-----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, St9OJ0ZLu13yUKy3dxTxMz8DU0AuUkQZlkQcEv5ktLQyFE06PRP4Tso9rXY3Bx0y vF6CoS8O1ic9fI/Mf9/Gww== 0001047469-98-038707.txt : 19981102 0001047469-98-038707.hdr.sgml : 19981102 ACCESSION NUMBER: 0001047469-98-038707 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19981030 SROS: NONE 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: S-6/A SEC ACT: SEC FILE NUMBER: 333-59103 FILM NUMBER: 98733779 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 S-6/A 1 FORM-S-6/A Registration No. 333-59103 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 ---------------- NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT (EXACT NAME OF TRUST) THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (NAME OF DEPOSITOR) 720 EAST WISCONSIN AVENUE MILWAUKEE, WISCONSIN 53202 (COMPLETE ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES) JOHN M. BREMER, EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY 720 EAST WISCONSIN AVENUE MILWAUKEE, WISCONSIN 53202 (NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE) ------------------- APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: DECEMBER 10, 1998 The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT VARIABLE JOINT LIFE INSURANCE POLICIES CROSS-REFERENCE SHEET Cross reference sheet showing location in Prospectus of information required by Form N-8B-2.
Item Number Heading in Prospectus ----------- --------------------- 1.........................................Cover Page 2 ........................................Cover Page; Northwestern Mutual Life 3 ........................................Not Applicable 4 ........................................Distribution of the Policies 5 ........................................The Account 6 ........................................The Account 7 ........................................Not Applicable 8 ........................................Not Applicable 9 ........................................Legal Proceedings 10(a)......................................Other Policy Provisions: Owner 10(b)......................................Other Policy Provisions: Dividends 10(c) and (d)..............................Death Benefit, Cash Value, Policy Loans, Withdrawals of Cash Value, Right to Return Policy 10(e)......................................Premiums, Termination and Reinstatement 10(f)......................................Voting Rights 10(g)......................................Voting Rights, Substitution of Fund Shares and Other Changes 10(h)......................................Voting Rights, Substitution of Fund Shares and Other Changes 10(i)......................................Premiums, Death Benefit, Cash Value, Dividends 11.........................................The Account, The Fund 12 ........................................The Fund 13 ........................................Summary, The Fund, Deductions and Charges, Distribution of the Policies 14 ........................................Summary: The Policy: Availability Limitations 15 ........................................Premiums, Allocations to the Account 16 ........................................The Account, The Fund, Allocations to the Account 17 ........................................Same Captions as Items 10(a), (c), and (d) 18 ........................................The Account, Detailed Information about the Policy 19 ........................................Reports 20 ........................................Not Applicable 21 ........................................Policy Loans 22 ........................................Other Policy Provisions: Incontestability and Deferral of Determination and Payment 23.........................................Not Applicable 24 ........................................Not Applicable 25 ........................................Northwestern Mutual Life 26 ........................................The Fund, Deductions and Charges 27 ........................................Northwestern Mutual Life 28 ........................................Management 29 ........................................Not Applicable 30 ........................................Not Applicable 31 ........................................Not Applicable 32 ........................................Not Applicable 33 ........................................Not Applicable
ii 34 ........................................Not Applicable 35 ........................................Northwestern Mutual Life 36 ........................................Not Applicable 37 ........................................Not Applicable 38 ........................................Distribution of the Policies 39 ........................................Distribution of the Policies 40 ........................................The Fund 41 ........................................The Fund, Distribution of the Policies 42 ........................................Not Applicable 43 ........................................Not Applicable 44 ........................................The Fund, Premiums, Death Benefit, Allocations to the Account, Cash Value 45 ........................................Not Applicable 46 ........................................Same Captions as Items 10(c) and (d) 47 ........................................Not Applicable 48 ........................................Not Applicable 49 ........................................Not Applicable 50 ........................................The Account 51 ........................................Numerous Captions 52 ........................................Substitution of Fund Shares and Other Changes 53 ........................................Not Applicable 54 ........................................Not Applicable 55 ........................................Not Applicable 56 ........................................Not Applicable 57 ........................................Not Applicable 58 ........................................Not Applicable 59 ........................................Financial Statements
iii December 10, 1998 [LOGO] Prospectus Northwestern Mutual Variable Joint Life Flexible Premium Variable Joint Life Insurance Policy Insurance Payable on Second Death (PHOTO) Northwestern Mutual Series Fund, Inc. The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 (414) 271-1444 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 Fund....................................3 The Northwestern Mutual Life Insurance Company, Northwestern Mutual Variable Life Account and Northwestern Mutual Series Fund, Inc.............3 Northwestern Mutual Life.............................3 The Account..........................................3 The Fund.............................................3 Aggressive Growth Stock Portfolio....................4 International Equity Portfolio.......................4 Growth Stock Portfolio...............................4 Growth and Income Stock Portfolio....................4 Index 500 Stock Portfolio............................4 Balanced Portfolio...................................4 High Yield Bond Portfolio............................4 Select Bond Portfolio................................4 Money Market Portfolio...............................4 Detailed Information About the Policy.....................5 Premiums.............................................5 Death Benefit........................................5 Death Benefit Options..............................5 Choice of Tests for Tax Purposes...................5 Death Benefit Changes..............................6 Allocations to the Account...........................6 Deductions and Charges...............................6 Deductions from Premiums...........................6 Charges against the Policy Value...................6 Surrender Charge...................................7 Expenses of the Fund...............................7 Cash Value...........................................7 Policy Loans.........................................8 Withdrawals of Cash Value............................8 Termination and Reinstatement........................8 Right to Return Policy.............................9 Other Policy Provisions............................9 Owner..........................................9 Beneficiary....................................9 Incontestability...............................9 Suicide........................................9 Misstatement of Age or Sex.....................9 Collateral Assignment..........................9 Deferral of Determination and Payment..........9 Dividends......................................9 Voting Rights......................................9 Substitution of Fund Shares and Other Changes...............................10 Reports...............................................10 Distribution of the Policies..........................10 Tax Considerations....................................10 General...........................................10 Life Insurance Qualification......................10 Tax Treatment of Life Insurance...................11 Modified Endowment Contracts......................11 Estate and Generation Skipping Taxes..............12 Other Tax Considerations..........................12 Other Information.....................................12 Management........................................12 Regulation........................................14 Year 2000 Issues..................................15 Legal Proceedings.................................15 Registration Statement............................15 Experts...........................................15 Financial Statements..................................16 Financial Statements of the Account (for the nine months ended September 30, 1998 -- unaudited)...................................16 Report of Independent Accountants (for the two years ended December 31, 1997).....22 Financial Statements of the Account (for the two years ended December 31, 1997).....23 Financial Statements of Northwestern Mutual Life (for the three years ended December 31, 1997)...29 Report of Independent Accountants (for the three years ended December 31, 1997)...42 Appendix A............................................43 Appendix B............................................52
P R O S P E C T U S 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, nine investment funding options and a choice of three death benefit options. The investment options correspond to the Portfolios of Northwestern Mutual Series Fund, Inc. (the "Fund"). The prospectus for the Fund, attached to this prospectus, describes the investment objectives of the nine portfolios: the Aggressive Growth Stock Portfolio, the International Equity Portfolio, the Growth Stock Portfolio, the Growth and Income Stock Portfolio, the Index 500 Stock Portfolio, the Balanced Portfolio, the High Yield Bond Portfolio, the Select Bond Portfolio and the Money Market Portfolio. The values provided by the Policy vary daily depending on investment results. These values are not guaranteed. The Portfolios present varying degrees of investment risk. A Policy may be returned for a limited period of time. See "Right to Return Policy", p. 9. 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 PROSPECTUS FOR NORTHWESTERN MUTUAL SERIES FUND, INC. WHICH IS 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. 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 Fund prospectus 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 nine divisions. The owner of the Policy determines how net premiums are to be allocated. The assets of each division are invested in a corresponding Portfolio of Northwestern Mutual Series Fund, Inc. The nine Portfolios are the Aggressive Growth Stock Portfolio, the International Equity Portfolio, the Growth Stock Portfolio, the Growth and Income Stock Portfolio, the Index 500 Stock Portfolio, the Balanced Portfolio, the High Yield Bond Portfolio, the Select Bond Portfolio and the Money Market Portfolio. The investment objectives of the Portfolios are briefly described herein. See "The Fund", p. 3. For additional information see the attached prospectus for the Fund. 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 Premiums may be paid 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. The Specified Amount is selected by the applicant when the Policy is purchased and may be increased or decreased by the owner, 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 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 the experience of Northwestern Mutual Life. 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 2 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 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. These charges are currently waived. 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 reduces linearly month by month to zero at the end of the tenth Policy year. From the Fund - - A daily charge for investment advisory and other services provided to the Fund. The total Fund expenses vary by Portfolio and currently fall in an approximate range of .21% to .77% of assets on an annual basis. The following table shows the annual expenses for each of the Portfolios of the Fund, as a percentage of the average net assets of the Portfolio, based on 1997 operations for the Portfolios and their predecessors:
Investment Advisory Other Total Portfolio Fee Expenses Expenses - --------- ---------- -------- -------- Aggressive Growth Stock................. .52% .01% .53% International Equity .67% .10% .77% Growth Stock ........... .47% .02% .49% Growth and Income Stock................. .59% .01% .60% Index 500 Stock......... .20% .01% .21% Balanced................ .30% .00% .30% High Yield Bond......... .52% .03% .55% Select Bond............. .30% .00% .30% Money Market............ .30% .00% .30%
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT AND NORTHWESTERN MUTUAL SERIES FUND, INC. 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 fifth largest life insurance company, based on total assets in excess of $71 billion on December 31, 1997, 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. The Account Northwestern Mutual Variable Life Account was established by the Trustees of Northwestern Mutual Life 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 other income, gains or losses of Northwestern Mutual Life. The Account is used only for variable life insurance policies, including the Policies described in this prospectus as well as other policy series. The Account is registered as a unit investment trust under the Investment Company Act of 1940. Such registration does not involve supervision of management or investment practices or policies. The Account has nine divisions. All of the assets of each division are invested in shares of the corresponding Portfolio of the Fund described below. The Fund 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. Shares of each 3 Portfolio of the Fund are purchased by the corresponding division of the Account at their net asset value without any sales charge. The investment adviser for the Fund is Northwestern Mutual Investment Services, LLC ("NMIS"), a wholly-owned subsidiary of Northwestern Mutual Life. 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 1997 asset size. Other expenses borne by the Portfolios range from 0% for the Select Bond, Money Market and Balanced Portfolios to .10% for the International Equity Portfolio. Northwestern Mutual Life provides certain personnel and facilities used by NMIS in performing its investment advisory functions and is a party to the investment advisory agreement. J.P. Morgan Investment Management, Inc. and Templeton Investment Counsel, Inc. have been retained under investment sub-advisory agreements to provide investment advice to the Growth and Income Stock Portfolio and the International Equity Portfolio, respectively. The investment objectives and types of investments for each of the nine Portfolios of the Fund are set forth below. There can be no assurance that the objectives of the Portfolios will be realized. For more information about the investment objectives and policies, the attendant risk factors and expenses, see the Fund prospectus. 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. 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 generally are 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. 4 DETAILED INFORMATION ABOUT THE POLICY Premiums The Policy permits premiums to be paid 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. The Specified Amount selected when the Policy is purchased is used to determine the minimum initial premium. The minimum initial premium varies with the issue age and sex of the insured persons. A Target Premium is calculated when the Policy is issued and is used in determining the sales load, commissions, surrender charge and other expense charges during the first 10 Policy years. The Target Premium is based on the Specified Amount and the age, sex and risk classification of the insured persons. After a Policy is issued, there are no minimum premiums, except that no premium of less than $25 will be accepted. 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 a premium that would increase the net amount at risk will be accepted only if the insurance, as increased, will be within the issue limits of Northwestern Mutual Life, the insureds meet the insurability requirements and the premium is received prior to the anniversary nearest the older insured's 85th birthday. If the Guideline Premium/Cash Value Corridor Test has been elected, a premium will not be accepted if it would disqualify the Policy as life insurance for federal income tax purposes. See "Choice of Tests for Tax Purposes", below and "Tax Considerations", p. 10. 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) The Specified Amount is selected by the applicant when the Policy is purchased. 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. Secified 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, the death benefit will be increased 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. The purchaser 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. The choice of testing methods is made when a Policy is purchased 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
5 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. 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 a Policy is issued the owner may change the death benefit option, or increase or decrease the Specified Amount, subject to approval by Northwestern Mutual Life. Changes are subject to insurability requirements and issue limits. A change will not be permitted if it results in a Specified Amount less than the minimum for a new Policy issued 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 the Home Office of Northwestern Mutual Life. 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. Any such charges will be deducted from the Policy Value. Northwestern Mutual Life is 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. 10. The cost of insurance charge will increase if a change results in a larger net amount at risk. See "Charges against the Policy Value," below. Allocations to the Account The initial net premium is placed in the Account on the Policy date. Net premiums paid thereafter are placed in the Account on the date received at the Home Office of Northwestern Mutual Life. Net premiums are premiums less the deductions from premiums. See "Deductions from Premiums", below. Premiums placed in the Account prior to the initial allocation date are invested in the Money Market Division of the Account. The initial allocation date is identified in the Policy and is the later of the date the application is approved by Northwestern Mutual Life and the date the initial premium is received at the Home Office of Northwestern Mutual Life. A different initial allocation date applies in those states which require a refund of at least the premium paid during the period when the Policy may be returned. See "Right to Return Policy," p. 9. On the initial allocation date the amount in the Money Market Division is invested in the Account divisions as directed in the application for the Policy. The owner may change the allocation for future net premiums at any time by written request and the change will be effective for premiums placed in the Account thereafter. Allocation must be in whole percentages. The owner may transfer accumulated amounts from one division of the Account to another. Transfers are effective on the date a written request is received at the Home Office of Northwestern Mutual Life. Northwestern Mutual Life reserves 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. Northwestern Mutual Life is currently waiving these fees. Deductions and Charges Deductions from Premiums A charge for taxes attributable to premiums is deducted 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 .75% 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. Northwestern Mutual Life does 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. Northwestern Mutual Life believes that this charge does not exceed a reasonable estimate of its federal income taxes attributable to the treatment of deferred acquisition costs. The charge for taxes may be changed to reflect any changes in the law. A charge for sales costs is deducted 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, Northwestern Mutual Life will pay the expenses from its 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 assumed by Northwestern Mutual Life, as described below. Charges against the Policy Value A cost of insurance charge is deducted from the Policy Value on each monthly processing date. The amount is determined by multiplying the net amount at risk by the cost of insurance rate. The net amount at risk is 6 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. A charge for the mortality and expense risks assumed by Northwestern Mutual Life is also deducted monthly from the Policy Value. 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. 52. The mortality risk is that insureds may not live as long as Northwestern Mutual Life estimated. The expense risk is that expenses of issuing and administering the Policies may exceed the estimated costs. Northwestern Mutual Life 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. Northwestern Mutual Life does 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. A deferred sales charge is deducted monthly. 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. A charge is made 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 all of these fees are being waived. Deductions from the Policy Value will be apportioned among the divisions of the Account in proportion to the amounts invested in the divisions. Surrender Charge. A surrender charge will be deducted from the Policy proceeds if the Policy is surrendered 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 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 reduces linearly 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 Fund The investment performance of each division of the Account reflects all expenses borne by the corresponding Portfolio of the Fund. See the attached Fund prospectus for more information about those expenses. Cash Value The owner of a Policy may surrender it 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 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. The cash value for a Policy is determined 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, the cash value for a Policy may also be determined on any other day on which there is sufficient trading in securities to materially affect the value of the securities held by the Portfolios of the Fund. 7 Policy Loans The owner of a Policy 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%. Unpaid interest is added 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. A notice will be sent to the owner at least 61 days before the termination date. The notice will show how much must be paid to keep the Policy in force. The amount of a Policy loan will be taken from the Account divisions in proportion to the amounts in the divisions. The amounts withdrawn will be transferred to Northwestern Mutual Life's general account and will be credited on a daily basis with an annual earnings rate equal to the 5% Policy loan interest rate. A Policy loan, even if it is repaid, 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. A Policy loan, and any accrued interest outstanding, may be repaid, in whole or in part, at any time. Payments will be credited as of the date received and will be transferred from the general account of Northwestern Mutual Life 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. 10. Withdrawals of Cash Value The owner 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. Up to four withdrawals are permitted in a Policy year. An administrative charge of up to $25 may apply, but is currently being waived. 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 Northwestern Mutual Life would currently issue. [ ] The amount withdrawn from cash value will be taken 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. 10. 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, a grace period of 61 days is allowed for the payment of sufficient premium to keep the Policy in force. The grace period begins on the date that a notice is sent to the owner. The notice will state the minimum amount of premium required to keep the Policy in force and the date by which the premium must be paid. The Policy will terminate with no value unless the required amount is paid 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. Reinstatement of a Policy will be effective on the first monthly processing date after an application for reinstatement is received at the Home Office of Northwestern Mutual Life, subject to approval by Northwestern Mutual Life. 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. The Policy Value, less any Policy debt, will be allocated 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. 10, for a discussion of the tax effects associated with termination and reinstatement of a Policy. 8 Right to Return Policy A Policy may be returned within 10 days (or later where required by state law) after the Policy is received. In some states the Policy may be returned within 45 days after the application for insurance is signed. The Policy may be mailed or delivered to the agent who sold it or to the Home Office of Northwestern Mutual Life. If returned, the Policy will be considered void from the beginning. Northwestern Mutual Life 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 refunded will not be less than the premium 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. Written proof of the transfer must be received by Northwestern Mutual Life at its Home Office. Beneficiary. The beneficiary is the person to whom the death benefit is payable. The beneficiary is named in the application. After the Policy is issued the owner may change the beneficiary in accordance with the Policy provisions. Incontestability. Northwestern Mutual Life 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. An increase in the amount of insurance that was subject to insurability requirements will not be contested 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, the charges for cost of insurance and other expenses under a Policy will be adjusted to reflect the correct age and sex of both insured persons. Collateral Assignment. The owner may assign a Policy as collateral security. Northwestern Mutual Life is 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 the Home Office. Deferral of Determination and Payment. Northwestern Mutual Life will ordinarily pay Policy benefits within seven days after receipt of all required documents at its Home Office. However, determination and payment of benefits may be deferred 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 determined annually by Northwestern Mutual Life. Since the Policies are not expected to contribute to divisible surplus, it is not expected that any dividends will be paid. Voting Rights Northwestern Mutual Life is the owner of the Fund shares in which all assets of the Account are invested. As the owner of the shares Northwestern Mutual Life will exercise its right to vote the shares to elect directors of the Fund, 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 Fund shareholders' meeting. However, Northwestern Mutual Life will vote the Fund shares held in the Account in accordance with instructions from owners of the Policies. Northwestern Mutual Life will vote the Fund shares held in its general account in the same proportions as the shares for which voting instructions are received. If the applicable laws or regulations change so as to permit Northwestern Mutual Life to vote the Fund shares in its own discretion, it may elect to do so. The number of 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 Fund Portfolio. The number will be determined as of a date chosen by Northwestern Mutual Life, but not more than 90 days before the Fund shareholders' meeting. Fractional votes are counted. Voting instructions will be solicited with written materials at least 14 days before the meeting. Shares as to which no instructions have been received will be voted in the same proportion as the shares as to which instructions have been received. Northwestern Mutual Life may, if required by state insurance officials, disregard voting instructions which would require Fund shares to be voted for a change in the sub-classification or investment objectives of a Fund Portfolio, or to approve or disapprove an investment advisory agreement for the Fund. 9 Northwestern Mutual Life may also disregard voting instructions that would require changes in the investment policy or investment adviser for the Fund or a Fund Portfolio, provided that Northwestern Mutual Life reasonably determines to take this action in accordance with applicable federal law. If Northwestern Mutual Life disregards voting instructions, a summary of the action and reasons therefor will be included in the next semiannual report to the owners of the Policies. Substitution of Fund Shares and Other Changes If, in the judgment of Northwestern Mutual Life, a Fund Portfolio becomes unsuitable for continued use with the Policies because of a change in investment objectives or restrictions, shares of another Portfolio 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. Northwestern Mutual Life has 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 the owner of a Policy 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. Owners will also receive annual and semiannual reports for the Account and the Fund, including financial statements. Distribution of the Policies The Policies will be sold 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"), a wholly-owned subsidiary of Northwestern Mutual Life. 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 .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. This discussion is not intended 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. 5. The Policy is designed to comply with these rules. Premiums that would cause a Policy to be disqualified as life insurance will be returned. 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. Northwestern Mutual Life intends 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. Northwestern Mutual Life believes that it owns the assets of the Account under current federal income tax law. Northwestern Mutual Life believes that the Policies comply with the provisions of Sections 7702 and 10 817(h) of the Code, but the application of these rules is not entirely clear. Northwestern Mutual Life 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, Northwestern Mutual Life believes 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. Qualified tax advice should be sought when a transfer of ownership is planned. 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 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 11 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 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. A qualified tax adviser should be consulted if transfer of ownership to grandchildren is contemplated. 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. Any person contemplating any such transaction 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)
12 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 of the Board, Spalding Sports Worldwide, 425 Meadow Street, P.O. Box 901, Chicopee, MA 01021-0901 (manufacturer of sporting equipment) since 1998; prior thereto, President 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 since 1993; President and Chief Operating Officer, 1991-1993; prior thereto, President 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) since 1994; Senior Partner, 1993-1994; prior thereto, Managing Partner - Milwaukee, WI office. 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, P.O. Box 13398, 5 Moore Drive, Research Triangle Park, NC 27709, since 1998. Senior Vice President Human Resources, General Counsel & Secretary from 1994 to 1998 (pharmaceuticals) Donald J. Schuenke (AM, E, F).................. Retired since 1994; Chairman of Northwestern Mutual Life, 1993-1994; Chairman and Chief Executive Officer, 1990-1993; prior thereto, President and Chief Executive Officer 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)
13 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 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 HR -- Member, Human Resources and Public Policy Committee Committee E -- Member, Executive Committee OT -- Member, Operations and Technology 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 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 Northwestern Mutual Life is subject to the laws of Wisconsin governing insurance companies and to regulation by the Wisconsin Commissioner of Insurance. An annual statement in a prescribed form is filed with the Department of Insurance on or before March 1 in each year covering operations for the preceding year and including financial statements. 14 Regulation by the Wisconsin Insurance Department includes periodic examination to determine solvency and compliance with insurance laws. Northwestern Mutual Life is also subject to the insurance laws and regulations of the other jurisdictions in which it is licensed to operate. Year 2000 Issues Since early 1996 Northwestern Mutual Life has been preparing for the computer requirements associated with the approaching turn of the century. Assessment of internal systems was completed in 1996. As of the date of this prospectus the necessary system changes are substantially complete. System testing is in process and testing of all critical systems is expected to be completed during the first six months of 1999. The work on these computer systems extends to software packages purchased from vendors. In addition, Northwestern Mutual Life has begun communicating formally with business partners to identify and assess potential exposure that could result from their failure to address these computer issues on a timely basis. The costs of identifying and resolving the computer systems issues associated with the year 2000 are borne entirely by Northwestern Mutual Life and its business partners. 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, Northwestern Mutual Life does not expect its costs for year 2000 compliance to have any significant effect on the benefits or values provided by the Policies. Northwestern Mutual Life believes that its 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 Northwestern Mutual Life is engaged in litigation of various kinds which in its 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 A registration statement has been filed with the Securities and Exchange Commission, Washington, D.C. by Northwestern Mutual Life 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, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 and of the Account as of December 31, 1997 and for each of the two years in the period ended December 31, 1997 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. 15 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT FINANCIAL STATEMENTS (IN THOUSANDS) STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30,1998
ASSETS Invesments at Market Value: Northwestern Mutual Series Fund, Inc. Aggressive Growth Stock 31,156 shares (cost $92,710) . . . . . . . . .. . $ 86,739 International Equity 43,007 shares (cost $67,076). . . . . . . . . . . 63,392 Growth Stock 25,930 shares (cost $42,237). . . . . . . . . . . 48,022 Growth and Income Stock 38,745 shares (cost $53,116). . . . . . . . . . . 52,074 Index 500 Stock 53,732 shares (cost $112,518) . . . . . . . . . . 145,505 Balanced 69,821 shares (cost $105,146) . . . . . . . . . . 138,384 High Yield Bond 12,312 shares (cost $13,690). . . . . . . . . . . 12,349 Select Bond 9,943 shares (cost $11,870) . . . . . . . . . . . 12,090 Money Market 31,467 shares (cost $31,467). . . . . . . . . . . 31,467 $ 590,022 Due from Sale of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . . 269 Due from Northwestern Mutual Life Insurance Company. . . . . . . . . . . . . 625 ---------- Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 590,916 ---------- ---------- LIABILITIES Due to Northwestern Mutual Life Insurance Company. . . . . . . . . . . . . . $ 625 Due on Purchase of Fund Shares . . . . . . . . . . . . . . . . . . . . . . . 269 ---------- Total Liabilities . . . . . . . . . . . . . . . . . . . . . . 894 ---------- EQUITY (NOTE 8) Variable Life Policies Issued Before October 11, 1995. . . . . . . . . . . . 332,413 Variable Complife Policies Issued On or After October 11, 1995 . . . . . . . 257,377 Variable Executive Life Policies Issued On or After March 2, 1998. . . . . . 232 ---------- Total Equity. . . . . . . . . . . . . . . . . . . . . . . . . 590,022 ---------- Total Liabilities and Equity. . . . . . . . . . . . . . . . . $ 590,916 ---------- ----------
The Accompanying Notes are an Integral Part of the Financial Statements (Prepared from Unaudited Figures) 16 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT STATEMENT OF OPERATIONS AND CHANGES IN EQUITY (IN THOUSANDS)
AGGRESSIVE GROWTH INTERNATIONAL EQUITY COMBINED STOCK DIVISION DIVISION --------------------------- --------------------------- -------------------------- NINE MONTHS NINE MONTHS NINE MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------- ------------ ------------- ------------ ------------- ------------ 1998 1997 1998 1997 1998 1997 ------------- ------------ ------------- ------------ ------------- ------------ INVESTMENT INCOME Dividend Income . . . . . . . . . . . . . $ 22,134 $ 24,262 $ 3,287 $ 3,345 $ 3,591 $ 1,286 Mortality and Expense Risks . . . . . . . 1,976 1,788 310 271 226 197 Taxes. . . . . . . . . . . . . . . . . . 846 767 133 116 96 85 ------------- ------------ ------------- ------------ ------------- ------------ Net Investment Income . . . . . . . . . . 19,312 21,707 2,844 2,958 3,269 1,004 ------------- ------------ ------------- ------------ ------------- ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments. . . . . . . . . . . . . 3,204 4,871 425 231 234 203 Unrealized Appreciation (Depreciation) of Investments During the Period . . . . . . . . . . . (33,480) 42,532 (17,868) 5,109 (10,361) 2,358 ------------- ------------ ------------- ------------ ------------- ------------ Net Gain (Loss) on Investments. . . . . . (30,276) 47,403 (17,443) 5,340 (10,127) 2,561 ------------- ------------ ------------- ------------ ------------- ------------ Increase Decrease in Equity Derived from Investment Activity. . . . (10,964) 69,110 (14,599) 8,298 (6,858) 3,565 ------------- ------------ ------------- ------------ ------------- ------------ EQUITY TRANSACTIONS Policyowners' Net Payments. . . . . . . . 181,526 170,672 20,898 21,502 14,783 12,656 Policy Loans, Surrenders, and Death Benefits. . . . . . . . . . . . . (26,413) (23,728) (4,846) (4,003) (3,209) (2,787) Mortality and Other (net) . . . . . . . . (28,325) (28,427) (3,696) (3,791) (2,782) (2,368) Transfers from Other Divisions . . . . . 95,818 86,366 14,898 19,008 11,685 14,866 Transfers to Other Divisions. . . . . . . (95,818) (86,366) (4,562) (4,091) (3,344) (2,149) ------------- ------------ ------------- ------------ ------------- ------------ Increase in Equity Derived from Equity Transactions. . . . . 126,788 118,517 22,692 28,625 17,133 20,218 ------------- ------------ ------------- ------------ ------------- ------------ Net Increase in Equity . . . . . . . . . . . 115,824 187,627 8,093 36,923 10,275 23,783 EQUITY Beginning of Period.. . . . . . . . . . . 474,198 286,571 78,647 41,724 53,116 29,333 ------------- ------------ ------------- ------------ ------------- ------------ End of Period . . . . . . . . . . . . . . $ 590,022 $ 474,198 $ 86,740 $ 78,647 $ 63,391 $ 53,116 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
The Accompanying Notes are an Integral Part of the Financial Statements (Prepared from Unaudited Figures) 17 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 BALANCED DIVISION ---------------------------- ---------------------------- ---------------------------- ---------------------------- NINE MONTHS NINE MONTHS NINE MONTHS NINE MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ 1998 1997 1998 1997 1998 1997 1998 1997 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ $ 555 $ 1,413 $ 74 $ 7,776 $ 4,530 $ 2,579 $ 8,344 $ 5,105 148 105 163 120 472 395 500 558 63 45 69 52 202 169 215 239 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ 344 1,263 (158) 7,604 3,856 2,015 7,629 4,308 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ 101 172 183 173 726 2,375 1,463 1,655 (439) 4,151 (914) (1,823) (354) 17,772 (2,337) 15,262 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ (338) 4,323 (731) (1,650) 372 20,147 (874) 16,917 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ 6 5,586 (889) 5,954 4,228 22,162 6,755 21,225 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ 8,944 7,334 9,868 7,537 20,336 19,733 12,657 15,394 (2,084) (1,314) (2,050) (1,842) (6,142) (5,039) (6,097) (7,260) (1,724) (1,329) (1,870) (1,457) (3,802) (4,127) (2,276) (3,395) 11,975 8,851 12,969 10,673 26,516 20,024 5,447 4,266 (1,330) (1,341) (2,343) (1,104) (3,330) (3,783) (4,424) (4,734) ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ 15,781 12,201 16,574 13,807 33,578 26,808 5,307 4,271 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ 15,787 17,787 15,685 19,761 37,806 48,970 12,062 25,496 32,233 14,446 36,389 16,628 107,699 58,729 126,322 100,826 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ $ 48,020 $ 32,233 $ 52,074 $ 36,389 $ 145,505 $ 107,699 $ 138,384 $ 126,322 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
The Accompanying Notes are an Integral Part of the Financial Statements (Prepared from Unaudited Figures) 18 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT STATEMENT OF OPERATIONS AND CHANGES IN EQUITY (IN THOUSANDS)
HIGH YIELD BOND DIVISION SELECT BOND DIVISION MONEY MARKET DIVISION --------------------------- --------------------------- --------------------------- NINE MONTHS NINE MONTHS NINE MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------- ------------ ------------- ------------ ------------- ------------ 1998 1997 1998 1997 1998 1997 ------------- ------------ ------------- ------------ ------------- ------------ Dividend Income . . . . . . . . . . . . . . $ - $ 1,370 $ 743 $ 436 $ 1,009 $ 952 Mortality and Expense Risks . . . . . . . . 38 29 37 35 82 78 Taxes. . . . . . . . . . . . . . . . . . . 16 12 16 15 35 34 ------------- ------------ ------------- ------------ ------------- ------------ Net Investment Income . . . . . . . . . . . (54) 1,329 690 386 892 840 ------------- ------------ ------------- ------------ ------------- ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS Realized Gain on Investments . . . . . . . . . . . . . 45 26 27 36 - - Unrealized Appreciation (Depreciation) of Investments During the Period. . . . . . . . . . . . (881) (531) (326) 234 - - ------------- ------------ ------------- ------------ ------------- ------------ Net Gain (Loss) on Investments . . . . . . (836) (505) (299) 270 - - ------------- ------------ ------------- ------------ ------------- ------------ Increase Decrease in Equity Derived from Investment Activity . . . . (890) 824 391 656 892 840 ------------- ------------ ------------- ------------ ------------- ------------ Policyowners' Net Payments. . . . . . . . . 2,317 1,922 1,326 1,820 90,396 82,774 Policy Loans, Surrenders, and Death Benefits . . . . . . . . . . . . . (514) (349) (432) (311) (1,039) (823) Mortality and Other (net) . . . . . . . . . (443) (339) (128) (560) (11,604) (11,061) Transfers from Other Divisions . . . . . . 4,097 3,276 2,977 2,000 5,253 3,402 Transfers to Other Divisions. . . . . . . . (1,019) (425) (1,135) (756) (74,329) (67,983) ------------- ------------ ------------- ------------ ------------- ------------ Increase in Equity Derived from Equity Transactions . . . . 4,438 4,085 2,608 2,193 8,677 6,309 ------------- ------------ ------------- ------------ ------------- ------------ Net Increase in Equity. . . . . . . . . . . 3,548 4,909 2,999 2,849 9,569 7,149 EQUITY Beginning of Period. . . . . . . . . . . 8,801 3,892 9,092 6,243 21,899 14,750 ------------- ------------ ------------- ------------ ------------- ------------ End of Period. . . . . . . . . . . . . . $ 12,349 $ 8,801 $ 12,091 $ 9,092 $ 31,468 $ 21,899 ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------ ------------- ------------
The Accompanying Notes are an Integral Part of the Financial Statements (Prepared from Unaudited Figures) 19 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Notes to Financial Statements SEPTEMBER 30, 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 nine months ended September 30, 1998 by each Division are shown below:
Purchases Sales ------------- ---------- Aggressive Growth Division . . . . . $ 26,513,670 $ 977,259 International Equity Division. . . . 21,073,260 751,733 Growth Stock Division. . . . . . . . 16,326,141 199,312 Growth & Income Stock Division . . . 17,032,508 600,992 Index 500 Stock Division . . . . . . 42,311,692 1,322,673 Balanced Division. . . . . . . . . . 16,873,034 3,936,009 High Yield Bond Division . . . . . . 4,835,061 451,938 Select Bond Division . . . . . . . . 4,212,106 926,482 Money Market Division. . . . . . . . 33,125,890 23,562,807
NOTE 5 - A deduction for mortality and expense risks is determined daily and paid to Northwestern Mutual. Generally, for policies issued before October 11, 1995, and Variable Comp Life 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. The mortality risk is that insured 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 or single premiums before accounts 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 change for taxes in the future. Generally, for Variable Comp Life policies issued on or after October 11, 1995, 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. 20 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS) SEPTEMBER 30, 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 . . . . . $ 33,876 $ 2,162 $ 36,038 International Equity Division. . . . . . . 28,835 1,840 30,675 Growth Stock Division. . . . . . . . . . . 18,030 1,151 19,181 Growth and Income Stock Division . . . . . 21,293 1,359 22,652 Index 500 Stock Division . . . . . . . . . 76,551 4,886 81,437 Balanced Division. . . . . . . . . . . . . 116,677 7,447 124,124 High Yield Bond Division . . . . . . . . . 4,694 300 4,994 Select Bond Division . . . . . . . . . . . 6,674 426 7,100 Money Market Division. . . . . . . . . . . 5,839 373 6,212 ------------ -------- --------- $ 312,469 $ 19,944 $ 332,413 ------------ -------- --------- ------------ -------- ---------
VARIABLE COMPLIFE POLICIES ISSUED ON OR AFTER OCTOBER 11, 1995 EQUITY OF: ---------------------------- TOTAL POLICYOWNERS NML EQUITY ------------ --------- --------- Aggressive Growth Stock Division . . . . . $ 33,933 $ 16,714 $ 50,647 International Equity Division. . . . . . . 21,915 10,794 32,709 Growth Stock Division. . . . . . . . . . . 19,311 9,512 28,823 Growth and Income Stock Division . . . . . 19,687 9,696 29,383 Index 500 Stock Division . . . . . . . . . 42,881 21,120 64,001 Balanced Division. . . . . . . . . . . . . 9,542 4,700 14,242 High Yield Bond Division . . . . . . . . . 4,921 2,424 7,345 Select Bond Division . . . . . . . . . . . 3,339 1,644 4,983 Money Market Division. . . . . . . . . . . 16,913 8,331 25,244 ------------ --------- --------- $ 172,442 $ 84,935 $ 257,377 ------------ --------- --------- ------------ --------- ---------
VARIABLE EXECUTIVE LIFE POLICIES ISSUED ON OR AFTER MARCH 2, 1998 EQUITY OF: ------------------------- TOTAL POLICYOWNERS NML EQUITY ------------ -------- --------- Aggressive Growth Stock Division . . . . . $ 44 $ 11 $ 55 International Equity Division. . . . . . . 6 1 7 Growth Stock Division. . . . . . . . . . . 14 4 18 Growth and Income Stock Division . . . . . 31 8 39 Index 500 Stock Division . . . . . . . . . 54 13 67 Balanced Division. . . . . . . . . . . . . 14 3 17 High Yield Bond Division . . . . . . . . . 8 2 10 Select Bond Division . . . . . . . . . . . 6 2 8 Money Market Division. . . . . . . . . . . 9 2 11 ------------ -------- --------- $ 186 $ 46 $ 232 ------------ -------- --------- ------------ -------- ---------
21 PRICE WATERHOUSE LLP 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, the Index 500 Stock Division, the Balanced Division, High Yield Bond Division, Select Bond Division, and Money Market Division thereof at December 31, 1997, the results of their operations and the changes in their equity for the year then ended and for each of the other periods presented, 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, 1997 with Northwestern Mutual Series Fund, Inc., provide a reasonable basis for the opinion expressed above. /s/ PRICE WATERHOUSE LLP Milwaukee, Wisconsin January 27, 1998 22 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Financial Statements DECEMBER 31, 1997 STATEMENT OF ASSETS AND LIABILITIES (IN THOUSANDS) ASSETS Investments at Market Value: Northwestern Mutual Series Fund, Inc. Aggressive Growth Stock 23,568 shares (cost $66,748)............... $ 78,645 International Equity 31,449 shares (cost $46,440)............... 53,117 Growth Stock 17,809 shares (cost $26,009)............... 32,234 Growth and Income Stock 27,339 shares (cost $36,512)............... 36,389 Index 500 Stock 40,734 shares (cost $74,358)............... 107,700 Balanced 63,446 shares (cost $90,745)............... 126,320 High Yield Bond 8,280 shares (cost $9,262)................. 8,802 Select Bond 7,233 shares (cost $8,546)................. 9,092 Money Market 21,899 shares (cost $21,899)............... 21,899 $ 474,198 --------- Due from Sale of Fund Shares.................................. 978 Due from Northwestern Mutual Life Insurance Company........... 382 --------- Total Assets............................................ $ 475,558 --------- --------- LIABILITIES Due to Northwestern Mutual Life Insurance Company........... $ 978 Due on Purchase of Fund Shares.............................. 382 --------- Total Liabilities....................................... 1,360 --------- EQUITY (NOTE 8) Policies Issued Before October 11, 1995..................... 315,462 Policies Issued On or After October 11, 1995................ 158,736 --------- Total Equity............................................ 474,198 --------- Total Liabilities and Equity............................ $ 475,558 --------- ---------
The Accompanying Notes are an Integral Part of the Financial Statements 23 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Operations and Changes in Equity (IN THOUSANDS)
AGGRESSIVE GROWTH STOCK COMBINED DIVISION INTERNATIONAL EQUITY 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, 1997 1996 1997 1996 1997 1996 ------------ ----------- ----------- ----------- ------------ ------------ INVESTMENT INCOME Dividend Income............. $ 24,262 $ 11,085 $ 3,345 $ 892 $ 1,286 $ 924 Mortality and Expense Risks..................... 1,788 1,102 271 139 197 100 Taxes....................... 767 461 116 57 85 42 ---------- ---------- --------- --------- -------- -------- Net Investment Income....... 21,707 9,522 2,958 696 1,004 782 ---------- ---------- --------- --------- --------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments............... 4,871 2,405 231 301 203 49 Unrealized Appreciation (Depreciation) of Investments During the Period.................... 42,532 21,398 5,109 2,690 2,358 3,197 ---------- ---------- --------- --------- --------- -------- Net Gain (Loss) on Investments............... 47,403 23,803 5,340 2,991 2,561 3,246 ---------- ---------- --------- --------- --------- -------- Increase in Equity Derived from Investment Activity.................. 69,110 33,325 8,298 3,687 3,565 4,028 ---------- ---------- --------- --------- --------- -------- EQUITY TRANSACTIONS Policyowners' Net Payments.................. 170,672 101,055 21,502 11,065 12,656 8,006 Policy Loans, Surrenders, and Death Benefits........ (23,728) (16,316) (4,003) (2,117) (2,787) (1,566) Mortality and Other (net)... (28,427) (16,382) (3,791) (1,943) (2,368) (1,529) Transfers from Other Divisions................. 86,366 45,652 19,008 14,807 14,866 6,728 Transfers to Other Divisions................. (86,366) (45,652) (4,091) (1,660) (2,149) (827) ---------- ---------- --------- --------- --------- -------- Increase in Equity Derived from Equity Transactions.... 118,517 68,357 28,625 20,152 20,218 10,812 ---------- ---------- --------- --------- --------- -------- Net Increase in Equity........ 187,627 101,682 36,923 23,839 23,783 14,840 EQUITY Beginning of Period......... 286,571 184,889 41,724 17,885 29,333 14,493 ---------- ---------- --------- --------- --------- -------- End of Period............... $ 474,198 $ 286,571 $ 78,647 $ 41,724 $ 53,116 $ 29,333 ---------- ---------- --------- --------- --------- -------- ---------- ---------- --------- --------- --------- --------
The Accompanying Notes are an Integral Part of the Financial Statements 24 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Operations and Changes in Equity (IN THOUSANDS)
GROWTH STOCK DIVISION GROWTH & INCOME STOCK DIVISION INDEX 500 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, 1997 1996 1997 1996 1997 1996 ------------ ------------- -------------- -------------- --------------- -------------- INVESTMENT INCOME Dividend Income............. $ 1,413 $ 564 $ 7,776 $ 1,458 $ 2,579 $ 1,153 Mortality and Expense Risks..................... 105 46 120 58 395 221 Taxes....................... 45 19 52 24 169 93 --------- --------- --------- --------- ---------- --------- Net Investment Income....... 1,263 499 7,604 1,376 2,015 839 --------- --------- --------- --------- ---------- --------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments............... 172 88 173 117 2,375 359 Unrealized Appreciation (Depreciation) of Investments During the Period.................... 4,151 1,191 (1,823) 728 17,772 8,074 --------- --------- --------- --------- ---------- --------- Net Gain (Loss) on Investments............... 4,323 1,279 (1,650) 845 20,147 8,433 --------- --------- --------- --------- ---------- --------- Increase in Equity Derived from Investment Activity.................. 5,586 1,778 5,954 2,221 22,162 9,272 --------- --------- --------- --------- ---------- --------- EQUITY TRANSACTIONS Policyowners' Net Payments.................. 7,334 3,397 7,537 4,523 19,733 12,626 Policy Loans, Surrenders, and Death Benefits........ (1,314) (436) (1,842) (692) (5,039) (3,465) Mortality and Other (net)... (1,329) (665) (1,457) (867) (4,127) (2,351) Transfers from Other Divisions................. 8,851 4,758 10,673 3,950 20,024 8,372 Transfers to Other Divisions................. (1,341) (447) (1,104) (974) (3,783) (2,211) --------- --------- --------- --------- ---------- --------- Increase in Equity Derived from Equity Transactions.... 12,201 6,607 13,807 5,940 26,808 12,971 --------- --------- --------- --------- ---------- --------- Net Increase in Equity........ 17,787 8,385 19,761 8,161 48,970 22,243 EQUITY Beginning of Period......... 14,446 6,061 16,628 8,467 58,729 36,486 --------- --------- --------- --------- ---------- --------- End of Period............... $ 32,233 $ 14,446 $ 36,389 $ 16,628 $ 107,699 $ 58,729 --------- --------- --------- --------- ---------- --------- --------- --------- --------- --------- ---------- ---------
The Accompanying Notes are an Integral Part of the Financial Statements 25 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Statement of Operations and Changes in Equity (IN THOUSANDS)
BALANCED DIVISION HIGH YIELD BOND DIVISION ------------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 -------------- -------------- ------------- ------------- INVESTMENT INCOME Dividend Income............. $ 5,105 $ 5,010 $ 1,370 $ 400 Mortality and Expense Risks..................... 558 452 29 13 Taxes....................... 239 193 12 5 --------- --------- -------- -------- Net Investment Income....... 4,308 4,365 1,329 382 --------- --------- -------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments............... 1,655 1,462 26 21 Unrealized Appreciation (Depreciation) of Investments During the Period.................... 15,262 5,413 (531) 83 --------- --------- -------- -------- Net Gain (Loss) on Investments............... 16,917 6,875 (505) 104 --------- --------- -------- -------- Increase in Equity Derived from Investment Activity.................. 21,225 11,240 824 486 --------- --------- -------- -------- EQUITY TRANSACTIONS Policyowners' Net Payments.................. 15,394 15,417 1,922 1,101 Policy Loans, Surrenders, and Death Benefits........ (7,260) (7,030) (349) (243) Mortality and Other (net)... (3,395) (3,034) (339) (193) Transfers from Other Divisions................. 4,266 2,467 3,276 1,043 Transfers to Other Divisions................. (4,734) (5,909) (425) (449) --------- --------- -------- -------- Increase in Equity Derived from Equity Transactions.... 4,271 1,911 4,085 1,259 --------- --------- -------- -------- Net Increase in Equity........ 25,496 13,151 4,909 1,745 EQUITY Beginning of Period......... 100,826 87,675 3,892 2,147 --------- --------- -------- -------- End of Period............... $126,322 $100,826 $ 8,801 $ 3,892 --------- --------- -------- -------- --------- --------- -------- --------
SELECT BOND DIVISION MONEY MARKET DIVISION --------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 ------------ ------------ ------------- ------------- INVESTMENT INCOME Dividend Income............. $ 436 $ 176 $ 952 $ 508 Mortality and Expense Risks..................... 35 26 78 47 Taxes....................... 15 11 34 17 -------- -------- --------- --------- Net Investment Income....... 386 139 840 444 -------- -------- --------- --------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized Gain on Investments............... 36 8 -- -- Unrealized Appreciation (Depreciation) of Investments During the Period.................... 234 22 -- -- -------- -------- --------- --------- Net Gain (Loss) on Investments............... 270 30 0 0 -------- -------- --------- --------- Increase in Equity Derived from Investment Activity.................. 656 169 840 444 -------- -------- --------- --------- EQUITY TRANSACTIONS Policyowners' Net Payments.................. 1,820 1,356 82,774 43,564 Policy Loans, Surrenders, and Death Benefits........ (311) (191) (823) (576) Mortality and Other (net)... (560) (248) (11,061) (5,552) Transfers from Other Divisions................. 2,000 954 3,402 2,573 Transfers to Other Divisions................. (756) (553) (67,983) (32,622) -------- -------- --------- --------- Increase in Equity Derived from Equity Transactions.... 2,193 1,318 6,309 7,387 -------- -------- --------- --------- Net Increase in Equity........ 2,849 1,487 7,149 7,831 EQUITY Beginning of Period......... 6,243 4,756 14,750 6,919 -------- -------- --------- --------- End of Period............... $ 9,092 $ 6,243 $ 21,899 $ 14,750 -------- -------- --------- --------- -------- -------- --------- ---------
The Accompanying Notes are an Integral Part of the Financial Statements 26 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Notes to Financial Statements DECEMBER 31, 1997 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 Life") 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, 1997 by each Division are shown below:
PURCHASES SALES -------------- -------------- Aggressive Growth Division.............. $ 32,148,589 $ 564,378 International Equity Division........... 22,025,927 803,101 Growth Stock Division................... 13,899,147 435,326 Growth & Income Stock Division.......... 21,933,009 522,627 Index 500 Stock Division................ 33,585,092 4,761,393 Balanced Division....................... 13,206,373 4,627,540 High Yield Bond Division................ 5,627,863 213,319 Select Bond Division.................... 3,269,526 691,055 Money Market Division................... 31,100,613 23,952,747
NOTE 5 -- A deduction for mortality and expense risks is determined daily and paid to Northwestern Mutual Life. Generally, for policies issued before October 11, 1995, and 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. 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 or single premiums before accounts 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 Life 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 Life 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 Life. Policies provide that a charge for taxes may be made against the assets of the Account. Generally, for policies issued before October 11, 1995, Northwestern Mutual Life 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 policies issued on or after October 11, 1995, there is no charge being made against the assets of the Account for federal income taxes, but Northwestern Mutual Life 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 Life's equity represents any unpaid portion of net annual premiums. 27 NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT Notes to Financial Statements DECEMBER 31, 1997 NOTE 8 -- Equity Values by Division are shown below:
POLICIES ISSUED BEFORE OCTOBER 11, 1995 EQUITY OF: ------------------------ TOTAL POLICYOWNERS NML EQUITY ------------- --------- ---------- Aggressive Growth Stock Division....................................................... $ 35,423 $ 4,027 $ 39,450 International Equity Division.......................................................... 28,405 3,253 31,658 Growth Stock Division.................................................................. 14,641 1,420 16,061 Growth and Income Stock Division....................................................... 19,349 1,808 21,157 Index 500 Stock Division............................................................... 67,754 4,993 72,747 Balanced Division...................................................................... 113,340 5,378 118,718 High Yield Bond Division............................................................... 4,331 427 4,758 Select Bond Division................................................................... 5,969 449 6,418 Money Market Division.................................................................. 4,274 221 4,495 ------------- --------- ---------- $ 293,486 $ 21,976 $ 315,462 ------------- --------- ---------- ------------- --------- ----------
POLICIES ISSUED ON OR AFTER OCTOBER 11, 1995 EQUITY OF: ------------------------ TOTAL POLICYOWNERS NML EQUITY ------------- --------- ---------- Aggressive Growth Stock Division....................................................... $ 26,389 $ 12,807 $ 39,196 International Equity Division.......................................................... 14,079 7,381 21,460 Growth Stock Division.................................................................. 10,886 5,287 16,173 Growth and Income Stock Division....................................................... 9,982 5,249 15,231 Index 500 Stock Division............................................................... 23,177 11,775 34,952 Balanced Division...................................................................... 5,155 2,448 7,603 High Yield Bond Division............................................................... 2,798 1,245 4,043 Select Bond Division................................................................... 2,034 640 2,674 Money Market Division.................................................................. 5,841 11,563 17,404 ------------- --------- ---------- $ 100,341 $ 58,395 $ 158,736 ------------- --------- ---------- ------------- --------- ----------
28 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, --------------------- 1997 1996 --------- --------- ASSETS Bonds......................................... $ 32,359 $ 29,076 Common and preferred stocks................... 6,524 4,728 Mortgage loans................................ 10,835 9,564 Real estate................................... 1,372 1,385 Policy loans.................................. 7,163 6,802 Other investments............................. 2,026 1,714 Cash and temporary investments................ 572 1,131 Due and accrued investment income............. 795 764 Other assets.................................. 1,275 1,177 Separate account assets....................... 8,160 6,339 --------- --------- Total assets.............................. $ 71,081 $ 62,680 --------- --------- --------- --------- LIABILITIES AND GENERAL CONTINGENCY RESERVE Reserves for policy benefits.................. $ 47,343 $ 43,209 Policy benefit and premium deposits........... 1,624 1,567 Policyowner dividends payable................. 2,640 2,350 Interest maintenance reserve.................. 461 299 Asset valuation reserve....................... 1,974 1,538 Income taxes payable.......................... 1,043 942 Other liabilities............................. 3,735 2,921 Separate account liabilities.................. 8,160 6,339 --------- --------- Total liabilities......................... 66,980 59,165 General contingency reserve................... 4,101 3,515 --------- --------- Total liabilities and general contingency reserve.................................. $ 71,081 $ 62,680 --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements 29 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 1997 1996 1995 -------- -------- -------- REVENUE Premiums...................................... $ 7,294 $ 6,667 $ 6,196 Net investment income......................... 4,171 3,836 3,673 Policy benefits left with Company and other income....................................... 861 759 733 -------- -------- -------- Total revenue............................. 12,326 11,262 10,602 -------- -------- -------- BENEFITS AND EXPENSES Benefit payments to policyowners and beneficiaries: Death benefits.............................. 775 673 655 Surrender benefits.......................... 1,422 1,182 1,375 Disability benefits......................... 227 202 174 Annuity benefits............................ 140 128 92 Matured endowments.......................... 58 52 48 Payments from policy benefits left with Company.................................... 707 684 590 -------- -------- -------- Benefits paid............................. 3,329 2,921 2,934 Net transfers to separate accounts............ 566 579 236 Net additions to policy reserves.............. 4,026 3,701 3,506 -------- -------- -------- Total benefits............................ 7,921 7,201 6,676 Operating expenses............................ 1,138 1,043 1,026 -------- -------- -------- Total benefits and expenses............... 9,059 8,244 7,702 -------- -------- -------- Gain from operations before income taxes and dividends........................................ 3,267 3,018 2,900 Policyowner dividends............................. 2,636 2,341 2,111 -------- -------- -------- Gain from operations before taxes................. 631 677 789 Income tax expense................................ 356 452 467 -------- -------- -------- Net gain from operations.......................... 275 225 322 Net realized capital gains........................ 414 395 137 -------- -------- -------- Net income................................ $ 689 $ 620 $ 459 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of the financial statements 30 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CHANGES IN GENERAL CONTINGENCY RESERVE (IN MILLIONS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 ------- ------- ------- BEGINNING OF YEAR BALANCE......................... $3,515 $2,786 $2,225 Net income...................................... 689 620 459 Increase in net unrealized capital gains........ 576 295 373 Increase in investment reserves................. (526) (176) (237) Other, net...................................... (153) (10) (34) ------- ------- ------- Net increase in general contingency reserve..... 586 729 561 ------- ------- ------- END OF YEAR BALANCE............................... $4,101 $3,515 $2,786 ------- ------- ------- ------- ------- -------
The accompanying notes are an integral part of the financial statements 31 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, ---------------------------------- 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Insurance and annuity premiums................ $ 8,093 $ 7,361 $ 6,864 Investment income received.................... 3,928 3,634 3,480 Net disbursement of policy loans.............. (360) (326) (331) Benefits paid to policyowners and beneficiaries................................ (3,316) (2,912) (2,939) Net transfers to separate accounts............ (565) (579) (236) Policyowner dividends paid.................... (2,347) (2,105) (1,945) Operating expenses and taxes.................. (1,722) (1,663) (1,364) Other, net.................................... 564 1,558 381 ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES..... 4,275 4,968 3,910 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES PROCEEDS FROM INVESTMENTS SOLD OR MATURED Bonds......................................... 38,284 31,942 25,317 Common and preferred stocks................... 9,057 4,570 2,465 Mortgage loans................................ 1,012 1,253 431 Real estate................................... 302 178 48 Other invested assets......................... 398 316 149 ------- ------- ------- 49,053 38,259 28,410 ------- ------- ------- COST OF INVESTMENTS ACQUIRED Bonds......................................... 41,169 35,342 27,596 Common and preferred stocks................... 9,848 4,463 2,562 Mortgage loans................................ 2,309 2,455 1,883 Real estate................................... 202 125 202 Other invested assets......................... 359 255 336 ------- ------- ------- 53,887 42,640 32,579 ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES......... (4,834) (4,381) (4,169) ------- ------- ------- NET (DECREASE) INCREASE IN CASH AND TEMPORARY INVESTMENTS...................................... (559) 587 (259) CASH AND TEMPORARY INVESTMENTS, BEGINNING OF YEAR............................................. 1,131 544 803 ------- ------- ------- CASH AND TEMPORARY INVESTMENTS, END OF YEAR....... $ 572 $ 1,131 $ 544 ------- ------- ------- ------- ------- -------
The accompanying notes are an integral part of the financial statements 32 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 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 offers life, annuity and disability income 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"). Prior to December 15, 1995, these policies were considered generally accepted accounting principles ("GAAP") for mutual life insurance enterprises. However, in April 1993, the Financial Accounting Standards Board issued Interpretation No. 40, "Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance Companies and Other Enterprises," which established a different definition of GAAP for mutual life insurance enterprises. Under the Interpretation, financial statements of mutual life insurance enterprises for periods beginning after December 15, 1995 which are prepared on the statutory basis of accounting are no longer characterized as being in conformity with GAAP. Financial statements prepared on the statutory basis of accounting vary from financial statements prepared on a GAAP basis 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 market value, preferred stocks are generally carried at cost, and unconsolidated subsidiaries are recorded as equity in subsidiaries' net assets 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 ventures which are valued at equity in ventures' net assets Cash and temporary investments -- Amortized cost, which approximates fair value
33 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 CASH AND 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 prorated portion of joint venture income. Net investment income is reduced by investment management expenses, real estate depreciation and depletion related to energy assets. 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. ASSET VALUATION RESERVE The Company is required to maintain an asset valuation reserve ("AVR"). The AVR establishes a general reserve for invested assets held by the Company using a formula prescribed by state regulations. The AVR is designed to stabilize the general contingency reserves against potential declines in the value of investments. SEPARATE ACCOUNT BUSINESS 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 and/or a fixed interest rate option. Separate account assets are reported at fair market value. RESERVES FOR POLICY BENEFITS Reserves for policy benefits are determined by 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. 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. 34 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 POLICYOWNER DIVIDENDS 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 1996 and 1995 financial statement balances have been reclassified to conform to the current year presentation. NOTE 2 -- INVESTMENTS DEBT SECURITIES Debt securities consist of all bonds and fixed-maturity preferred stocks. The estimated market 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. Statement value, which principally represents amortized cost, and estimated market value of the Company's debt securities at December 31, 1997 and 1996 are as follows:
RECONCILIATION TO ESTIMATED MARKET VALUE --------------------------------------- GROSS GROSS ESTIMATED STATEMENT UNREALIZED UNREALIZED MARKET 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 ------- ------ ----- ------- ------- ------ ----- ------- RECONCILIATION TO ESTIMATED MARKET VALUE --------------------------------------- GROSS GROSS ESTIMATED STATEMENT UNREALIZED UNREALIZED MARKET DECEMBER 31, 1996 VALUE APPRECIATION DEPRECIATION VALUE - -------------------------------------------------- --------- ------------ ------------ --------- (IN MILLIONS) US Government and political obligations........... $ 4,789 $ 171 $ (2) $ 4,958 Mortgage-backed securities........................ 6,747 179 (38) 6,888 Corporate and other debt securities............... 17,540 776 (99) 18,217 ------- ------ ----- ------- 29,076 1,126 (139) 30,063 Preferred stocks.................................. 84 6 (1) 89 ------- ------ ----- ------- Total............................................. $29,160 $1,132 $(140) $30,152 ------- ------ ----- ------- ------- ------ ----- -------
35 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 The statement value of debt securities by contractual maturity at December 31, 1997 and 1996 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, 1997 1996 ------------ ------------ (IN MILLIONS) Due in one year or less........................... $ 605 $ 457 Due after one year through five years............. 4,878 4,077 Due after five years through ten years............ 9,760 7,802 Due after ten years............................... 10,268 10,077 ------- ------- 25,511 22,413 Mortgage-backed securities........................ 7,015 6,747 ------- ------- $32,526 $29,160 ------- ------- ------- -------
STOCKS The estimated market 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. The cost of common and preferred stock held by the Company at December 31, 1997 and 1996 is $5.0 billion and $3.7 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 properties. The fair value of mortgage loans as of December 31, 1997 and 1996 was approximately $11.5 billion and $9.8 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, 1997, real estate includes $61 million acquired through foreclosure and $124 million of home office real estate. In 1997 and 1996, the Company recorded unrealized losses of $2 million and $43 million, respectively, for the excess of carrying value over fair value of certain real estate investments and mortgage loans. 36 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 REALIZED GAINS AND LOSSES Realized investment gains and losses for the years ended December 31, 1997, 1996 and 1995 are as follows:
FOR THE YEAR ENDED FOR THE YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 --------------------------------------- --------------------------------------- NET NET REALIZED REALIZED REALIZED REALIZED GAINS REALIZED REALIZED GAINS GAINS LOSSES (LOSSES) GAINS LOSSES (LOSSES) ----------- ----------- ----------- ----------- ----------- ----------- (IN MILLIONS) Bonds............................ $ 518 $(269) $249 $ 396 $(383) $ 13 Common and preferred Stocks...... 533 (150) 383 580 (115) 465 Mortgage loans................... 14 (14) - 2 (15) (13) Real estate...................... 100 (2) 98 36 0 36 Other invested assets............ 338 (105) 233 204 (51) 153 ------ ----- ---- ------ ----- ---- $1,503 $(540) $963 $1,218 $(564) $654 ------ ----- ---- ------ ----- ---- ------ ----- ---- ------ ----- ---- Less: Capital gains taxes........ 340 224 Less: IMR deferrals.............. 209 35 ---- ---- Net realized capital gains....... $414 $395 ---- ---- ---- ---- FOR THE YEAR ENDED DECEMBER 31, 1995 --------------------------------------- NET REALIZED REALIZED REALIZED GAINS GAINS LOSSES (LOSSES) ----------- ----------- ----------- Bonds............................ $ 576 $(130) $446 Common and preferred Stocks...... 574 (429) 145 Mortgage loans................... 2 (32) (30) Real estate...................... 14 (3) 11 Other invested assets............ 188 (95) 93 ------ ----- ---- $1,354 $(689) $665 ------ ----- ---- ------ ----- ---- Less: Capital gains taxes........ 239 Less: IMR deferrals.............. 289 ---- Net realized capital gains....... $137 ---- ----
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 and $1.0 billion are included in the consolidated statements of financial position at December 31, 1997 and 1996, respectively, and approximate the statement value of securities loaned at those dates. INVESTMENT IN MGIC The Company owns 18.4% (20.9 million shares) of the outstanding common stock of MGIC Investment Corporation ("MGIC"). This investment is accounted for using the equity method. At December 31, 1997, the market value of the Company's investment in MGIC exceeded the statement value of $273 million by $768 million. In July 1995, the Company entered into a forward contract with a brokerage firm to deliver 8.8 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. 37 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 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. In addition to the use of derivatives for hedging purposes, equity swaps were held for investment purposes during 1997. The Company held the following positions for hedging purposes at December 31, 1997:
NOTIONAL DERIVATIVE FINANCIAL INSTRUMENT AMOUNTS RISKS REDUCED - --------------------------------------------- ------------------ --------------------------------------------- (IN MILLIONS) Foreign Currency Forward Contracts........... $564 Currency exposure on foreign denominated investments. Common Stock Futures......................... 327 Stock market price fluctuation. Bond Futures................................. 95 Bond market price fluctuation. Options to acquire Interest Rate Swaps....... 530 Interest rates payable on certain annuity and insurance contracts. Foreign Currency and Interest Rate Swaps..... 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. The notional amount of equity swaps outstanding at December 31, 1997 was $143 million. The hedges are recorded by the Company in the same manner as the underlying investments. Foreign currency forwards, foreign currency swaps, stock futures, and options to acquire interest rate swaps are reported at market value. There is no statement value reported for interest rate swaps and bond futures prior to the settlement of the contract. Changes in the values of these contracts are expected to offset gains and losses on the hedged items. For hedges reported at market value, gains and losses are unrealized until expiration of the contract. The effect of derivative transactions is not material to the Company's results of operations or financial position. NOTE 3 -- RESERVES FOR POLICY BENEFITS Life insurance reserves on substantially all policies issued since 1978 are based on the Commissioner's Reserve Valuation Method ("CRVM") with interest rates ranging from 3 1/2% to 5 1/2%. Other life policy reserves are based primarily 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 using CRVM with interest rates ranging from 3 1/2% to 6 1/4%. Other deferred annuity reserves are based on the 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%. 38 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 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 estimated using 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 using primarily 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. NOTE 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, 1997, the most recent actuarial valuation date available, the defined benefit plans were fully funded. 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 required under the plan. The defined benefit and defined contribution plans' assets of $1.4 billion at December 31, 1997 are primarily invested in the separate accounts of the Company. In addition to pension 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 cost for the year ended December 31, 1997 was a net benefit of $1.3 million; it includes the expected cost of postretirement benefits for newly eligible and vested employees, interest cost and return on plan assets totaling $3.6 million, offset by gains from favorable differences between actuarial assumptions and actual experience of $4.9 million.
DECEMBER 31, DECEMBER 31, 1997 1996 -------------------- -------------------- Unfunded postretirement benefit obligation for retirees and other fully eligible employees (Accrued in statement of financial position).................... $34 million $35 million Estimated postretirement benefit obligation for active non-vested employees (Not accrued until employee vests)....................... $50 million $43 million Discount rate................. 7% 7% Health care cost trend rate... 10% to an ultimate 10% to an ultimate 5%, declining 1% 5%, declining 1% for 5 years for 5 years
If the health care cost trend rate assumptions were increased by 1%, the accrued postretirement benefit obligation as of December 31, 1997 would be increased by $4 million. At December 31, 1997, the recorded postretirement benefit obligation was reduced by $20 million for assets funded for postretirement health care benefits. 39 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 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 co-insurance contracts. The Company retains a maximum of $15 million of coverage per individual life and $20 million maximum of coverage per joint life. The Company has an excess reinsurance contract for disability income policies with retention limits varying based upon coverage type. The amounts shown in the accompanying consolidated financial statements are net of reinsurance activity. Benefit reserves at December 31, 1997 and 1996 are reported net of reinsurance of $435 million and $355 million, respectively. The effect of reinsurance on premiums and benefits for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 ------- ------- ------- (IN MILLIONS) Direct premiums................................... $7,647 $7,064 $6,452 Reinsurance ceded................................. (353) (397) (256) ------- ------- ------- Net premium revenue............................... $7,294 $6,667 $6,196 ------- ------- ------- ------- ------- ------- Benefits to policyowners and beneficiaries........ $8,057 $7,348 $6,818 Reinsurance recoveries............................ (136) (147) (142) ------- ------- ------- Net benefits to policyowners and beneficiaries.... $7,921 $7,201 $6,676 ------- ------- ------- ------- ------- -------
In addition, the Company received $115 million, $93 million and $67 million in 1997, 1996 and 1995 respectively, from reinsurers representing 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 policyholders. 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 NOTE 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 income tax expense (after dividends) in 1997, 1996 and 1995 were 56%, 67% and 60%, respectively. The Company's effective tax rate exceeds the federal corporate rate of 35% because, (1) the Company pays a tax that is assessed only on mutual life insurance companies which treats a portion of policyholder dividends like nondeductible dividends paid to shareholders of stock 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"). 40 THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED STATUTORY FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 7 -- CONTINGENCIES The Company has guaranteed certain obligations of its affiliates. These guarantees totaled approximately $112 million at December 31, 1997 and are generally supported by the underlying net asset values of the affiliates. 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 condition. 41 PRICE WATERHOUSE LLP 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, 1997 and 1996, and the related consolidated statements of operations, of changes in general contingency reserve and of cash flows for each of the three years in the period ended December 31, 1997. 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. In our report dated January 24, 1996, we expressed an opinion that the 1995 consolidated financial statements, prepared using accounting practices prescribed or permitted by the Insurance Departments of the states in which the Company and its subsidiary were domiciled (statutory basis of accounting), were presented fairly, in all material respects, in conformity with generally accepted accounting principles. As described in Note 1 to these financial statements, pursuant to the pronouncement of the Financial Accounting Standards Board, financial statements of mutual life insurance enterprises prepared using accounting practices prescribed or permitted by insurance regulators (statutory basis of accounting) are no longer considered presentations in conformity with generally accepted accounting principles. Accordingly, our present opinion on the presentation of the 1995 financial statements, as presented herein, is different from that expressed in our previous report. 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, 1997 and 1996, or the results of their operations or their cash flows for each of the three years in the period ended December 31, 1997 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, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, on the basis of accounting described in Note 1. /s/ PRICE WATERHOUSE LLP January 26, 1998 42 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 44-47, 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 return rate for the nine Fund Portfolios averaged 0%, 6% or 12%, but the rates for each individual Portfolio 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 Fund expenses applicable to each of the nine Portfolios of the Fund during 1997 at the annual rate of .45% of the Fund's net assets. See "The Fund", p. 3. Thus the 0%, 6% and 12% gross hypothetical return rates on the Fund's assets are equivalent to the net rates of -.45%, 5.55% and 11.55% 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 44, 46, 48 and 50 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. 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 GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
CURRENT CHARGES
Death Benefit ------------------------------------------------------- Assuming Hypothetical Gross Annual Investment Return of End of Premium Accumulated ------------------------------------------------------- Policy Year at 5% Interest Per 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 1,263,114 25 1,002,269 1,000,000 1,000,000 2,223,824 30 1,395,216 1,000,000 1,224,909 3,861,856 35 1,896,726 1,000,000 1,652,141 6,532,279
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 15,557 16,560 17,565 6,267 7,270 8,275 2 30,972 33,958 37,067 22,714 25,700 28,809 3 46,243 52,234 58,719 39,018 45,008 51,494 4 61,370 71,430 82,756 55,177 65,236 76,563 5 76,349 91,588 109,436 71,188 86,427 104,275 6 91,176 112,751 139,047 87,047 108,622 134,918 7 105,844 134,963 171,903 102,747 131,867 168,807 8 120,345 158,269 208,359 118,280 156,204 206,294 9 134,672 182,715 248,804 133,640 181,683 247,772 10 148,818 208,354 293,676 148,818 208,354 293,676 15 230,988 373,446 623,655 230,988 373,446 623,655 20 302,248 579,668 1,180,480 302,248 579,668 1,180,480 25 344,026 834,849 2,117,928 344,026 834,849 2,117,928 30 312,860 1,166,580 3,677,958 312,860 1,166,580 3,677,958 35 75,632 1,573,467 6,221,218 75,632 1,573,467 6,221,218
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: 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 Investment Return of End of Premium Accumulated ------------------------------------------------------- Policy Year at 5% Interest Per 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 1,111,331 25 1,002,269 1,000,000 1,000,000 1,920,064 30 1,395,216 0* 1,000,000 3,250,096 35 1,896,726 0* 1,029,127 5,326,214
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 15,413 16,410 17,408 6,123 7,120 8,118 2 30,513 33,465 36,539 22,255 25,207 28,281 3 45,283 51,175 57,555 38,057 43,950 50,330 4 59,704 69,549 80,635 53,511 63,356 74,442 5 73,756 88,591 105,973 68,595 83,430 100,811 6 87,411 108,303 133,780 83,282 104,174 129,651 7 100,634 128,678 164,287 97,537 125,582 161,191 8 113,375 149,699 197,742 111,310 147,635 195,678 9 125,569 171,333 234,409 124,537 170,301 233,377 10 137,137 193,537 274,583 137,137 193,537 274,583 15 197,389 328,964 562,463 197,389 328,964 562,463 20 222,986 475,520 1,038,627 222,986 475,520 1,038,627 25 169,729 622,087 1,828,633 169,729 622,087 1,828,633 30 0* 771,559 3,095,329 0* 771,559 3,095,329 35 0* 980,121 5,072,585 0* 980,121 5,072,585
*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: 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 Investment Return of End of Premium Accumulated ------------------------------------------------------- Policy Year at 5% Interest Per 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 1,153,309 20 694,385 1,000,000 1,000,000 1,853,149 25 1,002,269 1,000,000 1,153,358 2,858,371 30 1,395,216 1,000,000 1,405,325 4,316,513 35 1,896,726 1,000,000 1,670,923 6,419,966
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 15,557 16,560 17,565 6,267 7,270 8,275 2 30,972 33,958 37,067 22,714 25,700 28,809 3 46,243 52,234 58,719 39,018 45,008 51,494 4 61,370 71,430 82,756 55,177 65,236 76,563 5 76,349 91,588 109,436 71,188 86,427 104,275 6 91,176 112,751 139,047 87,047 108,622 134,918 7 105,844 134,963 171,903 102,747 131,866 168,807 8 120,345 158,269 208,359 118,280 156,204 206,294 9 134,672 182,715 248,804 133,640 181,683 247,772 10 148,818 208,354 293,676 148,818 208,354 293,676 15 230,988 373,446 623,548 230,988 373,446 623,548 20 302,248 579,668 1,172,469 302,248 579,668 1,172,469 25 344,026 831,075 2,059,656 344,026 831,075 2,059,656 30 312,860 1,119,566 3,438,793 312,860 1,119,566 3,438,793 35 75,632 1,428,472 5,488,429 75,632 1,428,472 5,488,429
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: 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 Investment Return of End of Premium Accumulated ------------------------------------------------------- Policy Year at 5% Interest Per 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 1,040,236 20 694,385 1,000,000 1,000,000 1,598,918 25 1,002,269 1,000,000 1,000,000 2,319,922 30 1,395,216 0* 1,000,000 3,266,634 35 1,896,726 0* 1,100,663 4,528,632
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 15,413 16,410 17,408 6,123 7,120 8,118 2 30,513 33,465 36,539 22,255 25,207 28,281 3 45,283 51,175 57,555 38,057 43,950 50,330 4 59,704 69,549 80,635 53,511 63,356 74,442 5 73,756 88,591 105,973 68,595 83,430 100,811 6 87,411 108,303 133,780 83,282 104,174 129,651 7 100,634 128,678 164,287 97,537 125,582 161,191 8 113,375 149,699 197,742 111,310 147,635 195,678 9 125,569 171,333 234,409 124,537 170,301 233,377 10 137,137 193,537 274,583 137,137 193,537 274,583 15 197,389 328,964 562,414 197,389 328,964 562,414 20 222,986 475,520 1,011,619 222,986 475,520 1,011,619 25 169,729 622,087 1,671,667 169,729 622,087 1,671,667 30 0* 771,559 2,602,397 0* 771,559 2,602,397 35 0* 940,957 3,871,527 0* 940,957 3,871,527
*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 GUIDELINE PREMIUM / CASH VALUE CORRIDOR TEST
CURRENT CHARGES
Death Benefit ------------------------------------------------------- Assuming Hypothetical Gross Annual Investment Return of End of Premium Accumulated ------------------------------------------------------- Policy Year at 5% Interest Per Year 0% 6% 12% - ----------- ----------------------- --------- --------- --------- 1 21,000 1,015,557 1,016,560 1,017,565 2 43,050 1,030,972 1,033,958 1,037,067 3 66,203 1,046,242 1,052,233 1,058,719 4 90,513 1,061,368 1,071,428 1,082,754 5 116,038 1,076,345 1,091,583 1,109,430 6 142,840 1,091,167 1,112,740 1,139,032 7 170,982 1,105,826 1,134,940 1,171,874 8 200,531 1,120,312 1,158,225 1,208,300 9 231,558 1,134,616 1,182,637 1,248,694 10 264,136 1,148,726 1,208,221 1,293,483 15 453,150 1,230,233 1,372,156 1,621,411 20 694,385 1,297,600 1,570,274 2,161,877 25 1,002,269 1,320,898 1,777,516 3,022,084 30 1,395,216 1,234,054 1,919,012 4,334,799 35 1,896,726 0* 1,827,516 6,244,070
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 15,557 16,560 17,565 6,267 7,270 8,275 2 30,972 33,958 37,067 22,714 25,700 28,809 3 46,242 52,223 58,719 39,017 45,008 51,493 4 61,368 71,428 82,754 55,175 65,234 76,560 5 76,345 91,583 109,430 71,184 86,422 104,269 6 91,167 112,740 139,032 87,038 108,611 134,904 7 105,826 134,940 171,874 102,729 131,844 168,777 8 120,312 158,225 208,300 118,248 156,161 206,236 9 134,616 182,637 248,694 133,583 181,604 247,662 10 148,726 208,221 293,483 148,726 208,221 293,483 15 230,233 372,156 621,411 230,233 372,156 621,411 20 297,600 570,274 1,161,877 297,600 570,274 1,161,877 25 320,898 777,516 2,022,084 320,898 777,516 2,022,084 30 234,054 919,012 3,334,799 234,054 919,012 3,334,799 35 0* 827,516 5,244,070 0* 827,516 5,244,070
*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 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 Investment Return of End of Premium Accumulated ------------------------------------------------------- Policy Year at 5% Interest Per Year 0% 6% 12% - ----------- ----------------------- --------- ---------- ---------- 1 21,000 1,015,412 1,016,409 1,017,407 2 43,050 1,030,507 1,033,459 1,036,532 3 66,203 1,045,263 1,051,153 1,057,530 4 90,513 1,059,657 1,069,493 1,080,569 5 116,038 1,073,660 1,088,473 1,105,829 6 142,840 1,087,236 1,108,081 1,133,499 7 170,982 1,100,339 1,128,290 1,163,779 8 200,531 1,112,904 1,149,057 1,196,869 9 231,558 1,124,848 1,170,312 1,232,967 10 264,136 1,136,065 1,191,962 1,272,273 15 453,150 1,191,719 1,318,996 1,544,704 20 694,385 1,202,653 1,431,355 1,941,455 25 1,002,269 1,116,030 1,461,530 2,470,774 30 1,395,216 0* 1,286,200 3,102,540 35 1,896,726 0* 0* 3,720,140
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 15,412 16,409 17,407 6,122 7,119 8,117 2 30,507 33,459 36,532 22,249 25,201 28,274 3 45,263 51,153 57,530 38,037 43,928 50,305 4 59,657 69,493 80,569 53,464 63,300 74,376 5 73,660 88,473 105,829 68,499 83,312 100,668 6 87,236 108,081 133,499 83,107 103,952 129,370 7 100,339 128,290 163,779 97,242 125,193 160,682 8 112,904 149,057 196,869 110,840 146,992 194,804 9 124,848 170,312 232,967 123,815 169,280 231,935 10 136,065 191,962 272,273 136,065 191,962 272,273 15 191,719 318,996 544,704 191,719 318,996 544,704 20 202,653 431,355 941,455 202,653 431,355 941,455 25 116,030 461,530 1,470,774 116,030 461,530 1,470,774 30 0* 286,200 2,102,540 0* 286,200 2,102,540 35 0* 0* 2,720,140 0* 0* 2,720,140
*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. 49 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 Investment Return of End of Premium Accumulated ------------------------------------------------------- Policy Year at 5% Interest Per Year 0% 6% 12% - ----------- ----------------------- --------- --------- --------- 1 21,000 1,015,557 1,016,560 1,017,565 2 43,050 1,030,972 1,033,958 1,037,067 3 66,203 1,046,242 1,052,233 1,058,719 4 90,513 1,061,368 1,071,428 1,082,754 5 116,038 1,076,345 1,091,583 1,109,430 6 142,840 1,091,167 1,112,740 1,139,032 7 170,982 1,105,826 1,134,940 1,171,874 8 200,531 1,120,312 1,158,225 1,208,300 9 231,558 1,134,616 1,182,637 1,248,694 10 264,136 1,148,726 1,208,221 1,293,483 15 453,150 1,230,233 1,372,156 1,621,411 20 694,385 1,297,600 1,570,274 2,161,877 25 1,002,269 1,320,898 1,777,516 3,022,084 30 1,395,216 1,234,054 1,919,012 4,334,799 35 1,896,726 0* 1,827,516 6,244,070
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 15,557 16,560 17,565 6,267 7,270 8,275 2 30,972 33,958 37,067 22,714 25,700 28,809 3 46,242 52,233 58,719 39,017 45,008 51,493 4 61,368 71,428 82,754 55,175 65,234 76,560 5 76,345 91,583 109,430 71,184 86,422 104,269 6 91,167 112,740 139,032 87,038 108,611 134,904 7 105,826 134,940 171,874 102,729 131,844 168,777 8 120,312 158,225 208,300 118,248 156,161 206,236 9 134,616 182,637 248,694 133,583 181,604 247,662 10 148,726 208,221 293,483 148,726 208,221 293,483 15 230,233 372,156 621,411 230,233 372,156 621,411 20 297,600 570,274 1,161,877 297,600 570,274 1,161,877 25 320,898 777,516 2,022,084 320,898 777,516 2,022,084 30 234,054 919,012 3,334,799 234,054 919,012 3,334,799 35 0* 827,516 5,244,070 0* 827,516 5,244,070
*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. 50 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 Investment Return of End of Premium Accumulated ------------------------------------------------------- Policy Year at 5% Interest Per Year 0% 6% 12% - ----------- ----------------------- --------- --------- --------- 1 21,000 1,015,412 1,016,409 1,017,407 2 43,050 1,030,507 1,033,459 1,036,532 3 66,203 1,045,263 1,051,153 1,057,530 4 90,513 1,059,657 1,069,493 1,080,569 5 116,038 1,073,660 1,088,473 1,105,829 6 142,840 1,087,236 1,108,081 1,133,499 7 170,982 1,100,339 1,128,290 1,163,779 8 200,531 1,112,904 1,149,057 1,196,869 9 231,558 1,124,848 1,170,312 1,232,967 10 264,136 1,136,065 1,191,962 1,272,273 15 453,150 1,191,719 1,318,996 1,544,704 20 694,385 1,202,653 1,431,355 1,941,455 25 1,002,269 1,116,030 1,461,530 2,470,774 30 1,395,216 0* 1,286,200 3,102,540 35 1,896,726 0* 0* 3,720,140
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 15,412 16,409 17,407 6,122 7,119 8,117 2 30,507 33,459 36,532 22,249 25,201 28,274 3 45,263 51,153 57,530 38,037 43,928 50,305 4 59,657 69,493 80,569 53,464 63,300 74,376 5 73,660 88,473 105,829 68,499 83,312 100,668 6 87,236 108,081 133,499 83,107 103,952 129,370 7 100,339 128,290 163,779 97,242 125,193 160,682 8 112,904 149,057 196,869 110,840 146,992 194,804 9 124,848 170,312 232,967 123,815 169,280 231,935 10 136,065 191,962 272,273 136,065 191,962 272,273 15 191,719 318,996 544,704 191,719 318,996 544,704 20 202,653 431,355 941,455 202,653 431,355 941,455 25 116,030 461,530 1,470,774 116,030 461,530 1,470,774 30 0* 286,200 2,102,540 0* 286,200 2,102,540 35 0* 0* 2,720,140 0* 0* 2,720,140
*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. 51 APPENDIX B Mortality and Expense Risk Charge - Specified Amount Component Table of Annual Charges Per $1,000 of Initial Specified Amount
Issue Annual Issue Annual Issue Annual Age* Charge Age* Charge Age* Charge ---- ------ ----- ------ ----- ------ 20-25 $0.04 42 0.33 59 0.94 26 0.05 43 0.36 60 0.99 27 0.06 44 0.38 61 1.04 28 0.07 45 0.41 62 1.10 29 0.08 46 0.44 63 1.15 30 0.09 47 0.47 64 1.21 31 0.10 48 0.50 65 1.26 32 0.11 49 0.53 66 1.31 33 0.12 50 0.57 67 1.35 34 0.13 51 0.60 68 1.40 35 0.14 52 0.63 69 1.44 36 0.17 53 0.66 70 1.49 37 0.19 54 0.69 71 1.54 38 0.22 55 0.72 72 1.58 39 0.25 56 0.77 73 1.63 40 0.28 57 0.83 74 1.67 41 0.30 58 0.88 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 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. 52 Northwestern Mutual Variable Joint Life Northwestern Mutual Variable Life Account Northwestern Mutual Series Fund, Inc. P r o s p e c t u s Northwestern Mutual Life-Registered Trademark- PO Box 3095 Milwaukee WI 53201-3095 PART II UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. UNDERTAKING WITH RESPECT TO INDEMNIFICATION Reference is made to the indemnification provisions contained in Article VII of the By-laws of the Depositor, The Northwestern Mutual Life Insurance Company, filed as Exhibit A(6)(b) to the Registration Statement. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. REPRESENTATION WITH RESPECT TO FEES AND CHARGES The Northwestern Mutual Life Insurance Company hereby represents that the fees and charges deducted under the contracts registered by this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the insurance company. CONTENTS OF REGISTRATION STATEMENT This registration statement comprises the following papers and documents: The facing sheet The cross-reference sheet The prospectus consisting of 53 pages The undertaking to file reports The undertaking with respect to indemnification The representation with respect to fees and charges The signatures Written consents of the following persons: John M. Bremer, Esq. (included in Exhibit 2) PricewaterhouseCoopers LLP (included in Exhibit C(1)) William C. Koenig, F.S.A. (included in Exhibit C(6)) II-1 The following exhibits: Exhibit 2 Opinion and consent of John M. Bremer as to the legality of the securities being registered. Exhibit C(1) Consent of PricewaterhouseCoopers LLP. Exhibit C(6) Opinion and consent of William C. Koenig, F.S.A. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, Northwestern Mutual Variable Life Account, has duly caused this Amended Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milwaukee, and State of Wisconsin, on the 30th day of October, 1998. NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT (Registrant) By THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (Depositor) Attest: JOHN M. BREMER By: JAMES D. ERICSON --------------------------------- ------------------------------- John M. Bremer, Executive Vice James D. Ericson, President and President, General Counsel Chief Executive Officer and Secretary By NORTHWESTERN MUTUAL INVESTMENT SERVICES, LLC (Depositor) Attest: MERRILL C. LUNDBERG By: RICHARD L. HALL --------------------------------- ------------------------------ Merrill C. Lundberg, Secretary Richard L. Hall, President and CEO Pursuant to the requirements of the Securities Act of 1933, the depositors have duly caused this Amended Registration Statement to be signed on their behalf by the undersigned, thereunto duly authorized, and their seals to be hereunto affixed, all in the City of Milwaukee, and State of Wisconsin, on the 30th day of October, 1998. THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY (Depositor) Attest: JOHN M. BREMER By: JAMES D. ERICSON --------------------------------- ------------------------------- John M. Bremer, Executive Vice James D. Ericson, President and President, General Counsel Chief Executive Officer and Secretary NORTHWESTERN MUTUAL INVESTMENT SERVICES, LLC (Depositor) Attest: MERRILL C. LUNDBERG By: RICHARD L. HALL --------------------------------- ------------------------------- Merrill C. Lundberg, Secretary Richard L. Hall, President and CEO Pursuant to the requirements of the Securities Act of 1933, this Amended Registration Statement has been signed by the following persons in the capacities with the depositor and on the dates indicated:
Signature Title - --------- ----- JAMES D. ERICSON Trustee, President and Dated - ------------------------------------- Principal Executive and October 30, James D. Ericson Financial Officer 1998
II-3 GARY E. LONG Vice President, Controller - ------------------------------------- and Principal Accounting Gary E. Long Officer HAROLD B. SMITH* Trustee - ------------------------------------- Harold B. Smith J. THOMAS LEWIS* Trustee - ------------------------------------- J. Thomas Lewis PATRICIA ALBJERG GRAHAM* Trustee - ------------------------------------- Patricia Albjerg Graham DONALD J. SCHUENKE* Trustee - ------------------------------------- Donald J. Schuenke R. QUINTUS ANDERSON* Trustee - ------------------------------------- R. Quintus Anderson STEPHEN F. KELLER* Trustee Dated - ------------------------------------- October 30, 1998 Stephen F. Keller PIERRE S. du PONT* Trustee - ------------------------------------- Pierre S. du Pont J. E. GALLEGOS* Trustee - ------------------------------------- J. E. Gallegos KATHRYN D. WRISTON* Trustee - ------------------------------------- Kathryn D. Wriston BARRY L. WILLIAMS* Trustee - ------------------------------------- Barry L. Williams GORDON T. BEAHAM III* Trustee - ------------------------------------- Gordon T. Beaham III DANIEL F. McKEITHAN, JR.* Trustee - ------------------------------------- Daniel F. McKeithan, Jr. ROBERT E. CARLSON* Trustee - ------------------------------------- Robert E. Carlson
II-4 EDWARD E. BARR* Trustee - -------------------------------------- Edward E. Barr ROBERT C. BUCHANAN* Trustee - -------------------------------------- Robert C. Buchanan SHERWOOD H. SMITH, JR.* Trustee - -------------------------------------- Sherwood H. Smith, Jr. H. MASON SIZEMORE, JR.* Trustee - -------------------------------------- H. Mason Sizemore, Jr. JOHN J. STOLLENWERK* Trustee - -------------------------------------- John J. Stollenwerk GEORGE A. DICKERMAN* Trustee - -------------------------------------- George A. Dickerman GUY A. OSBORN* Trustee Dated - -------------------------------------- October 30, 1998 Guy A. Osborn JOHN E. STEURI* Trustee - -------------------------------------- John E. Steuri STEPHEN N. GRAFF* Trustee - -------------------------------------- Stephen N. Graff BARBARA A. KING* Trustee - -------------------------------------- Barbara A. King TIMOTHY D. PROCTOR* Trustee - -------------------------------------- Timothy D. Proctor
*By: JAMES D. ERICSON ----------------------------------------- James D. Ericson, Attorney in fact, pursuant to the Power of Attorney attached hereto II-5 POWER OF ATTORNEY The undersigned Trustees of THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY hereby constitute and appoint James D. Ericson and Robert E. Carlson, or either of them, their true and lawful attorneys and agents to sign the names of the undersigned Trustees to (1) the registration statement or statements to be filed under the Securities Act of 1933 and to any instrument or document filed as part thereof or in connection therewith or in any way related thereto, and any and all amendments thereto in connection with variable contracts issued or sold by The Northwestern Mutual Life Insurance Company or any separate account credited therein and (2) the Form 10-K Annual Report or Reports of The Northwestern Mutual Life Insurance Company and/or its separate accounts for its or their fiscal year ended December 31, 1998 to be filed under the Securities Exchange Act of 1934 and to any instrument or document filed as part thereof or in connection therewith or in any way related thereto, and any and all amendments thereto. "Variable contracts" as used herein means any contracts providing for benefits or values which may vary according to the investment experience of any separate account maintained by The Northwestern Mutual Life Insurance Company, including variable annuity contracts and variable life insurance policies. Each of the undersigned hereby ratifies and confirms all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents this 22nd day of July, 1998. R. QUINTUS ANDERSON Trustee ------------------------------- R. Quintus Anderson EDWARD E. BARR Trustee ------------------------------- Edward E. Barr GORDON T. BEAHAM III Trustee ------------------------------- Gordon T. Beaham III ROBERT C. BUCHANAN Trustee ------------------------------- Robert C. Buchanan ROBERT E. CARLSON Trustee ------------------------------- Robert E. Carlson GEORGE A. DICKERMAN Trustee ------------------------------- George A. Dickerman II-6 PIERRE S. du PONT Trustee ------------------------------- Pierre S. du Pont JAMES D. ERICSON Trustee ------------------------------- James D. Ericson J. E. GALLEGOS Trustee ------------------------------- J. E. Gallegos STEPHEN N. GRAFF Trustee ------------------------------- Stephen N. Graff PATRICIA ALBJERG GRAHAM Trustee ------------------------------- Patricia Albjerg Graham STEPHEN F. KELLER Trustee ------------------------------- Stephen F. Keller BARBARA A. KING Trustee ------------------------------- Barbara A. King J. THOMAS LEWIS Trustee ------------------------------- J. Thomas Lewis DANIEL F. McKEITHAN, JR. Trustee ------------------------------- Daniel F. McKeithan, Jr. GUY A. OSBORN Trustee ------------------------------- Guy A. Osborn II-7 TIMOTHY D. PROCTOR Trustee ------------------------------- Timothy D. Proctor DONALD J. SCHUENKE Trustee ------------------------------- Donald J. Schuenke H. MASON SIZEMORE, JR. Trustee ------------------------------- H. Mason Sizemore, Jr. HAROLD B. SMITH Trustee ------------------------------- Harold B. Smith SHERWOOD H. SMITH, JR. Trustee ------------------------------- Sherwood H. Smith, Jr. JOHN E. STEURI Trustee ------------------------------- John E. Steuri JOHN J. STOLLENWERK Trustee ------------------------------- John J. Stollenwerk BARRY L. WILLIAMS Trustee ------------------------------- Barry L. Williams KATHRYN D. WRISTON Trustee ------------------------------- Kathryn D. Wriston II-8 EXHIBIT INDEX EXHIBITS FILED WITH FORM S-6 PRE-EFFECTIVE AMENDMENT NO. 1 UNDER THE SECURITIES ACT OF 1933 FOR NORTHWESTERN MUTUAL VARIABLE JOINT LIFE
Exhibit Number Exhibit Name - -------------- ------------ Exhibit 2 Opinion and consent of John M. Bremer as to the legality of the securities being registered. Exhibit C(1) Consent of PricewaterhouseCoopers LLP. Exhibit C(6) Opinion and consent of William C. Koenig, F.S.A.
EX-2 2 EX-2 Exhibit 2 October 30, 1998 Board of Trustees The Northwestern Mutual Life Insurance Company Milwaukee, WI 53202 TO ALL TRUSTEES: As Executive Vice President, General Counsel and Secretary of The Northwestern Mutual Life Insurance Company (the "Company") I have general supervision of the Law Department of such Company and its legal affairs. In such capacity I have supervised the corporate proceedings relating to the establishment of Northwestern Mutual Variable Life Account (the "Account") pursuant to the provisions of the Wisconsin Statutes and the issuance and proposed issuance in connection therewith of Variable Joint Life insurance policies (the "Policies"). I have also participated in the preparation of Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 (the "Registration Statement") which is to be filed with the Securities and Exchange Commission with respect to the Policies. In addition, I have examined such other documents and such questions of law as, in my judgment, are necessary or appropriate for purposes of this opinion. Based on the foregoing, it is my opinion that: 1. The Company is a duly organized and validly existing mutual life insurance corporation under the laws of the State of Wisconsin, duly authorized under such laws to issue and sell life insurance and annuity contracts. 2. The Account is a separate account of the Company duly created and validly existing pursuant to Wisconsin law. 3. The issuance and sale of the Policies have been duly authorized by the Company and duly approved by the Commissioner of Insurance of the State of Wisconsin. When issued and sold in compliance with local law and in the manner stated in the Prospectus constituting a part of the Registration Statement the Policies will be valid and legally binding obligations of the Company in accordance with their terms. Board of Trustees October 30, 1998 Page 2 I hereby consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, JOHN M. BREMER John M. Bremer Executive Vice President, General Counsel and Secretary EX-99.C1 3 EX-99.C1 Exhibit C(1) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 (the "Registration Statement") of our report dated January 26, 1998, relating to the financial statements of The Northwestern Mutual Life Insurance Company, and of our report dated January 27, 1998, relating to the financial statements of Northwestern Mutual Variable Life Account, which appear in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PricewaterhouseCoopers LLP Milwaukee, Wisconsin October 30, 1998 EX-99.C6 4 EX99-C6 Exhibit C(6) October 30, 1998 The Northwestern Mutual Life Insurance Company 720 East Wisconsin Milwaukee, WI 53202 Gentlemen: This opinion is furnished in connection with Pre-Effective Amendment No.1 to the Registration Statement on Form S-6, Registration No. 333-59103, of Northwestern Mutual Variable Life Account. The prospectus included in the Registration Statement ("Prospectus") describes the Flexible Premium Variable Joint Life Insurance Policy to be issued in connection with the Account ("Policy"). The Policy form was prepared under my direction, and I am familiar with the Registration Statement and Exhibits thereto. In my opinion: 1. The illustrations of death benefits, policy values, cash values and accumulated premiums included on pages 44 through 51 of the Prospectus, in Appendix A thereto, based on the assumptions stated in the illustrations, are consistent with the provisions of the Policies and current charges and experience. The Policy has not been designed so as to make the illustrations appear more favorable for a prospective male and female insured, both age 55, as shown, than for other combinations of insureds based on age and gender or for insureds on a sex-neutral basis. 2. With respect to the charge of 1.25% of premiums for federal income taxes measured by premiums, described on page 6 of the Prospectus, (a) the charge is reasonable in relation to the issuer's increased federal tax burden under Section 848 of the Internal Revenue Code of 1986; (b) the targeted rate of return (11%) used in calculating the charge is reasonable; and (c) the factors taken into account in determining such targeted rate of return are appropriate. I hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to my name under the heading "Experts" in the Prospectus. Sincerely, WILLIAM C. KOENIG William C. Koenig Senior Vice President and Chief Actuary -----END PRIVACY-ENHANCED MESSAGE-----