-----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, JT/XeYR6cEmjHGYpogBJgKYobsIhvhPjyvMg7fiWmq0LqTdTJOGSuw7ymAc4Obsf lrS35rPskuwppAw2a18KNA== 0000950130-98-006039.txt : 19981228 0000950130-98-006039.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950130-98-006039 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19981223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT CENTRAL INDEX KEY: 0000828972 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 221121670 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-6/A SEC ACT: SEC FILE NUMBER: 333-64957 FILM NUMBER: 98774485 BUSINESS ADDRESS: STREET 1: PRUDENTIAL INSURANCE CO OF AMERICA STREET 2: 213 WASHINGTON STREET CITY: NEWARK STATE: NJ ZIP: 07102 BUSINESS PHONE: 2018026000 MAIL ADDRESS: STREET 1: PRUDENTIAL INSURANCE CO OF AMERICA STREET 2: 751 BROAD STREET CITY: NEWARK STATE: NJ ZIP: 07102 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL VARIABLE LIFE INSURANCE ACCOUNT DATE OF NAME CHANGE: 19880606 S-6/A 1 PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT AS FILED WITH THE SEC ON _______________. REGISTRATION NO. 333-64957 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 ---------------------- PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (Exact Name of Trust) THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (Name of Depositor) 751 BROAD STREET NEWARK, NEW JERSEY 07102-3777 (800) 437-4016 (Address and telephone number of principal executive offices) --------------------- THOMAS C. CASTANO ASSISTANT SECRETARY THE PRUDENTIAL INSURANCE COMPANY OF AMERICA 751 BROAD STREET NEWARK, NEW JERSEY 07102-3777 (Name and address of agent for service) Copy to: JEFFREY C. MARTIN SHEA & GARDNER 1800 MASSACHUSETTS AVENUE, N.W. WASHINGTON, D.C. 20036 --------------------- Variable Universal Life Insurance Contracts--The Registrant hereby elects to register an indefinite amount of securities pursuant to Rule 24f-2 under the Investment Company Act of 1940. Approximate date of proposed public offering: As soon as practicable after the effective date of this Registration Statement. This filing is being made pursuant to Rules 6c-3 and 6e-3(T) under the Investment Company Act of 1940. CROSS REFERENCE SHEET (AS REQUIRED BY FORM N-8B-2) N-8B-2 ITEM NUMBER LOCATION ------------------ -------- 1. Cover Page 2. Cover Page 3. Not Applicable 4. Sale of the Contract and Sales Commissions 5. The Prudential Variable Appreciable Account 6. The Prudential Variable Appreciable Account 7. Not Applicable 8. Not Applicable 9. Litigation 10. Introduction and Summary; Short-Term Cancellation Right, or "Free Look"; Type of Death Benefit; Changing the Type of Death Benefit; Premiums; Contract Date; Allocation of Premiums; Transfers; Dollar Cost Averaging, Auto-Rebalancing; Charges and Expenses; How a Contract's Cash Surrender Value Will Vary; How a Type A (Fixed) Contract's Death Benefit Will Vary; How a Type B (Variable) Contract's Death Benefit Will Vary; Surrender of a Contract; Withdrawals; Increases in Basic Insurance Amount; Decreases in Basic Insurance Amount; Lapse and Reinstatement; When Proceeds are Paid; Riders; Other General Contract Provisions; Voting Rights; Substitution of Fund Shares 11. Introduction and Summary; The Prudential Variable Appreciable Account 12. Cover Page; Introduction and Summary; The Funds; Sale of the Contract and Sales Commissions 13. Introduction and Summary; The Funds; Charges and Expenses; Sale of the Contract and Sales Commissions 14. Introduction and Summary; Requirements for Issuance of a Contract 15. Introduction and Summary; Allocation of Premiums; Transfers; Dollar Cost Averaging, Auto-Rebalancing; The Fixed- Rate Option 16. Introduction and Summary; Detailed Information for Prospective Contract Owners 17. When Proceeds are Paid N-8B-2 ITEM NUMBER LOCATION ------------------ -------- 18. The Prudential Variable Appreciable Account 19. Reports to Contract Owners 20. Not Applicable 21. Contract Loans 22. Not Applicable 23. Not Applicable 24. Other General Contract Provisions 25. The Prudential Variable Appreciable Account 26. Introduction and Summary; The Funds; Charges and Expenses 27. The Prudential Insurance Company of America; The Funds 28. The Prudential Insurance Company of America; Directors and Officers 29. The Prudential Insurance Company of America 30. Not Applicable 31. Not Applicable 32. Not Applicable 33. Not Applicable 34. Not Applicable 35. The Prudential Insurance Company of America 36. Not Applicable 37. Not Applicable 38. Sale of the Contract and Sales Commissions 39. Sale of the Contract and Sales Commissions 40. Not Applicable 41. Sale of the Contract and Sales Commissions 42. Not Applicable 43. Not Applicable N-8B-2 ITEM NUMBER LOCATION ------------------ -------- 44. Introduction and Summary; The Funds; How a Contract's Cash Surrender Value Will Vary; How a Type A (Fixed) Contract's Death Benefit Will Vary; How a Type B (Variable) Contract's Death Benefit Will Vary 45. Not Applicable 46. Introduction and Summary; The Prudential Variable Appreciable Account; The Funds 47. The Prudential Variable Appreciable Account; The Funds 48. Not Applicable 49. Not Applicable 50. Not Applicable 51. Not Applicable 52. Substitution of Fund Shares 53. Tax Treatment of Contract Benefits 54. Not Applicable 55. Not Applicable 56. Not Applicable 57. Not Applicable 58. Not Applicable 59. Financial Statements; Financial Statements of the Variable Universal Life Subaccounts of the Prudential Variable Appreciable Account; Consolidated Financial Statements of The Prudential Insurance Company of America and Subsidiaries PART I INFORMATION REQUIRED IN PROSPECTUS Variable Universal Life Insurance PROSPECTUS The Prudential Variable Appreciable Account December 31, 1998 [LOGO] Prudential PROSPECTUS December 31, 1998 THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT VARIABLE UNIVERSAL LIFE This prospectus describes a flexible premium variable universal life insurance contract (the "Contract") offered by The Prudential Insurance Company of America ("Prudential"). The Contract provides life insurance coverage with flexible premium payments and a variety of investment options. You must pay an initial premium, after which you can pay premium amounts as desired, as long as sufficient money is in the Contract Fund to cover all charges. Your Contract may lapse without value if your Contract Fund has insufficient value. You may select either of two death benefit types, a fixed death benefit or a variable death benefit. The variable death benefit will vary with the performance of the investment options you select. For each type, there are generally two death benefit guarantees, each of which can be secured by a certain level of premium payments. You may choose to invest your Contract's premiums and its earnings in the following ways: Invest in one or more of 15 available subaccounts of The Prudential Variable Appreciable Account, each of which invests in a corresponding portfolio of the Funds indicated below: THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND") . Money Market . High Yield Bond . Equity . Diversified Bond . Stock Index . Prudential Jennison . Conservative Balanced . Equity Income . Global . Flexible Managed AIM VARIABLE INSURANCE FUNDS, INC. AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. AIM V.I. Value Fund American Century VP Value Fund JANUS ASPEN SERIES MFS(R) VARIABLE INSURANCE TRUST Growth Portfolio Emerging Growth Series T. ROWE PRICE INTERNATIONAL SERIES, INC. International Stock Portfolio Invest in the fixed-rate option, which pays a guaranteed interest rate. Prudential will credit interest daily on any portion of the premium payment that you have allocated to the fixed-rate option at rates periodically declared by Prudential, in its sole discretion. Any such interest rate will never be less than an effective annual rate of 4%. This prospectus describes the Contract generally and the The Prudential Variable Appreciable Account. The attached prospectuses for the Funds and their related statements of additional information describe the investment objectives and the risks of investing in the portfolios. Prudential may add additional investment options in the future. Please read this prospectus and keep it for future reference. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA 751 Broad Street Newark, New Jersey 07102-3777 Telephone: (800) 437-4016
PROSPECTUS CONTENTS PAGE DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS......................... 1 INTRODUCTION AND SUMMARY..................................................... 2 BRIEF DESCRIPTION OF THE CONTRACT........................................... 2 CHARGES..................................................................... 2 TYPES OF DEATH BENEFIT...................................................... 4 PREMIUM PAYMENTS............................................................ 5 REFUND...................................................................... 5 GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT................................................. 6 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA................................. 6 THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT................................. 6 THE FUNDS................................................................... 6 THE FIXED-RATE OPTION....................................................... 9 WHICH INVESTMENT OPTION SHOULD BE SELECTED?................................. 9 DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS.........................10 REQUIREMENTS FOR ISSUANCE OF A CONTRACT.....................................10 SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK.................................10 TYPE OF DEATH BENEFIT.......................................................10 CHANGING THE TYPE OF DEATH BENEFIT..........................................10 PREMIUMS....................................................................11 DEATH BENEFIT GUARANTEE.....................................................12 CONTRACT DATE...............................................................13 ALLOCATION OF PREMIUMS......................................................13 TRANSFERS...................................................................14 DOLLAR COST AVERAGING.......................................................14 AUTO-REBALANCING............................................................14 CHARGES AND EXPENSES........................................................15 HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY.............................18 HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY.....................18 HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY..................19 SURRENDER OF A CONTRACT.....................................................20 WITHDRAWALS.................................................................20 INCREASES IN BASIC INSURANCE AMOUNT.........................................21 DECREASES IN BASIC INSURANCE AMOUNT.........................................21 WHEN PROCEEDS ARE PAID......................................................22 LIVING NEEDS BENEFIT........................................................22 ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS....................................................23 CONTRACT LOANS..............................................................25 SALE OF THE CONTRACT AND SALES COMMISSIONS..................................26 TAX TREATMENT OF CONTRACT BENEFITS..........................................26 LAPSE AND REINSTATEMENT.....................................................28 LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS.........28 OTHER GENERAL CONTRACT PROVISIONS...........................................28 RIDERS......................................................................29 PARTICIPATION IN DIVISIBLE SURPLUS..........................................29 VOTING RIGHTS...............................................................29 SUBSTITUTION OF FUND SHARES.................................................30 REPORTS TO CONTRACT OWNERS..................................................30 STATE REGULATION............................................................30 EXPERTS.....................................................................30 LITIGATION..................................................................31 YEAR 2000 COMPLIANCE........................................................32
ADDITIONAL INFORMATION......................................................33 FINANCIAL STATEMENTS........................................................33 SUBSEQUENT EVENTS...........................................................34 DIRECTORS AND OFFICERS OF PRUDENTIAL.........................................34 FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT......................................A1 CONSOLIDATED FINANCIAL STATEMENTS OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES..........................................B1
DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS ACCUMULATED NET PAYMENTS--The actual premium payments you make, accumulated at an effective annual rate of 4%, less any withdrawals you make, accumulated at an effective annual rate of 4%. ATTAINED AGE--The insured's age on the Contract date plus the number of years since then. BASIC INSURANCE AMOUNT--The amount of life insurance as shown in the Contract. CASH SURRENDER VALUE--The amount payable to the Contract owner upon surrender of the Contract. It is equal to the Contract Fund minus any Contract debt and, during the first 10 Contract years, minus the applicable surrender charge. CONTRACT--The variable universal life insurance contract described in this prospectus. CONTRACT ANNIVERSARY--The same date as the Contract date in each later year. CONTRACT DATE--The date the Contract is effective, as specified in the Contract. CONTRACT DEBT--The principal amount of all outstanding loans plus any interest we have charged that is not yet due and that we have not yet added to the loan. CONTRACT FUND--The total amount credited to a specific Contract. On any date it is equal to the sum of the amounts in all the subaccounts, the amount invested under the fixed-rate option, and the principal amount of any Contract debt. CONTRACT OWNER--Unless a different owner is named in the application, the owner of the Contract is the insured. CONTRACT YEAR--A year that starts on the Contract date or on a Contract anniversary. For any portion of a Contract representing an increase (see page 21), "Contract year" is a year that starts on the effective date of the increase. DEATH BENEFIT--The amount we will pay upon the death of the insured before reduction of any Contract debt and amounts needed to pay charges through the date of death. FACE AMOUNT--The same as the "basic insurance amount." FIXED-RATE OPTION--An investment option under which interest is accrued daily at a rate that Prudential declares periodically, but not less than an effective annual rate of 4%. FUNDS--Mutual funds with separate portfolios. One or more of the available Fund portfolios may be chosen as an underlying investment for the Contract. LIFETIME DEATH BENEFIT GUARANTEE PERIOD--The lifetime of the Contract, during which time the Lifetime Death Benefit Guarantee is available if sufficient premiums are paid. See DEATH BENEFIT GUARANTEE, page 12. LIMITED DEATH BENEFIT GUARANTEE PERIOD--A period which is determined on a case- by-case basis, during which time the Limited Death Benefit Guarantee is available if sufficient premiums are paid. See DEATH BENEFIT GUARANTEE, page 12. MONTHLY DATE--The Contract date and the same date in each subsequent month. SUBACCOUNT--An investment division of the Account, the assets of which are invested in the shares of the corresponding portfolio of the Funds. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA--Us, we, Prudential. The company offering the Contract. THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (THE "ACCOUNT")--A separate account of Prudential registered as a unit investment trust under the Investment Company Act of 1940. VALUATION PERIOD--The period of time from one determination of the value of the amount invested in a subaccount to the next. Such determinations are made when the net asset values of the portfolios of the Funds are calculated, which is generally at 4:15 p.m. Eastern time on each day during which the New York Stock Exchange is open. VARIABLE INVESTMENT OPTIONS--The subaccounts. WE--The Prudential Insurance Company of America. YOU--The owner of the Contract. 1 INTRODUCTION AND SUMMARY This Summary provides a brief overview of the more significant aspects of the Contract. We provide further detail in the subsequent sections of this prospectus and in the Contract. The Contract, including the application attached to it, constitutes the entire agreement between you and Prudential and you should retain these documents. As you read this prospectus you should keep in mind that this is a life insurance contract. VARIABLE LIFE INSURANCE has significant investment aspects and requires you to make investment decisions and therefore it is also a "security." Securities that are offered to the public must be registered with the Securities and Exchange Commission. The prospectus that is a part of the registration statement must be given to all prospective purchasers. A substantial part of the premium pays for life insurance that will pay a benefit to the beneficiary, in the event of the insured's death. This death benefit generally far exceeds your total premium payments. Therefore, you should not buy this Contract unless the major reason for the purchase is to provide life insurance protection. BRIEF DESCRIPTION OF THE CONTRACT The Contract is a form of variable universal life insurance. It is based on a Contract Fund, the value of which changes every business day. The chart below describes how the value of your Contract Fund changes. You may invest premiums in one or more of the 15 available subaccounts or in the fixed-rate option. Your Contract Fund value changes every day depending upon the change in the value of the particular investment options that you have selected. Although the value of your Contract Fund will increase if there is favorable investment performance in the subaccounts you select, there is a risk that investment performance will be unfavorable and that the value of your Contract Fund will decrease. The risk will be different, depending upon which investment options you choose. See WHICH INVESTMENT OPTION SHOULD BE SELECTED?, page 9. If you select the fixed-rate option, Prudential credits your account with a declared rate or rates of interest but you assume the risk that the rate may change, although it will never be lower than an effective annual rate of 4%. CHARGES The following chart outlines the components of your Contract Fund and the adjustments which may be made including the maximum charges which may be deducted from each premium payment and from the amounts held in the designated investment options. These charges are largely designed to cover insurance costs and risks as well as sales and administrative expenses. The maximum charges shown in the chart, as well as the current lower charges, are fully described under CHARGES AND EXPENSES, page 15. 2 PREMIUM PAYMENT [LINE DOWN] . less an administrative charge of up to 7.5% of the premiums. . less a charge for sales expenses of up to 4% of the premiums paid. [LINE DOWN] INVESTED PREMIUM AMOUNT To be invested in one or a combination of: . 15 investment portfolios of the Funds . The fixed-rate option [LINE DOWN] CONTRACT FUND On the Contract Date, the Contract Fund is equal to the invested premium amount minus any of the charges described below which may be due on that date. Thereafter, the value of the Contract Fund changes daily. PRUDENTIAL ADJUSTS THE CONTRACT FUND FOR: . Addition of any new invested premium amounts. . Addition of any increase due to investment results of the chosen variable investment options. . Addition of guaranteed interest at an effective annual rate of 4% (plus any excess interest if applicable) on the portion of the Contract Fund allocated to the fixed-rate option. . Addition of guaranteed interest at an effective annual rate of 4% on the amount of any Contract loan. (Separately, interest charged on the loan accrues at an effective annual rate of 4.5% or 5%. See CONTRACT LOANS, page 25.) . Subtraction of any decrease due to investment results of the chosen variable investment options. . Subtraction of any amount withdrawn. . Subtraction of the charges listed below, as applicable. [LINE DOWN] DAILY CHARGES . Management fees and expenses are deducted from the Fund assets. . We deduct a daily mortality and expense risk charge, equivalent to an annual rate of up to 0.9%, from the variable investment options assets. 3 MONTHLY CHARGES . We reduce the Contract Fund by a monthly administrative charge of up to $10 plus $0.07 per $1,000 of the basic insurance amount; after the first Contract year, the $0.07 per $1,000 portion of the charge is reduced to $0.01 per $1,000 of the basic insurance amount. . We deduct a cost of insurance ("COI") charge. . We reduce the Contract Fund by a Death Benefit Guarantee risk charge of $0.01 per $1,000 of the basic insurance amount. . If the Contract includes riders, we deduct rider charges from the Contract Fund. . If the rating class of an insured results in an extra charge, we will deduct that charge from the Contract Fund. POSSIBLE ADDITIONAL CHARGES . During the first 10 Contract years, we will assess a contingent deferred sales charge if the Contract lapses, is surrendered, or the basic insurance amount is decreased (including as a result of a withdrawal or a death benefit type change). For insureds age 76 or less at issue, the maximum contingent deferred sales charge is 26% of the lesser of the target level premium or the actual premiums paid (see PREMIUMS, page 11) for the Contract. The charge is level for six years and then declines monthly to zero at the end of the 10th Contract year. For insureds age 77 or over at issue, the maximum charge will be a lesser percentage of the target level premium for the Contract or the actual premiums paid. . During the first 10 Contract years, we will assess a contingent deferred administrative charge if the Contract lapses, is surrendered or the basic insurance amount is decreased (including as a result of a withdrawal or a death benefit type change). This charge equals the lesser of: (a) $5 per $1,000 of basic insurance amount; and (b) $500. It is level for six years and then declines monthly until it reaches zero at the end of the 10th Contract year. . We assess an administrative charge of up to $25 for any withdrawals. . We may assess an administrative charge of up to $25 for any change in basic insurance amount. . We assess an administrative charge of up to $25 for each transfer exceeding 12 in any Contract year. TYPES OF DEATH BENEFIT There are two types of death benefit available. You may choose a Contract with a Type A (fixed) death benefit under which the cash surrender value varies daily with investment experience, and the death benefit generally remains at the basic insurance amount you initially chose. However, the Contract Fund may grow to a point where the death benefit may increase and vary with investment experience. If you choose a Contract with a Type B (variable) death benefit, the cash surrender value and the death benefit both vary with investment experience. For either type of death benefit, as long as the Contract is inforce, the death benefit will never be less than the basic insurance amount shown in your Contract. See TYPE OF DEATH BENEFIT, page 10. 4 PREMIUM PAYMENTS The Contract is a flexible premium contract -- there are no scheduled premiums. Except for the minimum initial premium, and subject to a minimum of $25 per subsequent payment, you choose the timing and amount of premium payments. The Contract will remain inforce if the Contract Fund less any applicable surrender charges is greater than zero and more than any Contract debt. However, if the accumulated premiums you pay are high enough, and Contract debt does not equal or exceed the Contract Fund less any applicable surrender charges, Prudential guarantees that your Contract will not lapse even if investment experience is very unfavorable and the Contract Fund drops below zero. Each Contract generally provides two guarantees, one that lasts for the lifetime of the Contract and another that lasts for a stated, reasonably lengthy period. The guarantee for the life of the Contract requires higher premium payments. See PREMIUMS, page 11, DEATH BENEFIT GUARANTEE, page 12 and LAPSE AND REINSTATEMENT, page 28. We offer and suggest regular billing of premiums even though you decide when to make premium payments and, subject to a $25 minimum, in what amounts. You should discuss your billing options with your Prudential representative when you apply for the Contract. See PREMIUMS, page 11. REFUND For a limited time, you may return your Contract for a refund in accordance with the terms of its "free look" provision. See SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK," page 10. For the DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, see page 1. THE REPLACEMENT OF LIFE INSURANCE IS GENERALLY NOT IN THE INTEREST OF THE CUSTOMER. WHEN A CUSTOMER REQUIRES ADDITIONAL COVERAGE, IN MOST CASES, THE BENEFITS OF THE EXISTING CONTRACT CAN BE PROTECTED BY PURCHASING ADDITIONAL INSURANCE OR A SUPPLEMENTAL CONTRACT. IF YOU ARE CONSIDERING REPLACING A CONTRACT, YOU SHOULD COMPARE THE BENEFITS AND COSTS OF SUPPLEMENTING YOUR EXISTING CONTRACT WITH THE BENEFITS AND COSTS OF PURCHASING THE CONTRACT DESCRIBED IN THIS PROSPECTUS AND YOU SHOULD CONSULT WITH A QUALIFIED TAX ADVISER. THIS PROSPECTUS MAY ONLY BE OFFERED IN JURISDICTIONS IN WHICH THE OFFERING IS LAWFUL. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE PROSPECTUSES AND THE STATEMENTS OF ADDITIONAL INFORMATION FOR THE FUNDS. 5 GENERAL INFORMATION ABOUT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT, AND THE VARIABLE INVESTMENT OPTIONS AVAILABLE UNDER THE CONTRACT THE PRUDENTIAL INSURANCE COMPANY OF AMERICA The Prudential Insurance Company of America ("Prudential") is a mutual insurance company, founded in 1875 under the laws of the State of New Jersey. Prudential is currently considering reorganizing itself into a stock company. This form of reorganization, known as demutualization, is a complex process that could take two years to complete. No plan of demutualization has been adopted yet by Prudential's Board of Directors. Any plan of reorganization adopted by the Board of Directors would have to be approved by qualified policyholders and appropriate state insurance regulators. Throughout the process, there will be a continuing evaluation by the Board of Directors and management of Prudential as to the desirability of demutualization. The Board of Directors, in its discretion, may choose not to demutualize or to delay demutualization for a time. Prudential is licensed to sell life insurance and annuities in the District of Columbia, Guam, U. S. Virgin Islands, and in all states. This Contract is only offered in New York State. Prudential's consolidated financial statements begin on page B1 and should be considered only as bearing upon Prudential's ability to meet its obligations under the Contracts. THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT The Prudential Variable Appreciable Account (the "Account") was established on August 11, 1987 under New Jersey law as a separate investment account. The Account meets the definition of a "separate account" under federal securities laws. The Account holds assets that are segregated from all of Prudential's other assets. The obligations to Contract owners and beneficiaries arising under the Contract are general corporate obligations of Prudential. Prudential is also the legal owner of the assets in the Account. Prudential will maintain assets in the Account with a total market value at least equal to the reserve and other liabilities relating to the variable benefits attributable to the Account. These assets may not be charged with liabilities which arise from any other business Prudential conducts. In addition to these assets, the Account's assets may include funds contributed by Prudential to commence operation of the Account and may include accumulations of the charges Prudential makes against the Account. From time to time these additional assets may be withdrawn by Prudential. The Account is a unit investment trust, which is a type of investment company. It is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act"). This does not involve any supervision by the SEC of the management, investment policies, or practices of the Account. For state law purposes, the Account is treated as a part or division of Prudential. Currently, you may invest in one or a combination of 15 available subaccounts within the Account, each of which invests in a single corresponding portfolio of the Funds. Prudential may add additional subaccounts in the future. The Account's financial statements begin on page A1. THE FUNDS The following is a list of the Funds, the portfolios' investment objectives and investment advisers: THE PRUDENTIAL SERIES FUND, INC. (THE "SERIES FUND"): . MONEY MARKET PORTFOLIO: The maximum current income that is consistent with stability of capital and maintenance of liquidity through investment in high- quality short-term debt obligations. There are no assurances that this portfolio will maintain a stable net asset value. . DIVERSIFIED BOND PORTFOLIO: A high level of income over the longer term while providing reasonable safety of capital through investment primarily in readily marketable intermediate and long-term fixed income securities that provide attractive yields but do not involve substantial risk of loss of capital through default. 6 . CONSERVATIVE BALANCED PORTFOLIO: Achievement of a favorable total investment return consistent with a portfolio having a conservatively managed mix of money market instruments, fixed income securities, and common stocks, in proportions believed by the investment manager to be appropriate for an investor desiring diversification of investment who prefers a relatively lower risk of loss than that associated with the Flexible Managed Portfolio while recognizing that this reduces the chances of greater appreciation. . FLEXIBLE MANAGED PORTFOLIO: Achievement of a high total return consistent with a portfolio having an aggressively managed mix of money market instruments, fixed income securities, and common stocks, in proportions believed by the investment manager to be appropriate for an investor desiring diversification of investment who is willing to accept a relatively high level of loss in an effort to achieve greater appreciation. . HIGH YIELD BOND PORTFOLIO: Achievement of a high total return through investment in high yield/high risk fixed income securities in the medium to lower quality ranges. . STOCK INDEX PORTFOLIO: Achievement of investment results that correspond to the price and yield performance of publicly traded common stocks in the aggregate by following a policy of attempting to duplicate the price and yield performance of the Standard & Poor's 500 Composite Stock Price Index. . EQUITY INCOME PORTFOLIO: Both current income and capital appreciation through investment primarily in common stocks and convertible securities that provide favorable prospects for investment income returns above those of the Standard & Poor's 500 Composite Stock Price Index or the New York Stock Exchange Composite Index. . EQUITY PORTFOLIO: Capital appreciation through investment primarily in common stocks of companies, including major established corporations as well as smaller capitalization companies, that appear to offer attractive prospects of price appreciation that are superior to broadly-based stock indices. Current income, if any, is incidental. . PRUDENTIAL JENNISON PORTFOLIO: Long-term growth of capital through investment primarily in equity securities of established companies with above-average growth prospects. Current income, if any, is incidental. . GLOBAL PORTFOLIO: Long-term growth of capital through investment primarily in common stock and common stock equivalents of foreign and domestic issuers. Current income, if any, is incidental. Prudential is the investment adviser for the assets of each of the portfolios of the Series Fund. Prudential's principal business address is 751 Broad Street, Newark, New Jersey 07102-3777. Prudential has a Service Agreement with its wholly-owned subsidiary, The Prudential Investment Corporation ("PIC"). The Service Agreement provides that, subject to Prudential's supervision, PIC will furnish investment advisory services in connection with the management of the Series Fund. In addition, Prudential has entered into a Subadvisory Agreement with its wholly-owned subsidiary Jennison Associates LLC ("Jennison"), under which Jennison furnishes investment advisory services in connection with the management of the Prudential Jennison Portfolio. AIM VARIABLE INSURANCE FUNDS, INC.: . AIM V.I. VALUE FUND. To achieve long-term growth of capital by investing primarily in equity securities judged by A I M Advisors, Inc. to be undervalued relative to the current or projected earnings of the companies issuing the securities, or relative market values of assets owned by the companies issuing the securities or relative to the equity market generally. Income is a secondary objective and would be satisfied principally from the income (interest and dividends) generated by the common stocks, convertible bonds and convertible preferred stocks that make up the Fund's portfolio. A I M Advisors, Inc. ("AIM") is the investment adviser for this fund. The principal business address for AIM is 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173. AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.: . AMERICAN CENTURY VP VALUE FUND. Seeks long-term capital growth with income as a secondary objective. The fund seeks to achieve its objective by investing primarily in equity securities of well-established companies with intermediate- to-large market capitalizations that are believed by management to be undervalued at the time of purchase. 7 American Century Investment Management, Inc. ("ACIM") is the investment adviser for this fund. ACIM's principal business address is American Century Tower, 4500 Main Street, Kansas City, Missouri 64111. The Principal Underwriter of the fund is American Century Services, Inc., located at 4500 Main Street, Kansas City, Missouri 64111. JANUS ASPEN SERIES: . GROWTH PORTFOLIO. Seeks long-term growth of capital in a manner consistent with the preservation of capital. Janus Capital Corporation is the investment adviser and is responsible for the day-to-day management of the portfolio and other business affairs of the portfolio. Janus Capital Corporation's principal business address is 100 Fillmore Street, Denver, Colorado 80206-4928. MFS(R) VARIABLE INSURANCE TRUSTSM: . EMERGING GROWTH SERIES. Seeks to provide long-term growth of capital. Dividend and interest income from portfolio securities, if any, is incidental to the Series' investment objective of long-term growth of capital. Massachusetts Financial Services Company, a Delaware corporation, is the investment adviser to this MFS Series. The principal business address for the Massachusetts Financial Services Company is 500 Boylston Street, Boston, Massachusetts 02116. T. ROWE PRICE INTERNATIONAL SERIES, INC.: . INTERNATIONAL STOCK PORTFOLIO. Long-term growth of capital through investments primarily in common stocks of established, non-U.S. companies. Rowe Price-Fleming International, Inc. is the investment manager for this fund. The principal business address for Rowe Price-Fleming International, Inc. is 100 East Pratt Street, Baltimore, Maryland 21202. Further information about Fund portfolios can be found in the attached prospectuses and their statements of additional information for each Fund. The investment advisers for the Funds charge a daily investment management fee as compensation for their services. These fees are described in the table in the DEDUCTIONS FROM PORTFOLIOS section on page 15, and are more fully described in the prospectus for each Fund. In the future it may become disadvantageous for both variable life insurance and variable annuity contract separate accounts to invest in the same underlying mutual funds. Although neither the companies which invest in the Funds nor the Funds currently foresee any such disadvantage, the Board of Directors for each Fund intends to monitor events in order to identify any material conflict between variable life insurance and variable annuity Contract owners and to determine what action, if any, should be taken. Material conflicts could result from such things as: (1) changes in state insurance law; (2) changes in federal income tax law; (3) changes in the investment management of any portfolio of the Funds; or (4) differences between voting instructions given by variable life insurance and variable annuity contract owners. Prudential may be compensated by an affiliate of each of the Funds (other than the Prudential Series Fund) based upon an annual percentage of the average assets held in the Fund by Prudential under the Contracts. These percentages vary by Fund, and reflect administrative and other services provided by Prudential. A FULL DESCRIPTION OF THE FUNDS, THEIR INVESTMENT OBJECTIVES, MANAGEMENT, POLICIES, RESTRICTIONS, EXPENSES, INVESTMENT RISKS, AND ALL OTHER ASPECTS OF THEIR OPERATION IS CONTAINED IN THE ATTACHED PROSPECTUSES FOR EACH FUND AND IN THE RELATED STATEMENTS OF ADDITIONAL INFORMATION, WHICH SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS. THERE IS NO ASSURANCE THAT THE INVESTMENT OBJECTIVES OF THE FUNDS WILL BE MET. 8 THE FIXED-RATE OPTION BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED-RATE OPTION UNDER THE CONTRACT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940. ACCORDINGLY, INTERESTS IN THE FIXED- RATE OPTION ARE NOT SUBJECT TO THE PROVISIONS OF THESE ACTS, AND PRUDENTIAL HAS BEEN ADVISED THAT THE STAFF OF THE SEC HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING TO THE FIXED-RATE OPTION. ANY INACCURATE OR MISLEADING DISCLOSURE REGARDING THE FIXED-RATE OPTION MAY, HOWEVER, SUBJECT PRUDENTIAL AND ITS DIRECTORS TO CIVIL LIABILITY IF THAT RESULTS IN ANY DAMAGE. You may choose to invest, either initially or by transfer, all or part of your Contract Fund to a fixed-rate option. This amount becomes part of Prudential's general account. The general account consists of all assets owned by Prudential other than those in the Account and in other separate accounts that have been or may be established by Prudential. Subject to applicable law, Prudential has sole discretion over the investment of the general account assets. Contract owners do not share in the investment experience of those assets. Instead, Prudential guarantees that the part of the Contract Fund allocated to the fixed- rate option will accrue interest daily at an effective annual rate that Prudential declares periodically, but not less than an effective annual rate of 4%. Currently, the following steps are taken for crediting interest rates: (1) declared interest rates remain in effect from the date money is allocated to the fixed-rate option until the first day of the same month in the following year; (2) a new crediting rate will apply to that money until the first day of the same month in the next year; (3) a new declared crediting rate will apply to that money for the remainder of that calendar year; (4) a new crediting rate will be declared each year for that money and it will remain in effect for the entire calendar year. Prudential reserves the right to change this practice. Prudential is not obligated to credit interest at a higher rate than 4%, although it may do so. Different crediting rates may be declared for different portions of the Contract Fund allocated to the fixed-rate option. On request, you will be advised of the interest rates that currently apply to your Contract. Transfers from the fixed-rate option are subject to strict limits, see TRANSFERS, page 14. The payment of any cash surrender value attributable to the fixed-rate option may be delayed up to six months, see WHEN PROCEEDS ARE PAID, page 22. WHICH INVESTMENT OPTION SHOULD BE SELECTED? Historically, for investments held over relatively long periods, the investment performance of common stocks has generally been superior to that of short or long-term debt securities, even though common stocks have been subject to much more dramatic changes in value over short periods of time. Accordingly, portfolios such as the Stock Index, Equity Income, Equity, Prudential Jennison, Global, AIM V.I. Value Fund, American Century VP Value Fund, Janus Growth, MFS Emerging Growth Series or T. Rowe Price International Stock may be desirable options if you are willing to accept such volatility in your Contract values. Each of these equity portfolios involves different policies and investment risks. You may prefer the somewhat greater protection against loss of principal (and reduced chance of high total return) provided by the Diversified Bond Portfolio. Or, you may want even greater safety of principal and may prefer the Money Market Portfolio or the fixed-rate option, recognizing that the level of short- term rates may change rather rapidly. If you are willing to take risks and possibly achieve a higher total return, you may prefer the High Yield Bond Portfolio, recognizing that the risks are greater for lower quality bonds with higher yields. You may wish to divide your invested premium among two or more of the portfolios. You may wish to obtain diversification by relying on Prudential's judgment for an appropriate asset mix by choosing the Conservative Balanced or Flexible Managed Portfolio. Your choice should take into account how willing you are to accept investment risks, how your other assets are invested, and what investment results you may experience in the future. You should consult your Prudential representative from time to time about the choices available to you under the Contract. Prudential recommends AGAINST frequent transfers among the several options. Experience generally indicates that "market timing" investing, particularly by non- professional investors, is likely to prove unsuccessful. 9 DETAILED INFORMATION FOR PROSPECTIVE CONTRACT OWNERS REQUIREMENTS FOR ISSUANCE OF A CONTRACT The Contract may generally be issued on insureds below the age of 81. Currently, the minimum basic insurance amount that can be applied for is $100,000. Prudential requires evidence of insurability, which may include a medical examination, before issuing any Contract. Non-smokers are offered the most favorable cost of insurance rates. A higher cost of insurance rate and/or an additional amount is charged if an extra mortality risk is involved. These are the current underwriting requirements. We reserve the right to change them on a non-discriminatory basis. SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK" Generally, you may return the Contract for a refund within 10 days after you receive it. You can request a refund by mailing or delivering the Contract to the representative who sold it or to the Home Office specified in the Contract. A Contract returned according to this provision shall be deemed void from the beginning. You will then receive a refund of all premium payments made, with no adjustment for investment experience. TYPE OF DEATH BENEFIT You may select either of two types of death benefit. Generally, a Contract with a Type A (fixed) death benefit has a death benefit equal to the basic insurance amount. This type of death benefit does not vary with the investment performance of the investment options you selected, except in certain circumstances. See HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY, page 18. The payment of additional premiums and favorable investment results of the variable investment options to which the assets are allocated will generally increase the cash surrender value. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 18. A Contract with a Type B (variable) death benefit has a death benefit which will generally equal the basic insurance amount plus the Contract Fund. Since the Contract Fund is a part of the death benefit, favorable investment performance and payment of additional premiums generally result in an increase in the death benefit as well as in the cash surrender value. Over time, however, the increase in the cash surrender value will be less than under a Type A (fixed) Contract. This is because, given two Contracts with the same basic insurance amount and equal Contract Funds, generally the cost of insurance charge for a Type B (variable) Contract will be greater. See HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY, page 18 and HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY, page 19. Unfavorable investment performance will result in decreases in the death benefit and in the cash surrender value. But, as long as the Contract is not in default, the death benefit may not fall below the basic insurance amount stated in the Contract. In choosing a death benefit type, you should also consider whether you intend to use the withdrawal feature. Contract owners of Type A (fixed) Contracts should note that any withdrawal may result in a reduction of the basic insurance amount and the deduction of any applicable surrender charges. In addition, we will not allow you to make a withdrawal that will decrease the basic insurance amount below the minimum basic insurance amount. See WITHDRAWALS, page 20. CHANGING THE TYPE OF DEATH BENEFIT You may change the type of death benefit on or after the first Contract anniversary and subject to Prudential's approval. We will increase or decrease the basic insurance amount so that the death benefit immediately after the change matches the death benefit immediately before the change. If you are changing your Contract's type of death benefit from Type A (fixed) to Type B (variable), we will reduce the basic insurance amount by the amount in your Contract Fund on the date the change takes place. The basic insurance amount after the change may not be lower than the minimum basic insurance amount applicable to the Contract. If you are changing from a Type B (variable) to a Type A (fixed) death benefit, we will increase the basic insurance amount by the amount in your Contract Fund on the date the change takes place. This is illustrated in the following chart. 10
CHANGING THE DEATH CHANGING THE DEATH BENEFIT FROM BENEFIT FROM TYPE A [RIGHT ARROW] TYPE B TYPE B [RIGHT ARROW] TYPE A (Fixed) (Variable) (Variable) (Fixed) - ------------------------------------------------------------------------------------ BASIC INSURANCE AMOUNT $300,000 [RIGHT ARROW] $250,000 $250,000 [RIGHT ARROW] $300,000 CONTRACT FUND $50,000 = $50,000 $50,000 = $50,000 DEATH BENEFIT $300,000 = $300,000 $300,000 = $300,000 - -------------------------------------------------------------------------------------
Changing your Contract's type of death benefit from Type A (fixed) to Type B (variable) during the first 10 Contract years may result in the assessment of surrender charges. In addition, we reserve the right to make an administrative processing charge of up to $25 for any change in basic insurance amount, although we do not currently do so. See CHARGES AND EXPENSES, page 15. To request a change, fill out an application for change which can be obtained from your Prudential representative or a Home Office. If the change is approved, we will recompute the Contract's charges and appropriate tables and send you new Contract data pages. We may require you to send us your Contract before making the change. PREMIUMS The Contract is a flexible premium contract. The minimum initial premium is due on or before the Contract date. Thereafter, you decide when to make premium payments and, subject to a $25 minimum, in what amounts. We reserve the right to refuse to accept any payment that increases the death benefit by more than it increases the Contract Fund. See HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY, page 18 and HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY, page 19. There are circumstances under which the payment of premiums in amounts that are too large may cause the Contract to be characterized, under the Internal Revenue Code, as a Modified Endowment Contract, which could be significantly disadvantageous. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. The Contract has several types of "premiums" which are described below. Understanding them will help you understand how the Contract works. MINIMUM INITIAL PREMIUM -- the premium needed to start the Contract. There is no insurance under the Contract unless the minimum initial premium is paid. GUIDELINE PREMIUMS -- the premiums that, if paid at the beginning of each Contract year, will keep the Contract inforce for the lifetime of the insured regardless of investment performance, assuming no loans or withdrawals. These guideline premiums will be higher for a Type B (variable) Contract than for a Type A (fixed) Contract. For a Contract with no riders or extra risk charges, these premiums will be level. If certain riders are included, the guideline premium may increase each year. Payment of guideline premiums at the beginning of each Contract year is one way to achieve the Lifetime Death Benefit Guarantee Values shown on the Contract data pages. See DEATH BENEFIT GUARANTEE, below. When you purchase a Contract, your Prudential representative can tell you the amount[s] of the guideline premium. TARGET PREMIUMS -- the premiums that, if paid at the beginning of each Contract year, will keep the Contract inforce during the Limited Death Benefit Guarantee period regardless of investment performance, assuming no loans or withdrawals. As is the case with the guideline premium, for a Contract with no riders or extra risk charges, these premiums will be level. If certain riders are included, the target premium may increase each year. Payment of target premiums at the beginning of each Contract year is one way to achieve the Limited Death Benefit Guarantee Values shown on the Contract data pages. At the end of the Limited Death Benefit Guarantee period, continuation of the Contract will depend on the Contract Fund having sufficient money to cover all charges or meeting the conditions of the Lifetime Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, below. When you purchase a Contract, your Prudential representative can tell you the amount[s] of the target premium. TARGET LEVEL PREMIUM -- the target premium at issue minus any premiums associated with riders or with aviation, avocation, occupational or temporary extra insurance charges. We use the target level premium in calculating the contingent deferred sales charges. See CHARGES AND EXPENSES, page 15. 11 We can bill you for the amount you select annually, semi-annually, quarterly or monthly. Because the Contract is a flexible premium contract, there are no scheduled premium due dates. When you receive a premium notice, you are not required to pay this amount. The Contract will remain inforce if: (1) the Contract Fund, less any applicable surrender charges, is greater than zero and more than any Contract debt or (2) you have paid sufficient premiums, on an accumulated basis, to meet the Death Benefit Guarantee conditions and Contract debt is not equal to or greater than the Contract Fund, less any applicable surrender charges. You may also pay premiums automatically through pre- authorized monthly transfers from a bank checking account. If you elect to use this feature, you choose the day of the month on which premiums will be paid and the amount of the premiums paid. When you apply for the Contract, you should discuss with your Prudential representative how frequently you would like to be billed (if at all) and for what amount. DEATH BENEFIT GUARANTEE Although you decide what premium amounts you wish to pay, sufficient premium payments, on an accumulated basis, will guarantee that your Contract will not lapse and a death benefit will be paid upon the death of the insured. This will be true even if, because of unfavorable investment experience, your Contract Fund value drops to zero. However, the guarantee is contingent upon Contract debt not being equal to or greater than the Contract Fund less any applicable surrender charges. See CONTRACT LOANS, page 25. You should consider the importance of the Death Benefit Guarantee to you when deciding what amounts of premiums to pay into the Contract. For purposes of determining this guarantee, we generally calculate, and show in the Contract data pages, two sets of amounts the Lifetime Death Benefit Guarantee Values and Limited Death Benefit Guarantee Values. These are not cash --- values that you can realize by surrendering the Contract, nor are they payable death benefits. They are values used solely to determine if a Death Benefit Guarantee is in effect. The Lifetime Death Benefit Guarantee Values are shown for the lifetime of the Contract. The Limited Death Benefit Guarantee Values are lower, but only apply for the length of the Limited Death Benefit Guarantee period. The length of the Limited Death Benefit Guarantee period is determined on a case by case basis depending on things like the insured's age, sex, smoker/non-smoker status, death benefit type and extra rating class, if any. The length of the Limited Death Benefit Guarantee period applicable to your particular Contract is shown on the Contract data pages. For certain insureds, generally those who are older and/or in a substandard risk classification, the Limited Death Benefit Guarantee period may be of short duration. At the Contract date, and on each Monthly date, we calculate your Contract's "Accumulated Net Payments" as of that date. Accumulated Net Payments equal the premiums you paid, accumulated at an effective annual rate of 4%, less withdrawals also accumulated at 4%. At each Monthly date within the Limited Death Benefit Guarantee period, we will compare your Accumulated Net Payments to the Limited Death Benefit Guarantee Value as of that date. At each Monthly date after the Limited Death Benefit Guarantee period, we will compare your Accumulated Net Payments to the Lifetime Death Benefit Guarantee Value as of that date. If your Accumulated Net Payments equal or exceed the applicable (Lifetime or Limited) Death Benefit Guarantee Value and Contract debt does not equal or exceed the Contract Fund less any applicable surrender charges, then the Contract is kept inforce, regardless of the amount in the Contract Fund. The Contract data pages show Lifetime Death Benefit Guarantee Values and Limited Death Benefit Guarantee Values as of Contract anniversaries. Values for non- anniversary Monthly dates will reflect the number of months elapsed between Contract anniversaries. Guideline and target premiums are premium levels that, if paid at the start of each Contract year, correspond to the Lifetime and Limited Death Benefit Guarantee Values, respectively (assuming no withdrawals or loans). See PREMIUMS, page 11. They are one way of reaching the Death Benefit Guarantee Values; they are certainly not the only way. Here is a table of typical guideline and target premiums along with corresponding Limited Death Benefit Guarantee periods. The examples assume the insured is a male, non-smoker, with no extra risk or substandard ratings, and no extra benefit riders added to the Contract. 12
BASIC INSURANCE AMOUNT -- $250,000 Illustrative Annual Premiums - ---------------------------------------------------------------------------------------------------------------- AGE OF TYPE OF DEATH GUIDELINE TARGET PREMIUM INSURED AT BENEFIT CHOSEN PREMIUM CORRESPONDING TO ISSUE CORRESPONDING TO LIMITED DEATH THE LIFETIME DEATH BENEFIT GUARANTEE BENEFIT GUARANTEE VALUES AND VALUES NUMBER OF YEARS OF GUARANTEE - ---------------------------------------------------------------------------------------------------------------- 35 Type A (fixed) $ 3,532.50 $ 2,007.50 for 35 years 35 Type B (variable) $ 12,037.50 $ 2,007.50 for 33 years 45 Type A (fixed) $ 5,462.50 $ 2,977.50 for 25 years 45 Type B (variable) $ 17,147.50 $ 2,977.50 for 23 years 55 Type A (fixed) $ 8,897.50 $ 5,770.00 for 20 years 55 Type B (variable) $ 25,607.50 $ 5,770.00 for 18 years - ----------------------------------------------------------------------------------------------------------------
The Death Benefit Guarantee allows considerable flexibility as to the timing of premium payments. Your Prudential representative can supply sample illustrations of various premium amount and frequency combinations that correspond to the Death Benefit Guarantee Values. You should consider carefully the value of maintaining the guarantee. If you desire the death benefit guarantee for lifetime protection, you may prefer to pay generally higher premiums in all years, rather than trying to make such payments on an as needed basis. For example, if you pay only enough premium to meet the Limited Death Benefit Guarantee Values, a substantial amount may be ----------- required to meet the Lifetime Death Benefit Guarantee Values in order to continue the guarantee at the end of the Limited Death Benefit Guarantee period. In addition, it is possible that the payment required to continue the guarantee after the Limited Death Benefit Guarantee period could cause the Contract to become a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. CONTRACT DATE When the first premium payment is paid with the application for a Contract, the Contract date will ordinarily be the later of the application date or the medical examination date. If the first premium is not paid with the application, the Contract date will be the date on which the first premium is paid and the Contract is delivered. Under certain circumstances, we may allow the Contract to be backdated for the purpose of lowering the insured's issue age, but only to a date not earlier than six months prior to the application date. This may be advantageous for some Contract owners as a lower issue age may result in lower current charges. For a Contract that is backdated, we will credit the initial premium as of the date of receipt and will deduct any charges due on or before that date. ALLOCATION OF PREMIUMS On the Contract date, the charge for sales expenses and the premium based administrative charge are deducted from the initial premium. The remainder of the initial premium will be allocated on the Contract date among the subaccounts and/or the fixed-rate option according to your desired allocation, as specified in the application form, and the first monthly deductions are made. If the first premium is received before the Contract date, there will be a period during which the Contract owner's initial premium will not be invested. See CHARGES AND EXPENSES, page 15. The charge for sales expenses and the premium based administrative charge also apply to all subsequent premium payments. The remainder will be invested as of the end of the valuation period in which it is received at a Home Office, in accordance with the allocation you previously designated. Provided the Contract is not in default, you may change the way in which subsequent premiums are allocated by giving written notice to a Home Office or by telephoning a Home Office, provided you are enrolled to use the Telephone Transfer System. There is no charge for reallocating future premiums. All percentage allocations must be in whole numbers. For example, 33% can be selected but 33 1/3% cannot. Of course, the total allocation to all selected investment options must equal 100%. 13 TRANSFERS You may, up to 12 times each Contract year, transfer amounts from one subaccount to another subaccount or to the fixed-rate option without charge. There is an administrative charge of up to $25 for each transfer made exceeding 12 in any Contract year. All or a portion of the amount credited to a subaccount may be transferred. Transfers will take effect as of the end of the valuation period in which a proper transfer request is received at a Home Office. The request may be in terms of dollars, such as a request to transfer $5,000 from one subaccount to another, or may be in terms of a percentage reallocation among subaccounts. In the latter case, as with premium reallocations, the percentages must be in whole numbers. You may transfer amounts by proper written notice to a Home Office or by telephone, provided you are enrolled to use the Telephone Transfer System. You will automatically be enrolled to use the Telephone Transfer System unless the Contract is jointly owned or you elect not to have this privilege. Telephone transfers may not be available on Contracts that are assigned (see ASSIGNMENT, page 28), depending on the terms of the assignment. We will use reasonable procedures, such as asking you to provide certain personal information provided on your application for insurance, to confirm that instructions given by telephone are genuine. We will not be held liable for following telephone instructions that we reasonably believe to be genuine. Prudential cannot guarantee that you will be able to get through to complete a telephone transfer during peak periods such as periods of drastic economic or market change. Only one transfer from the fixed-rate option will be permitted during each Contract year. The maximum amount which may be transferred out of the fixed- rate option each year is the greater of: (a) 25% of the amount in the fixed- rate option; and (b) $2,000. Prudential may change these limits in the future. We may waive these restrictions for limited periods of time in a non- discriminatory way, (e.g., when interest rates are declining). The Contract was not designed for professional market timing organizations, other organizations, or individuals using programmed, large, or frequent transfers. A pattern of exchanges that coincides with a "market timing" strategy may be disruptive to the subaccounts and will be discouraged. If such a pattern were to be found, we may be required to modify the transfer procedures, including but not limited to, not accepting transfer requests of an agent under a power of attorney on behalf of more than one Contract owner. DOLLAR COST AVERAGING Under the Dollar Cost Averaging ("DCA") feature, either fixed dollar amounts or a percentage of the amount designated for use under the DCA option will be transferred periodically from the DCA Money Market Subaccount into other subaccounts available under the Contract, excluding the fixed-rate option. You may choose to have periodic transfers made monthly, quarterly, semi-annually or annually. Each automatic transfer will take effect as of the end of the valuation period on the date coinciding with the periodic timing you designate, provided the New York Stock Exchange is open on that date. If the New York Stock Exchange is not open on that date, or if the date does not occur in that particular month, the transfer will take effect as of the end of the valuation period which immediately follows that date. Automatic transfers will continue until: (1) $50 or less remains of the amount designated for Dollar Cost Averaging, at which time the remaining amount will be transferred; or (2) you give us notification of a change in DCA allocation or cancellation of the feature. Currently, a transfer that occurs under the DCA feature is not counted towards the 12 free transfers permitted each Contract year; however, we reserve the right to change this practice. AUTO-REBALANCING As an administrative practice, we are currently offering a feature called Auto- Rebalancing. This feature allows you to automatically rebalance subaccount assets at specified intervals based on percentage allocations that you choose. For example, suppose your initial investment allocation of variable investment options X and Y is split 40% and 60%, respectively. Then, due to investment results, that split changes. You may instruct that those assets be rebalanced to your original or different allocation percentages. Auto-Rebalancing can be performed on a monthly, quarterly, semi-annual or annual basis. Each rebalance will take effect as of the end of the valuation period on the date coinciding with the periodic timing you designate, provided the New York Stock Exchange is open on that date. If the New York Stock Exchange is not open on that date, or if the date does not occur in that particular month, the transfer will take effect as of the end of the valuation period which immediately follows that date. The fixed-rate option cannot participate in this administrative procedure. Currently, a 14 transfer that occurs under the Auto-Rebalancing feature is not counted towards the 12 free transfers permitted each Contract year. We reserve the right to change this practice, modify the requirements or discontinue the feature. CHARGES AND EXPENSES This section provides a detailed description of each charge that is described briefly in the chart on page 3, and an explanation of the purpose of the charge. In several instances we will use the terms "maximum charge" and "current charge." The "maximum charge," in each instance, is the highest charge that Prudential is entitled to make under the Contract. The "current charge" is the lower amount that Prudential is now charging. However, if circumstances change, Prudential reserves the right to increase each current charge, up to but to no more than the maximum charge, without giving any advance notice. DEDUCTIONS FROM PREMIUM PAYMENTS (a) We charge up to 7.5% as an administrative charge. This charge is currently equal to 3.75% of each premium, of which 1.25% of the premium is used to cover a 1990 increase in Prudential's federal income taxes measured by premiums. (b) We charge up to 4% for sales expenses. This charge, often called a sales load, is deducted to compensate us for the costs Prudential incurs in selling the Contracts, including commissions, advertising and the printing and distribution of prospectuses and sales literature. Currently, the charge is equal to 4% of premiums paid in each Contract year up to the amount of the target premium (see PREMIUMS, page 11) and 0% of premiums paid in excess of this amount. Consequently, paying more than this amount in any Contract year could reduce your total sales load. For example, assume that a Contract with no riders or extra insurance charges has a target premium of $2,007.50 and the Contract owner would like to pay 10 target premiums. If the Contract owner paid $4,015 (two times the amount of the target premium in every other Contract year up to the ninth year (i.e. in years 1, 3, 5, 7, 9), the sales load charge would be $401.50. If the Contract owner paid $2,007.50 in each of the first 10 Contract years, the total sales load would be $803. For additional information, see INCREASES IN BASIC INSURANCE AMOUNT, page 21. Attempting to structure the timing and amount of premium payments to reduce the potential sales load may increase the risk that your Contract will lapse without value. Delaying the payment of target premium amounts to later years will adversely affect the Death Benefit Guarantee if the accumulated premium payments do not reach the accumulated values shown under your Contract's Limited Death Benefit Guarantee Values. See DEATH BENEFIT GUARANTEE, page 12. In addition, there are circumstances where payment of premiums that are too large may cause the Contract to be characterized as a Modified Endowment Contract, which could be significantly disadvantageous. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. DEDUCTIONS FROM PORTFOLIOS An investment advisory fee is deducted daily from each portfolio of the Funds at a rate, on an annualized basis, from 0.35% for the Stock Index Portfolio to 1.05% for the T. Rowe Price International Stock Portfolio. The expenses incurred in conducting the investment operations of the portfolios (such as custodian fees and preparation and distribution of annual reports) are paid out of the portfolio's income. These expenses also vary from portfolio to portfolio. The total expenses of each portfolio for the year 1997 expressed as a percentage of the average assets during the year are shown below: 15
PORTFOLIO Investment Other Total Advisory Fee Expenses Expenses - ---------------------------------------------------------------------------------------------- SERIES FUND Money Market 0.40% 0.03% 0.43% Diversified Bond 0.40% 0.03% 0.43% Conservative Balanced 0.55% 0.01% 0.56% Flexible Managed 0.60% 0.02% 0.62% High Yield Bond 0.55% 0.02% 0.57% Stock Index 0.35% 0.02% 0.37% Equity Income 0.40% 0.01% 0.41% Equity 0.45% 0.01% 0.46% Prudential Jennison 0.60% 0.04% 0.64% Global 0.75% 0.10% 0.85% AIM VARIABLE INSURANCE FUNDS, INC. AIM V.I. Value Fund (4) 0.62% 0.08% 0.70% AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. 1.00% 0.00% 1.00% VP Value Portfolio (1) Janus Aspen Series 0.65% 0.05% 0.70% Growth Portfolio (2) MFS(R) VARIABLE INSURANCE TRUST(SM) 0.75% 0.12% 0.87% Emerging Growth Series T. ROWE PRICE INTERNATIONAL SERIES, INC. 1.05% 0.00% 1.05% International Stock Portfolio (3) - ----------------------------------------------------------------------------------------------
(1) Fees are all-inclusive. (2) The fees and expenses in the table above are based on gross expenses of the Portfolio before expense offset arrangements for the fiscal year ended December 31, 1997. The information for the Portfolio is net of fee waivers or reductions from Janus Capital. Fee reductions for the Portfolio reduce the management fee to the level of the corresponding Janus retail fund. Other waivers, if applicable, are first applied against the management fee and then against other expenses. Without such waivers or reductions, the Management Fee, Other Expenses and Total Operating Expenses for the Portfolio would have been 0.74%, 0.04% and 0.78%, respectively. Janus Capital may modify or terminate the waivers or reductions at any time upon at least 90 days' notice to the Trustees. (3) The investment management fee includes the ordinary expenses of operating the Fund. (4) AIM may from time to time voluntarily waive or reduce its respective fees. Effective May 1, 1998, the Fund will reimburse AIM in an amount up to 0.25% of the average net asset value of the Fund for expenses incurred in providing, or assuring that participating insurance companies provide, certain administrative services. Currently, the fee only applies to the average net asset value of each Fund in excess of the net asset value of each Fund as calculated on April 30, 1998. THE EXPENSES RELATING TO THE FUNDS (OTHER THAN THOSE OF THE SERIES FUND) HAVE BEEN PROVIDED TO PRUDENTIAL BY THE FUNDS. PRUDENTIAL HAS NOT INDEPENDENTLY VERIFIED THEM. DAILY DEDUCTION FROM THE CONTRACT FUND Each day a charge is deducted from the assets of each of the subaccounts in an amount equivalent to an effective annual rate of up to 0.9%. Currently, we intend to charge 0.6%. This charge is intended to compensate Prudential for assuming mortality and expense risks under the Contract. The mortality risk assumed is that insureds may live for shorter periods of time than Prudential estimated when it determined what mortality charge to make. The expense risk assumed is that expenses incurred in issuing and administering the Contract will be greater than Prudential estimated in fixing its administrative charges. This charge is not assessed against amounts allocated to the fixed-rate option. 16 MONTHLY DEDUCTIONS FROM CONTRACT FUND Prudential deducts the following monthly charges proportionately from the dollar amounts held in each of the chosen investment option[s]. (a) An administrative charge based on the basic insurance amount is deducted. The charge is intended to compensate Prudential for things like processing claims, keeping records and communicating with Contract owners. Currently, the charge is equal to $10 per Contract plus $0.07 per $1,000 of basic insurance amount in the first Contract year and $5 per Contract plus $0.01 per $1,000 of basic insurance amount in all subsequent years. Prudential reserves the right, however to charge up to $10 per Contract plus $0.07 per $1,000 of basic insurance amount in the first Contract year and $10 per Contract plus $0.01 per $1,000 of basic insurance amount in all subsequent years. For example, a Contract with a basic insurance amount of $250,000 would currently have a charge equal to $10 plus $17.50 for a total of $27.50 per month for the first Contract year and $5 plus $2.50 for a total of $7.50 per month in all later years. The maximum charge for this same Contract would be $10 plus $17.50 for a total of $27.50 per month during the first Contract year. In later years, the maximum charge would be $10 plus $2.50 for a total of $12.50 per month. (b) A cost of insurance ("COI") charge is deducted. When an insured dies, the amount payable to the beneficiary (assuming there is no Contract debt) is larger than the Contract Fund -- significantly larger if the insured dies in the early years of a Contract. The cost of insurance charges collected from all Contract owners enables Prudential to pay this larger death benefit. The maximum COI charge is determined by multiplying the "net amount at risk" under a Contract (the amount by which the Contract's death benefit exceeds the Contract Fund) by maximum COI rates. The maximum COI rates are based upon the 1980 Commissioners Standard Ordinary ("CSO") Tables and an insured's current attained age, sex, smoker/non-smoker status, and extra rating class, if any. For an increase in basic insurance amount, maximum COI rates are based upon 1980 CSO Tables, the age at the increase effective date and the number of years since then, sex, smoker/nonsmoker status, and extra rating class, if any. See INCREASES IN BASIC INSURANCE AMOUNT, page 21. At most ages, Prudential's current COI rates are lower than the maximum rates. (c) A charge of $0.01 per $1,000 of basic insurance amount is made to compensate Prudential for the risk we assume by providing the Death Benefit Guarantee feature. See DEATH BENEFIT GUARANTEE, page 12. (d) You may add one or more of several riders to the Contract. Some riders are charged for separately. If you add such a rider to the basic Contract, additional charges will be deducted. (e) If an insured is in a substandard risk classification (for example, a person in a hazardous occupation), additional charges will be deducted. SURRENDER CHARGES (a) An additional sales load is charged if during the first 10 Contract years the Contract lapses, is surrendered or if the basic insurance amount is decreased. It is not deducted from the death benefit if the insured should die during this period. Upon lapse or surrender, for issue ages 76 or less, this contingent deferred charge will be 26% of the lesser of: (a) the target level premium for the Contract; and (b) the actual premiums paid. The rate used in the calculation of this contingent deferred charge will be 22% for issue ages 77-79, 16% for issue ages 80-83 and 13% for issue ages 84-85. The rate used in the calculation of this contingent deferred charge will remain level for six years. After six years, this charge will reduce monthly at a constant rate until it reaches zero at the end of the 10th year. If during the first 10 Contract years the basic insurance amount is decreased [including as a result of a withdrawal or a change in the type of death benefit from Type A (fixed) to Type B (variable)], we will deduct a proportionate amount of the charge from the Contract Fund. The proportion we use will be the amount by which the new basic insurance amount is less than the basic insurance amount at issue (but not greater than the amount of the decrease) divided by the basic insurance amount at issue. (b) If during the first 10 Contract years the Contract lapses, is surrendered or if the basic insurance amount is decreased, an administrative charge is deducted to cover the cost of processing applications, conducting medical examinations, determining insurability and the insured's rating class, and establishing records. The charge is equal to the lesser of: (a) $5 per $1,000 of basic insurance amount; and (b) $500. This charge is level for six years. After six years, this charge will be reduced monthly at a constant rate until it reaches zero at the end of the 10th year. If the basic insurance amount is decreased [including as a result of a withdrawal or a 17 change in the type of death benefit from Type A (fixed) to Type B (variable)] during the first 10 Contract years, we will deduct a proportionate amount of the charge from the Contract Fund. The proportion we use will be the amount by which the new basic insurance amount is less than the basic insurance amount at issue (but not greater than the amount of the decrease) divided by the basic insurance amount at issue. TRANSACTION CHARGES (a) An administrative processing charge, which is the lesser of: (a) $25 and; (b) 2% of the withdrawal amount, is made in connection with each withdrawal. (b) No administrative processing charge is currently being made in connection with a change in basic insurance amount. We reserve the right to make such a charge in an amount of up to $25 for any change in basic insurance amount. (c) An administrative processing charge of up to $25 is made for each transfer exceeding 12 in any Contract year. HOW A CONTRACT'S CASH SURRENDER VALUE WILL VARY You may surrender the Contract for its cash surrender value (referred to as net cash value in the Contract). The Contract's cash surrender value on any date will be the Contract Fund less any applicable surrender charges and less any Contract debt. See CONTRACT LOANS, page 25. The Contract Fund value changes daily, reflecting: (1) increases or decreases in the value of the Fund portfolios in which the assets of the subaccount[s] have been invested; (2) interest credited on any amounts allocated to the fixed-rate option; (3) interest credited on any loan; and (4) the daily asset charge for mortality and expense risks assessed against the variable investment options. The Contract Fund value also changes to reflect the receipt of premium payments and the monthly deductions described under CHARGES AND EXPENSES, page 15. Upon request, Prudential will tell you the cash surrender value of your Contract. It is possible for the cash surrender value of a Contract to decline to zero because of unfavorable investment performance or outstanding Contract debt. The tables on pages T1 through T4 of this prospectus illustrate approximately what the cash surrender values would be for representative Contracts paying target premium amounts (see PREMIUMS, page 11), assuming hypothetical uniform investment results in the Fund portfolios. Two of the tables assume current charges will be made throughout the lifetime of the Contract and two tables assume maximum charges will be made. See ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS, page 23. HOW A TYPE A (FIXED) CONTRACT'S DEATH BENEFIT WILL VARY As described earlier, there are two types of death benefit available under the Contract: Type A, a generally fixed death benefit and Type B, a variable death benefit. A Type B (variable) death benefit varies with investment performance while a Type A (fixed) death benefit does not, unless it must be increased to comply with the Internal Revenue Code's definition of life insurance. Under a Type A (fixed) Contract, the death benefit is generally equal to the basic insurance amount. See CONTRACT LOANS, page 25. If the Contract is kept inforce for several years, depending on how much premium you pay, and/or if investment performance is reasonably favorable, the Contract Fund may grow to the point where Prudential will increase the death benefit in order to ensure that the Contract will satisfy the Internal Revenue Code's definition of life insurance. Thus, the death benefit under a Type A (fixed) Contract will always be the greater of: (1) the basic insurance amount; and (2) the Contract Fund before the deduction of any monthly charges due on that date, multiplied by the attained age factor that applies. A listing of attained age factors can be found on the data pages of your Contract. The latter provision ensures that the Contract will always have a death benefit large enough so that the Contract will be treated as life insurance for tax purposes under current law. The following table illustrates at different ages how the attained age factor affects the death benefit for different Contract Fund amounts. The table assumes a $250,000 Type A (fixed) Contract was issued when the insured was age 35. 18 TYPE A (FIXED) DEATH BENEFIT
IF THEN - ---------------------------------------------------------------------------------------------------- THE INSURED IS AND THE CONTRACT THE ATTAINED AGE THE CONTRACT FUND AND THE DEATH AGE FUND IS FACTOR IS MULTIPLIED BY THE BENEFIT IS ATTAINED AGE FACTOR IS - ---------------------------------------------------------------------------------------------- 40 $ 25,000 3.64 91,000 $250,000 40 $ 75,000 3.64 273,000 $273,000* 40 $100,000 3.64 364,000 $364,000* - ---------------------------------------------------------------------------------------------- 60 $ 75,000 1.96 147,000 $250,000 60 $125,000 1.96 245,000 $250,000 60 $150,000 1.96 294,000 $294,000* - ---------------------------------------------------------------------------------------------- 80 $150,000 1.28 192,000 $250,000 80 $200,000 1.28 256,000 $256,000* 80 $225,000 1.28 288,000 $288,000* - ---------------------------------------------------------------------------------------------- * Note that the death benefit has been increased to comply with the Internal Revenue Code's definition of life insurance. - ----------------------------------------------------------------------------------------------------
This means, for example, that if the insured has reached the age of 60, and the Contract Fund is $150,000, the death benefit will be $294,000, even though the original basic insurance amount was $250,000. In this situation, for every $1 increase in the Contract Fund, the death benefit will be increased by $1.96. We reserve the right to refuse to accept any premium payment that increases the death benefit by more than it increases the Contract Fund. If we exercise this right, it may in certain situations result in the loss of the death benefit guarantee. HOW A TYPE B (VARIABLE) CONTRACT'S DEATH BENEFIT WILL VARY Under a Type B (variable) Contract, while the Contract is inforce, the death benefit will never be less than the basic insurance amount, but will also vary, immediately after it is issued, with the investment results of the selected investment options. The death benefit may be further increased to ensure that the Contract will satisfy the Internal Revenue Code's definition of life insurance. Thus, the death benefit will always be the greater of: (1) the basic insurance amount plus the Contract Fund before the deduction of any monthly charges due on that date; and (2) the Contract Fund before the deduction of any monthly charges due on that date, multiplied by the attained age factor that applies. For purposes of computing the death benefit, if the Contract Fund is less than zero we will consider it to be zero. A listing of attained age factors can be found on the data pages of your Contract. The latter provision ensures that the Contract will always have a death benefit large enough so that the Contract will be treated as life insurance for tax purposes under current law. The following table illustrates various attained age factors and Contract Funds and the corresponding death benefits. The table assumes a $250,000 Type B (variable) Contract was issued when the insured was age 35. 19 TYPE B (VARIABLE) DEATH BENEFIT
IF THEN - ---------------------------------------------------------------------------------------------------- THE INSURED IS AND THE CONTRACT THE ATTAINED AGE THE CONTRACT FUND AND THE DEATH AGE FUND IS FACTOR IS MULTIPLIED BY THE BENEFIT IS ATTAINED AGE FACTOR IS - ----------------------------------------------------------------------------------------------- 40 $ 25,000 3.64 91,000 $275,000 40 $ 75,000 3.64 273,000 $325,000 40 $100,000 3.64 364,000 $364,000* - ----------------------------------------------------------------------------------------------- 60 $ 75,000 1.96 147,000 $325,000 60 $125,000 1.96 245,000 $375,000 60 $150,000 1.96 294,000 $400,000 - ----------------------------------------------------------------------------------------------- 80 $150,000 1.28 192,000 $400,000 80 $200,000 1.28 256,000 $450,000 80 $225,000 1.28 288,000 $475,000 - ----------------------------------------------------------------------------------------------- * Note that the death benefit has been increased to comply with the Internal Revenue Code's definition of life insurance. - ----------------------------------------------------------------------------------------------------
This means, for example, that if the insured has reached the age of 40, and the Contract Fund is $100,000, the death benefit will be $364,000, even though the original basic insurance amount was $250,000. In this situation, for every $1 increase in the Contract Fund, the death benefit will be increased by $3.64. We reserve the right to refuse to accept any premium payment that increases the death benefit by more than it increases the Contract Fund. If we exercise this right, it may in certain situations result in the loss of the death benefit guarantee. SURRENDER OF A CONTRACT A Contract may be surrendered for its cash surrender value or for a fixed reduced paid-up insurance benefit while the insured is living. To surrender a Contract, we may require you to deliver or mail the Contract with a written request in a form that meets our needs, to a Home Office. The cash surrender value of a surrendered Contract will be determined as of the end of the valuation period in which such a request is received in the Home Office. Fixed reduced paid-up insurance provides paid-up insurance, the amount of which will be paid when the insured dies. There will be cash values and loan values. The loan interest rate for fixed reduced paid-up insurance is 5%. Upon surrender of the Contract, the amount of fixed reduced paid-up insurance depends upon the cash surrender value and the insured's issue age, sex, and the length of time since the Contract date. Surrender of a Contract may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. WITHDRAWALS Under certain circumstances, you may withdraw a portion of the Contract's cash surrender value without surrendering the Contract. The withdrawal amount is limited by the requirement that the cash surrender value after the withdrawal may not be zero or less than zero after deducting the withdrawal charges. The amount withdrawn must be at least $500. There is an administrative processing fee for each withdrawal which is the lesser of: (a) $25 and; (b) 2% of the withdrawal amount. An amount withdrawn may not be repaid except as a premium subject to the applicable charges. Upon request, we will tell you how much you may withdraw. Withdrawal of the cash surrender value may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. Whenever a withdrawal is made, the death benefit will immediately be reduced by at least the amount of the withdrawal. For a Type B (variable) Contract, this will not change the basic insurance amount. However, under a Type A (fixed) Contract, the resulting reduction in death benefit usually requires a reduction in the basic insurance amount. If the basic insurance amount is decreased to an amount less than the basic insurance amount at issue, a surrender charge may be deducted. See CHARGES AND EXPENSES, page 15. No withdrawal will be permitted under a Type A (fixed) Contract if it would result in a basic insurance amount of less than the minimum basic insurance amount. It is important to note, however, that if the basic insurance amount is decreased at any time during the life of the Contract, there is a possibility that the Contract might be classified as a Modified Endowment Contract. See TAX 20 TREATMENT OF CONTRACT BENEFITS, page 26. Before making any withdrawal which causes a decrease in basic insurance amount, you should consult with your tax adviser and your Prudential representative. When a withdrawal is made, the Contract Fund is reduced by the sum of the cash withdrawn and the withdrawal fee. An amount equal to the reduction in the Contract Fund will be withdrawn proportionally from the investment options unless you direct otherwise. Withdrawal of the cash surrender value increases the risk that the Contract Fund may be insufficient to provide Contract benefits. If such a withdrawal is followed by unfavorable investment experience, the Contract may go into default. Withdrawals may also affect whether a Contract is kept inforce under the Death Benefit Guarantee, since withdrawals decrease the accumulated net payments. See DEATH BENEFIT GUARANTEE, page 12. INCREASES IN BASIC INSURANCE AMOUNT Subject to the underwriting requirements determined by Prudential, on or after the first Contract anniversary, you may increase the amount of insurance by increasing the basic insurance amount of the Contract. The following conditions must be met: (1) you must ask for the change in a form that meets our needs; (2) the amount of the increase must be at least equal to the minimum increase in basic insurance amount shown under CONTRACT LIMITATIONS in the data pages of the Contract; (3) you must prove to us that the insured is insurable for any increase; (4) the Contract must not be in default; (5) we must not be paying premiums into the Contract as a result of the insured's total disability; and (6) if we ask you to do so, you must send us the Contract to be endorsed. If we approve the change, we will send you new Contract data pages showing the amount and effective date of the change and the recomputed charges, values and limitations. If the insured is not living on the effective date, the change will not take effect. No administrative processing charge is currently being made in connection with an increase in basic insurance amount. We reserve the right to make such a charge in an amount of up to $25. For sales load purposes, the target premiums are calculated separately for the initial basic insurance amount and each increase in basic insurance amount. Each target premium piece also includes the premium for extra insurance charges associated to that piece of coverage. When premiums are paid, each payment is allocated among the initial basic insurance amount and each increase in basic insurance amount according to the target premiums. Currently, the sales load charge for each piece is equal to 4% of the allocated premium paid in each Contract year up to the target premium and 0% of allocated premiums paid in excess of the target premium. See the definition of Contract year for an increase in DEFINITIONS OF SPECIAL TERMS USED IN THIS PROSPECTUS, page 1. Each Contract owner who elects to increase the basic insurance amount of his or her Contract will receive a "free-look" right which will apply only to the increase in basic insurance amount, not the entire Contract. This right is comparable to the right afforded to a purchaser of a new Contract except that, any cost of insurance charge for the increase in the basic insurance amount will be returned to the Contract Fund instead of a refund of premium. See SHORT-TERM CANCELLATION RIGHT OR "FREE LOOK", page 10. Generally, the "free-look" right would have to be exercised no later than 10 days after receipt of the Contract as increased. An increase in basic insurance amount may impact the status of the Contract as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. Therefore, before increasing the basic insurance amount, you should consult with your tax adviser and your Prudential representative. DECREASES IN BASIC INSURANCE AMOUNT As explained earlier, you may make a withdrawal (see WITHDRAWALS, page 20). On or after the first Contract anniversary, you also have the option of decreasing the basic insurance amount of your Contract without withdrawing any cash surrender value. Contract owners who conclude that, because of changed circumstances, the amount of insurance is greater than needed will be able to decrease their amount of insurance protection, and the monthly deductions for the cost of insurance. The amount of the decrease must be at least equal to the minimum decrease in basic insurance amount shown under Contract Limitations in the data pages of your Contract. In addition, the basic insurance amount after the decrease must be at least equal to the minimum basic insurance amount shown under CONTRACT LIMITATIONS in the data pages of your Contract. If the basic insurance amount is decreased to an amount less than the basic insurance amount at issue, a surrender charge may be deducted. No administrative processing charge is currently being made in connection with a decrease in basic insurance amount. We reserve the right to make such a charge in an amount of up to $25. See CHARGES AND EXPENSES, page 15. If we ask you to, you must send us your Contract to be endorsed. The Contract will be amended to show the new basic insurance amount, charges, values in the appropriate tables, and the effective date of the decrease. 21 We may decline a reduction if we determine it would cause the Contract to fail to qualify as "life insurance" for purposes of Section 7702 of the Internal Revenue Code. A decrease will not take effect if the insured is not living on the effective date. It is important to note, however, that if the basic insurance amount is decreased, there is a possibility that the Contract might be classified as a Modified Endowment Contract. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. Before requesting any decrease in basic insurance amount, you should consult with your tax adviser and your Prudential representative. WHEN PROCEEDS ARE PAID Prudential will generally pay any death benefit, cash surrender value, loan proceeds or withdrawal within seven days after all the documents required for such a payment are received at a Home Office. Other than the death benefit, which is determined as of the date of death, the amount will be determined as of the end of the valuation period in which the necessary documents are received at a Home Office. However, Prudential may delay payment of proceeds from the subaccount[s] and the variable portion of the death benefit due under the Contract if the disposal or valuation of the Account's assets is not reasonably practicable because the New York Stock Exchange is closed for other than a regular holiday or weekend, trading is restricted by the SEC, or the SEC declares that an emergency exists. With respect to the amount of any cash surrender value allocated to the fixed- rate option, Prudential expects to pay the cash surrender value promptly upon request. However, Prudential has the right to delay payment of such cash surrender value for up to six months. Prudential will pay interest of at least 3% a year if it delays such a payment for 10 days or more. LIVING NEEDS BENEFIT You may elect to add the LIVING NEEDS BENEFIT(SM) to your Contract at issue. There is no charge for adding the benefit to the Contract. However, an administrative charge (not to exceed $150) will be made at the time the LIVING NEEDS BENEFIT is paid. The LIVING NEEDS BENEFIT allows you to elect to receive an accelerated payment of all or part of the Contract's death benefit, adjusted to reflect current value, at a time when certain special needs exist. The adjusted death benefit will always be less than the death benefit, but will generally be greater than the Contract's cash surrender value. The following options are available. Terminal Illness Option. This option is available if the insured is diagnosed as terminally ill with a life expectancy of six months or less. When satisfactory evidence is provided, Prudential will provide an accelerated payment of the portion of the death benefit selected by you as a LIVING NEEDS BENEFIT. The benefit will be paid to you in a single sum. Organ Transplant Option. This option is available if the insured is diagnosed as having a life expectancy of six months or less unless the insured receives a vital organ transplant. When satisfactory evidence is provided, Prudential will provide an accelerated payment of the portion of the death benefit selected by you as a LIVING NEEDS BENEFIT. The benefit will be paid to you in a single sum. All or part of the Contract's death benefit may be accelerated under the LIVING NEEDS BENEFIT. If the benefit is only partially accelerated, a death benefit of at least $25,000 must remain under the Contract. Prudential reserves the right to determine the minimum amount that may be accelerated. No benefit will be payable if you are required to elect it in order to meet the claims of creditors or to obtain a government benefit. Prudential can furnish details about the amount of LIVING NEEDS BENEFIT that is available to an eligible Contract owner, and the effect on the Contract if less than the entire death benefit is accelerated. You should consider whether adding this settlement option is appropriate in your given situation. Adding the LIVING NEEDS BENEFIT to the Contract has no adverse consequences; however, electing to use it could. With the exception of certain business-related Contracts, the Health Insurance Portability and Accountability Act of 1996 excludes from income the LIVING NEEDS BENEFIT if the insured is terminally ill or chronically ill as defined in the tax law (although the exclusion in the latter case may be limited). You should consult a qualified tax adviser before electing to receive this 22 benefit. Receipt of a LIVING NEEDS BENEFIT payment may also affect your eligibility for certain government benefits or entitlements. ILLUSTRATIONS OF CASH SURRENDER VALUES, DEATH BENEFITS, AND ACCUMULATED PREMIUMS The following four tables show how the death benefit and cash surrender values change with the investment experience of the Account. They are "hypothetical" because they are based, in part, upon several assumptions, each of which is described below. All four tables assume that a Contract with a basic insurance amount of $250,000 has been bought by a 35 year old male, non-smoker, with no extra risks or substandard ratings, and no extra benefit riders added to the Contract. It is assumed that the target premium amount (see PREMIUMS, page 11) is paid on each Contract anniversary and that no loans are taken. The first table (page T1) assumes that a Type A (fixed) Contract has been purchased and the second table (page T2) assumes that a Type B (variable) Contract has been purchased. Both assume that the current charges will continue for the indefinite future. The third and fourth tables (pages T3 and T4) are based upon the same assumptions except that it is assumed that the maximum contractual charges have been made from the beginning. See CHARGES AND EXPENSES, page 15. Another assumption is that the Contract Fund has been invested in equal amounts in each of the 15 portfolios of the Funds and no portion of the Contract Fund has been allocated to the fixed-rate option. Finally, there are four assumptions, shown separately, about the average investment performance of the portfolios. The first is that there will be a uniform 0% gross rate of return, that is, that the average value of the Contract Fund will uniformly be adversely affected by very unfavorable investment performance. The other three assumptions are that investment performance will be at a uniform gross annual rate of 4%, 8% and 12%. These, of course, are unrealistic assumptions since actual returns will fluctuate from year to year. Nevertheless, these assumptions help show how the Contract values will change with investment experience. The first column in the following tables shows the Contract year. The second column, to provide context, shows what the aggregate amount would be if the premiums had been invested in a savings account paying 4% compounded interest. Of course, if that were done, there would be no life insurance protection. The next four columns show the death benefit payable in each of the years shown for the four different assumed investment returns. Note that a gross return (as well as the net return) is shown at the top of each column. The gross return represents the combined effect of income and capital appreciation of the portfolios before any reduction is made for investment advisory fees or other Fund expenses. The net return reflects average total annual expenses of the 15 portfolios of 0.68%, and the daily deduction from the Contract Fund of 0.6% per year for the tables based on current charges and 0.9% per year for the tables based on maximum charges. Thus, assuming current charges, gross returns of 0%, 4%, 8% and 12% are the equivalent of net returns of -1.24%, 2.76%, 6.76% and 10.76%, respectively. Assuming maximum charges, gross returns of 0%, 4%, 8% and 12% are the equivalent of net returns of -1.54%, 2.46%, 6.46% and 10.46%, respectively. The death benefits and cash surrender values shown reflect the deduction of all expenses and charges both from the Funds and under the Contract. Under the Type B (variable) Contract, the death benefit changes to reflect investment returns. While under the Type A (fixed) Contract, the death benefit increases only if the Contract Fund becomes large enough that an increase in the death benefit is necessary. The death benefit is increased so that the Contract will satisfy the Internal Revenue Code's definition of life insurance. See TYPE OF DEATH BENEFIT, page 10. Following these illustrations are two pages (pages T5 and T6) showing internal rates of return (commonly referred to as IRRs) associated with the cash values and death benefits shown on the preceding four pages. IRRs are often employed by insurance companies to provide some indication of the rate of return that may be thought of as earned upon your "investment" in the Contract (the aggregate premiums paid) if the Contract were surrendered or if the insured was to die. The IRR on the death benefit is equivalent to an interest rate (without considering taxes) at which an amount equal to the premiums illustrated on the preceding pages could have been invested to arrive at the death benefit of the Contract. The IRR on the cash surrender value is equivalent to an interest rate (without considering taxes) at which an amount equal to the illustrated premiums could have been invested to arrive at the cash surrender value of the Contract. The IRRs on page T5 are based on the Contract values shown on pages T1 and T2. The IRRs on page T6 are based on the Contract values shown on pages T3 and T4. 23 If you are considering the purchase of a variable life insurance contract from another insurance company, you should not rely upon these tables for comparison purposes. A comparison between two tables, each showing values for a 35 year old man, may be useful for a 35 year old man but would be inaccurate if made for insureds of other ages or sex. Your Prudential representative can provide you with a hypothetical illustration for your own age, sex, and rating class. You can obtain an illustration using premium amounts and payment patterns that you wish to follow. You may use assumed gross returns different than those shown in the tables, although currently they may not be higher than 12%. 24 VARIABLE UNIVERSAL LIFE TYPE A (FIXED) DEATH BENEFIT MALE NON-SMOKER AGE 35 $ 250,000 BASIC INSURANCE AMOUNT $ 2,007.50 ANNUAL PREMIUM PAYMENT USING CURRENT CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1) ------------------------------------------------------ ----------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Premiums Annual Investment Return of Annual Investment Return of End of Accumulated ------------------------------------------------------ ----------------------------------------------------- Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year Per Year (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) - ------ -------------- ------------- ------------- ------------- ------------- ------------ ------------ ------------ ------------ 1 $ 2,088 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 103 $ 161 $ 220 $ 279 2 $ 4,259 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 1,448 $ 1,618 $ 1,792 $ 1,972 3 $ 6,517 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 2,772 $ 3,109 $ 3,465 $ 3,841 4 $ 8,866 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 4,071 $ 4,634 $ 5,244 $ 5,904 5 $ 11,308 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 5,345 $ 6,191 $ 7,133 $ 8,180 6 $ 13,848 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 6,592 $ 7,781 $ 9,140 $ 10,692 7 $ 16,490 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 8,065 $ 9,656 $ 11,525 $ 13,716 8 $ 19,237 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 9,505 $ 11,560 $ 14,038 $ 17,025 9 $ 22,095 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 10,910 $ 13,488 $ 16,684 $ 20,643 10 $ 25,066 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 12,276 $ 15,439 $ 19,470 $ 24,604 15 $ 41,805 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 17,145 $ 24,162 $ 34,467 $ 49,628 20 $ 62,171 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 21,325 $ 33,788 $ 54,997 $ 91,317 25 $ 86,948 $ 250,000 $ 250,000 $ 250,000 $ 322,959 $ 24,307 $ 43,984 $ 82,976 $ 160,676 30 $ 117,094 $ 250,000 $ 250,000 $ 250,000 $ 479,220 $ 24,104 $ 52,883 $ 120,060 $ 272,284 35 $ 153,771 $ 250,000 $ 250,000 $ 267,837 $ 707,721 $ 19,426 $ 59,258 $ 170,597 $ 450,778 40 $ 198,394 $ 250,000 $ 250,000 $ 334,107 $ 1,031,251 $ 5,138 $ 58,475 $ 236,955 $ 731,384 45 $ 252,685 $ 0(2) $ 250,000 $ 417,984 $ 1,516,215 $ 0(2) $ 42,531 $ 321,526 $ 1,166,319 50 $ 318,738 $ 0 $ 0(2) $ 522,262 $ 2,236,837 $ 0 $ 0(2) $ 428,083 $ 1,833,473 55 $ 399,102 $ 0 $ 0 $ 649,272 $ 3,295,188 $ 0 $ 0 $ 559,717 $ 2,840,679 60 $ 496,877 $ 0 $ 0 $ 801,213 $ 4,831,881 $ 0 $ 0 $ 721,814 $ 4,353,046 65 $ 615,835 $ 0 $ 0 $ 995,275 $ 7,148,494 $ 0 $ 0 $ 947,881 $ 6,808,090
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0%, the Contract would go into default in year 42. Based on a gross return of 4%, the Contract would go into default in year 50. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATE OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUDENTIAL OR THE FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. T1 VARIABLE UNIVERSAL LIFE TYPE B (VARIABLE) DEATH BENEFIT MALE NON-SMOKER AGE 35 $ 250,000 BASIC INSURANCE AMOUNT $ 2,007.50 ANNUAL PREMIUM PAYMENT USING CURRENT CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1) ------------------------------------------------------ ----------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Premiums Annual Investment Return of Annual Investment Return of End of Accumulated ------------------------------------------------------ ----------------------------------------------------- Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year Per Year (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) - ------ -------------- ------------ ------------ ------------ ------------ ----------- ------------ ------------ ----------- 1 $ 2,088 $ 251,122 $ 251,181 $ 251,240 $ 251,299 $ 100 $ 159 $ 218 $ 277 2 $ 4,259 $ 252,464 $ 252,633 $ 252,807 $ 252,986 $ 1,442 $ 1,611 $ 1,785 $ 1,964 3 $ 6,517 $ 253,782 $ 254,118 $ 254,473 $ 254,847 $ 2,760 $ 3,096 $ 3,451 $ 3,825 4 $ 8,866 $ 255,074 $ 255,634 $ 256,241 $ 256,898 $ 4,052 $ 4,612 $ 5,219 $ 5,876 5 $ 11,308 $ 256,337 $ 257,178 $ 258,115 $ 259,156 $ 5,315 $ 6,156 $ 7,093 $ 8,134 6 $ 13,848 $ 257,572 $ 258,753 $ 260,103 $ 261,644 $ 6,550 $ 7,731 $ 9,081 $ 10,622 7 $ 16,490 $ 258,775 $ 260,354 $ 262,208 $ 264,381 $ 8,008 $ 9,587 $ 11,441 $ 13,615 8 $ 19,237 $ 259,943 $ 261,978 $ 264,434 $ 267,392 $ 9,432 $ 11,467 $ 13,923 $ 16,881 9 $ 22,095 $ 261,071 $ 263,622 $ 266,785 $ 270,701 $ 10,816 $ 13,367 $ 16,530 $ 20,445 10 $ 25,066 $ 262,159 $ 265,284 $ 269,266 $ 274,336 $ 12,159 $ 15,284 $ 19,266 $ 24,336 15 $ 41,805 $ 266,849 $ 273,717 $ 283,796 $ 298,614 $ 16,849 $ 23,717 $ 33,796 $ 48,614 20 $ 62,171 $ 270,772 $ 282,832 $ 303,326 $ 338,383 $ 20,772 $ 32,832 $ 53,326 $ 88,383 25 $ 86,948 $ 273,353 $ 292,094 $ 329,150 $ 403,329 $ 23,353 $ 42,094 $ 79,150 $ 153,329 30 $ 117,094 $ 272,404 $ 298,996 $ 360,887 $ 507,117 $ 22,404 $ 48,996 $ 110,887 $ 257,117 35 $ 153,771 $ 266,653 $ 301,583 $ 399,088 $ 673,789 $ 16,653 $ 51,583 $ 149,088 $ 423,789 40 $ 198,394 $ 251,285 $ 293,633 $ 440,136 $ 969,784 $ 1,285 $ 43,633 $ 190,136 $ 687,790 45 $ 252,685 $ 0(2) $ 266,416 $ 477,239 $ 1,426,734 $ 0(2) $ 16,416 $ 227,239 $ 1,097,488 50 $ 318,738 $ 0 $ 0(2) $ 498,085 $ 2,105,652 $ 0 $ 0(2) $ 248,085 $ 1,725,944 55 $ 399,102 $ 0 $ 0 $ 477,128 $ 3,102,704 $ 0 $ 0 $ 227,128 $ 2,674,745 60 $ 496,877 $ 0 $ 0 $ 372,844 $ 4,550,365 $ 0 $ 0 $ 122,844 $ 4,099,428 65 $ 615,835 $ 0 $ 0 $ 0(2) $ 6,732,708 $ 0 $ 0 $ 0(2) $ 6,412,103
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0%, the Contract would go into default in year 41. Based on a gross return of 4%, the Contract would go into default in year 47. Based on a gross return of 8%, the Contract would go into default in year 64. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATE OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUDENTIAL OR THE FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. T2 VARIABLE UNIVERSAL LIFE TYPE A (FIXED) DEATH BENEFIT MALE NON-SMOKER AGE 35 $ 250,000 BASIC INSURANCE AMOUNT $ 2,007.50 ANNUAL PREMIUM PAYMENT USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1) --------------------------------------------------- ------------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Premiums Annual Investment Return of Annual Investment Return of End of Accumulated --------------------------------------------------- ------------------------------------------------------- Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year Per Year (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) - ------ ----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 1 $ 2,088 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 0 $ 0 $ 53 $ 108 2 $ 4,259 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 1,056 $ 1,207 $ 1,364 $ 1,525 3 $ 6,517 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 2,122 $ 2,418 $ 2,731 $ 3,062 4 $ 8,866 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 3,142 $ 3,628 $ 4,156 $ 4,730 5 $ 11,308 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 4,115 $ 4,836 $ 5,642 $ 6,540 6 $ 13,848 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 5,034 $ 6,035 $ 7,184 $ 8,501 7 $ 16,490 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 6,153 $ 7,478 $ 9,041 $ 10,882 8 $ 19,237 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 7,216 $ 8,907 $ 10,959 $ 13,445 9 $ 22,095 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 8,218 $ 10,317 $ 12,938 $ 16,204 10 $ 25,066 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 9,156 $ 11,704 $ 14,978 $ 19,177 15 $ 41,805 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 11,439 $ 16,788 $ 24,779 $ 36,707 20 $ 62,171 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 11,106 $ 20,001 $ 35,702 $ 63,368 25 $ 86,948 $ 250,000 $ 250,000 $ 250,000 $ 250,000 $ 6,305 $ 19,042 $ 46,429 $ 104,464 30 $ 117,094 $ 250,000 $ 250,000 $ 250,000 $ 298,484 $ 0 $ 9,780 $ 54,305 $ 169,593 35 $ 153,771 $ 250,000 $ 250,000 $ 250,000 $ 417,880 $ 0 $ 0 $ 53,166 $ 266,166 40 $ 198,394 $ 0(2) $ 0(2) $ 250,000 $ 570,258 $ 0(2) $ 0(2) $ 28,298 $ 404,438 45 $ 252,685 $ 0 $ 0 $ 0(2) $ 775,012 $ 0 $ 0 $ 0(2) $ 596,163 50 $ 318,738 $ 0 $ 0 $ 0 $ 1,047,096 $ 0 $ 0 $ 0 $ 858,275 55 $ 399,102 $ 0 $ 0 $ 0 $ 1,403,925 $ 0 $ 0 $ 0 $ 1,210,280 60 $ 496,877 $ 0 $ 0 $ 0 $ 1,883,587 $ 0 $ 0 $ 0 $ 1,696,925 65 $ 615,835 $ 0 $ 0 $ 0 $ 2,430,417 $ 0 $ 0 $ 0 $ 2,314,683
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 29 and later, but because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The Contract would go into default at the beginning of year 36. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 33 and later, but because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 35 years. The Contract would go into default at the beginning of year 36. Based on a gross return of 8%, the Contract would go into default in year 43. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATE OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUDENTIAL OR THE FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. T3 VARIABLE UNIVERSAL LIFE TYPE B (VARIABLE) DEATH BENEFIT MALE NON-SMOKER AGE 35 $ 250,000 BASIC INSURANCE AMOUNT $ 2,007.50 ANNUAL PREMIUM PAYMENT USING MAXIMUM CONTRACTUAL CHARGES
Death Benefit (1) Cash Surrender Value (1) ----------------------------------------------------- ---------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Premiums Annual Investment Return of Annual Investment Return of End of Accumulated ----------------------------------------------------- ---------------------------------------------------- Policy at 4% Interest 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year Per Year (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) - ------ -------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 1 $ 2,088 $ 250,965 $ 251,019 $ 251,073 $ 251,127 $ 0 $ 0 $ 51 $ 105 2 $ 4,259 $ 252,071 $ 252,222 $ 252,378 $ 252,539 $ 1,049 $ 1,200 $ 1,356 $ 1,517 3 $ 6,517 $ 253,131 $ 253,425 $ 253,737 $ 254,066 $ 2,109 $ 2,403 $ 2,715 $ 3,045 4 $ 8,866 $ 254,142 $ 254,625 $ 255,150 $ 255,720 $ 3,120 $ 3,603 $ 4,128 $ 4,698 5 $ 11,308 $ 255,103 $ 255,818 $ 256,618 $ 257,509 $ 4,081 $ 4,796 $ 5,596 $ 6,487 6 $ 13,848 $ 256,007 $ 256,999 $ 258,137 $ 259,441 $ 4,985 $ 5,977 $ 7,115 $ 8,419 7 $ 16,490 $ 256,853 $ 258,162 $ 259,708 $ 261,527 $ 6,086 $ 7,396 $ 8,941 $ 10,761 8 $ 19,237 $ 257,638 $ 259,307 $ 261,331 $ 263,782 $ 7,127 $ 8,796 $ 10,820 $ 13,271 9 $ 22,095 $ 258,360 $ 260,426 $ 263,005 $ 266,218 $ 8,105 $ 10,171 $ 12,750 $ 15,962 10 $ 25,066 $ 259,014 $ 261,516 $ 264,728 $ 268,848 $ 9,014 $ 11,516 $ 14,728 $ 18,848 15 $ 41,805 $ 261,084 $ 266,246 $ 273,949 $ 285,440 $ 11,084 $ 16,246 $ 23,949 $ 35,440 20 $ 62,171 $ 260,405 $ 268,744 $ 283,444 $ 309,317 $ 10,405 $ 18,744 $ 33,444 $ 59,317 25 $ 86,948 $ 255,176 $ 266,514 $ 290,886 $ 342,505 $ 5,176 $ 16,514 $ 40,886 $ 92,505 30 $ 117,094 $ 250,000 $ 255,524 $ 291,782 $ 386,929 $ 0 $ 5,524 $ 41,782 $ 136,929 35 $ 153,771 $ 0(2) $ 0(2) $ 277,178 $ 442,655 $ 0(2) $ 0(2) $ 27,178 $ 192,655 40 $ 198,394 $ 0 $ 0 $ 0(2) $ 505,686 $ 0 $ 0 $ 0(2) $ 255,686 45 $ 252,685 $ 0 $ 0 $ 0 $ 561,998 $ 0 $ 0 $ 0 $ 311,998 50 $ 318,738 $ 0 $ 0 $ 0 $ 585,569 $ 0 $ 0 $ 0 $ 335,569 55 $ 399,102 $ 0 $ 0 $ 0 $ 521,201 $ 0 $ 0 $ 0 $ 271,201 60 $ 496,877 $ 0 $ 0 $ 0 $ 285,625 $ 0 $ 0 $ 0 $ 35,625 65 $ 0 $ 0 $ 0 $ 0 $ 0(2) $ 0 $ 0 $ 0 $ 0(2)
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the cash surrender value would go to zero in year 1 and in year 28 and later, but because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The Contract would go into default at the beginning of year 34. Based on a gross return of 4% the cash surrender value would go to zero in year 1 and in year 32 and later, but because the Target Premium is being paid, the Contract is kept inforce through the Limited Death Benefit Guarantee Period of 33 years. The Contract would go into default at the beginning of year 34. Based on a gross return of 8%, the Contract would go into default in year 39. Based on a gross return of 12%, the Contract would go into default in year 61. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATE OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUDENTIAL OR THE FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. T4 VARIABLE UNIVERSAL LIFE MALE NON-SMOKER AGE 35 $ 250,000 BASIC INSURANCE AMOUNT $ 2,007.50 ANNUAL PREMIUM PAYMENT USING CURRENT CONTRACTUAL CHARGES
FIXED INSURANCE AMOUNT Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1) -------------------------------------------------------- ---------------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of Annual Investment Return of End of ------------------------------------------------------- ---------------------------------------------------------- Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) - ------ ------------- ------------ ------------ ------------- ------------- ------------ ------------ ------------- 5 135.66% 135.66% 135.66% 135.66% -20.31% -15.70% -11.18% -6.75% 10 44.34% 44.34% 44.34% 44.34% -9.18% -4.84% -0.56% 3.67% 15 23.96% 23.96% 23.96% 23.96% -7.44% -2.81% 1.67% 6.02% 20 15.44% 15.44% 15.44% 15.44% -6.51% -1.67% 2.91% 7.31% 25 10.88% 10.88% 10.88% 12.46% -6.17% -1.03% 3.67% 8.09% 30 8.09% 8.09% 8.09% 11.38% -6.83% -0.85% 4.14% 8.53% 35 6.24% 6.24% 6.54% 10.70% -9.06% -0.97% 4.49% 8.80% 40 4.93% 4.93% 6.06% 10.19% -28.09% -1.62% 4.72% 8.96% 45 (2) 3.96% 5.73% 9.86% (2) -3.72% 4.84% 9.04% 50 (2) 5.50% 9.62% (2) 4.91% 9.08% 55 5.33% 9.44% 4.93% 9.07% 60 5.17% 9.28% 4.92% 9.05% 65 5.07% 9.17% 4.97% 9.07%
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the Contract would go into default in policy year 42. Based on a gross return of 4% the Contract would go into default in policy year 50.
VARIABLE INSURANCE AMOUNT Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1) -------------------------------------------------------- ---------------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of Annual Investment Return of End of ------------------------------------------------------- ---------------------------------------------------------- Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) (-1.24% Net) ( 2.76% Net) ( 6.76% Net) (10.76% Net) - ------ ------------- ------------ ------------ ------------- ------------- ------------ ------------ ------------- 5 137.03% 137.21% 137.41% 137.63% -20.49% -15.87% -11.36% -6.93% 10 45.20% 45.41% 45.68% 46.02% -9.37% -5.03% -0.75% 3.47% 15 24.66% 24.94% 25.33% 25.88% -7.68% -3.05% 1.43% 5.78% 20 16.06% 16.40% 16.95% 17.80% -6.81% -1.96% 2.63% 7.03% 25 11.43% 11.84% 12.57% 13.81% -6.56% -1.38% 3.34% 7.79% 30 8.54% 9.01% 9.97% 11.67% -7.49% -1.37% 3.69% 8.24% 35 6.52% 7.07% 8.28% 10.49% -10.56% -1.79% 3.85% 8.54% 40 4.95% 5.56% 7.10% 9.97% -60.97% -3.28% 3.83% 8.74% 45 (2) 4.19% 6.18% 9.67% (2) -10.84% 3.62% 8.85% 50 (2) 5.36% 9.46% (2) 3.20% 8.91% 55 4.49% 9.29% 2.36% 8.93% 60 3.26% 9.15% 0.06% 8.92% 65 (2) 9.05% (2) 8.95%
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the Contract would go into default in policy year 41. Based on a gross return of 4% the Contract would go into default in policy year 47. Based on a gross return of 8% the Contract would go into default in policy year 64. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATE OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUDENTIAL OR THE FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. T5 VARIABLE UNIVERSAL LIFE MALE NON-SMOKER AGE 35 $ 250,000 BASIC INSURANCE AMOUNT $ 2,007.50 ANNUAL PREMIUM PAYMENT USING MAXIMUM CONTRACTUAL CHARGES FIXED INSURANCE AMOUNT
Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1) -------------------------------------------------------- ---------------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of Annual Investment Return of End of ------------------------------------------------------- ---------------------------------------------------------- Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) - ------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------- 5 135.66% 135.66% 135.66% 135.66% -28.35% -23.42% -18.62% -13.95% 10 44.34% 44.34% 44.34% 44.34% -14.96% -10.10% -5.40% -0.83% 15 23.96% 23.96% 23.96% 23.96% -13.45% -7.73% -2.48% 2.44% 20 15.44% 15.44% 15.44% 15.44% -14.78% -7.24% -1.13% 4.17% 25 10.88% 10.88% 10.88% 10.88% -24.13% -8.62% -0.60% 5.26% 30 8.09% 8.09% 9.00% -16.98% -0.68% 6.04% 35 6.24% 8.48% -1.61% 6.52% 40 (2) (2) 4.93% 8.06% (2) (2) -6.13% 6.78% 45 (2) 7.75% (2) 6.91% 50 7.52% 6.95% 55 7.32% 6.94% 60 7.17% 6.93% 65 6.97% 6.87%
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the Contract would go into default in policy year 36. Based on a gross return of 4% the Contract would go into default in policy year 36. Based on a gross return of 8% the Contract would go into default in policy year 43. VARIABLE INSURANCE AMOUNT
Internal Rates of Return on Death (1) Internal Rates of Return on Surrender (1) -------------------------------------------------------- ---------------------------------------------------------- Assuming Hypothetical Gross (and Net) Assuming Hypothetical Gross (and Net) Annual Investment Return of Annual Investment Return of End of ------------------------------------------------------- ---------------------------------------------------------- Policy 0% Gross 4% Gross 8% Gross 12% Gross 0% Gross 4% Gross 8% Gross 12% Gross Year (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) (-1.54% Net) ( 2.46% Net) ( 6.46% Net) (10.46% Net) - ------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------- 5 136.77% 136.92% 137.09% 137.28% -28.61% -23.67% -18.88% -14.21% 10 44.98% 45.15% 45.37% 45.65% -15.27% -10.42% -5.72% -1.15% 15 24.43% 24.64% 24.95% 25.39% -13.95% -8.20% -2.92% 2.01% 20 15.76% 16.00% 16.42% 17.10% -15.73% -7.99% -1.77% 3.58% 25 11.01% 11.27% 11.82% 12.82% -27.94% -10.17% -1.62% 4.43% 30 8.20% 8.89% 10.32% -26.65% -2.48% 4.88% 35 (2) (2) 6.70% 8.73% (2) (2) -6.19% 5.06% 40 (2) 7.61% (2) 5.02% 45 6.71% 4.74% 50 5.84% 4.16% 55 4.74% 2.89% 60 2.56% -5.12% 65 (2) (2)
(1) Assumes no Contract loan has been made. (2) Based on a gross return of 0% the Contract would go into default in policy year 34. Based on a gross return of 4% the Contract would go into default in policy year 34. Based on a gross return of 8% the Contract would go into default in policy year 39. Based on a gross return of 12% the Contract would go into default in policy year 61. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING INTEREST RATES, AND RATE OF INFLATION. THE DEATH BENEFIT AND CASH SURRENDER VALUE FOR A CONTRACT WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGE 0%, 4%, 8%, AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL CONTRACT YEARS. NO REPRESENTATIONS CAN BE MADE BY PRUDENTIAL OR THE FUNDS THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. T6 CONTRACT LOANS You may borrow from Prudential an amount up to the current loan value of your Contract less any existing Contract debt using the Contract as the only security for the loan. The loan value at any time is equal to the sum of (1) 90% of the portion of the cash value attributable to the variable investment options, and (2) the balance of the cash value. The cash value is equal to the Contract Fund less any surrender charge. A Contract in default has no loan value. The minimum loan amount you may borrow is $200. Interest charged on a loan accrues daily. Interest is due on each Contract anniversary or when the loan is paid back, whichever comes first. If interest is not paid when due, it becomes part of the loan and we will charge interest on it, too. Except in the case of preferred loans, we charge interest at an effective annual rate of 5%. A portion of any amount you borrow on or after the 10th Contract anniversary may be considered a preferred loan if the Contract has not been surrendered for fixed reduced paid-up insurance. The maximum preferred loan amount is the total amount you may borrow minus the total net premiums paid (net premiums equal premiums paid less total withdrawals, if any). If the net premium amount is less than zero, we will, for purposes of this calculation, consider it to be zero. Only new loans borrowed after the 10th Contract anniversary may be considered preferred loans. Standard loans will not automatically be converted into preferred loans. Preferred loans are charged interest at an effective annual rate of 4.5%. The Contract debt is the amount of all outstanding loans plus any interest accrued but not yet due. If at any time the Contract debt equals or exceeds the Contract Fund less any applicable surrender charges, the Contract will go into default. See LAPSE AND REINSTATEMENT, page 28. If the Contract debt equals or exceeds the Contract Fund less any applicable surrender charges and you fail to keep the Contract inforce, the amount of unpaid Contract debt will be treated as a distribution which may be taxable. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. When a loan is made, an amount equal to the loan proceeds will be transferred out of the Account and/or the fixed-rate option, as applicable. Unless you ask us to take the loan amount from specific investment options and we agree, the reduction will be made in the same proportions as the value in each subaccount and the fixed-rate option bears to the total value of the Contract. While a loan is outstanding, the amount that was so transferred will continue to be treated as part of the Contract Fund. It will be credited with an effective annual rate of return of 4%. On each Monthly date, we will increase the portion of the Contract Fund in the investment options by interest credits accrued on the loan since the last Monthly date. The net cost of a standard loan is 1% and the net cost of a preferred loan is 1/2%. A loan will not affect the Death Benefit Guarantee as long as Contract debt does not equal or exceed the Contract Fund, less any applicable surrender charges. Loans from Modified Endowment Contracts may be treated for tax purposes as distributions of income. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. Any Contract debt will directly reduce a Contract's cash surrender value and will be subtracted from the death benefit to determine the amount payable. In addition, even if the loan is fully repaid, it may have an effect on future death benefits because the investment results of the selected investment options will apply only to the amount remaining invested under those options. The longer the loan is outstanding, the greater the effect is likely to be. The effect could be favorable or unfavorable. If investment results are greater than the rate being credited on the amount of the loan while the loan is outstanding, values under the Contract will not increase as rapidly as they would have if no loan had been made. If investment results are below that rate, Contract values will be higher than they would have been had no loan been made. When you repay all or part of a loan, we will increase the portion of the Contract Fund in the investment options by the amount of the loan you repay using the investment allocation for future premium payments as of the loan payment date, plus interest credits accrued on the loan since the last transaction date. If loan interest is paid when due, it will not change the portion of the Contract Fund allocated to the investment options. We reserve the right to change the manner in which we allocate loan repayments. 25 SALE OF THE CONTRACT AND SALES COMMISSIONS Pruco Securities Corporation ("Prusec"), an indirect wholly-owned subsidiary of Prudential, acts as the principal underwriter of the Contract. Prusec, organized in 1971 under New Jersey law, is registered as a broker and dealer under the Securities Exchange Act of 1934 and is a member of the National Association of Securities Dealers, Inc. Prusec's principal business address is 751 Broad Street, Newark, New Jersey 07102-3777. The Contract is sold by registered representatives of Prusec who are also authorized by state insurance departments to do so. The Contract may also be sold through other broker- dealers authorized by Prusec and applicable law to do so. Registered representatives of such other broker-dealers may be paid on a different basis than described below. Generally, representatives will receive a commission of no more than: (1) 50% of the premiums received in the first year on premiums up to the target premium (see PREMIUMS, page 11); (2) 5% of premiums received in years two through 10 on premiums up to the target premium; and (3) 3% on premiums received in the first 10 years in excess of the target premium or received after 10 years. If the basic insurance amount is increased, representatives will generally receive a commission of no more than: (1) 25% of the premiums received up to the target premium for the increase received in the first year; (2) 5% of the premiums received up to the target premium for years two through 10; and (3) 3% on other premiums received for the increase. Moreover, trail commissions of up to 0.025% of the Contract Fund as of the end of each calendar quarter may be paid. Representatives with less than 4 years of service may receive compensation on a different basis. Representatives who meet certain productivity or persistency standards may be eligible for additional compensation. TAX TREATMENT OF CONTRACT BENEFITS Prudential urges each prospective purchaser to consult a qualified tax adviser. The following discussion is not intended as tax advice, and it is not a complete statement of what the effect of federal income taxes will be under all circumstances. Rather, it provides information about how Prudential believes the tax laws apply in the most commonly occurring circumstances. There is no guarantee, however, that the current federal income tax laws and regulations or interpretations will not change. TREATMENT AS LIFE INSURANCE. The Contract will be treated as "life insurance," as long as it satisfies certain definitional tests set forth in Sections 7702 of the Internal Revenue Code (the "Code") and as long as the underlying investments for the Contract satisfy diversification requirements under Section 817(h) of the Code. (For further detail on diversification requirements, see the corresponding sections on Dividends, Distributions, and Taxes in the attached prospectuses for the Funds.) Prudential believes that it has taken adequate steps to cause the Contract to be treated as life insurance for tax purposes. This means that: (1) except as noted below, the Contract owner should not be taxed on any part of the Contract Fund, including additions attributable to interest, dividends or appreciation until amounts are distributed under the Contract; and (2) the death benefit should be excludible from the gross income of the beneficiary under Section 101(a) of the Code. However, Section 7702 of the Code which defines life insurance for tax purposes gives the Secretary of the Treasury authority to prescribe regulations to carry out the purposes of the Section. In this regard, proposed regulations governing mortality charges were issued in 1991 and proposed regulations relating to the definition of life insurance were issued in 1992. None of these proposed regulations has yet been finalized. Additional regulations under Section 7702 may also be promulgated in the future. Moreover, in connection with the issuance of temporary regulations under Section 817(h), the Treasury Department announced that such regulations do not provide guidance concerning the extent to which Contract owners may direct their investments to particular divisions of a separate account. Such guidance will be included in regulations or rulings under Section 817(d) relating to the definition of a variable contract. Prudential intends to comply with final regulations or rulings issued under Sections 7702 and 817. Therefore, it reserves the right to make such changes as it deems necessary to assure that the Contract continues to qualify as life insurance for tax purposes. Any such changes will apply uniformly to affected Contract owners and will be made only after advance written notice to affected Contract owners. PRE-DEATH DISTRIBUTIONS. The taxation of pre-death distributions depends on whether the Contract is classified as a Modified Endowment Contract. The following discussion first deals with distributions under Contracts not so classified, and then with Modified Endowment Contracts. 26 1. A surrender or lapse of the Contract may have tax consequences. Upon surrender, the owner will not be taxed on the cash surrender value except for the amount, if any, that exceeds the gross premiums paid less the untaxed portion of any prior withdrawals. The amount of any unpaid Contract debt will, upon surrender or lapse, be added to the cash surrender value and treated, for this purpose, as if it had been received. The tax consequences of a surrender may differ if the proceeds are received under any income payment settlement option. A withdrawal generally is not taxable unless it exceeds total gross premiums paid to the date of withdrawal less the untaxed portion of any prior withdrawals. However, under certain limited circumstances, in the first 15 Contract years all or a portion of a withdrawal may be taxable if the Contract Fund exceeds the total premiums paid less the untaxed portions of any prior withdrawals, even if total withdrawals do not exceed total premiums paid to date. Extra premiums for optional benefits and riders generally do not count in computing gross premiums paid, which in turn determines the extent to which a withdrawal might be taxed. Loans received under the Contract will ordinarily be treated as indebtedness of the owner and will not be considered to be distributions subject to tax. However, there is some risk the Internal Revenue Service might assert that the preferred loan should be treated as a distribution for tax purposes because of the relatively low differential between the loan interest rate and Contract's crediting rate. Were the Internal Revenue Service to take this position, Prudential would take reasonable steps to avoid this result, including modifying the Contract's loan provisions. 2. Some of the above rules are changed if the Contract is classified as a Modified Endowment Contract under Section 7702A of the Code. It is possible for this Contract to be classified as a Modified Endowment Contract under at least two circumstances: premiums in excess of the 7-pay premiums allowed under Section 7702A are paid or a decrease in the basic insurance amount is made (or a rider removed). Moreover, the addition of a rider or the increase in the basic insurance amount after the Contract date may have an impact on the Contract's status as a Modified Endowment Contract. Contract owners contemplating any of these steps, particularly a withdrawal that would reduce the basic insurance amount, should first consult a qualified tax adviser and their Prudential representative. If the Contract is classified as a Modified Endowment Contract, then pre- death distributions, including loans, assignment and pledges are includible in income to the extent that the Contract Fund prior to surrender charges exceeds the gross premiums paid for the Contract increased by the amount of any loans previously includible in income and reduced by any untaxed amounts previously received other than the amount of any loans excludible from income. These rules may also apply to pre-death distributions, including loans, made during the two year period prior to the Contract becoming a Modified Endowment Contract. In addition, pre-death distributions from such Contracts (including full surrenders) will be subject to a penalty of 10% of the amount includible in income unless the amount is distributed on or after age 59 1/2, on account of the taxpayer's disability or as a life annuity. It is presently unclear how the penalty tax provisions apply to Contracts owned by nonnatural persons such as corporations. Under certain circumstances, multiple Modified Endowment Contracts issued during any calendar year will be treated as a single contract for purposes of applying the above rules. WITHHOLDING. If the Contract owner fails to elect that no taxes be withheld, or in certain other circumstances, the taxable portion of any amounts received under the Contract will be subject to withholding to meet federal income tax obligations. Prudential will provide the Contract owner with forms and instructions concerning the right to elect that no taxes be withheld from the taxable portion of any payment. All recipients may be subject to penalties under the estimated tax payment rules if withholding and estimated tax payments are insufficient. Contract owners who do not provide a social security number or other taxpayer identification number will not be permitted to elect out of withholding. Special withholding rules apply to payments to non-resident aliens. DISTRIBUTION AT MATURITY. This Contract matures when the insured attains age 100. When the Contract matures it is payable in full and some portion of the distribution may be taxable. OTHER TAX CONSIDERATIONS. Transfer of the Contract to a new owner or assignment of the Contract may have gift, estate and/or income tax consequences depending on the circumstances. In the case of a transfer of the Contract for a valuable consideration, the death benefit may be subject to federal income taxes under Section 101(a)(2) of the Code. In addition, a transfer of the Contract to or the designation of a beneficiary who is either 37 1/2 years younger 27 than the Contract owner or a grandchild of the Contract owner may have Generation Skipping Transfer tax consequences under Section 2601 of the Code. In certain circumstances, deductions for interest paid or accrued on Contract debt or on other loans that are incurred or continued to purchase or carry the Contract may be denied under Sections 163 of the Code as personal interest or under Section 264 of the Code. Contract owners should consult a tax adviser regarding the application of these provisions to their circumstances. Business-owned life insurance is subject to additional rules. Section 264(a)(1) of the Code generally precludes business Contract owners from deducting premium payments. Interest on Contract debt on a business-owned insurance contract is generally not tax-deductible. An exemption permits the deduction of interest on policy loans on contracts for up to 20 key persons. The interest deduction for Contract debt on such loans is limited to a prescribed interest rate and a maximum aggregate loan amount of $50,000 per insured key person. Under certain circumstances, the Code also imposes a corporate alternative minimum tax. This is an indirect tax upon additions to the Contract Fund or the receipt of death benefits under business-owned life insurance policies. The individual situation of each Contract owner or beneficiary will determine the federal estate taxes and the state and local estate, inheritance and other taxes due if the owner or insured dies. LAPSE AND REINSTATEMENT Prudential will determine the value of the Contract Fund on each Monthly date. If the Contract Fund less any applicable surrender charges is zero or less, the Contract is in default unless it remains inforce under the Death Benefit Guarantee. See DEATH BENEFIT GUARANTEE, page 12. If the Contract debt ever grows to be equal to or more than the Contract Fund less any applicable surrender charges, the Contract will be in default. Should this happen, Prudential will send you a notice of default setting forth the payment which we estimate will keep the Contract inforce for three months from the date of default. This payment must be received at a Home Office within the 61-day grace period after the notice of default is mailed or the Contract will end and have no value. A Contract that lapses and ends without value with an outstanding Contract loan may have tax consequences. See TAX TREATMENT OF CONTRACT BENEFITS, page 26. A Contract that ended in default may be reinstated within 5 years after the date of default if the following conditions are met: (1) renewed evidence of insurability is provided on the insured; (2) submission of certain payments sufficient to bring the Contract up to date plus a premium that we estimate will cover all charges and deductions for the next three months; and (3) any Contract debt with interest to date must be restored (if the debt with interest would exceed the loan value of the reinstated Contract, the excess must be paid to us before reinstatement) or paid back. The reinstatement date will be the Monthly date that coincides with or next follows the date we approve your request. We will deduct all the required charges from your payment and the balance will be placed into your Contract Fund. If we approve the reinstatement, we will credit the Contract Fund with an amount equal to the surrender charge applicable as of the date of reinstatement. LEGAL CONSIDERATIONS RELATING TO SEX-DISTINCT PREMIUMS AND BENEFITS- The Contract generally employs mortality tables that distinguish between males and females. Thus, premiums and benefits under Contracts issued on males and females of the same age will generally differ. Employers and employee organizations considering purchase of a Contract should consult their legal advisers to determine whether purchase of a Contract based on sex-distinct actuarial tables is consistent with Title VII of the Civil Rights Act of 1964 or other applicable law. OTHER GENERAL CONTRACT PROVISIONS ASSIGNMENT. This Contract may not be assigned if the assignment would violate any federal, state or local law or regulation prohibiting sex distinct rates for insurance. Generally, the Contract may not be assigned to an employee benefit plan or program without Prudential's consent. Prudential assumes no responsibility for the validity or sufficiency of any assignment. We will not be obligated to comply with any assignment unless we receive a copy at a Home Office. BENEFICIARY. The Contract owner designates and names the beneficiary in the application. Thereafter, you may change the beneficiary, provided it is in accordance with the terms of the Contract. Should the insured die with no surviving beneficiary, the insured's estate will become the beneficiary. 28 INCONTESTABILITY. Prudential will not contest its liability under the Contract in accordance with its terms after the Contract has been inforce during the lifetime of the insured for two years from the Contract date or, with respect to any change in the Contract that requires Prudential's approval and could increase its liability, after the change has been in effect during the insured's lifetime for two years from the effective date of the change, assuming enough premium has been paid to cover the required charges. MISSTATEMENT OF AGE OR SEX. If the insured's stated age or sex or both are incorrect in the Contract, Prudential will adjust the death benefit payable and any amount to be paid, as required by law, to reflect the correct age and sex. Any such benefit will be based on what the most recent deductions from the Contract Fund would have provided at the insured's correct age and sex. SETTLEMENT OPTIONS. The Contract grants to most owners, or to the beneficiary, a variety of optional ways of receiving Contract proceeds, other than in a lump sum. Any Prudential representative authorized to sell this Contract can explain these options upon request. SUICIDE EXCLUSION. Generally, if the insured dies by suicide within two years from the Contract date, the Contract will end and Prudential will return the premiums paid, less any Contract debt, and less any withdrawals. Generally, if the insured dies by suicide after two years from the issue date, but within two years of the effective date of an increase in the basic insurance amount, we will pay, as to the increase in amount, no more than the sum of the premiums paid on and after the effective date of an increase. RIDERS Contract owners may be able to obtain extra fixed benefits which may require an additional premium. These optional insurance benefits will be described in what is known as a "rider" to the Contract. Charges applicable to the riders will be deducted from the Contract Fund on each Monthly date. One rider pays certain premiums into the Contract if the insured is totally disabled within the meaning of the provision. Others pay an additional amount if the insured dies within a stated number of years after issue; similar benefits may be available if the insured's spouse or child should die. The amounts of these benefits are fully guaranteed at issue; they do not depend on the performance of the Account, although they will no longer be available if the Contract lapses. Certain restrictions may apply; they are clearly described in the applicable rider. Any Prudential representative authorized to sell the Contract can explain these extra benefits further. Samples of the provisions are available from Prudential upon written request. PARTICIPATION IN DIVISIBLE SURPLUS The Contract is eligible to be credited part of Prudential's divisible surplus attributable to the Contracts, as determined by Prudential's Board of Directors. That determination is made, with respect to the insurance Contracts issued by Prudential, every year. However, Prudential does not expect to credit any dividends upon these Contracts because favorable investment performance will be reflected in Contract values and because Prudential intends, if experience indicates that current charges will be greater than needed to cover expenses, to reduce those charges further so that there will be no source of distributable surplus attributable to these Contracts. VOTING RIGHTS As described earlier, all of the assets held in the subaccounts will be invested in shares of the corresponding portfolios of the Funds. Prudential is the legal owner of those shares and as such has the right to vote on any matter voted on at shareholders meetings of the Funds. However, Prudential will, as required by law, vote the shares of the Funds in accordance with voting instructions received from Contract owners at any regular and special shareholders meetings. A Fund may not hold annual shareholders meetings when not required to do so under the laws of the state of its incorporation or the Investment Company Act of 1940. Fund shares for which no timely instructions from Contract owners are received, and any shares attributable to general account investments of Prudential, will be voted in the same proportion as shares in the respective portfolios for which instructions are received. Should the applicable federal securities laws or regulations, or their current interpretation, change so as to permit Prudential to vote shares of the Funds in its own right, it may elect to do so. Matters on which Contract owners may give voting instructions include the following: (1) election of the Board of Directors of the Series Fund; (2) ratification of the independent accountant of the Series Fund; (3) approval of the investment advisory agreement for a portfolio of the Series Fund corresponding to the Contract owner's selected 29 subaccount[s]; (4) any change in the fundamental investment policy of a portfolio corresponding to the Contract owner's selected subaccount[s]; and (5) any other matter requiring a vote of the shareholders of the Series Fund. With respect to approval of the investment advisory agreement or any change in a portfolio's fundamental investment policy, Contract owners participating in such portfolios will vote separately on the matter, pursuant to the requirements of Rule 18f-2 under the Investment Company Act of 1940. The number of Fund shares for which instructions may be given by a Contract owner is determined by dividing the portion of the value of the Contract derived from participation in a subaccount, by the value of one share in the corresponding portfolio of the applicable Fund. The number of votes for which each Contract owner may give Prudential instructions will be determined as of the record date chosen by the Board of Directors of the applicable Fund. Prudential will furnish Contract owners with proper forms and proxies to enable them to give these instructions. Prudential reserves the right to modify the manner in which the weight to be given voting instructions is calculated where such a change is necessary to comply with current federal regulations or interpretations of those regulations. Prudential may, if required by state insurance regulations, disregard voting instructions if they would require shares to be voted so as to cause a change in the sub-classification or investment objectives of one or more of a Fund's portfolios, or to approve or disapprove an investment advisory contract for a Fund. In addition, Prudential itself may disregard voting instructions that would require changes in the investment policy or investment adviser of one or more of a Fund's portfolios, provided that Prudential reasonably disapproves such changes in accordance with applicable federal regulations. If Prudential does disregard voting instructions, it will advise Contract owners of that action and its reasons for such action in the next annual or semi-annual report to Contract owners. SUBSTITUTION OF FUND SHARES Although Prudential believes it to be unlikely, it is possible that in the judgment of its management, one or more of the portfolios of the Funds may become unsuitable for investment by Contract owners because of investment policy changes, tax law changes, or the unavailability of shares for investment. In that event, Prudential may seek to substitute the shares of another portfolio or of an entirely different mutual fund. Before this can be done, the approval of the SEC, and possibly one or more state insurance departments, may be required. Contract owners will be notified of such substitution. REPORTS TO CONTRACT OWNERS Once each year, Prudential will send you a statement that provides certain information pertinent to your own Contract. This statement will detail values and transactions made and specific Contract data that apply only to your particular Contract. You will also be sent annual and semi-annual reports of the Funds showing the financial condition of the portfolios and the investments held in each portfolio. STATE REGULATION Prudential is subject to regulation and supervision by the Department of Insurance of the State of New Jersey, which periodically examines its operations and financial condition. It is also subject to the insurance laws and regulations of all jurisdictions in which it is authorized to do business. Prudential is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business to determine solvency and compliance with local insurance laws and regulations. In addition to the annual statements referred to above, Prudential is required to file with New Jersey and other jurisdictions a separate statement with respect to the operations of all its variable contract accounts, in a form promulgated by the National Association of Insurance Commissioners. EXPERTS The financial statements included in this prospectus for the years ended December 31, 1997 and December 31, 1996 have been audited by PricewaterhouseCoopers LLP, independent accountants. Prudential is relying on PricewaterhouseCoopers' reports, which are given on their authority as accounting and auditing experts. 30 PricewaterhouseCoopers LLP's principal business address is 1177 Avenue of the Americas, New York, New York 10036. The financial statements included in this prospectus for the year ended December 31, 1995 have been audited by Deloitte & Touche LLP, independent auditors. Prudential is relying on Deloitte & Touche LLP's reports, which are given on their authority as accounting and auditing experts. Deloitte & Touche LLP's principal business address is Two Hilton Court, Parsippany, New Jersey 07054- 0319. On March 12, 1996, Deloitte & Touche LLP was replaced as the independent accountants of Prudential. There have been no disagreements with Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of the accountant, would have caused them to make reference to the matter in their reports. Actuarial matters included in this prospectus have been examined by Ching-Meei Chang, MAAA, FSA, Actuarial Director of Prudential, whose opinion is filed as an exhibit to the registration statement. LITIGATION On October 28, 1996, Prudential entered into a Stipulation of Settlement in a multidistrict proceeding involving allegations of various claims relating to Prudential's life insurance sales practices. (In re Prudential Insurance -------------------------- Company of America Sales Practices Litigation, D.N.J., MDL No. 1061, Master - --------------------------------------------- Docket No. 95-4704 (AMW)). On March 7, 1997, the United States District Court for the District of New Jersey approved the Stipulation of Settlement as fair, reasonable and adequate, and later issued a Final Order and Judgement in the consolidated class actions before the court, 962 F. Supp. 450 (March 17, 1997, as amended April 14, 1997). The Court's Final Order and Judgement approving the class Settlement was appealed to the United States Court of Appeals for the Third Circuit, which upheld the district court's approval of the Stipulation of Settlement on July 23, 1998. As of now no further appeal has been taken. Pursuant to the Settlement, Prudential agreed to provide and has begun to implement an Alternative Dispute Resolution ("ADR") process for class members who believe they were misled concerning the sale or performance of their life insurance Contracts. As of December 31, 1997, based on a reasonable estimate of losses associated with ADR claims, management estimated the cost, before taxes, of remedying policyholder claims in the ADR process to be approximately $2.05 billion. While management believed these to be reasonable estimates based on information then available, further estimates are currently being developed in connection with the availability of more recent data. The ultimate amount of the total cost of remedied policyholder claims is dependent on complex and varying factors, including actual claims by eligible policyholders, the relief options chosen and the dollar value of those options. There are also additional elements of the ADR process which cannot be fully evaluated at this time (e.g., claims which may be successfully appealed) which could increase this estimate. In addition, a number of actions have been filed against Prudential by policyholders who have excluded themselves from the Settlement; Prudential anticipates that additional suits may be filed by other policyholders. Also, on July 9, 1996, a Multi-State Life Insurance Task Force comprised of insurance regulators from 29 states and the District of Columbia, released a report on Prudential's activities. As of February 24, 1997, Prudential had entered into consent orders or agreements with all 50 states and the District of Columbia to implement a remediation plan, whose terms closely parallel the Settlement approved in the MDL proceeding, and agreed to a series of payments allocated to all 50 states and the District of Columbia amounting to a total of approximately $65 million. These agreements are now being implemented through Prudential's implementation of the class Settlement. Litigation is subject to many uncertainties, and given the complexity and scope of these suits, their outcome cannot be predicted. It is also not possible to predict the likely results of any regulatory inquiries or their effect on litigation which might be initiated in response to widespread media coverage of these matters. Accordingly, management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of all pending litigation and regulatory inquiries. It is possible that the results of operations or the cash flow of Prudential, in particular quarterly or annual periods, could be materially affected by an ultimate unfavorable outcome of certain pending litigation and regulatory matters. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters referred to above should not have a material adverse effect on Prudential's financial position, after consideration of applicable reserves. 31 YEAR 2000 COMPLIANCE Many computer systems are programmed to recognize only the last two digits in a date. As a result, any computer system that has date-sensitive programming may recognize a date using "00" as the year 1900 rather than the year 2000. This problem can affect non-information technology systems that include embedded technology, such as microprocessors included in "infrastructure" equipment used for telecommunications and other services as well as computer systems. If this anomaly is not corrected, the year "00" could cause systems to perform date comparisons and calculations incorrectly which could in turn affect the accuracy and compromise the integrity of business records. Business operations could be interrupted when companies are unable to process transactions, send invoices, or engage in similar normal business activities. Prudential established a Company-wide Program Office (CPO) to develop and coordinate an operating framework for the Year 2000 compliance activities. Prudential's CPO structured the Year 2000 program into three major components: Business Applications, Infrastructure and Business Partners. The CPO also established quality assurance procedures including a certification process to monitor and evaluate enterprise-wide progress of each component of Prudential's program for conversion and upgrading of systems for Year 2000 compliance. BUSINESS APPLICATIONS The scope of the Business Applications component includes a wide range of computer systems that directly support Prudential's business operations and accounting systems. The entire application portfolio was analyzed in 1996 to determine appropriate Year 2000 readiness strategies (i.e., renovate, replace or retire). Rigorous testing standards have been employed for all applications that will not be retired, including those that are newly developed or purchased. Application replacement and renovation projects follow a similar path toward Year 2000 compliance. The key project phases include Year 2000 analysis and design, programming activities, testing, and implementation. Replacement projects are also tracked until the existing applications are removed from production. Business application projects are grouped by applications undergoing renovations, replacements or retirements. At September 30, 1998, the percentage of business applications (based on application count) in the implementation phase for Year 2000 compliance for renovation, replacement and retirement are 91%, 62% and 87%,respectively. The interim target date for completing renovations and retirements is December 1998, with an overall completion date for Business Applications of June 1999. INFRASTRUCTURE The scope of Prudential's Year 2000 Infrastructure initiatives include mainframe computer system hardware and operating system software, mid-range systems and servers, telecommunications equipment, buildings and facilities systems, personal computers, and vendor hardware and software. Although there are minor differences among these various components, the approach to Year 2000 readiness for Infrastructure generally involves phases identified as inventory, assessment, remediation activities (e.g., upgrading hardware or software), testing and implementation. The interim target date for completion of infrastructure initiatives is December 1998 with an overall completion date for Infrastructure of June 1999. BUSINESS PARTNERS Prudential's approach to business partner readiness includes classification of each partner's status as "critical" or "less critical" and the development of contingency plans to address the potential that a business partner could experience a Year 2000 failure. Project phases include inventory, risk assessment, and contingency planning activities. The interim target date for highly critical business partner readiness is December 1998 with an overall completion date for business partner readiness of June 1999. THE COST OF YEAR 2000 READINESS Prudential is funding the Year 2000 program from operating cash flows. The expenses of Prudential's Year 2000 compliance are allocated across its various businesses, including those businesses not engaged in providing services to Contract owners. The Year 2000 costs incurred to date are not material to Prudential's operations and financial condition and are not expected to have a material impact on its ability to meet its contractual commitments. 32 YEAR 2000 RISKS AND CONTINGENCY PLANNING The major portion of the Prudential's transactions are of such volume that they can only be effectively processed through the use of automated systems. Therefore, substantially all of Prudential's contingency plans include the ultimate resolution of any causative technology failures that may be encountered. Prudential believes that the Business Application, Infrastructure and Business Partners components of the Year 2000 project are substantially on schedule. While management expects that a small number of the projects slated for completion as of the end of 1998 will not meet this target date, it is anticipated that these projects will be completed mid-1999 so that these delays, if experienced, would not have a significant impact on the timing of the project as a whole. During the course of the Year 2000 program, some discretionary technology projects have been delayed in favor of the completion of Year 2000 projects. However, this impact has been minimized by Prudential's strategic decision to outsource most of the Year 2000 renovation work. While Prudential and its subsidiaries believe that they are well positioned to mitigate its Year 2000 issue, this issue, by its nature contains inherent uncertainties, including the uncertainty of Year 2000 readiness of third parties. Consequently, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material adverse effect on the Company's results of operations, liquidity or financial condition. In the worst case, it is possible that any technology failure, including an internal or external Year 2000 failure, could have a material impact on the Company's results of operations, liquidity, or financial position. Prudential is enhancing existing business contingency plans to mitigate Year 2000 risk. Current contingency plans include planned responses to the failure of specific business applications or infrastructure components. These responses are being reviewed and expected to be finalized by June 1999 to ensure that they are workable under the special conditions of a Year 2000 failure. The plans are also being updated to reduce the level of uncertainty about the Year 2000 problem including readiness of Prudential's Business Partners. The discussion of the Year 2000 Issue herein, and in particular Prudential's plans to remediate this issue and the estimated costs thereof, are forward-looking in nature. ADDITIONAL INFORMATION Prudential has filed a registration statement with the SEC under the Securities Act of 1933, relating to the offering described in this prospectus. This prospectus does not include all the information set forth in the registration statement. Certain portions have been omitted pursuant to the rules and regulations of the SEC. The omitted information may, however, be obtained from the SEC's principal office in Washington, D.C., upon payment of a prescribed fee. Further information may also be obtained from Prudential. Its address and telephone number are set forth on the inside front cover of this prospectus. FINANCIAL STATEMENTS The financial statements of the Account should be distinguished from the consolidated financial statements of Prudential and subsidiaries, which should be considered only as bearing upon the ability of Prudential to meet its obligations under the Contracts. The financial statements of Prudential that we show in this prospectus are those as of the end of the most recent fiscal year. Prudential does not currently prepare financial statements in accordance with generally accepted accounting principals more often than annually and believes that any incremental benefit to prospective Contract owners that may result from the inclusion of interim financial statements, though unaudited, does not justify the additional cost that would be incurred. In addition, Prudential represents that there have been no material adverse changes in the financial condition of Prudential between the end of the most current fiscal year and the date of this prospectus. 33 SUBSEQUENT EVENTS On December 10, 1998, the Company announced that it had entered into definitive agreements for Aetna to acquire, subject to regulatory approval and certain other conditions, Prudential's healthcare business for $1 billion. The transaction is expected to be completed in the second quarter of 1999. Included in this transaction are the Prudentail HealthCare Health Maintenance Organization (HMO), Point of Service (POS), Preferred Provider Organization (PPO), and idemnity health lines as well as its dental business. 34 DIRECTORS AND OFFICERS OF PRUDENTIAL DIRECTORS OF PRUDENTIAL FRANKLIN E. AGNEW -- Director since 1994 (current term expires April, 2000). Member, Committee on Dividends; Member, Finance Committee; Member Corporate Governance Committee. Business consultant since 1987. Senior Vice President, H.J. Heinz from 1971 to 1986. Mr. Agnew is also a director of Bausch & Lomb, Inc. John Wiley & Sons, Inc. and Erie Plastics Corporation. Age 63. Address: 600 Grant Street, Suite 660, Pittsburgh, PA 15219. FREDERICK K. BECKER -- Director since 1994 (current term expires April, 1999). Member, Auditing Committee, Member, Committee on Business Ethics; Member, Corporate Governance Committee. President, Wilentz Goldman and Spitzer, P.A. (law firm) since 1989, with firm since 1960. Age 62. Address: 90 Woodbridge Center Drive, Woodbridge, NJ 07095. GILBERT F. CASELLAS -- Director since 1998 (current term expires April, 2002). Partner, McConnell Valdes, LLP since 1998. Chairman, U.S. Equal Employment Opportunity Commission from 1994 to 1998. General Counsel, Department of Air Force from 1993 to 1994. Mr. Casellas is also a director of the American Arbitration Association and the Puerto Rican Legal Defense & Education Fund. Age 46. Address: 1717 Pennsylvania Avenue, NW, Suite 625, Washington, DC 20006. JAMES G. CULLEN -- Director since 1994 (current term expires April, 2001). Member, Compensation Committee; Member, Committee on Business Ethics. President & Chief Executive Officer, Telecom Group, Bell Atlantic Corporation, since 1997. Vice Chairman, Bell Atlantic Corporation from 1995 to 1997. President, Bell Atlantic Corporation from 1993 to 1995. Mr. Cullen is also a director of Bell Atlantic Corporation and Johnson & Johnson. Age 55. Address: 1310 North Court House Road, 11th Floor, Alexandria, VA 22201. CAROLYNE K. DAVIS -- Director since 1989 (current term expires April, 2001). Member, Finance Committee; Member Committee on Business Ethics; Member, Compensation Committee. Independent Health Care Advisor. National and International Health Care Advisor, Ernst & Young, LLP from 1985 to 1997. Dr. Davis is also a director of Beckman Instruments, Inc., Merck & Co., Inc., Science Applications International Corporation, Minimed Incorporated, and Beverley Enterprises. Age 65. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102. ROGER A. ENRICO -- Director since 1994 (current term expires April, 2002). Member, Committees on Nominations & Corporate Governance; Member, Compensation Committee. Chairman and Chief Executive Officer, PepsiCo, Inc. since 1996. Originally with PepsiCo, Inc. since 1971. Mr. Enrico is also a director of A.M. Belo Corporation and Dayton Hudson Corporation. Age 53. Address: 700 Anderson Hill Road, Purchase, NY 10577. ALLAN D. GILMOUR -- Director since 1995 (current term expires April, 1999). Member, Finance Committee; Member, Committee on Dividends. Retired since 1995. Vice Chairman, Ford Motor Company, from 1993 to 1995. Mr. Gilmour originally joined Ford in 1960. Mr. Gilmour is also a director of A.P. Automotive Systems, Inc., Whirlpool Corporation, USWest, Inc., The Dow Chemical Company and DTE Energy Company. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102. WILLIAM H. GRAY, III -- Director since 1991 (current term expires April, 2000). Member, Executive Committee; Member, Finance Committee; Chairman, Committees on Nominations & Corporate Governance. President and Chief Executive Officer, The College Fund/UNCF since 1991. Mr. Gray served in Congress from 1979 to 1991. Mr. Gray is also a director of Chase Manhattan Corporation, Municipal Bond Investors Assurance Corporation, Rockwell International Corporation, Union Pacific Corporation, Warner-Lambert Company, Westinghouse Electric Corporation, and Electronic Data Systems. Age 56. Address: 8260 Willow Oaks Corp. Drive, Fairfax, VA 22031-4511. JON F. HANSON -- Director since 1991 (current term expires April, 2003). Member, Finance Committee; Member, Committee on Dividends. Chairman, Hampshire Management Company since 1976. Mr. Hanson is also a director of United Water Resources, Orange & Rockland Utilities, Inc., Consolidated Delivery and Logistics, and Fleet Trust and Investments Services Company, N.A. Age 61. Address: 235 Moore Street, Suite 200, Hackensack, NJ 07601. GLEN H. HINER, JR. -- Director since 1997. (current term expires April, 2001). Member, Compensation Committee. Chairman and Chief Executive Officer, Owens Corning since 1991. Senior Vice President and Group Executive, Plastics Group, General Electric Company from 1983 to 1991. Mr. Hiner is also a director of Dana Corporation. Age 64. Address: One Owens Corning Parkway, Toledo, OH 43659. 35 CONSTANCE J. HORNER -- Director since 1994 (current term expires April, 2002). Member, Auditing Committee; Member, Committees on Nominations & Corporate Governance. Guest Scholar, The Brookings Institution since 1993. Ms. Horner is also a director of Foster Wheeler Corporation, Ingersoll-Rand Company, and Pfizer, Inc. Age 55. Address: 1775 Massachusetts Ave., N.W. Washington, D.C. 20036-2188. GAYNOR N. KELLEY -- Director since 1997 (current term expires April, 2001). Member, Auditing Committee. Retired since 1996. Former Chairman and Chief Executive Officer, The Perkins Elmer Corporation from 1990 to 1996. Mr. Kelley is also a director of Hercules Incorporated, and Alliant Techsystems. Age 66. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102-3777. BURTON G. MALKIEL -- Director since 1978 (current term expires April, 2002). Chairman, Finance Committee; Member, Executive Committee; Member, Committee on Dividends. Professor of Economics, Princeton University, since 1988. Dr. Malkiel is also a director of Banco Bilbao Vizcaya, Baker Fentress & Company, The Jeffrey Company, The Southern New England Telecommunications Company, and Vanguard Group, Inc. Age 65. Address: Princeton University, 110 Fisher Hall, Prospect Avenue, Princeton, NJ 08544-1021. ARTHUR F. RYAN -- Chairman of the Board, President and Chief Executive Officer of Prudential since 1994. President and Chief Operating Officer, Chase Manhattan Corp. from 1990 to 1994, with Chase since 1972. Age 55. Address: 751 Broad Street, Newark, NJ 07102. IDA F.S. SCHMERTZ -- Director since 1997 (current term expires April, 2004). Member, Finance Committee. Principal, Investment Strategies International since 1994. Age 63. Address: 751 Broad Street, 23rd Floor, Newark, NJ 07102. CHARLES R. SITTER -- Director since 1995 (current term expires April, 1999). Member, Finance Committee; Member, Committee on Dividends. Retired since 1996. President, Exxon Corporation from 1993 to 1996. Mr. Sitter began his career with Exxon in 1957. Age 67. Address: 5959 Las Colinas Boulevard, Irving, TX 75039- 2298. DONALD L. STAHELI -- Director since 1995 (current term expires April, 1999). Member, Compensation Committee; Member, Auditing Committee. Retired since 1997. Chairman and Chief Executive Officer, Continental Grain Company from 1994 to 1997. President and Chief Executive Officer, Continental Grain Company from 1988 to 1994. Mr. Staheli is also director of Bankers Trust Company, Bankers Trust New York Corporation, and Fresenius AG-Conti Financial Corporation. Age 66. Address: 39 Locust Street, Suite 204, New Canaan, CT 06840. RICHARD M. THOMSON -- Director since 1976 (current term expires April, 2000). Chairman, Executive Committee; Chairman, Compensation Committee; Member, Committee on Nominations & Corporate Governance. Chairman of the Board, The Toronto-Dominion Bank since 1997. Chairman and Chief Executive Officer from 1978 to 1997. Mr. Thomson is also a director of CGC, Inc., INCO, Limited, S.C. Johnson & Son, Inc., The Thomson Corporation, and Canadian Occidental Petroleum, Ltd. Age 64. Address: P.O. Box 1, Toronto-Dominion Centre, Toronto, Ontario, M5K 1A2, Canada. JAMES A. UNRUH -- Director since 1996 (current term expires April, 2000). Member, Compensation Committee. Retired since 1997. Chairman and Chief Executive Officer, Unisys Corporation, from 1990 to 1997. Mr. Unruh is also a director of Ameritech Corporation. Age 55. Address: Two Bala Plaza, Suite 300, Bala Cynwyd, PA 19004. P. ROY VAGELOS, M.D. -- Director since 1989 (current term expires April, 2001). Chairman, Auditing Committee; Member, Executive Committee; Member, Committees on Nominations & Corporate Governance. Chairman, Regeneron Pharmaceuticals since 1995. Chairman and Chief Executive Officer, Merck & Co., Inc. from 1986 to 1994. Dr. Vagelos is also a director of The Estee Lauder Companies, Inc., PepsiCo., Inc., and Regeneron Pharmaceuticals, Inc. Age 68. Address: One Crossroads Drive, Building A, 3rd Floor, Bedminster, NJ 07921. STANLEY C. VAN NESS -- Director since 1990 (current term expires April, 2002). Chairman, Committee on Business Ethics; Member, Executive Committee; Member, Auditing Committee. Counselor at Law, Picco Herbert Kennedy (law firm) from 1990. Mr. Van Ness is also a director of Jersey Central Power & Light Company. Age 63. Address: 22 Chambers Street, Princeton, NJ 08542. PAUL A. VOLCKER -- Director since 1988 (current term expires April, 2000). Chairman, Committee on Dividends; Member, Executive Committee; Member, Committee on Nominations & Corporate Governance. Consultant since 1996. Chairman, James D. Wolfensohn, Inc. from 1988 to 1996. Chief Executive Officer, James D. Wolfensohn, Inc. from 1995 to 1996. Mr. Volcker is also a public member of the Board of Governors of the American Stock Exchange, 36 a member of the Board of Overseers of TIAA-CREF, and a director of Nestle, S.A., UAL Corporation, and Bankers Trust New York Corporation. Age 70, Address: 610 Fifth Avenue, Suite 420, New York, NY 10020. JOSEPH H. WILLIAMS -- Director since 1994 (current term expires April, 2002). Member, Committee on Dividends; Member, Auditing Committee. Director, The Williams Companies since 1971. Chairman & Chief Executive Officer, The Williams Companies from 1979 to 1993. Mr. Williams is also a director of Flint Industries, The Orvis Company, and MTC Investors, LLC. Age 64. Address: One Williams Center, Tulsa, OK 74172. PRINCIPAL OFFICERS OF PRUDENTIAL ARTHUR F. RYAN -- Chairman, President and Chief Executive Officer since 1994; prior to 1994, President and Chief Operating Officer, Chase Manhattan Corporation, New York, NY. Age 55. E. MICHAEL CAULFIELD -- Chief Executive Officer, Prudential Investments since 1996; Chief Executive Officer, Money Management Group from 1995 to 1996; prior to 1995, President, Prudential Preferred Financial Services. Age 51. MICHELE S. DARLING -- Executive Vice President Human Resources since 1997; prior to 1997, Executive Vice President, Canadian Imperial Bank of Commerce, Toronto, Canada. Age 44. ROBERT C. GOLDEN -- Executive Vice President Corporate Operations and Systems since 1997; prior to 1997, Executive Vice President, Prudential Securities, New York, NY. Age 51. MARK B. GRIER -- Executive Vice President, Financial Management since 1997; Chief Financial Officer from 1995 to 1997; prior to 1995, Executive Vice President, Chase Manhattan Corporation, New York, NY. Age 44. RODGER A. LAWSON -- Executive Vice President, Marketing and Planning since 1996; President and CEO, Van Eck Global, New York, NY, from 1994 to 1996; prior to 1994, President and CEO, Global Private Banking, Bankers Trust Company, New York, NY. Age 50. JOHN V. SCICUTELLA -- Chief Executive Officer, Individual Insurance Group since 1997; Executive Vice President Operations and Systems from 1995 to 1997; prior to 1995, Executive Vice President, Chase Manhattan Corporation. Age 48. JOHN R. STRANGFELD -- Chief Executive Officer, Private Asset Management Group (PAMG) since 1998; President, PAMG, from 1996 to 1998; prior to 1996, Senior Managing Director. Age 44. JAMES J. AVERY, JR. -- Senior Vice President & Chief Actuary since 1997; President Prudential Select from 1995 to 1997; prior to 1995, Chief Financial Officer, Prudential Select. Age 46. MARTIN A. BERKOWITZ -- Senior Vice President and Comptroller since 1995; prior to 1995, Senior Vice President and CFO, Prudential Investment Corporation. Age 48. WILLIAM M. BETHKE -- Chief Investment Officer since 1997; prior to 1997, Senior Vice President. Age 50. RICHARD J. CARBONE -- Senior Vice President and Chief Financial Officer since 1997. Controller, Salomon Brothers, New York, NY, from 1995 to 1997; prior to 1995, Controller, Bankers Trust, New York, NY. Age 50. LEO J. CORBETT -- Senior Vice President, Individual Insurance Marketing since 1997; prior to 1997, Managing Director, Lehman Brothers, New York, NY. Age 49. THOMAS W. CRAWFORD -- President and Chief Executive Officer, Prudential Property and Casualty Company since 1996; prior to 1996, President and Chief Executive Officer, Southern Heritage Insurance Company, Tucker, GA. Age 55. MARK R. FETTING -- President, Prudential Retirement Services since 1996; prior to 1996, President, Prudential Defined Contribution Services. Age 43. WILLIAM D. FRIEL -- Senior Vice President and Chief Information Officer since 1993. Age 59. 37 JONATHAN M. GREENE -- President, Investment Management, Prudential Investments since 1996; prior to 1996, Vice President, T. Rowe Price, Baltimore, MD. Age 54. JEAN D. HAMILTON -- President, Diversified Group since 1995; prior to 1995, President, Prudential Capital Group. Age 51. RONALD P. JOELSON -- Senior Vice President, Guaranteed Products since 1997; President, Prudential Investments Guaranteed Products from 1996 to 1998; prior to 1996, Managing Director, Enterprise Planning Unit. Age 40. IRA J. KLEINMAN -- Executive Vice President, International Insurance Group, since 1997; prior to 1997, Senior Vice President. Age 51. NEIL A. MCGUINNESS -- Senior Vice President, Marketing, Prudential Investments, since 1996; prior to 1996, Managing Director, Putnam Investments, Boston, MA. Age 51. PRISCILLA A. MYERS -- Senior Vice President, Audit, Compliance and Investigation since 1995. Vice President and Auditor from 1989 to 1995. Age 48. RICHARD O. PAINTER -- President, Prudential Insurance & Financial Services since 1995; prior to 1995, Senior Vice President, New York Life, New York, NY. Age 50. I. EDWARD PRICE -- Senior Vice President and Actuary since 1995; prior to 1995, Chief Executive Officer, Prudential International Insurance. Age 55. KIYOFUMI SAKAGUCHI -- President, International Insurance Group since 1995; prior to 1995, Chairman and CEO, The Prudential Life Insurance Co., Ltd., Japan. Age 55. BRIAN M. STORMS -- President, Mutual Funds and Annuities, Prudential Investments since 1996; prior to 1996, Managing Director, Fidelity Investments, Boston. Age 43. ROBERT J. SULLIVAN -- Senior Vice President, Sales, Prudential Investments since 1997; prior to 1997, Managing Director, Fidelity Investments, Boston. Age 59. SUSAN J. BLOUNT -- Vice President and Secretary since 1995; prior to 1995, Assistant General Counsel. Age 40. C. EDWARD CHAPLIN -- Vice President and Treasurer since 1995; prior to 1995, Managing Director and Assistant Treasurer. Age 41. Prudential officers are elected annually. 38
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF NET ASSETS (unaudited) September 30, 1998 SUBACCOUNTS ------------------------------------------------------------------------------ MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ------------ ------------ -------------- -------------- -------------- ASSETS Investment in shares of The Prudential Series Fund, Inc. Portfolios at net asset value [Note 3] .... $112,823,063 $143,315,665 $1,334,111,408 $1,339,309,586 $1,059,852,464 Receivable from The Prudential Insurance Company of America [Note 2] ............... 0 33,566 0 0 0 ------------ ------------ -------------- -------------- -------------- Net Assets .............................. $112,823,063 $143,349,231 $1,334,111,408 $1,339,309,586 $1,059,852,464 ============ ============ ============== ============== ============== NET ASSETS, representing Equity of Contract Owners ................... $110,427,555 $143,349,231 $1,334,096,825 $1,338,321,016 $1,059,568,014 Equity of The Prudential Insurance Company of America ........................ 2,395,508 0 14,583 988,570 284,450 ------------ ------------ -------------- -------------- -------------- $112,823,063 $143,349,231 $1,334,111,408 $1,339,309,586 $1,059,852,464 ============ ============ ============== ============== ============== STATEMENTS OF OPERATIONS (UNAUDITED) For the nine months ended September 30, 1998 SUBACCOUNTS -------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ---------- ---------- ------------ ------------ ----------- INVESTMENT INCOME Dividend distributions received ............... $3,830,788 $4,247,636 $ 14,556,874 $ 22,380,896 $23,036,009 EXPENSES Charges to Contract owners for assuming mortality risk and expense risk [Note 5A] .................................... 501,813 712,166 7,949,905 7,516,943 5,880,951 ---------- ---------- ------------ ------------ ----------- NET EXPENSES ..................................... 501,813 712,166 7,949,905 7,516,943 5,880,951 ---------- ---------- ------------ ------------ ----------- NET INVESTMENT INCOME (LOSS) ..................... 3,328,975 3,535,470 6,606,969 14,863,953 17,155,058 ---------- ---------- ------------ ------------ ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received .......... 0 437,366 7,149,937 21,354,423 8,706,762 Realized gain (loss) on shares redeemed [average cost basis] ........................ 0 90,830 10,092,937 1,628,332 1,060,458 Net change in unrealized gain (loss) on investments ................................... 0 4,373,074 (91,590,037) (40,921,939) 14,690,923 ---------- ---------- ------------ ------------ ----------- NET GAIN (LOSS) ON INVESTMENTS ................... 0 4,901,270 (74,347,163) (17,939,184) 24,458,143 ---------- ---------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..................... $3,328,975 $8,436,740 $(67,740,194) $ (3,075,231) $41,613,201 ========== ========== ============ ============ =========== SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14 A1
SUBACCOUNTS (CONTINUED) ------------------------------------------------------------------------ HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ------------ ------------ ------------ ------------ ------------ ASSETS Investment in shares of The Prudential Series Fund, Inc. .................................... Portfolios at net asset value [Note 3] ....... $ 91,821,846 $688,673,938 $419,113,428 $115,473,032 $142,264,216 Receivable from The Prudential Insurance Company of America [Note 2] .................. 0 0 0 0 74,360 ------------ ------------ ------------ ------------ ------------ Net Assets ................................. $ 91,821,846 $688,673,938 $419,113,428 $115,473,032 $142,338,576 ============ ============ ============ ============ ============ NET ASSETS, representing Equity of Contract Owners....................... $ 91,733,729 $687,568,657 $419,036,356 $115,324,763 $142,338,576 Equity of The Prudential Insurance 88,117 1,105,281 77,072 148,269 0 Company of America ........................... ------------ ------------ ------------ ------------ ------------ $ 91,821,846 $688,673,938 $419,113,428 $115,473,032 $142,338,576 ============ ============ ============ ============ ============ SUBACCOUNTS (CONTINUED) --------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ----------- ----------- ------------ ---------- ----------- INVESTMENT INCOME Dividend distributions received ............... $ 4,779,143 $ 4,444,449 $ 6,860,608 $ 774,127 170,945 EXPENSES Charges to Contract owners for assuming mortality risk and expense risk [Note 5A] .................................... 526,815 3,761,689 2,460,778 622,002 638,664 ----------- ----------- ------------ ---------- ----------- NET EXPENSES ..................................... 526,815 3,761,689 2,460,778 622,002 638,664 ----------- ----------- ------------ ---------- ----------- NET INVESTMENT INCOME (LOSS) ..................... 4,252,328 682,760 4,399,830 152,125 (467,719) ----------- ----------- ------------ ---------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received .......... 0 1,726,723 7,590,287 115,371 602,201 Realized gain (loss) on shares redeemed [average cost basis] ........................ 315,090 1,216,602 (1,151,999) 1,090,717 365,393 Net change in unrealized gain (loss) on investments ................................... (9,825,323) 26,473,514 (61,953,549) 50,668 775,675 ----------- ----------- ------------ ---------- ----------- NET GAIN (LOSS) ON INVESTMENTS ................... (9,510,233) 29,416,839 (55,515,261) 1,256,756 1,743,269 ----------- ----------- ------------ ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..................... $(5,257,905) $30,099,599 $(51,115,431) $1,408,881 $ 1,275,550 =========== =========== ============ ========== =========== SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14 A2
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996 SUBACCOUNTS --------------------------------------------------------------------------------------- MONEY DIVERSIFIED MARKET BOND ----------------------------------------- ------------------------------------------- 1/1/98 1/1/98 TO 1/1/97 1/1/96 TO 1/1/97 1/1/96 9/30/98 TO TO 9/30/98 TO TO (UNAUDITED) 12/31/97 12/31/96 (UNAUDITED) 12/31/97 12/31/96 ------------ ------------ ----------- ------------ ------------ ------------ OPERATIONS: Net investment income (loss) .......... $ 3,328,975 $ 4,433,677 $ 4,058,398 $ 3,535,470 $ 8,177,017 $ 6,388,307 Capital gains distributions received .. 0 0 0 437,366 1,452,476 0 Realized gain on shares redeemed [average cost basis] ................ 0 0 0 90,830 107,543 19,658 Net change in unrealized gain (loss) on investments ......................... 0 0 0 4,373,074 (702,474) (2,104,541) ------------ ------------ ----------- ------------ ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............. 3,328,975 4,433,677 4,058,398 8,436,740 9,034,562 4,303,424 ------------ ------------ ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] .......... 13,850,547 (6,936,043) 768,830 5,780,752 3,856,643 10,268,006 ------------ ------------ ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] .................... 539,265 (147,721) 1,422,930 10,332 (196,475) (142,209) ------------ ------------ ----------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ................................ 17,718,787 (2,650,087) 6,250,158 14,227,824 12,694,730 14,429,221 ------------ ------------ ----------- ------------ ------------ ------------ NET ASSETS: Beginning of year ..................... 95,104,276 97,754,363 91,504,205 129,121,407 116,426,677 101,997,456 ------------ ------------ ----------- ------------ ------------ ------------ End of period ......................... $112,823,063 $ 95,104,276 $97,754,363 $143,349,231 $129,121,407 $116,426,677 ============ ============ =========== ============ ============ ============ SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14 A3
SUBACCOUNTS (CONTINUED) ------------------------------------------------ EQUITY ------------------------------------------------ 1/1/98 TO 1/1/97 1/1/96 9/30/98 TO TO (UNAUDITED) 12/31/97 12/31/96 -------------- -------------- -------------- OPERATIONS: Net investment income (loss) ...... $ 6,606,969 $ 19,974,703 $ 16,848,341 Capital gains distributions received ......................... 7,149,937 73,183,544 92,436,486 Realized gain on shares redeemed [average cost basis] ............ 10,092,937 7,311,176 755,380 Net change in unrealized gain (loss) on investments ........... (91,590,037) 158,043,072 41,805,447 -------------- -------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......... (67,740,194) 258,512,495 151,845,654 -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] ...... 28,213,529 55,194,557 116,044,081 -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] ................ (70,596) (1,730,961) (2,717,850) -------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ............................ (39,597,261) 311,976,091 265,171,885 -------------- -------------- -------------- NET ASSETS: Beginning of year ................. 1,373,708,669 1,061,732,578 796,560,693 -------------- -------------- -------------- End of period ..................... $1,334,111,408 $1,373,708,669 $1,061,732,578 ============== ============== ============== SUBACCOUNTS (CONTINUED) ------------------------------------------------- FLEXIBLE MANAGED ------------------------------------------------- 1/1/98 TO 1/1/97 1/1/96 9/30/98 TO TO (UNAUDITED) 12/31/97 12/31/96 -------------- -------------- -------------- OPERATIONS: Net investment income (loss) ...... $ 14,863,953 $ 29,285,286 $ 25,347,934 Capital gains distributions received ......................... 21,354,423 201,042,079 106,224,518 Realized gain on shares redeemed [average cost basis] ............ 1,628,332 3,097,268 487,657 Net change in unrealized gain (loss) on investments ........... (40,921,939) (37,001,732) (5,082,172) -------------- -------------- -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......... (3,075,231) 196,422,901 126,977,937 -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] ...... (7,639,749) 15,507,613 57,031,152 -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] ................ 839,090 (332,076) (1,594,508) -------------- -------------- -------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ............................ (9,875,890) 211,598,438 182,414,581 -------------- -------------- -------------- NET ASSETS: Beginning of year ................. 1,349,185,476 1,137,587,038 955,172,457 -------------- -------------- -------------- End of period ..................... $1,339,309,586 $1,349,185,476 $1,137,587,038 ============== ============== ============== SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14 A4
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996 SUBACCOUNTS (CONTINUED) --------------------------------------------------------------------------------------------- HIGH CONSERVATIVE YIELD BALANCED BOND ------------------------------------------------- ----------------------------------------- 1/1/98 1/1/98 TO 1/1/97 1/1/96 TO 1/1/97 1/1/96 9/30/98 TO TO 9/30/98 TO TO (UNAUDITED) 12/31/97 12/31/96 (UNAUDITED) 12/31/97 12/31/96 --------------- --------------- ------------- ------------ ------------ ----------- OPERATIONS: Net investment income (loss) ..... $ 17,155,058 $ 38,402,245 $ 29,326,106 $ 4,252,328 $ 7,594,709 $ 6,844,609 Capital gains distributions received ........................ 8,706,762 110,154,176 55,843,548 0 0 0 Realized gain on shares redeemed [average cost basis] ........... 1,060,458 2,680,112 627,498 315,090 311,580 20,787 Net change in unrealized gain (loss) on investments .......... 14,690,923 (36,006,094) 10,273,250 (9,825,323) 2,620,272 581,780 --------------- --------------- ------------- ------------ ------------ ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........ 41,613,201 115,230,439 96,070,402 (5,257,905) 10,526,561 7,447,176 --------------- --------------- ------------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] ..... (10,325,714) (5,484,215) 36,970,919 5,367,787 374,682 5,326,899 --------------- --------------- ------------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] ............... 216,514 98,440 (1,143,063) 44,029 (110,168) 52,425 --------------- --------------- ------------- ------------ ------------ ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS ........................... 31,504,001 109,844,664 131,898,258 153,911 10,791,075 12,826,500 --------------- --------------- ------------- ------------ ------------ ----------- NET ASSETS: Beginning of year ................ 1,028,348,463 918,503,799 786,605,541 91,667,936 80,876,861 68,050,361 --------------- --------------- ------------- ------------ ------------ ----------- End of period .................... $ 1,059,852,464 $ 1,028,348,463 $ 918,503,799 $ 91,821,846 $ 91,667,936 $80,876,861 =============== =============== ============= ============ ============ =========== SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14 A5
SUBACCOUNTS (CONTINUED) ------------------------------------------------------------------------------------- STOCK EQUITY INDEX INCOME ----------------------------------------- ------------------------------------------ 1/1/98 1/1/98 TO 1/1/97 1/1/96 TO 1/1/97 1/1/96 9/30/98 TO TO 9/30/98 TO TO (UNAUDITED) 12/31/97 12/31/96 (UNAUDITED) 12/31/97 12/31/96 ------------ ------------ ------------ ------------ ------------ ------------ OPERATIONS: Net investment income (loss) ..... $ 682,760 $ 4,312,113 $ 4,179,793 $ 4,399,830 $ 7,076,399 $ 7,350,510 Capital gains distributions received ......................... 1,726,723 17,197,911 4,749,836 7,590,287 39,390,070 9,133,917 Realized gain on shares redeemed [average cost basis] ............ 1,216,602 6,786,808 263,052 (1,151,999) 3,982,449 171,030 Net change in unrealized gain (loss) on investments ........... 26,473,514 113,415,557 61,075,735 (61,953,549) 59,248,683 32,816,172 ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......... 30,099,599 141,712,389 70,268,416 (51,115,431) 109,697,601 49,471,629 ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] ...... 35,182,165 58,525,779 55,125,681 28,940,298 36,671,034 23,125,635 ------------ ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] ................ 1,220,018 (910,143) 82,144 259,312 (393,762) (711,051) ------------ ------------ ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ............................ 66,501,782 199,328,025 125,476,241 (21,915,821) 145,974,873 71,886,213 ------------ ------------ ------------ ------------ ------------ ------------ NET ASSETS: Beginning of year ................. 622,172,156 422,844,131 297,367,890 441,029,249 295,054,376 223,168,163 ------------ ------------ ------------ ------------ ------------ ------------ End of period ..................... $688,673,938 $622,172,156 $422,844,131 $419,113,428 $441,029,249 $295,054,376 ============ ============ ============ ============ ============ ============ SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14 A6
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996 SUBACCOUNTS (CONTINUED) ---------------------------------------------------------------------------------- PRUDENTIAL GLOBAL JENNISON ---------------------------------------- --------------------------------------- 1/1/98 1/1/98 TO 1/1/97 1/1/96 TO 1/1/97 1/1/96 9/30/98 TO TO 9/30/98 TO TO (UNAUDITED) 12/31/97 12/31/96 (UNAUDITED) 12/31/97 12/31/96 ------------ ------------ ----------- ------------ ----------- ----------- OPERATIONS: Net investment income (loss) .......... $ 152,125 $ 595,128 $ 1,332,143 $ (467,719) $ (281,961) $ (85,477) Capital gains distributions received .. 115,371 5,120,114 1,298,584 602,201 5,052,341 0 Realized gain on shares redeemed [average cost basis] ................ 1,090,717 309,311 16,670 365,393 525,215 0 Net change in unrealized gain (loss) on investments ...................... 50,668 (917,843) 9,125,406 775,675 10,743,964 3,012,624 ------------ ------------ ----------- ------------ ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............. 1,408,881 5,106,710 11,772,803 1,275,550 16,039,559 2,927,147 ------------ ------------ ----------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] .......... 5,529,130 17,556,139 24,827,377 49,640,133 34,918,336 30,275,275 ------------ ------------ ----------- ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] .................... 24,873 (317,463) (137,878) (8,218) (773,643) 385,656 ------------ ------------ ----------- ------------ ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS ................................ 6,962,884 22,345,386 36,462,302 50,907,465 50,184,252 33,588,078 ------------ ------------ ----------- ------------ ----------- ----------- NET ASSETS: Beginning of year ..................... 108,510,148 86,164,762 49,702,460 91,431,111 41,246,859 7,658,781 ------------ ------------ ----------- ------------ ----------- ----------- End of period ......................... $115,473,032 $108,510,148 $86,164,762 $142,338,576 $91,431,111 $41,246,859 ============ ============ =========== ============ =========== =========== SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A8 THROUGH A14 A7
NOTES TO FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT September 30, 1998 (Unaudited) NOTE 1: GENERAL The Prudential Variable Appreciable Account (the "Account") of The Prudential Insurance Company of America ("Prudential") was established on August 11, 1987 by a resolution of Prudential's Board of Directors in conformity with insurance laws of the State of New Jersey. The assets of the Account are segregated from Prudential's other assets. Currently only proceeds from the purchases of Prudential Variable Appreciable Life (PVAL) and Prudential Survivorship Preferred (SVUL) Contracts invest in the Account. Beginning December 22, 1998 Prudential Variable Universal Life (PVUL) Contracts will be able to invest in the Account. The Account is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. There are ten subaccounts within the Account at September 30, 1998, which will be available to Contract holders of PVUL beginning December 22, 1998, which invest in a corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund") as shown in Note 3. The Series Fund is a diversified open=end management investment company, and is managed by Prudential. Also beginning December 22, 1998, the following five additional non=Prudential administered subaccounts will be available to PVUL Contract owners: AIM V.I. Value Fund; American Century VP Value Fund; Janus Growth Portfolio; MFS Emerging Growth Series; and the T. Rowe Price International Stock Portfolio. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements are prepared in conformity with generally accepted accounting principles ("GAAP"). The preparation of the financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Investments=The investments in shares of the Series Fund are stated at the net asset value of the respective portfolio. Security Transactions=Realized gains and losses on security transactions are reported on an average cost basis. Purchase and sale transactions are recorded as of the trade date of the security being purchased or sold. Distributions Received=Dividend and capital gain distributions received are reinvested in additional shares of the Series Fund and are recorded on the ex=dividend date. Equity of The Prudential Insurance Company of America=Prudential maintains a position in the Account for liquidity purposes including unit purchases and redemptions, fund share transactions, and expense processing. Prudential monitors the balance daily and transfers funds based upon anticipated activity. At times, Prudential may owe an amount to the Account, which is reflected in the Account's Statements of Net Assets as a receivable from Prudential. The receivable does not have an effect on the Contract owner's account or the related unit value. A8 NOTE 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS The net asset value per share for each portfolio of the Series Fund, the number of shares of each portfolio held by the subaccounts of the Account and the aggregate cost of investments in such shares at September 30, 1998 were as follows: (unaudited)
PORTFOLIOS ------------------------------------------------------------------------------------ MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ----------- ------------ -------------- -------------- -------------------- Number of Shares: 11,282,306 12,590,236 45,434,160 79,641,925 69,684,133 Net asset value per share: $ 10.00000 $ 11.38308 $ 29.36362 $ 16.81664 $ 15.20938 Cost: $112,823,063 $137,810,817 $1,075,593,561 $1,331,126,129 $1,030,493,496 PORTFOLIOS (CONTINUED) ----------------------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ----------- ------------ ------------ ------------ ------------------- Number of Shares: 12,415,807 21,727,705 21,406,951 6,334,516 7,604,353 Net asset value per share: $ 7.39556 $ 31.69566 $ 19.57838 $ 18.22918 $ 18.70826 Cost: $99,639,740 $402,737,570 $372,237,876 $104,423,901 $127,450,530
A9 NOTE 4: CONTRACT OWNER UNIT INFORMATION Outstanding Contract owner units, unit values and total value of Contract owner equity at September 30, 1998 were as follows: (unaudited)
SUBACCOUNTS ---------------------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED --------------- --------------- ---------------- ---------------- ----------------- Contract Owner Units Outstanding (PVAL)... 44,389,617.593 38,720,964.137 196,955,094.263 267,752,477.219 216,063,360.880 Unit Value (PVAL)......................... $ 1.64572 $ 2.31561 $ 4.09340 $ 3.07369 $ 2.65563 --------------- --------------- --------------- ---------------- ---------------- Contract Owner Equity (PVAL).............. $ 73,052,882 $ 89,662,652 $ 806,215,983 $ 822,988,112 $ 573,784,343 --------------- --------------- --------------- ---------------- ---------------- Contract Owner Units Outstanding (PVAL $100,000+ face)................... 18,851,606.039 23,065,575.062 130,826,994.530 171,492,835.375 187,254,284.126 Unit Value (PVAL $100,000+ face).......... $ 1.59974 $ 2.25021 $ 3.97870 $ 2.98730 $ 2.58088 --------------- --------------- --------------- ---------------- ---------------- Contract Owner Equity (PVAL $100,000+ face)..................................... $ 30,157,668 $ 51,902,388 $ 520,521,363 $ 512,300,547 $ 483,280,837 --------------- --------------- --------------- ---------------- ---------------- Contract Owner Units Outstanding (SVUL)... 6,422,937.390 1,500,228.389 5,223,155.734 2,275,024.254 1,900,708.958 Unit Value (SVUL)......................... $ 1.12363 $ 1.18928 $ 1.40901 $ 1.33289 $ 1.31679 --------------- --------------- --------------- ---------------- ---------------- Contract Owner Equity (SVUL).............. $ 7,217,005 $ 1,784,191 $ 7,359,479 $ 3,032,357 $ 2,502,834 --------------- --------------- --------------- ---------------- ---------------- TOTAL CONTRACT OWNER EQUITY............... $ 110,427,555 $ 143,349,231 $ 1,334,096,825 $ 1,338,321,016 $ 1,059,568,014 =============== =============== =============== ================ ================ SUBACCOUNTS (CONTINUED) ----------------------------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON --------------- --------------- --------------- --------------- --------------- Contract Owner Units Outstanding (PVAL)... 24,415,518.400 92,051,944.858 75,342,858.602 59,189,708.065 51,676,253.574 Unit Value (PVAL)......................... $ 2.25531 $ $4.64736 $ $3.73993 $ 1.43980 $ 1.96736 --------------- --------------- --------------- --------------- --------------- Contract Owner Equity (PVAL).............. $ 55,064,563 $ 427,798,526 $ 281,777,017 $ 85,221,342 $ 101,665,794 --------------- --------------- --------------- --------------- --------------- Contract Owner Units Outstanding (PVAL $100,000+ face)................... 15,844,374.348 55,945,351.132 36,580,944.068 18,140,891.317 18,494,834.837 Unit Value (PVAL $100,000+ face).......... $ 2.19259 $ 4.51610 $ 3.63395 $ 1.42120 $ 1.94755 --------------- --------------- --------------- --------------- --------------- Contract Owner Equity (PVAL $100,000+ face)..................................... $ 34,740,216 $ 252,654,800 $ 132,933,322 $ 25,781,835 $ 36,019,616 --------------- --------------- --------------- --------------- --------------- Contract Owner Units Outstanding (SVUL)... 1,656,021.074 4,126,049.113 2,898,212.403 3,387,247.975 2,742,270.307 Unit Value (SVUL)......................... $ 1.16481 $ 1.72449 $ 1.49265 $ 1.27584 $ 1.69683 --------------- --------------- --------------- --------------- --------------- Contract Owner Equity (SVUL).............. $ 1,928,950 $ 7,115,331 $ 4,326,017 $ 4,321,586 $ 4,653,166 --------------- --------------- --------------- --------------- --------------- TOTAL CONTRACT OWNER EQUITY............... $ 91,733,729 $ 687,568,657 $ 419,036,356 $ 115,324,763 $ 142,338,576 =============== =============== =============== =============== ===============
A10 NOTE 5: CHARGES AND EXPENSES (UNAUDITED) A. Mortality Risk and Expense Risk Charges The mortality risk and expense risk charges at an effective annual rate of 0.90% is applied daily against the net assets representing equity of PVAL Contract owners held in each subaccount. For Contract owners investing in PVAL with face amounts of $100,000 or more the annual rate is 0.60%. For Contract owners investing in SVUL the annual rate is 0.90%. For Contract owners investing in PVUL the annual rate is 0.90%. Mortality risk is that Contract owners may not live as long as estimated and expense risk is that the cost of issuing and administering the policies may exceed the estimated expenses. For the nine months ended September 30, 1998, the amount of these charges paid to Prudential was $15,479,138 for PVAL Contracts, $16,565,259 for PVAL Contracts with face amounts of $100,000 or more and $246,670 for SVUL Contracts. B. Deferred Sales Charge Subsequent to Contract owner redemption, a deferred sales charge is imposed upon surrenders of certain variable life insurance Contracts to compensate Prudential for sales and other marketing expenses. The amount of any sales charge will depend on the number of years that have elapsed since the Contract was issued. No sales charge will be imposed after the tenth year of the Contract. No sales charge will be imposed on death benefits. For the nine months ended September 30, 1998, the amount of these charges paid to Prudential was $5,870,317. C. Partial Withdrawal Charge A charge is imposed by Prudential on partial withdrawals of the cash surrender value. For the nine months ended September 30, 1998, the amount of these charges paid to Prudential was $3,399,834. D. Expense Reimbursement PVAL Contracts are reimbursed by Prudential, on a non=guaranteed basis, for expenses incurred by the Series Fund in excess of the effective rate 0.45% for the Stock Index Portfolio, 0.50% for the Equity Income Portfolio, and 0.65% for the High Yield Bond Portfolio of the average daily net assets of these portfolios. For the nine months ended September 30, 1998, the amount of these reimbursements totaled $0. E. Cost of Insurance Charges Contract owner contributions are applied to the Account net of the following charges: transaction costs, premium taxes, sales loads, monthly administrative charges, and death benefit risk charges prior to the investment in the Account. For the nine months ended September 30, 1998, Prudential received a total of $13,821,668, $28,333,098, $66,262,935, $45,270,318 and $10,270,916, respectively, for these charges. NOTE 6: TAXES Prudential is taxed as a "life insurance company" as defined by the Internal Revenue Code and the operations of the Account form a part of Prudential's consolidated federal tax return. Under current federal law, no federal income taxes are payable by the Account. As such, no provision for tax liability has been recorded in these financial statements. A11 NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS Premium Payments and other operating transfers in the Series Fund, Inc., for the nine months ended September 30, 1998, were as follows: (unaudited)
SUBACCOUNTS ------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE MARKET BOND EQUITY MANAGED ----------- ----------- ------------ ------------ Contract Owner Net Payments .......................... $26,779,453 $18,524,202 $216,914,142 $158,061,098 Policy Loans ......................................... (1,853,929) (2,385,425) (33,972,866) (26,847,240) Policy Loan Repayments and Interest .................. 1,460,733 1,074,174 14,763,053 12,075,399 Surrenders, Withdrawals, and Death ................... (6,803,883) (5,335,634) (65,596,394) (55,812,409) Benefits ............................................. Net Transfers From (To) Other Subaccounts or Fixed Rate Options ................. 686,259 1,936,617 (3,995,028) (14,663,027) Administrative and Other Charges ..................... (6,418,086) (8,033,182) (99,899,378) (80,453,570) ----------- ----------- ------------ ------------ TOTAL NET PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS ............................... $13,850,547 $ 5,780,752 $ 28,213,529 $ (7,639,749) =========== =========== ============ ============ SUBACCOUNTS (CONTINUED) -------------------------------------------------------------------- High Conservative Yield Stock Equity Balanced Bond Index Income ------------ ----------- ------------ ------------ Contract Owner Net Payments .......................... $132,557,259 $15,546,491 $105,921,054 $ 72,627,131 Policy Loans ......................................... (18,202,610) (1,982,032) (15,993,799) (9,722,059) Policy Loan Repayments and Interest .................. 9,990,075 1,059,905 6,121,153 4,052,465 Surrenders, Withdrawals, and Death ................... (50,883,225) (4,720,723) (27,679,212) (18,773,237) Benefits Net Transfers From (To) Other Subaccounts or Fixed Rate Options ................. (14,858,009) 1,948,318 13,051,392 11,536,553 Administrative and Other Charges ..................... (68,929,204) (6,484,172) (46,238,423) (30,780,555) ------------ ----------- ------------ ------------ TOTAL NET PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS ............................... $(10,325,714) $ 5,367,787 $ 35,182,165 $ 28,940,298 ============ =========== ============ ============ SUBACCOUNTS (CONTINUED) ------------------------------ PRUDENTIAL GLOBAL JENNISON ----------- ----------- Contract Owner Net Payments .......................... $27,306,306 $41,505,613 Policy Loans ......................................... (2,412,303) (2,788,537) Policy Loan Repayments and Interest .................. 1,270,632 1,034,856 Surrenders, Withdrawals, and Death ................... (5,536,888) (4,546,795) Benefits Net Transfers From (To) Other Subaccounts or Fixed Rate Options ................. (5,476,527) 28,121,590 Administrative and Other Charges ..................... (9,622,090) (13,686,594) ----------- ----------- TOTAL NET PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS ............................... $ 5,529,130 $49,640,133 =========== =========== A12
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS The increase (decrease) in net assets resulting from equity transfers represents the net contributions (withdrawals) of Prudential to (from) the Account. NOTE 9: UNIT ACTIVITY Transactions in units (including transfers among subaccounts) for the nine months ending September 30, 1998 were as follows: (unaudited)
SUBACCOUNTS ------------------------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED --------------- --------------- --------------- --------------- --------------- Contract Owner Contributions: 49,086,294.383 15,463,129.281 62,026,672.217 58,696,316.703 59,919,536.750 Contract Owner Redemptions: (39,093,644.176) (12,337,102.606) (54,188,227.934) (60,535,056.294) (63,251,100.311) SUBACCOUNTS (CONTINUED) -------------------------------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON --------------- --------------- --------------- --------------- ---------------- Contract Owner Contributions: 13,830,858.771 33,699,811.026 26,576,792.100 24,109,995.810 38,553,143.617 Contract Owner Redemptions: (11,048,026.997) (25,418,323.046) (19,007,708.525) (20,525,719.406) (15,075,629.795)
A13 NOTE 10: PURCHASES AND SALES OF INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments in the Series Fund for the nine months ending September 30, 1998 were as follows: (unaudited)
PORTFOLIOS ----------------------------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ------------ ----------- ------------ ------------ ------------ Purchases .................. $ 41,407,000 $ 9,956,000 $ 59,249,000 $ 10,879,000 $ 6,487,000 Sales ...................... $(27,519,000) $(4,700,000) $(37,072,000) $(23,804,000) $(21,436,000) PORTFOLIOS (CONTINUED) ------------------------------------------------------------------------------------------------ HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ------------ ------------ ------------ ----------- ------------ Purchases ................. $ 15,320,000 $ 50,276,000 $ 37,146,000 $12,137,000 $51,194,000 Sales ..................... $(10,435,000) $(16,806,000) $(10,017,000) $(7,205,000) $(2,260,000)
NOTE 11: RELATED PARTY TRANSACTIONS The Prudential has purchased multiple VAL Contracts insuring the lives of certain employees. The Prudential is the owner and beneficiary of the Contracts. There were no net premium payments for the nine months ended September 30, 1998. Equity of Contract owners in the Flexible Managed subaccount at September 30, 1998 includes approximately $182.4 million owned by Prudential. A14
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF NET ASSETS December 31,1997 SUBACCOUNTS ---------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ------------ -------------- -------------- -------------- -------------- ASSETS Investment in shares of The Prudential Series Fund, Inc. Portfolios at net asset value [Note 3] .......................................... $ 95,104,276 $ 128,910,758 $1,371,724,697 $1,347,792,874 $1,027,307,312 Receivable from The Prudential Insurance Company of America [Note 2] ............................... 0 210,649 1,983,972 1,392,602 1,041,151 ------------ -------------- -------------- -------------- -------------- Net Assets ...................................... $ 95,104,276 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463 ============ ============== ============== ============== ============== NET ASSETS, representing: Equity of Contract owners .......................... $ 93,269,424 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463 Equity of The Prudential Insurance Company of America ........................................... 1,834,852 0 0 0 0 ------------ -------------- -------------- -------------- -------------- $ 95,104,276 $ 129,121,407 $1,373,708,669 $1,349,185,476 $1,028,348,463 ============ ============== ============== ============== ============== STATEMENTS OF OPERATIONS For the year ended December 31, 1997 SUBACCOUNTS --------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ---------- ----------- ------------ ------------- ------------- INVESTMENT INCOME Dividend distributions received ....................... $5,094,912 $ 9,043,537 $ 28,870,327 $ 38,256,221 $ 45,612,319 EXPENSES Charges to Contract owners for assuming mortality risk and expense risk [Note 5A] ............ 661,235 866,520 8,895,624 8,970,935 7,210,074 ---------- ----------- ------------ ------------- ------------- NET EXPENSES ............................................ 661,235 866,520 8,895,624 8,970,935 7,210,074 ---------- ----------- ------------ ------------- ------------- NET INVESTMENT INCOME (LOSS) ............................ 4,433,677 8,177,017 19,974,703 29,285,286 38,402,245 ---------- ----------- ------------ ------------- ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received .................. 0 1,452,476 73,183,544 201,042,079 110,154,176 Realized gain on shares redeemed [average cost basis] ................................. 0 107,543 7,311,176 3,097,268 2,680,112 Net change in unrealized gain (loss) on investments ... 0 (702,474) 158,043,072 (37,001,732) (36,006,094) ---------- ----------- ------------ ------------- ------------- NET GAIN (LOSS) ON INVESTMENTS .......................... 0 857,545 238,537,792 167,137,615 76,828,194 ---------- ----------- ------------ ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............................. $4,433,677 $ 9,034,562 $258,512,495 $ 196,422,901 $ 115,230,439 ========== =========== ============ ============= ============= SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27 A15
SUBACCOUNTS (CONTINUED) ------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ------------ ------------ ------------ ------------ ----------- ASSETS Investment in shares of The Prudential Series Fund, Inc. Portfolios at net asset value [Note 3] ................................................... $ 91,667,936 $621,342,649 $440,639,081 $108,510,148 $91,416,002 Receivable from The Prudential Insurance Company of America [Note 2] ........................................ 0 829,507 390,168 0 15,109 ------------ ------------ ------------ ------------ ----------- Net Assets ............................................... $ 91,667,936 $622,172,156 $441,029,249 $108,510,148 $91,431,111 ============ ============ ============ ============ =========== NET ASSETS, representing: Equity of Contract owners ................................... $ 91,609,007 $622,172,156 $441,029,249 $108,451,737 $91,431,111 Equity of The Prudential Insurance Company of America .................................................... 58,929 0 0 58,411 0 ------------ ------------ ------------ ------------ ----------- $ 91,667,936 $622,172,156 $441,029,249 $108,510,148 $91,431,111 ============ ============ ============ ============ =========== SUBACCOUNTS (CONTINUED) ----------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ----------- ------------ ------------ ---------- ----------- INVESTMENT INCOME Dividend distributions received .............................. $ 8,213,223 $ 8,102,242 $ 9,608,504 $1,281,804 $ 157,623 EXPENSES Charges to Contract owners for assuming mortality risk and expense risk [Note 5A] ................... 618,514 3,790,129 2,532,105 686,676 439,584 ----------- ------------ ------------ ----------- ----------- NET EXPENSES ................................................... 618,514 3,790,129 2,532,105 686,676 439,584 ----------- ------------ ------------ ----------- ----------- NET INVESTMENT INCOME (LOSS) ................................... 7,594,709 4,312,113 7,076,399 595,128 (281,961) ----------- ------------ ------------ ----------- ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Capital gains distributions received ......................... 0 17,197,911 39,390,070 5,120,114 5,052,341 Realized gain on shares redeemed [average cost basis] ........................................ 311,580 6,786,808 3,982,449 309,311 525,215 Net change in unrealized gain (loss) on investments .......... 2,620,272 113,415,557 59,248,683 (917,843) 10,743,964 ----------- ------------ ------------ ----------- ----------- NET GAIN (LOSS) ON INVESTMENTS ................................. 2,931,852 137,400,276 102,621,202 4,511,582 16,321,520 ----------- ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .................................... $10,526,561 $141,712,389 $109,697,601 $5,106,710 $16,039,559 =========== ============ ============ ========== =========== SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27 A16
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31,1997, 1996 and 1995 SUBACCOUNTS ----------------------------------------------------------------------------------- MONEY DIVERSIFIED MARKET BOND -------------------------------------- ------------------------------------------ 1997 1996 1995 1997 1996 1995 ----------- ----------- ----------- ------------ ------------ ------------ OPERATIONS Net investment income (loss) ............ $ 4,433,677 $ 4,058,398 $ 4,217,643 $ 8,177,017 $ 6,388,307 $ 5,652,448 Capital gains distributions received .... 0 0 0 1,452,476 0 222,002 Realized gain (loss) on shares redeemed [average cost basis] ................... 0 0 0 107,543 19,658 30,407 Net change in unrealized gain (loss) on investments ........................... 0 0 0 (702,474) (2,104,541) 10,042,691 ----------- ----------- ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............... 4,433,677 4,058,398 4,217,643 9,034,562 4,303,424 15,947,548 ----------- ----------- ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] ................................ (6,936,043) 768,830 8,955,240 3,856,643 10,268,006 9,712,345 ----------- ----------- ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] ................................ (147,721) 1,422,930 161,461 (196,475) (142,209) 143,151 ----------- ----------- ----------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ... (2,650,087) 6,250,158 13,334,344 12,694,730 14,429,221 25,803,044 ----------- ----------- ----------- ------------ ------------ ------------ NET ASSETS: Beginning of year ....................... 97,754,363 91,504,205 78,169,861 116,426,677 101,997,456 76,194,412 ----------- ----------- ----------- ------------ ------------ ------------ End of year ............................. $95,104,276 $97,754,363 $91,504,205 $129,121,407 $116,426,677 $101,997,456 =========== =========== =========== ============ ============ ============ SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27 A17
SUBACCOUNTS (CONTINUED) ---------------------------------------------- EQUITY ---------------------------------------------- 1997 1996 1995 -------------- -------------- ------------ OPERATIONS Net investment income (loss) .......... $ 19,974,703 $ 16,848,341 $ 9,985,776 Capital gains distributions received .. 73,183,544 92,436,486 27,318,049 [average cost basis] Realized gain (loss) on shares redeemed 7,311,176 755,380 11,957 Net change in unrealized gain (loss) on investments ....................... 158,043,072 41,805,447 129,700,617 -------------- -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............. 258,512,495 151,845,654 167,016,399 -------------- -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] .............................. 55,194,557 116,044,081 130,026,767 -------------- -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] .............................. (1,730,961) (2,717,850) (595,673) -------------- -------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS . 311,976,091 265,171,885 296,447,493 -------------- -------------- ------------ NET ASSETS: Beginning of year ..................... 1,061,732,578 796,560,693 500,113,200 -------------- -------------- ------------ End of year ........................... $1,373,708,669 $1,061,732,578 $796,560,693 ============== ============== ============ SUBACCOUNTS (CONTINUED) --------------------------------------------- FLEXIBLE MANAGED --------------------------------------------- 1997 1996 1995 -------------- -------------- ------------ OPERATIONS Net investment income (loss) ............ $ 29,285,286 $ 25,347,934 $ 21,550,235 Capital gains distributions received .... 201,042,079 106,224,518 39,426,921 [average cost basis] Realized gain (loss) on shares redeemed.. 3,097,268 487,657 56,509 Net change in unrealized gain (loss) on investments ........................ (37,001,732) (5,082,172) 110,261,394 -------------- -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............... 196,422,901 126,977,937 171,295,059 -------------- -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] ................................ 15,507,613 57,031,152 86,936,282 -------------- -------------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] ................................ (332,076) (1,594,508) (2,895,506) -------------- -------------- ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS . 211,598,438 182,414,581 255,335,835 -------------- -------------- ------------ NET ASSETS: Beginning of year ..................... 1,137,587,038 955,172,457 699,836,622 -------------- -------------- ------------ End of year ........................... $1,349,185,476 $1,137,587,038 $955,172,457 ============== ============== ============ SUBACCOUNTS (CONTINUED) -------------------------------------------- CONSERVATIVE BALANCED -------------------------------------------- 1997 1996 1995 -------------- ------------ ------------ OPERATIONS Net investment income (loss) ............ $ 38,402,245 $ 29,326,106 $ 25,291,477 Capital gains distributions received .... 110,154,176 55,843,548 26,552,510 [average cost basis] Realized gain (loss) on shares redeemed 2,680,112 627,498 97,662 Net change in unrealized gain (loss) on investments ........................ (36,006,094) 10,273,250 55,648,508 -------------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............... 115,230,439 96,070,402 107,590,157 -------------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] ................................ (5,484,215) 36,970,919 44,932,925 -------------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] ................................ 98,440 (1,143,063) (3,421,660) -------------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ... 109,844,664 131,898,258 149,101,422 -------------- ------------ ------------ NET ASSETS: Beginning of year ....................... 918,503,799 786,605,541 637,504,119 -------------- ------------ ------------ End of year ............................. $1,028,348,463 $918,503,799 $786,605,541 ============== ============ ============ SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27 A18
FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT STATEMENTS OF CHANGES IN NET ASSETS For the years ended December 31,1997, 1996 and 1995 SUBACCOUNTS ---------------------------------------------------------------------------------- HIGH YIELD STOCK BOND INDEX --------------------------------------- ---------------------------------------- 1997 1996 1995 1997 1996 1995 ----------- ----------- ----------- ------------ ------------ ------------ OPERATIONS Net investment income (loss).............. $ 7,594,709 $ 6,844,609 $ 6,151,112 $ 4,312,113 $ 4,179,793 $ 3,665,394 Capital gains distributions received...... 0 0 0 17,197,911 4,749,836 2,097,393 Realized gain (loss) on shares redeemed [average cost basis] .................... 311,580 20,787 (58,578) 6,786,808 263,052 293,916 Net change in unrealized gain (loss) on investments............................. 2,620,272 581,780 3,163,738 113,415,557 61,075,735 66,716,563 ----------- ----------- ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................. 10,526,561 7,447,176 9,256,272 141,712,389 70,268,416 72,773,266 ----------- ----------- ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7].................................. 374,682 5,326,899 4,374,480 58,525,779 55,125,681 33,935,158 ----------- ----------- ----------- ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8].................................. (110,168) 52,425 (119,164) (910,143) 82,144 (100,558) ----------- ----------- ----------- ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS 10,791,075 12,826,500 13,511,588 199,328,025 125,476,241 106,607,866 NET ASSETS: Beginning of year......................... 80,876,861 68,050,361 54,538,773 422,844,131 297,367,890 190,760,024 ----------- ----------- ----------- ------------ ------------ ------------ End of year............................... $91,667,936 $80,876,861 $68,050,361 $622,172,156 $422,844,131 $297,367,890 =========== =========== =========== ============ ============ ============ SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27 A19
SUBACCOUNTS (CONTINUED) ------------------------------------------------------------------------------------- EQUITY INCOME GLOBAL ------------------------------------------ --------------------------------------- 1997 1996 1995 1997 1996 1995 ------------ ------------ ------------ ------------ ----------- ----------- OPERATIONS Net investment income (loss).............. $ 7,076,399 $ 7,350,510 $ 6,301,712 $ 595,128 $ 1,332,143 $ 454,049 Capital gains distributions received ...... 39,390,070 9,133,917 9,279,251 5,120,114 1,298,584 915,804 Realized gain (loss) on shares redeemed [average cost basis] ..................... 3,982,449 171,030 46,601 309,311 16,670 4,998 Net change in unrealized gain (loss) on investments ............................. 59,248,683 32,816,172 18,945,636 (917,843) 9,125,406 4,212,026 ------------ ------------ ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ................. 109,697,601 49,471,629 34,573,200 5,106,710 11,772,803 5,586,877 ------------ ------------ ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] .................................. 36,671,034 23,125,635 38,554,244 17,556,139 24,827,377 16,098,541 ------------ ------------ ------------ ------------ ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] .................................. (393,762) (711,051) (646,585) (317,463) (137,878) (1,921,654) ------------ ------------ ------------ ------------ ----------- ----------- TOTAL INCREASE (DECREASE) IN NET ASSETS ..... 145,974,873 71,886,213 72,480,859 22,345,386 36,462,302 19,763,764 NET ASSETS: Beginning of year ......................... 295,054,376 223,168,163 150,687,304 86,164,762 49,702,460 29,938,696 ------------ ------------ ------------ ------------ ----------- ----------- End of year ............................... $441,029,249 $295,054,376 $223,168,163 $108,510,148 $86,164,762 $49,702,460 ============ ============ ============ ============ =========== =========== SUBACCOUNTS (CONTINUED) -------------------------------------- PRUDENTIAL* JENNISON -------------------------------------- 1997 1996 1995 ----------- ----------- ---------- OPERATIONS Net investment income (loss) ............ $ (281,961) $ (85,477) $ (11,994) Capital gains distributions received .... 5,052,341 0 0 Realized gain (loss) on shares redeemed [average cost basis] ................... 525,215 0 0 Net change in unrealized gain (loss) on investments ........................... 10,743,964 3,012,624 281,405 ----------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............... 16,039,559 2,927,147 269,411 ----------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS [Note 7] ................................ 34,918,336 30,275,275 7,175,027 ----------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS [Note 8] ................................ (773,643) 385,656 214,343 ----------- ----------- ---------- TOTAL INCREASE (DECREASE) IN NET ASSETS ... 50,184,252 33,588,078 7,658,781 NET ASSETS: Beginning of year ....................... 41,246,859 7,658,781 0 ----------- ----------- ---------- End of year ............................. $91,431,111 $41,246,859 $7,658,781 =========== =========== ========== *Commenced Business on 5/1/95. SEE NOTES TO FINANCIAL STATEMENTS ON PAGES A21 THROUGH A27 A20
NOTES TO FINANCIAL STATEMENTS OF THE VARIABLE UNIVERSAL LIFE SUBACCOUNTS OF THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT For the Year Ended December 31, 1997 NOTE 1: GENERAL The Prudential Variable Appreciable Account (the "Account") of The Prudential Insurance Company of America ("Prudential") was established on August 11, 1987 by a resolution of Prudential's Board of Directors in conformity with insurance laws of the State of New Jersey. The assets of the Account are segregated from Prudential's other assets. Proceeds from the purchases of Prudential Variable Appreciable Life (PVAL) and Prudential Survivorship Preferred (SVUL) Contracts are invested in the Account. The Account is registered under the Investment Company Act of 1940, as amended, as a unit investment trust. There are ten subaccounts within the Account available to Contract holders of PVUL, which invest in a corresponding portfolio of The Prudential Series Fund, Inc. (the "Series Fund"). The Series Fund is a diversified open-end management investment company, and is managed by Prudential. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared in conformity with generally accepted accounting principles (GAAP). The preparation of the financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Investments - The investments in shares of the Series Fund are stated at the net asset value of the respective portfolio. Security Transactions - Realized gains and losses on security transactions are reported on an average cost basis. Purchase and sale transactions are recorded as of the trade date of the security being purchased or sold. Distributions Received - Dividend and capital gain distributions received are reinvested in additional shares of the Series Fund and are recorded on the ex-dividend date. Equity of The Prudential Insurance Company of America - Prudential maintains a position in the Account for liquidity purposes including unit purchases and redemptions, fund share transactions, and expense processing. Prudential monitors the balance daily and transfers funds based upon anticipated activity. At times, Prudential may owe an amount to the Account, which is reflected in the Account's Statements of Net Assets as a receivable from Prudential. The receivable does not have an effect on the Contract owner's account or the related unit value. Note 3: INVESTMENT INFORMATION FOR THE PRUDENTIAL SERIES FUND, INC. PORTFOLIOS The net asset value per share for each portfolio of the Series Fund, the number of shares of each portfolio held by the subaccounts of the Account and the aggregate cost of investments in such shares at December 31, 1997 were as follows:
PORTFOLIOS -------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ----------- ------------ -------------- -------------- -------------- Number of Shares: 9,510,428 11,695,927 44,150,785 77,995,962 68,623,393 Net asset value per share: $ 10.00000 $ 11.02185 $ 31.06909 $ 17.28029 $ 14.97022 Cost: $95,104,276 $127,778,984 $1,021,616,812 $1,298,687,478 $1,012,639,267 PORTFOLIOS (CONTINUED) -------------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ------------ ------------ ------------ ----------- ----------- Number of Shares: 11,255,154 20,560,943 19,682,485 6,054,080 5,155,568 Net asset value per share: $ 8.14453 $ 30.21956 $ 22.38737 $ 17.92348 $ 17.73151 Cost: $ 89,660,507 $361,879,797 $331,809,980 $97,511,686 $77,378,009
NOTE 4: CONTRACT OWNER UNIT INFORMATION Outstanding Contract owner units, unit values and total value of Contract owner equity at December 31, 1997 were as follows:
SUBACCOUNTS ------------------------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED --------------- --------------- ---------------- ---------------- ----------------- Contract Owner Units Outstanding (PVAL). 38,909,139.353 37,082,552.171 192,670,577.036 270,135,601.789 218,020,371.531 Unit Value (PVAL) ...................... $ 1.58873 $ 2.17433 $ 4.29156 $ 3.07895 $ 2.55041 --------------- --------------- ---------------- ---------------- ----------------- Contract Owner Equity (PVAL) ........... $ 61,816,117 $ 80,629,705 $ 826,857,342 $ 831,734,011 $ 556,041,336 --------------- --------------- ---------------- ---------------- ----------------- Contract Owner Units Outstanding (PVAL $100,000+ face) ................ 18,458,545.137 22,697,498.739 129,893,269.042 171,984,362.751 189,705,796.235 Unit Value (PVAL $100,000+ face) ....... $ 1.54794 $ 2.11769 $ 4.18060 $ 2.99911 $ 2.48409 Contract Owner Equity (PVAL --------------- --------------- ---------------- ---------------- ----------------- $100,000+ face) ...................... $ 28,572,720 $ 48,066,266 $ 543,031,800 $ 515,800,022 $ 471,246,271 --------------- --------------- ---------------- ---------------- ----------------- Contract Owner Units Outstanding (SVUL) 2,648,352.917 380,114.649 2,579,924.823 1,234,178.929 836,953.765 Unit Value (SVUL) ...................... $ 1.08769 $ 1.11923 $ 1.48048 $ 1.33809 $ 1.26752 --------------- --------------- ---------------- ---------------- ----------------- Contract Owner Equity (SVUL) ........... $ 2,880,587 $ 425,436 $ 3,819,527 $ 1,651,443 $ 1,060,856 --------------- --------------- ---------------- ---------------- ----------------- TOTAL CONTRACT OWNER EQUITY ............ $ 93,269,424 $ 129,121,407 $ 1,373,708,669 $ 1,349,185,476 $ 1,028,348,463 =============== =============== ================ ================ =================
A22
SUBACCOUNTS (CONTINUED) --------------------------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON --------------- --------------- --------------- --------------- --------------- Contract Owner Units Outstanding (PVAL). 23,131,451.862 87,096,741.492 71,391,113.621 58,222,623.069 36,483,251.911 Unit Value (PVAL) ...................... $ 2.37943 $ 4.41436 $ 4.17583 $ 1.41253 $ 1.86119 --------------- --------------- --------------- --------------- --------------- Contract Owner Equity (PVAL) ........... $ 55,039,671 $ 384,476,371 $ 298,117,154 $ 82,241,202 $ 67,902,264 --------------- --------------- --------------- --------------- --------------- Contract Owner Units Outstanding (PVAL $100,000+ face) ................ 15,535,412.038 54,360,075.140 34,647,590.548 17,548,821.325 12,109,526.233 Unit Value (PVAL $100,000+ face) ....... $ 2.31834 $ 4.29923 $ 4.06648 $ 1.39734 $ 1.84650 --------------- --------------- --------------- --------------- --------------- Contract Owner Equity (PVAL $100,000+ face) ...................... $ 36,016,367 $ 233,706,466 $ 140,893,734 $ 24,521,670 $ 22,360,240 --------------- --------------- --------------- --------------- --------------- Contract Owner Units Outstanding (SVUL) 448,976.859 2,430,022.226 1,208,375.161 1,346,309.879 726,406.872 Unit Value (SVUL) ...................... $ 1.23162 $ 1.64168 $ 1.67031 $ 1.25444 $ 1.60875 --------------- --------------- --------------- --------------- --------------- Contract Owner Equity (SVUL) ........... $ 552,969 $ 3,989,319 $ 2,018,361 $ 1,688,865 $ 1,168,607 --------------- --------------- --------------- --------------- --------------- TOTAL CONTRACT OWNER EQUITY............. $ 91,609,007 $ 622,172,156 $ 441,029,249 $ 108,451,737 $ 91,431,111 =============== =============== =============== =============== ===============
NOTE 5: CHARGES AND EXPENSES A. Mortality Risk and Expense Risk Charges The mortality risk and expense risk charges at an effective annual rate of 0.90% is applied daily against the net assets representing equity of PVAL Contract owners held in each subaccount. For Contract owners investing in PVAL with face amounts of $100,000 or more the annual rate is 0.60%. For Contract owners investing in SVUL the annual rate is 0.90%. Mortality risk is that Contract owners may not live as long as estimated and expense risk is that the cost of issuing and administering the policies may exceed the estimated expenses. For 1997, the amount of these charges paid to Prudential was $18,767,367 for PVAL Contracts, $18,002,915 for PVAL Contracts with face amounts of $100,000 or more and $109,088 for SVUL Contracts. B. Deferred Sales Charge Subsequent to Contract owner redemption, a deferred sales charge is imposed upon surrenders of certain variable life insurance Contracts to compensate Prudential for sales and other marketing expenses. The amount of any sales charge will depend on the number of years that have elapsed since the Contract was issued. No sales charge will be imposed after the tenth year of the Contract. No sales charge will be imposed on death benefits. For 1997, the amount of these charges paid to Prudential was $8,918,133. C. Partial Withdrawal Charge A charge is imposed by Prudential on partial withdrawals of the cash surrender value. For 1997, the amount of these charges paid to Prudential was $3,718,341. D. Expense Reimbursement PVAL Contracts are reimbursed by Prudential, on a non-guaranteed basis, for expenses incurred by the Series Fund in excess of the effective rate of 0.45% for the Stock Index Portfolio, 0.50% for the Equity Income Portfolio, and 0.65% for the High Yield Bond Portfolio of the average daily net assets of these portfolios. For 1997, the amount of these reimbursements totaled $0. A23 E. Cost of Insurance Charges Contract owners contributions to the Account are subject to the following charges: transaction costs, premium taxes, sales charges, monthly administration charges, and death benefit risk charges prior to the investment in the Account. During 1997, Prudential received a total of $18,592,697, $37,395,717, $97,887,744, $63,196,365 and $13,745,360, respectively, for these charges. NOTE 6: TAXES Prudential is taxed as a "life insurance company" as defined by the Internal Revenue Code and the results of operations of the Account form a part of Prudential's consolidated federal tax return. Under current federal law, no federal income taxes are payable by the Account. As such, no provision for tax liability has been recorded in these financial statements. NOTE 7: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM PREMIUM PAYMENTS AND OTHER OPERATING TRANSFERS The following amounts represent Contract owner activity components for the year ended December 31, 1997:
SUBACCOUNTS --------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ------------ ------------ ------------- ------------- ------------- Contract Owner Net Payments ................ $ 43,029,352 $ 27,918,752 $ 293,586,658 $ 230,098,301 $ 193,920,159 Policy Loans ............................... $ (2,616,136) $ (2,676,866) $ (36,815,052) $ (29,768,329) $ (21,017,180) Policy Loan Repayments and Interest ........ $ 1,685,370 $ 1,259,455 $ 15,156,086 $ 13,061,811 $ 10,130,000 Surrenders, Withdrawals, and Death Benefits. $(11,469,314) $ (7,179,534) $ (79,836,234) $ (69,955,243) $ (68,407,322) Net Transfers From (To) Other Subaccounts or Fixed Rate Options .................... $(27,263,357) $ (3,556,460) $ 281,061 $ (12,348,231) $ (19,240,097) Administrative and Other Charges ........... $(10,301,958) $(11,908,704) $(137,177,962) $(115,580,696) $(100,869,775) SUBACCOUNTS (CONTINUED) --------------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ----------- ------------ ------------ ------------ ------------- Contract Owner Net Payments ................ $19,451,504 $126,688,004 $ 79,016,436 $ 34,211,689 $ 34,294,641 Policy Loans ............................... $(2,378,667) $(15,814,797) $ (9,558,454) $ (2,628,076) $ (1,732,453) Policy Loan Repayments and Interest ........ $ 1,433,405 $ 5,919,148 $ 3,893,428 $ 1,262,980 $ 744,576 Surrenders, Withdrawals, and Death Benefits ................................... $(6,747,487) $(32,499,126) $(21,564,128) $ (7,075,480) $ (3,227,110) Net Transfers From (To) Other Subaccounts or Fixed Rate Options .................... $(2,355,030) $ 30,361,425 $ 21,482,832 $ 4,870,997 $ 16,630,147 Administrative and Other Charges ........... $(9,029,043) $(56,128,875) $(36,599,080) $(13,085,971) $(11,791,465)
NOTE 8: NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM EQUITY TRANSFERS The increase (decrease) in net assets resulting from equity transfers represents the net contributions (withdrawals) of Prudential to (from) the Account. A24 NOTE 9: UNIT ACTIVITY Transactions in units (including transfers among subaccounts) for the year ended December 31, 1997 were as follows:
SUBACCOUNTS --------------------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED --------------- --------------- --------------- --------------- ---------------- Contract Owner Contributions: 65,667,687.360 16,213,787.198 92,473,729.304 93,973,163.620 93,048,912.698 Contract Owner Redemptions: (69,425,851.286) (14,250,810.327) (76,628,697.286) (87,813,518.888) (94,880,956.345) SUBACCOUNTS (CONTINUED) --------------------------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON --------------- --------------- --------------- --------------- ---------------- Contract Owner Contributions: 17,186,033.239 50,408,149.325 34,569,865.840 37,198,996.863 36,782,725.213 Contract Owner Redemptions: (16,878,089.505) (34,222,528.100) (24,004,754.496) (24,567,570.689) (16,099,947.069)
NOTE 10: PURCHASES AND SALES OF INVESTMENTS The aggregate costs of purchases and proceeds from sales of investments in the Series Fund were as follows:
PORTFOLIOS --------------------------------------------------------------------------- MONEY DIVERSIFIED FLEXIBLE CONSERVATIVE MARKET BOND EQUITY MANAGED BALANCED ------------ ----------- ------------ ------------ ------------ For the year ended December 31, 1997 Purchases............................. $ 26,486,000 $ 6,759,000 $ 69,128,000 $ 24,560,000 $ 10,479,000 Sales................................. $(34,231,000) $(4,176,000) $(26,544,000) $(19,748,000) $(24,116,000) PORTFOLIOS (CONTINUED) -------------------------------------------------------------------------- HIGH YIELD STOCK EQUITY PRUDENTIAL BOND INDEX INCOME GLOBAL JENNISON ------------ ----------- ----------- ----------- ----------- For the year ended December 31, 1997 Purchases............................. $ 11,827,000 $ 60,645,000 $ 37,969,000 $ 18,498,000 $ 36,454,000 Sales................................. $(12,181,000) $ (7,649,000) $ (4,614,000) $ (1,946,000) $ (2,764,000)
NOTE 11: RELATED PARTY TRANSACTIONS The Prudential has purchased multiple VAL Contracts insuring the lives of certain employees. The Prudential is the owner and beneficiary of the Contracts. There were no net premium payments for the year ended December 31, 1997. Equity of Contract owners in the Flexible Managed subaccount at December 31, 1997 includes approximately $242.1 million owned by the Prudential. A25 REPORT OF INDEPENDENT ACCOUNTANTS To the Contract Owners of the Variable Universal Life Subaccounts of the Prudential Variable Appreciable Account and the Board of Directors of The Prudential Insurance Company of America In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of the subaccounts (Money Market, Diversified Bond, Equity, Flexible Managed, Conservative Balanced, High Yield Bond, Stock Index, Equity Income, Global, and Prudential Jennison) of the Prudential Variable Appreciable Account at December 31, 1997, the results of each of their operations for the year then ended and the changes in each of their net assets for each of the two years in the period then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of The Prudential Insurance Company of America'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 confirmation of shares owned in The Prudential Series Fund, Inc. at December 31, 1997, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP New York, New York March 20, 1998 A26 INDEPENDENT AUDITORS' REPORT To the Contract Owners of the Variable Universal Life Subaccounts of the Prudential Variable Appreciable Account and the Board of Directors of the Prudential Insurance Company of America Newark, New Jersey We have audited the accompanying statements of changes in net assets of The Prudential Variable Appreciable Account of The Prudential Insurance Company of America (comprising, respectively, the Money Market, Diversified Bond, Equity, Flexible Managed, Conservative Balanced, High Yield Bond, Stock Index, Equity Income, Global, and Prudential Jennison subaccounts) for the periods presented in the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the changes in net assets of each of the respective subaccounts constituting The Prudential Variable Appreciable Account for the respective stated periods in conformity with generally accepted accounting principles. Deloitte & Touche LLP Parsippany, New Jersey February 15, 1996 A27 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- March 5, 1998 To the Board of Directors and Policyholders of The Prudential Insurance Company of America In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of operations, of changes in equity and of cash flows present fairly, in all material respects, the financial position of The Prudential Insurance Company of America and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits of these 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 provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1 INDEPENDENT AUDITORS' REPORT To the Board of Directors of The Prudential Insurance Company of America Newark, New Jersey We have audited the accompanying consolidated statements of operations, changes in equity, and cash flows of The Prudential Insurance Company of America and subsidiaries for the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated statements of operations, changes in equity, and cash flows present fairly, in all material respects, the results of operations and cash flows of The Prudential Insurance Company of America and subsidiaries for the year ended December 31, 1995 in conformity with generally accepted accounting principles. Deloitte & Touche LLP June 4, 1997 2
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA CONSOLIDATED STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 1997 AND 1996 (IN MILLIONS) 1997 1996 ----------- ----------- ASSETS Fixed maturities: Available for sale, at fair value (amortized cost, 1997: $71,496; 1996: $64,545) .......... $ 75,270 $ 66,553 Held to maturity, at amortized cost (fair value, 1997: $19,894; 1996: $21,362) ............ 18,700 20,403 Trading account assets, at fair value........................................................ 6,044 4,219 Equity securities, available for sale, at fair value (cost, 1997: $2,376; 1996: $2,103) ..... 2,810 2,622 Mortgage loans on real estate ............................................................... 16,004 17,097 Investment real estate ...................................................................... 1,519 2,586 Policy loans ................................................................................ 6,827 6,692 Securities purchased under agreements to resell ............................................. 8,661 5,347 Cash collateral for borrowed securities ..................................................... 5,047 2,416 Short-term investments ...................................................................... 12,106 9,294 Other long-term investments ................................................................. 3,360 2,995 ----------- ----------- Total investments ......................................................................... 156,348 140,224 Cash ........................................................................................ 3,636 2,091 Deferred policy acquisition costs ........................................................... 5,994 6,291 Accrued investment income ................................................................... 1,909 1,828 Receivables from broker-dealer clients ...................................................... 6,273 5,281 Other assets ................................................................................ 11,276 9,990 Separate Account assets ..................................................................... 74,046 63,358 ----------- ----------- TOTAL ASSETS .................................................................................. $ 259,482 $ 229,063 =========== =========== LIABILITIES AND EQUITY LIABILITIES Future policy benefits ...................................................................... $ 65,581 $ 63,955 Policyholders' account balances ............................................................. 32,941 36,009 Other policyholders' liabilities ............................................................ 6,659 6,043 Policyholders' dividends .................................................................... 1,269 714 Securities sold under agreements to repurchase .............................................. 12,347 7,503 Cash collateral for loaned securities ....................................................... 14,117 8,449 Short-term debt ............................................................................. 6,774 6,562 Long-term debt .............................................................................. 4,273 3,760 Income taxes payable ........................................................................ 500 1,544 Payables to broker-dealer clients ........................................................... 3,338 3,018 Securities sold but not yet purchased ....................................................... 3,533 1,900 Other liabilities ........................................................................... 14,774 8,238 Separate Account liabilities ................................................................ 73,658 62,845 ----------- ----------- TOTAL LIABILITIES ......................................................................... 239,764 210,540 =========== =========== COMMITMENTS AND CONTINGENCIES (SEE NOTES 12, 13 AND 14) EQUITY Retained earnings ........................................................................... 18,051 17,443 Net unrealized investment gains ............................................................. 1,752 1,136 Foreign currency translation adjustments .................................................... (85) (56) ----------- ----------- TOTAL EQUITY .............................................................................. 19,718 18,523 ----------- ----------- TOTAL LIABILITIES AND EQUITY .................................................................. $ 259,482 $ 229,063 =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS) 1997 1996 1995 ------------ ----------- ----------- REVENUES Premiums .................................................................... $ 18,534 $ 18,962 $ 19,783 Policy charges and fee income ............................................... 1,828 1,912 1,824 Net investment income ....................................................... 9,863 9,742 10,178 Realized investment gains, net .............................................. 2,187 1,138 1,503 Commissions and other income ................................................ 4,661 4,521 3,952 ------------ ----------- ----------- Total revenues ............................................................ 37,073 36,275 37,240 ------------ ----------- ----------- BENEFITS AND EXPENSES Policyholders' benefits ..................................................... 18,208 19,306 19,470 Interest credited to policyholders' account balances ........................ 2,043 2,251 2,739 Dividends to policyholders .................................................. 2,429 2,339 2,317 General and administrative expenses ......................................... 11,926 10,875 10,345 Sales practice remediation costs ............................................ 1,640 410 -- ------------ ----------- ----------- Total benefits and expenses ............................................... 36,246 35,181 34,871 ------------ ----------- ----------- INCOME FROM OPERATIONS BEFORE INCOME TAXES .................................... 827 1,094 2,369 ------------ ----------- ----------- Income taxes Current ................................................................... (46) 406 1,293 Deferred .................................................................. 263 (390) (167) ------------ ----------- ----------- 217 16 1,126 ------------ ----------- ----------- NET INCOME .................................................................... $ 610 $ 1,078 $ 1,243 ============ =========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
FOREIGN NET CURRENCY UNREALIZED RETAINED TRANSLATION INVESTMENT TOTAL EARNINGS ADJUSTMENTS GAINS EQUITY --------- ----------- ---------- --------- BALANCE, JANUARY 1, 1995 ........................ $ 15,126 $ (42) $ 16 $ 15,100 Net income .................................... 1,243 -- -- 1,243 Change in foreign currency translation adjustments ................................. -- 18 -- 18 Change in net unrealized investment gains ..... -- -- 2,381 2,381 --------- --------- --------- --------- BALANCE, DECEMBER 31, 1995 ...................... 16,369 (24) 2,397 18,742 Net income .................................... 1,078 -- -- 1,078 Change in foreign currency translation adjustments ................................. -- (32) -- (32) Change in net unrealized investment gains ..... -- -- (1,261) (1,261) Additional pension liability adjustment ....... (4) -- -- (4) --------- --------- --------- --------- BALANCE, DECEMBER 31, 1996 ...................... 17,443 (56) 1,136 18,523 Net income .................................... 610 -- -- 610 Change in foreign currency translation adjustments ................................. -- (29) -- (29) Change in net unrealized investment gains ..... -- -- 616 616 Additional pension liability adjustment ....... (2) -- -- (2) --------- --------- --------- --------- BALANCE, DECEMBER 31, 1997 ...................... $ 18,051 $ (85) $ 1,752 $ 19,718 ========= ========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995 ---------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ..................................................... $ 610 $ 1,078 $ 1,243 Adjustments to reconcile net income to net cash provided by operating activities: Realized investment gains, net ............................... (2,187) (1,138) (1,503) Policy charges and fee income ................................ (258) (208) (201) Interest credited to policyholders' account balances ......... 2,043 2,128 2,616 Depreciation and amortization ................................ 258 266 398 Other, net ................................................... 4,681 (1,180) (2,628) Loss (gain) on divestitures .................................. -- (116) 297 Change in: Deferred policy acquisition costs .......................... 143 (122) (214) Policy liabilities and insurance reserves .................. 2,477 2,471 2,382 Securities purchased under agreements to resell ............ (3,314) (217) 461 Trading account assets ..................................... (1,825) (433) 2,579 Income taxes receivable/payable ............................ (1,391) (937) 194 Cash collateral for borrowed securities .................... (2,631) (332) 25 Broker-dealer client receivables/payables .................. (672) (607) (420) Securities sold but not yet purchased ...................... 1,633 251 (225) Securities sold under agreements to repurchase ............. 4,844 (490) (712) --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES ...................... $ 4,411 $ 414 $ 4,292 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale/maturity of: Fixed maturities, available for sale .......................... $ 123,550 $ 123,368 $ 97,084 Fixed maturities, held to maturity ............................ 4,042 4,268 3,767 Equity securities, available for sale ......................... 2,572 2,162 2,370 Mortgage loans on real estate ................................. 4,299 5,731 5,553 Investment real estate ........................................ 1,842 615 435 Other long-term investments ................................... 5,081 3,203 3,385 Divestitures .................................................. -- 52 790 Payments for the purchase of: Fixed maturities, available for sale .......................... (129,854) (125,093) (101,197) Fixed maturities, held to maturity ............................ (2,317) (2,844) (6,803) Equity securities, available for sale ......................... (2,461) (2,384) (1,391) Mortgage loans on real estate ................................. (3,363) (1,906) (3,015) Investment real estate ........................................ (241) (142) (387) Other long-term investments ................................... (4,148) (2,060) (1,849) Cash collateral for securities loaned (net) .................... 5,668 2,891 3,471 Short-term investments (net) ................................... (2,848) (1,915) 2,793 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES ...................... $ 1,822 $ 5,946 $ 5,006 --------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN MILLIONS)
1997 1996 1995 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Policyholders' account deposits ................................ $ 5,020 $ 2,799 $ 2,724 Policyholders' account withdrawals ............................. (9,873) (8,099) (9,164) Net increase(decrease) in short-term debt ...................... 305 583 (3,077) Proceeds from the issuance of long-term debt ................... 324 93 763 Repayments of long-term debt ................................... (464) (1,306) (30) --------- --------- --------- CASH FLOWS USED IN FINANCING ACTIVITIES ................... (4,688) (5,930) (8,784) --------- --------- --------- NET INCREASE IN CASH ............................................. 1,545 430 514 CASH, BEGINNING OF YEAR .......................................... 2,091 1,661 1,147 --------- --------- --------- CASH, END OF YEAR ................................................ $ 3,636 $ 2,091 $ 1,661 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid ................................................ $ 968 $ 793 $ 430 --------- --------- --------- Interest paid .................................................... $ 1,243 $ 1,404 $ 1,413 --------- --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS The Prudential Insurance Company of America and its subsidiaries (collectively, "the Company") provide insurance and financial services throughout the United States and many locations worldwide. Principal products and services provided include life and health insurance, annuities, pension and retirement related investments and administration, managed healthcare, property and casualty insurance, securities brokerage, asset management, investment advisory services and real estate brokerage. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Prudential Insurance Company of America, a mutual life insurance company, and its subsidiaries, and those partnerships and joint ventures in which the Company has a controlling interest. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"). All significant intercompany balances and transactions have been eliminated. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. INVESTMENTS FIXED MATURITIES classified as "available for sale" are carried at estimated fair value. Fixed maturities that the Company has both the positive intent and ability to hold to maturity are stated at amortized cost and classified as "held to maturity." The amortized cost of fixed maturities are written down to estimated fair value when considered impaired and the decline in value is considered to be other than temporary. Unrealized gains and losses on fixed maturities "available for sale," net of income tax, the effect on deferred policy acquisition costs and participating annuity contracts that would result from the realization of unrealized gains and losses, are included in a separate component of equity, "Net unrealized investment gains." TRADING ACCOUNT ASSETS are carried at estimated fair value. EQUITY SECURITIES, available for sale, comprised of common and non-redeemable preferred stock, are carried at estimated fair value. The associated unrealized gains and losses, net of income tax, the effect on deferred policy acquisition costs and participating annuity contracts that would result from the realization of unrealized gains and losses, are included in a separate component of equity, "Net unrealized investment gains." MORTGAGE LOANS ON REAL ESTATE are stated primarily at unpaid principal balances, net of unamortized discounts and allowance for losses on impaired loans. Impaired loans are identified by management as loans in which a probability exists that all amounts due according to the contractual terms of the loan agreement will not be collected. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate or the fair value of the collateral, if the loan is collateral dependent. The Company's periodic evaluation of the adequacy of the allowance for losses is based on a number of factors, including past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires estimating the amounts and timing of future cash flows expected to be received on impaired loans. Interest received on impaired loans, including loans that were previously modified in a troubled debt restructuring, is either applied against the principal or reported as revenue, according to management's judgment as to the collectibility of principal. Management discontinues the accrual of interest on impaired loans after the loans are 90 days delinquent as to principal or interest or earlier when management has serious doubts about collectibility. When a loan is recognized as 8 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) impaired, any accrued but unpaid interest previously recorded on such loan is reversed against interest income of the current period. Generally, a loan is restored to accrual status only after all delinquent interest and principal are brought current and, in the case of loans where interest has been interrupted for a substantial period, a regular payment performance has been established. INVESTMENT REAL ESTATE, which the Company has the intent to hold for the production of income, is carried at depreciated cost less any write-downs to fair value for impairment losses. Depreciation on real estate is computed using the straight-line method over the estimated lives of the properties. Real estate to be disposed of is carried at the lower of depreciated cost or fair value less selling costs and is not depreciated once classified as such. POLICY LOANS are carried at unpaid principal balances. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE are carried at the amounts at which the securities will be subsequently resold or reacquired, including accrued interest, as specified in the respective agreements. The Company's policy is to take possession of securities purchased under agreements to resell. The market value of securities to be repurchased is monitored, and additional collateral is requested, where appropriate, to protect against credit exposure. SECURITIES BORROWED AND SECURITIES LOANED are recorded at the amount of cash advanced or received. With respect to securities loaned, the Company obtains collateral in an amount equal to 102% and 105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of securities borrowed and loaned on a daily basis with additional collateral obtained as necessary. Non-cash collateral received is not reflected in the Consolidated Statements of Financial Position. Substantially, all the Company's securities borrowed contracts are with other brokers and dealers, commercial banks and institutional clients. Substantially, all of the Company's securities loaned are with large brokerage firms. These transactions are used to generate net investment income and facilitate trading activity. These instruments are short-term in nature (usually 30 days or less) and are collateralized principally by U.S. Government and mortgage-backed securities. The carrying amounts of these instruments approximate fair value because of the relatively short period of time between the origination of the instruments and their expected realization. SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased with an original maturity of twelve months or less, are carried at amortized cost, which approximates fair value. OTHER LONG-TERM INVESTMENTS primarily represent the Company's investments in joint ventures and partnerships in which the Company does not have control and derivatives held for purposes other than trading. Joint venture and partnership investments are recorded using the equity method of accounting, reduced for other than temporary declines in value. REALIZED INVESTMENT GAINS, NET are computed using the specific identification method. Costs of fixed maturities and equity securities are adjusted for impairments considered to be other than temporary. Allowances for losses on mortgage loans on real estate are netted against asset categories to which they apply and provisions for losses on investments are included in "Realized investment gains, net." Unrealized gains and losses on trading account assets are included in "Commissions and other income." CASH Cash includes cash on hand, amounts due from banks, and money market instruments. DEFERRED POLICY ACQUISITION COSTS The costs which vary with and that are related primarily to the production of new insurance business are deferred to the extent such costs are deemed recoverable from future profits. Such costs include certain commissions, costs of policy issuance and underwriting, and certain variable field office expenses. Deferred policy acquisition costs are subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period. Deferred policy acquisition costs are adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been realized, with corresponding credits or charges included in equity. 9 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For life insurance, deferred policy acquisition costs are amortized over the expected life of the contracts (up to 45 years) in proportion to estimated gross margins based on historical and anticipated future experience, which is updated periodically. The effect of changes in estimated gross margins is reflected in earnings in the period they are revised. Policy acquisition costs related to interest-sensitive products and certain investment-type products are deferred and amortized over the expected life of the contracts (periods ranging from 15 to 30 years) in proportion to estimated gross profits arising principally from investment results, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated periodically. The effect of revisions to estimated gross profits on unamortized deferred acquisition costs is reflected in earnings in the period such estimated gross profits are revised. For property and casualty contracts, deferred policy acquisition costs are amortized over the period in which related premiums are earned. Future investment income is considered in determining the recoverability of deferred policy acquisition costs. For disability insurance, health insurance, group life insurance and most group annuities, acquisition costs are expensed as incurred. POLICYHOLDERS' DIVIDENDS The amount of the dividends to be paid to policyholders is determined annually by the Company's Board of Directors. The aggregate amount of policyholders' dividends is related to actual interest, mortality, morbidity, persistency and expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by the Company. SEPARATE ACCOUNT ASSETS AND LIABILITIES Separate Account assets and liabilities are reported at estimated fair value and represent segregated funds which are invested for certain policyholders, pension fund and other customers. The assets consist of common stocks, fixed maturities, real estate related securities, real estate mortgage loans and short-term investments. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Investment risks associated with market value changes are generally borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. The investment income and gains or losses for Separate Accounts generally accrue to the policyholders and are not included in the Consolidated Statement of Operations. Mortality, policy administration and surrender charges on the accounts are included in "Policy charges and fee income." INSURANCE REVENUE AND EXPENSE RECOGNITION Premiums from participating insurance policies are generally recognized when due. Benefits are recorded as an expense when they are incurred. A liability for future policy benefits is recorded using the net level premium method. Premiums from non-participating group annuities with life contingencies are generally recognized when due. For single premium immediate annuities and structured settlements, premiums are recognized when due with any excess profit deferred and recognized in a constant relationship to insurance in-force or, for annuities, the amount of expected future benefit payments. Amounts received as payment for interest sensitive investment contracts, deferred annuities and participating group annuities are reported as deposits to "Policyholders' account balances." Revenues from these contracts are reflected in "Policy charges and fee income" and consist primarily of fees assessed during the period against the policyholders' account balances for mortality charges, policy administration charges, surrender charges and interest earned from the investment of these account balances. Benefits and expenses for these products include claims in excess of related account balances, expenses of contract administration, interest credited and amortization of deferred policy acquisition costs. For disability insurance, group life insurance, health insurance and property and casualty insurance, premiums are recognized over the period to which the premiums relate in proportion to the amount of insurance protection provided. Claim and claim adjustment expenses are recognized when incurred. 10 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Assets and liabilities of foreign operations and subsidiaries reported in other than U.S. dollars are translated at the exchange rate in effect at the end of the period. Revenues, benefits and other expenses are translated at the average rate prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are charged or credited directly to equity. The cumulative effect of changes in foreign exchange rates are included in "Foreign currency translation adjustments." COMMISSIONS AND OTHER INCOME Commissions and other income principally includes securities and commodities, commission revenues, asset management fees, investment banking revenue and realized and unrealized gains on trading account assets of the Company's broker-dealer subsidiary. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives include swaps, forwards, futures, options and loan commitments subject to market risk, all of which are used by the Company in both trading and other than trading activities. Income and expenses related to derivatives used to hedge are recorded on the accrual basis as an adjustment to the carrying amount or to the yield of the related assets or liabilities over the periods covered by the derivative contracts. Gains and losses relating to early terminations of interest rate swaps used to hedge are deferred and amortized over the remaining period originally covered by the swap. Gains and losses relating to derivatives used to hedge the risks associated with anticipated transactions are deferred and utilized to adjust the basis of the transaction once it has closed. If it is determined that the transaction will not close, such gains and losses are included in "Realized investment gains, net." DERIVATIVES HELD FOR TRADING PURPOSES are used in the Company's securities broker-dealer business and in a limited-purpose swap subsidiary to meet the risk management needs of its customers by structuring transactions that allow customers to manage their exposure to interest rates, foreign exchange rates, indices or prices of securities and commodities and when possible, matched trading positions are established to minimize risk to the Company. Derivatives used for trading purposes are recorded at fair value as of the reporting date. Realized and unrealized changes in fair values are included in "Commissions and other income" in the period in which the changes occur. DERIVATIVES HELD FOR PURPOSES OTHER THAN TRADING are primarily used to hedge or reduce exposure to interest rate and foreign currency risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be incurred. Additionally, other than trading derivatives are used to change the characteristics of the Company's asset/liability mix consistent with the Company's risk management activities. INCOME TAXES The Company and its domestic subsidiaries file a consolidated federal income tax return. The Internal Revenue Code (the "Code") limits the amount of non-life insurance losses that may offset life insurance company taxable income. The Code also imposes an "equity tax" on mutual life insurance companies which, in effect, imputes an additional tax to the Company based on a formula that calculates the difference between stock and mutual insurance companies' earnings. Income taxes include an estimate for changes in the total equity tax to be paid for current and prior years. Subsidiaries operating outside the United States are taxed under applicable foreign statutes. Deferred income taxes are generally recognized, based on enacted rates, when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to that portion which management believes is more likely than not to be realized. NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board ("FASB") issued the Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 11 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 125"). The statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities and provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 became effective January 1, 1997 and is to be applied prospectively. Subsequent to June 1996, FASB issued SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of SFAS 125" ("SFAS 127"). SFAS 127 delays the implementation of SFAS 125 for one year for certain provisions, including repurchase agreements, dollar rolls, securities lending and similar transactions. The Company will delay implementation with respect to those affected provisions. Adoption of SFAS 125 has not and will not have a material impact on the Company's results of operations, financial condition and liquidity. In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for years beginning after December 15, 1997. This statement defines comprehensive income as "the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, excluding investments by owners and distributions to owners" and establishes standards for reporting and displaying comprehensive income and its components in financial statements. The statement requires that the Company classify items of other comprehensive income by their nature and display the accumulated balance of other comprehensive income separately from retained earnings in the equity section of the Statement of Financial Position. In addition, reclassification of financial statements for earlier periods must be provided for comparative purposes. RECLASSIFICATIONS Certain amounts in the prior years have been reclassified to conform to current year presentation. 12 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENTS FIXED MATURITIES AND EQUITY SECURITIES The following tables provide additional information relating to fixed maturities and equity securities (excluding trading account assets) as of December 31:
1997 ------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE -------------- -------------- -------------- ------------ FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS) U.S. Treasury securities and obligations of U.S. government corporations and agencies......... $ 9,755 $ 783 $ -- $ 10,538 Obligations of U.S. states and their political subdivisions..................... 1,375 93 -- 1,468 Foreign government bonds............................ 3,177 218 17 3,378 Corporate securities................................ 49,997 2,601 144 52,454 Mortgage-backed securities.......................... 6,828 210 5 7,033 Other fixed maturities.............................. 364 35 -- 399 -------------- -------------- -------------- ------------ Total fixed maturities available for sale........... $ 71,496 $ 3,940 $ 166 $ 75,270 ============== ============== ============== ============ EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,376 $ 680 $ 246 $ 2,810 ============== ============== ============== ============ 1997 ------------------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE -------------- -------------- -------------- ------------ FIXED MATURITIES HELD TO MATURITY (IN MILLIONS) U.S. Treasury securities and obligations of U.S. government corporations and agencies......... $ 88 $ - $ - $ 88 Obligations of U.S. states and their political subdivisions...................... 152 4 1 155 Foreign government bonds............................ 33 5 - 38 Corporate securities................................ 18,282 1,212 34 19,460 Mortgage-backed securities.......................... 1 - - 1 Other fixed maturities.............................. 144 8 - 152 -------------- -------------- -------------- ------------ Total fixed maturities held to maturity............. $ 18,700 $ 1,229 $ 35 $ 19,894 ============== ============== ============== ============
13
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENTS (CONTINUED) 1996 ------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------------- -------------- -------------- ------------ FIXED MATURITIES AVAILABLE FOR SALE (IN MILLIONS) U.S. Treasury securities and obligations of U.S. government corporations and agencies......... $ 10,618 $ 361 $ 77 $ 10,902 Obligations of U.S. states and their political subdivisions...................... 1,104 29 2 1,131 Foreign government bonds............................ 2,814 137 12 2,939 Corporate securities................................ 43,593 1,737 284 45,046 Mortgage-backed securities.......................... 6,377 140 21 6,496 Other fixed maturities.............................. 39 1 1 39 --------------- -------------- -------------- ------------ Total fixed maturities available for sale........... $ 64,545 $ 2,405 $ 397 $ 66,553 =============== ============== ============== ============ EQUITY SECURITIES AVAILABLE FOR SALE................ $ 2,103 $ 659 $ 140 $ 2,622 =============== ============== ============== ============ 1996 ------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------------- -------------- -------------- ------------ FIXED MATURITIES HELD TO MATURITY (IN MILLIONS) U.S. Treasury securities and obligations of U.S. government corporations and agencies......... $ 309 $ 3 $ 6 $ 306 Obligations of U.S. states and their political subdivisions...................... 7 -- -- 7 Foreign government bonds............................ 162 11 -- 173 Corporate securities................................ 19,886 1,033 82 20,837 Mortgage-backed securities.......................... 26 -- -- 26 Other fixed maturities.............................. 13 -- -- 13 --------------- -------------- -------------- ------------ Total fixed maturities held to maturity............. $ 20,403 $ 1,047 $ 88 $ 21,362 =============== ============== ============== ============
14 INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENTS (CONTINUED) The amortized cost and estimated fair value of fixed maturities by contractual maturities at December 31, 1997, is shown below:
AVAILABLE FOR SALE HELD TO MATURITY -------------------------------- ------------------------------ ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE -------------- -------------- -------------- ------------ (IN MILLIONS) (IN MILLIONS) Due in one year or less....................... $ 1,991 $ 2,011 $ 686 $ 695 Due after one year through five years......... 18,916 19,226 4,496 4,659 Due after five years through ten years........ 16,776 17,494 7,161 7,551 Due after ten years........................... 26,985 29,506 6,356 6,988 Mortgage-backed securities.................... 6,828 7,033 1 1 -------------- -------------- -------------- ------------ Total......................................... $ 71,496 $ 75,270 $ 18,700 $ 19,894 ============== ============== ============== ============
Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations Proceeds from the repayment of held to maturity fixed maturities during 1997, 1996 and 1995 were $4,042 million, $4,268 million, and $3,767 million, respectively. Gross gains of $62 million, $78 million, and $27 million, and gross losses of $1 million, $7 million, and $0.2 million were realized on prepayment of held to maturity fixed maturities during 1997, 1996 and 1995, respectively. Proceeds from the sale of available for sale fixed maturities during 1997, 1996 and 1995 were $120,604 million, $121,910 million and $96,134 million, respectively. Proceeds from the maturity of available for sale fixed maturities during 1997, 1996 and 1995 were $2,946 million, $1,458 million, and $950 million, respectively. Gross gains of $1,310 million, $1,562 million, and $2,052 million and gross losses of $639 million, $1,026 million, and $941 million were realized on sales and prepayments of available for sale fixed maturities during 1997, 1996 and 1995, respectively. Write downs for impairments of fixed maturities which were deemed to be other than temporary were $13 million, $54 million and $100 million for the years 1997, 1996 and 1995, respectively. During the year ended December 31, 1997, there were no securities classified as held to maturity that were sold and two securities so classified were transferred to the available for sale portfolio. These actions were taken as a result of a significant deterioration in credit worthiness. The aggregate amortized cost of the securities transferred was $26 million with gross unrealized investment gains of $0.5 million charged to "Net unrealized investment gains." During the year ended December 31, 1996, one security classified as held to maturity was sold and two securities so classified were transferred to the available for sale portfolio. These actions were taken as a result of a significant deterioration in credit worthiness. The amortized cost of the security sold was $35 million with a related realized investment loss of $0.7 million; the aggregate amortized cost of the securities transferred was $26 million with gross unrealized investment losses of $6 million charged to "Net unrealized investment gains." 15 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENTS (CONTINUED) MORTGAGE LOANS ON REAL ESTATE The Company's mortgage loans were collateralized by the following property types at December 31:
1997 1996 --------------------------------- -------------------------------- (IN MILLIONS) Office buildings............................... $ 4,692 28.5% $ 6,056 34.4% Retail stores.................................. 3,078 18.7% 3,676 20.9% Residential properties......................... 891 5.4% 961 5.4% Apartment complexes............................ 3,551 21.6% 2,954 16.8% Industrial buildings........................... 1,958 11.9% 1,807 10.3% Agricultural properties........................ 1,666 10.1% 1,550 8.8% Other.......................................... 618 3.8% 608 3.4% --------------- --------- -------------- ------ Subtotal 16,454 100.0% 17,612 100.0% ========= ====== Allowance for losses........................... (450) (515) --------------- -------------- Net carrying value............................. $ 16,004 $ 17,097 =============== ==============
The mortgage loans are geographically dispersed throughout the United States and Canada with the largest concentrations in California (25.3%) and New York (8.3%) at December 31, 1997. Included in the above balances are mortgage loans receivable from affiliated joint ventures of $225 million and $461 million at December 31, 1997 and 1996, respectively. Activity in the allowance for losses for all mortgage loans, for the years ended December 31, is summarized as follows:
1997 1996 1995 ---------------- ---------------- --------------- (IN MILLIONS) Allowance for losses, beginning of year.............. $ 515 $ 862 $ 1,004 Additions charged to operations...................... 19 9 6 Release of allowance for losses...................... (60) (256) (32) Charge-offs, net of recoveries....................... (24) (100) (116) --------------- ---------------- --------------- Allowance for losses, end of year.................... $ 450 $ 515 $ 862 ================ ================ ===============
The $60 million, $256 million and $32 million reduction of the mortgage loan allowance for losses in 1997, 1996 and 1995, respectively, is primarily attributable to the improved economic climate, changes in the nature and mix of borrowers and underlying collateral and a significant decrease in impaired loans consistent with a general decrease in the mortgage loan portfolio due to prepayments, sales and foreclosures. 16 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENTS (CONTINUED) Impaired mortgage loans and related allowance for losses at December 31, are as follows:
1997 1996 ----------------- ------------------ (IN MILLIONS) Impaired mortgage loans with allowance for losses ............. $ 330 $ 941 Impaired mortgage loans with no allowance for losses .......... 1,303 1,491 Allowance for losses .......................................... (97) (189) ----------------- ------------------ Net carrying value of impaired mortgage loans ................. $ 1,536 $ 2,243 ================= ==================
Impaired mortgage loans with no provision for losses are loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. The average recorded investment in impaired loans before allowance for losses was $2,102 million, $2,842 million and $4,146 million during 1997, 1996 and 1995, respectively. Net investment income recognized on these loans totaled $140 million, $265 million and $415 million for the years ended December 31, 1997, 1996 and 1995, respectively. INVESTMENT REAL ESTATE The Company's "investment real estate" of $1,519 million and $2,586 million at December 31, 1997 and 1996, respectively, is held through direct ownership. Of the Company's real estate, $1,490 million and $406 million consists of commercial and agricultural assets held for disposal at December 31, 1997 and 1996, respectively. Impairment losses and the valuation allowances aggregated $40 million, $38 million and $124 million for the years ended December 31, 1997, 1996 and 1995, respectively, and are included in "Realized investment gains, net." RESTRICTED ASSETS AND SPECIAL DEPOSITS Assets of $2,783 million and $2,453 million at December 31, 1997 and 1996, respectively, were on deposit with governmental authorities or trustees as required by certain insurance laws. Additionally, assets valued at $2,352 million at December 31, 1997, were held in voluntary trusts. Of this amount, $1,801 million related to the multi-state policyholder settlement as described in Note 14. The remainder relates to trusts established to fund guaranteed dividends to certain policyholders. The terms of these trusts provide that the assets are to be used for payment of the designated settlement and dividend benefits, as the case may be. Assets valued at $741 million and $3,414 million at December 31, 1997 and 1996, respectively, were maintained as compensating balances or pledged as collateral for bank loans and other financing agreements. Restricted cash and securities of $1,835 million and $1,614 million at December 31, 1997, and 1996, respectively, were included in the consolidated financial statements. The restricted cash represents funds deposited by clients and funds accruing to clients as a result of trades or contracts. OTHER LONG-TERM INVESTMENTS The Company's "Other long-term investments" of $3,360 million and $2,995 million as of December 31, 1997 and 1996, respectively, are composed of $1,349 million and $832 million in real estate related interests and $2,011 million and $2,163 million of non-real estate related interests, including a $149 million net investment in a leveraged lease entered into in 1997. The Company's share of net income from such entities was $411 million, $245 million, and $326 million for 1997, 1996, and 1995, respectively, and is reported in "Net investment income." 17 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENTS (CONTINUED) INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES NET INVESTMENT INCOME arose from the following sources for the years ended December 31:
1997 1996 1995 -------------- -------------- ----------- (IN MILLIONS) Fixed maturities-available for sale........................ $ 5,074 $ 4,871 $ 4,774 Fixed maturities-held to maturity.......................... 1,622 1,793 1,717 Trading account assets..................................... 504 444 588 Equity securities-available for sale ...................... 52 81 57 Mortgage loans on real estate.............................. 1,555 1,690 2,075 Real estate ............................................... 565 685 742 Policy loans............................................... 396 384 392 Securities purchased under agreements to resell............ 15 11 19 Receivables from broker-dealer clients..................... 706 579 678 Short-term investments..................................... 697 536 590 Other investment income.................................... 573 725 983 -------------- -------------- ------------- Gross investment income.................................... 11,759 11,799 12,615 Less investment expenses................................... (1,896) (2,057) (2,437) -------------- -------------- ------------- Net investment income...................................... $ 9,863 $ 9,742 $ 10,178 ============== ============== =============
REALIZED INVESTMENT GAINS, NET, including changes in allowances for losses and charges for other than temporary reductions in value, for the years ended December 31, were from the following sources:
1997 1996 1995 -------------- -------------- ----------- (IN MILLIONS) Fixed maturities....................................... $ 684 $ 513 $ 1,180 Mortgage loans on real estate ......................... 68 248 67 Investment real estate ................................ 700 76 (19) Equity securities-available for sale .................. 363 267 400 Other gains (losses)................................... 372 34 (125) -------------- -------------- ----------- Realized investment gains, net......................... $ 2,187 $ 1,138 $ 1,503 ============== ============== ===========
NET UNREALIZED INVESTMENT GAINS on securities available for sale are included in the consolidated statement of financial position as a component of equity, net of tax. Changes in these amounts for the years ended December 31, are as follows:
1997 1996 ----------------- ----------------- (IN MILLIONS) Balance, beginning of year................................. $ 1,136 $ 2,397 Changes in unrealized investment gains(losses) attributable to: Fixed maturities ....................................... 1,766 (2,892) Equity securities....................................... (85) 254 Participating group annuity contracts................... (564) 479 Deferred policy acquisition costs....................... (154) 261 Deferred federal income taxes........................... (347) 637 ----------------- ----------------- Sub-total............................................... 616 (1,261) ----------------- ----------------- Balance, end of year....................................... $ 1,752 $ 1,136 ================= =================
18 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENTS (CONTINUED) Based on the carrying value, assets categorized as "non-income producing" for the year ended December 31, 1997 included in fixed maturities available for sale, mortgage loans on real estate and other long term investments totaled $26 million, $93 million and $7 million, respectively. 4. DEFERRED POLICY ACQUISITION COSTS The balances of and changes in deferred policy acquisition costs as of and for the years ended December 31, are as follows:
1997 1996 1995 -------------- -------------- ----------- (IN MILLIONS) Balance, beginning of year ............................ $ 6,291 $ 6,088 $ 6,403 Capitalization of commissions, sales and issue expenses 1,049 931 919 Amortization and other adjustments..................... (1,192) (989) (783) Change in unrealized investment gains ................. (154) 261 (451) -------------- -------------- ----------- Balance, end of year .................................. $ 5,994 $ 6,291 $ 6,088 ============== ============== ===========
5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES FUTURE POLICY BENEFITS at December 31 are as follows:
1997 1996 ----------------- ----------------- (IN MILLIONS) Life insurance ............................................ $ 46,712 $ 44,118 Annuities ................................................. 15,469 14,828 Other contract liabilities ................................ 3,400 5,009 ----------------- ----------------- Future policy benefits .................................... $ 65,581 $ 63,955 ================= =================
Life insurance liabilities include reserves for death and endowment policy benefits, terminal dividends, premium deficiency reserves and certain health benefits. Annuity liabilities include reserves for immediate annuities and non-participating group annuities. Other contract liabilities primarily consist of unearned premium and benefit reserves for group health products. The following table highlights the key assumptions generally utilized in calculating these reserves:
PRODUCT MORTALITY INTEREST RATE ESTIMATION METHOD - ------------------------- ------------------------ --------------- ------------------------ Life insurance Generally rates 2.5% to 7.5% Net level premium guaranteed in calculating based on non-forfeiture cash surrender values interest rate Individual immediate 1983 Individual 3.25% to 11.25% Present value of annuities Annuity Mortality expected future payments Table with certain based on historical modifications experience Group annuities in 1950 Group 3.75% to 17.35% Present value of payout status Annuity Mortality expected future payments Table with certain based on historical modifications experience Other contract liabilities -- 6.0% to 7.0% Present value of expected future payments based on historical experience
19 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED) For the above categories, premium deficiency reserves are established, if necessary, when the liability for future policy benefits plus the present value of expected future gross premiums are insufficient to provide for expected future policy benefits and expenses. A premium deficiency reserve has been recorded for the group single premium annuity business, which consists of limited-payment, long duration, traditional non-participating annuities. A liability of $1,645 million and $1,320 million is included in "Future policy benefits" with respect to this deficiency for the years ended December 31, 1997 and 1996, respectively. POLICYHOLDERS' ACCOUNT BALANCES at December 31, are as follows:
1997 1996 --------- --------- (IN MILLIONS) Individual annuities........................................ $ 5,695 $ 6,408 Group annuities & guaranteed investment contracts........... 19,053 21,706 Interest-sensitive life contracts........................... 3,160 2,888 Dividend accumulations...................................... 5,033 5,007 --------- --------- Policyholders' account balances............................. $ 32,941 $ 36,009 ========= =========
Policyholders' account balances for interest-sensitive life and investment-type contracts are equal to policy account values. The policy account values represent an accumulation of gross premium payments plus credited interest less withdrawals, expenses and mortality charges. Certain contract provisions that determine the policyholder account balances are as follows:
WITHDRAWAL/ PRODUCT INTEREST RATE SURRENDER CHARGES ----------------------------------- ------------------------ ------------------------------------- Individual annuities 3.1% to 6.6% 0% to 8% for up to 8 years Group annuities 5.0% to 12.7% Contractually limited or subject to market value adjustments Guaranteed investment contracts 3.9% to 14.34% Subject to market value withdrawal provisions for any funds withdrawn other than for benefit responsive and contractual payments Interest sensitive life contracts 4.0% to 6.5% Various up to 10 years Dividend accumulations 3.0% to 4.0%
20 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. FUTURE POLICY BENEFITS AND OTHER POLICYHOLDERS' LIABILITIES (CONTINUED) OTHER POLICYHOLDERS' LIABILITIES. The following table provides a reconciliation of the activity in the liability for unpaid claims and claim adjustment expense for property and casualty and accident and health insurance, which is included in "Other policyholder's liabilities" at December 31:
1997 1996 1995 ---------- ---------- ---------- (IN MILLIONS) Balance at January 1......................................... $ 6,043 $ 5,933 $ 7,983 Less reinsurance recoverables.............................. 563 572 865 ---------- ---------- ---------- Net balance at January 1..................................... 5,480 5,361 7,118 ---------- ---------- ---------- Incurred related to: Current year............................................... 10,691 10,281 10,534 Prior years................................................ 11 (91) 141 ---------- ---------- ---------- Total incurred............................................... 10,702 10,190 10,675 ---------- ---------- ---------- Paid related to: Current year............................................... 7,415 7,497 7,116 Prior years................................................ 2,651 2,574 2,800 ---------- ---------- ---------- Total paid................................................... 10,066 10,071 9,916 ---------- ---------- ---------- Less Reinsurance Segment.................................................... -- -- 2,516 ---------- ---------- ---------- Net balance at December 31................................... 6,116 5,480 5,361 Plus reinsurance recoverables.............................. 543 563 572 ---------- ---------- ---------- Balance at December 31....................................... $ 6,659 $ 6,043 $ 5,933 ========== ========== ==========
The changes in provision for claims and claim adjustment expenses related to prior years of $11 million, $(91) million and $141 million in 1997, 1996 and 1995, respectively, are due to such factors as changes in claim cost trends in healthcare, an accelerated decline in indemnity health business, and lower than anticipated property and casualty unpaid claims and claim adjustment expenses. The other policyholders' liabilities presented above consist primarily of unpaid claim liabilities which include estimates for liabilities associated with reported claims and for incurred but not reported claims based, in part, on the Company's experience. Changes in the estimated cost to settle unpaid claims are charged or credited to the statement of operations periodically as the estimates are revised. Accident and health unpaid claims liabilities for 1997 and 1996 included above are discounted using interest rates ranging from 6.0% to 7.5%. 21 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. SHORT-TERM AND LONG-TERM DEBT Debt consists of the following at December 31: SHORT-TERM DEBT
1997 1996 -------------- -------------- (IN MILLIONS) Commercial paper.......................................... $ 4,268 $ 4,511 Notes payable............................................. 2,151 1,614 Current portion of long-term debt......................... 355 437 -------------- -------------- Total short-term debt................................ $ 6,774 $ 6,562 ============== ==============
The weighted average interest rate on outstanding short-term debt was approximately 6.0% and 5.6% at December 31, 1997 and 1996, respectively. The Company issues commercial paper primarily to manage operating cash flows and existing commitments, meet working capital needs and take advantage of current investment opportunities. Commercial paper borrowings are supported by various lines of credit. LONG-TERM DEBT
DESCRIPTION MATURITY DATES RATE 1997 1996 ------------------------------------ ----------------- -------------- --------- ---------- (IN MILLIONS) Floating rate notes ("FRN") 1998 6.5% $ 40 $ 128 Long term notes 1998 - 2023 4% - 12% 1,194 1,023 Zero coupon notes 1998 - 1999 8.6% (a) 334 365 Australian dollar notes 1997 9% -- 55 Canadian dollar notes 1997 - 1998 7.0% - 9.125% 117 320 Japanese yen notes 1998 - 2000 0.5% - 4.6% 178 90 Swiss francs notes 1998 3.875% 120 103 Canadian dollar FRN 2003 5.89% 96 96 Surplus notes 2003 - 2025 6.875% - 8.3% 986 985 Commercial paper backed by long-term credit agreements 1,500 1,000 Other notes payable 1998 - 2017 4% - 7.5% 63 32 ---------- ---------- Sub-total............................................................................. 4,628 4,197 Less: current portion of long-term debt............................................ (355) (437) ---------- ---------- Total long-term debt.................................................................. $ 4,273 $ 3,760 ========== ==========
(a) The rate shown for zero coupon notes, which do not bear interest, represents a level yield to maturity. Payment of interest and principal on the surplus notes of $686 million issued after 1993 may be made only with the prior approval of the Commissioner of Insurance of the State of New Jersey. In order to modify exposure to interest rate and currency exchange rate movements, the Company utilizes derivative instruments, primarily interest rate swaps, in conjunction with some of its debt issues. The effect of these derivative instruments is included in the calculation of the interest expense on the associated debt, and as a result, the effective interest rates on the debt may differ from the rates reflected in the tables above. Floating rates are determined by formulas and may be subject to certain minimum or maximum rates. Scheduled principal repayments of long-term debt as of December 31, 1997, are as follows: $357 million in 1998, $808 million in 1999, $260 million in 2000, $32 million in 2001, $1,814 million in 2002 and $1,379 million thereafter. At December 31, 1997, the Company had $8,257 million in lines of credit from numerous financial institutions of which $5,160 million were unused. These lines of credit generally have terms ranging from 1 to 5 years. 22 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. EMPLOYEE BENEFIT PLANS PENSION PLANS The Company has one funded non-contributory defined benefit pension plan, which covers substantially all of its employees. The Company also has several non-contributory non-funded defined benefit plans covering certain executives. Benefits are generally based on career average earnings and credited length of service. The Company's funding policy is to contribute annually an amount necessary to satisfy the Internal Revenue Service contribution guidelines. Prepaid and accrued pension costs are included in "Other assets" and "Other liabilities," respectively, in the Company's consolidated statements of financial position. The status of these plans as of September 30, adjusted for fourth quarter activity related to funding activity and contractual termination benefits is summarized below:
1997 1996 --------------------------------- -------------------------------- ASSETS ACCUMULATED ASSETS ACCUMULATED EXCEED BENEFITS EXCEED BENEFITS ACCUMULATED EXCEED ACCUMULATED EXCEED BENEFITS ASSETS BENEFITS ASSETS --------------- -------------- -------------- ------------- (IN MILLIONS) Actuarial present value of benefit obligation: Vested benefit obligation.............. $ (4,129) $ (205) $ (3,826) $ (180) ============ ============ =========== ============= Accumulated benefit obligation......... $ (4,434) $ (226) $ (4,121) $ (198) ============ ============ =========== ============= Projected benefit obligation............. $ (5,238) $ (319) $ (4,873) $ (274) Plan assets at fair value................ 8,489 -- 7,306 -- ------------ ------------ ----------- ------------- Plan assets in excess of (less than) projected benefit obligation........... 3,251 (319) 2,433 (274) Unrecognized transition amount........... (662) 1 (769) 1 Unrecognized prior service cost.......... 317 10 356 11 Unrecognized net (gain) loss............. (1,689) 45 (916) 16 Additional minimum liability............. -- (11) -- (10) Effect of fourth quarter activity........ (67) 4 (98) 4 ------------ ------------ ----------- ------------- Prepaid (accrued) pension cost at December 31......................... $ 1,150 $ (270) $ 1,006 $ (252) ============ ============ =========== =============
Plan assets consist primarily of equity securities, bonds, real estate and short-term investments, of which $6,022 million and $5,668 million are included in Separate Account assets and liabilities at December 31, 1997 and 1996, respectively. Effective December 31, 1996, The Prudential Securities Incorporated Cash Balance Plan (the "PSI Plan") was merged into The Retirement System for United States Employees and Special Agents of The Prudential Insurance Company of America (the "Prudential Plan"). The name of the merged plan is The Prudential Merged Retirement Plan ("Merged Retirement Plan"). All of the assets of the Merged Retirement Plan are available to pay benefits to participants and their beneficiaries who are covered by the Merged Retirement Plan. The merger of the plans had no effect on the December 31, 1996 consolidated financial position or results of operations. During 1996, the Prudential Plan was amended to provide cost of living adjustments for retirees. The effect of this plan amendment increased benefit obligations and unrecognized prior service cost by $170 million at September 30, 1996. In addition, the Prudential Plan was amended to provide contractual termination benefits to certain plan participants who were notified between September 15, 1996 and December 31, 1997 that their employment had been terminated. During 1997, the Prudential Retirement Plan Document, a component of the Merged Retirement Plan was amended to extend the contractual termination benefits to December 31, 1998. Costs related to these amendments are reflected below in contractual termination benefits. 23 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. EMPLOYEE BENEFIT PLANS (CONTINUED) Net periodic pension income included in "General and administrative expenses" in the Company's consolidated statement of operations for the years ended December 31, 1997, 1996 and 1995 include the following components:
1997 1996 1995 -------------- ------------- -------------- (IN MILLIONS) Service cost-benefits earned during the year......... $ 127 $ 140 $ 133 Interest cost on projected benefit obligation........ 376 354 392 Actual return on plan assets......................... (1,693) (748) (1,288) Net amortization and deferral........................ 1,012 73 629 Contractual termination benefits..................... 30 63 -- -------------- ------------- -------------- Net periodic pension income.......................... $ (148) $ (118) $ (134) ============== ============= ==============
The assumptions at September 30 used by the Company are to calculate the projected benefit obligations as of that date and determine the pension expense for the following fiscal year:
1997 1996 1995 -------------- ------------- -------------- Discount rate.......................................... 7.25% 7.75% 7.50% Rate of increase in compensation levels................ 4.50% 4.50% 4.50% Expected long-term rate of return on plan assets....... 9.50% 9.50% 9.00%
OTHER POSTRETIREMENT BENEFITS The Company provides certain life insurance and health care benefits for its retired employees, their beneficiaries and covered dependents. Substantially all of the Company's employees may become eligible to receive benefits if they retire after age 55 with at least 10 years of service, or under circumstances after age 50 with at least 20 years of continuous service. The Company has elected to amortize its transition obligation over 20 years. Post-retirement benefits are funded as considered necessary by Company management. The Company's funding of its postretirement benefit obligations totaled $43 million, $38 million and $94 million in 1997, 1996 and 1995, respectively. In 1995 the Company modified the restrictions on certain post-retirement plan assets to allow these assets to be used for benefits related to both active and retired employees. Formerly, these benefits were available only for retired employees. In connection with this modification, the Company transferred $120 million from one of these plans in 1995. Of the $120 million transferred, $45 million went to Union Post-Retirement Benefits and $75 million went to Union Medical Benefits. 24 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. EMPLOYEE BENEFIT PLANS (CONTINUED) The status of the plan at September 30, adjusted for assets transferred to the plan in the fourth quarter, is provided below. Accrued post-retirement benefit costs are included in "Other liabilities" in the Company's consolidated statement of financial position.
1997 1996 ---------- ---------- (IN MILLIONS) Accumulated postretirement benefit obligation (APBO): Retirees.......................................................... $ (1,516) $ (1,423) Fully eligible active plan participants........................... (36) (35) Other active plan participants.................................... (576) (544) --------- --------- Total APBO..................................................... (2,128) (2,002) Plan assets at fair value............................................ 1,354 1,313 --------- --------- Funded status........................................................ (774) (689) Unrecognized transition amount....................................... 707 787 Unrecognized net gain ............................................... (364) (428) Effects of fourth quarter activity................................... 33 28 --------- --------- Accrued postretirement benefit cost at December 31................... $ (398) $ (302) ========= =========
Plan assets with respect to this coverage consist of group and individual variable life insurance policies, group life and health contracts, common stocks, U.S. government securities and short-term investments. Plan assets include $1,044 million and $1,003 million of Company insurance policies and contracts at December 31, 1997 and 1996, respectively. Net periodic postretirement benefit cost included in "General and administrative expenses" for the years ended December 31, 1997, 1996 and 1995 includes the following components:
1997 1996 1995 ---------- ----------- ----------- (IN MILLIONS) Service cost.............................................. $ 38 $ 45 $ 44 Interest cost............................................. 149 157 169 Actual return on plan assets.............................. (120) (105) (144) Net amortization and deferral............................. 70 53 111 ----------- ----------- ----------- Net periodic postretirement benefit cost.................. $ 137 $ 150 $ 180 =========== =========== ===========
The following assumptions at September 30 are used to calculate the APBO as of that date and determine postretirement benefit expense for the following fiscal year:
1997 1996 1995 --------- --------- --------- Discount rate............................................. 7.25% 7.75% 7.50% Rate of increase in compensation levels................... 4.5% 4.5% 4.5% Expected long-term rate of return on plan assets.......... 9.0% 9.0% 8.0% Health care cost trend rates.............................. 8.2-11.8% 8.5-12.5% 8.9-13.3% Ultimate health care cost trend rate after gradual decrease until 2006....................................... 5.0% 5.0% 5.0%
25 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. EMPLOYEE BENEFIT PLANS (CONTINUED) The effect of a 1% increase in health care cost trend rates for each future year on the following costs at December 31, are as follows:
1997 1996 1995 ---------- ---------- ---------- (IN MILLIONS) Accumulated postretirement benefit obligation............ $ (218) $ (207) $ (217) Service and interest costs............................... 24 25 27
POSTEMPLOYMENT BENEFITS The Company accrues postemployment benefits primarily for life and health benefits provided to former or inactive employees who are not retirees. The net accumulated liability for these benefits at December 31, 1997 and 1996 was $144 million and $156 million, respectively, and is included in "Other liabilities." OTHER EMPLOYEE BENEFITS The Company sponsors voluntary savings plans for employees (401(k) plans). The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to three percent of annual salary, resulting in $63 million, $57 million, and $61 million of expenses included in "General and administrative expenses" for 1997, 1996 and 1995, respectively. 8. INCOME TAXES The components of income tax expense for the years ended December 31, were as follows:
1997 1996 1995 --------- --------- --------- (IN MILLIONS) Current tax expense (benefit): U.S...................................................... $ (158) $ 255 $ 1,189 State and Iocal.......................................... 48 103 38 Foreign.................................................. 64 48 66 --------- --------- --------- Total.................................................... $ (46) $ 406 $ 1,293 ========= ========= ========= Deferred tax expense (benefit): U.S...................................................... $ 227 $ (442) $ (166) State and Iocal.......................................... 3 (2) (10) Foreign.................................................. 33 54 9 --------- --------- --------- Total.................................................... $ 263 $ (390) $ (167) ========= ========= ========= Total income tax expense................................. $ 217 $ 16 $ 1,126 ========= ========= =========
26 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES (CONTINUED) The Company's income tax expense for the years ended December 31, differs from the amount computed by applying the expected federal income tax rate of 35% to income from operations before income taxes for the following reasons:
1997 1996 1995 -------- -------- -------- (IN MILLIONS) Expected federal income tax expense.......................... $ 290 $ 382 $ 829 Equity tax................................................... (91) (365) 163 State and local income taxes................................. 51 100 28 Tax-exempt interest and dividend received deduction.......... (67) (50) (77) Other........................................................ 34 (51) 183 -------- -------- -------- Total income tax expense..................................... $ 217 $ 16 $ 1,126 ======== ======== ========
Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:
1997 1996 ------- -------- (IN MILLIONS) Deferred tax assets Insurance reserves.......................................... $ 1,482 $ 1,316 Policyholder dividends...................................... 250 257 Net operating loss carryforwards............................ 80 268 Depreciation................................................ -- 44 Litigation related reserves................................. 178 297 Employee benefits........................................... 42 10 Other....................................................... 360 329 -------- -------- Deferred tax assets before valuation allowance.............. 2,392 2,521 Valuation allowance......................................... (18) (36) -------- -------- Deferred tax assets after valuation allowance............... 2,374 2,485 -------- -------- Deferred tax liabilities Investments................................................. 1,867 1,183 Deferred acquisition costs.................................. 1,525 1,707 Depreciation................................................ 36 -- Other....................................................... 73 110 -------- -------- Deferred tax liabilities.................................... 3,501 3,000 -------- -------- Net deferred tax liability.................................... $ 1,127 $ 515 ======== ========
The Company's income taxes payable of $500 million and $1,544 million includes a $627 million current income tax receivable at December 31, 1997 and a $1,029 million current income taxes payable at December 31, 1996. 27 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES (CONTINUED) Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its net deferred tax asset after valuation allowance. Adjustments to the valuation allowance will be made if there is a change in management's assessment of the amount of the deferred tax asset that is realizable. At December 31, 1997, the Company had state non-life operating loss carryforwards for tax purposes approximating $800 million. The Internal Revenue Service (the "Service") has completed an examination of the consolidated federal income tax return through 1989. The Service has examined the years 1990 through 1992. Discussions are being held with the Service with respect to proposed adjustments, however, management believes there are adequate defenses against, or sufficient reserves to provide for, such adjustments. The Service has begun their examination of the years 1993 through 1995. 9. EQUITY RECONCILIATION OF STATUTORY SURPLUS AND NET INCOME Accounting practices used to prepare statutory financial statements for regulatory purposes differ in certain instances from GAAP. The following table reconciles the Company's statutory net income and surplus as of and for the years ended December 31, determined in accordance with accounting practices prescribed or permitted by the New Jersey Department of Banking and Insurance with net income and equity determined using GAAP:
1997 1996 1995 -------- -------- -------- (IN MILLIONS) STATUTORY NET INCOME........................................... $ 1,471 $ 1,402 $ 478 Adjustments to reconcile to net income on a GAAP basis: Insurance revenues and expenses.............................. 12 (478) (496) Income taxes................................................. 601 439 (596) Valuation of investments..................................... (62) 121 -- Realized investment gains.................................... 702 327 1,562 Litigation and other reserves................................ (1,975) (906) -- Other, net................................................... (139) 173 295 -------- -------- -------- GAAP NET INCOME................................................ $ 610 $ 1,078 $ 1,243 ======== ======== ========
1997 1996 -------- -------- (IN MILLIONS) STATUTORY SURPLUS.............................................. $ 9,242 $ 9,375 Adjustments to reconcile to equity on a GAAP basis: Deferred policy acquisition costs............................ 5,994 6,291 Valuation of investments..................................... 8,067 5,624 Future policy benefits and policyholder account balances..... (2,906) (1,976) Non-admitted assets.......................................... 1,643 1,285 Income taxes................................................. (1,070) (654) Surplus notes................................................ (986) (985) Other, net................................................... (266) (437) -------- -------- GAAP EQUITY.................................................... $ 19,718 $ 18,523 ======== ========
28 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. EQUITY (CONTINUED) The New York State Insurance Department ("Department") recognizes only statutory accounting for determining and reporting the financial condition of an insurance company, for determining its solvency under the New York Insurance Law and for determining whether its financial condition warrants the payment of a dividend to its policyholders. No consideration is given by the Department to financial statements prepared in accordance with GAAP in making such determinations. 10. OPERATING LEASES The Company and its subsidiaries occupy leased office space in many locations under various long-term leases and have entered into numerous leases covering the long-term use of computers and other equipment. At December 31, 1997, future minimum lease payments under non-cancelable operating leases are estimated as follows: (IN MILLIONS) 1998........................................ $ 313 1999........................................ 277 2000........................................ 230 2001........................................ 201 2002........................................ 171 Remaining years after 2002.................. 833 ----------- Total....................................... $ 2,025 =========== Rental expense incurred for the years ended December 31, 1997 and 1996 was approximately $352 million and $343 million, respectively. 11. DIVESTITURES In October 1995, the Company completed the sale of its reinsurance segment, Prudential Reinsurance Holdings, Inc., through an initial public offering of common stock. As a result of the sale, an after-tax loss of $297 million was recorded in 1995. On January 26, 1996, the Company entered into a definitive agreement to sell substantially all the assets of Prudential Home Mortgage Company, Inc. It has also liquidated certain mortgage-backed securities and extended warehouse losses, asset write downs, and other costs directly related to the planned sale. The Company recorded an after-tax loss in 1995 of $98 million which includes operating gains and losses, asset write downs and other costs directly related with the planned sale. The net assets of the mortgage banking segment at December 31, 1995 was $78 million, comprised of $4,293 million in assets and $4,215 million in liabilities. On July 31, 1996, the Company sold a substantial portion of its Canadian Branch business to the London Life Insurance Company ("London Life"). This transaction was structured as a reinsurance transaction whereby London Life assumed total liabilities of the Canadian Branch equal to $3,291 million as well as a related amount of assets equal to $3,205 million. This transfer resulted in a reduction of policy liabilities of $3,257 million and a corresponding reduction in invested assets. The Company recognized an after-tax gain in 1996 of $116 million as a result of this transaction, recorded in "Realized investment gains, net." 12. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values presented below have been determined using available information and valuation methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. Accordingly, such estimates presented may not be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair values. The following methods and assumptions were used in calculating the fair values (for all other financial instruments presented in the table, the carrying value approximates fair value). 29 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) FIXED MATURITIES AND EQUITY SECURITIES Fair values for fixed maturities and equity securities, other than private placement securities, are based on quoted market prices or estimates from independent pricing services. Fair values for private placement securities are estimated using a discounted cash flow model which considers the current market spreads between the U.S. Treasury yield curve and corporate bond yield curve, adjusted for the type of issue, its current credit quality and its remaining average life. The estimated fair value of certain non-performing private placement securities is based on amounts estimated by management. MORTGAGE LOANS ON REAL ESTATE The fair value of the mortgage loan portfolio is primarily based upon the present value of the scheduled future cash flows discounted at the appropriate U.S. Treasury rate, adjusted for the current market spread for a similar quality mortgage. For certain non-performing and other loans, the fair value is based upon the present value of expected future cash flows discounted at the appropriate U.S. Treasury rate adjusted for current market spread for a similar quality mortgage. POLICY LOANS The estimated fair value of policy loans is calculated using a discounted cash flow model based upon current U.S. Treasury rates and historical loan repayments. DERIVATIVE FINANCIAL INSTRUMENTS The fair value of swap agreements is estimated based on the present value of future cash flows under the agreements discounted at the applicable zero coupon U.S. Treasury rate and swap spread. The fair value of forwards, futures and options is estimated based on market quotes for a transaction with similar terms. The fair value of loan commitments is derived by comparing the contractual stream of fees with such fee streams adjusted to reflect current market rates that would be applicable to instruments of similar type, maturity, and credit standing. POLICYHOLDERS' ACCOUNT BALANCES Fair values of policyholders' account balances are estimated using discounted projected cash flows, based on interest rates being offered for similar contracts, with maturities consistent with those remaining for the contracts being valued. DEBT The estimated fair value of short-term and long-term debt is derived by using discount rates based on the borrowing rates currently available to the Company for debt with similar terms and remaining maturities. 30 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table discloses the carrying amounts and estimated fair values of the Company's financial instruments at December 31:
1997 1996 -------------------------- ------------------------------ CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------ ----------- ------------ -------------- FINANCIAL ASSETS: (IN MILLIONS) Other than trading: - ------------------- Fixed maturities: Available for sale....................... $ 75,270 $ 75,270 $ 66,553 $ 66,553 Held to maturity......................... 18,700 19,894 20,403 21,362 Equity securities........................... 2,810 2,810 2,622 2,622 Mortgage loans on real estate............... 16,004 17,153 17,097 17,963 Policy loans................................ 6,827 6,994 6,692 6,613 Securities purchased under agreements to resell .................... 8,661 8,661 5,347 5,347 Cash collateral for borrowed securities..... 5,047 5,047 2,416 2,416 Short-term investments...................... 12,106 12,106 9,294 9,294 Cash ....................................... 3,636 3,636 2,091 2,091 Separate Accounts assets.................... 74,046 74,046 63,358 63,358 Derivative financial instruments............ 24 35 16 32 Trading: - -------- Trading account assets...................... 6,044 6,044 4,219 4,219 Receivables from broker-dealer clients...... 6,273 6,273 5,281 5,281 Derivative financial instruments............ 979 979 904 904 FINANCIAL LIABILITIES: Other than trading: - ------------------- Policyholders' account balances............. 32,941 33,896 36,009 37,080 Securities sold under agreements to repurchase................. 12,347 12,347 7,503 7,503 Cash collateral for loaned securities....... 14,117 14,117 8,449 8,449 Short-term and long-term debt............... 11,047 11,020 10,322 10,350 Securities sold but not yet purchased....... 3,533 3,533 1,900 1,900 Separate Accounts liabilities............... 73,658 73,658 62,845 62,845 Derivative financial instruments............ 32 47 32 45 Trading: - -------- Payables to broker-dealer clients........... 3,338 3,338 3,018 3,018 Derivative financial instruments ........... 1,088 1,088 1,120 1,120
31 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS DERIVATIVE FINANCIAL INSTRUMENTS The tables below summarize the Company's outstanding positions by derivative instrument types as of December 31, 1997 and 1996. The amounts presented are classified as either trading or other than trading, based on management's intent at the time of contract inception and throughout the life of the contract. The table includes the estimated fair values of outstanding derivative positions only and does not include the changes in fair values of associated financial and non-financial assets and liabilities, which generally offset derivative notional amounts. The fair value amounts presented also do not reflect the netting of amounts pursuant to right of setoff, qualifying master netting agreements with counterparties or collateral arrangements. DERIVATIVE FINANCIAL INSTRUMENTS DECEMBER 31, 1997 (IN MILLIONS)
TRADING OTHER THAN TRADING TOTAL ------------------------ ----------------------- ------------------------------------ ESTIMATED ESTIMATED CARRYING ESTIMATED NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE ----------- ----------- ---------- ----------- ----------- ---------- ----------- Swaps: Assets.............. $ 7,759 $ 394 $ 61 $ -- $ 7,820 $ 395 $ 394 Liabilities......... 6,754 489 13 3 6,767 493 491 Forwards: Assets.............. 29,511 429 1,031 23 30,542 452 452 Liabilities......... 29,894 459 647 7 30,541 466 466 Futures: Assets.............. 4,103 51 46 -- 4,149 51 51 Liabilities......... 3,064 50 3,320 21 6,384 71 71 Options: Assets.............. 6,893 105 239 -- 7,132 105 105 Liabilities......... 4,165 90 5 -- 4,170 90 90 Loan Commitments: Assets.............. -- -- 317 12 317 -- 12 Liabilities......... -- -- 524 16 524 -- 16 ----------- ----------- ---------- ----------- ----------- ---------- ----------- Total: Assets.............. $ 48,266 $ 979 $ 1,694 $ 35 $ 49,960 $ 1,003 $ 1,014 =========== =========== ========== =========== =========== ========== =========== Liabilities......... $ 43,877 $ 1,088 $ 4,509 $ 47 $ 48,386 $ 1,120 $ 1,134 =========== =========== ========== =========== =========== ========== ===========
32 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS DECEMBER 31, 1997 (IN MILLIONS)
TRADING OTHER THAN TRADING TOTAL ------------------------ ----------------------- ------------------------------------ ESTIMATED ESTIMATED CARRYING ESTIMATED NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE NOTIONAL AMOUNT FAIR VALUE ----------- ----------- ---------- ----------- ----------- ---------- ----------- Swaps: Assets.............. $ 8,080 $ 481 $ 398 $ 10 $ 8,478 $ 481 $ 491 Liabilities......... 8,316 756 139 17 8,455 771 773 Forwards: Assets.............. 24,275 367 489 13 24,764 376 380 Liabilities......... 20,103 308 920 10 21,023 318 318 Futures: Assets.............. 2,299 24 3 -- 2,302 24 24 Liabilities......... 2,573 30 1,087 6 3,660 36 36 Options: Assets.............. 2,981 32 2,083 7 5,064 39 39 Liabilities......... 2,653 26 437 12 3,090 27 38 Loan Commitments: Assets.............. -- -- 163 2 163 -- 2 Liabilities......... -- -- 445 -- 445 -- -- ----------- ----------- ---------- ----------- ----------- ---------- ----------- Total: Assets.............. $ 37,635 $ 904 $ 3,136 $ 32 $ 40,771 $ 920 $ 936 =========== =========== ========== =========== =========== ========== =========== Liabilities......... $ 33,645 $ 1,120 $ 3,028 $ 45 $ 36,673 $ 1,152 $ 1,165 =========== =========== ========== =========== =========== ========== ===========
CREDIT RISK The current credit exposure of the Company's derivative contracts is limited to the fair value at the reporting date. Credit risk is managed by entering into transactions with creditworthy counterparties and obtaining collateral where appropriate and customary. The Company also attempts to minimize its exposure to credit risk through the use of various credit monitoring techniques. Approximately 95% of the net credit exposure for the Company from derivative contracts is with investment-grade counterparties. Net trading revenues for the years ended December 31, 1997, 1996 and 1995 relating to forwards, futures and swaps were $54 million, $37 million, $(8) million; $42 million, $32 million, $(11) million; and $110 million, $42 million, $3 million respectively. Net trading revenues for options were not material. Average fair values for trading derivatives in an asset position during the years ended December 31, 1997 and 1996 were $1,015 million and $881 million, respectively, and for derivatives in a liability position were $1,166 million and $1,038 million, respectively. Of those derivatives held for trading purposes at December 31, 1997, 52% of the notional amount consisted of interest rate derivatives, 40% consisted of foreign currency derivatives, and 8% consisted of equity and commodity derivatives. Of those derivatives held for purposes other than trading at December 31, 1997, 72% of notional consisted of interest rate derivatives and 28% consisted of foreign currency derivatives. 33 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (CONTINUED) OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS During the normal course of its business, the Company utilizes financial instruments with off-balance sheet credit risk such as commitments, financial guarantees, loans sold with recourse and letters of credit. Commitments include commitments to purchase and sell mortgage loans, the unfunded portion of commitments to fund investments in private placement securities, and unused credit card and home equity lines. The Company also provides financial guarantees incidental to other transactions and letters of credit that guarantee the performance of customers to third parties. These credit-related financial instruments have off-balance sheet credit risk because only their origination fees, if any, and accruals for probable losses, if any, are recognized until the obligation under the instrument is fulfilled or expires. These instruments can extend for several years and expirations are not concentrated in any period. The Company seeks to control credit risk associated with these instruments by limiting credit, maintaining collateral where customary and appropriate, and performing other monitoring procedures. The fair value of asset positions in these instruments, which represents the Company's current exposure to credit loss from other parties' non-performance, was $1,014 million and $936 million at December 31, 1997 and 1996, respectively. 14. CONTINGENCIES AND LITIGATION FINANCIAL GUARANTEE AGREEMENT In connection with the sale in 1995 of its wholly-owned subsidiary Prudential Reinsurance Company ("Pru Re"), the Company's subsidiary, Gibraltar Casualty Insurance Company ("Gibraltar") entered into a stop-loss reinsurance agreement with Pru Re whereby Gibraltar has reinsured up to $375 million of the first $400 million of aggregate adverse loss development on reserves recorded by Pru Re at June 30, 1995. Gibraltar also has entered into several quota share reinsurance arrangements with Pru Re whereby certain medical malpractice, direct insurance and casualty reinsurance pool risks previously underwritten by Pru Re prior to June 30, 1995 were ceded to Gibraltar. The Company has guaranteed Gibraltar's obligations arising under each of these contracts subject to a limit of $375 million for the stop-loss agreement and $400 million for the other agreements. Through December 31, 1997, Gibraltar has incurred $285 million in losses under the stop-loss agreement, including $45 million in 1997. Gibraltar has paid $165 million to Pru Re under the stop-loss agreement. The Company has not been required to fund losses arising under the other arrangements. ENVIRONMENTAL AND ASBESTOS-RELATED CLAIMS Certain of the Company's subsidiaries received claims under expired contracts which assert alleged injuries and/or damages relating to or resulting from toxic torts, toxic waste and other hazardous substances. The liabilities for such claims cannot be estimated by traditional reserving techniques. As a result of judicial decisions and legislative actions, the coverage afforded under these contracts may be expanded beyond their original terms. Extensive litigation between insurers and insureds over these issues continues and the outcome is not predictable. In establishing the liability for unpaid claims for these losses, management considered the available information. However, given the expansion of coverage and liability by the courts and legislatures in the past, and potential for other unfavorable trends in the future, the ultimate cost of these claims could increase from the levels currently established. MANAGED CARE REIMBURSEMENT In 1997, the Company continued to review its obligations under certain managed care arrangements for possible failure to comply with contractual and regulatory requirements. The estimated cost to the Company for these reimbursements increased by $115 million in 1997, bringing the total provision to $265 million. As of December 31, 1997, $163 million has been paid or credited to customers. It is the opinion of management that the remaining reserves of $102 million at December 31, 1997 represent a reasonable estimate of remaining reimbursements to customers and other related costs. LITIGATION Various lawsuits against the Company have arisen in the course of the Company's business. In certain of these matters, large and/or indeterminate amounts are sought. Three putative class actions and approximately 677 individual actions were pending against the Company in the United States as of January 31, 1998 brought on behalf of those persons who purchased life insurance policies allegedly because of deceptive sales practices engaged in by the Company and its insurance agents in violation of state and federal laws. The Company anticipates additional suits may be filed by individuals who opted out of the class action settlement described below. The sales practices alleged to have occurred are contrary to Company policy. Some of 34 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. CONTINGENCIES AND LITIGATION (CONTINUED) these cases seek substantial damages while others seek unspecified compensatory, punitive and treble damages. The Company intends to defend these cases vigorously. A Multi-State Life Insurance Task Force (the "Task Force"), comprised of insurance regulators from 29 states and the District of Columbia, was formed in April 1995 to conduct a review of sales and marketing practices throughout the life insurance industry. As the largest life insurance company in the United States, the Company was the initial focus of the Task Force examination. On July 9, 1996, the Task Force released its report on the Company's activities. The Task Force found that some sales of life insurance policies by the Company had been improper. Based on the findings, the Task Force recommended, and the Company agreed to, a series of fines allocated to all 50 states and the District of Columbia. In addition, the Task Force recommended a remediation program pursuant to which the Company would offer relief to the policyowners who were misled when they purchased permanent life insurance policies in the United States from 1982 to 1995. On October 28, 1996, the Company entered into a Stipulation of Settlement with attorneys for the plaintiffs in the consolidated class action lawsuit pending in a Multi-District Litigation proceeding in the federal court in New Jersey. The class action suit involved alleged improprieties in connection with the Company's sale, servicing and operation of permanent life insurance policies from 1982 through 1995. Pursuant to the settlement, the Company agreed to provide certain enhancements and changes to the remediation program previously accepted by the Task Force, including some additional remedies. In addition, the Company agreed that it would incur a minimum cost of $410 million in providing remedies to policyowners under the program and, in specified circumstances, agreed to make certain other payments and guarantees. Under the terms of the settlement, the Company agreed to a minimum average cost per remedy of $2,364 for up to 330,000 claims remedied and also agreed to provide additional compensation to be determined by formula that will range in aggregate amount from $50 million to $300 million depending on the total number of claims remedied. At the end of the remediation program's claim evaluation process, the Court will determine how the additional compensation will be distributed. The terms of the remediation program described above were enhanced again in February 1997 pursuant to agreements reached with several states that had not previously accepted the terms of the program. These changes were incorporated as amendments to the above-described Stipulation of Settlement and related settlement documents, and the amended Stipulation of Settlement was approved as fair to class members by the United States District Court for the District of New Jersey in March 1997. By that point in time, the Company had entered into agreements with all 50 states and the District of Columbia pursuant to which each jurisdiction had accepted the remediation plan and the Company had agreed to pay approximately $65 million in fines, penalties and related payments. The decision of the U.S. District Court to certify a class in the above-described litigation for settlement purposes only and to approve the class action settlement as described in the amended Stipulation of Settlement is presently on appeal to the U.S. Court of Appeals for the Third Circuit. The appellants claim that the District Court erred in certifying a class and in finding that the terms of the settlement are fair to the class. Pursuant to the state agreements and the amended Stipulation of Settlement, as approved by the U.S. District Court, the Company initiated its remediation program in 1997. The Company mailed packages and provided broad class notice to the owners of approximately 10.7 million policies eligible to participate in the remediation program, informing them of their rights. Owners of approximately 21,800 policies elected to be excluded from the class action settlement. Of those eligible to participate in the settlement, policyowners who believed they were misled were invited to file a claim through an Alternative Dispute Resolution ("ADR") process. The ADR process was established to enable the company to discharge its liability to the affected policyowners. Policyowners who did not wish to file a claim in the ADR process were permitted to choose from options available under Basic Claim Relief, such as preferred rate premium loans, or annuities, mutual fund shares or life insurance policies that the Company will enhance. The owners of approximately 1.16 million policies responded to these notices by indicating an intent to file an ADR claim. All policyholders who responded were provided an ADR claim form for completion and submission. Approximately 635,000 claim forms were completed and returned as of January 31, 1998. Management does not believe the number of ADR claims that will be completed and returned will increase significantly. In addition, the owners of approximately 510,000 policies indicated an interest in a Basic Claim Relief remedy. The ADR process requires that individual claim files be reviewed by one or more independent claim evaluators. Management does not believe costs associated with providing Basic Claim Relief will be material to the Company's financial position or results of operations. 35 THE PRUDENTIAL INSURANCE COMPANY OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. CONTINGENCIES AND LITIGATION (CONTINUED) In 1996, the Company recorded in its Statement of Operations, the minimum cost of $410 million as agreed to in the settlement. Management had no better information available at that time upon which to make a reasonable estimate of losses. Management now has additional information which allows for computation of a reasonable estimate of losses associated with ADR claims. Based on this additional information, in 1997, management had increased the estimated liability for the cost of remedying policyholder claims in the ADR process by $1.64 billion before taxes to approximately $2.05 billion before taxes of which $1.80 billion has been funded in a settlement trust as described in Note 3. While management believes these are reasonable estimates based on information currently available, the ultimate amount of the total cost of remedied policyholder claims is dependent on complex and varying factors, including actual claims by eligible policyholders, the relief options chosen and the dollar value of those options. There are also additional elements of the ADR process which cannot be fully evaluated at this time (e.g., claims which may be successfully appealed) which could increase this estimate. Litigation is subject to many uncertainties, and given the complexity and scope of these suits, their outcome cannot be predicted. It is also not possible to predict the likely results of any regulatory inquiries or their effect on litigation which might be initiated in response to widespread media coverage of these matters. Accordingly, management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of all pending litigation and the regulatory inquiries. It is possible that the results of operations or the cash flow of the Company, in particular quarterly or annual periods, could be materially affected by an ultimate unfavorable outcome of certain pending litigation and regulatory matters. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters referred to above should not have a material adverse effect on the Company's financial position, after consideration of applicable reserves. The Company and a number of other insurers ("the Consortium") entered into a Reinsurance and Participation Agreement (the "Agreement") with MBL Life Assurance Corporation ("MBLLAC") and others, under which the Company and the other insurers agreed to reinsure certain payments to be made to contract holders by MBLLAC in connection with the plan of rehabilitation of Mutual Benefit Life Insurance Company. Under the agreement, the Consortium, subject to certain terms and conditions, will indemnify MBLLAC for the ultimate net loss sustained by MBLLAC on each contract subject to the Agreement. The ultimate net loss represents the amount by which the aggregate required payments exceed the fair market value of the assets supporting the covered contracts at the time such payments are due. The Company's share of any net loss is 30.55%. The Company has determined that it does not expect to make any payments to MBLLAC under the agreement. The Company concluded this after testing a wide range of potentially adverse scenarios during the rehabilitation period for MBLLAC. 15. SUBSEQUENT EVENTS DEMUTUALIZATION On February 10, 1998, the Company's Board of Directors authorized management to take the preliminary steps necessary to allow the Company to demutualize and become a publicly-traded company. The Company has begun discussions with the New Jersey Department of Banking and Insurance, leaders in the New Jersey State Legislature, as well as other key regulatory agencies around the country. The New Jersey State Legislature must first pass a law permitting demutualization. The New Jersey Department of Banking and Insurance, the Company's Board and a majority of participating policyholders must ultimately approve the Company's plan for demutualization. HEALTHCARE (UNAUDITED) On December 10, 1998, the Company announced that it had entered into definitive agreements for Aetna to acquire, subject to regulatory approval and certain other conditions, the Company's healthcare business for $1 billion. The transaction is expected to be completed in the second quarter of 1999. Included in this transaction are the Prudential HealthCare Health Maintenance Organization, Point of Service, Preferred Provider Organization, and indemnity health lines as well as its dental business. * * * * * 36 VARIABLE UNIVERSAL LIFE INSURANCE LOGO PRUDENTIAL The Prudential Insurance Company of America 751 Broad Street, Newark, NJ 07102-3777 Telephone 800 437-4016 PVUL-1 Ed. 12/98 CAT#64N370M PART II OTHER INFORMATION UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. REPRESENTATION WITH RESPECT TO CHARGES The Prudential Insurance Company of America represents that the fees and charges deducted under the Variable Universal Life Insurance Contracts registered by this registration statement, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by Prudential. UNDERTAKING WITH RESPECT TO INDEMNIFICATION The Registrant, in conjunction with certain affiliates, maintains insurance on behalf of any person who is or was a trustee, director, officer, employee, or agent of the Registrant, or who is or was serving at the request of the Registrant as a trustee, director, officer, employee or agent of such other affiliated trust or corporation, against any liability asserted against and incurred by him or her arising out of his or her position with such trust or corporation. New Jersey, being the state of organization of Prudential Insurance Company of America ("Prudential"), permits entities organized under its jurisdiction to indemnify directors and officers with certain limitations. The relevant provisions of New Jersey law permitting indemnification can be found in Section 14A:3-5 of the New Jersey Statutes Annotated. The text of Prudential's By-law 27, which relates to indemnification of officers and directors, is incorporated by reference to Exhibit (6)(b) of this registration statement. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-1 CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents: - ------------------------------------------------------------------------- The facing sheet. Cross-reference to items required by Form N-8B-2. The prospectus consisting of 112 pages. The undertaking to file reports. The representation with respect to charges. The undertaking with respect to indemnification. The signatures. Written consents of the following persons: 1. PricewaterhouseCoopers, LLP 2. Deloitte & Touche, LLP 3. Clifford E. Kirsch, Esq. 4. Ching-Meei Chang, MAAA, FSA The following exhibits: - ----------------------- 1. The following exhibits correspond to those required by paragraph A of the instructions as to exhibits in Form N-8B-2: A. (1) (a) Resolution of Board of Directors of The Prudential Insurance Company of America establishing The Prudential Variable Appreciable Account. (Note 2) (b) Authorization for Separate Account to Invest in Unaffiliated Mutual Funds (Note 5) (2) Not Applicable. (3) Distributing Contracts: (a) Distribution Agreement between Pruco Securities Corporation and The Prudential Insurance Company of America. (Note 5) (b) Proposed form of Agreement between Pruco Securities Corporation and independent brokers with respect to the Sale of the Contracts. (Note 5) (c) Schedules of Sales Commissions. (Note 1) (d) Participation Agreements: (i) (a) AIM Variable Insurance Funds, Inc., AIM V.I. Value Fund. (Note 1) (ii) (a) American Century Variable Portfolios, Inc., VP Value Portfolio. (Note 7) (b) Amendment to the American Century Variable Portfolios, Inc. Participation Agreement. (Note 1) (iii) (a) Janus Aspen Series, Growth Portfolio. (Note 7) (b) Amendment to the Janus Aspen Series Participation Agreement. (Note 1) (iv) (a) MFS Variable Insurance Trust, Emerging Growth Series. (Note 7) (b) Amendment to the MFS Variable Insurance Trust Participation Agreement. (Note 1) (v) (a) T. Rowe Price International Series, Inc., International Stock Portfolio. (Note 8) (b) Amendment to the T. Rowe Price International Series, Inc. Participation Agreement. (Note 1) (4) Not Applicable. (5) Variable Universal Life Insurance Contract: (Note 1) (6) (a) Charter of The Prudential Insurance Company of America, as amended November 14, 1995. (Note 3) (b) By-laws of The Prudential Insurance Company of America, as amended May 12, 1998. (Note 5) (7) Not Applicable. (8) Not Applicable. II-2 (9) Not Applicable. (10) (a) Application Form. (Note 5) (b) Supplement to the Application. (Note 5) (11) Not Applicable. (12) Memorandum describing Prudential's issuance, transfer, and redemption procedures for the Contracts pursuant to Rule 6e-3(T)(b)(12)(iii) and method of computing adjustments in payments and cash surrender values upon conversion to fixed-benefit policies pursuant to Rule 6e-3(T)(b)(13)(v)(B). (Note 5) (13) Available Contract Riders and Endorsements: (a) Rider for Payment of Premium Benefit Upon Insured's Total Disability. (Note 5) (b) 10 Year Level PremiumTerm Rider on Insured. (Note 1) (c) 10 Year Level PremiumTerm Rider on Spouse. (Note 1) (d) Children's Rider (i) The dependent child is named in the application for the contract and on the date of the application has not reached his or her 18th birthday. (Note 1) (ii) The dependent child just before the contract date of this contract was insured under the earlier contract that was converted or changed to this contract. (Note 1) (iii) The dependent child is named in the application for change. (Note 1) (iv) After-issue. (Note 1) (e) Endorsement to the Rider for Level Term Insurance Benefit on Dependent Children. (Note 1) (f) Living Needs Benefit Rider (i) for use in all approved jurisdictions except Florida. (Note 2) 2. See Exhibit 1.A.(5). 3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the securities being registered. (Note 1) 4. None. 5. Not Applicable. 6. Opinion and Consent of Ching-Meei Chang, MAAA, FSA, as to actuarial matters pertaining to the securities being registered. (Note 1) 7. Powers of Attorney. (a) F. Agnew, F. Becker, M. Berkowitz, J.Cullen, C. Davis, R. Enrico, A. Gilmour, W. Gray, III, J. Hanson, G. Hiner, C. Horner, G. Kelley, B. Malkiel, A. Ryan, I. Schmertz, C. Sitter, D. Staheli, R. Thomson, J. Unruh, P. Vagelos, S. Van Ness, P. Volcker, J. Williams (Note 4) (b) G. Casellas (Note 5) (c) R. Carbone (Note 6) 27. Financial Data Schedule. (Note 1) (Note 1) Filed herewith. (Note 2) Incorporated by reference to Post-Effective Amendment No. 15 to Form S-6, Registration No. 33-20000, filed May 1, 1995 on behalf of The Prudential Variable Appreciable Account. (Note 3) Incorporated by reference to Post-Effective Amendment No. 9 to Form S-1, Registration No. 33-20083, filed April 9, 1997 on behalf of The Prudential Variable Contract Real Property Account. II-3 (Note 4) Incorporated by reference to Post-Effective Amendment No. 10 to Form S-1, Registration No. 33-20083, filed April 9, 1998 on behalf of The Prudential Variable Contract Real Property Account. (Note 5) Incorporated by reference to Registrant's Form S-6, filed September 30, 1998. (Note 6) Incorporated by reference to Post-Effective Amendment No. 3 to Form N-4, Registration No. 333-23271, filed October 16, 1998 on behalf of The Prudential Discovery Select Group Variable Contract Account. (Note 7) Incorporated by reference to Post-Effective Amendment No. 1 to Form S-6, Registration No. 333-01031, filed May 14, 1997 on behalf of The Prudential Variable Contract Account GI-2. (Note 8) Incorporated by reference to Pre-Effective Amendment No. 1 to Form N-4, Registration No. 333-23271, filed June 17, 1997 on behalf of The Prudential Discovery Select Group Variable Contract Account. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, the Prudential Variable Appreciable Account, has duly caused this Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, and its seal hereunto affixed and attested, all in the city of Newark and the State of New Jersey, on this 22nd day of December, 1998. (Seal) THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT (Registrant) By: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (Depositor) Attest: /s/ Thomas C. Castano By: /s/ Esther H. Milnes ------------------------ -------------------------- Thomas C. Castano Esther H. Milnes Assistant Secretary Vice President and Actuary Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated on this 22nd day of December, 1998. SIGNATURE AND TITLE /s/ * - ------------------------------------------------------------ Arthur F. Ryan Chairman of the Board, President, and Chief Executive Officer /s/ * - ------------------------------------------------------------ Martin A. Berkowitz *By: /s/ Thomas C. Castano Senior Vice President and Comptroller --------------------- Thomas C. Castano /s/ * (Attorney-in-Fact) - ------------------------------------------------------------ Richard J. Carbone Chief Financial Officer /s/ * - ------------------------------------------------------------ Franklin E. Agnew Director /s/ * - ------------------------------------------------------------ Frederic K. Becker Director /s/ * - ------------------------------------------------------------ Gilbert F. Casellas Director /s/ * - ------------------------------------------------------------ James G. Cullen Director /s/ * - ------------------------------------------------------------ Carolyne K. Davis Director /s/ * - ------------------------------------------------------------ Roger A. Enrico Director /s/* - ------------------------------------------------------------ Allan D. Gilmour Director II-5 /s/ * - ---------------------------------------------- William H. Gray, III Director /s/ * - ---------------------------------------------- Jon F. Hanson Director /s/ * - ---------------------------------------------- Glen H. Hiner, Jr. Director /s/ * - ---------------------------------------------- Constance J. Horner Director /s/ * - ---------------------------------------------- Gaynor N. Kelley Director /s/ * - ---------------------------------------------- Burton G. Malkiel *By: /s/ Thomas C. Castano Director --------------------- Thomas C. Castano /s/* (Attorney-in-Fact) - ---------------------------------------------- Ida F. S. Schmertz Director /s/* - ---------------------------------------------- Charles R. Sitter Director /s/* - ---------------------------------------------- Donald L. Staheli Director /s/ * - ---------------------------------------------- Richard M. Thomson Director /s/ * - ---------------------------------------------- James A. Unruh Director /s/ * - ---------------------------------------------- P. Roy Vagelos, M.D. Director /s/ * - ---------------------------------------------- Stanley C. Van Ness Director /s/ * - ---------------------------------------------- Paul A. Volcker Director /s/ * - ---------------------------------------------- Joseph H. Williams Director II-6 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 March 20, 1998, relating to the financial statements of the Variable Universal Life Subaccounts of the Prudential Variable Appreciable Account, which appears in such Prospectus. We also consent to the use in the Prospectus constituting part of this Registration Statement of our report dated March 5, 1998, relating to the consolidated financial statements of The Prudential Insurance Company of America, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in the Prospectus. /s/ PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York 10036 December 22, 1998 II-7 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Pre-Effective Amendment No. 1 to Registration Statement No. 333-64957 on Form S-6 of The Prudential Variable Appreciable Account of The Prudential Insurance Company of America (a) of our report dated February 15, 1996, relating to the financial statements of The Prudential Variable Appreciable Account, and (b) of our report dated June 4, 1997, relating to the consolidated financial statements of The Prudential Insurance Company of America and subsidiaries appearing in the Prospectus, which is a part of such Registration Statement; and (c) to the reference to us under the heading of "Experts" in such Registration Statement. /s/ Deloitte & Touche LLP Parsippany, New Jersey December 22, 1998 II-8 EXHIBIT INDEX
Consent of PricewaterhouseCoopers LLP, independent accountants. Page II-7 Consent of Deloitte & Touche LLP, independent auditors. Page II-8 1.A.(3)(c) Schedules of Sales Commissions. Page II-10 1.A.(3)(d) Participation Agreements: (i)(a) AIM Variable Insurance Funds, Inc., AIM V.I. Value Fund. Page II-11 (ii)(b) American Century Variable Portfolios, Inc., VP Value Portfolio. Page II-41 (iii)(b) Janus Aspen Series, Growth Portfolio. Page II-45 (iv)(b) MFS Variable Insurance Trust, Emerging Growth Series. Page II-47 (v)(b) T. Rowe Price International Series, Inc., International Stock Portfolio. Page II-49 1.A.(5) Variable Universal Life Insurance Contract Page II-52 1.A.(13)(b) 10 Year Level Premium Term Rider on Insured. Page II-98 1.A.(13)(c) 10 Year Level Premium Term Rider on Spouse. Page II-101 1.A.(13)(d)(i) Rider for Level Term Insurance Benefit on Dependent Children under 18 years of age. Page II-105 1.A.(13)(d)(ii) Rider for Level Term Insurance Benefit on Dependent Children insured under a previous Contract. Page II-116 1.A.(13)(d)(iii) Rider for Level Term Insurance Benefit on Dependent Children named in the application for change. Page II-127 1.A.(13)(d)(iv) Rider for Level Term Insurance Benefit on Dependent Children after-issue. Page II-138 1.A.(13)(e) Endorsement to the Rider for Level Term Insurance Benefit on Dependent Children. Page II-142 3. Opinion and Consent of Clifford E. Kirsch, Esq. as to the legality of the securities being registered Page II-143 6. Opinion and Consent of Ching-Meei Chang, MAAA, FSA, as to actuarial matters pertaining to the securities being registered Page II-144 27. Financial Data Schedule
II-9 EX-99.1(A)(3)(C) 2 COMMISSION SCHEDULE Exhibit 1.A.(3)(c) COMMISSION SCHEDULE FOR Variable Universal Life Insurance Contracts ------------------------------------------- I.) Commissions FIRST YEAR COMMISSION - rate will be 50% of the Modified Commissionable Target Premiums (MCTP). The Modified Commissionable Target Premium will be the least of (a) the Commissionable Target Premium (b) the annual planned premium payment for the first two policy years, as specified on the application (i.e. billed premium); and (c) the premium actually received in the First policy year. The Commissionable Target Premium (CTP) is the target premium amount excluding aviation, avocation, occupational and temporary extras on the base policy and any riders. As premiums are received in the first contract year, commissions will be paid at a rate of 50% until the total premium received reaches the MCTP amount. Any premiums received above the MCTP in year 1 will generate a 3% excess commission. If we issue a policy with an issue age in excess of 80, we may reduce the first year commissions. Agents in their first 4 years in Prudential Preferred Financial Services (PPFS) or the first 2 years in Prudential Insurance and Financial Services (PI&FS) may be paid on a different basis. RENEWAL COMMISSIONS, SERVICE COMMISSIONS AND DROP-INS, the commission rate on renewal premiums in policy years 2 through 10 is 5% on the amount up to the CTP and it is 3% on the excess. Commissions on renewal/drop-in premiums received in year 11 or later will be paid at 3% or less. II.) COMMISSION RECAPTURES In PPFS, if a case lapses or is surrendered before the end of the sixth month, 100% of the commission paid will be withdrawn. If the case lapses o is surrendered after being in force 7 months but within the first 24 months, a portion of the commission will be withdrawn. III.) OTHER BROKER-DEALERS The Contract may also be sold through other broker-dealers authorized by Prusec and applicable law to do so. Registered representatives of such other broker-dealers may be paid on a different basis than that stated above. II-10 EX-99.1(A)(3)(D) 3 PARTICIPATION AGREEMENT EXHIBIT 99.1(a)(3)(d) PARTICIPATION AGREEMENT BY AND AMONG AIM VARIABLE INSURANCE FUNDS, INC., A I M DISTRIBUTORS, INC., THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ON BEHALF OF ITSELF AND ITS SEPARATE ACCOUNTS AND PRUCO SECURITIES CORPORATION II-11 TABLE OF CONTENTS -----------------
DESCRIPTION PAGE - ----------- ---- Section 1. Available Funds...................................................................... 2 1.1 Availability.................................................................... 2 1.2 Addition, Deletion or Modification of Funds..................................... 2 1.3 No Sales to the General Public.................................................. 2 Section 2. Processing Transactions.............................................................. 3 2.1 Timely Pricing and Orders....................................................... 3 2.2 Timely Payments................................................................. 3 2.3 Applicable Price................................................................ 4 2.4 Dividends and Distributions..................................................... 4 2.5 Book Entry...................................................................... 4 Section 3. Costs and Expenses................................................................... 4 3.1 General......................................................................... 4 3.2 Registration.................................................................... 4 3.3 Other (Non-Sales-Related)....................................................... 5 3.4 Other (Sales-Related)........................................................... 5 3.5 Parties To Cooperate............................................................ 5 Section 4. Legal Compliance..................................................................... 6 4.1 Tax Laws........................................................................ 6 4.2 Insurance and Certain Other Laws................................................ 8 4.3 Securities Laws................................................................. 9 4.4 Notice of Certain Proceedings and Other Circumstances........................... 9 4.5 Prudential and the Underwriter To Provide Documents; Information About AVIF..... 10 4.6 AVIF or AIM To Provide Documents; Information About Prudential and the Underwriter..................................................................... 11 4.7 Definition of Sales Literature or Other Promotional Material.................... 12 Section 5. Mixed and Shared Funding............................................................. 12 5.1 General......................................................................... 12 5.2 Disinterested Directors......................................................... 12 5.3 Monitoring for Material Irreconcilable Conflicts................................ 13 5.4 Conflict Remedies............................................................... 14 5.5 Notice to Prudential............................................................ 15 5.6 Information Requested by Board of Directors..................................... 15 5.7 Compliance with SEC Rules....................................................... 15 5.8 Other Requirements.............................................................. 15
II-12
DESCRIPTION Page - ----------- ---- Section 6. Termination.......................................................................... 15 6.1 Events of Termination........................................................... 15 6.2 Notice Requirement for Termination.............................................. 17 6.3 Funds To Remain Available....................................................... 17 6.4 Survival of Warranties and Indemnifications..................................... 17 6.5 Continuance of Agreement for Certain Purposes................................... 18 Section 7. Parties To Cooperate Respecting Termination.......................................... 18 Section 8. Assignment........................................................................... 18 Section 9. Notices.............................................................................. 18 Section 10. Voting Procedures................................................................... 19 Section 11. Foreign Tax Credits................................................................. 19 Section 12. Indemnification..................................................................... 20 12.1 Of AVIF and AIM by Prudential and the Underwriter............................... 20 12.2 Of Prudential and the Underwriter by AVIF and AIM............................... 22 12.3 Effect of Notice................................................................ 24 12.4 Successors...................................................................... 24 12.5 Assignments..................................................................... 24 Section 13. Applicable Law...................................................................... 25 Section 14. Execution in Counterparts........................................................... 25 Section 15. Severability........................................................................ 25 Section 16. Rights Cumulative................................................................... 25 Section 17. Headings............................................................................ 25
II-13 PARTICIPATION AGREEMENT THIS AGREEMENT, made and entered into as of the day of , 1998 ("Agreement"), by and among AIM Variable Insurance Funds, Inc., a Maryland corporation ("AVIF"); A I M Distributors, Inc., a Delaware corporation ("AIM"); The Prudential Insurance Company of America ("Prudential"), a New Jersey life insurance company, on behalf of itself and each of its segregated asset accounts listed in Schedule A hereto, as the parties hereto may amend from time to time (each, an "Account," and collectively, the "Accounts"); and Pruco Securities Corporation, a New Jersey corporation and the principal underwriter of the Contracts and Policies referred to below ("Underwriter") (collectively, the "Parties"). WITNESSETH THAT: WHEREAS, AVIF is registered with the Securities and Exchange Commission ("SEC") as an open-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, AVIF currently consists of fifteen separate series ("Series"), shares ("Shares") of each of which are registered under the Securities Act of 1933, as amended (the "1933 Act") and are currently sold to one or more separate accounts of life insurance companies to fund benefits under variable annuity contracts; and WHEREAS, AVIF will make Shares of each Series listed on Schedule A hereto as the Parties hereto may amend from time to time (each a "Fund"; reference herein to "AVIF" includes reference to each Fund, to the extent the context requires) available for purchase by the Accounts; and WHEREAS, AIM is a broker-dealer registered with the SEC under the Securities Exchange Act of 1934 (the "1934 Act") and a member in good standing of the National Association of Securities Dealers, Inc. ("NASD"); and WHEREAS, AIM currently serves as the distributor for the Shares; and WHEREAS, Prudential will be the issuer of certain variable annuity contracts ("Contracts") and/or variable life insurance policies ("Policies") as set forth on Schedule A hereto, as the Parties hereto may amend from time to time, which Contracts and Policies (hereinafter collectively, the "Policies"), if required by applicable law, will be registered under the 1933 Act; and WHEREAS, Prudential will fund the Policies through the Accounts, each of which may be divided into two or more subaccounts ("Subaccounts"; reference herein to an "Account" includes reference to each Subaccount thereof to the extent the context requires); and II-14 WHEREAS, Prudential will serve as the depositor of the Accounts, each of which is registered as a unit investment trust investment company under the 1940 Act (or exempt therefrom), and the security interests deemed to be issued by the Accounts under the Policies will be registered as securities under the 1933 Act (or exempt therefrom); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, Prudential intends to purchase Shares in one or more of the Funds on behalf of the Accounts to fund the Policies; and WHEREAS, the Underwriter is a broker-dealer registered with the SEC under the 1934 Act and a member in good standing of the NASD; NOW, THEREFORE, in consideration of the mutual benefits and promises contained herein, the Parties hereto agree as follows: SECTION 1. AVAILABLE FUNDS -------------------------- 1.1 AVAILABILITY. ------------ AVIF will make Shares of each Fund available to Prudential for purchase and redemption at net asset value and with no sales charges, subject to the terms and conditions of this Agreement. The Board of Directors of AVIF may refuse to sell Shares of any Fund to any person, or suspend or terminate the offering of Shares of any Fund if such action is required by law or by regulatory authorities having jurisdiction or if, in the sole discretion of the Directors acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, such action is deemed in the best interests of the shareholders of such Fund. 1.2 ADDITION, DELETION OR MODIFICATION OF FUNDS. ------------------------------------------- The Parties hereto may agree, from time to time, to add other Funds to provide additional funding media for the Policies, or to delete, combine, or modify existing Funds, by amending Schedule A hereto. Upon such amendment to Schedule A, any applicable reference to a Fund, AVIF, or its Shares herein shall include a reference to any such additional Fund. Schedule A, as amended from time to time, is incorporated herein by reference and is a part hereof. 1.3 NO SALES TO THE GENERAL PUBLIC. ------------------------------ AVIF represents and warrants that Shares of each Fund have been and will be sold only to those entities listed under Section 817(h)(4) of the Code and the regulations thereunder, as such Code Section and the regulations may be amended from time to time. II-15 SECTION 2. PROCESSING TRANSACTIONS ---------------------------------- 2.1 TIMELY PRICING AND ORDERS. ------------------------- (a) AVIF or its designated agent will use its best efforts to provide Prudential with the net asset value per Share for each Fund by 5:30 p.m. Central Time on each Business Day. As used herein, "Business Day" shall mean any day on which (i) the New York Stock Exchange is open for regular trading, and (ii) AVIF calculates the Fund's net asset value. (b) Prudential will use the data provided by AVIF each Business Day pursuant to paragraph (a) immediately above to calculate Account unit values and to process transactions that receive that same Business Day's Account unit values. Prudential will perform such Account processing the same Business Day, and will place corresponding orders to purchase or redeem Shares with AVIF by 9:00 a.m. Central Time the following Business Day; provided, however, that AVIF shall provide additional time to Prudential in the event that AVIF is unable to meet the 5:30 p.m. time stated in paragraph (a) immediately above. Such additional time shall be equal to the additional time that AVIF takes to make the net asset values available to Prudential. (c) Each order to purchase or redeem Shares will separately describe the amount of Shares of each Fund to be purchased, redeemed or exchanged and will not be netted; provided, however, with respect to payment of the purchase price by Prudential and of redemption proceeds by AVIF, Prudential and AVIF shall net purchase and redemption orders with respect to each Fund and shall transmit one (1) net payment per Fund in accordance with Section 2.2, below. Each order to purchase or redeem Shares shall also specify whether the order results from purchase payments, surrenders, partial withdrawals, routine withdrawals of charges, or requests for other transactions under Policies (collectively, "Policy transactions"). (d) If AVIF provides materially incorrect Share net asset value information, Prudential shall be entitled to an adjustment to the number of Shares purchased or redeemed to reflect the correct net asset value per Share. Any material error in the calculation or reporting of net asset value per Share, dividend or capital gain information shall be reported promptly upon discovery to Prudential. 2.2 TIMELY PAYMENTS. --------------- Prudential will wire payment for net purchases to a custodial account designated by AVIF by 1:00 p.m. Central Time on the same day as the order for Shares is placed, to the extent practicable. AVIF will wire payment for net redemptions to an account designated by Prudential by 1:00 p.m. Central Time on the same day as the Order is placed, to the extent practicable, but in any event within five (5) calendar days after the date the order is placed in order to enable Prudential to pay redemption proceeds within the time specified in Section 22(e) of the 1940 Act or such shorter period of time as may be required by law. II-16 2.3 APPLICABLE PRICE. ---------------- (a) Share purchase and redemption orders that result from Policy transactions and that Prudential receives prior to the close of regular trading on the New York Stock Exchange on a Business Day will be executed at the net asset values of the appropriate Funds next computed after receipt by AVIF or its designated agent of the orders. For purposes of this Section 2.3(a), the Underwriter shall be the designated agent of AVIF for receipt of orders relating to Policy transactions on each Business Day and receipt by such designated agent shall constitute receipt by AVIF; provided, that AVIF receives notice of such orders by 9:00 a.m. Central Time on the next following Business Day or such later time as computed in accordance with Section 2.1(b) hereof. (b) All other Share purchases and redemptions by Prudential will be effected at the net asset values of the appropriate Funds next computed after receipt by AVIF or its designated agent of the order therefor, and such orders will be irrevocable. 2.4 DIVIDENDS AND DISTRIBUTIONS. --------------------------- AVIF will furnish notice promptly to Prudential of any income dividends or capital gain distributions payable on the Shares of any Fund. Prudential hereby elects to reinvest all dividends and capital gains distributions in additional Shares of the corresponding Fund at the ex-dividend date net asset values until Prudential otherwise notifies AVIF in writing, it being agreed by the Parties that the ex-dividend date and the payment date with respect to any dividend or distribution will be the same Business Day. Prudential reserves the right to revoke this election and to receive all such income dividends and capital gain distributions in cash. 2.5 BOOK ENTRY. ---------- Issuance and transfer of AVIF Shares will be by book entry only. Stock certificates will not be issued to Prudential. Shares ordered from AVIF will be recorded in an appropriate title for Prudential, on behalf of its Account. SECTION 3. COSTS AND EXPENSES ----------------------------- 3.1 GENERAL. ------- Except as otherwise specifically provided herein, each Party will bear all expenses incident to its performance under this Agreement. 3.2 REGISTRATION. ------------ (a) AVIF will bear the cost of its registering as a management investment company under the 1940 Act and registering its Shares under the 1933 Act, and keeping such II-17 registrations current and effective; including, without limitation, the preparation of and filing with the SEC of Forms N-SAR and Rule 24f-2 Notices with respect to AVIF and its Shares and payment of all applicable registration or filing fees with respect to any of the foregoing. (b) Prudential will bear the cost of registering, to the extent required, each Account as a unit investment trust under the 1940 Act and registering units of interest under the Policies under the 1933 Act and keeping such registrations current and effective; including, without limitation, the preparation and filing with the SEC of Forms N-SAR and Rule 24f-2 Notices with respect to each Account and its units of interest and payment of all applicable registration or filing fees with respect to any of the foregoing. 3.3 OTHER (NON-SALES-RELATED). --------------------------- (a) AVIF will bear, or arrange for others to bear, the costs of preparing, filing with the SEC and setting for printing AVIF's prospectus, statement of additional information and any amendments or supplements thereto (collectively, the "AVIF Prospectus"), periodic reports to shareholders, AVIF proxy material and other shareholder communications. (b) Prudential will bear the costs of preparing, filing with the SEC and setting for printing each Account's prospectus, statement of additional information and any amendments or supplements thereto (collectively, the "Account Prospectus"), any periodic reports to Policy owners, annuitants or participants under the Policies (collectively, "Participants"), voting instruction solicitation material, and other Participant communications. (c) Prudential or the Underwriter will print in quantity and deliver to existing Participants the documents described in Section 3.3(b) above and the documents provided by AVIF in camera ready or computer diskette form pursuant to Section 4.6(b) hereof. The costs of printing in quantity and delivering to existing Participants such documents will be borne by Prudential. 3.4 OTHER (SALES-RELATED). --------------------- The Underwriter will bear the expenses of distributing Fund Shares and the Policies. These expenses would include by way of illustration, but are not limited to, the costs of printing and distributing to offerees the AVIF Prospectus and periodic reports of AVIF. These costs would also include the costs of preparing, printing, and distributing sales literature and advertising relating to the Funds, as well as filing such materials with, and obtaining approval from, the SEC, NASD, any state insurance regulatory authority, and any other appropriate regulatory authority, to the extent required. 3.5 PARTIES TO COOPERATE. -------------------- Each Party agrees to cooperate with the others, as applicable, in arranging to print, mail and/or deliver, in a timely manner, combined or coordinated prospectuses or other materials of AVIF and the Accounts. II-18 SECTION 4. LEGAL COMPLIANCE --------------------------- 4.1 TAX LAWS. -------- (a) AVIF represents and warrants that each Fund is currently qualified as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and represents that it will qualify and maintain qualification of each Fund as a RIC. AVIF will notify Prudential immediately upon having a reasonable basis for believing that a Fund has ceased to so qualify or that it might not so qualify in the future. (b) AVIF represents that it will comply and maintain each Fund's compliance with the diversification requirements set forth in Section 817(h) of the Code and Section 1.817-5(b) of the regulations under the Code. AVIF will notify Prudential immediately upon having a reasonable basis for believing that a Fund has ceased to so comply or that a Fund might not so comply in the future. (c) Prudential agrees that if the Internal Revenue Service ("IRS") asserts in writing in connection with any governmental audit or review of Prudential or, to Prudential's knowledge, of any Participant, that any Fund has failed to comply with the diversification requirements of Section 817(h) of the Code or Prudential otherwise becomes aware of any facts that could give rise to any claim against AVIF or its affiliates as a result of such a failure or alleged failure: (i) Prudential shall promptly notify AVIF of such assertion or potential claim; (ii) Prudential shall consult with AVIF as to how to minimize any liability that may arise as a result of such failure or alleged failure; (iii) Prudential shall use its best efforts to minimize any liability of AVIF or its affiliates resulting from such failure, including, without limitation, demonstrating, pursuant to Treasury Regulations Section 1.817- 5(a)(2), to the Commissioner of the IRS that such failure was inadvertent; (iv) Prudential shall permit AVIF, its affiliates and their legal and accounting advisors to participate in any conferences, settlement discussions or other administrative or judicial proceeding or contests (including judicial appeals thereof) with the IRS, any Participant or any other claimant regarding any claims that could give rise to liability to AVIF or its affiliates as a result of such a failure or alleged failure; II-19 (v) any written materials to be submitted by Prudential to the IRS, any Participant or any other claimant in connection with any of the foregoing proceedings or contests (including, without limitation, any such materials to be submitted to the IRS pursuant to Treasury Regulations Section 1.817-5(a)(2)), (a) shall be provided by Prudential to AVIF (together with any supporting information or analysis) at least ten (10) business days' prior to the day on which such proposed materials are to be submitted, and (b) shall not be submitted by Prudential to any such person without the express written consent of AVIF WHICH shall not be unreasonably withheld; (vi) Prudential shall provide AVIF or its affiliates and their accounting and legal advisors with such cooperation as AVIF shall reasonably request (including, without limitation, by permitting AVIF and its accounting and legal advisors to review the relevant books and records of Prudential) in order to facilitate review by AVIF or its advisors of any written submissions provided to it pursuant to the preceding clause or its assessment of the validity or amount of any claim against its arising from such a failure or alleged failure; (vii) Prudential shall not with respect to any claim of the IRS or any Participant that would give rise to a claim against AVIF or its affiliates (a) compromise or settle any claim, (b) accept any adjustment on audit, or (c) forego any allowable administrative or judicial appeals, without the express written consent of AVIF or its affiliates, which shall not be unreasonably withheld, provided that Prudential shall not be required, after exhausting all administrative penalties, to appeal any adverse judicial decision unless AVIF or its affiliates shall have provided an opinion of independent counsel to the effect that a reasonable basis exists for taking such appeal; and provided further that the costs of any such appeal shall be borne equally by the Parties hereto; and (viii) AVIF and its affiliates shall have no liability as a result of such failure or alleged failure if Prudential fails to comply with any of the foregoing clauses (i) through (vii), and such failure could be shown to have materially contributed to the liability. Should AVIF or any of its affiliates refuse to give its written consent to any compromise or settlement of any claim or liability hereunder, Prudential may, in its discretion, authorize AVIF or its affiliates to act in the name of Prudential in, and to control the conduct of, such conferences, discussions, proceedings, contests or appeals and all administrative or judicial appeals thereof, and in that event AVIF or its affiliates shall bear the fees and expenses associated with the conduct of the proceedings that it is so authorized to control; provided that in no event shall Prudential have any liability resulting from AVIF's refusal to accept the proposed settlement or compromise with respect to any failure caused by AVIF. As used in this Agreement, the term "affiliates" shall have the same meaning as "affiliated person" as defined in Section 2(a)(3) of the 1940 Act. II-20 (d) Prudential represents and warrants that the Policies currently are and will be treated as annuity, endowment, or life insurance contracts under applicable provisions of the Code and that it will maintain such treatment; Prudential will notify AVIF immediately upon having a reasonable basis for believing that any of the Policies have ceased to be so treated or that they might not be so treated in the future. (e) Prudential represents and warrants that each Account is a "segregated asset account" and that interests in each Account are offered exclusively through the purchase of or transfer into a "variable contract," within the meaning of such terms under Section 817 of the Code and the regulations thereunder. Prudential will continue to meet such definitional requirementS, and it will notify AVIF immediately upon having a reasonable basis for believing that such requirements have ceased to be met or that they might not be met in the future. 4.2 INSURANCE AND CERTAIN OTHER LAWS. -------------------------------- (a) AVIF and AIM will use their best efforts to comply with any applicable state insurance laws or regulations, to the extent specifically requested in writing by Prudential. (b) Prudential represents and warrants that (i) it is an insurance company duly organized, validly existing and in good standing under the laws of the State of New Jersey and has full corporate power, authority and legal right to execute, deliver and perform its duties and comply with its obligations under this Agreement, (ii) it has legally and validly established and maintains each Account as a segregated asset account under the New Jersey Insurance Code and the regulations thereunder, and (iii) the Policies comply in all material respects with all other applicable federal and state laws and regulations. (c) AVIF represents and warrants that it is a corporation duly organized, validly existing, and in good standing under the laws of the State of Maryland and has full power, authority, and legal right to execute, deliver, and perform its duties and comply with its obligations under this Agreement. (d) AIM represents and warrants that it is a Delaware corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has full power, authority and right to execute, deliver and perform its duties and comply with the its obligations under this Agreement. (e) The Underwriter represents and warrants that it is a New Jersey corporation duly organized, validly existing, and in good standing under the laws of the State of New Jersey and has full power, authority, and legal right to execute, deliver, and perform its duties and comply with its obligations under this Agreement. II-21 4.3 SECURITIES LAWS. --------------- (a) Prudential and the Underwriter represent and warrant that (i) interests in each Account pursuant to the Policies will be registered under the 1933 Act to the extent required by the 1933 Act, (ii) the Policies will be duly authorized for issuance and sold in compliance with all applicable federal and state laws, including, without limitation, the 1933 Act, the 1934 Act, the 1940 Act and Arizona law, (iii) each Account is and will remain registered under the 1940 Act, to the extent required by the 1940 Act, (iv) each Account does and will comply in all material respects with the requirements of the 1940 Act and the rules thereunder, to the extent required, (v) each Account's 1933 Act registration statement relating to the Policies, together with any amendments thereto, will at all times comply in all material respects with the requirements of the 1933 Act and the rules thereunder, (vi) Prudential will amend the registration statement for its Policies under the 1933 Act and for its Accounts under the 1940 Act from time to time as required in order to effect the continuous offering of its Policies or as may otherwise be required by applicable law, and (vii) each Account Prospectus will at all times comply in all material respects with the requirements of the 1933 Act and the rules thereunder. (b) AVIF and AIM represent and warrant that (i) Shares sold pursuant to this Agreement will be registered under the 1933 Act to the extent required by the 1933 Act and duly authorized for issuance and sold in compliance with Maryland law, (ii) AVIF is and will remain registered under the 1940 Act to the extent required by the 1940 Act, (iii) AVIF will amend the registration statement for its Shares under the 1933 Act and itself under the 1940 Act from time to time as required in order to effect the continuous offering of its Shares, (iv) AVIF does and will comply in all material respects with the requirements of the 1940 Act and the rules thereunder, (v) AVIF's 1933 Act registration statement, together with any amendments thereto, will at all times comply in all material respects with the requirements of the 1933 Act and rules thereunder, and (vi) AVIF Prospectus will at all times comply in all material respects with the requirements of the 1933 Act and the rules thereunder. (c) AVIF will register and qualify its Shares for sale in accordance with the laws of any state or other jurisdiction if and to the extent reasonably deemed advisable by AVIF. 4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER CIRCUMSTANCES. ----------------------------------------------------- (a) AVIF and/or AIM will immediately notify Prudential of (i) the issuance by any court or regulatory body of any stop order, cease and desist order, or other similar order with respect to AVIF's registration statement under the 1933 Act or AVIF Prospectus, (ii) any request by the SEC for any amendment to such registration statement or AVIF Prospectus, (iii) the initiation of any proceedings for that purpose or for any other purpose relating to the registration or offering of AVIF's Shares, or (iv) any other action or circumstances that may prevent the lawful offer or sale of Shares of any Fund in any state or jurisdiction, including, without limitation, any circumstances in which (a) such Shares are not registered and, in all material respects, issued and sold in accordance with applicable state and federal law, or (b) such law precludes the use of such Shares as an underlying investment medium of the Policies issued or to be issued by Prudential. AVIF will II-22 make every reasonable effort to prevent the issuance, with respect to any Fund, of any such stop order, cease and desist order or similar order and, if any such order is issued, to obtain the lifting thereof at the earliest possible time. (b) Prudential and the Underwriter will immediately notify AVIF of (i) the issuance by any court or regulatory body of any stop order, cease and desist order, or other similar order with respect to each Account's registration statement under the 1933 Act relating to the Policies or each Account Prospectus, (ii) any request by the SEC for any amendment to such registration statement or Account Prospectus, (iii) the initiation of any proceedings for that purpose or for any other purpose relating to the registration or offering of each Account's interests pursuant to the Policies, or (iv) any other action or circumstances that may prevent the lawful offer or sale of said interests in any state or jurisdiction, including, without limitation, any circumstances in which said interests are not registered and, in all material respects, issued and sold in accordance with applicable state and federal law. Prudential will make every reasonable effort to prevent the issuance of any such stop order, cease and desist order or similar order and, if any such order is issued, to obtain the lifting thereof at the earliest possible time. 4.5 PRUDENTIAL AND THE UNDERWRITER TO PROVIDE DOCUMENTS; INFORMATION ---------------------------------------------------------------- ABOUT AVIF. - ---------- (a) Prudential or the Underwriter will provide to AVIF or its designated agent at least one (1) complete copy of all SEC registration statements, Account Prospectuses, reports, any preliminary and final voting instruction solicitation material, applications for exemptions, requests for no- action letters, and all amendments to any of the above, that relate to each Account or the Policies, contemporaneously with the filing of such document with the SEC or other regulatory authorities. (b) The Underwriter will provide to AVIF or its designated agent at least one (1) complete copy of each piece of sales literature or other promotional material in which AVIF or any of its affiliates is named, at least five (5) business days' prior to its use or such shorter period as the Parties hereto may, from time to time, agree upon. No such material shall be used if AVIF or its designated agent objects to such use within five (5) business days after receipt of such material or such shorter period as the Parties hereto may, from time to time, agree upon. AVIF hereby designates its investment adviser as the entity to receive such sales literature or other promotional material, until such time as AVIF appoints another designated agent by giving notice to Prudential in the manner required by Section 9 hereof. (c) Neither Prudential, the Underwriter, nor any of their respective affiliates will give any information or make any representations or statements on behalf of or concerning AVIF or its affiliates in connection with the sale of the Policies other than (i) the information or representations contained in the registration statement, including the AVIF Prospectus contained therein, relating to Shares, as such registration statement and AVIF Prospectus may be amended from time to time; or (ii) in reports or proxy materials for AVIF; or (iii) in sales literature or other promotional material approved by AVIF, except with the express written permission of AVIF. II-23 (d) Prudential and the Underwriter shall adopt and implement procedures reasonably designed to ensure that information concerning AVIF and its affiliates that is intended for use only by brokers or agents selling the Policies (i.e., information that is not intended for distribution to Participants or offerees) ("broker only materials") is so used, and neither AVIF nor any of its affiliates shall be liable for any losses, damages or expense relating to the improper use of such broker only materials. 4.6 AVIF OR AIM TO PROVIDE DOCUMENTS; INFORMATION ABOUT PRUDENTIAL AND ------------------------------------------------------------------ THE UNDERWRITER. - --------------- (a) AVIF will provide to Prudential at least one (1) complete copy of all SEC registration statements, AVIF Prospectuses, reports, any preliminary and final proxy material, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to AVIF or the Shares of a Fund, contemporaneously with the filing of such document with the SEC or other regulatory authorities. (b) AVIF will provide to Prudential or the Underwriter camera ready or computer diskette copies of all AVIF Prospectuses, proxy materials, periodic reports to shareholders and other materials required by law to be sent to Participants who have allocated any Policy value to a Fund. AVIF will provide such copies to Prudential or the Underwriter in a timely manner so as to enable Prudential or the Underwriter, as the case may be, to print and distribute such materials within the time required by law to be furnished to Participants. (c) AIM will provide to Prudential or its designated agent at least one (1) complete copy of each piece of sales literature or other promotional material in which Prudential, the Underwriter or any of their respective affiliates is named, or that refers to the Policies, at least five (5) business days' prior to its use or such shorter period as the Parties hereto may, from time to time, agree upon. No such material shall be used if Prudential or its designated agent objects to such use within five (5) business days after receipt of such material or such shorter period as the Parties hereto may, from time to time, agree upon. Prudential shall receive all such sales literature or other promotional material, until such time as it appoints a designated agent by giving notice to AVIF in the manner required by Section 9 hereof. (d) Neither AVIF nor any of its affiliates will give any information or make any representations or statements on behalf of or concerning Prudential, the Underwriter, each Account, or the Policies other than (i) the information or representations contained in the registration statement, including each Account Prospectus contained therein, relating to the Policies, as such registration statement and Account Prospectus may be amended from time to time; or (ii) in reports or voting instruction materials for each Account; or (iii) in sales literature or other promotional material approved by Prudential or its affiliates, except with the express written permission of Prudential. II-24 (e) AIM shall adopt and implement procedures reasonably designed to ensure that information concerning Prudential, the Underwriter, and their respective affiliates that is intended for use only by brokers or agents selling the Policies (i.e., information that is not intended for distribution to Participants or offerees) ("broker only materials") is so used, and neither Prudential, the Underwriter, nor any of their respective affiliates shall be liable for any losses, damages or expense relating to the improper use of such broker only materials. 4.7 DEFINITION OF SALES LITERATURE OR OTHER PROMOTIONAL MATERIAL. ------------------------------------------------------------ For purposes of this Section 4.7, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, video tape display, signs or billboards, motion pictures, or other public media), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circular, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published articles), educational or training materials or other communications distributed or made generally available to some or all agents or employees, prospectuses, statements of additional information, shareholder reports, and proxy materials and any other material constituting sales literature of advertising under NASD Rules, the 1940 Act or the 1933 Act. SECTION 5. MIXED AND SHARED FUNDING ----------------------------------- 5.1 GENERAL. ------- The SEC has granted an order AVIF exempting it from certain provisions of the 1940 Act and rules thereunder so that AVIF may be available for investment by certain other entities, including, without limitation, separate accounts funding variable life insurance contracts, separate accounts of insurance companies unaffiliated with Prudential, and trustees of qualified pension and retirement plans (collectively, "Mixed and Shared Funding"). The Parties recognize that the SEC has imposed terms and conditions for such orders that are substantially identical to many of the provisions of this Section 5. Sections 5.2 through 5.8 below shall apply, if and only if AVIF continues to implement Mixed and Shared Funding, pursuant to such an exemptive order or otherwise. AVIF hereby notifies Prudential that it may be appropriate to include in the prospectus pursuant to which a Policy is offered disclosure regarding the potential risks of Mixed and Shared Funding. 5.2 DISINTERESTED DIRECTORS. ----------------------- AVIF agrees that its Board of Directors shall at all times consist of directors a majority of whom (the "Disinterested Directors") are not interested persons of AVIF within the meaning of Section 2(a)(19) of the 1940 Act and the Rules thereunder and as modified by any applicable orders of the SEC, except that if this condition is not met by reason of the death, II-25 disqualification, or bona fide resignation of any director, then the operation of this condition shall be suspended (a) for a period of forty-five (45) days if the vacancy or vacancies may be filled by the Board, (b) for a period of sixty (60) days if a vote of shareholders is required to fill the vacancy or vacancies, or (c) for such longer period as the SEC may prescribe by order upon application. 5.3 MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS. ------------------------------------------------ AVIF agrees that its Board of Directors will monitor for the existence of any material irreconcilable conflict between the interests of the Participants in all separate accounts of life insurance companies utilizing AVIF ("Participating Insurance Companies"), including each Account, and participants in all qualified retirement and pension plans investing in AVIF ("Participating Plans"). Prudential agrees to inform the Board of Directors of AVIF of the existence of or any potential for any such material irreconcilable conflict of which it is aware. The concept of a "material irreconcilable conflict" is not defined by the 1940 Act or the rules thereunder, but the Parties recognize that such a conflict may arise for a variety of reasons, including, without limitation: (a) an action by any state insurance or other regulatory authority; (b) a change in applicable federal or state insurance, tax or securities laws or regulations, or a public ruling, private letter ruling, no- action or interpretative letter, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Fund are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract Participants or by Participants of different Participating Insurance Companies; (f) a decision by a Participating Insurance Company to disregard the voting instructions of Participants; or (g) a decision by a Participating Plan to disregard the voting instructions of Plan participants. Consistent with the SEC's requirements in connection with exemptive orders of the type referred to in Section 5.1 hereof, Prudential will assist the Board of Directors in carrying out its responsibilities by providing the Board of Directors with all information reasonably necessary for the Board of Directors to consider any issue raised, including information as to a decision by Prudential to disregard voting instructions of Participants. Prudential's responsibilities with the foregoing shall be carried out with a view only to the interest of Participants. II-26 5.4 CONFLICT REMEDIES. ----------------- (a) It is agreed that if it is determined by a majority of the members of the Board of Directors or a majority of the Disinterested Directors that a material irreconcilable conflict exists, Prudential will, if it is a Participating Insurance Company for which a material irreconcilable conflict is relevant, at its own expense and to the extent reasonably practicable (as determined by a majority of the Disinterested Directors), take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict, which steps may include, but are not limited to: (i) withdrawing the assets allocable to some or all of the Accounts from AVIF or any Fund and reinvesting such assets in a different investment medium, including another Fund of AVIF, or submitting the question whether such segregation should be implemented to a vote of all affected Participants and, as appropriate, segregating the assets of any particular group (e.g., annuity Participants, life insurance Participants or all Participants) that votes in favor of such segregation, or offering to the affected Participants the option of making such a change; and (ii) establishing a new registered investment company of the type defined as a "management company" in Section 4(3) of the 1940 Act or a new separate account that is operated as a management company. (b) If the material irreconcilable conflict arises because of Prudential's decision to disregard Participant voting instructions and that decision represents a minority position or would preclude a majority vote, Prudential may be required, at AVIF's election, to withdraw each Account's investment in AVIF or any Fund. No charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal must take place within six (6) months after AVIF gives notice to Prudential that this provision is being implemented, and until such withdrawal AVIF shall continue to accept and implement orders by Prudential for the purchase and redemption of Shares of AVIF. (c) If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to Prudential conflicts with the majority of other state regulators, then Prudential will withdraw each Account's investment in AVIF within six (6) months after AVIF's Board of Directors informs Prudential that it has determined that such decision has created a material irreconcilable conflict, and until such withdrawal AVIF shall continue to accept and implement orders by Prudential for the purchase and redemption of Shares of AVIF. (d) Prudential agrees that any remedial action taken by it in resolving any material irreconcilable conflict will be carried out at its expense and with a view only to the interests of Participants. (e) For purposes hereof, a majority of the Disinterested Directors will determine whether or not any proposed action adequately remedies any material irreconcilable conflict. In no event, however, will AVIF or any of its affiliates be required to establish a new funding medium for any Policies. Prudential will not be required by the terms hereof to establish a new funding medium II-27 for any Policies if an offer to do so has been declined by vote of a majority of Participants materially adversely affected by the material irreconcilable conflict. 5.5 NOTICE TO PRUDENTIAL. -------------------- AVIF will promptly make known in writing to Prudential the Board of Directors' determination of the existence of a material irreconcilable conflict, a description of the facts that give rise to such conflict and the implications of such conflict. 5.6 INFORMATION REQUESTED BY BOARD OF DIRECTORS. ------------------------------------------- Prudential and AVIF (or its investment adviser) will at least annually submit to the Board of Directors of AVIF such reports, materials or data as the Board of Directors may reasonably request so that the Board of Directors may fully carry out the obligations imposed upon it by the provisions hereof or any exemptive order granted by the SEC to permit Mixed and Shared Funding, and said reports, materials and data will be submitted at any reasonable time deemed appropriate by the Board of Directors. All reports received by the Board of Directors of potential or existing conflicts, and all Board of Directors actions with regard to determining the existence of a conflict, notifying Participating Insurance Companies and Participating Plans of a conflict, and determining whether any proposed action adequately remedies a conflict, will be properly recorded in the minutes of the Board of Directors or other appropriate records, and such minutes or other records will be made available to the SEC upon request. 5.7 Compliance with SEC Rules. ------------------------- If, at any time during which AVIF is serving as an investment medium for variable life insurance Policies, 1940 Act Rules 6e-3(T) or, if applicable, 6e-2 are amended or Rule 6e-3 is adopted to provide exemptive relief with respect to Mixed and Shared Funding, AVIF agrees that it will comply with the terms and conditions thereof and that the terms of this Section 5 shall be deemed modified if and only to the extent required in order also to comply with the terms and conditions of such exemptive relief that is afforded by any of said rules that are applicable. 5.8 Other Requirements. ------------------ AVIF will require that each Participating Insurance Company and Participating Plan enter into an agreement with AVIF that contains in substance the same provisions as are set forth in Sections 4.1(b), 4.1(d), 4.3(a), 4.4(b), 4.5(a), 5, and 10 of this Agreement. SECTION 6. TERMINATION ---------------------- 6.1 EVENTS OF TERMINATION. --------------------- Subject to Section 6.4 below, this Agreement will terminate as to a Fund: II-28 (a) at the option of AVIF or Prudential upon the approval by (i) a majority of the Disinterested Directors, or (ii) a majority vote of the Shares of the affected Fund that are held in the corresponding Subaccount of an Account (pursuant to the procedures set forth in Section 10 of this Agreement for voting Shares in accordance with Participant instructions); provided, however, that the approvals described in clauses (i) and (ii) above shall not be required if (1) the aggregate account value under the Policies is less than one million dollars ($1,000,000,000) at the date the notice of termination is delivered, and (2) thirty-six (36) full calendar months have expired following the date the first Policy invested in any Fund; or (b) at the option of AVIF OR AIM upon institution of formal proceedings against Prudential or its affiliates by The NASD, The SEC, any state insurance regulator or any other regulatory body regarding Prudential's obligations under this Agreement or related to the sale of the Policies, the operation of each Account, or the purchase of Shares, if, in each case, AVIF or AIM reasonably determines that such proceedings, or the facts on which such proceedings would be based, have a material likelihood of imposing material adverse consequences on the Fund with respect to which the Agreement is to be terminated; or (c) at the option of Prudential upon institution of formal proceedings against AVIF, its principal underwriter, or its investment adviser by the NASD, the SEC, or any state insurance regulator or any other regulatory body regarding AVIF's obligations under this Agreement or related to the operation or management of AVIF or the purchase of AVIF Shares, if, in each case, Prudential reasonably determines that such proceedings, or the facts on which such proceedings would be based, have a material likelihood of imposing material adverse consequences on Prudential, or the Subaccount corresponding to the Fund with respect to which the Agreement is to be terminated; or (d) at the option of any Party in the event that (i) the Fund's Shares are not registered and, in all material respects, issued and sold in accordance with any applicable federal or state law, or (ii) such law precludes the use of such Shares as an underlying investment medium of the Policies issued or to be issued by Prudential; or (e) upon termination of the corresponding Subaccount's investment in the Fund pursuant to Section 5 hereof; or (f) at the option of Prudential if the Fund ceases to qualify as a RIC under Subchapter M of the Code or under successor or similar provisions, or if Prudential reasonably believes that the Fund may fail to so qualify; or (g) at the option of Prudential if the Fund fails to comply with Section 817(h) of the Code or with successor or similar provisions, or if Prudential reasonably believes that the Fund may fail to so comply; or (h) at the option of AVIF or AIM if the Policies issued by Prudential cease to qualify as annuity contracts or life insurance contracts under the Code (other than by reason of the II-29 Fund's noncompliance with Section 817(h) or Subchapter M of the Code) or if interests in an Account under the Policies are not registered, where required, and, in all material respects, are not issued or sold in accordance with any applicable federal or state law; or (i) upon another Party's material breach of any provision of this Agreement; or (j) at the option of either party upon six (6) months' advance written notice. 6.2 NOTICE REQUIREMENT FOR TERMINATION. ---------------------------------- No termination of this Agreement will be effective unless and until the Party terminating this Agreement gives prior written notice to the other Party to this Agreement of its intent to terminate, and such notice shall set forth the basis for such termination. Furthermore: (a) in the event that any termination is based upon the provisions of Sections 6.1(a) or 6.1(e) hereof, such prior written notice shall be given at least six (6) months in advance of the effective date of termination unless a shorter time is required by law or is agreed to by the Parties hereto; (b) in the event that any termination is based upon the provisions of Sections 6.1(b) or 6.1(c) hereof, such prior written notice shall be given at least ninety (90) days in advance of the effective date of termination unless a shorter time is required by law or is agreed to by the Parties hereto; and (c) in the event that any termination is based upon the provisions of Sections 6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i) hereof, such prior written notice shall be given as soon as possible after the terminating Party learns of the event causing termination to be required. 6.3 FUNDS TO REMAIN AVAILABLE. ------------------------- Except (a) as necessary to implement Participant-initiated transactions, (b) as required by state insurance laws or regulations, (c) as required pursuant to Section 5 of this Agreement, or (d) with respect to any Fund as to which this Agreement has terminated pursuant to Section 6.1 hereof, Prudential shall not (i) redeem AVIF Shares attributable to the Policies (as opposed to AVIF Shares attributable to Prudential's assets held in each Account), or (ii) prevent Participants from allocating payments to or transferring amounts from a Fund that was otherwise available under the Policies, until six (6) months after Prudential shall have notified AVIF of its intention to do so. 6.4 SURVIVAL OF WARRANTIES AND INDEMNIFICATIONS. ------------------------------------------- All warranties and indemnifications will survive the termination of this Agreement. II-30 6.5 CONTINUANCE OF AGREEMENT FOR CERTAIN PURPOSES. --------------------------------------------- If any Party terminates this Agreement with respect to any Fund pursuant to Sections 6.1(b), 6.1(c), 6.1(d), 6.1(f), 6.1(g), 6.1(h) or 6.1(i) hereof, this Agreement shall nevertheless continue in effect as to any Shares of that Fund that are outstanding as of the date of such termination (the "Initial Termination Date"). This continuation shall extend to the date as of which an Account owns no Shares of the affected Fund. SECTION 7. PARTIES TO COOPERATE RESPECTING TERMINATION ------------------------------------------------------ The Parties hereto agree to cooperate and give reasonable assistance to one another in taking all necessary and appropriate steps for the purpose of ensuring that an Account owns no Shares of a Fund after the Final Termination Date with respect thereto, or, in the case of a termination pursuant to Section 6.1 (a), the termination date specified in the notice of termination. Such steps may include combining the affected Account with another Account, substituting other mutual fund shares for those of the affected Fund, or otherwise terminating participation by the Policies in such Fund. SECTION 8. ASSIGNMENT --------------------- This Agreement may not be assigned by any Party, except with the written consent of each other Party. SECTION 9. NOTICES ------------------ Notices and communications required or permitted by Section 2 hereof will be given by means mutually acceptable to the Parties concerned. Each other notice or communication required or permitted by this Agreement will be given to the following persons at the following addresses and facsimile numbers, or such other persons, addresses or facsimile numbers as the Party receiving such notices or communications may subsequently direct in writing: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA 751 Broad Street, 21st Floor Newark, New Jersey 07102 Facsimile: (201) 643-5520 Attn: Mary Cavanaugh, Esq. II-31 Pruco Securities Corporation 751 Broad Street Newark, New Jersey 07102 Facsimile: (201) 643-5520 Attn: Mary Cavanaugh, Esq. AIM VARIABLE INSURANCE FUNDS, INC. A I M DISTRIBUTORS, INC. 11 Greenway Plaza, Suite 100 Houston, Texas 77046 Facsimile: (713) 993-9185 Attn: Nancy L. Martin, Esq. SECTION 10. VOTING PROCEDURES ----------------------------- Subject to the cost allocation procedures set forth in Section 3 hereof, Prudential will distribute all proxy material furnished by AVIF to Participants to whom pass-through voting privileges are required to be extended and will solicit voting instructions from Participants. Prudential will vote Shares in accordance with timely instructions received from Participants. Prudential will vote Shares that are (a) not attributable to Participants to whom pass-through voting privileges are extended, or (b) attributable to Participants, but for which no timely instructions have been received, in the same proportion as Shares for which said instructions have been received from Participants, so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for Participants. Neither Prudential nor any of its affiliates will in any way recommend action in connection with or oppose or interfere with the solicitation of proxies for the Shares held for such Participants. Prudential reserves the right to vote shares held in any Account in its own right, to the extent permitted by law. Prudential shall be responsible for assuring that each of its Accounts holding Shares calculates voting privileges in a manner consistent with that of other Participating Insurance Companies or in the manner required by the Mixed and Shared Funding exemptive order obtained by AVIF. AVIF will notify Prudential of any changes of interpretations or amendments to the Mixed and Shared Funding exemptive order it has obtained. SECTION 11. FOREIGN TAX CREDITS ------------------------------- AVIF agrees to consult in advance with Prudential concerning any decision to elect or not to elect pursuant to Section 853 of the Code to pass through the benefit of any foreign tax credits to its shareholders. II-32 SECTION 12. INDEMNIFICATION --------------------------- 12.1 OF AVIF AND AIM BY PRUDENTIAL AND THE UNDERWRITER. ------------------------------------------------- (a) Except to the extent provided in Sections 12.1(b) and 12.1(c), below, Prudential and the Underwriter each agree to indemnify and hold harmless AVIF, its affiliates (including AIM), and each of their respective directors and officers, and each person, if any, who controls AVIF or its affiliates (including AIM) within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 12.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of Prudential) or actions in respect thereof (including, to the extent reasonable, legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or actions are related to the sale or acquisition of AVIF's Shares and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Account's 1933 Act registration statement, any Account Prospectus, the Policies, or sales literature or advertising for the Policies (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to Prudential or the Underwriter by or on behalf of AVIF for use in any Account's 1933 Act registration statement, any Account Prospectus, the Policies, or sales literature or advertising or otherwise for use in connection with the sale of Policies or Shares (or any amendment or supplement to any of the foregoing); or (ii) arise out of or as a result of any other statements or representations (other than statements or representations contained in AVIF's 1933 Act registration statement, AVIF Prospectus, sales literature or advertising of AVIF, or any amendment or supplement to any of the foregoing, not supplied for use therein by or on behalf of Prudential or the Underwriter and on which such persons have reasonably relied) or the negligent, illegal or fraudulent conduct of Prudential, the Underwriter or their respective affiliates or persons under their control (including, without limitation, their employees and "Associated Persons," as that term is defined in paragraph (m) of Article I of the NASD's By-Laws), in connection with the sale or distribution of the Policies or Shares; or (iii) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in AVIF's 1933 Act registration statement, AVIF Prospectus, sales literature or advertising of AVIF, or any amendment or supplement to any of the foregoing, or the omission or alleged omission to state II-33 therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon and in conformity with information furnished to AVIF or AIM by or on behalf of Prudential, the Underwriter or their respective affiliates for use in AVIF's 1933 Act registration statement, AVIF Prospectus, sales literature or advertising of AVIF, or any amendment or supplement to any of the foregoing; or (iv) arise as a result of any failure by Prudential or the Underwriter to perform the obligations, provide the services and furnish the materials required of them under the terms of this Agreement, or any material breach of any representation and/or warranty made by Prudential or the Underwriter in this Agreement or arise out of or result from any other material breach of this Agreement by Prudential or the Underwriter; or (v) arise as a result of failure by the Policies issued by Prudential to qualify as life insurance, endowment, or annuity contracts under the Code, otherwise than by reason of any Fund's failure to comply with Subchapter M or Section 817(h) of the Code. (b) Neither Prudential nor the Underwriter shall be liable under this Section 12.1 with respect to any losses, claims, damages, liabilities or actions to which an Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance by that Indemnified Party of its duties or by reason of that Indemnified Party's reckless disregard of obligations or duties (i) under this Agreement, or (ii) to AVIF or AIM. (c) Neither Prudential nor the Underwriter shall be liable under this Section 12.1 with respect to any action against an Indemnified Party unless AVIF or AIM shall have notified Prudential or the Underwriter in writing within a reasonable time after the summons or other first legal process giving information of the nature of the action shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify Prudential or the Underwriter of any such action shall not relieve Prudential or the Underwriter from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this Section 12.1. Except as otherwise provided herein, in case any such action is brought against an Indemnified Party, Prudential or the Underwriter shall be entitled to participate, at its own expense, in the defense of such action and also shall be entitled to assume the defense thereof, with counsel approved by the Indemnified Party named in the action, which approval shall not be unreasonably withheld. After notice from Prudential or the Underwriter to such Indemnified Party of its election to assume the defense thereof, the Indemnified Party will cooperate fully with Prudential and shall bear the fees and expenses of any additional counsel retained by it, and Prudential will not be liable to such Indemnified Party under this Agreement for any legal or other expenses subsequently incurred by such Indemnified Party independently in connection with the defense thereof, other than reasonable costs of investigation. II-34 12.2 OF PRUDENTIAL AND THE UNDERWRITER BY AVIF AND AIM. ------------------------------------------------- (a) Except to the extent provided in Sections 4.1(c)(vii), 12.2(d), 12.2(e) and 12.2(f), below, AVIF and AIM each agree to indemnify and hold harmless Prudential, the Underwriter, their respective affiliates, and each of their respective directors and officers, and each person, if any, who controls Prudential, the Underwriter, or their respective affiliates within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 12.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of AVIF and AIM) or actions in respect thereof (including, to the extent reasonable, legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law, or otherwise, insofar as such losses, claims, damages, liabilities or actions are related to the sale or acquisition of AVIF's Shares and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in AVIF's 1933 Act registration statement, AVIF Prospectus or sales literature or advertising of AVIF (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to AVIF or its affiliates by or on behalf of Prudential or its affiliates for use in AVIF's 1933 Act registration statement, AVIF Prospectus, or in sales literature or advertising (or any amendment or supplement to any of the foregoing); or (ii) arise out of or as a result of any other statements or representations (other than statements or representations contained in any Account's 1933 Act registration statement, any Account Prospectus, sales literature or advertising for the Policies, or any amendment or supplement to any of the foregoing, not supplied for use therein by or on behalf of AVIF or its affiliates and on which such persons have reasonably relied) or the negligent, illegal or fraudulent conduct of AVIF, its affiliates or persons under their control (including, without limitation, their employees and "Associated Persons"), in connection with the sale or distribution of AVIF Shares; or (iii) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Account's 1933 Act registration statement, any Account Prospectus, sales literature or advertising covering the Policies, or any amendment or supplement to any of the foregoing, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished to Prudential, the Underwriter, or their respective affiliates by or on behalf of AVIF II-35 or AIM for use in any Account's 1933 Act registration statement, any Account Prospectus, sales literature or advertising covering the Policies, or any amendment or supplement to any of the foregoing; or (iv) arise as a result of any failure by AVIF or AIM to perform the obligations, provide the services and furnish the materials required of it under the terms of this Agreement, or any material breach of any representation and/or warranty made by AVIF or AIM in this Agreement or arise out of or result from any other material breach of this Agreement by AVIF or AIM. (b) Except to the extent provided in Sections 4.1(c)(vii), 12.2(d), 12.2(e) and 12.2(f) hereof, AVIF and AIM each agree to indemnify and hold harmless the Indemnified Parties from and against any and all losses, claims, damages, liabilities (including amounts paid in settlement thereof with, except as set forth in Section 12.2(c) below, the written consent of AVIF and AIM) or actions in respect thereof (including, to the extent reasonable, legal and other expenses) to which the Indemnified Parties may become subject directly or indirectly under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or actions directly or indirectly result from or arise out of the failure of any Fund to operate as a regulated investment company in compliance with (i) Subchapter M of the Code and regulations thereunder, or (ii) Section 817(h) of the Code and regulations thereunder, including, without limitation, any income taxes and related penalties, rescission charges, liability under state law to Participants asserting liability against Prudential or the Underwriter pursuant to the Policies, the costs of any ruling and closing agreement or other settlement with the IRS, and the cost of any substitution by Prudential of Shares of another investment company or portfolio for those of any adversely affected Fund as a funding medium for each Account that Prudential reasonably deems necessary or appropriate as a result of the noncompliance. (c) The written consent of AVIF and AIM referred to in Section 12.2(b) above shall not be required with respect to amounts paid in connection with any ruling and closing agreement or other settlement with the IRS. (d) Neither AVIF nor AIM shall be liable under this Section 12.2 with respect to any losses, claims, damages, liabilities or actions to which an Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance by that Indemnified Party of its duties or by reason of such Indemnified Party's reckless disregard of its obligations and duties (i) under this Agreement, or (ii) to Prudential, each Account, the Underwriter or Participants. (e) Neither AVIF nor AIM shall be liable under this Section 12.2 with respect to any action against an Indemnified Party unless the Indemnified Party shall have notified AVIF or AIM in writing within a reasonable time after the summons or other first legal process giving information of the nature of the action shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify AVIF or AIM of any such action shall not relieve AVIF or AM from any liability II-36 which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this Section 12.2. Except as otherwise provided herein, in case any such action is brought against an Indemnified Party, AVIF or AIM will be entitled to participate, at its own expense, in the defense of such action and also shall be entitled to assume the defense thereof (which shall include, without limitation, the conduct of any ruling request and closing agreement or other settlement proceeding with the IRS), with counsel approved by the Indemnified Party named in the action, which approval shall not be unreasonably withheld. After notice from AVIF or AIM to such Indemnified Party of its election to assume the defense thereof, the Indemnified Party will cooperate fully with AVIF and shall bear the fees and expenses of any additional counsel retained by it, and AVIF will not be liable to such Indemnified Party under this Agreement for any legal or other expenses subsequently incurred by such Indemnified Party independently in connection with the defense thereof, other than reasonable costs of investigation. (f) In no event shall either AVIF or AIM be liable under the indemnification provisions contained in this Agreement to any individual or entity, including, without limitation, Prudential, the Underwriter, or any other Participating Insurance Company or any Participant, with respect to any losses, claims, damages, liabilities or expenses that arise out of or result from (i) a breach of any representation, warranty, and/or covenant made by Prudential or the Underwriter hereunder or by any Participating Insurance Company under an agreement containing substantially similar representations, warranties and covenants, (ii) the failure by Prudential or any Participating Insurance Company to maintain its segregated asset account (which invests in any Fund) as a legally and validly established segregated asset account under applicable state law and as a duly registered unit investment trust under the provisions of the 1940 Act (unless exempt therefrom), or (iii) the failure by Prudential or any Participating Insurance Company to maintain its variable annuity and/or variable life insurance contracts (with respect to which any Fund serves as an underlying funding vehicle) as life insurance, endowment or annuity contracts under applicable provisions of the Code. 12.3 Effect of Notice. ---------------- Any notice given by the indemnifying Party to an Indemnified Party referred to in Sections 12.1 (c) or 12.2(e) above of participation in or control of any action by the indemnifying Party will in no event be deemed to be an admission by the indemnifying Party of liability, culpability or responsibility, and the indemnifying Party will remain free to contest liability with respect to the claim among the Parties or otherwise. 12.4 Successors. ---------- This Agreement shall be binding on successors of any Party who shall be entitled, among other things, to the benefits of the indemnification contained in this Section 12. 12.5 Assignments. ------------ This Agreement shall not be assigned by any party hereto without the prior written consent of all the parties, which consent shall not be unreasonably withheld. II-37 SECTION 13. APPLICABLE LAW -------------------------- This Agreement will be construed and the provisions hereof interpreted under and in accordance with Maryland law, without regard for that state's principles of conflict of laws. SECTION 14. EXECUTION IN COUNTERPARTS ------------------------------------- This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. SECTION 15. SEVERABILITY ------------------------ If any provision of this Agreement is held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement will not be affected thereby. SECTION 16. RIGHTS CUMULATIVE ----------------------------- The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, that the Parties are entitled to under federal and state laws. SECTION 17. HEADINGS -------------------- The Table of Contents and headings used in this Agreement are for purposes of reference only and shall not limit or define the meaning of the provisions of this Agreement. ---------------------------- II-38 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers signing below. AIM VARIABLE INSURANCE FUNDS, INC. Attest: /s/ Nancy L. Martin By: /s/ Robert H. Graham -------------------- --------------------- Name: Nancy L. Martin Name: Robert H. Graham Title: Assistant Secretary Title: President A I M DISTRIBUTORS, INC. Attest: /s/ Nancy L. Martin By: /s/ Michael J. Cemo -------------------- --------------------- Name: Nancy L. Martin Name: Michael J. Cemo Title Assistant Secretary Title: President THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, on behalf of itself and its separate accounts Attest: /s/ Thomas C. Castano By: /s/ Fred H. Funk ---------------------- --------------------------- Name: Thomas C. Castano Name: Fred H. Funk ---------------------- --------------------------- Title: Assistant Secretary Title: VP, Product Development ---------------------- --------------------------- PRUCO SECURITIES CORPORATION Attest: /s/ Thomas C. Castano By: /s/ Richard A. Topp ---------------------- ---------------------- Name: Thomas C. Castano Name: Richard A. Topp ---------------------- ---------------------- Title: Assistant Secretary Title: President ---------------------- ---------------------- II-39 SCHEDULE A FUNDS AVAILABLE UNDER THE POLICIES - ---------------------------------- AIM V.I. Value Fund SEPARATE ACCOUNTS UTILIZING THE FUNDS - ------------------------------------- The Prudential Variable Appreciable Account, established August 11, 1987 POLICIES FUNDED BY THE SEPARATE ACCOUNTS - ---------------------------------------- Prudential Variable Universal Life Insurance Policy II-40 EX-99.1(A)(3)(D)(II) 4 AMERICAN CENTURY VARIABLE PORTFOLIOS EXHIBIT 99.1(a)(3)(d)(ii)(b) AMENDMENT NO. 1 TO FUND PARTICIPATION AGREEMENT THIS AMENDMENT NO. 1 TO FUND PARTICIPATION AGREEMENT(the "Amendment") is effective as of December 7, 1998, by and among PRUDENTIAL INSURANCE COMPANY OF AMERICA (the "Company"), AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("ACIM"), and AMERICAN CENTURY INVESTMENT SERVICES, INC. ("ACIS"). Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement (defined below). WHEREAS, the Company, ACIM and ACIS are parties to that certain Fund Participation Agreement dated April 30, 1997 (the "Agreement") in connection with the participation by the Funds in Contracts offered by the Company to its clients; and WHEREAS, since the date of the Agreement, the Funds have changed their names; and WHEREAS, the Company now desires to add an Account to those which offer certain of the Funds and to update the names of the Funds; and WHEREAS, since the date of the Agreement, ACIS has ceased being the Distributor of the Funds; and WHEREAS, the parties to this Amendment now desire to modify the Agreement as provided herein. NOW, THEREFORE, in consideration of the mutual promises set forth herein, the parties hereto agree as follows: 1. CHANGE OF FUND NAMES. Exhibit A to the Agreement is hereby deleted in its entirety and replaced with Exhibit A attached hereto. 2. ADDITION OF ACCOUNT. Exhibit B to the Agreement is hereby deleted in its entirety and replaced with Exhibit B attached hereto. 3. ASSIGNMENT OF OBLIGATIONS. ACIS hereby assigns all of its rights and obligations under the agreement to ACIM, and ACIM hereby accepts such assignment. The company hereby consents to such assignment. 4. RATIFICATION AND CONFIRMATION OF AGREEMENT. In the event of a conflict between the terms of this Amendment and the Agreement, it is the intention of the parties that the terms of this Amendment shall control and the Agreement shall be interpreted on that basis. To the extent the provisions of the Agreement have not been amended by this Amendment, the parties hereby confirm and ratify the Agreement. 5. COUNTERPARTS. This Amendment may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one instrument. II-41 6. FULL FORCE AND EFFECT. Except as expressly supplemented, amended or consented to hereby, all of the representations, warranties, terms, covenants and conditions of the Agreement shall remain unamended and shall continue to be a full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Amendment NO. 1 as of the date first above written. PRUDENTIAL INSURANCE COMPANY AMERICAN CENTURY INVESTMENT OF AMERICA MANAGEMENT, INC. By: /s/ Fred H. Funk By: /s/ William M. Lyons --------------------------- ------------------------------------ Name: Fred H. Funk Name: William M. Lyons --------------------- ----------------------------------- Title: Vice President, Title: Executive Vice President Product Management ---------------------------------- -------------------- AMERICAN CENTURY INVESTMENT SERVICES, INC. By: /s/ William M. Lyons ------------------------------------ Name: William M. Lyons ----------------------------- Title: Executive Vice President ---------------------------- II-42 EXHIBIT A - -------------------------------------------------------------------------------- ISSUER NAME OF THE FUND - -------------------------------------------------------------------------------- American Century Variable Portfolios, Inc. VP Balanced VP Capital Appreciation VP International VP Value - -------------------------------------------------------------------------------- II-43 EXHIBIT B Separate Accounts -----------------
Name of Separate Account and Contracts/Policies Funded Date Established by Board of Directors By Separate Account - -------------------------------------- ------------------- Prudential Variable Contract Account GI-2 . Group Variable Universal Life Insurance established June 24, 1988 Contract The Prudential Variable Appreciable Account . Individual Flexible Premium Variable Life established August 11, 1987 Policy . Survivorship Variable Universal Life Policy
II-44 EX-99.1(A)(3)(D)(III 5 JANUS ASPEN SERIES EXHIBIT 99.1(a)(3)(d)(iii)(b) Janus Aspen Series Amendment to Fund Participation Agreement ----------------------------------------- The undersigned hereby amend their Fund Participation Agreement dated April 15, 1997 ("Agreement") by: . Replacing Schedule A of the original Agreement with the attached Schedule A, which adds a Separate Account to offer Janus Aspen Series Growth Portfolio. This amendment shall not affect any other provision of the Agreement or any other agreement or understanding among the parties. IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Participation Agreement Amendment as of December 3, 1998 , 1998. -------------------- Prudential Insurance Company of America - --------------------------------------- By: /s/ Fred H. Funk ------------------------ Name: Fred H. Funk Title: Vice President, Product Management Janus Aspen Series - ------------------ By: /s/ Bonnie Howe --------------- Name: Bonnie Howe Title: Assistant V.P. Janus Capital Corporation - ------------------------- By: /s/ Bonnie Howe ---------------- Name: Bonnie Howe Title: Assistant V.P. II-45 SCHEDULE A Separate Accounts and Associated Contracts ------------------------------------------
Name of Separate Account and Contracts/Policies Funded Date Established by Board of Directors By Separate Account - -------------------------------------- ------------------- Prudential Variable Contract Account GI-2 . Group Variable Universal Life Insurance established June 24, 1988 Contracts The Prudential Variable Appreciable Account . Individual Flexible Premium Variable Life established August 11, 1987 Policy . Survivorship Variable Universal Life Policy
II-46 EX-99.1(A)(3)(D)(IV) 6 MFS VARIABLE INSURANCE TRUST EXHIBIT 99.1(a)(3)(d)(iv)(b) AMENDMENT TO PARTICIPATION AGREEMENT Pursuant to the Participation Agreement, made and entered into as of the 11th day of April, 1997, by and among MFS Variable Insurance Trust, Prudential Insurance Compay of America and Massachusetts Financial Services Company, the parties do hereby agree to an amended Schedule A as attached hereto. IN WITHNESS WHEREOF, each of the parties hereto has caused this Amendment to the Participation Agreement to be executed in its name and on its behalf by its duly authorized representative. The Amendment shall take effect on ______, 1998. PRUDENTIAL INSURANCE COMPANY OF AMERICA By its authorized officer, By: /s/ ---------------------------------------------------- Title: Vice President, Marketing & Client Management MFS VAIABLE INSURANCE TRUST, ON BEHALF OF THE PORTFOLIOS By its authorized officer and not individually, By: /s/ James R. Bordewick, Jr. ---------------------------------------------------- James R. Bordewick, Jr. Assistant Secretary MASSACHUSETTS FINANCIAL SERVICES COMPANY By its authorized officer, By: /s/ Jeffrey L. Shanies ---------------------------------------------------- Jeffrey L. Shanies Chairman and Chief Executive Officer II-47 As of ___________, 1998 SCHEDULE A ACCOUNTS, POLICIES AND PORTFOLIOS SUBJECT TO THE PARTICIPATION AGREEMENT
========================================================================================================- Name of Separate Account Policies Funded Portfolios Applicable and Date Established by Separate Account to Policies by Board of Directors ======================================================================================================== The Prudential Variable Contract Group Variable Universal MFS Bond Series Account GI-2 Life Insurance Contract MFS Emerging Growth Series (June 24, 1998) Series #89759 MFS Growth and Income Series MFS High Income Series MFS Limited Maturity Series MFS Research Series MFS Total Return Series MFS Utilities Series MFS Value Series MFS World Government Series - ------------------------------------------------------------------------------------------------------- Prudential Discovery Select Group Discovery Select Group Annuity MFS Emerging Growth Series Variable Contract Account Contract MFS Research Series (February 11, 1997) - ------------------------------------------------------------------------------------------------------- Prudential Variable Variable Appreciable Life MFS Emerging Growth Series Appreciable Account (August 11, 1987) Survivorship Preferred - -------------------------------------------------------------------------------------------------------
II-48 EX-99.1(A)(3)(D)(V)( 7 T. ROWE PRICE INTERNATIONAL SERIES EXHIBIT 99.1(a)(3)(d)(v)(b) SCHEDULE A ---------- Effective as of September 16, 1998, this Schedule A to the Participation Agreement is hereby amended as follows:
Name of Separate Account and Date Established by Contracts Funded by Board of Directors Separate Account Designated Portfolios - ------------------------ ---------------- ------------------------------- Prudential Variable Contract Group Variable T. Rowe Price International Series,Inc. --------------------------------------- Account GI-2 Universal Life . T. Rowe Price International Stock Established June 14, 1988 Insurance Contracts Portfolio T. Rowe Price Equity Series, Inc. --------------------------------- . T. Rowe Price Personal Strategy Balanced Portfolio . T. Rowe Price Equity Income Portfolio . T. Rowe Price Mid-Cap Growth Portfolio . T. Rowe Price New America Growth Portfolio T. Rowe Price Fixed Income Series, Inc. --------------------------------------- . T. Rowe Price Limited-Term Bond Portfolio The Prudential Variable Individual Flexible T. Rowe Price International Series, Inc. ---------------------------------------- Appreciable Account Premium Universal . T. Rowe Price International Stock Established August 11, 1987 Life Policy Portfolio Survivorship Variable Universal Life Policy
II-49 IN WITNESS WHEREOF, Prudential Insurance Company of America, T. Rowe Price Investment Services, Inc. and the undersigned Funds hereby amend this Schedule A in accordance with the Participation Agreement made and entered into as of the 1st day of March, 1997. COMPANY: PRUDENTIAL INSURANCE COMPANY OF AMERICA By its authorized officer By: /s/ ------------------------------------- Title: Vice President, Marketing & Client ----------------------------------- Management ---------- Date: 11/4/98 ------------------------------------ FUND: T. ROWE PRICE INTERNATIONAL SERIES, INC. By its authorized officer By: /s/ ------------------------------------- Title: Vice President ----------------------------------- Date: September 16, 1998 ------------------------------------ FUND: T. ROWE PRICE EQUITY SERIES, INC. By its authorized officer By: /s/ -------------------------------------- Title: Vice President ----------------------------------- Date: September 16, 1998 ------------------------------------ FUND: T. ROWE PRICE FIXED INCOME SERIES, INC. By its authorized officer By: /s/ -------------------------------------- Title: Vice President ----------------------------------- Date: September 16, 1998 ------------------------------------ II-50 UNDERWRITER: T. ROWE PRICE INVESTMENT SERVICES, INC. By its authorized officer By: /s/ -------------------------------------- Title: Vice President ----------------------------------- Date: September 16, 1998 ------------------------------------ II-51 EX-99.1(A)(5) 8 VARIABLE UNIVERSAL LIFE INSURANCE CONTRACT EXHIBIT 99.1.A.(5) VUL 97 NY PLEASE READ YOUR POLICY CAREFULLY; it is a legal contract between you and Prudential. Flexible Premium Variable Life Insurance Policy. Insurance payable only upon death. Cash values reflect premium payments, investment results, and charges. Eligible for annual dividends as stated under Dividends. We will promptly pay the beneficiary the death benefit described under the Death Benefit provision of this contract if we receive due proof that the Insured died. We make this promise subject to all the provisions of this contract. The amount and duration of the death benefit may be fixed or variable, depending on the payment of premiums, the investment experience of the variable investment options, any interest credited to the fixed investment options, and the charges made. The cash value may increase or decrease daily, depending on the payment of premiums, the investment experience of the variable investment options, any interest credited to the fixed investment options, and the charges made. There is no guaranteed minimum cash value. If there is ever a question about this contract, please see a Prudential representative or contact one of our offices. Right to Cancel Contract. You may return this contract to us within 10 days after you receive it. All you have to do is take the contract or mail it to one of our offices or to the representative who sold it to you. It will be canceled and we will return your money in accordance with applicable law. II-52 (VUL 97) NY 2 GUIDE TO CONTENTS Contract Data Insured's Information; Rating Class; Basic Contract Information; Notice; Type of Death Benefit; Life Insurance on the Insured; Minimum Initial Premium; Contract Limitations; Other Benefits (if applicable); Adjustments to Premium Payments; Adjustments to the Contract Fund; Schedule of Maximum Surrender Charges; Monthly Deductions from the Contract Fund for Other Benefits (if applicable); Investment Options; The Prudential Variable Appreciable Account; Variable Investment Options; Fixed Interest Rate Investment Option; Initial Allocation of Invested Premium Amounts Table Of Death Benefit Guarantee Values Table Of Maximum Monthly Insurance Rates Per $1000 Table Of Attained Age Factors Definitions The Contract Entire Contract; Contract Modifications; Incontestability Ownership Death Benefit Provisions Death Benefit; Additional Death Benefits; Method of Payment; Suicide Exclusion; Interest on Death Benefit Change In Basic Insurance Amount Changing The Type Of Death Benefit Beneficiary Dividends Participation; Dividend Options Premium Payment Payment of Premiums; Invested Premium Amount; Crediting the Initial Premium Payment; Allocations Contract Fund Cash Value; Net Cash Value; Coverage Amount Default Excess Contract Debt Default; Cash Value Default; Notice of Default Death Benefit Guarantee Death Benefit Guarantee; Guarantee Values Reinstatement Separate Account II-53 Separate Account; Variable Investments; Separate Account Investments; Change in Investment Policy Fixed Investments II-54 (VUL 97) NY 2A Transfers Class One Investments; Class Two Investments; Dollar Cost Averaging Surrender Cash Value Option; Fixed Reduced Paid-up Insurance Withdrawals Effect on Contract Fund; Effect on Basic Insurance Amount Loans Loan Value; Contract Debt; Loan Requirements; Interest Charge; Preferred Loan; Maximum Preferred Loan Amount; Effect on Contract Fund; Deferral General Provisions Annual Report; Payment of Death Claim; Currency; Misstatement of Age or Sex; Assignment; Change in Plan; Factors Subject to Change; Applicable Tax Law Basis Of Computation Mortality Basis and Interest Rate; Minimum Legal Values Settlement Options Options Described; Interest Rate Settlement Options Tables A copy of the application and any riders or endorsements can be found at the end of the contract. II-55 CONTRACT DATA INSURED JOHN DOE Male, Issue Age 35 - -------------------------------------------------------------------------------- RATING CLASS Select Standard - -------------------------------------------------------------------------------- BASIC CONTRACT INFORMATION Policy Number xx xxx xx Contract Date January 1, 1997 Premium Period To the Insured's Attained Age 100 Beneficiary Mary Doe, wife - -------------------------------------------------------------------------------- NOTICE The contract has no generally applicable guaranteed effective interest rate used to determine contract values. The guaranteed interest rate credited on that portion of the contract fund placed in the fixed interest rate investment option is 4% a year. Excess interest credited on the fixed interest rate investment option is not guaranteed and we have the right to change the interest rate from time to time, but not less than the fixed interest rate investment option's guaranteed interest rate. Dividends are not guaranteed. We have the right to change the amount of any dividend to be credited to the contract. This may result in lower total cash values than were illustrated, or, if applicable, require you to pay more premiums than were illustrated. - -------------------------------------------------------------------------------- TYPE OF DEATH BENEFIT (see Death Benefit Provisions) Type B - -------------------------------------------------------------------------------- LIFE INSURANCE ON THE INSURED (as of the Contract Date) Basic Insurance Amount $50,000.00 - -------------------------------------------------------------------------------- MINIMUM INITIAL PREMIUM The minimum initial premium due on the Contract Date is $68.13. This amount, if paid at the beginning of each Contract Month, will accumulate at 4% to equal or exceed the Limited Death Benefit Guarantee Values shown in the Table of Death Benefit Guarantee Values, assuming no loans or withdrawals. - -------------------------------------------------------------------------------- CONTRACT DATA CONTINUED ON NEXT PAGE II-56 Page 3 (97)(NY) POLICY NO. XX XXX XXX CONTRACT DATA CONTINUED CONTRACT LIMITATIONS The minimum premium we will accept is $25.00. The minimum basic insurance amount is $50,000.00. The minimum increase in basic insurance amount is $10,000.00. The minimum decrease in basic insurance amount is $10,000.00. The minimum amount you may withdraw is $500.00. The minimum amount you may borrow is $200.00. The Surrender Charge Threshold is $50,000.00 - -------------------------------------------------------------------------------- ADJUSTMENTS TO PREMIUM PAYMENTS From each premium paid we will: Subtract an administrative charge of up to 7.5% of the premium (s) paid. --------- Subtract a charge for sales expenses at a rate of up to 4% of the premium(s) --------- paid. The remainder of the premium is the invested premium amount. - -------------------------------------------------------------------------------- ADJUSTMENTS TO THE CONTRACT FUND On the Contract Date the contract fund is equal to the invested premium amount credited on that date, minus any of the charges described below which may be ----- due on that date. CONTRACT DATA CONTINUED ON NEXT PAGE II-57 Page 3A (97)(NY) II-58 POLICY NO. XX XXX XXX CONTRACT DATA CONTINUED On each day after the contract date, we will adjust the contract fund by: adding any invested premium amounts. ------ adding any increase due to investment results of the variable investment ------ options. adding guaranteed interest at an effective annual rate of 4% (0.01074598% a ------ day) on that portion of the contract fund that is not in a variable investment option. adding any excess interest on that portion of the contract fund that is in a ------ fixed interest rate investment option. subtracting any decrease due to investment results of the variable investment ----------- options. subtracting a charge against the variable investment options at an effective ----------- annual rate of not more than 0.90% (.00245475% a day) for mortality and expense risks that we assume. subtracting any withdrawals. ----------- subtracting an administrative charge of up to $25.00 for any withdrawals. ----------- subtracting an administrative charge of up to $25.00 for any change in basic ----------- insurance amount. subtracting an administrative charge of up to $25.00 for each transfer between ----------- investment options exceeding twelve in any contract year. subtracting any surrender charges that may result from a withdrawal, ----------- surrender, or reduction in the basic insurance amount. And on each monthly date, we will adjust the contract fund by: subtracting a charge for the cost of insurance of up to the maximum monthly ----------- rate (see Table of Maximum Monthly Insurance Rates) multiplied by the coverage amount divided by $1000.00. The coverage amount is equal to the death benefit (See Death Benefit) minus the value of the contract fund. This charge is deducted proportionally from each of the investment options in which you are investing on each monthly date. CONTRACT DATA CONTINUED ON NEXT PAGE II-59 Page 3B (97) (NY) POLICY NO. XX XXX XXX CONTRACT DATA CONTINUED subtracting a charge for administrative expenses of up to $10.00 plus $0.07 per - ----------- $1000.00 of the basic insurance amount within the first contract year. subtracting a charge for administrative expenses of up to $10.00 plus $0.01 per - ----------- $1000.00 of the basic insurance amount after the first contract year. subtracting a charge of up to $0.01 per $1000.00 of the basic insurance - ----------- amount to guarantee the minimum death benefit. - -------------------------------------------------------------------------------- SCHEDULE OF MAXIMUM SURRENDER CHARGES For a full surrender at the beginning of the contract year indicated, the maximum charge we will deduct from the contract fund is shown below. For a full surrender at other times, the surrender charge will reflect the completed contract months that have passed since the last anniversary. For a Surrender Occurring At the Start of The Maximum Surrender Contract Year Charge is - -------------------------------------------------------------------------------- 1 $446.82 2 $446.82 3 $446.82 4 $446.82 5 $446.82 6 $446.82 7 $446.82 8 $335.12 9 $223.41 10 $111.71 11 and later $0.00 - -------------------------------------------------------------------------------- We may also deduct a surrender charge when you change the basic insurance amount or the type of death benefit, and when you make a withdrawal. (See Change In Basic Insurance Amount, Changing The Type Of Death Benefit, and Withdrawals.) - -------------------------------------------------------------------------------- CONTRACT DATA CONTINUED ON NEXT PAGE II-60 Page 3C (97) II-61 POLICY NO. XX XXX XXX CONTRACT DATA CONTINUED INVESTMENT OPTIONS THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT This account is registered with the SEC under the Investment Company Act of 1940. Each investment option of this account invests in a specific portfolio of The Prudential Series Fund, Inc., and such other funds as we may specify from time to time. The Prudential Series Fund, Inc. and other funds identified below are registered with the SEC under the Investment Company Act of 1940 as open-end diversified management investment companies. Shares in the Series Fund are currently offered continuously, without surcharges, at prices equal to the net asset value of the portfolios. The net asset value is determined once daily on each day the New York Stock Exchange is open for business. Shares of the Prudential Variable Appreciable Account are purchased when: 1. You pay a premium (see Premium Payment) or a charge to reinstate the contract (see Reinstatement); 2. You transfer an amount into a subaccount (see Transfers); and 3. You repay a loan (see Loans). Shares of the Prudential Variable Appreciable Account are sold when: 1. You make a new loan or increase an existing loan (see Loans); 2. You make a withdrawal (see Withdrawals); 3. You transfer an amount out of a subaccount (see Transfers); 4. You surrender the contract for its net cash value (see Surrender); and 5. We subtract charges from the contract fund (see Contract Fund and Adjustments to the Contract Fund). We show below the available investment options and the funds and fund portfolios they invest in. These are Class One investments as described under Transfers. VARIABLE INVESTMENT OPTIONS Money Market Diversified Bond Conservative Balanced Flexible Managed High Yield Bond Stock Index Equity Income Equity Prudential Jennison Global FIXED INTEREST RATE INVESTMENT OPTION The fixed interest rate investment option is funded by the general account of the company. II-62 It is described in the Fixed Investments provision of this contract. This is a Class Two investment as described under Transfers. - -------------------------------------------------------------------------------- CONTRACT DATA CONTINUED ON NEXT PAGE Page 3D (97) (NY) POLICY NO. XX XXX XXX CONTRACT DATA CONTINUED INITIAL ALLOCATION OF INVESTED PREMIUM AMOUNTS Fixed Interest Rate 40% Money Market 60% - -------------------------------------------------------------------------------- END OF CONTRACT DATA II-63 Page 3E (97) POLICY NO. XX XXX XX TABLE(S) TABLE OF DEATH BENEFIT GUARANTEE VALUES These values are used to determine the death benefit guarantee as described under Death Benefit Guarantee. The values on contract anniversaries are shown below. On a date that falls between two anniversaries, the value will fall between the values for those anniversaries considering the time that has passed since the last anniversary. The Limited Death Benefit Guarantee period is the first 32 contract years. LIMITED LIFETIME CONTRACT DEATH BENEFIT DEATH BENEFIT ANNIVERSARY GUARANTEE VALUE GUARANTEE VALUE - -------------------------------------------------------------------------------- Contract Date $ 0 $ 0 1st $ 787.28 $ 3,057.08 2nd $ 1,606.05 $ 6,236.44 3rd $ 2,457.57 $ 9,542.98 4th $ 3,343.15 $ 12,981.78 5th $ 4,264.16 $ 16,558.13 6th $ 5,222.01 $ 20,277.54 7th $ 6,218.17 $ 24,145.72 8th $ 7,254.18 $ 28,168.63 9th $ 8,331.63 $ 32,352.46 10th $ 9,452.18 $ 36,703.64 11th $10,617.55 $ 41,228.87 12th $11,829.53 $ 45,935.10 13th $13,089.99 $ 50,829.58 14th $14,400.87 $ 55,919.84 15th $15,764.18 $ 61,213.71 16th $17,182.03 $ 66,719.34 17th $18,656.59 $ 72,445.19 18th $20,190.13 $ 78,400.08 19th $21,785.02 $ 84,593.16 20th $23,443.70 $ 91,033.97 21st $25,168.73 $ 97,732.41 22nd $26,962.76 $104,698.79 23rd $28,828.55 $111,943.82 24th $30,768.97 $119,478.65 25th $32,787.01 $127,314.88 TABLE(S) CONTINUED ON NEXT PAGE II-64 Page 4 (97) POLICY NO. XX XXX XXX LIMITED LIFETIME CONTRACT DEATH BENEFIT DEATH BENEFIT ANNIVERSARY GUARANTEE VALUE GUARANTEE VALUE - -------------------------------------------------------------------------------- 26th $34,885.77 $135,464.56 27th $37,068.48 $143,940.22 28th $39,338.50 $152,754.91 29th $41,699.32 $161,922.19 30th $44,154.57 $171,456.16 31st $46,708.03 $181,371.49 32nd $49,363.63 $191,683.43 33rd $202,407.85 34th $213,561.24 35th $225,160.77 36th $237,224.28 37th $249,770.33 38th $262,818.22 39th $276,388.03 40th $290,500.63 41st $305,177.74 42nd $320,441.93 43rd $336,316.69 44th $352,826.44 45th $369,996.58 46th $387,853.52 47th $406,424.74 48th $425,738.81 49th $445,825.44 50th $466,715.54 51st $488,441.24 52nd $511,035.97 53rd $534,534.49 54th $558,972.95 55th $584,388.95 56th $610,821.59 II-65 57th $638,311.53 58th $666,901.07 59th $696,634.19 60th $727,556.64 61st $759,715.99 62nd $793,161.71 63rd $827,945.26 64th $864,120.15 65th $901,742.04 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE(S) CONTINUED ON NEXT PAGE Page 4A (97) II-66 POLICY NO. XX XXX XXX TABLE(S) CONTINUED TABLE OF MAXIMUM MONTHLY INSURANCE RATES PER $1,000 CONTRACT MAXIMUM CONTRACT MAXIMUM YEAR MONTHLY RATE YEAR MONTHLY RATE - -------------------------------------------------------------------------------- 1 $0.22667 26 $ 2.01750 2 $0.24333 27 $ 2.20083 3 $0.26417 28 $ 2.40750 4 $0.28750 29 $ 2.63833 5 $0.31417 30 $ 2.89083 6 $0.34500 31 $ 3.15833 7 $0.37833 32 $ 3.43833 8 $0.41500 33 $ 3.72833 9 $0.45500 34 $ 4.03250 10 $0.49917 35 $ 4.36252 11 $0.54583 36 $ 4.72667 12 $0.59417 37 $ 5.13583 13 $0.64667 38 $ 5.59833 14 $0.70333 39 $ 6.11083 15 $0.76500 40 $ 6.67250 16 $0.83333 41 $ 7.27250 17 $0.91083 42 $ 7.88583 18 $0.99833 43 $ 8.50167 19 $1.09750 44 $ 9.12417 20 $1.20583 45 $ 9.77500 21 $1.32167 46 $10.47583 22 $1.44417 47 $11.24667 23 $1.57333 48 $12.10083 24 $1.70917 49 $13.02417 25 $1.85500 50 $13.98583 TABLE(S) CONTINUED ON NEXT PAGE II-67 Page 4B (97) POLICY NO. XX XXX XXX TABLE(S) CONTINUED TABLE OF MAXIMUM MONTHLY INSURANCE RATES PER $1,000 CONTRACT MAXIMUM CONTRACT MAXIMUM YEAR MONTHLY RATE YEAR MONTHLY RATE - ---------- ------------ -------- ------------ 51 $14.95333 61 $29.32167 52 $15.90333 62 $35.08250 53 $16.87833 63 $45.08333 54 $17.89417 64 $62.09583 55 $18.90417 65 $83.33333 56 $19.92333 57 $20.98333 58 $22.21250 59 $23.78917 60 $25.93917 - -------------------------------------------------------------------------------- We may charge less than the maximum monthly rates. At least once every five years, but not more often than once a year, we will consider the need to change the rates we charge. We describe the factors we use to determine such changes under General Provisions. See the Basis of Computation for a description of the basis we use to compute these rates. - -------------------------------------------------------------------------------- TABLE(S) CONTINUED ON NEXT PAGE II-68 Page 4C (97) II-69 POLICY NO. XX XXX XXX TABLE(S) CONTINUED TABLE OF ATTAINED AGE FACTORS These factors are used to determine your death benefit as described under Death Benefit Provisions. These factors apply during each contract year starting on the contract anniversary. INSURED'S INSURED'S ATTAINED AGE FACTORS ATTAINED AGE FACTORS - -------------------------------------------------------------------------------- 35 4.07 60 1.74 36 3.42 61 1.70 37 3.31 62 1.67 38 3.21 63 1.63 39 3.11 64 1.60 40 3.01 65 1.57 41 2.92 66 1.54 42 2.83 67 1.51 43 2.74 68 1.48 44 2.66 69 1.46 45 2.58 70 1.43 46 2.51 71 1.41 47 2.44 72 1.39 48 2.37 73 1.36 49 2.30 74 1.34 50 2.24 75 1.33 51 2.18 76 1.31 52 2.12 77 1.29 53 2.07 78 1.28 54 2.01 79 1.26 55 1.96 80 1.25 56 1.91 81 1.24 57 1.87 82 1.22 58 1.82 83 1.21 59 1.78 84 1.20 TABLE(S) CONTINUED ON NEXT PAGE II-70 Page 4D (97) POLICY NO. XX XXX XXX TABLE(S) CONTINUED INSURED'S INSURED'S ATTAINED AGE FACTORS ATTAINED AGE FACTORS - -------------------------------------------------------------------------------- 85 1.19 93 1.12 86 1.18 94 1.11 87 1.17 95 1.10 88 1.16 96 1.08 89 1.16 97 1.07 90 1.15 98 1.06 91 1.14 99 1.05 92 1.13 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- END OF TABLE(S) II-71 Page 4E (97) (NY) (VUL 97) NY 5 DEFINITIONS We, our and us. The Prudential Insurance Company of America (Prudential). You and your. The owner(s) of the contract. Insured. The person named as the Insured on the first page. He or she need not be the owner. SEC. The Securities and Exchange Commission. Issue Date. The contract date shown on the first page. Anniversary or contract anniversary. The same day and month as the contract date in each later year. Contract Year. A year that starts on the contract date or on an anniversary. Monthly Date. The contract date and the same day as the contract date in each later month. Contract Month. A month that starts on a monthly date. Attained Age. The Insured's attained age at any time is the issue age plus the length of time since the contract date. You will find the Insured's issue age near the top of page 3. Maturity Date. The maturity date is the contract anniversary when the Insured reaches attained age 100. THE CONTRACT Entire Contract This policy and any attached copy of an application, including an application requesting a change, form the entire contract. We assume that all statements in an application are made to the best of the knowledge and belief of the person(s) who make them; they are deemed to be representations and not warranties. We rely on those statements when we issue the contract and when we change it. We will not use any statement, unless made in an II-72 application, to try to void the contract, to contest a change, or to deny a claim. Contract Modifications Only a Prudential officer with the rank or title of vice president may agree to modify this contract, and then only in writing. Incontestability Except as we state in the next sentence, we will not contest this contract after it has been in force during the Insured's lifetime for two years from the issue date. The exceptions are: (1) non-payment of enough premium to pay the required charges; and (2) any change in the contract that requires our approval and that would increase our liability. For any such change, we will not contest the change after it has been in effect for two years during the lifetime of the Insured. II-73 (VUL 97) NY 6 OWNERSHIP Unless a different owner is named in the application, the owner of the contract is the Insured. If a different owner is named, we will show that owner in an endorsement to the contract. This ownership arrangement will remain in effect unless you ask us to change it. You may change the ownership of the contract by sending us a request in a form that meets our needs. We may ask you to send us the contract to be endorsed. If we receive your request in a form that meets our needs, and the contract if we ask for it, we will file and record the change, and it will take effect as of the date you signed the request. While the Insured is living, the owner, with no one else's consent, is entitled to any contract benefit and value, and to the exercise of any right and privilege granted by the contract or by us. DEATH BENEFIT PROVISIONS We will pay a benefit (described below) to the beneficiary at the Insured's death if this contract is in force at the time of that death; that is, if it has not been surrendered and it is not in default past the grace period. If the contract is not in default, the amount we will pay will be the death benefit determined as of the date of the Insured's death, increased by any dividend credits and reduced by any contract debt (described under Loans). If the contract is in default, and the Insured's death occurs in the grace period (described under Default), we will pay the death benefit, increased by any dividend credits and reduced by any contract debt and the amount needed to pay charges through the date of death. If the Insured's death occurs past the grace period, no death benefit is payable. Death Benefit This contract has either a Type A or Type B death benefit. We show the type of death benefit that applies to this contract under Type of Death Benefit in the contract data pages. If this contract has a Type A death benefit, the death benefit on any date is equal to the greater of: (1) the basic insurance amount, and (2) the contract fund before deduction of any monthly charges due on that date, multiplied by the attained age factor that applies. If this contract has a Type B death benefit, the death benefit on any date is equal to the greater of: (1) the basic insurance amount plus the contract fund before deduction of any monthly II-74 charges due on that date, and (2) the contract fund before deduction of any monthly charges due on that date, multiplied by the attained age factor that applies. For the purposes of computing the death benefit, if the contract fund is less than zero we will consider it to be zero. Your basic insurance amount and attained age factors are shown in the contract data pages. Additional Death Benefits This contract may provide additional benefits, which may be payable on an Insured's death. If it does, they will be listed on a contract data page, and a form describing the benefit will be included in this contract. Any such benefit will be payable only if the contract is not in default past the grace period at the time of the death. Method of Payment You may choose to have any death benefit paid in a single sum or under one of the optional modes of settlement shown in the Settlement Options provision. II-75 (VUL 97) NY 7 Suicide Exclusion If the Insured dies by suicide within two years from the issue date, this contract will end and we will return the premiums paid, less any contract debt, and less any withdrawals. If the Insured dies by suicide after two years from the issue date but within two years of the effective date of an increase in the basic insurance amount, we will pay, as to the increase in amount, no more than the sum of the premiums paid on and after the effective date of the increase. Interest on Death Benefit Any death benefit described above will be credited with interest from the date of death in accordance with applicable laws. CHANGE IN BASIC INSURANCE AMOUNT You may change the basic insurance amount. You may do so subject to our approval and all these conditions and the paragraphs that follow: You must ask for the change in a form that meets our needs. The amount of an increase or decrease must be at least equal to the minimum increase or decrease in basic insurance amount shown under Contract Limitations in the contract data pages. The basic insurance amount after the decrease must be at least equal to the minimum basic insurance amount shown under Contract Limitations in the contract data pages. If we ask you to do so, you must send us the contract to be endorsed. You must prove to us that the Insured is insurable for any increase. The contract must not be in default. Any request for a change must be made on or after the first contract anniversary. We must not be paying premiums into the contract as a result of the Insured's total disability. We show under Contract Limitations a Surrender Charge Threshold. If you decrease your basic insurance amount to an amount equal to or greater than this threshold, we will not impose a surrender charge. If you decrease your basic insurance amount below this threshold, we will subtract the new basic insurance amount from the threshold amount. We will then multiply the surrender charge (see Schedule of Maximum Surrender Charges) by the lesser of this difference and the amount of the decrease and divide by the threshold amount. The result is the maximum surrender charge we will deduct from the contract fund as a result of this transaction. We may decline the change if we determine it would cause the contract to fail to qualify as life insurance under the applicable tax law. A change will take effect only if we approve your request for it at our Home Office and will take effect on the date we approve it. If we approve the change, we will also recompute the contract's charges, values and limitations. A II-76 change in the basic insurance amount may also affect the amount of any extra benefits this contract might have. We will send you new contract data pages showing the amount and effective date of the change and the recomputed charges, values and limitations. If the Insured is not living on the effective date, the change will not take effect. We may deduct the administrative charge (shown under Adjustments to the Contract Fund) for the change. II-77 (VUL 97) 8 CHANGING THE TYPE OF DEATH BENEFIT This contract has either a Type A or Type B death benefit (see Death Benefit). Subject to our approval, you may change the type of death benefit after the first contract year. If you do so, we will adjust the basic insurance amount so that the death benefit immediately after the change will remain the same as the death benefit immediately before the change. If you are changing from a Type B to a Type A death benefit, we will increase the basic insurance amount by the amount in your contract fund on the date the change takes effect. If you are changing from a Type A to a Type B death benefit, we will reduce the basic insurance amount by the amount in your contract fund on the date the change takes effect. The basic insurance amount after the decrease must be at least equal to the minimum basic insurance amount, which we show under Contract Limitations in the contract data pages. We show under Contract Limitations a Surrender Charge Threshold. If we decrease your basic insurance amount to an amount equal to or greater than this threshold, we will not impose a surrender charge. If we decrease your basic insurance amount below this threshold, we will subtract the new basic insurance amount from the threshold amount. We will then multiply the surrender charge (see Schedule of Maximum Surrender Charges) by the lesser of this difference and the amount of the decrease and divide by the threshold amount. The result is the maximum surrender charge we will deduct from the contract fund as a result of this transaction. A change in the type of death benefit will take effect only if we approve your request at our Home Office. If we approve the change, we will recompute the contract's charges, values and limitations shown in the contract data pages. The change will take effect on the monthly date that coincides with or next follows the date we approve your request. We will send you new contract data pages showing the amount and effective date of the change in basic insurance amount and the recomputed charges, values and limitations. Your request for a change must be in a form that meets our needs. We may require you to send us this contract before we make the change. II-78 (VUL 97) NY 9 BENEFICIARY You may designate or change a beneficiary by sending us a request in a form that meets our needs. We may ask you to send us the contract to be endorsed. If we receive your request, and the contract if we ask for it, at our Home Office, we will file and record the change and it will take effect as of the date you signed the request. But if we make any payment(s) before we receive the request, we will not have to make the payment(s) again. Any beneficiary's interest is subject to the rights of any assignee we know of. When a beneficiary is designated, any relationship shown is to the Insured, unless otherwise stated. To show priority, we may use numbered classes, so that the class with first priority is called class 1, the class with next priority is called class 2, and so on. When we use numbered classes, these statements apply to beneficiaries unless the form states otherwise: One who survives the Insured will have the right to be paid only if no one in a prior class survives the Insured. One who has the right to be paid will be the only one paid if no one else in the same class survives the Insured. Two or more in the same class who have the right to be paid will be paid in equal shares. If none survives the Insured, we will pay in one sum to the Insured's estate. Before we make a payment, we have the right to decide what proof we need of the identity, age, or other facts about any persons designated as beneficiaries. If beneficiaries are not designated by name and we make payment(s) based on that proof, we will not have to make the payment(s) again. DIVIDENDS Participation This contract will be eligible for a dividend on each contract anniversary if the Insured is living. We will decide each year what part, if any, of our surplus to credit to this contract as a dividend. We do not expect to credit any dividends to this contract. Dividend Options While the contract is in force, you may choose any of the uses we show below for any dividend. You must ask us in a form that meets our needs. Cash. We will pay it to you in cash. Increase Contract Fund. We will use it to increase your contract fund. Paid-Up Life Insurance Addition. We will use it at the net single premium rate as of the anniversary to provide a paid-up life insurance addition. If you have not made another choice by 31 days after the anniversary, we will use any dividend as we state under dividend option 2. II-79 (VUL 97) NY 10 PREMIUM PAYMENT Payment of Premiums The minimum initial premium shown in the contract data pages is due on or before the contract date. There is no insurance under this contract until that premium is paid. We may require an additional premium if adjustments to premium payments plus any contract fund charges due on or before the payment date exceed the minimum initial premium. Subject to the limitations below, additional premiums may be paid at any time during the Insured's lifetime as long as the contract is not in default beyond the grace period. Premiums may be paid at one of our offices or to one of our authorized representatives. We will give a signed receipt upon request. The minimum premium we will accept is shown on a contract data page. We have the right to refuse to accept a premium payment that would cause this contract to fail to qualify as life insurance under applicable tax law. We also have the right to refuse to accept any payment that increases the death benefit by more than it increases the contract fund. Invested Premium Amount The invested premium amount is the portion of each premium you pay that we add to the contract fund. It is equal to the premium paid minus the adjustments to premium payments shown on a contract data page. Crediting the Initial Premium Payment If we receive the first premium payment on or before the contract date, we will credit the invested premium amount to the contract fund on the contract date. If we receive the first premium payment after the contract date, we will credit the premium amount to the contract fund on the payment date. Allocations You may allocate all or a part of your invested premium amount to one or more of the investment options listed in the contract data pages. You may choose to allocate nothing to a particular investment option. You may not choose a fractional percentage. The initial allocation of invested premium amounts is shown on a contract data page. You may change the allocation for future invested premium amounts at any time if the contract is not in default. To change your allocation, simply notify us in a form that meets our needs. The change will take effect on the date we receive your notice; we will send you a confirmation of the transaction. CONTRACT FUND When you make your first premium payment, the invested premium amount, less any charges due on or before that day, becomes your contract fund. Amounts are added and subtracted from the contract fund as shown under Adjustments to the Contract Fund in II-80 the contract data pages. The amount in your contract fund is used to pay charges under this contract and will determine, in part, whether this contract will remain in force or go into default. The contract fund value is also used to determine your loan and surrender values, the amount you may withdraw, and the death benefit. Cash Value The cash value at any time is the contract fund less any surrender charge. Net Cash Value The net cash value at any time is the cash value less any contract debt. If the contract is in default, the net cash value is zero. Coverage Amount The coverage amount is used to determine the cost of insurance as described under Adjustments to the Contract Fund. It is equal to the death benefit (see Death Benefit) minus the value of the contract fund. II-81 (VUL 97) 11 DEFAULT Excess Contract Debt Default If contract debt ever grows to be equal to or more than the cash value, the contract will have excess contract debt and will be in default. Cash Value Default On each monthly date, we will determine the cash value. If the cash value is greater than zero and the contract has no excess contract debt, the contract will remain in force until the next monthly date. If the cash value is zero or less, the contract is in default unless it remains in force under the Death Benefit Guarantee. Notice of Default If the contract is in default, we will mail you a notice stating the amount we will need to keep the contract in force. That amount will equal a premium which we estimate will keep the contract in force for three months from the date of default. We grant a 61-day grace period from the date we mail the notice to pay this charge. The contract will remain in force during this period. If that amount is not paid to us by the end of the 61-day grace period, the contract will end and have no value. DEATH BENEFIT GUARANTEE Death Benefit Guarantee On each monthly date while the contract is in force, we will: Accumulate premium payments at 4% annual interest; and Accumulate any withdrawal amounts at 4% annual interest. We then subtract amount 2 from amount 1 and compare the result to the values shown in or derived from the Table of Death Benefit Guarantee Values for such monthly date. If the result is equal to or greater than the appropriate value and the contract has no excess contract debt, the contract will remain in force until the next monthly date. If the result is less than the appropriate value and any of the events described under Default have occurred, the contract is in default as described under Default. Guarantee Values We show the Limited Death Benefit Guarantee Period under the Table of Death Benefit Guarantee Values in the contract data pages. When the monthly date occurs within this period, we use the values shown in or derived from the Limited Death Benefit Guarantee Value column to determine if the contract will remain in force until the next monthly date. When the monthly date occurs after this period, we use the values shown in or derived from the Lifetime Death Benefit Guarantee Value column to determine if the contract will remain in force until the next monthly date. II-82 (VUL 97) 12 REINSTATEMENT If this contract ends without value, as described under Default, you may reinstate it. The following conditions must be satisfied: The contract must not have been in default for more than 5 years. You must prove to us that the Insured is insurable for the contract. You must pay us a charge equal to: (a) an amount, if any, required to bring the cash value to zero on the date the contract went into default, plus (b) the deductions from the contract fund during the grace period following the date of default, plus (c) a premium that we estimate will be sufficient after administrative charges to cover the deductions from the contract fund for three monthly dates starting on the date of reinstatement. Any contract debt (with interest to date at the rate(s) we set for loans as we state under Loans) must be restored or paid back. If that debt with interest would exceed the loan value of the reinstated contract, the excess must be paid to us before reinstatement. The date of reinstatement will be the beginning of the contract month that coincides with or next follows the date we approve your request. We will deduct all required charges from your payment and put the balance in your contract fund. If we approve the reinstatement, we will credit the contract fund with a refund of that part of any surrender charge deducted at the time of default which would have been charged if the contract were surrendered immediately after reinstatement. II-83 (VUL 97) NY 13 SEPARATE ACCOUNT Separate Account The words separate account , when we use them in this contract without qualification, mean any separate account we establish to support variable life insurance contracts like this one. We list the separate accounts available to you in the contract data pages. We may establish additional separate accounts. We will notify you within one year if we do so. Variable Investments A separate account may offer one or more variable investment options. We list them in the contract data pages. We may establish additional variable investment options. We will notify you within one year if we do so. We may also eliminate existing variable investment options, but only with the consent of the SEC and the Superintendent of the New York Insurance Department. Income and realized and unrealized gains and losses from assets in each variable investment option are credited to, or charged against, that variable investment option. This is without regard to income, gains, or losses in other investment options. Separate Account Investments We may invest the assets of different separate accounts in different ways. But we will do so only with the consent of the SEC and the Superintendent of the New York Insurance Department. The process for obtaining consent is on file with the Superintendent of the New York Insurance Department. We will always keep assets in the separate accounts with a total value at least equal to the amount of the variable investment options under contracts like this one. To the extent those assets do not exceed that amount, we use them only to support those contracts; we do not use those assets to support any other business we conduct. We may use any excess over that amount in any way we choose. We will determine the value of the assets in each separate account and any investment option on each day the New York Stock Exchange is open for business. Change in Investment Policy A portfolio of the fund might make a material change in its investment policy. In that case, we will send you a notice of the change. Within 60 days after you receive the notice, or within 60 days after the effective date of the change, if later, you may transfer to the Fixed Account any amounts in the investment option investing in that portfolio. No material change in investment policy of a portfolio shall be made unless we have filed such change with the Superintendent of the New York Insurance Department. FIXED INVESTMENTS We list any fixed investment option available to you in the II-84 contract data pages. We may establish additional fixed investment options. We will notify you within one year if we do so. You may allocate all or part of your invested premium amount to an available fixed investment option. As stated under Adjustments to the Contract Fund, we credit fixed investment options with guaranteed interest and we may credit them with excess interest. This excess interest is non-forfeitable. II-85 (VUL 97) NY 14 TRANSFERS You have the right to transfer amounts into or out of investment options up to twelve times in each contract year without charge if the contract is not in default, subject to certain restrictions depending on an investment's class. We may charge for additional transfers in any contract year as we state under Adjustments to the Contract Fund except that you may transfer all amounts into the fixed interest rate investment option, without charge, during the first 18 months. The investment class for each investment is shown under Investment Options in the contract data pages. To make a transfer, you must ask us in a form that meets our needs. Unless otherwise restricted, the transfer will take effect on the date we receive your notice at our Home Office. Class One Investments You may transfer amounts into or out of these investments. Class Two Investments You may transfer amounts into these investments. You may transfer out up to 25% of the amount in these investments once each contract year. Additional transfers out of these investments may be made only with our consent. Dollar Cost Averaging You may elect to transfer money periodically from the Money Market Investment Option into other variable investment options. The transfer can be either a fixed dollar amount or a percentage of the amount you designate for this purpose. The transfers may be made monthly, quarterly, semi-annually or annually. It will take effect as of the end of the valuation period on the date coinciding with the period you select. If the New York Stock Exchange is not open on that date, or if that date does not occur in a particular month, the transfer will take effect as of the end of the valuation period which immediately follows that date. This feature will end when (1) $50 or less remains of the amount you designated or (2) you ask us to cancel. SURRENDER You may surrender this contract for its net cash value or for a fixed reduced paid-up insurance benefit. To do so, you must ask us in a form that meets our needs. We may require you to send us the contract. Cash Value Option We will usually pay any net cash value within seven days after we receive your request and the contract at our Home Office. But we have the right to postpone paying you the part of the net cash value that is to come from any variable investment option (provided by a separate account registered under the Investment Company Act of 1940) if: (1) the New York Stock Exchange is closed; or (2) the SEC requires that trading be restricted or declares an emergency. We have the right to postpone paying you the remainder for up to six months. If we do so for more than ten days, we will pay interest at the rate that then applies to Option 3 (Interest Payment) of the Settlement Options provision. II-86 Fixed Reduced Paid-up Insurance This will be paid-up life insurance on the Insured's life. We will pay the amount of this insurance when the Insured dies. There will be cash values and loan values. The loan interest rate will be 5%. The amount of this insurance will be what is provided when we use the net cash value at the net single premium rate. This rate depends on the Insured's issue age and sex and on the length of time since the contract date. II-87 (VUL 97) NY 15 WITHDRAWALS You may make withdrawals from the contract subject to all these conditions and the paragraph that follows: You must ask for the withdrawal in a form that meets our needs. The net cash value after withdrawal may not be less than or equal to zero after deducting any charges associated with the withdrawal. You may not withdraw less than the minimum amount shown under Contract Limitations. The basic insurance amount after withdrawals must be at least equal to the minimum basic insurance amount shown under Contract Limitations. Any amount withdrawn may not be repaid except as a premium subject to charges. Effect on Contract Fund We will reduce your contract fund on the date we approve your request by the withdrawal amount and any charges listed under Adjustments to the Contract Fund. Unless you request otherwise and we agree, we will take any withdrawal proportionately from all investment options that apply to the contract. We may charge an administrative fee as stated under Adjustments to the Contract Fund. Effect on Basic Insurance Amount If you have a Type B death benefit, withdrawals will not affect the basic insurance amount. If you have a Type A death benefit and the withdrawal would cause the coverage amount (see Contract Fund) to increase, we will reduce the basic insurance amount and, consequently, your death benefit to offset this increase. The reduction in the basic insurance amount will never be more than the withdrawal amount. If we reduce the basic insurance amount, we will recompute the contract's charges, values and limitations. We will send you new contract data pages showing these changes. We show under Contract Limitations a Surrender Charge Threshold. If we decrease your basic insurance amount to an amount equal to or greater than this threshold, we will not impose a surrender charge. If we decrease your basic insurance amount below this threshold, we will subtract the new basic insurance amount from the threshold amount. We will then multiply the surrender charge (see Schedule of Maximum Surrender Charges) by the lesser of this difference and the amount of the decrease and divide by the threshold amount. The result is the maximum surrender charge we will deduct from the contract fund as a result of this transaction. We will usually pay any withdrawal amount within seven days after we receive your request and the contract (if we require it) at our Home Office. But we have the right to postpone paying you the part of the net cash value that is to come from any variable II-88 investment option provided by a separate account registered under the Investment Company Act of 1940 if: (1) the New York Stock Exchange is closed; or (2) the SEC requires that trading be restricted or declares an emergency. We have the right to postpone paying you the remainder for up to six months. If we do so for more than ten days, we will pay interest at the rate of 3% a year. II-89 (VUL 97) NY 16 LOANS Subject to the minimum loan requirement and the requirements of this provision, you may at any time borrow any amount up to the current loan value less any existing contract debt. Loan Value If the contract is not in default, the loan value at any time is equal to the sum of (a) 90% of the portion of the cash value attributable to the variable investment options, and (b) the balance of the cash value. If the contract is in default, it has no loan value. Contract Debt Contract debt at any time means the loan on the contract at that time, plus the interest we have charged that is not yet due and that we have not yet added to the loan. Loan Requirements For us to approve a loan, the following requirements must be met: you must assign this contract to us as sole security for the loan; the Insured must be living; and the resulting contract debt must not be more than the loan value. If there is already contract debt when you borrow from us, we will add the new amount you borrow to that debt. Interest Charge We will charge interest daily on any loan. Interest is due on each contract anniversary, or when the loan is paid back, whichever comes first. If interest is not paid when due, it becomes part of the loan. Then we start to charge interest on it, too. Except as stated below, we charge interest at an effective annual rate of 5%. Preferred Loan Unless you ask us otherwise, on or after the 10th contract anniversary, a portion of the amount you may borrow will be considered a Preferred Loan up to an amount equal to the maximum preferred loan amount described below. Preferred Loans are charged interest at an effective annual rate of 4 1/2%. Maximum Preferred Loan Amount The maximum preferred loan amount available starting on the 10th contract anniversary is (A) minus (B), where (A) is the total amount you may borrow, and (B) is the total premiums paid less total withdrawals, if any. If (B) is less than zero, we will consider it to be zero. Effect on Contract Fund When you take a loan, the amount of the loan continues to be a part of the contract fund and is credited with interest at an effective rate of 4% a year. We will reduce the portion of the contract fund allocated to the investment options by the amount you borrow, and by loan interest II-90 that becomes part of the loan if it is not paid when due. We will take any loan proportionately from all investment options that apply to the contract unless you ask us otherwise and we agree. On each monthly date, if there is a contract loan outstanding, we will increase the portion of the contract fund in the investment options by interest credits accrued on the loan since the last monthly date. When you repay all or part of a loan, we will increase the portion of the contract fund in the investment options and decrease the portion on which we credit the guaranteed interest rate of 4% a year by the amount of loan you repay using your investment allocation for future premium payments on file as of the loan payment date, plus interest credits accrued on the loan since the last transaction date. We will not increase the portion of the contract fund allocated to the investment options by loan interest that is paid before we make it part of the loan. We reserve the right to change the manner in which we allocate loan repayments. If we make such a change, we will do so for all contracts like this one. We will send you notice of any change. For the possible effect of excess contract debt and/or failure to repay loans, see Default on page 11. II-91 (VUL 97) NY 17 Deferral We will usually pay any loan within seven days after we receive your request and the contract at our Home Office. But we have the right to postpone paying you the part of the net cash value that is to come from any variable investment option (provided by a separate account registered under Investment Company Act of 1940) if: (1) the New york Stock Exchange is closed; or (2) the SEC requires that trading be restricted or declares an emergency. We have the right to postpone paying you the remainder for up to six months. If we do so for more than ten days, we will pay interest at the rate that then applies to Option 3 (Interest Payment) of the Settlement Options provision. GENERAL PROVISIONS Annual Report Once each contract year we will send you a report. It will show: the current death benefit; the amount of the contract fund in each investment option; the cash surrender value; any contract debt and the interest rate we are charging; premiums paid, investment results, charges deducted, and withdrawals taken since the last report. The report may also show any other data that may be required where this contract is delivered. Payment of Death Claim If we settle this contract in one sum as a death claim we will usually pay the proceeds within seven days after we receive at our Home Office proof of the Insured's death and any other information we need to pay the claim. But we have the right to postpone paying the part of the proceeds that is to come from a variable investment option provided by a separate account registered under the Investment Company Act of 1940 if: (1) the New York Stock Exchange is closed; or (2) the SEC requires that trading be restricted or declares an emergency. We have the right to postpone paying the remainder for up to six months. If we postpone payment of the death claim, we will pay interest from the date of death to the date of payment at the rate that then applies to Option 3 (Interest Payment) of the Settlement Options provision. Currency Any money we pay, or that is paid to us, must be in United States currency. Any amount we owe will be payable at our Corporate Office. Misstatement of Age or Sex If the Insured's stated age or sex or both are not correct, we will change each benefit and any amount to be paid to what the most recent deductions from the contract fund would have provided at the Insured's correct age and sex. Assignment We will not be deemed to know of an assignment unless we receive it, or a copy of it, at our Home Office. We are not obliged to see that an assignment is valid or sufficient. This contract may II-92 not be assigned to any employee benefit plan or program without our consent. This contract may not be assigned if such assignment would violate any federal, state, or local law or regulation prohibiting sex distinct rates for insurance. Change in Plan You may be able to have this contract changed to another plan of life insurance. Any change may be made only if we consent, and will be subject to conditions and charges that are then determined. Factors Subject To Change Charges deducted from premium payments and the contract fund may change from time to time, subject to the maximums shown in the contract data pages. In deciding whether to change any of these charges, we will periodically consider factors such as mortality, persistency, expenses, taxes and interest and/or investment experience to see if a change in our assumptions is needed. Administrative charges attributable to premiums will be set at one rate for all contracts like this one. Changes in other factors will be by class. All changes will be determined only prospectively; that is, we will not recoup prior losses or distribute prior gains by means of these changes. The procedure for computing rates is on file with the Department of Insurance. Applicable Tax Law This contract has been designed to satisfy the definition of life insurance for Federal income tax purposes under Section 7702 of the Internal Revenue Code of 1986, as amended. We reserve the right, however, to decline any change we determine would cause this contract to fail to qualify as life insurance under the applicable tax law. This includes changing the basic insurance amount, withdrawals, and changing the type of death benefit. We also have the right to change this contract, to require additional premium payments, or to make distributions from this contract to the extent necessary to continue to qualify this contract as life insurance. II-93 (VUL 97) NY 18 BASIS OF COMPUTATION Mortality Basis and Interest Rate We compute maximum monthly insurance rates using: the Commissioners 1980 Standard Ordinary Mortality Table; the issue age, sex, smoker and non-smoker status, and rating class of the Insured and the length of time since the contract date; age last birthday; and an effective interest rate of 4% a year. We compute all net single premiums and values for fixed reduced paid-up insurance using: the Commissioners 1980 Standard Ordinary Mortality Table; the Insured's issue age, sex, smoker and non-smoker status and the length of time since the contract date; continuous functions based on age last birthday; and an effective interest rate of 4% a year. Minimum Legal Values The cash surrender values provided by this contract are at least as large as those set by law where it is delivered. Where required, we have given the insurance regulator a detailed statement of how we compute values and benefits. II-94 (VUL 97) 19 SETTLEMENT OPTIONS Options Described You may choose to have the proceeds (that is, any death benefit or any amount payable upon surrender of the contract) paid in a single sum or under one of the optional modes of settlement described below. If the person who is to receive the proceeds of this contract wishes to take advantage of one of these optional modes, we will furnish, on request, details of the options we describe below or any others we may have available at the time the proceeds become payable. Option 1 (Instalments for a Fixed Period) We will make equal payments for up to 25 years. The Option 1 Table shows the minimum amounts we will pay. Option 2 (Life Income) We will make equal monthly payments for as long as the person on whose life the settlement is based lives, with payments certain for 120 months or until the sum of the payments equals the amount put under this option. The Option 2 Table shows the minimum amounts we will pay. But, we must have proof of the date of birth of the person on whose life the settlement is based. The settlement will share in our surplus to the extent and in the way we decide. Option 3 (Interest Payment) We will hold an amount at interest. We will pay the interest annually, semi- annually, quarterly, or monthly. Option 4 (Instalments of a Fixed Amount) We will make equal annual, semi-annual, quarterly, or monthly payments for as long as the available proceeds provide. Option 5 (Non-Participating Income) We will make payments like those of any annuity we then regularly issue that: (1) is based on United States currency; (2) is bought by a single sum; (3) does not provide for dividends; and (4) does not normally provide for deferral of the first payment. Each payment will be at least equal to what we would pay under that kind of annuity with its first payment due on its contract date. If a life income is chosen, we must have proof of the date of birth of any person on whose life the option is based. Option 5 cannot be chosen more than 30 days before the due date of the first payment. Interest Rate Payments under Options 1 and 4 will be calculated assuming an effective interest rate of at least 3 % a year. Under Option 3 it will be at an effective rate of at least 3% a year. II-95 (VUL 97) 20 SETTLEMENT OPTIONS TABLES II-96 Flexible Premium Variable Life Insurance Policy. Insurance payable only upon death. Cash values reflect premium payments, investment results, and charges. VUL 97 NY 22 II-97 EX-99.1(A)(13)(B) 9 TERM RIDER ON INSURED EXHIBIT 1.A.(13)(b) VL 402 B-97 NY RIDER FOR LEVEL TERM INSURANCE BENEFIT ON LIFE OF INSURED -CHARGES INCREASE ANNUALLY This benefit is a part of this contract only if it is listed on a contract data page. Benefit We will pay an amount under this benefit if we receive due proof that the Insured died: (1) in the term period for the benefit; and (2) while this contract is in force and not in default past the last day of the grace period. But our payment is subject to all the provisions of this rider and of the rest of this contract. We show the amount of term insurance under this benefit on a contract data page. We also show the term period for the benefit there. The term period starts on the contract date. The anniversary at the end of the term period is part of that period. Benefit Charges The monthly charge for this benefit is deducted on each monthly date from the contract fund. The amount of that charge is shown under Adjustments to the Contract Fund. Monthly charges for this benefit stop on the anniversary at the end of the term period. This benefit has no cash value, but it can affect the cash value of the contract. CONVERSION TO ANOTHER PLAN OF INSURANCE Right to Convert You may convert this benefit to a new contract of life insurance on the Insured's life. You will not have to prove that the Insured is insurable. Conditions You must ask for the conversion in a form that meets our needs, while this contract is in force and not in default past the last day of the grace period, and on or before the fifth contract anniversary. We may require you to send us this contract. The new contract will not take effect unless the modal premium for it is paid while the Insured is living and within 31 days after its contract date. If the premium is paid as we state, it will be deemed that the new contract took effect on its contract date and that this benefit ended just before that date. Premium Credit Upon conversion to a new contract with scheduled premiums, we will allow a credit, as described below, on each premium that is due or scheduled for payment during the first year of the new contract. Upon conversion to a new contract without scheduled premiums, we will allow a credit as of the contract date provided II-98 you pay any required minimum initial premium for the new contract. If this benefit has been in force for at least one year on the contract date of the new contract, we will allow the full credit described below. If this benefit has been in force for less than one year as of that date, the credit will be reduced on a pro-rata basis taking into consideration the portion of a year for which this benefit has then been in force. The full credit is equal to the monthly charges deducted from the contract fund for the benefits being converted under this rider during the twelve months preceding the date of the new contract, less 20% of any of those premiums that were due prior to the first anniversary of this contract. Extra charges for extra risks or extra benefits other than a waiver benefit are not considered in determining this credit. If the new contract has scheduled premiums, we will reduce each premium due or scheduled for payment in the first year of the new contract to consider either the full or reduced credit, as appropriate. If more than one premium is due or scheduled for payment, we will apportion any credit between them. If the new contract does not have scheduled premiums, we will pay either the full or reduced credit, as appropriate, into the new contract as of the contract date provided you pay any required minimum initial premium for the new contract. Contract Date If this contract is not in default, you may choose any contract date for the new contract that is not more than 31 days after nor more than 31 days before the date we receive your request, and not later than the fifth contract anniversary. If this contract is in default but not past the last day of the grace period, the contract date for the new contract will be the date on which this contract went into default. VL 402 B-97 NY Contract Specifications The new contract will be in the same rating class as this contract. We will set the issue age, premiums and charges for the new contract in accordance with our regular rules in use on its contract date. Except as we state in the next sentence, the new contract may be any life or endowment policy we regularly issue on its contract date for the same rating class, amount, issue age and sex. It may not be: a single-premium contract; one that insures anyone in addition to the Insured; one that includes or provides for term insurance, other than extended insurance; one with premiums that increase after a stated time, if its first premium is less than 80% of any later premium; or one with any benefit other than the basic insurance benefit and the waiver benefit we refer to below. A waiver benefit may either waive or pay premiums in the event of the Insured's total disability. The basic amount of the new contract may be any amount you ask for as long as it is at least $10,000 and not more than the amount of term insurance for this benefit. If the amount you want is smaller than the smallest amount we would regularly issue on the plan you want, we will issue a new contract for as low as $10,000 on the Life Paid Up at Age 85 plan if you ask us to. If this contract has a benefit for paying premiums in the event of the Insured's total disability, we will include a waiver benefit in the new contract if its premium period runs to at least the Insured's attained age 85 II-99 and if we would include a waiver benefit in other contracts like the new one. We will not deny a waiver benefit that we would have allowed under this contract, and that we would otherwise allow under the new contract, just because total disability started before the contract date of the new contract. Any premium to be waived or paid for total disability under the new contract must be on the monthly mode. We will not waive or pay any premium under the new contract unless it has a waiver benefit, even if we have paid premiums into this contract due to the Insured's total disability. Any waiver benefit in the new contract will be the same one, with the same provisions, that we put in other contracts like it on its contract date. In any of these paragraphs, when we refer to other contracts, we mean contracts we would regularly issue on the same plan as the new contract and for the same rating class, amount, issue age and sex. Changes You may be able to have this benefit changed to a new contract of life insurance other than in accordance with the requirements for conversion that we state above. But any change may be made only if we consent, and will be subject to conditions and charges that are then determined. TERMINATION OF BENEFIT This benefit will end on the earliest of: 1 The end of its term period; 2 the end of the last day of the grace period if the contract is in default; 3 the end of the last day before the contract date of any other contract to which the benefit is converted or changed; 4 the date the contract is surrendered for its net cash value; and 5 the date the contract ends for any other reason. Further, if you ask us in a form that meets our needs, we will cancel the benefit as of the first monthly date on or after the date we receive your request. Monthly charges due then and later will be reduced accordingly. This Supplementary Benefit rider attached to this contract on the Contract Date II-100 EX-99.1(A)(13)(C) 10 TERM RIDER ON SPOUSE EXHIBIT 1.A.(13)(c) VL 450 B-97 NY RIDER FOR TERM INSURANCE BENEFIT ON LIFE OF INSURED SPOUSE This benefit is a part of this contract only if it is listed on a contract data page. Benefit We will pay an amount under this benefit if we receive due proof that the insured spouse died: (1)in the term period for the benefit; and (2)while this contract is in force and not in default past the last day of the grace period. But our payment is subject to all the provisions of this rider and of the rest of this contract. The phrase insured spouse means the Insured's spouse named in the application for this contract. We show the amount of this benefit on a contract data page. We also show the term period for the benefit there. The term period starts on the contract date. The anniversary at the end of the period is part of that period. Benefit Charges The monthly charge for this benefit is deducted on each monthly date from the contract fund. The amount of that charge is shown under Adjustments to the Contract Fund. Monthly charges for this benefit stop on the earliest of: (1)the death of the Insured, (2)the death of the insured spouse, and (3)the anniversary at the end of the term period. This benefit has no cash value, but it can affect the cash value of the contract. PAID-UP INSURANCE Paid-up Insurance on Life of Insured Spouse If the Insured dies in the term period for this benefit while this contract is in force and not in default past the last day of the grace period and while the insured spouse is living, the insurance on the life of the insured spouse under the benefit will become paid-up term insurance. While the paid-up insurance is in effect, the contract will remain in force until the end of the term period for this benefit. The paid-up insurance will have cash values but no loan value. If the Insured dies by suicide within the period which we state in the Suicide Exclusion under Death Benefits provision of the contract and our liability is limited as we state for suicide in that provision, any provision for paid-up insurance on the life of the insured spouse will not apply. Instead, we will then offer to insure the insured spouse under a new contract of life or endowment insurance. The new contract will be subject to conditions and charges that are then determined, in accordance with regular rules in effect at the time. Its amount will not be less than the greater of (1)the amount of insurance on the insured spouse's life under this contract, and (2)the lowest amount offered for the plan of insurance to be provided by the new contract. Proof that the insured spouse is insurable will not be required, unless the new II-101 contract is to provide either an increased amount of insurance or a benefit that did not apply to the insured spouse under this contract. If this benefit becomes paid-up, it may be surrendered for its net cash value. This will be the net value on the date of surrender of the paid-up insurance. But, within 30 days after a contract anniversary, the net cash value will not be less than it was on that anniversary. We base this net cash value on the insured spouse's age and sex. The insured spouse's age at any time will be his or her age last birthday on the contract date plus the length of time since that date. We use the Commissioners 1980 Standard Ordinary Mortality Table. We use continuous functions based on age last birthday. We use an effective interest rate of 4% a year. We will usually pay any cash value promptly. But we have the right to postpone paying it for up to six months. If we do so for more than 30 days, we will pay interest at the rate that then applies to Option 3 (Interest Payment) of the Settlement Options provision in this contract. CONVERSION TO ANOTHER PLAN OF INSURANCE Right to Convert While the Insured is living, you may convert this benefit to a new contract of life insurance on the life of the insured spouse. You will not have to prove that the insured spouse is insurable. Conditions You must ask for the conversion in a form that meets our needs, while this contract is in force and not in default past the last day of the grace period, and on or before the fifth contract anniversary. We may require you to send us the contract. The new contract will not take effect unless the modal premium for it is paid while the insured spouse is living and within 31 days after its contract date. If the premium is paid as we state, it will be deemed that the new contract took effect on its contract date and that this benefit ended just before that date. Premium Credit Upon conversion to a new contract with scheduled premiums, we will allow a credit, as described below, on each premium that is due or scheduled for payment during the first year of the new contract. Upon conversion to a new contract without scheduled premiums, we will allow a credit as of the contract date provided you pay any required minimum initial premium for the new contract. If this benefit has been in force for at least one year on the contract date of the new contract, we will allow the full credit described below. If this benefit has been in force for less than one year as of that date, the credit will be reduced on a pro-rata basis taking into consideration the portion of a year for which this benefit has then been in force. The full credit is equal to the monthly charges deducted from the contract fund for the benefits being converted under this rider during the twelve months preceding the date of the new contract, less 20% of any of those premiums that were due prior to the first anniversary of this II-102 contract. Extra charges for extra risks or extra benefits other than a waiver benefit are not considered in determining this credit. If the new contract has scheduled premiums, we will reduce each premium due or scheduled for payment in the first year of the new contract to consider either the full or reduced credit, as appropriate. If more than one premium is due or scheduled for payment, we will apportion any credit between them. If the new contract does not have scheduled premiums, we will pay either the full or reduced credit, as appropriate, into the new contract as of the contract date provided you pay any required minimum initial premium for the new contract. Contract Date If this contract is not in default, you may choose any contract date for the new contract that is not more than 31 days after nor more than 31 days before the date we receive your request, and not later than the fifth contract anniversary. If this contract is in default but not past the last day of the grace period, the contract date for the new contract will be the date on which this contract went into default. Contract Specifications The new contract will be in the rating class we show for this benefit on a contract data page. We will set the issue age, premiums and charges for the new contract in accordance with our regular rules in use on its contract date. Except as we state in the next sentence, the new contract may be any life or endowment policy we regularly issue on its contract date for the same rating class, amount, issue age and sex. It may not be: a single-premium contract; one that insures anyone in addition to the Insured; one that includes or provides for term insurance, other than extended insurance; one with premiums that increase after a stated time, if its first premium is less than 80% of any later premium; or one with any benefit other than the basic insurance benefit and the waiver benefit we refer to below. A waiver benefit may either waive or pay premiums in the event of the Insured's total disability. The basic amount of the new contract may be any amount you ask for as long as it is at least $10,000 and not more than the amount of term insurance for this benefit. If the amount you want is smaller than the smallest amount we would regularly issue on the plan you want, we will issue a new contract for as low as $10,000 on the Life Paid Up at Age 85 plan (or any other plan we are regularly issuing at that face amount) if you ask us to. Even though this contract does not have a waiver benefit on the disability of an insured spouse, we will include a waiver benefit in the new contract if its premium period runs to at least the Insured's attained age 85 and if we would include a waiver benefit in other contracts like the new one. We will not waive or pay any premium under the new contract unless it has a waiver benefit, even if we have paid premiums into this contract due to the Insured's total disability. And we will not waive or pay any premium under the new contract unless the total disability started on or after its contract date. II-103 Any waiver benefit in the new contract will be the same one, with the same provisions, that we put in other contracts like it on its contract date. In any of these paragraphs, when we refer to other contracts, we mean contracts we would regularly issue on the same plan as the new contract and for the same rating class, amount, issue age and sex. MISCELLANEOUS Changes You may be able to have this benefit changed to a new contract of life insurance other than in accordance with the requirements for conversion that we state above. But any change may be made only if we consent, and will be subject to conditions and charges that are applicable to the new plan in accordance with regular rules in effect at the time of the change. Ownership While any insurance under this benefit is in force after the Insured's death, the insured spouse will be the owner of the contract and will be entitled to any contract benefit and value and the exercise of any right and privilege granted by the contract or by us. But any insurance payable upon the Insured's death will be payable to the beneficiary for that insurance. Beneficiary The word beneficiary where we use it in this contract without qualification means the beneficiary for insurance payable upon the death of the Insured. On the contract date, unless we issue the contract with an endorsement that states otherwise, the beneficiary for insurance payable upon the death of the insured spouse will be the Insured if living, otherwise the estate of the insured spouse. You may change a beneficiary for insurance payable upon the death of the insured spouse by sending us a request in a form that meets our needs. We may ask you to send us the contract to be endorsed. If we receive your request, and the contract if we ask for it, at our Home Office, we will file and record the change and it will take effect as of the date you signed the request. But if we make any payment(s) before we receive the request, we will not have to make the payment(s) again. Any beneficiary's interest is subject to the rights of any assignee we know of. When a beneficiary is designated, any relationship shown is to the Insured, unless otherwise stated. Misstatement of Age or Sex If the insured spouse's stated age or sex or both are not correct, we will change each benefit and any amount payable to what the charges for this benefit would have provided at the insured spouse's correct age and sex. The charges for this benefit may change or stop on a certain date. We may have used that date because the insured spouse would attain a certain age on that date. If we find that the issue age for the insured spouse was wrong, we will correct that date. II-104 Suicide Exclusion If the insured spouse dies by suicide within the period which we state in the Suicide Exclusion under Death Benefits provision of the contract, we will not pay the amount we describe under Benefit above. Instead, we will pay no more than the charges deducted from the contract fund for this benefit. We will make that payment in one sum. Reinstatement If this contract is reinstated, it will not include the insurance that we provide under this benefit on the life of the insured spouse unless you prove to us that the insured spouse is insurable for the benefit. Incontestability Except for non-payment of premium, we will not contest this benefit after it has been in force during the insured spouse's lifetime for two years from the issue date. TERMINATION OF BENEFIT This benefit will end on the earliest of: 1 the end of the last day of the grace period if the contract is in default; 2 the end of the last day before the contract date of any other contract to which the benefit is converted or changed; 3 the date the contract is surrendered for its net cash value, or the paid-up insurance, if any, under the benefit is surrendered; 4 the end of its term period; and 5 the date the contract ends for any other reason. Further, if you ask us in a form that meets our needs, we will cancel the benefit as of the first monthly date on or after the date we receive your request. Monthly charges due then and later will be reduced accordingly. This Supplementary Benefit rider attached to this contract on the Contract Date II-104 EX-99.1(A)(13)(D)(I) 11 BENEFIT ON DEPENDENT CHILDREN UNDER 18 YEARS OLD EXHIBIT 1.A.(13)(d)(i) RIDER FOR LEVEL TERM INSURANCE BENEFIT ON DEPENDENT CHILDREN This benefit is a part of this contract only if it is listed on a contract data page. Benefit We will pay the amount of term insurance under this benefit if we receive due proof that a dependent child died while this contract is in force and not in default past the last day of the grace period and before the term insurance provided by the benefit on his or her life ends. But our payment is subject to all the provisions of this rider and of the rest of this contract. The phrase dependent child means the Insured's child, stepchild, or legally adopted child who: (1) has reached the 14th day after his or her date of birth; (2) has not reached the first contract anniversary after his or her 25th birthday; and either (3) is named in the application for this contract and on the date of the application has not reached his or her 18th birthday; or (4) becomes the child of the Insured by birth, marriage or adoption after the date of the application but before the child's 18th birthday. We show the amount of term insurance under this benefit on a contract data page. The insurance on each dependent child's life will end on the earlier of: (1) the end of the day before the first contract anniversary after the child's 25th birthday; (2) the end of the day before the first contract anniversary after the Insured's 75th birthday; and (3) the end of the last day before the contract date of any other contract to which the insurance on the dependent child is converted or changed. Benefit Charges The monthly charge for this benefit is deducted each month from the contract fund. The amount of that charge is shown under Adjustments to the Contract Fund. Monthly charges for this benefit stop on the earlier of the date of the Insured's death and the first anniversary after the Insured's 75th birthday. This benefit has no cash value, but it can affect the cash value of the contract. PAID-UP INSURANCE Paid-up Insurance on a Dependent Child If the Insured dies while this contract is in force and not in default past the last day of the grace period, any term insurance provided by this benefit on a dependent child's life will become paid-up term insurance. While this paid-up insurance is in effect, the contract will remain in force. The paid-up insurance will have cash values but no loan value. If the Insured dies by suicide within the period which we state in the Suicide Exclusion under Death Benefits provision of the contract and our liability is limited as we state for suicide in that provision, any provision for paid up insurance on a dependent child who was, until the Insured died, insured under this contract will not apply. Instead, we will then offer to insure a dependent child under a new contract of life insurance. The new contract will be subject to conditions and charges that are then determined, in accordance with regular rules in effect at the time. It's amount will not be less than the greater of (1) the amount of insurance on that person's life under this contract, and (2) the lowest amount offered for the plan of insurance to be provided by the new contract. Proof that the dependent child is insurable will not be required, unless the new contract is to provide either an increased amount of insurance or a benefit that did not apply to the dependent child under this contract. If this benefit becomes paid-up, it may be surrendered for its net cash value. This will be the net value on the date of surrender of the paid-up insurance. But, within 30 days after a contract anniversary, the net cash value will not be less than it was on that anniversary. To compute this net cash value, we use the Commissioners 1980 Standard Ordinary Mortality Table. We use continuous functions based on age last birthday. We use an effective interest rate of 4% a year. We will usually pay any cash value promptly. But we have the right to postpone paying it for up to six months. If we do so for more than ten days, we will pay interest at the rate that then applies to Option 3 (Interest Payment) of the Settlement Options provision in this contract. VL 182 B-98 NY II-105 CONVERSION OF INSURANCE ON A DEPENDENT CHILD Right to Convert The insurance on each dependent child may be converted under this rider to a new contract of life insurance. The insurance on each child's life may be converted only once and once converted, all coverage under this rider on such child will end. A conversion may be made only on (a) the day the insurance ends as described in the last paragraph under Benefit above, and (b) each contract anniversary immediately following his or her 18th and 22nd birthdays provided that such anniversary occurs before the insurance ends. It will not be necessary to prove that the child is insurable. Conditions The right to convert to a new contract is subject to these conditions: (1) The insurance on the child must be converted while this contract is in force and not in default past the last day of the grace period. (2) The amount of the new contract must meet the minimum as we describe under Contract Specifications. (3) We must receive a written application for the new contract no later than the date the insurance on the child may be converted. The new contract will not take effect unless the premium for it is paid while the child is living and within 31 days after its contract date. If the premium is paid as we state, it will be deemed that the insurance under the new contract took effect on its contract date. Premium Credit When the insurance on a dependent child is converted, we will allow a premium credit on the first premium for the new contract. The credit is equal to the lesser of $1.00 for each full $1,000 of the term insurance under this benefit and $1.00 for each full $1,000 of the new contract's basic amount of insurance. Contract Date The date of the new contract will be the day after the date the insurance on the dependent child is converted. If a dependent child's coverage is converted, that child's coverage will end at the end of the day before the contract date of the new contract. Contract Specifications The new contract will be in the standard rating class. We will set the issue age and the premiums for the new contract in accordance with our regular rules in use on its contract date. We will endorse the new contract to show that the period we state in its Incontestability provision will start on the date coverage of the child began under this benefit. But if this contract was reinstated after the date the coverage began but before the date of the new contract, that period will start on the date of the most recent reinstatement. We will have the right to use the statements that were made to us as the basis for reinstatement to contest the new contract. The period during which we will have that right will be the period we state in the Incontestability provision of the new contract. We will endorse the new contract to show that the period we state in its Suicide Exclusion provision will start on the date coverage of the child began under this benefit. Except as we state in the next sentence, the new contract may be any life or endowment policy we regularly issue on its contract date for the same rating class, amount, issue age, and sex. It may not be; a single premium contract; one that insures anyone in addition to the child; one that includes or provides for term insurance, other than extended insurance; one with premiums that increase after a stated time, if its first premium is less than 80% of any later premium; or one with any benefit other than the basic insurance benefit and the waiver benefit we refer to below. A waiver benefit may either waive or pay premiums in the event of the Insured's total disability. The basic amount of the new contract may be any amount you ask for as long as it is at least $10,000 and not more than five times the amount of insurance on the child's life under this benefit; but the total amount for the child may not exceed the maximum amount allowed by law. If the amount you want is smaller than the smallest amount we would regularly issue on the plan you want, we will issue a new contract for as low as $10,000 on the Life Paid Up at Age 85 plan (Life Paid Up at Age 65 plan if the issue age for the new contract is less than 15 years) if you ask us to. If the new contract provides for premium payment to at least age 85, or age 65 if the issue age for it is less than 15 years, we will include a waiver benefit in the event of the total disability of the person insured if we would include a waiver benefit in other contracts like the new one. VL 182 B-98 NY II-106 We will not waive or pay any premium under the new contract unless the total disability started on or after its contract date. And we will not waive or pay any premium under the new contract unless it has a waiver benefit, even if we have paid premiums into this contract due to the Insured's total disability. Any waiver benefit in the new contract will be the same one, with the same provisions, that we put in other contracts like it on its contract date. In any of these paragraphs, when we refer to other contracts, we mean contracts we would regularly issue on the same plan as the new contract and for the same rating class, amount, issue age and sex. MISCELLANEOUS PROVISIONS Changes The insurance on a dependent child may be changed to a new contract of life insurance other than in accordance with the requirements we state in this form. But this kind of change may be made only if we consent, and will be subject to conditions and charges that are then determined. Beneficiary The word beneficiary where we use it in this contract without qualification means the beneficiary for insurance payable upon the death of the Insured. On the contract date, the following two statements apply, unless we issue the contract with an endorsement that states otherwise: (1) The beneficiary for insurance payable upon the death of a dependent child will be the Insured if living, otherwise the beneficiary for this insurance named in the application. (2) If no such beneficiary is living when insurance under this benefit becomes payable, we will make the payment in one sum to the estate of the later to die of the Insured and such beneficiary. You may change a beneficiary for insurance payable upon the death of a dependent child by sending us a request in a form that meets our needs. We may ask you to send us the contract to be endorsed. If we receive your request, and the contract if we ask for it, at our Home Office, we will file and record the change and it will take effect as of the date you signed the request. But if we make any payment(s) before we receive the request, we will not have to make the payment(s) again. Any beneficiary's interest is subject to the rights of any assignee we know of. When a beneficiary is designated, any relationship shown is to the Insured, unless otherwise stated. Reinstatement If this contract is reinstated, it will not include the insurance that we provide under this benefit on the dependent children unless you prove to us that each child who is to be insured on or within 15 days after the date of reinstatement is insurable for the benefit. If you do not submit such proof for any child, the benefit may be reinstated if all the other conditions are met to reinstate the contract, but any child for whom proof is not submitted will not be insured under the reinstated benefit. In this case, you may be required to send the contract to us for endorsement. Incontestability Except for non-payment of premium, we will not contest this benefit with respect to the insurance on any dependent child's life after it has been in force during the child's lifetime for two years from the issue date. TERMINATION OF BENEFIT This benefit will end on the earliest of: 1. the end the last day of the grace period if the contract is in default; 2. the end of the day before the first contract anniversary after the Insured's 75th birthday; 3. the date the contract is surrendered for its net cash value, if it has any, or the paid-up insurance, if any, under the benefit is surrendered; and 4. the date the contract ends for any other reason. Further, if you ask us in a form that meets our needs, we will cancel the benefit as of the first monthly date on or after we receive your request. Monthly charges due then and later will be reduced accordingly. VL 182 B-98 NY II-107 MAXIMUM TOTAL AMOUNT OF INSURANCE ALLOWED BY LAW A dependent child might die when his or her age is less than 14 years and six months. And there might be other life insurance, with us or other companies, payable on the child's life under a contract(s) that was issued and dated before the insurance for the child took effect under this benefit. If so, the most we could pay under this benefit for that death is the excess of: (1) the maximum that is allowed to be paid in accordance with the Table below, over (2) the amount of the insurance on the child's life under (all) the other contract(s). If the amount of insurance on the child's life under this benefit is greater than that excess, we will reduce it by the difference, with appropriate adjustment of the premium as filed with the Superintendent of Insurance of New York. If the insurance under this benefit is more than we would be allowed to pay upon a dependent child's death, you may wish to have us reduce it to what we could pay, with appropriate adjustment of the premium as filed with the Superintendent of Insurance of New York. To do so, you must ask us in writing and in a form that meets our needs. You must also send the contract to us to be endorsed. When we compute insurance under this or other contracts we will not include: (1) return premium benefits; (2) dividend additions; or (3) benefits that are paid only for death by accident. [DEPENDENT CHILD] THIS SUPPLEMENTARY BENEFIT RIDER ATTACHED TO THIS CONTRACT ON THE CONTRACT DATE II-108 CONTRACT DATA INSURED [JOHN DOE] [Male], Issue Age [35] ================================================================================ RATING CLASS [Standard] ================================================================================ BASIC CONTRACT INFORMATION Policy Number [xx xxx xx] Contract Date [January 1, 1998] Premium Period Life Beneficiary [See Beneficiary Provision attached] ================================================================================ NOTICE The contract has no generally applicable guaranteed effective interest rate used to determine contract values. The guaranteed interest rate credited on that portion of the contract fund placed in the fixed interest rate investment option is 4% a year. Excess interest credited on the fixed interest rate investment option is not guaranteed and we have the right to change the interest rate from time to time, but not less than the fixed interest rate investment option's guaranteed interest rate. Dividends are not guaranteed. We have the right to determine the amount of dividends, if any, to be credited to the contract. This may result in total cash values different from those illustrated. ================================================================================ TYPE OF DEATH BENEFIT (see Death Benefit Provisions) [Type B] ================================================================================ LIFE INSURANCE ON THE INSURED (as of the Contract Date) Basic Insurance Amount $[50,000.00] ================================================================================ INSURANCE ON ALL OTHER INSUREDS (see appropriate form for details) Rider VL 182 B on the life of each dependent child - Level Term Insurance Benefit on Dependent Children. Amount $[10,000.00] ================================================================================ CONTRACT DATA CONTINUED ON NEXT PAGE Page 3 (97)(NY) II-109 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED MINIMUM INITIAL PREMIUM The minimum initial premium due on the Contract Date is $[72.86]. ================================================================================ CONTRACT LIMITATIONS The minimum premium we will accept is $[25.00]. The minimum basic insurance amount is $[50,000.00]. The minimum increase in basic insurance amount is $[10,000.00]. The minimum decrease in basic insurance amount is $[10,000.00]. The minimum amount you may withdraw is $[500.00]. The minimum amount you may borrow is $[200.00]. The Surrender Charge Threshold is $[50,000.00]. ================================================================================ ADJUSTMENTS TO PREMIUM PAYMENTS From each premium paid we will: Subtract an administrative charge of up to 7.5% of the premium (s) paid. --------- Subtract a charge for sales expenses at a rate of up to 4% of the premium(s) --------- paid. The remainder of the premium is the invested premium amount. ================================================================================ ADJUSTMENTS TO THE CONTRACT FUND On the Contract Date the contract fund is equal to the invested premium amount credited on that date, minus any of the charges described below which may be ----- due on that date. On each day after the contract date, we will adjust the contract fund by: adding any invested premium amounts. ------ adding any increase due to investment results of the variable investment ------ options. adding guaranteed interest at an effective annual rate of 4% (0.01074598% a ------ day) on that portion of CONTRACT DATA CONTINUED ON NEXT PAGE Page 3A (97)(NY) II-110 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED the contract fund that is not in a variable investment option. adding any excess interest on that portion of the contract fund that is in a ------ fixed interest rate investment option. subtracting any decrease due to investment results of the variable investment ----------- options. subtracting a charge against the variable investment options at an effective ----------- annual rate of not more than 0.90% (.00245475% a day) for mortality and expense risks that we assume. subtracting any withdrawals. ----------- subtracting an administrative charge of up to $25.00 for any withdrawals. ----------- subtracting an administrative charge of up to $25.00 for any change in basic ----------- insurance amount. subtracting an administrative charge of up to $25.00 for each transfer between ----------- investment options exceeding twelve in any contract year. subtracting any surrender charges that may result from a withdrawal, ----------- surrender, or reduction in the basic insurance amount. And on each monthly date, we will adjust the contract fund by: subtracting a charge for the cost of insurance of up to the maximum monthly ----------- rate (see Table of Maximum Monthly Insurance Rates) multiplied by the coverage amount divided by $1000. The coverage amount is equal to the death benefit (See Death Benefit) minus the value of the contract fund. subtracting a charge for administrative expenses of up to $10.00 plus $0.07 ----------- per $1000 of the basic insurance amount within the first contract year. subtracting a charge for administrative expenses of up to $10.00 plus $0.07 ----------- per $1000 of the basic insurance amount after the first contract year. CONTRACT DATA CONTINUED ON NEXT PAGE Page 3B (97) II-111 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED subtracting a charge of up to $0.01 per $1000 of the basic insurance amount to ----------- guarantee the minimum death benefit. subtracting a maximum monthly charge for the following benefits: ----------- the maximum monthly charge for Rider VL 182 B is: starting on the Contract Date $[4.10] payable until [JAN 1, 2038]. ================================================================================ SCHEDULE OF MAXIMUM SURRENDER CHARGES For a full surrender at the beginning of the contract year indicated, the maximum charge we will deduct from the contract fund is shown below. For a full surrender at other times, the surrender charge will reflect the completed contract months that have passed since the last anniversary. For a Surrender Occurring At the Start of The Maximum Surrender Contract Year Charge is --------------------------------------------------------------- 1 $[446.82] 2 $[446.82] 3 $[446.82] 4 $[446.82] 5 $[446.82] 6 $[446.82] 7 $[446.82] 8 $[335.12] 9 $[223.41] 10 $[111.71] 11 and later 0.00 --------------------------------------------------------------- We may also deduct a surrender charge when you change the basic insurance amount or the type of death benefit, and when you make a withdrawal. (See Change In Basic Insurance Amount, Changing The Type Of Death Benefit, and Withdrawals.) ================================================================================ CONTRACT DATA CONTINUED ON NEXT PAGE Page 3C (97) II-112 POLICY NO. XX XXX XXX CONTRACT DATA CONTINUED INVESTMENT OPTIONS THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT This account is registered with the SEC under the Investment Company Act of 1940. Each investment option of this account invests in a specific portfolio of The Prudential Series Fund Inc., and such other funds as we may specify from time to time. The Prudential Series Fund, Inc. and other funds identified below are registered with the SEC under the Investment Company Act of 1940 as open- end diversified management investment companies. We show below the available investment options and the funds and fund portfolios they invest in. These are Class One investments as described under Transfers. VARIABLE INVESTMENT OPTIONS Money Market Diversified Bond Conservative Balanced Flexible Managed High Yield Bond Stock Index Equity Income Equity Prudential Jennison Global FIXED INTEREST RATE INVESTMENT OPTION The fixed interest rate investment option is funded by the general account of the company. It is described in the Fixed Investments provision of this contract. This is a Class Two investment as described under Transfers. ================================================================================ INITIAL ALLOCATION OF INVESTED PREMIUM AMOUNTS Fixed Interest Rate 40% Money Market 60% ================================================================================ END OF CONTRACT DATA Page 3D (97)(NY) II-113 POLICY NO. XX XXX XX TABLE(S) TABLE OF DEATH BENEFIT GUARANTEE VALUES These values are used to determine the death benefit guarantee as described under Death Benefit Guarantee. The values on contract anniversaries are shown below. On a date that falls between two anniversaries, the value will fall between the values for those anniversaries considering the time that has passed since the last anniversary. The Limited Death Benefit Guarantee period is the first [32] contract years. LIMITED LIFETIME CONTRACT DEATH BENEFIT DEATH BENEFIT ANNIVERSARY GUARANTEE VALUE GUARANTEE VALUE - -------------------------------------------------------------------------- Contract Date $0 $0 1st $[841.88] $[3,111.68] 2nd $[1,717.44] $[6,347.83] 3rd $[2,628.02] $[9,713.42] 4th $[3,575.02] $[13,213.64] 5th $[4,559.90] $[16,853.87] 6th $[5,584.18] $[20,639.70] 7th $[6,649.43] $[24,576.97] 8th $[7,757.29] $[28,671.73] 9th $[8,909.46] $[32,930.28] 10th $[10,107.72] $[37,359.17] 11th $[11,353.91] $[41,965.22] 12th $[12,649.95] $[46,755.51] 13th $[13,997.83] $[51,737.41] 14th $[15,399.62] $[56,918.59] 15th $[16,857.48] $[62,307.01] 16th $[18,373.66] $[67,910.97] 17th $[19,950.49] $[73,739.09] 18th $[21,590.39] $[79,800.33] 19th $[23,295.89] $[86,104.02] 20th $[25,069.61] $[92,659.86] 21st $[26,914.27] $[99,477.93] 22nd $[28,832.72] $[106,568.73] 23rd $[30,827.91] $[113,943.16] 24th $[32,902.91] $[121,612.57] 25th $[35,060.91] $[129,588.75] CONTRACT DATA CONTINUED ON NEXT PAGE Page 4 (97) II-114 POLICY NO. XX XXX XXX LIMITED LIFETIME CONTRACT DEATH BENEFIT DEATH BENEFIT ANNIVERSARY GUARANTEE VALUE GUARANTEE VALUE - -------------------------------------------------------------------------- 26th $[37,305.23] $[137,883.98] 27th $[39,639.32] $[146,511.02] 28th $[42,066.77] $[155,483.14] 29th $[44,591.32] $[164,814.15] 30th $[47,216.85] $[174,518.40] 31st $[49,947.40] $[184,610.82] 32nd $[52,787.18] $[195,106.93] 33rd $[206,022.89] 34th $[217,375.49] 35th $[229,182.19] 36th $[241,461.16] 37th $[254,231.29] 38th $[267,512.22] 39th $[281,324.39] 40th $[295,689.05] 41st $[310,573.69] 42nd $[326,053.72] 43rd $[342,152.95] 44th $[358,896.15] 45th $[376,309.08] 46th $[394,418.52] 47th $[413,252.34] 48th $[432,839.51] 49th $[453,210.17] 50th $[474,395.66] 51st $[496,428.57] 52nd $[519,342.79] 53rd $[543,173.58] 54th $[567,957.60] 55th $[593,732.98] 56th $[620,539.38] 57th $[648,418.04] 58th $[677,411.84] 59th $[707,565.39] 60th $[738,925.09] 61st $[771,539.17] 62nd $[805,457.82] 63rd $[840,733.21] 64th $[877,419.62] 65th $[915,573.48] - --------------------------------------------------------------------------- ================================================================================ Page 4A (97) II-115 EX-99.1(A)(13)(D)(II 12 BENEFIT ON DEPENDENT CHILDREN PREVIOUS CONTRACT EXHIBIT 99.1.A.(13)(d)(ii) RIDER FOR LEVEL TERM INSURANCE BENEFIT ON DEPENDENT CHILDREN This benefit is a part of this contract only if it is listed on a contract data page. Benefit We will pay the amount of term insurance under this benefit if we receive due proof that a dependent child died while this contract is in force and not in default past the last day of the grace period and before the term insurance provided by the benefit on his or her life ends. But our payment is subject to all the provisions of this rider and of the rest of this contract. The phrase dependent child means the Insured's child, stepchild, or legally adopted child who: (1) has reached the 14th day after his or her date of birth; (2) has not reached the first contract anniversary after his or her 25th birthday; and either (3) just before the contract date of this contract was insured under the earlier contract that was converted or changed to this contract; or (4) becomes the child of the Insured by birth, marriage or adoption after the date of this contract but before the child's 18th birthday. We show the amount of term insurance under this benefit on a contract data page. The insurance on each dependent child's life will end on the earlier of: (1) the end of the day before the first contract anniversary after the child's 25th birthday; (2) the end of the day before the first contract anniversary after the Insured's 75th birthday; and (3) the end of the last day before the contract date of any other contract to which the insurance on the dependent child is converted or changed. Benefit Charges The monthly charge for this benefit is deducted each month from the contract fund. The amount of that charge is shown under Adjustments to the Contract Fund. Monthly charges for this benefit stop on the earlier of the date of the Insured's death and the first anniversary after the Insured's 75th birthday. This benefit has no cash value, but it can affect the cash value of the contract. PAID-UP INSURANCE Paid-up Insurance on a Dependent Child If the Insured dies while this contract is in force and not in default past the last day of the grace period, any term insurance provided by this benefit on a dependent child's life will become paid-up term insurance. While this paid-up insurance is in effect, the contract will remain in force. The paid-up insurance will have cash values but no loan value. If the Insured dies by suicide within the period which we state in the Suicide Exclusion under Death Benefits provision of the contract and our liability is limited as we state for suicide in that provision, any provision for paid up insurance on a dependent child who was, until the Insured died, insured under this contract will not apply. Instead, we will then offer to insure a dependent child under a new contract of life insurance. The new contract will be subject to conditions and charges that are then determined, in accordance with regular rules in effect at the time. It's amount will not be less than the greater of (1) the amount of insurance on that person's life under this contract, and (2) the lowest amount offered for the plan of insurance to be provided by the new contract. Proof that the dependent child is insurable will not be required, unless the new contract is to provide either an increased amount of insurance or a benefit that did not apply to the dependent child under this contract. If this benefit becomes paid-up, it may be surrendered for its net cash value. This will be the net value on the date of surrender of the paid-up insurance. But, within 30 days after a contract anniversary, the net cash value will not be less than it was on that anniversary. To compute this net cash value, we use the Commissioners 1980 Standard Ordinary Mortality Table. We use continuous functions based on age last birthday. We use an effective interest rate of 4% a year. We will usually pay any cash value promptly. But we have the right to postpone paying it for up to six months. If we do so for more than ten days, we will pay interest at the rate that then applies to Option 3 (Interest Payment) of the Settlement Options provision in this contract. VL 184 B-98 NY II-116 CONVERSION OF INSURANCE ON A DEPENDENT CHILD Right to Convert The insurance on each dependent child may be converted under this rider to a new contract of life insurance. The insurance on each child's life may be converted only once and once converted, all coverage under this rider on such child will end. A conversion may be made only on (a) the day the insurance ends as described in the last paragraph under Benefit above, and (b) each contract anniversary immediately following his or her 18th and 22nd birthdays provided that such anniversary occurs before the insurance ends. It will not be necessary to prove that the child is insurable. Conditions The right to convert to a new contract is subject to these conditions: (1) The insurance on the child must be converted while this contract is in force and not in default past the last day of the grace period. (2) The amount of the new contract must meet the minimum as we describe under Contract Specifications. (3) We must receive a written application for the new contract no later than the date the insurance on the child may be converted. The new contract will not take effect unless the premium for it is paid while the child is living and within 31 days after its contract date. If the premium is paid as we state, it will be deemed that the insurance under the new contract took effect on its contract date. Premium Credit When the insurance on a dependent child is converted, we will allow a premium credit on the first premium for the new contract. The credit is equal to the lesser of $1.00 for each full $1,000 of the term insurance under this benefit and $1.00 for each full $1,000 of the new contract's basic amount of insurance. Contract Date The date of the new contract will be the day after the date the insurance on the dependent child is converted. If a dependent child's coverage is converted, that child's coverage will end at the end of the day before the contract date of the new contract. Contract Specifications The new contract will be in the standard rating class. We will set the issue age and the premiums for the new contract in accordance with our regular rules in use on its contract date. We will endorse the new contract to show that the period we state in its Incontestability provision will start on the date coverage of the child began under this benefit. But if this contract was reinstated after the date the coverage began but before the date of the new contract, that period will start on the date of the most recent reinstatement. We will have the right to use the statements that were made to us as the basis for reinstatement to contest the new contract. The period during which we will have that right will be the period we state in the Incontestability provision of the new contract. We will endorse the new contract to show that the period we state in its Suicide Exclusion provision will start on the date coverage of the child began under this benefit. Except as we state in the next sentence, the new contract may be any life or endowment policy we regularly issue on its contract date for the same rating class, amount, issue age, and sex. It may not be; a single premium contract; one that insures anyone in addition to the child; one that includes or provides for term insurance, other than extended insurance; one with premiums that increase after a stated time, if its first premium is less than 80% of any later premium; or one with any benefit other than the basic insurance benefit and the waiver benefit we refer to below. A waiver benefit may either waive or pay premiums in the event of the Insured's total disability. The basic amount of the new contract may be any amount you ask for as long as it is at least $10,000 and not more than five times the amount of insurance on the child's life under this benefit; but the total amount for the child may not exceed the maximum amount allowed by law. If the amount you want is smaller than the smallest amount we would regularly issue on the plan you want, we will issue a new contract for as low as $10,000 on the Life Paid Up at Age 85 plan (Life Paid Up at Age 65 plan if the issue age for the new contract is less than 15 years) if you ask us to. If the new contract provides for premium payment to at least age 85, or age 65 if the issue age for it is less than 15 years, we will include a waiver benefit in the event of the total disability of the person insured if we would include a waiver benefit in other contracts like the new one. VL 184 B-98 NY II-117 We will not waive or pay any premium under the new contract unless the total disability started on or after its contract date. And we will not waive or pay any premium under the new contract unless it has a waiver benefit, even if we have paid premiums into this contract due to the Insured's total disability. Any waiver benefit in the new contract will be the same one, with the same provisions, that we put in other contracts like it on its contract date. In any of these paragraphs, when we refer to other contracts, we mean contracts we would regularly issue on the same plan as the new contract and for the same rating class, amount, issue age and sex. MISCELLANEOUS PROVISIONS Changes The insurance on a dependent child may be changed to a new contract of life insurance other than in accordance with the requirements we state in this form. But this kind of change may be made only if we consent, and will be subject to conditions and charges that are then determined. Beneficiary The word beneficiary where we use it in this contract without qualification means the beneficiary for insurance payable upon the death of the Insured. On the contract date, the following two statements apply, unless we issue the contract with an endorsement that states otherwise: (1) The beneficiary for insurance payable upon the death of a dependent child will be the Insured if living, otherwise the beneficiary for this insurance named in the application. (2) If no such beneficiary is living when insurance under this benefit becomes payable, we will make the payment in one sum to the estate of the later to die of the Insured and such beneficiary. You may change a beneficiary for insurance payable upon the death of a dependent child by sending us a request in a form that meets our needs. We may ask you to send us the contract to be endorsed. If we receive your request, and the contract if we ask for it, at our Home Office, we will file and record the change and it will take effect as of the date you signed the request. But if we make any payment(s) before we receive the request, we will not have to make the payment(s) again. Any beneficiary's interest is subject to the rights of any assignee we know of. When a beneficiary is designated, any relationship shown is to the Insured, unless otherwise stated. Reinstatement If this contract is reinstated, it will not include the insurance that we provide under this benefit on the dependent children unless you prove to us that each child who is to be insured on or within 15 days after the date of reinstatement is insurable for the benefit. If you do not submit such proof for any child, the benefit may be reinstated if all the other conditions are met to reinstate the contract, but any child for whom proof is not submitted will not be insured under the reinstated benefit. In this case, you may be required to send the contract to us for endorsement. Incontestability Except for non-payment of premium, we will not contest this benefit with respect to the insurance on any dependent child's life after it has been in force during the child's lifetime for two years from: (1) the date the level term insurance benefit on dependent children began under the earliest contract; or, if later, (2) the date of any rider that added the child for coverage under any such earlier contract. But, in any case, if there was a later reinstatement of any such earlier contract, then the two years will start on the date of the most recent reinstatement. TERMINATION OF BENEFIT This benefit will end on the earliest of: 1. the end the last day of the grace period if the contract is in default; 2. the end of the day before the first contract anniversary after the Insured's 75th birthday; 3. the date the contract is surrendered for its net cash value, if it has any, or the paid-up insurance, if any, under the benefit is surrendered; and 4. the date the contract ends for any other reason. Further, if you ask us in a form that meets our needs, we will cancel the benefit as of the first monthly date on or after we receive your request. Monthly charges due then and later will be reduced accordingly. VL 184 B-98 NY II-118 MAXIMUM TOTAL AMOUNT OF INSURANCE ALLOWED BY LAW A dependent child might die when his or her age is less than 14 years and six months. And there might be other life insurance, with us or other companies, payable on the child's life under a contract(s) that was issued and dated before the insurance for the child took effect under this benefit. If so, the most we could pay under this benefit for that death is the excess of: (1) the maximum that is allowed to be paid in accordance with the Table below, over (2) the amount of the insurance on the child's life under (all) the other contract(s). If the amount of insurance on the child's life under this benefit is greater than that excess, we will reduce it by the difference, with appropriate adjustment of the premium as filed with the Superintendent of Insurance of New York. If the insurance under this benefit is more than we would be allowed to pay upon a dependent child's death, you may wish to have us reduce it to what we could pay, with appropriate adjustment of the premium as filed with the Superintendent of Insurance of New York. To do so, you must ask us in writing and in a form that meets our needs. You must also send the contract to us to be endorsed. When we compute insurance under this or other contracts we will not include: (1) return premium benefits; (2) dividend additions; or (3) benefits that are paid only for death by accident. [DEPENDENT CHILD] THIS SUPPLEMENTARY BENEFIT RIDER ATTACHED TO THIS CONTRACT ON THE CONTRACT DATE VL 184 B-98 NY II-119 CONTRACT DATA INSURED [JOHN DOE] [Male], Issue Age [35] ================================================================================ RATING CLASS [Standard] ================================================================================ BASIC CONTRACT INFORMATION Policy Number [xx xxx xx] Contract Date [January 1, 1998] Premium Period Life Beneficiary [See Beneficiary Provision attached] ================================================================================ NOTICE The contract has no generally applicable guaranteed effective interest rate used to determine contract values. The guaranteed interest rate credited on that portion of the contract fund placed in the fixed interest rate investment option is 4% a year. Excess interest credited on the fixed interest rate investment option is not guaranteed and we have the right to change the interest rate from time to time, but not less than the fixed interest rate investment option's guaranteed interest rate. Dividends are not guaranteed. We have the right to determine the amount of dividends, if any, to be credited to the contract. This may result in total cash values different from those illustrated. ================================================================================ TYPE OF DEATH BENEFIT (see Death Benefit Provisions) [Type B] ================================================================================ LIFE INSURANCE ON THE INSURED (as of the Contract Date) Basic Insurance Amount $[50,000.00] ================================================================================ INSURANCE ON ALL OTHER INSUREDS (see appropriate form for details) Rider VL 184 B on the life of each dependent child - Level Term Insurance Benefit on Dependent Children. Amount $[10,000.00] ================================================================================ CONTRACT DATA CONTINUED ON NEXT PAGE Page 3 (97)(NY) II-120 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED MINIMUM INITIAL PREMIUM The minimum initial premium due on the Contract Date is $[72.86]. ================================================================================ CONTRACT LIMITATIONS The minimum premium we will accept is $[25.00]. The minimum basic insurance amount is $[50,000.00]. The minimum increase in basic insurance amount is $[10,000.00]. The minimum decrease in basic insurance amount is $[10,000.00]. The minimum amount you may withdraw is $[500.00]. The minimum amount you may borrow is $[200.00]. The Surrender Charge Threshold is $[50,000.00]. ================================================================================ ADJUSTMENTS TO PREMIUM PAYMENTS From each premium paid we will: Subtract an administrative charge of up to 7.5% of the premium (s) paid. --------- Subtract a charge for sales expenses at a rate of up to 4% of the premium(s) --------- paid. The remainder of the premium is the invested premium amount. ================================================================================ ADJUSTMENTS TO THE CONTRACT FUND On the Contract Date the contract fund is equal to the invested premium amount credited on that date, minus any of the charges described below which may be ----- due on that date. On each day after the contract date, we will adjust the contract fund by: adding any invested premium amounts. ------ adding any increase due to investment results of the variable investment ------ options. adding guaranteed interest at an effective annual rate of 4% (0.01074598% a ------ day) on that portion of CONTRACT DATA CONTINUED ON NEXT PAGE Page 3A (97)(NY) II-121 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED the contract fund that is not in a variable investment option. adding any excess interest on that portion of the contract fund that is in a ------ fixed interest rate investment option. subtracting any decrease due to investment results of the variable investment ----------- options. subtracting a charge against the variable investment options at an effective ----------- annual rate of not more than 0.90% (.00245475% a day) for mortality and expense risks that we assume. subtracting any withdrawals. ----------- subtracting an administrative charge of up to $25.00 for any withdrawals. ----------- subtracting an administrative charge of up to $25.00 for any change in basic ----------- insurance amount. subtracting an administrative charge of up to $25.00 for each transfer between ----------- investment options exceeding twelve in any contract year. subtracting any surrender charges that may result from a withdrawal, ----------- surrender, or reduction in the basic insurance amount. And on each monthly date, we will adjust the contract fund by: subtracting a charge for the cost of insurance of up to the maximum monthly ----------- rate (see Table of Maximum Monthly Insurance Rates) multiplied by the coverage amount divided by $1000. The coverage amount is equal to the death benefit (See Death Benefit) minus the value of the contract fund. subtracting a charge for administrative expenses of up to $10.00 plus $0.07 ----------- per $1000 of the basic insurance amount within the first contract year. subtracting a charge for administrative expenses of up to $10.00 plus $0.07 ----------- per $1000 of the basic insurance amount after the first contract year. CONTRACT DATA CONTINUED ON NEXT PAGE Page 3B (97) II-122 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED subtracting a charge of up to $0.01 per $1000 of the basic insurance amount to ----------- guarantee the minimum death benefit. subtracting a maximum monthly charge for the following benefits: ----------- the maximum monthly charge for Rider VL 184 B is: starting on the Contract Date $[4.10]payable until [JAN 1, 2038]. ================================================================================ SCHEDULE OF MAXIMUM SURRENDER CHARGES For a full surrender at the beginning of the contract year indicated, the maximum charge we will deduct from the contract fund is shown below. For a full surrender at other times, the surrender charge will reflect the completed contract months that have passed since the last anniversary. For a Surrender Occurring At the Start of The Maximum Surrender Contract Year Charge is ------------------------------------------------------------- 1 $[446.82] 2 $[446.82] 3 $[446.82] 4 $[446.82] 5 $[446.82] 6 $[446.82] 7 $[446.82] 8 $[335.12] 9 $[223.41] 10 $[111.71] 11 and later 0.00 ------------------------------------------------------------- We may also deduct a surrender charge when you change the basic insurance amount or the type of death benefit, and when you make a withdrawal. (See Change In Basic Insurance Amount, Changing The Type Of Death Benefit, and Withdrawals.) ================================================================================ CONTRACT DATA CONTINUED ON NEXT PAGE Page 3C (97) II-123 POLICY NO. XX XXX XXX CONTRACT DATA CONTINUED INVESTMENT OPTIONS THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT This account is registered with the SEC under the Investment Company Act of 1940. Each investment option of this account invests in a specific portfolio of The Prudential Series Fund, Inc., and such other funds as we may specify from time to time. The Prudential Series Fund, Inc. and other funds identified below are registered with the SEC under the Investment Company Act of 1940 as open- end diversified management investment companies. We show below the available investment options and the funds and fund portfolios they invest in. These are Class One investments as described under Transfers. VARIABLE INVESTMENT OPTIONS Money Market Diversified Bond Conservative Balanced Flexible Managed High Yield Bond Stock Index Equity Income Equity Prudential Jennison Global FIXED INTEREST RATE INVESTMENT OPTION The fixed interest rate investment option is funded by the general account of the company. It is described in the Fixed Investments provision of this contract. This is a Class Two investment as described under Transfers. ================================================================================ INITIAL ALLOCATION OF INVESTED PREMIUM AMOUNTS Fixed Interest Rate 40% Money Market 60% ================================================================================ END OF CONTRACT DATA Page 3D (97)(NY) II-124 POLICY NO. XX XXX XX TABLE(S) TABLE OF DEATH BENEFIT GUARANTEE VALUES These values are used to determine the death benefit guarantee as described under Death Benefit Guarantee. The values on contract anniversaries are shown below. On a date that falls between two anniversaries, the value will fall between the values for those anniversaries considering the time that has passed since the last anniversary. The Limited Death Benefit Guarantee period is the first [32] contract years. LIMITED LIFETIME CONTRACT DEATH BENEFIT DEATH BENEFIT ANNIVERSARY GUARANTEE VALUE GUARANTEE VALUE - ------------------------------------------------------------------------- Contract Date $0 $0 1st $[841.88] $[3,111.68] 2nd $[1,717.44] $[6,347.83] 3rd $[2,628.02] $[9,713.42] 4th $[3,575.02] $[13,213.64] 5th $[4,559.90] $[16,853.87] 6th $[5,584.18] $[20,639.70] 7th $[6,649.43] $[24,576.97] 8th $[7,757.29] $[28,671.73] 9th $[8,909.46] $[32,930.28] 10th $[10,107.72] $[37,359.17] 11th $[11,353.91] $[41,965.22] 12th $[12,649.95] $[46,755.51] 13th $[13,997.83] $[51,737.41] 14th $[15,399.62] $[56,918.59] 15th $[16,857.48] $[62,307.01] 16th $[18,373.66] $[67,910.97] 17th $[19,950.49] $[73,739.09] 18th $[21,590.39] $[79,800.33] 19th $[23,295.89] $[86,104.02] 20th $[25,069.61] $[92,659.86] 21st $[26,914.27] $[99,477.93] 22nd $[28,832.72] $[106,568.73] 23rd $[30,827.91] $[113,943.16] 24th $[32,902.91] $[121,612.57] 25th $[35,060.91] $[129,588.75] CONTRACT DATA CONTINUED ON NEXT PAGE Page 4 (97) II-125 POLICY NO. XX XXX XXX LIMITED LIFETIME CONTRACT DEATH BENEFIT DEATH BENEFIT ANNIVERSARY GUARANTEE VALUE GUARANTEE VALUE - -------------------------------------------------------------------------- 26th $[37,305.23] $[137,883.98] 27th $[39,639.32] $[146,511.02] 28th $[42,066.77] $[155,483.14] 29th $[44,591.32] $[164,814.15] 30th $[47,216.85] $[174,518.40] 31st $[49,947.40] $[184,610.82] 32nd $[52,787.18] $[195,106.93] 33rd $[206,022.89] 34th $[217,375.49] 35th $[229,182.19] 36th $[241,461.16] 37th $[254,231.29] 38th $[267,512.22] 39th $[281,324.39] 40th $[295,689.05] 41st $[310,573.69] 42nd $[326,053.72] 43rd $[342,152.95] 44th $[358,896.15] 45th $[376,309.08] 46th $[394,418.52] 47th $[413,252.34] 48th $[432,839.51] 49th $[453,210.17] 50th $[474,395.66] 51st $[496,428.57] 52nd $[519,342.79] 53rd $[543,173.58] 54th $[567,957.60] 55th $[593,732.98] 56th $[620,539.38] 57th $[648,418.04] 58th $[677,411.84] 59th $[707,565.39] 60th $[738,925.09] 61st $[771,539.17] 62nd $[805,457.82] 63rd $[840,733.21] 64th $[877,419.62] 65th $[915,573.48] - ------------------------------------------------------------------------- ================================================================================ Page 4A (97) II-126 EX-99.1(A)(13)(D)(II 13 DEPENDENT CHILDREN APPLICATION FOR CHANGE EXHIBIT 1.A.(13)(d)(iii) RIDER FOR LEVEL TERM INSURANCE BENEFIT ON DEPENDENT CHILDREN This benefit is a part of this contract only if it is listed on a contract data page. Benefit We will pay the amount of term insurance under this benefit if we receive due proof that a dependent child died while this contract is in force and not in default past the last day of the grace period and before the term insurance provided by the benefit on his or her life ends. But our payment is subject to all the provisions of this rider and of the rest of this contract. The phrase dependent child means the Insured's child, stepchild, or legally adopted child who: (1) has reached the 14th day after his or her date of birth; (2) has not reached the first contract anniversary after his or her 25th birthday; and either (3) is named in the application for change, which is attached to and made a part of this contract, and on the date of the request has not reached his or her 18th birthday; or (4) becomes the child of the Insured by birth, marriage or adoption after the date of the request but before the child's 18th birthday. We show the amount of term insurance under this benefit on a contract data page. The insurance on each dependent child's life will end on the earlier of: (1) the end of the day before the first contract anniversary after the child's 25th birthday; (2) the end of the day before the first contract anniversary after the Insured's 75th birthday; and (3) the end of the last day before the contract date of any other contract to which the insurance on the dependent child is converted or changed. Benefit Charges The monthly charge for this benefit is deducted each month from the contract fund. The amount of that charge is shown under Adjustments to the Contract Fund. Monthly charges for this benefit stop on the earlier of the date of the Insured's death and the first anniversary after the Insured's 75th birthday. This benefit has no cash value, but it can affect the cash value of the contract. PAID-UP INSURANCE Paid-up Insurance on a Dependent Child If the Insured dies while this contract is in force and not in default past the last day of the grace period, any term insurance provided by this benefit on a dependent child's life will become paid-up term insurance. While this paid-up insurance is in effect, the contract will remain in force. The paid-up insurance will have cash values but no loan value. If the Insured dies by suicide within the period which we state in the Suicide Exclusion under Death Benefits provision of the contract and our liability is limited as we state for suicide in that provision, any provision for paid up insurance on a dependent child who was, until the Insured died, insured under this contract will not apply. Instead, we will then offer to insure a dependent child under a new contract of life insurance. The new contract will be subject to conditions and charges that are then determined, in accordance with regular rules in effect at the time. It's amount will not be less than the greater of (1) the amount of insurance on that person's life under this contract, and (2) the lowest amount offered for the plan of insurance to be provided by the new contract. Proof that the dependent child is insurable will not be required, unless the new contract is to provide either an increased amount of insurance or a benefit that did not apply to the dependent child under this contract. If this benefit becomes paid-up, it may be surrendered for its net cash value. This will be the net value on the date of surrender of the paid-up insurance. But, within 30 days after a contract anniversary, the net cash value will not be less than it was on that anniversary. To compute this net cash value, we use the Commissioners 1980 Standard Ordinary Mortality Table. We use continuous functions based on age last birthday. We use an effective interest rate of 4% a year. We will usually pay any cash value promptly. But we have the right to postpone paying it for up to six months. If we do so for more than ten days, we will pay interest at the rate that then applies to Option 3 (Interest Payment) of the Settlement Options provision in this contract. VL 185 B-98 NY II-127 CONVERSION OF INSURANCE ON A DEPENDENT CHILD Right to Convert The insurance on each dependent child may be converted under this rider to a new contract of life insurance. The insurance on each child's life may be converted only once and once converted, all coverage under this rider on such child will end. A conversion may be made only on (a) the day the insurance ends as described in the last paragraph under Benefit above, and (b) each contract anniversary immediately following his or her 18th and 22nd birthdays provided that such anniversary occurs before the insurance ends. It will not be necessary to prove that the child is insurable. Conditions The right to convert to a new contract is subject to these conditions: (1) The insurance on the child must be converted while this contract is in force and not in default past the last day of the grace period. (2) The amount of the new contract must meet the minimum as we describe under Contract Specifications. (3) We must receive a written application for the new contract no later than the date the insurance on the child may be converted. The new contract will not take effect unless the premium for it is paid while the child is living and within 31 days after its contract date. If the premium is paid as we state, it will be deemed that the insurance under the new contract took effect on its contract date. Premium Credit When the insurance on a dependent child is converted, we will allow a premium credit on the first premium for the new contract. The credit is equal to the lesser of $1.00 for each full $1,000 of the term insurance under this benefit and $1.00 for each full $1,000 of the new contract's basic amount of insurance. Contract Date The date of the new contract will be the day after the date the insurance on the dependent child is converted. If a dependent child's coverage is converted, that child's coverage will end at the end of the day before the contract date of the new contract. Contract Specifications The new contract will be in the standard rating class. We will set the issue age and the premiums for the new contract in accordance with our regular rules in use on its contract date. We will endorse the new contract to show that the period we state in its Incontestability provision will start on the date coverage of the child began under this benefit. But if this contract was reinstated after the date the coverage began but before the date of the new contract, that period will start on the date of the most recent reinstatement. We will have the right to use the statements that were made to us as the basis for reinstatement to contest the new contract. The period during which we will have that right will be the period we state in the Incontestability provision of the new contract. We will endorse the new contract to show that the period we state in its Suicide Exclusion provision will start on the date coverage of the child began under this benefit. Except as we state in the next sentence, the new contract may be any life or endowment policy we regularly issue on its contract date for the same rating class, amount, issue age, and sex. It may not be; a single premium contract; one that insures anyone in addition to the child; one that includes or provides for term insurance, other than extended insurance; one with premiums that increase after a stated time, if its first premium is less than 80% of any later premium; or one with any benefit other than the basic insurance benefit and the waiver benefit we refer to below. A waiver benefit may either waive or pay premiums in the event of the Insured's total disability. The basic amount of the new contract may be any amount you ask for as long as it is at least $10,000 and not more than five times the amount of insurance on the child's life under this benefit; but the total amount for the child may not exceed the maximum amount allowed by law. If the amount you want is smaller than the smallest amount we would regularly issue on the plan you want, we will issue a new contract for as low as $10,000 on the Life Paid Up at Age 85 (Life Paid Up at Age 65 plan if the issue age for the new contract is less than 15 years) plan if you ask us to. If the new contract provides for premium payment to at least age 85, or age 65 if the issue age for it is less than 15 years, we will include a waiver benefit in the event of the total disability of the person insured if we would include a waiver benefit in other contracts like the new one. VL 185 B-98 NY II-128 We will not waive or pay any premium under the new contract unless the total disability started on or after its contract date. And we will not waive or pay any premium under the new contract unless it has a waiver benefit, even if we have paid premiums into this contract due to the Insured's total disability. Any waiver benefit in the new contract will be the same one, with the same provisions, that we put in other contracts like it on its contract date. In any of these paragraphs, when we refer to other contracts, we mean contracts we would regularly issue on the same plan as the new contract and for the same rating class, amount, issue age and sex. MISCELLANEOUS PROVISIONS Changes The insurance on a dependent child may be changed to a new contract of life insurance other than in accordance with the requirements we state in this form. But this kind of change may be made only if we consent, and will be subject to conditions and charges that are then determined. Beneficiary The word beneficiary where we use it in this contract without qualification means the beneficiary for insurance payable upon the death of the Insured. On the contract date, the following two statements apply, unless we issue the contract with an endorsement that states otherwise: (1) The beneficiary for insurance payable upon the death of a dependent child will be the Insured if living, otherwise the beneficiary for this insurance named in the application. (2) If no such beneficiary is living when insurance under this benefit becomes payable, we will make the payment in one sum to the estate of the later to die of the Insured and such beneficiary. You may change a beneficiary for insurance payable upon the death of a dependent child by sending us a request in a form that meets our needs. We may ask you to send us the contract to be endorsed. If we receive your request, and the contract if we ask for it, at our Home Office, we will file and record the change and it will take effect as of the date you signed the request. But if we make any payment(s) before we receive the request, we will not have to make the payment(s) again. Any beneficiary's interest is subject to the rights of any assignee we know of. When a beneficiary is designated, any relationship shown is to the Insured, unless otherwise stated. Reinstatement If this contract is reinstated, it will not include the insurance that we provide under this benefit on the dependent children unless you prove to us that each child who is to be insured on or within 15 days after the date of reinstatement is insurable for the benefit. If you do not submit such proof for any child, the benefit may be reinstated if all the other conditions are met to reinstate the contract, but any child for whom proof is not submitted will not be insured under the reinstated benefit. In this case, you may be required to send the contract to us for endorsement. Incontestability Except for non-payment of premium, we will not contest this benefit with respect to the insurance on any dependent child's life after it has been in force during the child's lifetime for two years from the issue date. TERMINATION OF BENEFIT This benefit will end on the earliest of: 1. the end the last day of the grace period if the contract is in default; 2. the end of the day before the first contract anniversary after the Insured's 75th birthday; 3. the date the contract is surrendered for its net cash value, if it has any, or the paid-up insurance, if any, under the benefit is surrendered; and 4. the date the contract ends for any other reason. Further, if you ask us in a form that meets our needs, we will cancel the benefit as of the first monthly date on or after we receive your request. Monthly charges due then and later will be reduced accordingly. VL 185 B-98 NY II-129 MAXIMUM TOTAL AMOUNT OF INSURANCE ALLOWED BY LAW A dependent child might die when his or her age is less than 14 years and six months. And there might be other life insurance, with us or other companies, payable on the child's life under a contract(s) that was issued and dated before the insurance for the child took effect under this benefit. If so, the most we could pay under this benefit for that death is the excess of: (1) the maximum that is allowed to be paid in accordance with the Table below, over (2) the amount of the insurance on the child's life under (all) the other contract(s). If the amount of insurance on the child's life under this benefit is greater than that excess, we will reduce it by the difference, with appropriate adjustment of the premium as filed with the Superintendent of Insurance of New York. If the insurance under this benefit is more than we would be allowed to pay upon a dependent child's death, you may wish to have us reduce it to what we could pay, with appropriate adjustment of the premium as filed with the Superintendent of Insurance of New York. To do so, you must ask us in writing and in a form that meets our needs. You must also send the contract to us to be endorsed. When we compute insurance under this or other contracts we will not include: (1) return premium benefits; (2) dividend additions; or (3) benefits that are paid only for death by accident. [DEPENDENT CHILD] THIS SUPPLEMENTARY BENEFIT RIDER ATTACHED TO THIS CONTRACT ON THE CONTRACT DATE VL 185 B-98 NY II-130 CONTRACT DATA INSURED [JOHN DOE] [Male], Issue Age [35] ================================================================================ RATING CLASS [Standard] ================================================================================ BASIC CONTRACT INFORMATION Policy Number [xx xxx xx] Contract Date [January 1, 1998] Premium Period Life Beneficiary [See Beneficiary Provision attached] ================================================================================ NOTICE The contract has no generally applicable guaranteed effective interest rate used to determine contract values. The guaranteed interest rate credited on that portion of the contract fund placed in the fixed interest rate investment option is 4% a year. Excess interest credited on the fixed interest rate investment option is not guaranteed and we have the right to change the interest rate from time to time, but not less than the fixed interest rate investment option's guaranteed interest rate. Dividends are not guaranteed. We have the right to determine the amount of dividends, if any, to be credited to the contract. This may result in total cash values different from those illustrated. ================================================================================ TYPE OF DEATH BENEFIT (see Death Benefit Provisions) [Type B] ================================================================================ LIFE INSURANCE ON THE INSURED (as of the Contract Date) Basic Insurance Amount $[50,000.00] ================================================================================ INSURANCE ON ALL OTHER INSUREDS (see appropriate form for details) Rider VL 185 B on the life of each dependent child - Level Term Insurance Benefit on Dependent Children. Amount $[10,000.00] ================================================================================ CONTRACT DATA CONTINUED ON NEXT PAGE Page 3 (97)(NY) II-131 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED MINIMUM INITIAL PREMIUM The minimum initial premium due on the Contract Date is $[72.86]. ================================================================================ CONTRACT LIMITATIONS The minimum premium we will accept is $[25.00]. The minimum basic insurance amount is $[50,000.00]. The minimum increase in basic insurance amount is $[10,000.00]. The minimum decrease in basic insurance amount is $[10,000.00]. The minimum amount you may withdraw is $[500.00]. The minimum amount you may borrow is $[200.00]. The Surrender Charge Threshold is $[50,000.00]. ================================================================================ ADJUSTMENTS TO PREMIUM PAYMENTS From each premium paid we will: Subtract an administrative charge of up to 7.5% of the premium (s) paid. --------- Subtract a charge for sales expenses at a rate of up to 4% of the premium(s) --------- paid. The remainder of the premium is the invested premium amount. ================================================================================ ADJUSTMENTS TO THE CONTRACT FUND On the Contract Date the contract fund is equal to the invested premium amount credited on that date, minus any of the charges described below which may be ----- due on that date. On each day after the contract date, we will adjust the contract fund by: adding any invested premium amounts. ------ adding any increase due to investment results of the variable investment ------ options. adding guaranteed interest at an effective annual rate of 4% (0.01074598% a ------ day) on that portion of CONTRACT DATA CONTINUED ON NEXT PAGE Page 3A (97)(NY) II-132 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED the contract fund that is not in a variable investment option. adding any excess interest on that portion of the contract fund that is in a ------ fixed interest rate investment option. subtracting any decrease due to investment results of the variable investment ----------- options. subtracting a charge against the variable investment options at an effective ----------- annual rate of not more than 0.90% (.00245475% a day) for mortality and expense risks that we assume. subtracting any withdrawals. ----------- subtracting an administrative charge of up to $25.00 for any withdrawals. ----------- subtracting an administrative charge of up to $25.00 for any change in basic ----------- insurance amount. subtracting an administrative charge of up to $25.00 for each transfer between ----------- investment options exceeding twelve in any contract year. subtracting any surrender charges that may result from a withdrawal, ----------- surrender, or reduction in the basic insurance amount. And on each monthly date, we will adjust the contract fund by: subtracting a charge for the cost of insurance of up to the maximum monthly ----------- rate (see Table of Maximum Monthly Insurance Rates) multiplied by the coverage amount divided by $1000. The coverage amount is equal to the death benefit (See Death Benefit) minus the value of the contract fund. subtracting a charge for administrative expenses of up to $10.00 plus $0.07 ----------- per $1000 of the basic insurance amount within the first contract year. subtracting a charge for administrative expenses of up to $10.00 plus $0.07 ----------- per $1000 of the basic insurance amount after the first contract year. CONTRACT DATA CONTINUED ON NEXT PAGE Page 3B (97) II-133 POLICY NO. [XX XXX XXX] CONTRACT DATA CONTINUED subtracting a charge of up to $0.01 per $1000 of the basic insurance amount to ----------- guarantee the minimum death benefit. subtracting a maximum monthly charge for the following benefits: ----------- the maximum monthly charge for Rider VL 185 B is: starting on the Contract Date $[4.10]payable until [JAN 1, 2038]. ================================================================================ SCHEDULE OF MAXIMUM SURRENDER CHARGES For a full surrender at the beginning of the contract year indicated, the maximum charge we will deduct from the contract fund is shown below. For a full surrender at other times, the surrender charge will reflect the completed contract months that have passed since the last anniversary. For a Surrender Occurring At the Start of The Maximum Surrender Contract Year Charge is ----------------------------------------------------------------- 1 $[446.82] 2 $[446.82] 3 $[446.82] 4 $[446.82] 5 $[446.82] 6 $[446.82] 7 $[446.82] 8 $[335.12] 9 $[223.41] 10 $[111.71] 11 and later 0.00 ----------------------------------------------------------------- We may also deduct a surrender charge when you change the basic insurance amount or the type of death benefit, and when you make a withdrawal. (See Change In Basic Insurance Amount, Changing The Type Of Death Benefit, and Withdrawals.) ================================================================================ CONTRACT DATA CONTINUED ON NEXT PAGE Page 3C (97) II-134 POLICY NO. XX XXX XXX CONTRACT DATA CONTINUED INVESTMENT OPTIONS THE PRUDENTIAL VARIABLE APPRECIABLE ACCOUNT This account is registered with the SEC under the Investment Company Act of 1940. Each investment option of this account invests in a specific portfolio of The Prudential Series Fund, Inc., and such other funds as we may specify from time to time. The Prudential Series Fund, Inc. and other funds identified below are registered with the SEC under the Investment Company Act of 1940 as open- end diversified management investment companies. We show below the available investment options and the funds and fund portfolios they invest in. These are Class One investments as described under Transfers. VARIABLE INVESTMENT OPTIONS Money Market Diversified Bond Conservative Balanced Flexible Managed High Yield Bond Stock Index Equity Income Equity Prudential Jennison Global FIXED INTEREST RATE INVESTMENT OPTION The fixed interest rate investment option is funded by the general account of the company. It is described in the Fixed Investments provision of this contract. This is a Class Two investment as described under Transfers. ================================================================================ INITIAL ALLOCATION OF INVESTED PREMIUM AMOUNTS Fixed Interest Rate 40% Money Market 60% ================================================================================ END OF CONTRACT DATA Page 3D (97)(NY) II-135 POLICY NO. XX XXX XX TABLE(S) TABLE OF DEATH BENEFIT GUARANTEE VALUES These values are used to determine the death benefit guarantee as described under Death Benefit Guarantee. The values on contract anniversaries are shown below. On a date that falls between two anniversaries, the value will fall between the values for those anniversaries considering the time that has passed since the last anniversary. The Limited Death Benefit Guarantee period is the first [32] contract years. LIMITED LIFETIME CONTRACT DEATH BENEFIT DEATH BENEFIT ANNIVERSARY GUARANTEE VALUE GUARANTEE VALUE - -------------------------------------------------------------------------- Contract Date $0 $0 1st $[841.88] $[3,111.68] 2nd $[1,717.44] $[6,347.83] 3rd $[2,628.02] $[9,713.42] 4th $[3,575.02] $[13,213.64] 5th $[4,559.90] $[16,853.87] 6th $[5,584.18] $[20,639.70] 7th $[6,649.43] $[24,576.97] 8th $[7,757.29] $[28,671.73] 9th $[8,909.46] $[32,930.28] 10th $[10,107.72] $[37,359.17] 11th $[11,353.91] $[41,965.22] 12th $[12,649.95] $[46,755.51] 13th $[13,997.83] $[51,737.41] 14th $[15,399.62] $[56,918.59] 15th $[16,857.48] $[62,307.01] 16th $[18,373.66] $[67,910.97] 17th $[19,950.49] $[73,739.09] 18th $[21,590.39] $[79,800.33] 19th $[23,295.89] $[86,104.02] 20th $[25,069.61] $[92,659.86] 21st $[26,914.27] $[99,477.93] 22nd $[28,832.72] $[106,568.73] 23rd $[30,827.91] $[113,943.16] 24th $[32,902.91] $[121,612.57] 25th $[35,060.91] $[129,588.75] CONTRACT DATA CONTINUED ON NEXT PAGE Page 4 (97) II-136 POLICY NO. XX XXX XXX LIMITED LIFETIME CONTRACT DEATH BENEFIT DEATH BENEFIT ANNIVERSARY GUARANTEE VALUE GUARANTEE VALUE - -------------------------------------------------------------------------- 26th $[37,305.23] $[137,883.98] 27th $[39,639.32] $[146,511.02] 28th $[42,066.77] $[155,483.14] 29th $[44,591.32] $[164,814.15] 30th $[47,216.85] $[174,518.40] 31st $[49,947.40] $[184,610.82] 32nd $[52,787.18] $[195,106.93] 33rd $[206,022.89] 34th $[217,375.49] 35th $[229,182.19] 36th $[241,461.16] 37th $[254,231.29] 38th $[267,512.22] 39th $[281,324.39] 40th $[295,689.05] 41st $[310,573.69] 42nd $[326,053.72] 43rd $[342,152.95] 44th $[358,896.15] 45th $[376,309.08] 46th $[394,418.52] 47th $[413,252.34] 48th $[432,839.51] 49th $[453,210.17] 50th $[474,395.66] 51st $[496,428.57] 52nd $[519,342.79] 53rd $[543,173.58] 54th $[567,957.60] 55th $[593,732.98] 56th $[620,539.38] 57th $[648,418.04] 58th $[677,411.84] 59th $[707,565.39] 60th $[738,925.09] 61st $[771,539.17] 62nd $[805,457.82] 63rd $[840,733.21] 64th $[877,419.62] 65th $[915,573.48] - ------------------------------------------------------------------- ================================================================================ Page 4A (97) II-137 EX-99.1(A)(13)(D)(IV 14 BENEFIT ON DEPENDENT CHILDREN AFTER ISSUE EXHIBIT 1.A.(13)(d)(iv) RIDER FOR LEVEL TERM INSURANCE BENEFIT ON DEPENDENT CHILDREN Benefit We will pay the amount of term insurance under this benefit if we receive due proof that a dependent child died on or after the effective date of this rider, while this contract is in force and not in default past the last day of the grace period, and before the term insurance provided by the benefit on his or her life ends. But our payment is subject to all the provisions of this rider and of the rest of this contract. The phrase dependent child means the Insured's child, stepchild, or legally adopted child who: (1) has reached the 14th day after his or her date of birth; (2) has not reached the first contract anniversary after his or her 25th birthday; and either (3) is named in the application for this rider and on the date of the request has not reached his or her 18th birthday; or (4) becomes the child of the Insured by birth, marriage or adoption after the date of the request but before the child's 18th birthday. We show the amount of term insurance under this benefit on a contract data page. The insurance on each dependent child's life will end on the earliest of: (1) the end of the day before the first contract anniversary after the child's 25th birthday; (2) the end of the day before the first contract anniversary after the Insured's 75th birthday; and (3) the end of the last day before the contract date of any other contract to which the insurance on the dependent child is converted or changed. Benefit Charges The monthly charge for this benefit is deducted each month from the contract fund starting on the effective date of this rider. The amount of that charge is shown under Adjustments to the Contract Fund. Monthly charges for this benefit stop on the earlier of the date of the Insured's death and the first anniversary after the Insured's 75th birthday. This benefit has no cash value, but it can affect the cash value of the contract. PAID-UP INSURANCE Paid-up Insurance on a Dependent Child If the Insured dies while this contract is in force and not in default past the last day of the grace period, any term insurance provided by this benefit on a dependent child's life will become paid-up term insurance. While this paid-up insurance is in effect, the contract will remain in force. The paid-up insurance will have cash values but no loan value. If the Insured dies by suicide within the period which we state in the Suicide Exclusion under Death Benefits provision of the contract and our liability is limited as we state for suicide in that provision, any provision for paid up insurance on a dependent child who was, until the Insured died, insured under this contract will not apply. Instead, we will then offer to insure a dependent child under a new contract of life insurance. The new contract will be subject to conditions and charges that are then determined, in accordance with regular rules in effect at the time. It's amount will not be less than the greater of (1) the amount of insurance on that person's life under this contract, and (2) the lowest amount offered for the plan of insurance to be provided by the new contract. Proof that the dependent child is insurable will not be required, unless the new contract is to provide either an increased amount of insurance or a benefit that did not apply to the dependent child under this contract. If this benefit becomes paid-up, it may be surrendered for its net cash value. This will be the net value on the date of surrender of the paid-up insurance. But, within 30 days after a contract anniversary, the net cash value will not be less than it was on that anniversary. To compute this net cash value, we use the Commissioners 1980 Standard Ordinary Mortality Table. We use continuous functions based on age last birthday. We use an effective interest rate of 4% a year. ORD 97320-98 II-138 We will usually pay any cash value promptly. But we have the right to postpone paying it for up to six months. If we do so for more than ten days, we will pay interest at the rate that then applies to Option 3 (Interest Payment) of the Settlement Options provision in this contract. CONVERSION OF INSURANCE ON A DEPENDENT CHILD Right to Convert The insurance on each dependent child may be converted under this rider to a new contract of life insurance. The insurance on each child's life may be converted only once and once converted, all coverage under this rider on such child will end. A conversion may be made only on (a) the day the insurance ends as described in the last paragraph under Benefit above, and (b) each contract anniversary immediately following his or her 18th and 22nd birthdays provided that such anniversary occurs before the insurance ends. It will not be necessary to prove that the child is insurable. Conditions The right to convert to a new contract is subject to these conditions: (1) The insurance on the child must be converted while this contract is in force and not in default past the last day of the grace period. (2) The amount of the new contract must meet the minimum as we describe under Contract Specifications. (3) We must receive a written application for the new contract no later than the date the insurance on the child may be converted. The new contract will not take effect unless the premium for it is paid while the child is living and within 31 days after its contract date. If the premium is paid as we state, it will be deemed that the insurance under the new contract took effect on its contract date. Premium Credit When the insurance on a dependent child is converted, we will allow a premium credit on the first premium for the new contract. The credit is equal to the lesser of $1.00 for each full $1,000 of the term insurance under this benefit and $1.00 for each full $1,000 of the new contract's basic amount of insurance. Contract Date The date of the new contract will be the day after the date the insurance on the dependent child is converted. If a dependent child's coverage is converted, that child's coverage will end at the end of the day before the contract date of the new contract. Contract Specifications The new contract will be in the standard rating class. We will set the issue age and the premiums for the new contract in accordance with our regular rules in use on its contract date. We will endorse the new contract to show that the period we state in its Incontestability provision will start on the date coverage of the child began under this benefit. But if this contract was reinstated after the date the coverage began but before the date of the new contract, that period will start on the date of the most recent reinstatement. We will have the right to use the statements that were made to us as the basis for reinstatement to contest the new contract. The period during which we will have that right will be the period we state in the Incontestability provision of the new contract. We will endorse the new contract to show that the period we state in its Suicide Exclusion provision will start on the date coverage of the child began under this benefit. Except as we state in the next sentence, the new contract may be any life or endowment policy we regularly issue on its contract date for the same rating class, amount, issue age, and sex. It may not be; a single premium contract; one that insures anyone in addition to the child; one that includes or provides for term insurance, other than extended insurance; one with premiums that increase after a stated time, if its first premium is less than 80% of any later premium; or one with any benefit other than the basic insurance benefit and the waiver benefit we refer to below. A waiver benefit may either waive or pay premiums in the event of the Insured's total disability. The basic amount of the new contract may be any amount you ask for as long as it is at least $10,000 and not more than five times the amount of insurance on the child's life under this benefit, but the total amount for the child may not exceed the maximum amount allowed by law. If the amount you want is smaller than the smallest amount we would regularly issue on the plan you want, we will issue a new contract for as low as $10,000 on the Life Paid Up at Age 85 plan Life Paid Up at Age 65 plan if the issue age for the new contract is less than 15 years) if you ask us to. ORD 97320-98 II-139 If the new contract provides for premium payment to at least age 85, or age 65 if the issue age for it is less than 15 years, we will include a waiver benefit in the event of the total disability of the person insured if we would include a waiver benefit in other contracts like the new one. We will not waive or pay any premium under the new contract unless the total disability started on or after its contract date. And we will not waive or pay any premium under the new contract unless it has a waiver benefit, even if we have paid premiums into this contract due to the Insured's total disability. Any waiver benefit in the new contract will be the same one, with the same provisions, that we put in other contracts like it on its contract date. In any of these paragraphs, when we refer to other contracts, we mean contracts we would regularly issue on the same plan as the new contract and for the same rating class, amount, issue age and sex. MISCELLANEOUS PROVISIONS Changes The insurance on a dependent child may be changed to a new contract of life insurance other than in accordance with the requirements we state in this form. But this kind of change may be made only if we consent, and will be subject to conditions and charges that are then determined. Beneficiary The word beneficiary where we use it in this contract without qualification means the beneficiary for insurance payable upon the death of the Insured. On the contract date, the following two statements apply, unless we issue the contract with an endorsement that states otherwise: (1) The beneficiary for insurance payable upon the death of a dependent child will be the Insured if living, otherwise the beneficiary for this insurance named in the application. (2) If no such beneficiary is living when insurance under this benefit becomes payable, we will make the payment in one sum to the estate of the later to die of the Insured and such beneficiary. You may change a beneficiary for insurance payable upon the death of a dependent child by sending us a request in a form that meets our needs. We may ask you to send us the contract to be endorsed. If we receive your request, and the contract if we ask for it, at our Home Office, we will file and record the change and it will take effect as of the date you signed the request. But if we make any payment(s) before we receive the request, we will not have to make the payment(s) again. Any beneficiary's interest is subject to the rights of any assignee we know of. When a beneficiary is designated, any relationship shown is to the Insured, unless otherwise stated. Reinstatement If this contract is reinstated, it will not include the insurance that we provide under this benefit on the dependent children unless you prove to us that each child who is to be insured on or within 15 days after the date of reinstatement is insurable for the benefit. If you do not submit such proof for any child, the benefit may be reinstated if all the other conditions are met to reinstate the contract, but any child for whom proof is not submitted will not be insured under the reinstated benefit. In this case, you may be required to send the contract to us for endorsement. Incontestability Except for non-payment of premium, we will not contest this benefit with respect to the insurance on any dependent child's life after it has been in force during the child's lifetime for two years from the effective date of this rider. ORD 97320-98 II-140 TERMINATION OF BENEFIT This benefit will end on the earliest of: 1. end the last day of the grace period if the contract is in default; 2. the end of the day before the first contract anniversary after the Insured's 75th birthday; 3. the date the contract is surrendered for its net cash value, if it has any, or the paid-up insurance, if any, under the benefit is surrendered; and 4. the date the contract ends for any other reason. Further, if you ask us in a form that meets our needs, we will cancel the benefit as of the first monthly date on or after we receive your request. Monthly charges due then and later will be reduced accordingly. MAXIMUM TOTAL AMOUNT OF INSURANCE ALLOWED BY LAW A dependent child might die when his or her age is less than 14 years and six months. And there might be other life insurance, with us or other companies, payable on the child's life under a contract(s) that was issued and dated before the insurance for the child took effect under this benefit. If so, the most we could pay under this benefit for that death is the excess of: (1) the maximum that is allowed to be paid in accordance with the Table below, over (2) the amount of the insurance on the child's life under (all) the other contract(s). If the amount of insurance on the child's life under this benefit is greater than that excess, we will reduce it by the difference, with appropriate adjustment of the premium as filed with the Superintendent of Insurance of New York. If the insurance under this benefit is more than we would be allowed to pay upon a dependent child's death, you may wish to have us reduce it to what we could pay, with appropriate adjustment of the premium as filed with the Superintendent of Insurance of New York. To do so, you must ask us in writing and in a form that meets our needs. You must also send the contract to us to be endorsed. When we compute insurance under this or other contracts we will not include: (1) return premium benefits; (2) dividend additions; or (3) benefits that are paid only for death by accident. [DEPENDENT CHILD] THIS SUPPLEMENTARY BENEFIT RIDER ATTACHED TO THIS CONTRACT ON THE EFFECTIVE DATE II-141 EX-99.1(A)(13)(E) 15 ENDORSEMENT ON BENEFIT ON DEPENDENT CHILDREN EXHIBIT 1.A.(13)(e) PLI 453-98 ENDORSEMENTS ENDORSEMENT TO THE RIDER FOR LEVEL TERM INSURANCE BENEFIT ON DEPENDENT CHILDREN The Rider For Level Term Insurance Benefit On Dependent Children states the coverage on a dependent child may be converted to a new contract of life insurance on the date that coverage expires. The purpose of this endorsement is (a) to provide additional conversion dates on which the coverage on a dependent child may be converted to a new contract of life insurance and (b) grant a premium credit on any conversion of a dependent child's coverage. Additional Conversion Dates Each dependent child may convert his or her coverage under this rider to a new contract of life insurance on each contract anniversary immediately following his or her 18th and 22nd birthdays that occur before that child's coverage ends if we have a written application for the new contract on or before those contract anniversaries. The date of the new contract will be the day after the date the insurance on the dependent child is converted. If a dependent child's coverage is converted on an Additional Conversion Date, that child's coverage will end at the end of the day before the contract date of the new contract. All other conditions and contract specifications stated in the above mentioned rider also apply to the Additional Conversion Dates. Changes On the Additional Conversion Dates, a dependent child may be able to obtain a new contract of life insurance other than in accordance with the requirements we state in this form. But this kind of change may be made only if we consent, and will be subject to conditions and charges that are then determined. Premium Credit When the insurance on a dependent child is converted (on the date the coverage expires or on an Additional Conversion Date), we will allow a premium credit on the first premium for the new contract. The credit is equal to the lesser of $1.00 for each full $1,000 of the term insurance under this benefit and $1.00 for each full $1,000 of the new contract's basic amount of insurance. II-142 EX-99.3 16 OPINION AND CONSENT OF CLIFFORD E. KIRSCH Exhibit 99.3 December 22, 1998 The Prudential Insurance Company of America Prudential Plaza Newark, New Jersey 07102-3777 Gentlemen: In my capacity as Chief Counsel, Variable Products, Law Department of The Prudential Insurance Company of America, I have reviewed the establishment on August 11, 1987 of The Prudential Variable Appreciable Account (the "Account") by the Finance Committee of the Board of Directors of The Prudential Insurance Company of America ("Prudential") as a separate account for assets applicable to certain variable life insurance contracts, pursuant to the provisions of Section 17B:28-7 of the Revised Statutes of New Jersey. I am responsible for oversight of the preparation and review of the Registration Statements on Form S-6, as amended, filed by Prudential with the Securities and Exchange Commission (Registration No. 333-64957) under the Securities Act of 1933 for the registration of certain variable appreciable life insurance contracts issued with respect to the Account. I am of the following opinion: 1. Prudential is a corporation duly organized under the laws of the State of New Jersey and is a validly existing corporation. 2. The Account has been duly created and is validly existing as a separate account pursuant to the aforesaid provisions of New Jersey law. 3. The portion of the assets held in the Account equal to the reserve and other liabilities for variable benefits under the variable appreciable life insurance contracts is not chargeable with liabilities arising out of any other business Prudential may conduct. 4. The variable universal life insurance contracts are legal and binding obligations of Prudential, in accordance with their terms. In arriving at the foregoing opinion, I have made such examination of law and examined such records and other documents as I judged to be necessary or appropriate. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, /S/ Clifford E. Kirsch - --------------------------------------------- Clifford E. Kirsch II-143 EX-99.6 17 OPINION AND CONSENT OF CHING-MEEI CHANG Exhibit 99.6 December 22, 1998 The Prudential Insurance Company of America Prudential Plaza Newark, New Jersey 07102-3777 To Prudential: This opinion is furnished in connection with the registration by The Prudential Insurance Company of America of its Variable Universal Life Contract ("Contract") under the Securities Act of 1933. The prospectus included in Pre- Effective Amendment No. 1 to Registration Statement No. 333-64957 on Form S-6 describes the Contract. I have reviewed the Contract and I have participated in the preparation and review of the Registration Statement and Exhibits thereto. In my opinion: (1) The illustrations of cash surrender values and death benefits included in the section of the prospectus entitled "Illustrations of Cash Surrender Values, Death Benefits, and Accumulated Premiums," based on the assumptions stated in the illustrations, are consistent with the provisions of the Contracts. The rate structure of the Contract has not been designed so as to make the relationship between premiums and benefits, as shown in the illustrations, appear more favorable to a prospective purchaser of a Contract for male age 35 than to prospective purchasers of Contracts on males of other ages or on females. (2) The examples shown in the section of the prospectus entitled "Changing the Type of Death Benefit" are consistent with the provisions of the Contract. (3) The examples shown in the section of the prospectus entitled "Death Benefit Guarantee" are consistent with the provisions of the Contract. (4) The charts included in the sections of the prospectus "How a Type A (Fixed) Contract's Death Benefit Will Vary" and "How a Type B (Variable) Contract's Death Benefit Will Vary" are consistent with the provisions of the Contract. (5) The deduction in an amount equal to 1.25% of each premium is a reasonable charge in relation to the additional income tax burden imposed upon The Prudential Insurance Company of America as the result of the enactment of Section 848 of the internal Revenue Code. In reaching that conclusion, a number of factors were taken into account that, in my opinion, were appropriate and which resulted in a project after-tax rate of return that is a reasonable rate to use in discounting the tax benefit of the deductions allowed in Section 848 in taxable years subsequent to the year in which the premiums are received. 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. Very truly yours, /S/ Ching-Meei Chang - -------------------------------------------- Ching-Meei Chang, FSA, MAAA Actuarial Director The Prudential Insurance Company of America II-144 EX-27 18 ART. 6 FDS FOR PRUDENTIAL VARIABLE APPREC. ACCOUNT
6 YEAR JUN-30-1998 JUN-30-1998 4692781 6003374 0 0 0 6003374 0 0 0 0 0 0 282681 0 0 0 0 0 0 6003374 41176 0 47683 20232 20944 5746 498460 572832 0 0 0 0 0 0 0 672821 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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