ------- ------- ------- ------- -------
The accompanying notes are an integral part of these financial statements. -- 28 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Insurance and annuity premiums.................. $ 8,876 $ 8,093 $ 7,361 Investment income received...................... 4,216 3,928 3,634 Disbursement of policy loans, net of repayments..................................... (416) (360) (326) Benefits paid to policyowners and beneficiaries.................................. (3,572) (3,316) (2,912) Net transfers to separate accounts.............. (564) (565) (579) Policyowner dividends paid...................... (2,639) (2,347) (2,105) Operating expenses and taxes.................... (1,749) (1,722) (1,663) Other, net...................................... (83) 124 (59) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES..... 4,069 3,835 3,351 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES PROCEEDS FROM INVESTMENTS SOLD OR MATURED Bonds......................................... 28,720 38,284 31,942 Common and preferred stocks................... 10,359 9,057 4,570 Mortgage loans................................ 1,737 1,012 1,253 Real estate................................... 159 302 178 Other investments............................. 768 398 316 -------- -------- -------- 41,743 49,053 38,259 -------- -------- -------- COST OF INVESTMENTS ACQUIRED Bonds......................................... 30,873 41,169 35,342 Common and preferred stocks................... 9,642 9,848 4,463 Mortgage loans................................ 3,135 2,309 2,455 Real estate................................... 268 202 125 Other investments............................. 567 359 255 -------- -------- -------- 44,485 53,887 42,640 -------- -------- -------- NET INCREASE (DECREASE) IN SECURITIES LENDING AND OTHER...................................... (624) 440 1,617 -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES......... (3,366) (4,394) (2,764) -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND TEMPORARY INVESTMENTS...................................... 703 (559) 587 CASH AND TEMPORARY INVESTMENTS, BEGINNING OF YEAR............................................. 572 1,131 544 -------- -------- -------- CASH AND TEMPORARY INVESTMENTS, END OF YEAR....... $ 1,275 $ 572 $ 1,131 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. -- 29 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 1. PRINCIPAL ACCOUNTING POLICIES The accompanying consolidated statutory financial statements include the accounts of The Northwestern Mutual Life Insurance Company ("Company") and its wholly-owned life insurance subsidiary, Northwestern Long Term Care Insurance Company ("Subsidiary"). The Company and its Subsidiary offer life, annuity, disability income and long term care products to the personal, business, estate and tax-qualified markets. The consolidated financial statements have been prepared using accounting policies prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin ("statutory basis of accounting"). In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the codification guidance that would also be effective upon its planned implementation effective January 1, 2001. It is expected that the Office of the Commissioner of Insurance of the State of Wisconsin ("OCI") will adopt the codification, but it is not known whether the OCI will make any changes to that guidance. The potential effect of the codification on the Company will depend upon the guidance adopted by the OCI. Financial statements prepared on the statutory basis of accounting vary from financial statements prepared on the basis of Generally Accepted Accounting Principles ("GAAP") primarily because on a GAAP basis (1) policy acquisition costs are deferred and amortized, (2) investment valuations and insurance reserves are based on different assumptions, (3) funds received under deposit-type contracts are not reported as premium revenue, and (4) deferred taxes are provided for temporary differences between book and tax basis of certain assets and liabilities. The effects on the financial statements of the differences between the statutory basis of accounting and GAAP are material to the Company. The preparation of financial statements in conformity with the statutory basis of accounting requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual future results could differ from these estimates. INVESTMENTS The Company's investments are valued on the following bases: Bonds -- Amortized cost using the interest method; loan-backed and structured securities are amortized using estimated prepayment rates and, generally, the prospective adjustment method Common and preferred stocks -- Common stocks are carried at fair value, preferred stocks are generally carried at cost, and unconsolidated subsidiaries are recorded using the equity method Mortgage loans -- Amortized cost Real estate -- Lower of cost, less depreciation and encumbrances, or estimated net realizable value Policy loans -- Unpaid principal balance, which approximates fair value Other investments -- Consists primarily of joint venture investments which are valued at equity in ventures' net assets Cash and temporary investments -- Amortized cost, which approximates fair value
-- 30 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 TEMPORARY INVESTMENTS Temporary investments consist of debt securities that have maturities of one year or less at acquisition. NET INVESTMENT INCOME Net investment income includes interest and dividends received or due and accrued on debt securities and stocks, equity in unconsolidated subsidiaries' earnings and the Company's share of joint venture income. Net investment income is reduced by investment management expenses, real estate depreciation, depletion related to energy assets and costs associated with securities lending. INTEREST MAINTENANCE RESERVE The Company is required to maintain an interest maintenance reserve ("IMR"). The IMR is used to defer realized gains and losses, net of tax, on fixed income investments resulting from changes in interest rates. Net realized gains and losses deferred to the IMR are amortized into investment income over the approximate remaining term to maturity of the investment sold. INVESTMENT RESERVES The Company is required to maintain an asset valuation reserve ("AVR"). The AVR establishes a general reserve for invested asset valuation using a formula prescribed by state regulations. The AVR is designed to stabilize surplus against potential declines in the value of investments. In addition, the Company maintained a $200 million voluntary investment reserve at December 31, 1998 and 1997 to absorb potential investment losses exceeding those considered by the AVR formula. Increases or decreases in these investment reserves are recorded directly to surplus. SEPARATE ACCOUNTS Separate account assets and related policy liabilities represent the segregation of funds deposited by "variable" life insurance and annuity policyowners. Policyowners bear the investment performance risk associated with variable products. Separate account assets are invested at the direction of the policyowner in a variety of Company-managed mutual funds. Variable product policyowners also have the option to invest in a fixed interest rate annuity in the general account of the Company. Separate account assets are reported at fair value. PREMIUM REVENUE AND OPERATING EXPENSES Life insurance premiums are recognized as revenue at the beginning of each policy year. Annuity and disability income premiums are recognized when received by the Company. Operating expenses, including costs of acquiring new policies, are charged to operations as incurred. OTHER INCOME Other income includes considerations on supplementary contracts, ceded reinsurance expense allowances and miscellaneous policy charges. -- 31 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 BENEFIT PAYMENTS TO POLICYOWNERS AND BENEFICIARIES Benefit payments to policyowners and beneficiaries include death, surrender and disability benefits, matured endowments and supplementary contract payments. RESERVES FOR POLICY BENEFITS Reserves for policy benefits are determined using actuarial estimates based on mortality and morbidity experience tables and valuation interest rates prescribed by the Office of the Commissioner of Insurance of the State of Wisconsin. See Note 3. POLICYOWNER DIVIDENDS Almost all life insurance policies, and certain annuity and disability income policies, issued by the Company are participating. Annually, the Company's Board of Trustees approves dividends payable on participating policies in the following fiscal year, which are accrued and charged to operations when approved. RECLASSIFICATION Certain financial statement balances for 1997 and 1996 have been reclassified to conform to the current year presentation. 2. INVESTMENTS DEBT SECURITIES Debt securities consist of all bonds and fixed-maturity preferred stocks. The estimated fair values of debt securities are based upon quoted market prices, if available. For securities not actively traded, fair values are estimated using independent pricing services or internally developed pricing models. The Company records unrealized losses for debt securities considered impaired. -- 32 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 Statement value, which principally represents amortized cost, and estimated fair value of the Company's debt securities at December 31, 1998 and 1997 were as follows:
RECONCILIATION TO ESTIMATED FAIR VALUE --------------------------------------- GROSS GROSS ESTIMATED STATEMENT UNREALIZED UNREALIZED FAIR DECEMBER 31, 1998 VALUE APPRECIATION DEPRECIATION VALUE - -------------------------------------------------- --------- ------------ ------------ --------- (IN MILLIONS) US Government and political obligations........... $ 3,904 $ 461 $ (11) $ 4,354 Mortgage-backed securities........................ 7,357 280 (15) 7,622 Corporate and other debt securities............... 23,627 1,240 (382) 24,485 --------- ------------ ------ --------- 34,888 1,981 (408) 36,461 Preferred stocks.................................. 189 4 (1) 192 --------- ------------ ------ --------- Total............................................. $35,077 $1,985 $(409) $36,653 --------- ------------ ------ --------- --------- ------------ ------ --------- RECONCILIATION TO ESTIMATED FAIR VALUE --------------------------------------- GROSS GROSS ESTIMATED STATEMENT UNREALIZED UNREALIZED FAIR DECEMBER 31, 1997 VALUE APPRECIATION DEPRECIATION VALUE - -------------------------------------------------- --------- ------------ ------------ --------- (IN MILLIONS) US Government and political obligations........... $ 3,695 $ 336 $ (3) $ 4,028 Mortgage-backed securities........................ 7,015 264 (4) 7,275 Corporate and other debt securities............... 21,649 1,098 (208) 22,539 --------- ------------ ------ --------- 32,359 1,698 (215) 33,842 Preferred stocks.................................. 167 4 (2) 169 --------- ------------ ------ --------- Total............................................. $32,526 $1,702 $(217) $34,011 --------- ------------ ------ --------- --------- ------------ ------ ---------
The statement value of debt securities by contractual maturity at December 31, 1998 and 1997 is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN MILLIONS) Due in one year or less........................... $ 655 $ 605 Due after one year through five years............. 5,031 4,878 Due after five years through ten years............ 10,286 9,760 Due after ten years............................... 11,748 10,268 ------------ ------------ 27,720 25,511 Mortgage-backed securities........................ 7,357 7,015 ------------ ------------ $35,077 $32,526 ------------ ------------ ------------ ------------
STOCKS The estimated fair values of common and perpetual preferred stocks are based upon quoted market prices, if available. For securities not actively traded, fair values are estimated using independent pricing services or internally developed pricing models. -- 33 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 The adjusted cost of common and preferred stock held by the Company at December 31, 1998 and 1997 was $4.8 billion and $5.0 billion, respectively. MORTGAGE LOANS AND REAL ESTATE Mortgage loans are collateralized by properties located throughout the United States and Canada. The Company attempts to minimize mortgage loan investment risk by diversification of geographic locations and types of collateral properties. The fair value of mortgage loans as of December 31, 1998 and 1997 was approximately $12.9 billion and $11.5 billion, respectively. The fair value of the mortgage loan portfolio is estimated by discounting the future estimated cash flows using current interest rates of debt securities with similar credit risk and maturities, or utilizing net realizable values. At December 31, 1998 and 1997, real estate includes $61 million acquired through foreclosure at each date and $120 million and $124 million, respectively, of home office real estate. In 1998, 1997 and 1996, the Company recorded unrealized losses of $5 million, $2 million and $43 million, respectively, for the excess of statement value over fair value of certain real estate investments and mortgage loans. REALIZED GAINS AND LOSSES Realized investment gains and losses for the years ended December 31, 1998, 1997 and 1996 were as follows:
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------------ ------------------------------ ------------------------------ NET NET NET REALIZED REALIZED REALIZED REALIZED REALIZED GAINS REALIZED REALIZED GAINS REALIZED REALIZED GAINS GAINS LOSSES (LOSSES) GAINS LOSSES (LOSSES) GAINS LOSSES (LOSSES) -------- -------- -------- -------- -------- -------- -------- -------- -------- (IN MILLIONS) Bonds......................... $ 514 $ (231) $ 283 $ 518 $ (269) $ 249 $ 396 $ (383) $ 13 Common and preferred stocks... 885 (240) 645 533 (150) 383 580 (115) 465 Mortgage loans................ 18 (11) 7 14 (14) - 2 (15) (13) Real estate................... 41 - 41 100 (2) 98 36 - 36 Other investments............. 330 (267) 63 338 (105) 233 204 (51) 153 -------- -------- -------- -------- -------- -------- -------- -------- -------- $ 1,788 $ (749) 1,039 $ 1,503 $ (540) 963 $ 1,218 $ (564) 654 -------- -------- -------- -------- -------- -------- -------- -------- -------- Less: Capital gains taxes..... 358 340 224 Less: IMR deferrals........... 197 209 35 -------- -------- -------- Net realized capital gains.... $ 484 $ 414 $ 395 -------- -------- -------- -------- -------- --------
SECURITIES LENDING The Company has entered into a securities lending agreement whereby certain securities are loaned to third parties, primarily major brokerage firms. The Company's policy requires a minimum of 102 percent of the fair value of the loaned securities as collateral, calculated on a daily basis in the form of either cash or securities. Collateral assets received and related liability due to counterparties of $1.5 billion are included in the consolidated -- 34 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 statements of financial position for each of the periods ended at December 31, 1998 and 1997, and approximate the statement value of securities loaned at those dates. INVESTMENT IN MGIC The Company owns 11.0% (11.9 million shares) of the outstanding common stock of MGIC Investment Corporation ("MGIC"). This investment is accounted for using the equity method. At December 31, 1998 and 1997, the fair value of the Company's investment in MGIC exceeded the statement value of $180 million and $273 million, respectively, by $296 million and $768 million, respectively. In July 1995, the Company entered into a forward contract with a brokerage firm to deliver 8.9 million to 10.7 million shares of MGIC (or cash in an amount equal to the market value of the MGIC shares at contract maturity) in August, 1998, in exchange for a fixed cash payment of $247 million ($24 per share). The Company's objective in entering into the forward contract was to hedge against depreciation in the value of its MGIC holdings during the contract period below the initial spot price of $24, while partially participating in appreciation, if any, during the forward contract's duration. In August 1998, the Company delivered 8.9 million shares to settle the forward contract. In conjunction with the settlement, the Company recorded a $114 million realized gain. DERIVATIVE FINANCIAL INSTRUMENTS In the normal course of business, the Company enters into transactions to reduce its exposure to fluctuations in interest rates, foreign currency exchange rates and market volatility. These hedging strategies include the use of forwards, futures, options and swaps. The Company held the following positions for hedging purposes at December 31, 1998 and 1997:
DERIVATIVE FINANCIAL INSTRUMENT NOTIONAL AMOUNTS RISKS REDUCED - ---------------------------------------------- --------------------------- ---------------------------------------- (IN MILLIONS) DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Foreign Currency Forward Currency exposure on foreign-denominated Contracts.................................... $601 $564 investments. Common Stock Futures.......................... 657 327 Stock market price fluctuation. Bond Futures.................................. 379 95 Bond market price fluctuation. Options to acquire Interest Rate Swaps........ 419 530 Interest rates payable on certain annuity and insurance contracts. Foreign Currency and Interest Rate Swaps...... 94 209 Interest rates on variable rate notes and currency exposure on foreign-denominated bonds.
The notional or contractual amounts of derivative financial instruments are used to denominate these types of transactions and do not represent the amounts exchanged between the parties. In addition to the use of derivatives for hedging purposes, equity swaps were held for investment purposes during 1997 and 1998. The notional amount of equity swaps outstanding at December 31, 1998 and 1997 was $188 million and $143 million, respectively. Foreign currency forwards, foreign currency swaps, stock futures and equity swaps are reported at fair value. Resulting gains and losses on these contracts are unrealized until expiration of the contract. There is no statement -- 35 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 value reported for interest rate swaps, bond futures and options to acquire interest rate swaps prior to the settlement of the contract, at which time realized gains and losses are deferred to IMR. Changes in the value of derivative instruments are expected to offset gains and losses on the hedged investments. During 1998, net realized and unrealized gains on investments were partially offset by net realized losses of $104 million and net unrealized losses of $58 million on derivative instruments. The effect of derivative instruments in 1997 and 1996 was not material to the Company's results of operations. 3. RESERVES FOR POLICY BENEFITS Life insurance reserves on substantially all policies issued since 1978 are based on the Commissioner's Reserve Valuation Method with interest rates ranging from 3 1/2% to 5 1/2%. Other life policy reserves are primarily based on the net level premium method employing various mortality tables at interest rates ranging from 2% to 4 1/2%. Deferred annuity reserves on contracts issued since 1985 are valued primarily using the Commissioner's Annuity Reserve Valuation Method with interest rates ranging from 3 1/2% to 6 1/4%. Other deferred annuity reserves are based on contract value. Immediate annuity reserves are based on present values of expected benefit payments at interest rates ranging from 3 1/2% to 7 1/2%. Active life reserves for disability income ("DI") policies issued since 1987 are primarily based on the two-year preliminary term method using a 4% interest rate and the 1985 Commissioner's Individual Disability Table A ("CIDA") for morbidity. Active life reserves for prior DI policies are based on the net level premium method, a 3% to 4% interest rate and the 1964 Commissioner's Disability Table for morbidity. Disabled life reserves for DI policies are based on the present values of expected benefit payments primarily using the 1985 CIDA (modified for Company experience in the first two years of disability) with interest rates ranging from 3% to 5 1/2%. Use of these actuarial tables and methods involves estimation of future mortality and morbidity based on past experience. Actual future experience could differ from these estimates. 4. EMPLOYEE AND AGENT BENEFIT PLANS The Company sponsors noncontributory defined benefit retirement plans for all eligible employees and agents. The expense associated with these plans is generally recorded by the Company in the period contributions to the plans are funded. As of January 1, 1998, the most recent actuarial valuation date available, the qualified defined benefit plans were fully funded. The Company recorded a liability of $98 million and $87 million for nonqualified defined benefit plans at December 31, 1998 and 1997, respectively. In addition, the Company has a contributory 401(k) plan for eligible employees and a noncontributory defined contribution plan for all full-time agents. The Company's contributions are expensed in the period contributions are made to the plans. The Company recorded $29 million, $27 million and $25 million of total expense related to its defined benefit and defined contribution plans for the years ended December 31, 1998, 1997 and 1996, respectively. The defined benefit and defined contribution plans' assets of $1.9 billion and $1.7 billion at December 31, 1998 and 1997, respectively, were primarily invested in the separate accounts of the Company. In addition to pension and retirement benefits, the Company provides certain health care and life insurance benefits ("postretirement benefits") for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Company. Postretirement benefit costs for the years ended December 31, 1998, 1997 and 1996 were a net expense (benefit) of $1.8 million, ($1.3) million and -- 36 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 ($12.0) million, respectively. Net benefits were primarily a result of favorable differences between actuarial assumptions and actual experience.
DECEMBER 31, DECEMBER 31, 1998 1997 -------------------- -------------------- Unfunded postretirement benefit obligation for retirees and other fully eligible employees (Accrued in statement of financial position).................... $35 million $34 million Estimated postretirement benefit obligation for active non-vested employees (Not accrued until employee vests)....................... $56 million $50 million Discount rate................. 7% 7% Health care cost trend rate... 10% to an ultimate 10% to an ultimate 5%, declining 1% for 5%, declining 1% for 5 years 5 years
If the health care cost trend rate assumptions were increased by 1%, the accrued postretirement benefit obligation as of December 31, 1998 and 1997 would have been increased by $5 million and $4 million, respectively. At December 31, 1998 and 1997, the recorded postretirement benefit obligation was reduced by $23 million and $20 million, respectively, for assets funded for postretirement health care benefits. 5. REINSURANCE In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding to reinsurers under excess coverage and coinsurance contracts. The Company retains a maximum of $25 million of coverage per individual life and $35 million maximum of coverage per joint life. The Company has an excess reinsurance contract for disability income policies with retention limits varying based upon on coverage type. The amounts shown in the accompanying consolidated financial statements are net of reinsurance. Policy benefit reserves at December 31, 1998 and 1997 were reported net of ceded reserves of $518 million and $435 million, respectively. The effect of reinsurance on premiums and benefits for the years ended December 31, 1998, 1997 and 1996 was as follows:
1998 1997 1996 ------- ------- ------- (IN MILLIONS) Direct premiums................................... $8,426 $7,647 $7,064 Premiums ceded.................................... (405) (353) (397) ------- ------- ------- Net premium revenue............................... $8,021 $7,294 $6,667 ------- ------- ------- ------- ------- ------- Benefits to policyowners and beneficiaries........ $8,869 $8,057 $7,348 Benefits ceded.................................... (182) (136) (147) ------- ------- ------- Net benefits to policyowners and beneficiaries.... $8,687 $7,921 $7,201 ------- ------- ------- ------- ------- -------
-- 37 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 In addition, the Company received $121 million, $115 million and $93 million for the years ended December 31, 1998, 1997 and 1996, respectively, from reinsurers representing allowances for reimbursement of commissions and other expenses. These amounts are included in other income in the consolidated statement of operations. Reinsurance contracts do not relieve the Company from its obligations to policyowners. Failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. 6. INCOME TAXES Provisions for income taxes are based on current income tax payable without recognition of deferred taxes. The Company files a consolidated life-nonlife federal income tax return. Federal income tax returns for years through 1988 are closed as to further assessment of tax. Adequate provision has been made in the financial statements for any additional taxes which may become due with respect to the open years. The Company's effective tax rate on gains from operations before taxes for the years ended December 31, 1998, 1997 and 1996 was 48%, 56%, and 67% respectively. The Company's effective tax rate exceeds the federal corporate rate of 35% primarily because, (1) the Company pays a tax that is assessed only on the surplus of mutual life insurance companies ("equity tax"), and (2) the Company must capitalize and amortize (as opposed to immediately deducting) an amount deemed to represent the cost of acquiring new business ("DAC tax"). 7. ACQUISITION OF FRANK RUSSELL COMPANY Pursuant to an Agreement and Plan of Merger, dated as of August 10, 1998, the Company acquired Frank Russell Company effective January 1, 1999 for a purchase price of approximately $950 million. Frank Russell is a leading investment management and consulting firm, providing investment advice, analytical tools and investment vehicles to institutional and individual investors in more than 30 countries. In connection with its acquisition of Frank Russell Company, the Company will be required in 1999 to charge-off directly from surplus approximately $341 million, which represents the amount of acquisition goodwill less 10% of the Company's surplus at December 31, 1998. In addition, the Company will request permission from the OCI to charge-off the remaining $474 million of acquisition goodwill in 1999 and currently intends to do so. In connection with the acquisition, the Company has unconditionally guaranteed certain debt obligations of Frank Russell Company, including $350 million of senior notes and up to $150 million of other credit facilities. 8. CONTINGENCIES The Company has guaranteed certain obligations of its affiliates. These guarantees totaled approximately $133 million at December 31, 1998 and are generally supported by the underlying net asset values of the affiliates. In addition, the Company routinely makes commitments to fund mortgage loans or other investments in the normal course of business. These commitments aggregated to $2.1 billion at December 31, 1998 and were extended at market interest rates and terms. The Company is engaged in various legal actions in the normal course of its investment and insurance operations. In the opinion of management, any losses resulting from such actions would not have a material effect on the Company's financial position. -- 38 [LOGO] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Trustees and Policyowners of The Northwestern Mutual Life Insurance Company We have audited the accompanying consolidated statement of financial position of The Northwestern Mutual Life Insurance Company and its subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, of changes in surplus and of cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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. As described in Note 1, these consolidated financial statements were prepared in conformity with accounting practices prescribed or permitted by the Office of the Commissioner of Insurance of the State of Wisconsin (statutory basis of accounting), which practices differ from generally accepted accounting principles. Accordingly, the consolidated financial statements are not intended to represent a presentation in accordance with generally accepted accounting principles. The effects on the consolidated financial statements of the variances between the statutory basis of accounting and generally accepted accounting principles, although not reasonably determinable, are presumed to be material. In our opinion, the consolidated financial statements audited by us (1) do not present fairly in conformity with generally accepted accounting principles, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary at December 31, 1998 and 1997, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 1998 because of the effects of the variances between the statutory basis of accounting and generally accepted accounting principles referred to in the preceding paragraph and (2) do present fairly, in all material respects, the financial position of The Northwestern Mutual Life Insurance Company and its subsidiary at December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, on the basis of accounting described in Note 1. [SIGNATURE] January 25, 1999 -- 39 APPENDIX A ILLUSTRATIONS OF DEATH BENEFITS, POLICY VALUES CASH VALUES AND ACCUMULATED PREMIUMS. The tables on the following pages illustrate how the death benefit, Policy Value and cash value for a Policy would vary over time based on hypothetical investment results. The tables assume gross investment return rates of 0%, 6% and 12% on assets of the Account. The Policies illustrated are for a male and female, both select risks, age 55, with a Specified Amount of $1,000,000 and annual premium of $20,000. The first four illustrations, on pages 41-44, are for death benefit Option A, based on both current charges and Guaranteed Charges, using 1) the Guideline Premium/Cash Value Corridor Test, and 2) the Cash Value Accumulation Test for the definition of life insurance. The next four illustrations are for Policies with death benefit Option B. The death benefits and cash values would be different from those shown if the gross investment return rate averaged 0%, 6% or 12%, but fluctuated over and under the average rate at various points in time. The values would also be different, depending on the Account divisions selected by the owner of the Policy, if the Portfolios or Funds return rate averaged 0%, 6% or 12%, but the rates for each individual Portfolio or Fund varied over and under the average. The amounts shown as the death benefits, Policy Values and cash values reflect the deductions from premiums and deductions from Policy Value. The amounts shown as the cash values reflect surrender charges. The amounts shown also reflect the average of the investment advisory fees and other expenses applicable to each of the Portfolios and Funds at the annual rate of .66% of their net assets. In calculating this average rate we used the actual expenses for 1998 for the nine Portfolios which were in operation, and estimated expense ratios which we expect the two new Portfolios and five Funds to incur in 1999 on an annualized basis. See "The Funds", p. 4. Thus the 0%, 6% and 12% gross hypothetical return rates on the Fund's assets are equivalent to the net rates of -.66%, 5.34% and 11.34% on the assets of the Account. The second column of each table shows the amount which would accumulate if an amount equal to the annual premium were invested to earn interest, after taxes, at a 5% interest rate compounded annually. The death benefits and corresponding Policy Values and cash values shown on pages 41, 43, 45 and 47 illustrate benefits which would be paid if investment returns of 0%, 6% and 12% are realized, and if mortality and expense experience in the future is as currently experienced. HOWEVER, CURRENT MONTHLY COST OF INSURANCE AND EXPENSE CHARGES MAY CHANGE SUBJECT TO THE STATED MAXIMUM CHARGES. A comparable illustration based on the issue age, sex and risk classification of the proposed insured persons and proposed Specified Amount, death benefit option and premium is available upon request. -- 40 FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY SPECIFIED AMOUNT: $1,000,000 DEATH BENEFIT OPTION: A MALE SELECT CLASS ISSUE AGE 55 FEMALE SELECT CLASS ISSUE AGE 55 ANNUAL PREMIUM: $20,000 GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST CURRENT CHARGES
DEATH BENEFIT ------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL PREMIUM ACCUMULATED INVESTMENT RETURN OF END OF AT 5% INTEREST PER ------------------------------------- POLICY YEAR YEAR 0% 6% 12% - --------------- ---------------------- ----------- ----------- ----------- 1 21,000 1,000,000 1,000,000 1,000,000 2 43,050 1,000,000 1,000,000 1,000,000 3 66,203 1,000,000 1,000,000 1,000,000 4 90,513 1,000,000 1,000,000 1,000,000 5 116,038 1,000,000 1,000,000 1,000,000 6 142,840 1,000,000 1,000,000 1,000,000 7 170,982 1,000,000 1,000,000 1,000,000 8 200,531 1,000,000 1,000,000 1,000,000 9 231,558 1,000,000 1,000,000 1,000,000 10 264,136 1,000,000 1,000,000 1,000,000 15 453,150 1,000,000 1,000,000 1,000,000 20 694,385 1,000,000 1,000,000 1,231,273 25 1,002,269 1,000,000 1,000,000 2,151,291 30 1,395,216 1,000,000 1,176,067 3,705,695 35 1,896,726 1,000,000 1,575,433 6,215,194
POLICY VALUE CASH VALUE --------------------------------------------- --------------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF RETURN OF --------------------------------------------- --------------------------------------------- END OF POLICY YEAR 0% 6% 12% 0% 6% 12% - ------------ ------- --------- --------- ------- --------- --------- 1 15,522 16,525 17,530 6,232 7,235 8,240 2 30,869 33,852 36,956 22,612 25,594 28,699 3 46,042 52,016 58,484 38,816 44,791 51,258 4 61,039 71,057 82,337 54,846 64,864 76,143 5 75,859 91,013 108,764 70,698 85,852 103,602 6 90,496 111,922 138,037 86,367 107,793 133,908 7 104,946 133,822 170,459 101,849 130,726 167,362 8 119,201 156,755 206,363 117,136 154,691 204,298 9 133,254 180,761 246,120 132,222 179,729 245,088 10 147,099 205,888 290,146 147,099 205,888 290,146 15 227,297 366,996 612,297 227,297 366,996 612,297 20 295,833 565,953 1,150,722 295,833 565,953 1,150,722 25 334,046 808,247 2,048,848 334,046 808,247 2,048,848 30 297,781 1,120,064 3,529,234 297,781 1,120,064 3,529,234 35 51,073 1,500,412 5,919,233 51,073 1,500,412 5,919,233
ALL PREMIUM PAYMENTS ARE ILLUSTRATED AS IF MADE AT THE BEGINNING OF THE POLICY YEAR. ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE VARIABLE ACCOUNT. THE DEATH BENEFIT, POLICY VALUE AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD OF TIME. -- 41 FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY SPECIFIED AMOUNT: $1,000,000 DEATH BENEFIT OPTION: A MALE SELECT CLASS ISSUE AGE 55 FEMALE SELECT CLASS ISSUE AGE 55 ANNUAL PREMIUM: $20,000 GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST GUARANTEED CHARGES
DEATH BENEFIT ------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL PREMIUM ACCUMULATED INVESTMENT RETURN OF END OF AT 5% INTEREST PER ------------------------------------- POLICY YEAR YEAR 0% 6% 12% - --------------- ---------------------- ----------- ----------- ----------- 1 21,000 1,000,000 1,000,000 1,000,000 2 43,050 1,000,000 1,000,000 1,000,000 3 66,203 1,000,000 1,000,000 1,000,000 4 90,513 1,000,000 1,000,000 1,000,000 5 116,038 1,000,000 1,000,000 1,000,000 6 142,840 1,000,000 1,000,000 1,000,000 7 170,982 1,000,000 1,000,000 1,000,000 8 200,531 1,000,000 1,000,000 1,000,000 9 231,558 1,000,000 1,000,000 1,000,000 10 264,136 1,000,000 1,000,000 1,000,000 15 453,150 1,000,000 1,000,000 1,000,000 20 694,385 1,000,000 1,000,000 1,081,505 25 1,002,269 1,000,000 1,000,000 1,855,009 30 1,395,216 0* 1,000,000 3,115,429 35 1,896,726 0* 1,000,000 5,063,479
POLICY VALUE CASH VALUE ------------------------------------------------------- ------------------------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ------------------------------------------------------- ------------------------------------------------------- END OF POLICY YEAR 0% 6% 12% 0% 6% 12% - --------------- --------- --------- ----------- --------- --------- ----------- 1 15,378 16,375 17,373 6,088 7,085 8,083 2 30,412 33,360 36,429 22,154 25,102 28,172 3 45,085 50,961 57,324 37,859 43,736 50,098 4 59,381 69,184 80,225 53,188 62,991 74,031 5 73,279 88,031 105,317 68,118 82,870 100,156 6 86,754 107,499 132,801 82,625 103,370 128,672 7 99,770 127,579 162,894 96,673 124,482 159,797 8 112,280 148,248 195,826 110,216 146,184 193,762 9 124,220 169,470 231,846 123,188 168,438 230,814 10 135,512 191,197 271,226 135,512 191,197 271,226 15 194,004 322,978 551,824 194,004 322,978 551,824 20 217,278 462,857 1,010,752 217,278 462,857 1,010,752 25 161,091 596,725 1,766,675 161,091 596,725 1,766,675 30 0* 716,915 2,967,075 0* 716,915 2,967,075 35 0* 832,007 4,822,361 0* 832,007 4,822,361
* Additional payment will be required to prevent policy termination. ALL PREMIUM PAYMENTS ARE ILLUSTRATED AS IF MADE AT THE BEGINNING OF THE POLICY YEAR. ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE VARIABLE ACCOUNT. THE DEATH BENEFIT, POLICY VALUE AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD OF TIME. -- 42 FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY SPECIFIED AMOUNT: $1,000,000 DEATH BENEFIT OPTION: A MALE SELECT CLASS ISSUE AGE 55 FEMALE SELECT CLASS ISSUE AGE 55 ANNUAL PREMIUM: $20,000 CASH VALUE ACCUMULATION TEST CURRENT CHARGES
DEATH BENEFIT ------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL PREMIUM ACCUMULATED INVESTMENT RETURN OF END OF AT 5% INTEREST PER ------------------------------------- POLICY YEAR YEAR 0% 6% 12% - --------------- ---------------------- ----------- ----------- ----------- 1 21,000 1,000,000 1,000,000 1,000,000 2 43,050 1,000,000 1,000,000 1,000,000 3 66,203 1,000,000 1,000,000 1,000,000 4 90,513 1,000,000 1,000,000 1,000,000 5 116,038 1,000,000 1,000,000 1,000,000 6 142,840 1,000,000 1,000,000 1,000,000 7 170,982 1,000,000 1,000,000 1,000,000 8 200,531 1,000,000 1,000,000 1,000,000 9 231,558 1,000,000 1,000,000 1,000,000 10 264,136 1,000,000 1,000,000 1,000,000 15 453,150 1,000,000 1,000,000 1,132,348 20 694,385 1,000,000 1,000,000 1,806,760 25 1,002,269 1,000,000 1,118,299 2,765,673 30 1,395,216 1,000,000 1,353,595 4,142,958 35 1,896,726 1,000,000 1,598,348 6,110,280
POLICY VALUE CASH VALUE --------------------------------------------- --------------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF RETURN OF --------------------------------------------- --------------------------------------------- END OF POLICY YEAR 0% 6% 12% 0% 6% 12% - ----------- ------- --------- --------- ------- --------- --------- 1 15,522 16,525 17,530 6,232 7,235 8,240 2 30,869 33,852 36,956 22,612 25,594 28,699 3 46,042 52,016 58,484 38,816 44,791 51,258 4 61,039 71,057 82,337 54,846 64,864 76,143 5 75,859 91,013 108,764 70,698 85,852 103,602 6 90,496 111,922 138,037 86,367 107,793 133,908 7 104,946 133,822 170,459 101,849 130,726 167,362 8 119,201 156,755 206,363 117,136 154,691 204,298 9 133,254 180,761 246,120 132,222 179,729 245,088 10 147,099 205,888 290,146 147,099 205,888 290,146 15 227,297 366,996 612,215 227,297 366,996 612,215 20 295,833 565,953 1,143,119 295,833 565,953 1,143,119 25 334,046 805,813 1,992,861 334,046 805,813 1,992,861 30 297,781 1,078,355 3,300,529 297,781 1,078,355 3,300,529 35 51,073 1,366,427 5,223,679 51,073 1,366,427 5,223,679
ALL PREMIUM PAYMENTS ARE ILLUSTRATED AS IF MADE AT THE BEGINNING OF THE POLICY YEAR. ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE VARIABLE ACCOUNT. THE DEATH BENEFIT, POLICY VALUE AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD OF TIME. -- 43 FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY SPECIFIED AMOUNT: $1,000,000 DEATH BENEFIT OPTION: A MALE SELECT CLASS ISSUE AGE 55 FEMALE SELECT CLASS ISSUE AGE 55 ANNUAL PREMIUM: $20,000 CASH VALUE ACCUMULATION TEST GUARANTEED CHARGES
DEATH BENEFIT ------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL PREMIUM ACCUMULATED INVESTMENT RETURN OF END OF AT 5% INTEREST PER ------------------------------------- POLICY YEAR YEAR 0% 6% 12% - --------------- ---------------------- ----------- ----------- ----------- 1 21,000 1,000,000 1,000,000 1,000,000 2 43,050 1,000,000 1,000,000 1,000,000 3 66,203 1,000,000 1,000,000 1,000,000 4 90,513 1,000,000 1,000,000 1,000,000 5 116,038 1,000,000 1,000,000 1,000,000 6 142,840 1,000,000 1,000,000 1,000,000 7 170,982 1,000,000 1,000,000 1,000,000 8 200,531 1,000,000 1,000,000 1,000,000 9 231,558 1,000,000 1,000,000 1,000,000 10 264,136 1,000,000 1,000,000 1,000,000 15 453,150 1,000,000 1,000,000 1,020,630 20 694,385 1,000,000 1,000,000 1,558,395 25 1,002,269 1,000,000 1,000,000 2,244,735 30 1,395,216 0* 1,000,000 3,136,441 35 1,896,726 0* 1,000,000 4,313,250
POLICY VALUE CASH VALUE ------------------------------------------------------- ------------------------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ------------------------------------------------------- ------------------------------------------------------- END OF POLICY YEAR 0% 6% 12% 0% 6% 12% - --------------- --------- --------- ----------- --------- --------- ----------- 1 15,378 16,375 17,373 6,088 7,085 8,083 2 30,412 33,360 36,429 22,154 25,102 28,172 3 45,085 50,961 57,324 37,859 43,736 50,098 4 59,381 69,184 80,225 53,188 62,991 74,031 5 73,279 88,031 105,317 68,118 82,870 100,156 6 86,754 107,499 132,801 82,625 103,370 128,672 7 99,770 127,579 162,894 96,673 124,482 159,797 8 112,280 148,248 195,826 110,216 146,184 193,762 9 124,220 169,470 231,846 123,188 168,438 230,814 10 135,512 191,197 271,226 135,512 191,197 271,226 15 194,004 322,978 551,814 194,004 322,978 551,814 20 217,278 462,857 985,981 217,278 462,857 985,981 25 161,091 596,725 1,617,489 161,091 596,725 1,617,489 30 0* 716,915 2,498,677 0* 716,915 2,498,677 35 0* 832,007 3,687,397 0* 832,007 3,687,397
* Additional payment will be required to prevent policy termination. ALL PREMIUM PAYMENTS ARE ILLUSTRATED AS IF MADE AT THE BEGINNING OF THE POLICY YEAR. ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE VARIABLE ACCOUNT. THE DEATH BENEFIT, POLICY VALUE AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD OF TIME. -- 44 FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY SPECIFIED AMOUNT: $1,000,000 DEATH BENEFIT OPTION: B MALE SELECT CLASS ISSUE AGE 55 FEMALE SELECT CLASS ISSUE AGE 55 ANNUAL PREMIUM: $20,000 GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST CURRENT CHARGES
DEATH BENEFIT ------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL PREMIUM ACCUMULATED INVESTMENT RETURN OF END OF AT 5% INTEREST PER ------------------------------------- POLICY YEAR YEAR 0% 6% 12% - --------------- ---------------------- ----------- ----------- ----------- 1 21,000 1,015,522 1,016,525 1,017,530 2 43,050 1,030,869 1,033,852 1,036,956 3 66,203 1,046,041 1,052,016 1,058,483 4 90,513 1,061,038 1,071,055 1,082,334 5 116,038 1,075,855 1,091,008 1,108,757 6 142,840 1,090,487 1,111,911 1,138,023 7 170,982 1,104,928 1,133,800 1,170,429 8 200,531 1,119,169 1,156,712 1,206,304 9 231,558 1,133,198 1,180,684 1,246,012 10 264,136 1,147,008 1,205,756 1,289,955 15 453,150 1,226,555 1,365,731 1,610,096 20 694,385 1,291,294 1,556,795 2,132,395 25 1,002,269 1,311,607 1,752,777 2,953,868 30 1,395,216 1,222,198 1,877,906 4,188,729 35 1,896,726 0* 1,765,090 5,948,114
POLICY VALUE CASH VALUE ------------------------------------------------------- ------------------------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ------------------------------------------------------- ------------------------------------------------------- END OF POLICY YEAR 0% 6% 12% 0% 6% 12% - --------------- --------- --------- ----------- --------- --------- ----------- 1 15,522 16,525 17,530 6,232 7,235 8,240 2 30,869 33,852 36,956 22,611 25,594 28,698 3 46,041 52,016 58,483 38,816 44,790 51,257 4 61,038 71,055 82,334 54,844 64,862 76,141 5 75,855 91,008 108,757 70,694 85,847 103,596 6 90,487 111,911 138,023 86,359 107,782 133,894 7 104,928 133,800 170,429 101,832 130,703 167,332 8 119,169 156,712 206,304 117,104 154,647 204,240 9 133,198 180,684 246,012 132,166 179,651 244,980 10 147,008 205,756 289,955 147,008 205,756 289,955 15 226,555 365,731 610,096 226,555 365,731 610,096 20 291,294 556,795 1,132,395 291,294 556,795 1,132,395 25 311,607 752,777 1,953,868 311,607 752,777 1,953,868 30 222,198 877,906 3,188,729 222,198 877,906 3,188,729 35 0* 765,090 4,948,114 0* 765,090 4,948,114
* Additional payment will be required to prevent policy termination. ALL PREMIUM PAYMENTS ARE ILLUSTRATED AS IF MADE AT THE BEGINNING OF THE POLICY YEAR. ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE VARIABLE ACCOUNT. THE DEATH BENEFIT, POLICY VALUE AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD OF TIME. -- 45 FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY SPECIFIED AMOUNT: $1,000,000 DEATH BENEFIT OPTION: B MALE SELECT CLASS ISSUE AGE 55 FEMALE SELECT CLASS ISSUE AGE 55 ANNUAL PREMIUM: $20,000 GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST GUARANTEED CHARGES
DEATH BENEFIT ------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL PREMIUM ACCUMULATED INVESTMENT RETURN OF END OF AT 5% INTEREST PER ------------------------------------- POLICY YEAR YEAR 0% 6% 12% - --------------- ---------------------- ----------- ----------- ----------- 1 21,000 1,015,378 1,016,374 1,017,372 2 43,050 1,030,406 1,033,354 1,036,422 3 66,203 1,045,065 1,050,939 1,057,299 4 90,513 1,059,334 1,069,129 1,080,159 5 116,038 1,073,184 1,087,914 1,105,175 6 142,840 1,086,580 1,107,279 1,132,523 7 170,982 1,099,478 1,127,194 1,162,390 8 200,531 1,111,815 1,147,613 1,194,962 9 231,558 1,123,507 1,168,461 1,230,421 10 264,136 1,134,454 1,189,644 1,268,947 15 453,150 1,188,444 1,313,207 1,534,423 20 694,385 1,197,477 1,419,897 1,915,813 25 1,002,269 1,109,440 1,442,153 2,414,421 30 1,395,216 0* 1,257,611 2,988,793 35 1,896,726 0* 0* 3,504,461
POLICY VALUE CASH VALUE ------------------------------------------------------- ------------------------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ------------------------------------------------------- ------------------------------------------------------- END OF POLICY YEAR 0% 6% 12% 0% 6% 12% - --------------- --------- --------- ----------- --------- --------- ----------- 1 15,378 16,374 17,372 6,088 7,084 8,082 2 30,406 33,354 36,422 22,148 25,096 28,165 3 45,065 50,939 57,299 37,840 43,714 50,073 4 59,334 69,129 80,159 53,140 62,935 73,966 5 73,184 87,914 105,175 68,023 82,753 100,014 6 86,580 107,279 132,523 82,451 103,150 128,394 7 99,478 127,194 162,390 96,381 124,098 159,293 8 111,815 147,613 194,962 109,750 145,548 192,898 9 123,507 168,461 230,421 122,475 167,429 229,389 10 134,454 189,644 268,947 134,454 189,644 268,947 15 188,444 313,207 534,423 188,444 313,207 534,423 20 197,477 419,897 915,813 197,477 419,897 915,813 25 109,440 442,153 1,414,421 109,440 442,153 1,414,421 30 0* 257,611 1,988,793 0* 257,611 1,988,793 35 0* 0* 2,504,461 0* 0* 2,504,461
* *Additional payment will be required to prevent policy termination. ALL PREMIUM PAYMENTS ARE ILLUSTRATED AS IF MADE AT THE BEGINNING OF THE POLICY YEAR. ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE VARIABLE ACCOUNT. THE DEATH BENEFIT, POLICY VALUE AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD OF TIME. -- 46 FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY SPECIFIED AMOUNT: $1,000,000 DEATH BENEFIT OPTION: B MALE SELECT CLASS ISSUE AGE 55 FEMALE SELECT CLASS ISSUE AGE 55 ANNUAL PREMIUM: $20,000 CASH VALUE ACCUMULATION TEST CURRENT CHARGES
DEATH BENEFIT ------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL PREMIUM ACCUMULATED INVESTMENT RETURN OF END OF AT 5% INTEREST PER ------------------------------------- POLICY YEAR YEAR 0% 6% 12% - --------------- ---------------------- ----------- ----------- ----------- 1 21,000 1,015,522 1,016,525 1,017,530 2 43,050 1,030,869 1,033,852 1,036,956 3 66,203 1,046,041 1,052,016 1,058,483 4 90,513 1,061,038 1,071,055 1,082,334 5 116,038 1,075,855 1,091,008 1,108,757 6 142,840 1,090,487 1,111,911 1,138,023 7 170,982 1,104,928 1,133,800 1,170,429 8 200,531 1,119,169 1,156,712 1,206,304 9 231,558 1,133,198 1,180,684 1,246,012 10 264,136 1,147,008 1,205,756 1,289,955 15 453,150 1,226,555 1,365,731 1,610,096 20 694,385 1,291,294 1,556,795 2,132,395 25 1,002,269 1,311,607 1,752,777 2,953,868 30 1,395,216 1,222,198 1,877,906 4,188,729 35 1,896,726 0* 1,765,090 5,948,114
POLICY VALUE CASH VALUE ------------------------------------------------------- ------------------------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ------------------------------------------------------- ------------------------------------------------------- END OF POLICY YEAR 0% 6% 12% 0% 6% 12% - --------------- --------- --------- ----------- --------- --------- ----------- 1 15,522 16,525 17,530 6,232 7,235 8,240 2 30,869 33,852 36,956 22,611 25,594 28,698 3 46,041 52,016 58,483 38,816 44,790 51,257 4 61,038 71,055 82,334 54,844 64,862 76,141 5 75,855 91,008 108,757 70,694 85,847 103,596 6 90,487 111,911 138,023 86,359 107,782 133,894 7 104,928 133,800 170,429 101,832 130,703 167,332 8 119,169 156,712 206,304 117,104 154,647 204,240 9 133,198 180,684 246,012 132,166 179,651 244,980 10 147,008 205,756 289,955 147,008 205,756 289,955 15 226,555 365,731 610,096 226,555 365,731 610,096 20 291,294 556,795 1,132,395 291,294 556,795 1,132,395 25 311,607 752,777 1,953,868 311,607 752,777 1,953,868 30 222,198 877,906 3,188,729 222,198 877,906 3,188,729 35 0* 765,090 4,948,114 0* 765,090 4,948,114
* Additional payment will be required to prevent policy termination. ALL PREMIUM PAYMENTS ARE ILLUSTRATED AS IF MADE AT THE BEGINNING OF THE POLICY YEAR. ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE VARIABLE ACCOUNT. THE DEATH BENEFIT, POLICY VALUE AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD OF TIME. -- 47 FLEXIBLE PREMIUM VARIABLE JOINT LIFE INSURANCE POLICY SPECIFIED AMOUNT: $1,000,000 DEATH BENEFIT OPTION: B MALE SELECT CLASS ISSUE AGE 55 FEMALE SELECT CLASS ISSUE AGE 55 ANNUAL PREMIUM: $20,000 CASH VALUE ACCUMULATION TEST GUARANTEED CHARGES
DEATH BENEFIT ------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL PREMIUM ACCUMULATED INVESTMENT RETURN OF END OF AT 5% INTEREST PER ------------------------------------- POLICY YEAR YEAR 0% 6% 12% - --------------- ---------------------- ----------- ----------- ----------- 1 21,000 1,015,378 1,016,374 1,017,372 2 43,050 1,030,406 1,033,354 1,036,422 3 66,203 1,045,065 1,050,939 1,057,299 4 90,513 1,059,334 1,069,129 1,080,159 5 116,038 1,073,184 1,087,914 1,105,175 6 142,840 1,086,580 1,107,279 1,132,523 7 170,982 1,099,478 1,127,194 1,162,390 8 200,531 1,111,815 1,147,613 1,194,962 9 231,558 1,123,507 1,168,461 1,230,421 10 264,136 1,134,454 1,189,644 1,268,947 15 453,150 1,188,444 1,313,207 1,534,423 20 694,385 1,197,477 1,419,897 1,915,813 25 1,002,269 1,109,440 1,442,153 2,414,421 30 1,395,216 0* 1,257,611 2,988,793 35 1,896,726 0* 0* 3,504,461
POLICY VALUE CASH VALUE ------------------------------------------------------- ------------------------------------------------------- ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ASSUMING HYPOTHETICAL GROSS ANNUAL INVESTMENT RETURN OF ------------------------------------------------------- ------------------------------------------------------- END OF POLICY YEAR 0% 6% 12% 0% 6% 12% - --------------- --------- --------- ----------- --------- --------- ----------- 1 15,378 16,374 17,372 6,088 7,084 8,082 2 30,406 33,354 36,422 22,148 25,096 28,165 3 45,065 50,939 57,299 37,840 43,714 50,073 4 59,334 69,129 80,159 53,140 62,935 73,966 5 73,184 87,914 105,175 68,023 82,753 100,014 6 86,580 107,279 132,523 82,451 103,150 128,394 7 99,478 127,194 162,390 96,381 124,098 159,293 8 111,815 147,613 194,962 109,750 145,548 192,898 9 123,507 168,461 230,421 122,475 167,429 229,389 10 134,454 189,644 268,947 134,454 189,644 268,947 15 188,444 313,207 534,423 188,444 313,207 534,423 20 197,477 419,897 915,813 197,477 419,897 915,813 25 109,440 442,153 1,414,421 109,440 442,153 1,414,421 30 0* 257,611 1,988,793 0* 257,611 1,988,793 35 0* 0* 2,504,461 0* 0* 2,504,461
* Additional payment will be required to prevent policy termination. ALL PREMIUM PAYMENTS ARE ILLUSTRATED AS IF MADE AT THE BEGINNING OF THE POLICY YEAR. ASSUMES NO POLICY LOAN OR WITHDRAWAL HAS BEEN MADE. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE VARIABLE ACCOUNT. THE DEATH BENEFIT, POLICY VALUE AND CASH VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. THEY WOULD ALSO BE DIFFERENT IF PREMIUMS WERE PAID IN DIFFERENT AMOUNTS OR FREQUENCIES THAN SHOWN. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER A PERIOD OF TIME. -- 48 APPENDIX B Mortality and Expense Risk Charge - Specified Amount Component Table of Annual Charges Per $1,000 of Initial Specified Amount
Issue Annual Age* Charge - --------- ----------- 20-25 $ 0.04 26 0.05 27 0.06 28 0.07 29 0.08 30 0.09 31 0.10 32 0.11 33 0.12 34 0.13 35 0.14 36 0.17 37 0.19 38 0.22 39 0.25 40 0.28 41 0.30 Issue Annual Age* Charge - --------- ----------- 42 0.33 43 0.36 44 0.38 45 0.41 46 0.44 47 0.47 48 0.50 49 0.53 50 0.57 51 0.60 52 0.63 53 0.66 54 0.69 55 0.72 56 0.77 57 0.83 58 0.88 Issue Annual Age* Charge - --------- ----------- 59 0.94 60 0.99 61 1.04 62 1.10 63 1.15 64 1.21 65 1.26 66 1.31 67 1.35 68 1.40 69 1.44 70 1.49 71 1.54 72 1.58 73 1.63 74 1.67 75-85 1.72
*The issue age used in this calculation equals the younger insured issue age plus an age adjustment. The age adjustment is based on the age difference (older issue age minus younger issue age) and this schedule:
Age Age Difference Adjustment (years) (years) - ------------- ------------ 0-1 0 2-4 1 5-8 2 9-14 3 15-24 4 25-34 5 35-44 6 45-54 7 55-65 8
Example: For a Policy at issue ages 65 and 60 and a Specified Amount of $1,000,000, the age adjustment is 2 and the issue age is 62. The annual charge per $1000 of Specified Amount is $1.10. The Specified Amount component of the mortality and expense risk charge will be $1100.04 annually, or $91.67 monthly, for this Policy. Note: In no event will the sum of the Mortality and Expense Risk Charge - Specified Amount Component Annual Charge and the annualized underwriting and issue charge exceed $1.90 per $1000 of initial Specified Amount. The underwriting and issue charge will be reduced to meet this constraint if necessary. -- 49 (This page has been left blank intentionally.) -- 50 More information about Northwestern Mutual Series Fund, Inc. is included in the Fund's Statement of Additional Information (SAI), incorporated by reference in this prospectus, which is available free of charge. More information about the Fund's investments is included in the Fund's annual and semi-annual reports, which discuss the market conditions and investment strategies that significantly affected each Portfolio's performance during the previous fiscal period. To request a free copy of the Fund's SAI, or current annual or semi-annual report, call us at 1-800-519-4665. Information about the Fund (including the SAI) can be reviewed and copied at the Public Reference Room of the Securities and Exchange Commission (SEC) in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Reports and other information about the Fund are available on the SEC's Internet site at http://www.sec.gov. Copies of the information may be obtained, upon payment of a duplicating fee by writing the Public Reference Section of the SEC, Washington, DC 20549-6009. NORTHWESTERN MUTUAL LIFE Northwestern Mutual Variable Joint Life Northwestern Mutual Variable Life Account Northwestern Mutual Series Fund, Inc. Russell Insurance Funds 71-2010 (4-99) PROSPECTUSES Investment Company Act File Nos. 811-3990 and 811-5371 NORTHWESTERN MUTUAL LIFE-Registered Trademark- PO Box 3095 Milwaukee WI 53201-3095 Change Service Requested -----END PRIVACY-ENHANCED MESSAGE-----