-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, r8TL7SR1jWSDBvbfpDHv5rtrtiYau00CG+5zn47GHSL/qpOPKr/4hRIC3YejkTcd lkzOfPf0hJr5PbubvYbVoQ== 0000950152-95-000863.txt : 19950505 0000950152-95-000863.hdr.sgml : 19950505 ACCESSION NUMBER: 0000950152-95-000863 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950504 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONWIDE VLI SEPARATE ACCOUNT 3 CENTRAL INDEX KEY: 0000866064 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 314156830 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-44296 FILM NUMBER: 95534682 BUSINESS ADDRESS: STREET 1: ONE NATIONWIDE PLAZA STREET 2: C/O NATIONWIDE LIFE INSURANCE CO CITY: COLUMBUS STATE: OH ZIP: 43216 BUSINESS PHONE: 614-249-7111 MAIL ADDRESS: STREET 1: NATIONWIDE LIFE INSURANCE CO STREET 2: ONE NATIONWIDE PLAZA CITY: COLUMBUS STATE: OH ZIP: 43216 424B3 1 NATIONWIDE VLI SEPARATE ACCOUNT-3 1 Offered by Nationwide Life Insurance Company NATIONWIDE LIFE INSURANCE COMPANY Nationwide VLI Separate Account - 3 Individual Flexible Premium Variable Life Insurance Contract PROSPECTUS May 1, 1995 2 NATIONWIDE LIFE INSURANCE COMPANY P.O. Box 182150 Columbus, Ohio 43218-2150 (800) 547-7548, TDD (800) 238-3035 FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICIES ISSUED BY THE NATIONWIDE LIFE INSURANCE COMPANY THROUGH ITS NATIONWIDE VLI SEPARATE ACCOUNT-3 The Life Insurance Policies offered by this prospectus are variable life insurance policies (collectively referred to as the "Policies"). The Policies are designed to provide life insurance coverage and the flexibility to vary the amount and frequency of premium payments. The Policies may also provide a Cash Surrender Value if the Policy is terminated during the lifetime of the Insured. Nationwide Life Insurance Company guarantees to keep the Policy in force during the first three years so long as the Minimum Premium requirement has been met. The death benefit and Cash Value of the Policies may vary to reflect the experience of the Nationwide VLI Separate Account-3 (the "Variable Account.") or the Fixed Account to which Cash Values are allocated. The Policies described in this prospectus meet the definition of "Life Insurance" under Section 7702 of the Internal Revenue Code. The Policy Owner may allocate Net Premiums and Cash Value to one or more of the sub-accounts of the Variable Account and the Fixed Account. The assets of each sub-account will be used to purchase, at net asset value, shares of a designated underlying mutual fund of the following series of the underlying variable account mutual fund options: NATIONWIDE SEPARATE ACCOUNT TRUST: -Capital Appreciation Fund -Money Market Fund -Government Bond Fund -Total Return Fund NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST: -Balanced Portfolio TCI PORTFOLIOS, INC.: -TCI Advantage Nationwide Life Insurance Company (the "Company") guarantees that the death benefit for a Policy will never be less than the Specified Amount stated on the Policy data pages as long as the Policy is in force. There is no guaranteed Cash Surrender Value. If the Cash Surrender Value is insufficient to cover the charges under the Policy, the Policy will lapse without value. This prospectus generally describes only that portion of the Cash Value allocated to the Variable Account. For a brief summary of the Fixed Account Option, see "The Fixed Account Option". THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 1 3 THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. A PROSPECTUS FOR THE UNDERLYING MUTUAL FUND OPTION(S) BEING CONSIDERED MUST ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH. The date of this Prospectus is May 1, 1995 2 4 GLOSSARY OF TERMS ATTAINED AGE-The Insured's age on the Policy Date, plus the number of full years since the Policy Date. ACCUMULATION UNIT-An accounting unit of measure used to calculate the Variable Account Cash Value. BENEFICIARY-The person to whom the Death Proceeds are paid. BREAK POINT PREMIUM-The level annual premium at which the sales load is reduced on a current basis. CASH VALUE-The sum of the Policy values in the Variable Account, Fixed Account and any associated value in the Policy Loan Account. CASH SURRENDER VALUE-The Policy's Cash Value, less any Indebtedness under the Policy, less any Surrender Charge. CODE-The Internal Revenue Code of 1986, as amended. DEATH PROCEEDS-Amount of money payable to the Beneficiary if the Insured dies while the Policy is in force. FIXED ACCOUNT-An investment option which is funded by the General Account of the Company. GENERAL ACCOUNT-All assets of the Company other than those of the Variable Account or in other separate accounts that have been or may be established by the Company. GUIDELINE LEVEL PREMIUM-The amount of level annual premium calculated in accordance with the provisions of the Internal Revenue Code of 1986. It represents the level annual premiums required to mature the Policy under guaranteed mortality and expense charges, and an interest rate of 5%. INDEBTEDNESS-Amounts owed the Company as a result of policy loans including both principal and accrued interest. INITIAL PREMIUM-The Initial Premium is the premium required for coverage to become effective on the Policy Date. It is shown on the Policy Data Page. INSURED-The person whose life is covered by the Policy, and who is named on the Policy Data Page. MATURITY DATE-The Policy Anniversary on or following the Insured's 95th birthday. MINIMUM PREMIUM-The Minimum Premium is shown on the Policy Data Page. It is used to measure the total amount of premiums that must be paid during the first three Policy Years to guarantee the Policy remains in force. MONTHLY ANNIVERSARY DAY-The same day as the Policy Date for each succeeding month. MUTUAL FUNDS-The underlying Mutual Funds which correspond to the sub-accounts of the Variable Account. NET PREMIUMS-Net Premiums are equal to the actual premiums minus the percent of premium charge. The percent of premium charges are shown on the Policy Data Page. POLICY ANNIVERSARY-The same day and month as the Policy Date for succeeding years. POLICY CHARGES-All deductions made from the value of the Variable Account, or the Policy Cash Value. 3 5 POLICY DATE-The date the provisions of the Policy take effect, as shown on the Policy Owner's Policy Data Page. POLICY LOAN ACCOUNT-The Portion of the Cash Value which results from Policy Indebtedness. POLICY OWNER-The person designated in the Policy application as the Owner. In the State of New York, the variable life insurance Policies offered by the Company are offered as either "Certificates" for "Certificate Owners" under a group contract or as individual Policies. The provisions of both the Certificates and the Policies are essentially the same and references to the provisions of Policies and rights of Policy Owners in this prospectus include Certificates and Certificate Owners. POLICY YEAR-Each year commencing with the Policy Date and each Policy Anniversary thereafter. SCHEDULED PREMIUM-The Scheduled Premium is shown on the Policy Data Page. SPECIFIED AMOUNT-A dollar amount used to determine the death benefit under a Policy. It is shown on the Policy Data Page. SURRENDER CHARGE-An amount deducted from the Cash Value if the Policy is surrendered. VALUATION DATE-Each day the New York Stock Exchange and the Company's home office are open for business or any other day during which there is a sufficient degree of trading of the underlying Mutual Fund shares held by the Variable Account, such that the current net asset value of the Variable Account Accumulation Units might be materially affected. VALUATION PERIOD-A period commencing with the close of business on the New York Stock Exchange and ending at the close of business for the next succeeding Valuation Date. VARIABLE ACCOUNT-A separate investment account of the Nationwide Life Insurance Company. 4 6 TABLE OF CONTENTS GLOSSARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 SUMMARY OF THE POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Variable Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 The Variable Account and its Sub-Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 The Fixed Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Deductions and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 NATIONWIDE LIFE INSURANCE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 THE VARIABLE ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Investments of the Variable Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Nationwide Separate Account Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Neuberger & Berman Advisers Management Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 TCI Portfolios, Inc., member of the Twentieth Century Family of Mutual Funds . . . . . . . . . . . . . . . . 14 Reinvestment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Dollar Cost Averaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Substitution of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 INFORMATION ABOUT THE POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Underwriting and Issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 -Minimum Requirements for Issuance of a Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 -Premium Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Allocation of Cash Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Short-Term Right to Cancel Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 POLICY CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Deductions from Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Surrender Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 -Reductions to Surrender Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Deductions from Cash Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 -Monthly Cost of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 -Monthly Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 -Increase Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Deductions from the Sub-Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 HOW THE CASH VALUE VARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 How the Investment Experience is Determined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Net Investment Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Valuation of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Determining the Cash Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Valuation Periods and Valuation Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SURRENDERING THE POLICY FOR CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Right to Surrender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Cash Surrender Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Partial Surrenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Maturity Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 POLICY LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5 7 Taking a Policy Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Effect on Investment Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Effect on Death Benefit and Cash Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 HOW THE DEATH BENEFIT VARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Calculation of the Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Proceeds Payable on Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 RIGHT TO EXCHANGE FOR A FIXED BENEFIT POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 CHANGES OF INVESTMENT POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 GRACE PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 -First Three Policy Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 -Policy Years Four and After . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 -All Policy Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 THE FIXED ACCOUNT OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 CHANGES IN EXISTING INSURANCE COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Specified Amount Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Specified Amount Decreases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Changes in the Death Benefit Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 OTHER POLICY PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Policy Owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Incontestability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Error in Age or Sex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Suicide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Nonparticipating Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 LEGAL CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 DISTRIBUTION OF THE POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 CUSTODIAN OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Policy Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Taxation of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Other Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 COMPANY MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Directors of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 OTHER CONTRACTS ISSUED BY THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 STATE REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 REPORTS TO POLICY OWNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ADVERTISING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 REGISTRATION STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6 8 APPENDIX 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 APPENDIX 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 APPENDIX 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 PERFORMANCE TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. 7 9 THE PRIMARY PURPOSE OF THE POLICIES IS TO PROVIDE LIFE INSURANCE PROTECTION FOR THE BENEFICIARY NAMED IN THE POLICY. NO CLAIM IS MADE THAT THE POLICIES ARE IN ANY WAY SIMILAR OR COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. SUMMARY OF THE POLICIES VARIABLE LIFE INSURANCE The variable life insurance Policies offered by Nationwide Life Insurance Company (the "Company") are similar in many ways to fixed-benefit whole life insurance. As with fixed-benefit whole life insurance, the Owner of the Policy pays a premium for life insurance coverage on the person insured. Also like fixed-benefit whole life insurance, the Policies may provide for a Cash Surrender Value which is payable if the Policy is terminated during the Insured's lifetime. As with fixed-benefit whole life insurance, the Cash Surrender Value during the early Policy years may be substantially lower than the premiums paid. However, the Policies differ from fixed-benefit whole life insurance in several respects. Unlike fixed-benefit whole life insurance, the death benefit and Cash Value of the Policies may increase or decrease to reflect the investment performance of the Variable Account sub-accounts or the Fixed Account to which Cash Values are allocated (See "How the Death Benefit Varies"). There is no guaranteed Cash Surrender Value (See "How the Cash Value Varies"). If the Cash Surrender Value is insufficient to pay the Policy Charges, the Policy will lapse without value. Nationwide Life Insurance Company guarantees to keep the Policy in force during the first three years so long as certain requirements are met (See "Underwriting and Issuance"). Under certain conditions, a Policy may be issued as or become a modified endowment contract (MEC) as a result of a material change or a reduction in benefits as defined by the Internal Revenue Code ("Code"). Excess premiums paid may also cause the Policy to become a modified endowment contract, since the tax treatment of certain distributions varies between MECs and non-MECs. The Company will monitor premiums paid and other policy transactions and will notify the Policy Owner when the Policy is about to become a non-modified endowment contract (See "Tax Matters"). THE VARIABLE ACCOUNT AND ITS SUB-ACCOUNTS The Company places the Policy's Net Premiums in the Variable Account or the Fixed Account at the time the Policy is issued. The Policy Owner chooses the sub-accounts of the Variable Account or the Fixed Account into which the Cash Value will be allocated (See "Allocation of Cash Value"). Assets of each sub-account are invested at net asset value in shares of a corresponding underlying Mutual Fund options For a description of the underlying Mutual Fund options and their investment objectives, see "Investments of the Variable Account." THE FIXED ACCOUNT The Fixed Account is funded by the assets of the Company's General Account. Cash Values allocated to the Fixed Account are credited with interest daily at a rate declared by the Company. The interest rate declared is at the Company's sole discretion, but may never be less than an effective annual rate of 4%. 8 10 DEDUCTIONS AND CHARGES The Company deducts certain charges from the assets of the Variable Account and the Cash Value of the Policy. These charges are made for administrative and sales expenses, state premium taxes, providing life insurance protection and assuming the mortality and expense risks. For a discussion of any charges imposed by the underlying Mutual Fund options, see the prospectuses of the respective underlying Mutual Fund options. The Company deducts a sales load from each premium payment received not to exceed 3.5% of each premium payment. On a current basis, the sales load is reduced to 1.5% on any portion of the annual premium paid in excess of the annual Break Point Premium. The total sales load actually deducted from any Policy will be equal to the sum of this front-end load plus any sales surrender charge that may be deducted from Policies that are surrendered. The Company also deducts a charge for state premium taxes equal to 2.5% of all premium payments. The Company also deducts the following charges from the Policy's Cash Value on the Policy Date and each subsequent Monthly Anniversary Day: 1. monthly cost of insurance; plus 2. monthly cost of any additional benefits provided by riders to the Policy; plus 3. an administrative expense charge. This charge is $25 per month in the first year and $5 per month in renewal years. The charge in renewal years may be increased at the sole discretion of the Company but may not exceed $7.50 per month; plus 4. an increase charge per $1000 applied to any increase in the Specified Amount. The increase charge is $2.04 per year per $1000 and is shown on the Policy data page. This charge is designed to cover the costs associated with increasing the Specified Amount (See "Policy Charges"). This charge will be deducted on each Monthly Anniversary Day for the first 12 months after the increase becomes effective. The Company also deducts on a daily basis from the assets of the Variable Account a charge to provide for mortality and expense risks. This charge is equivalent to an annual effective rate of 0.80% of the daily net assets of the Variable Account. On each Policy Anniversary beginning with the 10th, the mortality and expense risk charge is reduced to 0.50% on an annual basis of the daily net assets of the Variable account, provided the Cash Surrender Value is $25,000 or more on such anniversary. For Policies which are surrendered during the first nine Policy Years, the Company deducts a Surrender Charge. This Surrender Charge is comprised of an Underwriting Surrender Charge and a Sales Surrender Charge. The maximum initial Surrender Charge varies by issue age, sex, Specified Amount and underwriting classification and is calculated based on the initial Specified Amount. The following table illustrates the maximum initial Surrender Charge per $1,000 of initial Specified Amount for Policies which are issued on a Standard basis (See Appendix 1 for specific examples). 9 11 Initial Specified Amount $50,000-$99,999
Issue Male Female Male Female Age Non-Tobacco Non-Tobacco Standard Standard 25 $7.776 $7.521 $8.369 $7.818 35 8.817 8.398 9.811 8.891 45 12.191 11.396 13.887 12.169 55 15.636 14.011 18.415 15.116 65 22.295 19.086 26.577 20.641
Initial Specified Amount $100,000+
Issue Male Female Male Female Age Non-Tobacco Non-Tobacco Standard Standard 25 $5.776 $5.521 $6.369 $5.818 35 6.817 6.398 7.811 6.891 45 9.691 8.896 11.387 9.669 55 13.136 11.511 15.915 12.616 65 21.295 18.086 25.577 19.641
Underlying Mutual Fund shares are purchased at net asset value, which reflects the deduction of investment management fees and certain other expenses. The management fees are charged by each underlying Mutual Fund's investment adviser for managing the underlying Mutual Fund and selecting their portfolio of securities. Other underlying Mutual Fund expenses can include such items as interest expense on loans and contracts with transfer agents, custodians, and other companies that provide services to the underlying Mutual Fund. The management fees and other expenses for each underlying Mutual Fund for its most recently completed fiscal year, expressed as a percentage of the underlying Mutual Fund's average assets are as follows: NSAT Capital Appreciation Fund Management Fees . . . . . . . . . . . . . . . . . . . . . . . . 0.50% Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 0.06% Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 0.56% NSAT Money Market Fund Management Fees . . . . . . . . . . . . . . . . . . . . . . . . 0.50% Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 0.04% Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 0.54% NSAT Government Bond Fund Management Fees . . . . . . . . . . . . . . . . . . . . . . . . 0.50% Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 0.01% Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 0.51% NSAT Total Return Fund Management Fees . . . . . . . . . . . . . . . . . . . . . . . . 0.50% Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 0.02% Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 0.52% N & B Advisers Management Trust-Balanced Portfolio Management Fees . . . . . . . . . . . . . . . . . . . . . . . . 0.80% Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 0.17% Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 0.97%
10 12 TCI Portfolios-TCI Advantage Management Fees . . . . . . . . . . . . . . . . . . . . . . . . 1.00% Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . 0.00% Total Expenses . . . . . . . . . . . . . . . . . . . . . . . 1.00%
The Mutual Fund expenses shown above are assessed at the underlying Mutual Fund level and are not direct charges against the Variable Account or reductions in Cash Value. These underlying Mutual Fund expenses are taken into consideration in computing each underlying Mutual Fund's net asset value, which is the share price used to calculate the Variable Account's unit value. The management fees and other expenses are more fully described in the prospectuses for each individual underlying Mutual Fund option. PREMIUMS The minimum Initial Premium for which a Policy may be issued is equal to three minimum monthly premiums. A Policy may be issued to an Insured up to age 80. For a limited time, the Policy Owner has a right to cancel the Policy and receive a full refund of premiums paid (See "Short-Term Right to Cancel Policy"). The Initial Premium is due on the Policy Date. It will be credited on the Policy Date. Any due and unpaid monthly deductions will be subtracted from the Cash Value at this time. Insurance will not be effective until the Initial Premium is paid. The Initial Premium is shown on the Policy data page. Premiums, other than the Initial Premium may be made at any time while your Policy is in force subject to the limits described below. During the first three Policy Years, the total premium payments less any Policy Indebtedness, less any partial surrenders, and less any partial surrender fee must be greater than or equal to the Minimum Premium requirement in order to guarantee the Policy remain in force. The Minimum Premium requirement is equal to the monthly Minimum Premium multiplied by the number of completed policy months. The monthly Minimum Premium is shown on the Policy data page. We will send Scheduled Premium payment reminder notices to you. We will send them according to the premium mode shown on the Policy data page. You may pay the Initial Premium to us at our home office or to an authorized agent. All premiums after the first are payable at our home office. Premium receipts will be furnished upon request. Each premium must be at least equal to the monthly Minimum Premium. The Company reserves the right to require satisfactory evidence of insurability before accepting any additional premium payment which results in any increase in the net amount at risk. Also, we will refund any portion of any premium payment which is determined to be in excess of the premium limit established by law to qualify your Policy as a contract for life insurance. Where permitted by state law, we may also require that any existing Policy Indebtedness is repaid prior to accepting any additional premium payments. NATIONWIDE LIFE INSURANCE COMPANY The Company is a stock life insurance company organized under the laws of the State of Ohio in March, 1929. The Company is a member of the Nationwide Insurance Enterprise which includes Nationwide Mutual Insurance Company, Nationwide Mutual Fire Insurance Company, Nationwide Life and Annuity Insurance Company, Nationwide Property and Casualty Company, National Casualty 11 13 Company, West Coast Life Insurance Company, Scottsdale Indemnity Company, Nationwide Indemnity Company and Nationwide General Insurance Company. The Company's home office is at One Nationwide Plaza, Columbus, Ohio 43216. The Company offers a complete line of life insurance, including annuities and accident and health insurance. It is admitted to do business in all states, the District of Columbia, and Puerto Rico (For additional information, see "The Company"). THE VARIABLE ACCOUNT The Variable Account was established by a resolution of the Company's Board of Directors, on August 8, 1984, pursuant to the provisions of Ohio law. The Company has caused the Variable Account to be registered with the Securities and Exchange Commission as a unit investment trust pursuant to the provisions of the Investment Company Act of 1940. Such registration does not involve supervision of the management of the Variable Account or the Company by the Securities and Exchange Commission. The Variable Account is a separate investment account of the Company and as such, is not chargeable with the liabilities arising out of any other business the Company may conduct. The Company does not guarantee the investment performance of the Variable Account. The death benefit and Cash Value under the Policy may vary with the investment performance of the investments in the Variable Account (See "How the Death Benefit Varies" and "How the Cash Value Varies"). Net Premium payments and Cash Value are allocated within the Variable Account among one or more sub-accounts (See "Tax Matters"). The assets of each sub-account are used to purchase shares of the underlying Mutual Funds designated by the Policy Owner. Thus, the investment performance of a Policy depends upon the investment performance of the underlying Mutual Funds designated by the Policy Owner. INVESTMENTS OF THE VARIABLE ACCOUNT At the time of application, the Policy Owner elects to have the Net Premiums allocated among one or more of the Variable Account sub-accounts and the Fixed Account (See "Allocation of Cash Value"). During the period in which the Policy Owner may exercise his or her short-term right to cancel the Policy, all Net Premiums not allocated to the Fixed Account are placed in the Nationwide Separate Account Trust Money Market Fund sub-account. At the end of this period, the Cash Value in that sub-account will be transferred to the Variable Account sub-accounts based on the Fund allocation factors. Any subsequent Net Premiums received after this period will be allocated based on the underlying Mutual Fund allocation factors. No less than 5% of Net Premiums may be allocated to any one sub-account or the Fixed Account. The Policy Owner may change the allocation of Net Premiums or may transfer Cash Value from one sub-account to another, subject to such terms and conditions as may be imposed by each underlying Mutual Fund option and as set forth in this prospectus (See "Transfers", "Allocation of Cash Value" and "Short-Term Right to Cancel Policy"). These underlying Mutual Fund options are available only to serve as the underlying investment for variable annuity and variable life contracts issued through separate accounts of the life insurance companies which may or may not be affiliated, also known as "mixed and shared funding." There are certain risks associated with mixed and shared funding, which is disclosed in the underlying Mutual 12 14 Funds' prospectuses. A full description of the underlying Mutual Fund options, their investment policies and restrictions, risks and charges are contained in the prospectuses of the respective underlying Mutual Funds. Each of the underlying Mutual Fund options receives investment advice from a registered investment adviser: 1. Nationwide Separate Account Trust, managed by Nationwide Financial Services, Inc.; 2. Neuberger & Berman Advisers Management Trust, managed by Neuberger & Berman Management Incorporated; and 3. TCI Portfolios, Inc., managed by Investors Research Corporation, an affiliate of Twentieth Century Companies. A summary of investment objectives is contained in the description of each underlying Mutual Fund option below. More detailed information may be found in the current prospectus for each underlying Mutual Fund option. A prospectus for the underlying Mutual Fund option(s) being considered must accompany this prospectus and should be read in conjunction herewith. NATIONWIDE SEPARATE ACCOUNT TRUST Nationwide Separate Account Trust (the "Trust") is a diversified open-end management investment company organized under the laws of Massachusetts, by a Declaration of Trust, dated June 30, 1981, as subsequently amended. The Trust offers shares in the four separate Funds listed below, each with its own investment objectives. Currently, shares of the Trust will be sold only to life insurance company separate accounts to fund the benefits under variable insurance or annuity policies issued by life insurance companies. The assets of the Trust are managed by Nationwide Financial Services, Inc., of One Nationwide Plaza, Columbus, Ohio 43216, a wholly-owned subsidiary of Nationwide Life Insurance Company. - - CAPITAL APPRECIATION FUND Investment Objective: The Fund is designed for investors who are interested in long-term growth. The Fund seeks to meet its objective primarily through a diversified portfolio of the common stock of companies which the investment manager determines have a better-than-average potential for sustained capital growth over the long term. - - MONEY MARKET FUND Investment Objective: To seek as high a level of current income as is considered consistent with the preservation of capital and liquidity by investing primarily in money market instruments. - - GOVERNMENT BOND FUND Investment Objective: To provide as high a level of income as is consistent with capital preservation through investing primarily in bonds and securities issued or backed by the U.S. Government, its agencies or instrumentalities. - - TOTAL RETURN FUND Investment Objective: To obtain a reasonable long-term total return (i.e., earnings growth plus potential dividend yield) on invested capital from a flexible combination of current return and capital gains through investments in common stocks, convertible issues, money market instruments and bonds with a primary emphasis on common stocks. 13 15 NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST Neuberger & Berman Advisers Management Trust is an open-end diversified management investment company established as a Massachusetts business trust on December 14, 1983. Shares of the Trust are offered in connection with certain variable annuity contracts and variable life insurance policies issued through life insurance company separate accounts and are also offered directly to qualified pension and retirement plans outside of the separate account context. The investment adviser is Neuberger & Berman Management Incorporated. - - BALANCED PORTFOLIO Investment Objective: To provide long-term capital growth and reasonable current income without undue risk to principal. The Balanced Portfolio will seek to achieve its objective through investment of a portion of its assets in common stocks and a portion of its assets in debt securities. The Investment Adviser anticipates that the Balanced Portfolio's investments will normally be managed so that approximately 60% of the Portfolio's total assets will be invested in common stocks and the remaining assets will be invested in debt securities. However, depending on the Investment Adviser's views regarding current market trends, the common stock portion of the Portfolio's investments may be adjusted downward to as low as 50% or upward to as high as 70%. At least 25% of the Portfolio's assets will be invested in fixed income senior securities. TCI PORTFOLIOS, INC., MEMBER OF THE TWENTIETH CENTURY FAMILY OF MUTUAL FUNDS TCI Portfolios, Inc. was organized as a Maryland corporation in 1987. It is a diversified, open-end management investment company, designed only to provide investment vehicles for variable annuity and variable life insurance products of insurance companies. A member of the Twentieth Century Family of Mutual Funds, TCI Portfolios is managed by Investors Research Corporation. - - TCI ADVANTAGE Investment Objective: Current income and capital growth. The fund will seek to achieve its objective by investing in three types of securities. The fund's investment manager intends to invest approximately (i) 20% of the fund's assets in securities of the United States government and its agencies and instrumentalities and repurchase agreements collateralized by such securities with a weighted average maturity of six months or less, i.e., cash or cash equivalents; (ii) 40% of the fund's assets in fixed income securities of the United States government and its agencies and instrumentalities with a weighted average maturity of three to ten years; and (iii) 40% of the fund's assets in equity securities that are considered by management to have better-than-average prospects for appreciation. Assets will be purchased or sold, as the case may be, as is necessary in response to changes in market value to maintain the asset mix of the Fund's portfolio at approximately 60% cash, cash equivalents and fixed income securities and 40% equity securities. There can be no assurance that the Fund will achieve its investment objective. (Although the Statement of Additional Information concerning TCI Portfolios, Inc. refers to redemptions of securities in kind under certain conditions, all surrendering or redeeming Contract Owners will receive cash from the Company.) REINVESTMENT The underlying Mutual Fund options described above have as a policy the distribution of dividends in the form of additional shares (or fractions thereof) of the underlying Mutual Funds. The distribution of 14 16 additional shares will not affect the number of Accumulation Units attributable to a particular Policy (See "Allocation of Cash Value"). TRANSFERS The Policy Owner may transfer Cash Value among the sub-accounts of the Variable Account and the Fixed Account. A transfer will take effect on the date of receipt of written notice at the Company's home office. Transfer requests must be in a written form acceptable to the Company. After the first Policy Anniversary, the Policy Owner may annually transfer a portion of the value of the Variable Account to the Fixed Account, without penalty or adjustment. The Policy Owner may request a transfer of up to 100% of the Cash Value from the Variable Account to the Fixed Account. The Company reserves the right to restrict transfers to the Fixed Account to 25% of the Cash Value. The Policy Owner's Cash Value in each sub-account will be determined as of the date the transfer request is received in the home office in good order. The Policy Owner may transfer a portion of the value of the Fixed Account to the Variable Account once each Policy Year, without penalty or adjustment. The Policy Owner may request a transfer of up to 100% of the Cash Value in the Fixed Account to the Variable sub-accounts. The Company reserves the right to restrict the amount of such transfers to 25% of the Cash Value in the Fixed Account. Transfers among the sub-accounts may be made once per Valuation Date and may be made either in writing or, in states allowing such transfers, by telephone. The Company will employ procedures reasonably designed to confirm that instructions communicated by telephone are genuine. Such procedures may include any or all of the following, or such other procedures as the company may, from time to time, deem reasonable: requesting identifying information, such as name, contract number, Social Security number, and/or personal identification number; tape recording all telephone transactions; and providing written confirmation thereof to both the Policy owner and any agent of record at the last address of record. Although failure to follow reasonable procedures may result in the Company's liability for any losses due to unauthorized or fraudulent telephone transfers, the Company will not be liable for following instructions communicated by telephone which it reasonably believes to be genuine. The Company may withdraw the telephone exchange privilege upon 30 days written notice to Policy Owners. Policy Owners who have entered into a Dollar Cost Averaging Agreement with the Company (see "Dollar Cost Averaging") may transfer from the Fixed Account to the Variable Account under the terms of that agreement. DOLLAR COST AVERAGING The Policy Owner may direct the Company to automatically transfer from the Money Market sub-account or the Fixed Account to any other sub-account within the Variable Account on a monthly basis. This service is intended to allow the Policy Owner to utilize Dollar Cost Averaging, a long-term investment program which provides for regular, level investments over time. The Company makes no guarantees that Dollar Cost Averaging will result in a profit or protect against loss. To qualify for Dollar Cost Averaging, there must be a minimum total Cash Value, less Policy Indebtedness, of $15,000. Transfers for purposes of Dollar Cost Averaging can only be made from the Money Market sub-account or the Fixed Account. The minimum monthly Dollar Cost Averaging transfer is $100. In addition, Dollar Cost Averaging monthly transfers from the Fixed Account must be equal to or less than 1/30th of the Fixed Account value when the Dollar Cost Averaging program is requested. Transfers out of the 15 17 Fixed Account, other than for Dollar Cost Averaging, may be subject to certain additional restrictions (See "Transfers"). A written election of this service, on a form provided by the Company, must be completed by the Policy Owner in order to begin transfers. Once elected, transfers from the Money Market sub-account or the Fixed Account will be processed monthly until either the value in the Money Market sub-account or the Fixed Account is completely depleted or the Policy Owner instructs the Company in writing to cancel the monthly transfers. The Company reserves the right to discontinue offering Dollar Cost Averaging upon 30 days' written notice to Policy Owners however, any such discontinuation would not affect Dollar Cost Averaging programs already commenced. The Company also reserves the right to assess a processing fee for this service. SUBSTITUTION OF SECURITIES If shares of the above underlying Mutual Funds should no longer be available for investment by the Variable Account or, if in the judgment of the Company's management further investment in such underlying Mutual Funds should become inappropriate in view of the purposes of the Policy, the Company may substitute shares of another underlying Mutual Fund for shares already purchased or to be purchased in the future by Net Premium payments under the Policy. No substitution of securities in the Variable Account may take place without prior approval of the Securities and Exchange Commission, and under such requirements as it and any state insurance department may impose. VOTING RIGHTS Voting rights under the Policies apply only with respect to Cash Value allocated to the sub-accounts of the Variable Account. In accordance with its view of present applicable law, the Company will vote the shares of the underlying Mutual Funds held in the Variable Account at regular and special meetings of the shareholders of the underlying Mutual Funds in accordance with instructions received from Policy Owners. However, if the Investment Company Act of 1940 or any regulation thereunder should be amended or if the present interpretation thereof should change, and as a result the Company determines that it is permitted to vote the shares of the underlying Mutual Funds in its own right, the Company may elect to do so. Underlying Mutual Fund shares held by the Company or by the Variable Account as to which no timely instructions are received will be voted by the Company in the same proportion as the voting instructions which are received. The Policy Owner shall have the voting interest under a Policy. The number of shares in each sub-account for which the Policy Owner may give voting instructions is determined by dividing any portion of the Policy's Cash Value derived from participation in that underlying Mutual Fund option by the net asset value of one share of that underlying Mutual Fund. The number of shares which a person has a right to vote will be determined as of a date chosen by the Company, but not more than 90 days prior to the meeting of the underlying Mutual Fund. Voting instructions will be solicited by written communication prior to such meeting. Each person having a voting interest in the Variable Account will receive periodic reports relating to investments of the Variable Account, the underlying Mutual Funds' proxy material and a form with which to give such voting instructions. 16 18 Notwithstanding contrary Policy Owner voting instructions, the Company may vote underlying Mutual Fund shares in any manner necessary to enable the underlying Mutual Fund to: (1) make or refrain from making any change in the investments or investment policies for any of the underlying Mutual Funds, if required by an insurance regulatory authority; (2) refrain from making any change in the investment policies or any investment adviser or principal underwriter of any portfolio which may be initiated by Policy Owners or the underlying Mutual Fund's Board of Directors, provided the Company's disapproval of the change is reasonable and, in the case of a change in the investment policies or investment adviser, based on a good faith determination that such change would be contrary to state law or otherwise inappropriate in light of the portfolio's objective and purposes; or (3) enter into or refrain from entering into any advisory agreement or underwriting contract, if required by any insurance regulatory authority. INFORMATION ABOUT THE POLICIES UNDERWRITING AND ISSUANCE - -Minimum Requirements for Issuance of a Policy The Policies are designed to provide life insurance coverage and the flexibility to vary the amount and frequency of premium payments. At issue, the Policy Owner selects the initial specified amount and premium. The minimum Specified Amount is $50,000 ($100,000 in Pennsylvania and New Jersey). Policies may be issued to Insureds with issue ages 80 or younger. Before issuing any Policy, the Company requires satisfactory evidence of insurability which may include a medical examination. - -Premium Payments The Initial Premium for a Policy is payable in full at the Company's home office. Upon payment of an initial premium, temporary insurance may be provided, subject to a maximum amount. The effective date of permanent insurance coverage is dependent upon completion of all underwriting requirements, payment of the Initial Premium, and delivery of the Policy while the Insured is still living. Premiums, other than the Initial Premium, may be made at any time while the Policy is in force subject to the limits described below. During the first three Policy Years, the total premium payments less any Policy Indebtedness, less any partial surrenders, and less any partial surrender fee must be greater than or equal to the Minimum Premium requirement in order to guarantee the Policy remains in force. The Minimum Premium requirement is equal to the monthly Minimum Premium multiplied by the number of completed policy months. The monthly Minimum Premium is shown on the Policy data page. Each premium payment must be at least equal to the monthly Minimum Premium. Additional premium payments may be made at any time while the Policy is in force. However, the Company reserves the right to require satisfactory evidence of insurability before accepting any additional premium payment which results in an increase in the net amount at risk. Also, the Company will refund any portion of any premium payment which is determined to be in excess of the premium limit established by law to qualify the Policy as a contract for life insurance. The Company may also require that any existing Policy Indebtedness is repaid prior to accepting any additional premium payments. Additional premium payments or other changes to the contract, may jeopardize the Policy's non-modified endowment 17 19 status. The Company will monitor premiums paid and other policy transactions and will notify the Policy Owner when non-modified endowment contract status is in jeopardy (See "Tax Matters"). ALLOCATION OF CASH VALUE At the time a Policy is issued, its Cash Value will be based on the Nationwide Separate Account Trust Money Market Fund sub-account value or the Fixed Account as if the Policy had been issued and the Initial Net Premium invested on the date such premium was received in good order by the Company. When the Policy is issued, the Net Premiums will be allocated to the Nationwide Separate Account Trust Money Market Fund sub-account (for any Net Premiums allocated to a sub-account on the Application) or the Fixed Account until the expiration of the period in which the Policy Owner may exercise his or her short-term right to cancel the Policy. Net Premiums not designated for the Fixed Account will be placed in the Nationwide Separate Account Trust Money Market Sub-Account. At the expiration of the period in which the Policy Owner may exercise his or her short term right to cancel the Policy, shares of the underlying Mutual Funds specified by the Policy Owner are purchased at net asset value for the respective sub-account(s). The Policy Owner may change the allocation of Net Premiums or may transfer Cash Value from one sub-account to another, subject to such terms and conditions as may be imposed by each underlying Mutual Fund and as set forth in the prospectus. Net Premiums allocated to the Fixed Account at the time of application may not be transferred prior to the first Policy Anniversary (See "Transfers" and "Investments of the Variable Account"). The designation of investment allocations will be made by the prospective Policy Owner at the time of application for a Policy. The Policy Owner may change the way in which future Net Premiums are allocated by giving written notice to the Company. All percentage allocations must be in whole numbers, and must be at least 5%. The sum of allocations must equal 100%. SHORT-TERM RIGHT TO CANCEL POLICY A Policy may be returned for cancellation and a full refund of premium within 10 days after the Policy is received, within 45 days after the application for insurance is signed, or within 10 days after the Company mails or delivers a Notice of Right of Withdrawal, whichever is latest. In order to cancel the Policy, the Policy can be mailed or delivered to the registered representative who sold it, or to the Company. Immediately after such mailing or delivery, the Policy will be deemed void from the beginning. The Company will refund the total premiums paid within seven days after it receives the Policy. POLICY CHARGES DEDUCTIONS FROM PREMIUMS The Company deducts a sales load from each premium payment received not to exceed 3.5% of each premium payment. On a current basis, the sales load is reduced to 1.5% on any portion of the annual premium paid in excess of the annual Break Point Premium. The total sales load actually deducted from any Policy will be equal to the sum of this front-end sales load plus any sales surrender charge that may be deducted from Policies that are surrendered. The Company also pays any state premium taxes attributable to a particular policy when incurred by the Company. The Company expects to pay an average state premium tax rate of approximately 2.5% of premiums for all states, although such tax rates range from 0% to 4%. To reimburse the Company for the payment of state premium taxes associated with the Policies, the Company deducts a charge 18 20 for state premium taxes equal to 2.5% of all premium payments received. This charge may be more or less than the amount actually assessed by the state in which a particular Policy Owner lives. The Company does not expect to make a profit from this change. SURRENDER CHARGES The Company will deduct a Surrender Charge from the Policy's Cash Value for any Policy surrendered during the first nine Policy Years. The maximum initial Surrender Charge varies by issue age, sex, Specified Amount and underwriting classification and is calculated based on the initial Specified Amount. The following table illustrates the maximum initial Surrender Charge per $1,000 of initial Specified Amount for Policies which are issued on a standard basis (See Appendix 1 for specific examples). Initial Specified Amount $50,000-$99,999
Issue Male Female Male Female Age Non-Tobacco Non-Tobacco Standard Standard 25 $7.776 $7.521 $8.369 $7.818 35 8.817 8.398 9.811 8.891 45 12.191 11.396 13.887 12.169 55 15.636 14.011 18.415 15.116 65 22.295 19.086 26.577 20.641
Initial Specified Amount $100,000+
Issue Male Female Male Female Age Non-Tobacco Non-Tobacco Standard Standard 25 $5.776 $5.521 $6.369 $5.818 35 6.817 6.398 7.811 6.891 45 9.691 8.896 11.387 9.669 55 13.136 11.511 15.915 12.616 65 21.295 18.086 25.577 19.641
The Surrender Charge is comprised of two components: an underwriting surrender charge and sales surrender charge. The underwriting surrender charge varies by issue age in the following manner: Charge per $1,000 of Initial Specified Amount
Issue Specified Amounts Specified Amounts Age less than $100,000 $100,000 or more 0-35 $6.00 $4.00 36-55 7.50 5.00 56-80 7.50 6.50
The underwriting surrender charge is designed to cover the administrative expenses associated with underwriting and issuing the Policy, including the costs of processing applications, conducting medical exams, determining insurability and the Insured's underwriting class, and establishing policy records. The Company does not expect to profit from the underwriting surrender charges. The Surrender Charge may be insufficient to recover certain expenses related to the sale of the Policies. 19 21 Unrecovered expenses are born by the Company's general assets which may include profits, if any, from Mortality and Expense Risk Charges (See "Deductions from the Sub-Accounts"). Additional premiums and/or income earned on assets in the Variable Account have no effect on these charges. The remainder of the Surrender Charge which is not attributable to the underwriting surrender charge component represents the sales surrender charge component. In no event will this component exceed 26-1/2% of the lesser of the Guideline Level Premium required in the first year or the premiums actually paid in the first year. The purpose of the sales surrender charge component is to reimburse the Company for some of the expenses incurred in the distribution of the Policies. The company also deducts 3.5% of each premium for sales load (See "Deductions from Premiums"). - -Reductions to Surrender Charges The Surrender Charges are reduced in subsequent Policy Years in the following manner:
Surrender Charge Surrender Charge Completed as a % of Initial Completed as a % of Initial Policy Years Surrender Charges Policy Years Surrender Charges 0 100% 5 60% 1 100% 6 50% 2 90% 7 40% 3 80% 8 30% 4 70% 9+ 0%
Special guaranteed maximum Surrender Charges apply in Pennsylvania (See Appendix 1). DEDUCTIONS FROM CASH VALUE The Company also deducts the following charges from the Policy's Cash Value on the Policy Date and each subsequent Monthly Anniversary Day: 1. monthly cost of insurance charges; plus 2. monthly cost of any additional benefits provided by riders; plus 3. monthly administrative expense charge; plus 4. the increase charge per $1000 applied to any increase in the Specified Amount (See "Specified Amount Increases"). The increase charge is $2.04 per year per $1000 and is shown on the Policy data page. This charge is designed to cover the costs associated with increasing the Specified Amount (See "Policy Charges"). This charge will be deducted on each Monthly Anniversary Day for the first 12 months after the increase becomes effective. These deductions will be charged proportionately to the Cash Value in each Variable Account sub-account and the Fixed Account. - -Monthly Cost of Insurance The monthly cost of insurance charge for each policy month is determined by multiplying the monthly cost of insurance rate by the net amount at risk. The net amount at risk is the difference between the death benefit and the Policy's Cash Value, each calculated at the beginning of the policy month. 20 22 If death benefit Option 1 is in effect and there have been increases in the Specified Amount, then the Cash Value shall first be considered a part of the initial Specified Amount. If the Cash Value exceeds the initial Specified Amount, it shall then be considered a part of the additional increases in Specified Amount resulting from the increases in the order of the increases. Monthly cost of insurance rates will not exceed those guaranteed in the Policy. Guaranteed cost of insurance rates for Policies issued on Specified Amounts less than $100,000 are based on the 1980 Commissioners Extended Term Mortality Table, Age Last Birthday (1980 CET). Guaranteed cost of insurance rates for Policies issued on Specified Amounts $100,000 or more are based on the 1980 Commissioners Standard Ordinary Mortality Table, Age Last Birthday (1980 CSO). Guaranteed cost of insurance rates for Policies issued on a substandard basis are based on appropriate percentage multiples of the 1980 CSO. These mortality tables are sex distinct. In addition, separate mortality tables will be used for standard and non-tobacco. For Policies issued in Texas on a standard basis ("Special Class - Standard" in Texas), guaranteed cost of insurance rates for Specified Amounts less than $100,000 are based on 130% of the 1980 Commissioners Standard Ordinary Mortality Table, Age Last Birthday (1980 CSO). The rate class of an Insured may affect the cost of insurance rate. The Company currently places Insureds into both standard rate classes and substandard classes that involve a higher mortality risk. In an otherwise identical Policy, an Insured in the standard rate class will have a lower cost of insurance than an Insured in a rate class with higher mortality risks. The Company may also issue certain Policies on a "Non Medical" basis to certain categories of individuals. Due to the underwriting criteria established for Policies issued on a Non Medical basis, actual rates will be higher than the current cost of insurance rates being charged under Policies that are medically underwritten. - -Monthly Administrative Charge The Company deducts a monthly Administrative Expense Charge to reimburse it for certain expenses related to maintenance of the Policies, accounting and record keeping and periodic reporting to Policy Owners. This charge is designed only to reimburse the Company for certain actual administrative expenses. The Company does not expect to recover from this charge any amount in excess of aggregate maintenance expenses. Currently, this charge is $25 per month in the first year, $5 per month in renewal years. The Company may at its sole discretion increase this charge. However, the Company guarantees that this charge will never exceed $7.50 per month in renewal years. - -Increase Charge The Increase Charge is comprised of two components: an underwriting and administration charge as well as a sales charge (See "Specified Amount Increases"). The underwriting and administration charge is $1.50 per year per $1000. This charge is to cover the cost of underwriting the increases and any processing expenses. Nationwide Life does not expect to profit from this charge. The sales charge is equal to .54 per year per $1000 and reimburses the Company for expenses incurred in distribution. DEDUCTIONS FROM THE SUB-ACCOUNTS The Company assumes certain risks for guaranteeing the Mortality and Expense Charges. The Mortality Risks assumed under the Policies is that the Insured may not live as long as expected. The Expense Risk assumed is that the actual expenses incurred in issuing and administering the Policies may be greater than expected. In addition, the Company assumes risks associated with the non- 21 23 recovery of policy issue, underwriting and other administrative expenses due to Policies which lapse or are surrendered in the early Policy Years. To compensate the Company for assuming these risks associated with the Policies, the Company deducts on a daily basis from the assets of the Variable Account a charge to provide for Mortality and Expense risks. This charge is equivalent to an annual effective rate of 0.80% of the daily net assets of the Variable Account. On each Policy Anniversary beginning with the 10th, the Mortality and Expense Risk Charge is reduced to 0.50% on an annual basis of the daily net assets of the Variable Account, provided the Cash Surrender Value is $25,000 or more on such anniversary. To the extent that future levels of mortality and expenses are less than or equal to those expected, the Company may realize a profit from this charge. The Surrender Charge may be insufficient to recover certain expenses related to the sale of the Policies. Unrecovered expenses are born by the Company's general assets which may include profits, if any, from Mortality and Expense Risk Charges (See "Surrender Charges). The Company does not currently assess any charge for income taxes incurred by the Company as a result of the operations of the sub- accounts of the Variable Account (See "Taxation of the Company"). The Company reserves the right to assess a charge for such taxes against the Variable Account if the Company determines that such taxes will be incurred. HOW THE CASH VALUE VARIES On any date during the Policy Year, the Cash Value equals the Cash Value on the preceding Valuation Date, plus any Net Premium applied since the previous Valuation Date, minus any partial surrenders, plus or minus any investment results, and less any Policy Charges. There is no guaranteed Cash Value. The Cash Value will vary with the investment experience of the Variable Account and/or the daily crediting of interest in the Fixed Account and Policy Loan Account depending on the allocation of Cash Value by the Policy Owner. HOW THE INVESTMENT EXPERIENCE IS DETERMINED The Cash Value in each sub-account is converted to Accumulation Units of that sub-account. The conversion is accomplished by dividing the amount of Cash Value allocated to a sub-account by the value of an Accumulation Unit for the sub-account of the Valuation Period during which the allocation occurs. The value of an Accumulation Unit for each sub-account was arbitrarily set initially at $10 when the underlying Mutual Fund shares in that sub-account were available for purchase. The value for any subsequent Valuation Period is determined by multiplying the Accumulation Unit value for each sub-account for the immediately preceding Valuation Period by the Net Investment Factor for the sub-account during the subsequent Valuation Period. The value of an Accumulation Unit may increase or decrease from Valuation Period to Valuation Period. The number of Accumulation Units will not change as a result of investment experience. NET INVESTMENT FACTOR The Net Investment Factor for any Valuation Period is determined by dividing (a) by (b) and subtracting (c) from the result where: (a) is the net of: 22 24 (1) the net asset value per share of the underlying Mutual Fund held in the sub-account determined at the end of the current Valuation Period, plus (2) the per share amount of any dividend or capital gain distributions made by the underlying Mutual Fund held in the sub- account if the "ex-dividend" date occurs during the current Valuation Period. (b) is the net asset value per share of the underlying Mutual Fund held in the sub-account determined at the end of the immediately preceding Valuation Period. (c) is a factor representing the daily Mortality and Expense Risk Charge deducted from the Variable Account. Such factor is equal to an annual rate of 0.80% of the daily net asset value of the Variable Account. On each Policy Anniversary beginning with the 10th, the mortality and expense risk charge is reduced to 0.50% on an annual basis of the daily net assets of the Variable Account, provided the Cash Surrender Value is $25,000 or more on such anniversary. For underlying Mutual Funds that credit dividends on a daily basis and pay such dividends once a month, the Net Investment Factor allows for the monthly reinvestment of these daily dividends. The Net Investment Factor may be greater or less than one; therefore, the value of an Accumulation Unit may increase or decrease. It should be noted that changes in the Net Investment Factor may not be directly proportional to changes in the net asset value of underlying Mutual Fund shares, because of the deduction for Mortality and Expense Risk Charge, and any charge or credit for tax reserves. VALUATION OF ASSETS Underlying Mutual Fund shares in the Variable Account will be valued at their net asset value. DETERMINING THE CASH VALUE The sum of the value of all Variable Account Accumulation Units attributable to the Policy and amounts credited to the Fixed Account is the Cash Value. The number of Accumulation Units credited per each sub-account are determined by dividing the net amount allocated to the sub-account by the Accumulation Unit Value for the sub-account for the Valuation Period during which the premium is received by the Company. In the event part or all of the Cash Value is surrendered or charges or deductions are made against the Cash Value, an appropriate number of Accumulation Units from the Variable Account and an appropriate amount from the Fixed Account will be deducted in the same proportion that the Policy Owner's interest in the Variable Account and the Fixed Account bears to the total Cash Value. The Cash Value in the Fixed Account and the Policy Loan Account is credited with interest daily at an effective annual rate which the Company periodically declares. The annual effective rate will never be less than 4%. Upon request, the Company will inform the Policy Owner of the then applicable rates for each account. VALUATION PERIODS AND VALUATION DATES A Valuation Period is the period commencing at the close of business on the New York Stock Exchange and ending at the close of business for the next succeeding Valuation Date. A Valuation Date is each day that the New York Stock Exchange and the Company's home office are open for business or any other day during which there is sufficient degree of trading of the underlying Mutual 23 25 Fund shares held by the Variable Account, such that the current net asset value of the Accumulation Units might be materially affected. SURRENDERING THE POLICY FOR CASH RIGHT TO SURRENDER The Policy Owner may surrender the Policy in full at any time while the Insured is living and receive its Cash Surrender Value. The cancellation will be effective as of the date the Company receives a proper written request for cancellation and the Policy. Such written request must be signed and, where permitted, the signature guaranteed by a member firm of the New York, American, Boston, Midwest, Philadelphia or Pacific Stock Exchange, or by a Commercial Bank or a Savings and Loan, which is a member of the Federal Deposit Insurance Corporation. In some cases, the Company may require additional documentation of a customary nature. CASH SURRENDER VALUE The Cash Surrender Value increases or decreases daily to reflect the investment experience of the Variable Account and the daily crediting of interest in the Fixed Account and the Policy Loan Account. The Cash Surrender Value equals the Policy's Cash Value, next computed after the date the Company receives a proper written request for surrender, minus any charges, Policy Indebtedness or other deductions due on that date, which may also include a Surrender Charge. PARTIAL SURRENDERS After the Policy has been in force for one year, the Policy Owner may request a partial surrender. Partial surrenders will be permitted only if they satisfy the following requirements: 1. The minimum partial surrender is $500; 2. The partial surrender may not reduce the Specified Amount to less than $50,000; 3. After the partial surrender, the Cash Surrender Value is greater than $500 or an amount equal to three times the current monthly deduction if higher; 4. The maximum total partial surrenders in any policy year are limited to 10% of the total premium payments. On a current basis, this requirement is waived in years 15 and beyond provided the Cash Surrender Value is $10,000 or more after the withdrawal; and 5. After the partial surrender, the Policy continues to qualify as life insurance. When a partial surrender is made, the Cash Value is reduced by the amount of the partial surrender. Also, under death benefit Option 1, the Specified Amount is reduced by the amount of the partial surrender. Partial surrender amounts must be first deducted from the values in the Variable Account sub-accounts. Partial surrenders will be deducted from the Fixed Account only to the extent that insufficient values are available in the Variable Account sub-accounts. The Company reserves the right to deduct a $25.00 fee from the partial surrender amount. Surrender Charges will be waived for any partial surrenders which satisfy the above conditions. Certain partial surrenders may result in currently taxable income and tax penalties (See "Tax Matters"). 24 26 MATURITY PROCEEDS The Maturity Date is the Policy Anniversary on or next following the Insured's 95th birthday. The maturity proceeds will be payable to the Policy Owner on the Maturity Date provided the Policy is still in force. The Maturity Proceeds will be equal to the amount of the Policy's Cash Value, less any Indebtedness. INCOME TAX WITHHOLDING Federal law requires the Company to withhold income tax from any portion of surrender proceeds that is subject to tax, unless the Policy Owner advises the Company, in writing, of his or her request not to withhold. If the Policy Owner requests that the Company not withhold taxes, or if the taxes withheld are insufficient, the Policy Owner may be liable for payment of an estimated tax. The Policy Owner should consult his or her tax advisor. POLICY LOANS TAKING A POLICY LOAN After the first Policy Year, the Policy Owner may take a Policy loan using the Policy as security. Maximum Policy Indebtedness is limited to 90% of the Cash Value less Surrender Charge less interest due on the next Policy Anniversary. Maximum Policy Indebtedness, in Texas, is limited to 90% of the Cash Value in the sub-accounts and 100% of the Cash Value in the Fixed Account less Surrender Charge less interest due on the next Policy Anniversary. The Company will not grant a loan for an amount less than $200. Should the Death Proceeds become payable, the Policy be surrendered, or the Policy mature while a loan is outstanding, the amount of Policy Indebtedness will be deducted from the death benefit, Cash Surrender Value or the maturity value, respectively. Any request for a Policy loan must be in written form satisfactory to the Company. The request must be signed and, where permitted, the signature guaranteed by a member firm of the New York, American, Boston, Midwest, Philadelphia or Pacific Stock Exchange; or by a Commercial Bank or a Savings and Loan which is a member of the Federal Deposit Insurance Corporation. Certain policy loans may result in currently taxable income and tax penalties (See "Tax Matters"). A Policy Owner considering the use of policy loans in connection with his or her retirement income plan should consult his or her personal tax adviser regarding potential tax consequences that may arise if necessary payments are not made to keep the Policy from lapsing. The amount of such payments necessary to prevent the Policy from lapsing would increase with age. (See "Tax Matters"). EFFECT ON INVESTMENT PERFORMANCE When a loan is made, an amount equal to the amount of the loan is transferred from the Variable Account to the Policy Loan Account. If the assets relating to a Policy are held in more than one sub-account, withdrawals from sub-accounts will be made in proportion to the assets in each Variable sub-account at the time of the loan. Policy loans will be transferred from the Fixed Account only when insufficient amounts are available in the Variable sub-accounts. The amount taken out of the Variable Account will not be affected by the Variable Account's investment experience while the loan is outstanding. 25 27 INTEREST On a current basis, policy loans are credited with an annual effective rate of 5.1% during policy years 2 through 14 and an annual effective rate of 6% during the 15th and subsequent policy years. The rate is guaranteed never to be lower than 4%. The Company may change the current interest crediting rate on policy loans at its sole discretion. The loan interest rate is 6% per year for all Policy loans. In the event that it is determined that such loans will be treated, as a result of the differential between the interest crediting rate and the loan interest rate, as taxable distributions under any applicable ruling, regulation, or court decision, the Company retains the right to increase the net cost (by decreasing the interest crediting rate) on all subsequent policy loans to an amount that would result in the transaction being treated as a loan under Federal tax law. If this amount is not prescribed by such ruling, regulation, or court decision, the amount will be that which the Company considers to be more likely to result in the transaction being treated as a loan under Federal tax law. Amounts transferred to the Policy Loan Account will earn interest daily from the date of transfer. The earned interest is transferred from the Policy Loan Account to a Variable Account or the Fixed Account on each Policy Anniversary or at the time of loan repayment. It will be allocated according to the Fund allocation factors in effect at the time of the transfer. Interest is charged daily and is payable at the end of each Policy Year or at the time of loan repayment. Unpaid interest will be added to the existing Policy Indebtedness as of the due date and will be charged interest at the same rate as the rest of the Indebtedness. Whenever the total Policy Indebtedness exceeds the Cash Value less any Surrender Charges, the Company will send a notice to the Policy Owner and the assignee, if any. The Policy will terminate without value 61 days after the mailing of the notice unless a sufficient repayment is made during that period. A repayment is sufficient if it is large enough to reduce the total Policy Indebtedness to an amount equal to the total Cash Value less any Surrender Charges plus an amount sufficient to continue the Policy in force for 3 months. EFFECT ON DEATH BENEFIT AND CASH VALUE A Policy loan, whether or not repaid, will have a permanent effect on the Death Benefit and Cash Value because the investment results of the Variable Account or the Fixed Account will apply only to the non-loaned portion of the Cash Value. The longer the loan is outstanding, the greater the effect is likely to be. Depending on the investment results of the Variable Account or the Fixed Account while the loan is outstanding, the effect could be favorable or unfavorable. REPAYMENT All or part of the Indebtedness may be repaid at any time while the Policy is in force during the Insured's lifetime. Any payment intended as a loan repayment, rather than a premium payment, must be identified as such. Loan repayments will be credited to the Variable sub-accounts and the Fixed Account in proportion to the Policy Owner's underlying Mutual Fund allocation factors in effect at the time of the repayment. Each repayment may not be less than $50. The Company reserves the right to require that any loan repayments resulting from Policy loans transferred from the Fixed Account must be first allocated to the Fixed Account. 26 28 HOW THE DEATH BENEFIT VARIES CALCULATION OF THE DEATH BENEFIT At issue, the Policy Owner selects the Specified Amount. While the Policy is in force, the death benefit will never be less than the Specified Amount. The death benefit may vary with the Cash Value of the Policy, which depends on investment performance. The Policy Owner may choose one of two death benefit options. Under Option 1, the death benefit will be the greater of the Specified Amount or the Applicable Percentage of Cash Value. Under Option 1, the amount of the death benefit will ordinarily not change for several years to reflect the investment performance and may not change at all. If investment performance is favorable the amount of death benefit may increase. To see how and when investment performance will begin to affect death benefits, please see the illustrations. Under Option 2, the death benefit will be the greater of the Specified Amount plus the Cash Value, or the Applicable Percentage of Cash Value and will vary directly with the investment performance. The term "Applicable Percentage" means: 1. 250% when the Insured is Attained Age 40 or less at the beginning of a Policy Year; and 2. when the Insured is above Attained Age 40, the percentage shown in the "Applicable Percentage of Cash Value Table" shown below: APPLICABLE PERCENTAGE OF CASH VALUE TABLE
Attained Percentage Attained Percentage Attained Percentage Age of Cash Value Age of Cash Value Age of Cash Value 0-40 250% 60 130% 80 105% 41 243% 61 128% 81 105% 42 236% 62 126% 82 105% 43 229% 63 124% 83 105% 44 222% 64 122% 84 105% 45 215% 65 120% 85 105% 46 209% 66 119% 86 105% 47 203% 67 118% 87 105% 48 197% 68 117% 88 105% 49 191% 69 116% 89 105% 50 185% 70 115% 90 105% 51 178% 71 113% 91 104% 52 171% 72 111% 92 103% 53 164% 73 109% 93 102% 54 157% 74 107% 94 101% 55 150% 75 105% 95 100% 56 146% 76 105% 57 142% 77 105% 58 138% 78 105% 59 134% 79 105%
27 29 PROCEEDS PAYABLE ON DEATH The actual Proceeds payable on the Insured's death will be the death benefit as described above, less any Policy Indebtedness and less any unpaid Policy Charges. Under certain circumstances, the Death Proceeds may be adjusted (See "Incontestability", "Error in Age or Sex" and "Suicide"). RIGHT TO EXCHANGE FOR A FIXED BENEFIT POLICY The Policy Owner may exchange the Policy for a flexible premium adjustable life insurance policy offered by the Company on the Policy Date. The benefits for the new policy will not vary with the investment experience of a separate account. The exchange must be elected within 24 months from the Policy Date. No evidence of insurability will be required. The Policy Owner and Beneficiary under the new policy will be the same as those under the exchanged Policy on the effective date of the exchange. The new policy will have a death benefit on the exchange date not more than the death benefit of the original Policy immediately prior to the exchange date. The new policy will have the same Policy Date and issue age as the original Policy. The initial Specified Amount and any increases in Specified Amount will have the same rate class as those of the original Policy. Any Indebtedness may be transferred to the new policy. The exchange may be subject to an equitable adjustment in rates and values to reflect variances, if any, in the rates and values between the two Policies. After adjustment, if any excess is owed the Policy Owner, the Company will pay the excess to the Policy Owner in cash. The exchange may be subject to federal income tax withholding (See "Income Tax Withholding"). CHANGES OF INVESTMENT POLICY The Company may materially change the investment policy of Variable Account. The Company must inform the Policy Owners and obtain all necessary regulatory approvals. Any change must be submitted to the various state insurance departments which shall disapprove it if deemed detrimental to the interests of the Policy Owners or if it renders the Company's operations hazardous to the public. If a Policy Owner objects, the Policy may be converted to a substantially comparable Nationwide General Account life insurance policy offered by the Company on the life of the Insured. The Policy Owner has the later of 60 days (6 months in Pennsylvania) from the date of the investment policy change or 60 days (6 months in Pennsylvania) from being informed of such change to make this conversion. The Company will not require evidence of insurability for this conversion. The new policy will not be affected by the investment experience of any Variable Account. The new policy will be for an amount of insurance not exceeding the death benefit of the Policy converted on the date of such conversion. GRACE PERIOD - -FIRST THREE POLICY YEARS This Policy will not lapse during the first three Policy Years provided that on each Monthly Anniversary Day (1) is greater than or equal to (2) where: (1) Is the sum of all premiums paid to date minus any Policy Indebtedness, minus any partial surrenders, and minus any partial surrender fee; and 28 30 (2) Is the sum of monthly Minimum Premiums required since the Policy Date including the monthly Minimum Premium for the current Monthly Anniversary Day. If (1) is less than (2) and the Cash Surrender Value is less than zero, a Grace Period of 61 days from the Monthly Anniversary Day will be allowed for the payment of sufficient premium to satisfy the Minimum Premium requirement. If sufficient premium is not paid by the end of the Grace Period, the Policy will lapse without value. In any event the Policy will not lapse as long as there is a positive Cash Surrender Value. - -POLICY YEARS FOUR AND AFTER If the Cash Surrender Value on a Monthly Anniversary Day is not sufficient to cover the current Policy Charges, a Grace Period of 61 days from the Monthly Anniversary Day will be allowed for the payment of sufficient premium to cover the current Policy Charges due plus an amount equal to three times the current monthly deduction. - -ALL POLICY YEARS The Company will send such a notice at the start of the Grace Period to the Policy Owner's last known address. If the Insured dies during the Grace Period, the Company will pay the Death Proceeds. REINSTATEMENT If the Grace Period ends and the Policy Owner has neither paid the required premium nor surrendered the Policy for its Cash Surrender Value, the Policy Owner may reinstate the Policy by: 1. submitting a written request at any time within 3 years after the end of the Grace Period and prior to the Maturity Date; 2. providing evidence of insurability satisfactory to the Company; 3. paying an amount of premium equal to the sum of the Minimum Monthly Premiums missed since the beginning of the Grace Period, if your Policy terminated in the first three policy years; 4. paying sufficient premium to cover all policy charges that were due and unpaid during the Grace Period if your Policy terminated in the fourth or later policy year; 5. paying sufficient premium to keep the Policy in force for 3 months from the date of reinstatement; and 6. paying or reinstating any Indebtedness against the Policy which existed at the end of the Grace Period. The effective date of a reinstated Policy will be the Monthly Anniversary Day on or next following the date the application for reinstatement is approved by us. If your Policy is reinstated, the Cash Value on the date of reinstatement, but prior to applying any premiums or loan repayments received, will be set equal to the lesser of: 1. the Cash Value at the end of the Grace Period; or 2. the Surrender Charge for the Policy Year in which the Policy was reinstated. 29 31 Unless the Policy Owner has provided otherwise, all amounts will be allocated based on the Fund allocation factors in effect at the start of the Grace Period. THE FIXED ACCOUNT OPTION Because of exemptive and exclusionary provisions, interests in the Company's General Account have not been registered under the Securities Act of 1933 and the General Account has not been registered as an investment company under the Investment Company Act of 1940. Accordingly, neither the General Account nor any interests therein are subject to the provisions of these Acts, and the Company has been advised that the staff of the Securities and Exchange Commission has not reviewed the disclosures in this prospectus relating to the Fixed Account option. Disclosures regarding the General Account may, however, be subject to certain generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses. As explained earlier, a Policy Owner may elect to allocate or transfer all or part of the Cash Value to the Fixed Account and the amount allocated or transferred becomes part of the Company's General Account. The Company's General Account consists of all assets of the Company other than those in the Variable Account and in other separate accounts that have been or may be established by the Company. Subject to applicable law, the Company has sole discretion over the investment of the assets of the General Account, and Policy Owners do not share in the investment experience of those assets. The Company guarantees that the part of the Cash Value invested under the Fixed Account option will accrue interest daily at an effective annual rate that the Company declares periodically. The Fixed Account crediting rate will not be less than an effective annual rate of 4%. Upon request the Company will inform a Policy Owner of the then applicable rate. The Company is not obligated to credit interest at a higher rate. CHANGES IN EXISTING INSURANCE COVERAGE The Policy Owner may request certain changes in the insurance coverage under the Policy. Any request must be in writing and received at the Company's home office. No change will take effect unless the Cash Surrender Value, after the change, is sufficient to keep the Policy in force for at least 3 months. SPECIFIED AMOUNT INCREASES After the first Policy Year, the Policy Owner may request an increase to the Specified Amount. Any increase will be subject to the following conditions: 1. the request must be applied for in writing; 2. satisfactory evidence of insurability must be provided; 3. the increase must be for a minimum of $10,000; 4. the Cash Surrender Value is sufficient to continue the Policy in force for at least 3 months; and 5. age limits are the same as for a new issue. Any approved increase will have an effective date of the Monthly Anniversary Day on or next following the date the Company approves the supplemental application. The Company reserves the right to limit the number of Specified Amount increases to one each Policy Year. 30 32 SPECIFIED AMOUNT DECREASES After the first Policy Year, the Policy Owner may also request a decrease to the Specified Amount. Any approved decrease will be effective on the Monthly Anniversary Day on or next following the date the Company receives the request. Any such decrease shall reduce insurance in the following order: 1. against insurance provided by the most recent increase; 2. against the next most recent increases successively; and 3. against insurance provided under the original application. The Company reserves the right to limit the number of Specified Amount decreases to one each Policy Year. The Company will refuse a request for a decrease which would: 1. reduce the Specified Amount to less than $50,000 ($100,000 in New Jersey); or 2. disqualify the Policy as a contract for life insurance. CHANGES IN THE DEATH BENEFIT OPTION After the first Policy Year, the Policy Owner may change the death benefit option under the Policy. If the change is from Option 1 to Option 2, the Specified Amount will be decreased by the amount of the Cash Value. If the change is from Option 2 to Option 1, the Specified Amount will be increased by the amount of the Cash Value. Evidence of insurability is not required for a change from Option 2 to Option 1. The Company reserves the right to require evidence of insurability for a change from Option 1 to Option 2. The effective date of the change will be the Monthly Anniversary Day on or next following the date the Company approves the request for change. Only one change of option is permitted per Policy Year. A change in death benefit option will not be permitted if it results in the total premiums paid exceeding the then current maximum premium limitations prescribed by the Internal Revenue Service to qualify the Policy as a life insurance contract. OTHER POLICY PROVISIONS POLICY OWNER While the Insured is living, all rights in this Policy are vested in the Policy Owner named in the application or as subsequently changed, subject to assignment, if any. The Policy Owner may name a contingent Policy Owner or a new Policy Owner while the Insured is living. Any change must be in a written form satisfactory to the Company and recorded at the Company's home office. Once recorded, the change will be effective when signed. The change will not affect any payment made or action taken by the Company before it was recorded. The Company may require that the Policy be submitted for endorsement before making a change. If the Policy Owner is other than the Insured and names no contingent Policy Owner, and dies before the Insured, the Policy Owner's rights in this Policy belong to the Policy Owner's estate. BENEFICIARY The Beneficiary(ies) shall be as named in the application or as subsequently changed, subject to assignment, if any. 31 33 The Policy Owner may name a new Beneficiary while the Insured is living. Any change must be in a written form satisfactory to the Company and recorded at the Company's home office. Once recorded, the change will be effective when signed. The change will not affect any payment made or action taken by the Company before it was recorded. If any Beneficiary predeceases the Insured, that Beneficiary's interest passes to any surviving Beneficiary(ies), unless otherwise provided. Multiple Beneficiaries will be paid in equal shares, unless otherwise provided. If no named Beneficiary survives the Insureds, the Death Proceeds shall be paid to the Policy Owner or the Policy Owner's estate. ASSIGNMENT While the Insured is living, the Policy Owner may assign his or her rights in the Policy. The assignment must be in writing, signed by the Policy Owner and recorded by the Company at its home office. Any assignment will not affect any payments made or actions taken by the Company before it was recorded. The Company is not responsible for any assignment not submitted for recording, nor is the Company responsible for the sufficiency or validity of any assignment. The assignment will be subject to any Indebtedness owed to the Company before it was recorded. INCONTESTABILITY The Company will not contest payment of the Death Proceeds based on the initial Specified Amount after the Policy has been in force during the Insured's lifetime for 2 years from the Policy Date. For any increase in Specified Amount requiring evidence of insurability, the Company will not contest payment of the Death Proceeds based on such an increase after it has been in force during the Insured's lifetime for 2 years from its effective date. ERROR IN AGE OR SEX If the age or sex of the Insured has been misstated, the affected benefits will be adjusted. The amount of the death benefit will be 1. multiplied by 2. and then the result added to 3., where: 1. is the amount of the death benefit at the time of the Insured's death reduced by the amount of the Cash Value at the time of the Insured's death; 2. is the ratio of the monthly cost of insurance applied in the policy month of death and the monthly cost of insurance that should have been applied at the true age and sex in the policy month of death; and 3. is the Cash Value at the time of the Insured's death. SUICIDE If the Insured dies by suicide, while sane or insane, within two years from the Policy Date, the Company will pay no more than the sum of the premiums paid, less any Indebtedness. If the Insured dies by suicide, while sane or insane, within two years from the date an application is accepted for an increase in the Specified Amount, the Company will pay no more than the amount paid for such additional benefit. NONPARTICIPATING POLICIES These are nonparticipating Policies on which no dividends are payable. These Policies do not share in the profits or surplus earnings of the Company. 32 34 LEGAL CONSIDERATIONS On July 6, 1983, the U.S. Supreme Court held in Arizona Governing Committee v. Norris that certain annuity benefits provided by employers' retirement and fringe benefit programs may not vary between men and women on the basis of sex. This decision applies only to benefits derived from contributions made on or after August 1, 1983. The Policies offered by this prospectus are based upon actuarial tables which distinguish between men and women and thus the Policies provide different benefits to men and women of the same age. Accordingly, employers and employee organizations should consider, in consultation with legal counsel, the impact of Norris on any employment related insurance or benefit program before purchasing this Policy. DISTRIBUTION OF THE POLICIES The Policies will be sold by licensed insurance agents in those states where the Policies may lawfully be sold. Such agents will be registered representatives of broker dealers registered under the Securities Exchange Act of 1934 who are members of the National Association of Securities Dealers, Inc. (NASD). The Policies will be distributed by the General Distributor, Nationwide Financial Services, Inc., a wholly-owned subsidiary of Nationwide Life Insurance Company. Gross first year commissions paid by the Company on the sale of these Policies plus fees for marketing services provided by the General Distributor are not more than 35% of the target Premium plus 4% of any excess premium payments. Gross renewal commissions in years 2-5 paid by the Company will not exceed 4% of actual premium payments, and will not exceed 2% in years 6+. CUSTODIAN OF ASSETS The Company serves as the Custodian of the assets of the Variable Account. TAX MATTERS POLICY PROCEEDS Section 7702 of the Internal Revenue Code ("Code") provides that if certain tests are met, a Policy will be treated as a life insurance policy for federal tax purposes. The Company will monitor compliance with these tests. The Policy should thus receive the same federal income tax treatment as fixed benefit life insurance. As a result, the Death Proceeds payable under a Policy are excludable from gross income of the beneficiary under Section 101 of the Code. Section 7702A of the Code defines modified endowment contracts as those policies issued or materially changed on or after June 21, 1988, on which the total premiums paid during the first seven years exceed the amount that would have been paid if the policy provided for paid up benefits after seven level annual premiums (See "Information about the Policies"). The Code provides for taxation of surrenders, partial surrenders, loans, collateral assignments and other pre-death distributions from modified endowment contracts in the same way annuities are taxed. Modified endowment contract distributions are defined by the Code as amounts not received as an annuity and are taxable to the extent the cash value of the policy exceeds, at the time of distribution, the premiums paid into the policy. A 10% tax penalty also applies to the taxable portion of such distributions unless the Policy Owner is over age 59-1/2 or disabled. 33 35 It may not be advantageous to replace existing insurance with Policies described in this prospectus. It may also be disadvantageous to purchase a policy to obtain additional insurance protection if the purchaser already owns another variable life insurance policy. The Policies offered by this prospectus may or may not be issued as modified endowment contracts. The Company will monitor premiums paid and will notify the Policy Owner when the policy's non-modified endowment status is in jeopardy. If a policy is not a modified endowment contract, a cash distribution during the first 15 years after a policy is issued which causes a reduction in death benefits may still become fully or partially taxable to the Owner pursuant to Section 7702(f) (7) of the Code. The Policy Owner should carefully consider this potential effect and seek further information before initiating any changes in the terms of the policy. Under certain conditions, a policy may become a modified endowment as a result of a material change or a reduction in benefits as defined by Section 7702A (c) of the Code. In addition to meeting the tests required under Sections 7702, Section 817(h) of the Code requires that the investments of separate accounts such as the Variable Account be adequately diversified. Regulations, issued by the Secretary of the Treasury, set the standards for measuring the adequacy of this diversification. The regulations provide that a variable life policy which does not satisfy the diversification standards will not be treated as life insurance under Section 7702 of the Code unless the failure to satisfy the regulations was inadvertent, the failure is corrected, and the Policy Owner or the Company pays an amount to the Internal Revenue Service. The amount will be based on the tax that would have been paid by the Policy Owner if the income, for the period the policy was not diversified, had been received by the Policy Owner. If the failure to diversify is not corrected in this manner, the Policy Owner will be deemed the owner of the underlying securities and taxed on the earnings of his or her account. To be adequately diversified, each sub- account of the Variable Account must meet certain tests. The Company believes that the investments of the Variable Account meet the applicable diversification standards. Should the Secretary of the Treasury issue additional rules or regulations limiting the number of funds, transfers between underlying Mutual Funds, exchanges of underlying Mutual Funds or changes in investment objectives of underlying Mutual Funds such that the Policy would no longer qualify as life insurance under Section 7702 of the Code, the Company will take whatever steps are available to remain in compliance. The Company will monitor compliance with these regulations and, to the extent necessary, will change the objectives or assets of the sub-account investments to remain in compliance. A total surrender or cancellation of the Policy by lapse or the maturity of the Policy on its Maturity Date may have adverse tax consequences. If the amount received by the Policy Owner plus total Policy Indebtedness exceeds the premiums paid into the Policy, the excess will generally be treated as taxable income, regardless of whether or not the Policy is a modified endowment contract. Federal estate and state and local estate, inheritance and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Policy Owner or Beneficiary. TAXATION OF THE COMPANY The Company is taxed as a life insurance company under the Code. Since the Variable Account is not a separate entity from the Company and its operations form a part of the Company, it will not be taxed separately as a "regulated investment company" under Sub-chapter M of the Code. Investment income and realized capital gains on the assets of the Variable Account are reinvested and taken into 34 36 account in determining the value of Accumulation Units. As a result, such investment income and realized capital gains are automatically applied to increase reserves under the Policies. The Company does not initially expect to incur any Federal income tax liability that would be chargeable to the Variable Account. Based upon these expectations, no charge is currently being made against the Variable Account for federal income taxes. If, however, the Company determines that on a separate company basis such taxes may be incurred, it reserves the right to assess a charge for such taxes against the Variable Account. The Company may also incur state and local taxes (in addition to premium taxes) in several states. At present, these taxes are not significant. If they increase, however, charges for such taxes may be made. OTHER CONSIDERATIONS The foregoing discussion is general and is not intended as tax advice. Counsel and other competent advisors should be consulted for more complete information. This discussion is based on the Company's understanding of Federal income tax laws as they are currently interpreted by the Internal Revenue Service. No representation is made as to the likelihood of continuation of these current laws and interpretations. THE COMPANY The life insurance business, which includes product lines in health insurance and annuities, is the only business in which the Company is engaged. The Company markets its Policies through independent insurance brokers, general agents, and registered representatives of registered NASD broker/dealer firms. The Company, in common with other insurance companies, is subject to regulation and supervision by the regulatory authorities of the states in which it is licensed to do business. A license from the state insurance department is a prerequisite to the transaction of insurance business in that state. In general, all states have statutory administrative powers. Such regulation relates, among other things, to licensing of insurers and their agents, the approval of policy forms, the methods of computing reserves, the form and content of statutory financial statements, the amount of policyholders' and stockholders' dividends, and the type of distribution of investments permitted. The Company operates in the highly competitive field of life insurance. There are approximately 2,300 stock, mutual and other types of insurers in the life insurance business in the United States, and a large number of them compete with the registrant in the sale of insurance policies. As is customary in insurance company groups, employees are shared with the other insurance companies in the group. In addition to its direct salaried employees, the Company shares employees with Nationwide Mutual Insurance Company and Nationwide Mutual Fire Insurance Company. The Company does not presently own or lease any materially important physical properties when its property holdings are viewed in relation to its total assets. The Company shares home office, other facilities and equipment with Nationwide Mutual Insurance Company. 35 37 COMPANY MANAGEMENT Nationwide Life Insurance Company, together with Nationwide Mutual Insurance Company, Nationwide Mutual Fire Insurance Company, Nationwide Life and Annuity Insurance Company, Nationwide Property and Casualty Insurance Company, National Casualty Company, West Coast Life Insurance, Company, Scottsdale Indemnity Company, Nationwide Indemnity Company and Nationwide General Insurance Company and their affiliated companies comprise the Nationwide Insurance Enterprise. The companies comprising the Nationwide Insurance Enterprise have substantially common boards of directors and officers. Nationwide Corporation, is the sole shareholder of the Company. DIRECTORS OF THE COMPANY
Director Name Since Principal Occupation ---- ----- -------------------- Lewis J. Alphin 1993 Farm Owner and Operator (1) Willard J. Engel 1994 General Manager Lyon County Cooperative Oil Company (1) Fred C. Finney 1992 Owner and Operator, Moreland Fruit Farm; Operator, Melrose Orchard Peter F. Frenzer 1991 President, Nationwide Corporation; President and Chief Operating Officer, Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company; Executive Vice President - Investments, Nationwide Mutual Insurance Company, Nationwide Mutual Fire Insurance Company, Nationwide General Insurance Company, Nationwide Property and Casualty Insurance Company Charles L. Fuellgraf, Jr. *+ 1969 Chief Executive Officer, Fuellgraf Electric Company, Electrical Construction and Engineering Services(1) Henry S. Holloway 1986 Farm Owner and Operator (1) D. Richard McFerson + 1988 President and Chief Executive Officer, Nationwide Mutual, Nationwide Mutual Fire, Nationwide General, and Nationwide Property and Casualty Insurance Companies; Chief Executive Officer, Nationwide Life Insurance Company and Nationwide Life and Annuity Insurance Company (2) David O. Miller 1985 Farm Owner and Land Developer; President, Owen Potato Farm, Inc.; Partner, M&M Enterprises (1) C. Ray Noecker 1994 Farm Owner and Operator (1) James F. Patterson 1989 Vice President, Pattersons, Inc. ; President, Patterson Farms, Inc. Robert H. Rickel 1984 Rancher (1) Arden L. Shisler 1984 Partner and Manager, Sweetwater Beef Farms; President and Chief Executive Officer, K&B Transport, Inc. (1)
36 38 Robert L. Stewart 1989 Farm Owner and Operator; Owner, Sunnydale Mining (1) Nancy C. Thomas 1986 Farm Owner and Operator, Da-Ma-Lor Farms (1) Harold W. Weihl 1990 Farm Owner and Operator, Weihl Farm (1)
. . . . . . . . . . . . *Member, Executive Committee +Member, Investment Committee (1) Principal occupation for last five years. (2) Prior to assuming his current position, Mr. McFerson held other executive management positions with the companies. Each of the directors is a director of the other major insurance affiliates of the Nationwide Insurance Enterprise, except Mr. Frenzer who is a director only of the Company and Nationwide Life and Annuity Insurance Company. Each of the directors of the Company is a director of Nationwide Financial Services, Inc., a registered broker-dealer. Messrs. Frenzer, Holloway, McFerson, Miller, Patterson and Shisler are directors of Nationwide Corporation. Messrs. Fuellgraf, Frenzer, McFerson, Weihl and Ms. Thomas are trustees of Nationwide Investing Foundation, a registered investment company. Messrs. Frenzer and McFerson are trustees of Nationwide Separate Account Trust, Nationwide Life and Annuity Investment Trust and Nationwide Investing Foundation II, registered investment companies. Mr. Engel is a director of Western Cooperative Transport. EXECUTIVE OFFICERS OF THE COMPANY
NAME OFFICE HELD - ---- ----------- D. Richard McFerson President and Chief Executive Officer- Nationwide Insurance Enterprise Peter F. Frenzer President and Chief Operating Officer Gordon E. McCutchan Executive Vice President, Law and Corporate Services and Secretary Harvey S. Galloway, Jr. Senior Vice President and Chief Actuary Robert A. Oakley Senior Vice President - Chief Financial Officer James E. Brock Senior Vice President - Investment Product Operations Carl Santillo Senior Vice President - Life and Health Operations Richard A. Karas Senior Vice President - Sales and Financial Services Mark A. Folk Vice President and Treasurer
Mr. Frenzer is also President and Chief Operating Officer of Nationwide Life and Annuity Insurance Company and President of Nationwide Corporation and Executive Vice President-Investments of Nationwide Mutual Insurance Company. Mr. Galloway is also an officer of Nationwide Mutual Insurance Company and Nationwide Life and Annuity Insurance Company. Each of the other officers listed above is also an officer of each of the companies comprising the Nationwide Insurance 37 39 Enterprise. Each of the executive officers listed above has been associated with the registrant in an executive capacity for more than the past five years, except Mr. Folk. OTHER CONTRACTS ISSUED BY THE COMPANY The Company does presently and will, from time to time, offer variable contracts and policies with benefits which vary in accordance with the investment experience of other separate accounts of the Company. STATE REGULATION The Company is subject to the laws of Ohio governing insurance companies and to regulation by the Ohio Insurance Department. An annual statement in a prescribed form is filed with the Insurance Department each year covering the operation of the Company for the preceding year and its financial condition as of the end of such year. Regulation by the Insurance Department includes periodic examination to determine the Company's contract liabilities and reserves so that the Insurance Department may certify the items are correct. The Company's books and accounts are subject to review by the Insurance Department at all times and a full examination of its operations is conducted periodically by the National Association of Insurance Commissioners. Such regulation does not, however, involve any supervision of management or investment practices or policies. In addition, the Company is subject to regulation under the insurance laws of other jurisdictions in which it may operate. REPORTS TO POLICY OWNERS The Company will mail to the Policy Owner, at the last known address of record, an annual statement showing the amount of the current death benefit, the Cash Value, and Cash Surrender Value, premiums paid and monthly charges deducted since the last report, the amounts invested in the Fixed Account and in the Variable Account and in each sub-account of the Variable Account, and any Policy Indebtedness. Policy Owners will also be sent annual and semi-annual reports containing financial statements for the Variable Account as required by the 1940 Act. In addition, Policy Owners will receive statements of significant transactions, such as changes in Specified Amount, changes in death benefit option, changes in future premium allocation, transfers among sub-accounts, premium payments, loans, loan repayments, reinstatement and termination. ADVERTISING The Company is also ranked and rated by independent financial rating services, among which are Moody's, Standard & Poor's and A.M. Best Company. The purpose of these ratings is to reflect the financial strength or claims-paying ability of the Company. The ratings are not intended to reflect the investment experience or financial strength of the Variable Account. The Company may advertise these ratings from time to time. In addition, the Company may include in certain advertisements endorsements in the form of a list of organizations, individuals or other parties which recommend the Company or the Contracts . Furthermore, the Company may occasionally include in advertisements comparisons of currently taxable and tax deferred investment programs, based on selected tax brackets, or discussions of alternative investment vehicles and general economic conditions. 38 40 LEGAL PROCEEDINGS There are no material legal proceedings, other than ordinary routine litigation incidental to the business to which the Company and the Variable Account are parties or to which any of their property is the subject. The General Distributor, Nationwide Financial Services, Inc., is not engaged in any material litigation of any nature. EXPERTS The financial statements and schedule included herein have been included herein in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. REGISTRATION STATEMENT A Registration Statement has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the Policies offered hereby. This prospectus does not contain all the information set forth in the Registration Statement and amendments thereto and exhibits filed as a part thereof, to all of which reference is hereby made for further information concerning the Variable Account, the Company, and the Policies offered hereby. Statements contained in this prospectus as to the content of Policies and other legal instruments are summaries. For a complete statement of the terms thereof, reference is made to such instruments as filed. LEGAL OPINIONS Legal matters in connection with the Policies described herein are being passed upon by Druen, Rath & Dietrich, One Nationwide Plaza, Columbus, Ohio 43216. All the members of such firm are employed by the Nationwide Mutual Insurance Company. 39 41 APPENDIX 1 ILLUSTRATION OF SURRENDER CHARGES Example 1: A female non-tobacco, age 45, purchases a Policy with a Specified Amount of $50,000 and a Scheduled Premium of $750. She now wishes to surrender the Policy during the first Policy year. By using the initial surrender charge table reproduced below, (also see "Surrender Charges") the total surrender charge per thousand multiplied by the Specified Amount expressed in thousands equals the total surrender charge of $569.80 ($11.396 x 50=569.80). Example 2: A male non-tobacco, age 35, purchases a Policy with a Specified Amount of $100,000 and a Scheduled Premium of $1100. He now wants to surrender the Policy in the sixth Policy Year. The total initial surrender charge is calculated using the method illustrated above. (surrender charge per 1000 6.817 x 100=681.70 maximum initial surrender charge). Because the fifth Policy Year has been completed, the maximum initial surrender charge is reduced by multiplying it by the applicable percentage factor from the "Reductions to Surrender Charges" table (Also see "Reductions to Surrender Charges"). In this case, $681.70 x 60%=$409.02. Maximum Surrender Charge per $1,000 of initial Specified Amount for policies which are issued on a standard basis. Initial Specified Amount $50,000-$99,999
ISSUE MALE FEMALE MALE FEMALE AGE NON-TOBACCO NON-TOBACCO STANDARD STANDARD 25 $7.776 $7.521 $8.369 $7.818 35 8.817 8.398 9.811 8.891 45 12.191 11.396 13.887 12.169 55 15.636 14.011 18.415 15.116 65 22.295 19.086 26.577 20.641
Initial Specified Amount $100,000+
ISSUE MALE FEMALE MALE FEMALE AGE NON-TOBACCO NON-TOBACCO STANDARD STANDARD 25 $5.776 $5.521 $6.369 $5.818 35 6.817 6.398 7.811 6.891 45 9.691 8.896 11.387 9.669 55 13.136 11.511 15.915 12.616 65 21.295 18.086 25.577 19.641
40 42 Reductions to Surrender Charges.
SURRENDER CHARGE SURRENDER CHARGE COMPLETED AS A % OF INITIAL COMPLETED AS A % OF INITIAL POLICY YEARS SURRENDER CHARGES POLICY YEARS SURRENDER CHARGES 0 100% 5 60% 1 100% 6 50% 2 90% 7 40% 3 80% 8 30% 4 70% 9+ 0%
The current Surrender Charges are the same for all states. However, in Pennsylvania the guaranteed maximum Surrender Charges are spread out over 14 years. The guaranteed maximum Surrender Charge in subsequent years in Pennsylvania is reduced in the following manner:
SURRENDER CHARGE SURRENDER CHARGE SURRENDER CHARGE AS A % OF INITIAL AS A % OF INITIAL AS A % OF INITIAL COMPLETED SURRENDER COMPLETED SURRENDER COMPLETED SURRENDER POLICY YEARS CHARGES POLICY YEARS CHARGES POLICY YEARS CHARGES 0 100% 5 60% 10 20% 1 100% 6 50% 11 15% 2 90% 7 40% 12 10% 3 80% 8 30% 13 5% 4 70% 9 25% 14+ 0%
The illustrations of current values in this prospectus are the same for Pennsylvania. However, the illustrations of guaranteed values in this prospectus do not reflect guaranteed maximum Surrender Charges which are spread out over 14 years. If this contract is issued in Pennsylvania, please contact the home office for an illustration. The Company has no plans to change the current Surrender Charges. 41 43 APPENDIX 2 ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES, AND DEATH BENEFITS The illustrations in this prospectus have been prepared to help show how values under the Policies change with investment performance. The illustrations illustrate how Cash Values, Cash Surrender Values and death benefits under a Policy would vary over time if the hypothetical gross investment rates of return were a uniform annual effective rate of either 0%, 6% or 12%. If the hypothetical gross investment rate of return averages 0%, 6% or 12% over a period of years, but fluctuates above or below those averages for individual years, the Cash Values, Cash Surrender Values and death benefits may be different. For hypothetical returns of 0% and 6%, the illustrations also illustrate when the Policies would go into default, at which time additional premium payments would be required to continue the Policy in force. The illustrations also assume there is no Policy Indebtedness, no additional premium payments are made, no Cash Values are allocated to the Fixed Account, and there are no changes in the Specified Amount or death benefit option. The amounts shown for the Cash Value, Cash Surrender Value and death benefit as of each Policy Anniversary reflect the fact that the net investment return on the assets held in the sub-accounts is lower than the gross return. This is due to the daily charges made against the assets of the sub-accounts for assuming mortality and expense risks. The mortality and expense risk charges are equivalent to an annual effective rate of 0.80% of the daily net asset value of the Variable Account. On each Policy Anniversary beginning with the 10th, the mortality and expense risk charge is reduced to 0.50% on an annual basis of the daily net assets of the Variable Account, provided the Cash Surrender Value is $25,000 or more on such anniversary. In addition, the net investment returns also reflect the deduction of underlying Mutual Fund investment advisory fees and other expenses which are equivalent to an annual effective rate of 0.80% of the daily net asset value of the Variable Account. This effective rate is based on the average of the fund expenses for the preceding year for all mutual fund options available under the policy as of April 30, 1995. Considering current charges for mortality and expense risks and underlying Mutual Fund expenses, gross annual rates of return of 0%, 6% and 12% correspond to net investment experience at constant annual rates of -1.60%, 4.40% and 10.40%. On each Policy Anniversary beginning with the 10th, the gross annual rates of return of 0%, 6%, and 12% correspond to net investment experience at constant annual rates of -1.30%, 4.70%, and 10.70%, provided the Cash Surrender Value is $25,000 or more on such anniversary. This is due to a guaranteed reduction in the mortality and expense risk charge from an annual effective rate of 0.80% to an annual effective rate of 0.50% if the aforementioned conditions apply. The illustrations also reflect the fact that the Company makes monthly charges for providing insurance protection. Current values reflect current cost of insurance charges and guaranteed values reflect the maximum cost of insurance charges guaranteed in the Policy. The values shown are for Policies which are issued as standard. Policies issued on a substandard basis would result in lower Cash Values and Death benefits than those illustrated. The illustrations also reflect the fact that the Company deducts a sales load from each premium payment. Current values reflect a deduction of 3.5% of each premium payment up to Break Point Premium and 1.5% of any excess. Guaranteed values reflect a deduction of 3.5% of each premium payment. The illustrations also reflect the fact that the Company deducts a charge for state premium taxes equal to 2.5% of all premium payments. 42 44 The Cash Surrender Values shown in the illustrations reflect the fact that the Company will deduct a Surrender Charge from the Policy's Cash Value for any Policy surrendered in full during the first nine years. In addition, the illustrations reflect the fact that the Company deducts a monthly administrative charge at the beginning of each Policy Month. This monthly administrative expense charge is $25 per month in the first year, $5 per month in renewal years. Current values reflect a current monthly administrative expense charge of $5 in renewal years, and guaranteed values reflect the $7.50 maximum monthly administrative charge under the Policy in renewal years. The illustrations also reflect the fact that no charges for federal or state income taxes are currently made against the Variable Account. If such a charge is made in the future, it will require a higher gross investment return than illustrated in order to produce the net after-tax returns shown in the illustrations. Upon request, the Company will furnish a comparable illustration based on the proposed Insured's age, sex, smoking classification, rating classification and premium payment requested. 43 45 DEATH BENEFIT OPTION 1 $750 ANNUAL PREMIUM: $50,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 45 CURRENT VALUES
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 750 788 241 0 50,000 268 0 50,000 296 0 50,000 2 750 1,614 706 132 50,000 783 210 50,000 864 290 50,000 3 75 2,483 1,154 637 50,000 1,310 794 50,000 1,480 964 50,000 4 750 3,394 1,579 1,120 50,000 1,845 1,386 50,000 2,144 1,685 50,000 5 750 4,351 1,981 1,579 50,000 2,386 1,985 50,000 2,860 2,459 50,000 6 750 5,357 2,362 2,018 50,000 2,937 2,592 50,000 3,636 3,292 50,000 7 750 6,412 2,727 2,440 50,000 3,502 3,215 50,000 4,483 4,196 50,000 8 750 7,520 3,071 2,842 50,000 4,077 3,847 50,000 5,404 5,174 50,000 9 750 8,683 3,395 3,223 50,000 4,663 4,491 50,000 6,407 6,235 50,000 10 750 9,905 3,698 3,698 50,000 5,262 5,262 50,000 7,503 7,503 50,000 15 750 16,993 4,785 4,785 50,000 8,326 8,326 50,000 14,657 14,657 50,000 20 750 26,039 4,747 4,747 50,000 11,163 11,163 50,000 25,820 25,820 50,000 25 750 37,585 2,779 2,779 50,000 13,084 13,084 50,000 44,987 44,987 52,185 30 750 52,321 (*) (*) (*) 12,846 12,846 50,000 77,324 77,324 82,737 35 750 71,127 (*) (*) (*) 7,510 7,510 50,000 130,329 130,329 136,846
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $5.00 THEREAFTER. CURRENT VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS UP TO THE BREAK POINT PREMIUM AND 4% ON PREMIUMS IN EXCESS OF BREAK POINT FOR ANY SINGLE POLICY YEAR. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 44 46 DEATH BENEFIT OPTION 1 $750 ANNUAL PREMIUM: $50,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 45 GUARANTEED VALUES
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 750 788 175 0 50,000 200 0 50,000 226 0 50,000 2 750 1,614 540 0 50,000 608 34 50,000 679 105 50,000 3 750 2,483 881 365 50,000 1,015 498 50,000 1,161 644 50,000 4 750 3,394 1,198 739 50,000 1,420 961 50,000 1,672 1,213 50,000 5 750 4,351 1,489 1,087 50,000 1,823 1,421 50,000 2,216 1,814 50,000 6 750 5,357 1,751 1,407 50,000 2,219 1,875 50,000 2,792 2,448 50,000 7 750 6,412 1,982 1,695 50,000 2,605 2,318 50,000 3,401 3,115 50,000 8 750 7,520 2,178 1,948 50,000 2,977 2,748 50,000 4,044 3,814 50,000 9 750 8,683 2,333 2,161 50,000 3,330 3,157 50,000 4,718 4,546 50,000 10 750 9,905 2,445 2,445 50,000 3,657 3,657 50,000 5,425 5,425 50,000 15 750 16,993 2,199 2,199 50,000 4,731 4,731 50,000 9,486 9,486 50,000 20 750 26,039 (*) (*) (*) 3,966 3,966 50,000 14,446 14,446 50,000 25 750 37,585 (*) (*) (*) (*) (*) (*) 20,249 20,249 50,000 30 750 52,321 (*) (*) (*) (*) (*) (*) 27,165 27,165 50,000 35 750 71,127 (*) (*) (*) (*) (*) (*) 37,284 37,284 50,000
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $7.50 THEREAFTER. GUARANTEED VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 45 47 DEATH BENEFIT OPTION 2 $750 ANNUAL PREMIUM: $50,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 45 CURRENT VALUES
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 750 788 240 0 50,240 267 0 50,267 294 0 50,294 2 750 1,614 702 128 50,702 779 205 50,779 859 285 50,859 3 750 2,483 1,145 628 51,145 1,300 784 51,300 1,469 952 51,469 4 750 3,394 1,563 1,104 51,563 1,826 1,367 51,826 2,122 1,663 52,122 5 750 4,351 1,956 1,555 51,956 2,356 1,954 52,356 2,823 2,421 52,823 6 750 5,357 2,326 1,982 52,326 2,891 2,546 52,891 3,577 3,233 53,577 7 750 6,412 2,677 2,391 52,677 3,436 3,149 53,436 4,395 4,108 54,395 8 750 7,520 3,005 2,775 53,005 3,985 3,756 53,985 5,277 5,047 55,277 9 750 8,683 3,309 3,137 53,309 4,540 4,368 54,540 6,230 6,058 56,230 10 750 9,905 3,590 3,590 53,590 5,100 5,100 55,100 7,261 7,261 57,261 15 750 16,993 4,508 4,508 54,508 7,815 7,815 57,815 13,712 13,712 63,712 20 750 26,039 4,169 4,169 54,169 9,813 9,813 59,813 22,659 22,659 72,659 25 750 37,585 1,809 1,809 51,809 9,931 9,931 59,931 34,844 34,844 84,844 30 750 52,321 (*) (*) (*) 6,336 6,336 56,336 50,867 50,867 100,867 35 750 71,127 (*) (*) (*) (*) (*) (*) 70,540 70,540 120,540
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $5.00 THEREAFTER. CURRENT VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS UP TO THE BREAK POINT PREMIUM AND 4% ON PREMIUMS IN EXCESS OF BREAK POINT FOR ANY SINGLE POLICY YEAR. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 46 48 DEATH BENEFIT OPTION 2 $750 ANNUAL PREMIUM: $50,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 45 GUARANTEED VALUES
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 750 788 173 0 50,173 198 0 50,198 224 0 50,224 2 750 1,614 534 0 50,534 602 28 50,602 672 99 50,672 3 750 2,483 870 354 50,870 1,002 486 51,002 1,146 630 51,146 4 750 3,394 1,179 720 51,179 1,398 939 51,398 1,646 1,187 51,646 5 750 4,351 1,460 1,058 51,460 1,787 1,385 51,787 2,172 1,770 52,172 6 750 5,357 1,710 1,366 51,710 2,165 1,821 52,165 2,723 2,379 52,723 7 750 6,412 1,925 1,638 51,925 2,529 2,242 52,529 3,299 3,012 53,299 8 750 7,520 2,102 1,873 52,102 2,871 2,642 52,871 3,896 3,667 53,896 9 750 8,683 2,236 2,064 52,236 3,187 3,015 53,187 4,512 4,340 54,512 10 750 9,905 2,323 2,323 52,323 3,471 3,471 53,471 5,142 5,142 55,142 15 750 16,993 1,909 1,909 51,909 4,161 4,161 54,161 8,382 8,382 58,382 20 750 26,039 (*) (*) (*) 2,670 2,670 52,670 10,970 10,970 60,970 25 750 37,585 (*) (*) (*) (*) (*) (*) 10,552 10,552 60,552 30 750 52,321 (*) (*) (*) (*) (*) (*) 2,076 2,076 52,076
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $7.50 THEREAFTER. GUARANTEED VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 47 49 DEATH BENEFIT OPTION 1 $1,200 ANNUAL PREMIUM: $50,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 55 CURRENT VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 1,200 1,260 493 0 50,000 540 0 50,000 587 0 50,000 2 1,200 2,583 1,195 502 50,000 1,328 635 50,000 1,466 773 50,000 3 1,200 3,972 1,862 1,238 50,000 2,125 1,502 50,000 2,411 1,788 50,000 4 1,200 5,431 2,489 1,935 50,000 2,929 2,375 50,000 3,426 2,872 50,000 5 1,200 6,962 3,070 2,585 50,000 3,731 3,246 50,000 4,509 4,024 50,000 6 1,200 8,570 3,605 3,189 50,000 4,534 4,119 50,000 5,673 5,257 50,000 7 1,200 10,259 4,087 3,740 50,000 5,330 4,984 50,000 6,918 6,571 50,000 8 1,200 12,032 4,507 4,230 50,000 6,111 5,833 50,000 8,247 7,970 50,000 9 1,200 13,893 4,868 4,660 50,000 6,877 6,669 50,000 9,675 9,467 50,000 10 1,200 15,848 5,160 5,160 50,000 7,621 7,621 50,000 11,207 11,207 50,000 15 1,200 27,189 5,361 5,361 50,000 10,798 10,798 50,000 20,938 20,938 50,000 20 1,200 41,663 2,465 2,465 50,000 12,184 12,184 50,000 36,920 36,920 50,000 25 1,200 60,136 (*) (*) (*) 9,324 9,324 50,000 66,534 66,534 69,861 30 1,200 83,713 (*) (*) (*) (*) (*) (*) 114,688 114,688 120,423 35 1,200 113,804 (*) (*) (*) (*) (*) (*) 190,213 190,213 199,723
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $5.00 THEREAFTER. CURRENT VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS UP TO THE BREAK POINT PREMIUM AND 4% ON PREMIUMS IN EXCESS OF BREAK POINT FOR ANY SINGLE POLICY YEAR. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 48 50 DEATH BENEFIT OPTION 1 $1,200 ANNUAL PREMIUM: $50,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 55 GUARANTEED VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 1,200 1,260 288 0 50,000 328 0 50,000 369 0 50,000 2 1,200 2,583 730 37 50,000 835 142 50,000 947 254 50,000 3 1,200 3,972 1,113 490 50,000 1,312 689 50,000 1,530 907 50,000 4 1,200 5,431 1,434 879 50,000 1,752 1,198 50,000 2,117 1,563 50,000 5 1,200 6,962 1,683 1,198 50,000 2,146 1,661 50,000 2,700 2,215 50,000 6 1,200 8,570 1,855 1,439 50,000 2,485 2,069 50,000 3,272 2,856 50,000 7 1,200 10,259 1,940 1,594 50,000 2,756 2,409 50,000 3,824 3,478 50,000 8 1,200 12,032 1,926 1,649 50,000 2,943 2,666 50,000 4,344 4,066 50,000 9 1,200 13,893 1,798 1,590 50,000 3,028 2,820 50,000 4,814 4,607 50,000 10 1,200 15,848 1,542 1,542 50,000 2,991 2,991 50,000 5,220 5,220 50,000 15 1,200 27,189 (*) (*) (*) 106 106 50,000 5,495 5,495 50,000
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $7.50 THEREAFTER. GUARANTEED VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 49 51 DEATH BENEFIT OPTION 2 $1,200 ANNUAL PREMIUM: $50,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 55 CURRENT VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 1,200 1,260 487 0 50,487 534 0 50,534 581 0 50,581 2 1,200 2,583 1,180 487 51,180 1,311 618 51,311 1,448 755 51,448 3 1,200 3,972 1,831 1,207 51,831 2,090 1,466 52,090 2,371 1,747 52,371 4 1,200 5,431 2,436 1,882 52,436 2,865 2,311 52,865 3,350 2,796 53,350 5 1,200 6,962 2,986 2,501 52,986 3,628 3,143 53,628 4,381 3,896 54,381 6 1,200 8,570 3,483 3,067 53,483 4,377 3,961 54,377 5,471 5,055 55,471 7 1,200 10,259 3,917 3,570 53,917 5,102 4,755 55,102 6,613 6,267 56,613 8 1,200 12,032 4,279 4,002 54,279 5,791 5,514 55,791 7,803 7,526 57,803 9 1,200 13,893 4,570 4,362 54,570 6,443 6,235 56,443 9,045 8,837 59,045 10 1,200 15,848 4,781 4,781 54,781 7,044 7,044 57,044 10,334 10,334 60,334 15 1,200 27,189 4,390 4,390 54,390 8,915 8,915 58,915 17,325 17,325 67,325 20 1,200 41,663 776 776 50,776 7,486 7,486 57,486 24,406 24,406 74,406 25 1,200 60,136 (*) (*) (*) (*) (*) (*) 29,600 29,600 79,600 30 1,200 83,713 (*) (*) (*) (*) (*) (*) 27,765 27,765 77,765 35 1,200 113,804 (*) (*) (*) (*) (*) (*) 9,106 9,106 59,106
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $5.00 THEREAFTER. CURRENT VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS UP TO THE BREAK POINT PREMIUM AND 4% ON PREMIUMS IN EXCESS OF BREAK POINT FOR ANY SINGLE POLICY YEAR. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 50 52 DEATH BENEFIT OPTION 2 $1,200 ANNUAL PREMIUM: $50,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 55 GUARANTEED VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 1,200 1,260 280 0 50,280 320 0 50,320 361 0 50,361 2 1,200 2,583 710 17 50,710 813 120 50,813 921 228 50,921 3 1,200 3,972 1,074 450 51,074 1,266 643 51,266 1,478 854 51,478 4 1,200 5,431 1,368 814 51,368 1,674 1,119 51,674 2,023 1,468 52,023 5 1,200 6,962 1,585 1,100 51,585 2,023 1,538 52,023 2,546 2,061 52,546 6 1,200 8,570 1,718 1,302 51,718 2,304 1,888 52,304 3,036 2,620 53,036 7 1,200 10,259 1,758 1,411 51,758 2,504 2,157 52,504 3,481 3,134 53,481 8 1,200 12,032 1,693 1,415 51,693 2,605 2,327 52,605 3,860 3,582 53,860 9 1,200 13,893 1,510 1,302 51,510 2,588 2,380 52,588 4,151 3,943 54,151 10 1,200 15,848 1,199 1,199 51,199 2,434 2,434 52,434 4,332 4,332 54,332 15 1,200 27,189 (*) (*) (*) (*) (*) (*) 2,609 2,609 52,609
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $7.50 THEREAFTER. GUARANTEED VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 51 53 DEATH BENEFIT OPTION 1 $1,500 ANNUAL PREMIUM: $100,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 45 CURRENT VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 1,500 1,575 799 0 100,000 864 0 100,000 928 31 100,000 2 1,500 3,229 1,803 905 100,000 1,989 1,091 100,000 2,183 1,286 100,000 3 1,500 4,965 2,771 1,963 100,000 3,143 2,335 100,000 3,547 2,739 100,000 4 1,500 6,788 3,704 2,986 100,000 4,328 3,610 100,000 5,031 4,313 100,000 5 1,500 8,703 4,604 3,976 100,000 5,546 4,918 100,000 6,650 6,022 100,000 6 1,500 10,713 5,472 4,933 100,000 6,800 6,262 100,000 8,420 7,881 100,000 7 1,500 12,824 6,297 5,848 100,000 8,081 7,632 100,000 10,345 9,897 100,000 8 1,500 15,040 7,069 6,710 100,000 9,379 9,020 100,000 12,433 12,074 100,000 9 1,500 17,367 7,790 7,521 100,000 10,698 10,428 100,000 14,704 14,435 100,000 10 1,500 19,810 8,451 8,451 100,000 12,028 12,028 100,000 17,170 17,170 100,000 15 1,500 33,986 11,068 11,068 100,000 19,125 19,125 100,000 33,766 33,766 100,000 20 1,500 52,079 11,929 11,929 100,000 26,663 26,663 100,000 61,182 61,182 100,000 25 1,500 75,170 9,916 9,916 100,000 34,418 34,418 100,000 107,751 107,751 124,991 30 1,500 104,641 2,735 2,735 100,000 41,087 41,087 100,000 184,431 184,431 197,341 35 1,500 142,254 (*) (*) (*) 44,522 44,522 100,000 310,217 310,217 325,728
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $5.00 THEREAFTER. CURRENT VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS UP TO THE BREAK POINT PREMIUM AND 4% ON PREMIUMS IN EXCESS OF BREAK POINT FOR ANY SINGLE POLICY YEAR. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 52 54 DEATH BENEFIT OPTION 1 $1,500 ANNUAL PREMIUM: $100,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 45 GUARANTEED VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 1,500 1,575 751 0 100,000 814 0 100,000 878 0 100,000 2 1,500 3,229 1,675 777 100,000 1,854 956 100,000 2,041 1,144 100,000 3 1,500 4,965 2,558 1,750 100,000 2,913 2,105 100,000 3,298 2,490 100,000 4 1,500 6,788 3,399 2,681 100,000 3,989 3,271 100,000 4,655 3,937 100,000 5 1,500 8,703 4,196 3,567 100,000 5,082 4,453 100,000 6,122 5,494 100,000 6 1,500 10,713 4,945 4,406 100,000 6,187 5,649 100,000 7,707 7,168 100,000 7 1,500 12,824 5,642 5,193 100,000 7,302 6,853 100,000 9,417 8,969 100,000 8 1,500 15,040 6,282 5,923 100,000 8,421 8,062 100,000 11,262 10,903 100,000 9 1,500 17,367 6,858 6,588 100,000 9,537 9,268 100,000 13,251 12,982 100,000 10 1,500 19,810 7,365 7,365 100,000 10,646 10,646 100,000 15,395 15,395 100,000 15 1,500 33,986 8,667 8,667 100,000 15,879 15,879 100,000 29,121 29,121 100,000 20 1,500 52,079 7,003 7,003 100,000 19,687 19,687 100,000 50,746 50,746 100,000 25 1,500 75,170 (*) (*) (*) 19,705 19,705 100,000 87,111 87,111 101,049 30 1,500 104,641 (*) (*) (*) 10,491 10,491 100,000 149,298 149,298 159,749 35 1,500 142,254 (*) (*) (*) (*) (*) (*) 250,764 250,764 263,302
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $7.50 THEREAFTER. GUARANTEED VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 53 55 DEATH BENEFIT OPTION 2 $1,500 ANNUAL PREMIUM: $100,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 45 CURRENT VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 1,500 1,575 796 0 100,796 860 0 100,860 925 27 100,925 2 1,500 3,229 1,793 896 101,793 1,978 1,081 101,978 2,171 1,274 102,171 3 1,500 4,965 2,751 1,943 102,751 3,120 2,313 103,120 3,521 2,713 103,521 4 1,500 6,788 3,670 2,952 103,670 4,288 3,570 104,288 4,983 4,265 104,983 5 1,500 8,703 4,552 3,924 104,552 5,482 4,853 105,482 6,571 5,942 106,571 6 1,500 10,713 5,397 4,858 105,397 6,704 6,165 106,704 8,296 7,758 108,296 7 1,500 12,824 6,193 5,745 106,193 7,942 7,494 107,942 10,161 9,712 110,161 8 1,500 15,040 6,931 6,572 106,931 9,187 8,828 109,187 12,167 11,808 112,167 9 1,500 17,367 7,610 7,341 107,610 10,437 10,168 110,437 14,329 14,060 114,329 10 1,500 19,810 8,221 8,221 108,221 11,682 11,682 111,682 16,651 16,651 116,651 15 1,500 33,986 10,477 10,477 110,477 18,031 18,031 118,031 31,632 31,632 131,632 20 1,500 52,079 10,710 10,710 110,710 23,760 23,760 123,760 54,303 54,303 154,303 25 1,500 75,170 7,771 7,771 107,771 27,485 27,485 127,485 87,582 87,582 187,582 30 1,500 104,641 (*) (*) (*) 26,171 26,171 126,171 135,472 135,472 235,472 35 1,500 142,254 (*) (*) (*) 13,912 13,912 113,912 202,743 202,743 302,743
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $5.00 THEREAFTER. CURRENT VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS UP TO THE BREAK POINT PREMIUM AND 4% ON PREMIUMS IN EXCESS OF BREAK POINT FOR ANY SINGLE POLICY YEAR. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 54 56 DEATH BENEFIT OPTION 2 $1,500 ANNUAL PREMIUM: $100,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 45 GUARANTEED VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 1,500 1,575 748 0 100,748 810 0 100,810 873 0 100,873 2 1,500 3,229 1,664 766 101,664 1,842 944 101,842 2,028 1,131 102,028 3 1,500 4,965 2,536 1,728 102,536 2,887 2,080 102,887 3,269 2,461 103,269 4 1,500 6,788 3,361 2,643 103,361 3,944 3,226 103,944 4,602 3,884 104,602 5 1,500 8,703 4,137 3,509 104,137 5,009 4,381 105,009 6,033 5,405 106,033 6 1,500 10,713 4,861 4,322 104,861 6,079 5,540 106,079 7,567 7,029 107,567 7 1,500 12,824 5,525 5,077 105,525 7,146 6,697 107,146 9,209 8,760 109,209 8 1,500 15,040 6,126 5,767 106,126 8,204 7,845 108,204 10,961 10,602 110,961 9 1,500 17,367 6,655 6,386 106,655 9,243 8,974 109,243 12,826 12,557 112,826 10 1,500 19,810 7,108 7,108 107,108 10,257 10,257 110,257 14,809 14,809 114,809 15 1,500 33,986 7,992 7,992 107,992 14,608 14,608 114,608 26,644 26,644 126,644 20 1,500 52,079 5,673 5,673 105,673 16,391 16,391 116,391 42,448 42,448 142,448 25 1,500 75,170 (*) (*) (*) 12,425 12,425 112,425 61,419 61,419 161,419 30 1,500 104,641 (*) (*) (*) (*) (*) (*) 80,800 80,800 180,800 35 1,500 142,254 (*) (*) (*) (*) (*) (*) 92,554 92,554 192,554
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $7.50 THEREAFTER. GUARANTEED VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 55 57 DEATH BENEFIT OPTION 1 $2,500 ANNUAL PREMIUM: $100,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 55 CURRENT VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 2,500 2,625 1,386 223 100,000 1,495 333 100,000 1,605 443 100,000 2 2,500 5,381 2,961 1,799 100,000 3,275 2,112 100,000 3,602 2,439 100,000 3 2,500 8,275 4,489 3,443 100,000 5,109 4,063 100,000 5,782 4,736 100,000 4 2,500 11,314 5,949 5,019 100,000 6,982 6,052 100,000 8,147 7,217 100,000 5 2,500 14,505 7,327 6,513 100,000 8,878 8,064 100,000 10,701 9,887 100,000 6 2,500 17,855 8,626 7,929 100,000 10,805 10,107 100,000 13,471 12,773 100,000 7 2,500 21,373 9,844 9,262 100,000 12,760 12,178 100,000 16,479 15,898 100,000 8 2,500 25,066 10,965 10,500 100,000 14,732 14,267 100,000 19,743 19,278 100,000 9 2,500 28,945 11,988 11,639 100,000 16,721 16,372 100,000 23,293 22,944 100,000 10 2,500 33,017 12,919 12,919 100,000 18,735 18,735 100,000 27,174 27,174 100,000 15 2,500 56,644 15,657 15,657 100,000 28,929 28,929 100,000 53,773 53,773 100,000 20 2,500 86,798 13,769 13,769 100,000 39,070 39,070 100,000 99,843 99,843 106,832 25 2,500 125,284 3,152 3,152 100,000 47,636 47,636 100,000 178,503 178,503 187,428 30 2,500 174,402 (*) (*) (*) 51,634 51,634 100,000 304,551 304,551 319,778 35 2,500 237,091 (*) (*) (*) 43,079 43,079 100,000 502,828 502,828 527,969
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $5.00 THEREAFTER. CURRENT VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS UP TO THE BREAK POINT PREMIUM AND 4% ON PREMIUMS IN EXCESS OF BREAK POINT FOR ANY SINGLE POLICY YEAR. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 56 58 DEATH BENEFIT OPTION 1 $2,500 ANNUAL PREMIUM: $100,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 55 GUARANTEED VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 2,500 2,625 1,212 50 100,000 1,316 154 100,000 1,421 258 100,000 2 2,500 5,381 2,542 1,380 100,000 2,832 1,670 100,000 3,135 1,973 100,000 3 2,500 8,275 3,778 2,732 100,000 4,340 3,294 100,000 4,953 3,906 100,000 4 2,500 11,314 4,913 3,983 100,000 5,833 4,903 100,000 6,878 5,948 100,000 5 2,500 14,505 5,937 5,123 100,000 7,301 6,488 100,000 8,915 8,101 100,000 6 2,500 17,855 6,842 6,145 100,000 8,735 8,037 100,000 11,070 10,372 100,000 7 2,500 21,373 7,617 7,036 100,000 10,121 9,540 100,000 13,348 12,767 100,000 8 2,500 25,066 8,245 7,780 100,000 11,443 10,978 100,000 15,753 15,288 100,000 9 2,500 28,945 8,708 8,359 100,000 12,682 12,333 100,000 18,289 17,940 100,000 10 2,500 33,017 8,989 8,989 100,000 13,818 13,818 100,000 20,963 20,963 100,000 15 2,500 56,644 7,002 7,002 100,000 17,234 17,234 100,000 37,407 37,407 100,000 20 2,500 86,798 (*) (*) (*) 12,880 12,880 100,000 62,409 62,409 100,000 25 2,500 125,284 (*) (*) (*) (*) (*) (*) 109,545 109,545 115,023 30 2,500 174,402 (*) (*) (*) (*) (*) (*) 190,458 190,458 199,981 35 2,500 237,091 (*) (*) (*) (*) (*) (*) 314,104 314,104 329,809
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $7.50 THEREAFTER. GUARANTEED VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 57 59 DEATH BENEFIT OPTION 2 $2,500 ANNUAL PREMIUM: $100,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 55 CURRENT VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 2,500 2,625 1,374 211 101,374 1,482 320 101,482 1,591 429 101,591 2 2,500 5,381 2,927 1,764 102,927 3,236 2,074 103,236 3,559 2,397 103,559 3 2,500 8,275 4,419 3,373 104,419 5,029 3,983 105,029 5,691 4,645 105,691 4 2,500 11,314 5,832 4,902 105,832 6,841 5,911 106,841 7,980 7,050 107,980 5 2,500 14,505 7,144 6,330 107,144 8,651 7,837 108,651 10,420 9,607 110,420 6 2,500 17,855 8,362 7,664 108,362 10,463 9,765 110,463 13,032 12,335 113,032 7 2,500 21,373 9,478 8,897 109,478 12,268 11,687 112,268 15,824 15,242 115,824 8 2,500 25,066 10,477 10,012 110,477 14,049 13,584 114,049 18,794 18,329 118,794 9 2,500 28,945 11,354 11,005 111,354 15,797 15,448 115,797 21,956 21,607 121,956 10 2,500 33,017 12,115 12,115 112,115 17,516 17,516 117,516 25,333 25,333 125,333 15 2,500 56,644 13,550 13,550 113,550 24,855 24,855 124,855 46,145 46,145 146,145 20 2,500 86,798 9,551 9,551 109,551 28,172 28,172 128,172 73,441 73,441 173,441 25 2,500 125,284 (*) (*) (*) 22,016 22,016 122,016 106,695 106,695 206,695 30 2,500 174,402 (*) (*) (*) (*) (*) (*) 141,554 141,554 241,554 35 2,500 237,091 (*) (*) (*) (*) (*) (*) 168,976 168,976 268,976
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) CURRENT VALUES REFLECT CURRENT COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $5.00 THEREAFTER. CURRENT VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS UP TO THE BREAK POINT PREMIUM AND 4% ON PREMIUMS IN EXCESS OF BREAK POINT FOR ANY SINGLE POLICY YEAR. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 58 60 DEATH BENEFIT OPTION 2 $2,500 ANNUAL PREMIUM: $100,000 SPECIFIED AMOUNT MALE: NON-TOBACCO: AGE 55 GUARANTEED VALUES
0.00% 6.00% 12.00% HYPOTHETICAL HYPOTHETICAL HYPOTHETICAL GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN CASH CASH CASH ANNUAL PREMIUMS CASH SURR DEATH CASH SURR DEATH CASH SURR DEATH YEAR PAID AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 2,500 2,625 1,197 35 101,197 1,300 138 101,300 1,404 241 101,404 2 2,500 5,381 2,500 1,338 102,500 2,785 1,623 102,785 3,083 1,921 103,083 3 2,500 8,275 3,693 2,647 103,693 4,242 3,196 104,242 4,840 3,794 104,840 4 2,500 11,314 4,768 3,838 104,768 5,660 4,730 105,660 6,671 5,741 106,671 5 2,500 14,505 5,715 4,901 105,715 7,024 6,211 107,024 8,571 7,758 108,571 6 2,500 17,855 6,523 5,825 106,523 8,319 7,622 108,319 10,534 9,836 110,534 7 2,500 21,373 7,179 6,598 107,179 9,527 8,946 109,527 12,549 11,968 112,549 8 2,500 25,066 7,665 7,200 107,665 10,622 10,157 110,622 14,600 14,135 114,601 9 2,500 28,945 7,962 7,613 107,962 11,578 11,229 111,578 16,669 16,320 116,669 10 2,500 33,017 8,052 8,052 108,052 12,366 12,366 112,366 18,734 18,734 118,734 15 2,500 56,644 4,841 4,841 104,841 12,798 12,798 112,798 28,282 28,282 128,282 20 2,500 86,798 (*) (*) (*) 2,956 2,956 102,956 32,479 32,479 132,479 25 2,500 125,284 (*) (*) (*) (*) (*) (*) 19,082 19,082 119,082
(1) ASSUMES NO POLICY LOANS AND NO PARTIAL WITHDRAWALS HAVE BEEN MADE. (2) GUARANTEED VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES AND A MONTHLY ADMINISTRATIVE EXPENSE CHARGE OF $25 FOR THE FIRST POLICY YEAR AND $7.50 THEREAFTER. GUARANTEED VALUES REFLECT A 6% OF PREMIUM CHARGE ON ALL PREMIUMS. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (*) UNLESS ADDITIONAL PREMIUM IS PAID, THE POLICY WILL NOT STAY IN FORCE. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER, PREVAILING RATES AND RATES OF INFLATION. THE DEATH BENEFIT AND CASH VALUES WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED THE ASSUMED RATES, BUT ALSO FLUCTUATED ABOVE AND BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. 59 61 APPENDIX 3 The following performance tables display historical investment results of the underlying Mutual Fund sub-accounts of the Variable Account. This information may be useful in helping potential investors in deciding which underlying Mutual Fund sub- accounts to choose and in assessing the competence of the underlying Mutual Funds' investment advisers. The performance figures shown should be considered in light of the investment objectives and policies, characteristics and quality of the underlying portfolios of the underlying Mutual Funds, and the market conditions during the periods of time quoted. The performance figures should not be considered as estimates or predictions of future performance. Investment return and the principal value of the underlying Mutual Fund sub-accounts are not guaranteed and will fluctuate so that a Contract Owner's units, when redeemed, may be worth more or less than their original cost. 60 62 PERFORMANCE TABLES TOTAL RETURN
ANNUAL PERCENTAGE CHANGE NON-ANNUALIZED PERCENTAGE CHANGE Fund Inception Inception 1 Mo. to 1 Yr. to 2 Yrs. to 3 Yrs. to 5 Yrs. to to Date* 1991 1992 1993 1994 12/31/94 12/31/94 12/31/94 12/31/94 12/31/94 12/31/94 NATIONWIDE SEPARATE ACCOUNT TRUST Money Market Fund 11/10/81 5.00% 2.58% 1.93% 3.05% 0.38% 3.05% 5.04% 7.75% 21.32% 127.34% Government Bond Fund 11/08/82 15.77% 7.00% 8.64% -4.00% 0.81% -4.00% 4.30% 11.60% 40.33% 168.83% Total Return Fund 11/08/82 37.38% 7.31% 10.03% 0.27% 1.02% 0.27% 10.33% 18.40% 48.39% 334.95% Capital Appreciation 04/15/92 N/A* N/A* 8.73% -1.69% 2.00% -1.69% 6.90% N/A* N/A* 12.44% Fund NEUBERGER & BERMAN ADVISERS MGT. TRUST Balanced Portfolio 02/28/89 21.70% 7.19% 5.61% -4.13% 0.70% -4.13% 1.25% 8.53% 31.91% 52.52% TCI PORTFOLIOS, INC. TCI Advantage 08/01/91 N/A* -4.53% 5.98% 0.23% 0.78% 0.23% 6.23% 1.42% N/A* 15.04%
This Table displays three types of total return. Simply stated, total return shows the percent change in unit values, with dividends and capital gains reinvested, after the deduction of a 0.80% asset charge (and the deduction of applicable investment advisory fees and other expenses of the underlying Mutual Funds). The total return figures shown in the Annual Percentage Change and Annualized Percentage Change columns represent annualized figures, i.e., they show the rate of growth that would have produced the corresponding cumulative return had performance been constant over the entire period quoted. The Non-Annualized Percentage Change total return figures are not annual return figures but instead represent the total percentage change in unit value over the stated periods without annualization. THE TOTAL RETURN FIGURES DO NOT TAKE INTO ACCOUNT SEVERAL OTHER POLICY CHARGES WHICH ARE DESCRIBED IN THE "POLICY CHARGES" SECTION. THESE OTHER CHARGES INCLUDE DEDUCTIONS FROM PREMIUMS, COST OF INSURANCE CHARGES, SURRENDER CHARGES AND A MONTHLY ADMINISTRATIVE CHARGE. *The underlying Mutual Fund Inception Date is the date the Fund first became effective, which is not necessarily the same date the underlying Mutual Fund was first made available through the Variable Account. For those underlying Mutual Funds which have not been offered as sub-accounts through the Variable Account for one of the quoted periods, the total return figures will show the investment performance such underlying Mutual Funds would have achieved (reduced by the 0.80% asset charge and underlying Mutual Fund investment advisory fees and expenses) had they been offered as sub-accounts through the Variable Account for the period quoted. Certain underlying Mutual Funds are not as old as some of the periods quoted, therefore, total return figures may not be available for all of the periods shown. 61 63 PERFORMANCE TABLES TOTAL RETURN (CONTINUED)
ANNUALIZED PERCENTAGE CHANGE 3 Yrs. to 5 Yrs. to Inception to 12/31/94 12/31/94 12/31/94 NATIONWIDE SEPARATE ACCOUNT TRUST Money Market Fund 2.52% 3.94% 6.45% Government Bond Fund 3.73% 7.01% 8.48% Total Return Fund 5.79% 8.21% 12.87% Capital Appreciation N/A* N/A* 4.42% Fund NEUBERGER & BERMAN ADVISERS MGT. TRUST Balanced Portfolio 2.76% 5.70% 7.50% TCI PORTFOLIOS, INC. TCI Advantage 0.47% N/A* 4.18%
62 64 PERFORMANCE TABLES CASH VALUES
1 YR. TO 12/31/94 2 YRS. TO 12/31/94 3 YRS. TO 12/31/94 5 YRS. TO 12/31/94 Fund Cash Cash Cash Cash Inception Accum. Surr. Accum. Surr. Accum. Surr. Accum. Surr. Date** Value Value Value Value Value Value Value Value NATIONWIDE SEPARATE ACCOUNT TRUST Money Market Fund 11/10/81 1,860 0 3,946 1,932 6,038 4,225 10,467 9,057 Government Bond Fund 11/08/82 1,697 0 3,807 1,793 5,969 4,156 11,084 9,675 Total Return Fund 11/08/82 1,811 0 4,026 2,012 6,324 4,511 12,249 10,839 Capital Appreciation 04/15/92 1,752 0 3,869 1,855 N/A** N/A** N/A** N/A** Fund NEUBERGER & BERMAN ADVISERS MGT. TRUST Balanced Portfolio 02/28/89 1,699 0 3,716 1,702 5,816 4,004 10,831 9,422 TCI PORTFOLIOS, INC. TCI Advantage 08/01/91 1,801 0 3,924 1,910 5,838 4,026 N/A** N/A**
This Table shows the effect of the performance quoted on accumulated values and cash surrender values, based on a hypothetical annual premium of $2,882.50 for a 45 year-old male, non-tobacco preferred, with a level death benefit and an initial specified amount of $250,000. The cash surrender values reflect the deduction of all applicable Policy Charges, including a deduction from each premium payment, a 0.80% asset charge, applicable cost of insurance charges, surrender charges, and a monthly administrative charge (and the deduction of applicable investment advisory fees and other expenses of the underlying Mutual Funds). See the "Policy Charges" section for more information about these charges. The cost of insurance charges may be higher or lower for purchasers who do not meet the profile of the hypothetical purchaser. Illustrations reflecting a potential purchaser's specific characteristics are available from the Company upon request. **The underlying Mutual Fund Inception Date is the date the underlying Mutual Fund first became effective, which is not necessarily the same date the underlying Mutual Fund was first made available through the Variable Account. For those underlying Mutual Funds which have not been offered as sub- accounts through the Variable Account for one of the quoted periods, the cash values will show the investment performance such underlying Mutual Funds would have achieved (reduced by any applicable Variable Account and Policy Charges, and underlying Mutual Fund investment advisory fees and expenses) had they been offered as sub-accounts through the Variable Account for the period quoted. Certain underlying Mutual Funds are not as old as some of the periods quoted, therefore, the cash values may not be available for all of the periods shown. 63 65 PERFORMANCE TABLES CASH VALUES (CONTINUED)
10 YRS. TO 12/31/94 INCEPTION TO 12/31/94 Accum. Cash Surr. Accum. Cash Surr. Value Value Value Value NATIONWIDE SEPARATE ACCOUNT TRUST Money Market Fund 23,257 23,257 35,780 35,780 Government Bond Fund 27,443 27,443 39,344 39,344 Total Return Fund 32,656 32,656 51,392 51,392 Capital Appreciation N/A** N/A** 6,369 4,556 Fund NEUBERGER & BERMAN ADVISERS MGT. TRUST Balanced Portfolio N/A** N/A** 13,797 12,589 TCI PORTFOLIOS, INC. TCI Advantage N/A** N/A** 8,680 7,068
64 66 Independent Auditors' Report The Board of Directors and Contract Owners of Nationwide VLI Separate Account-3 Nationwide Life Insurance Company: We have audited the accompanying statement of assets, liabilities and contract owners' equity of Nationwide VLI Separate Account-3 as of December 31, 1994, and the related statements of operations and changes in contract owners' equity for each of the years in the three year period then ended. 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. Our procedures included confirmation of securities owned as of December 31, 1994, by correspondence with the custodian and the transfer agents of the underlying mutual funds. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nationwide VLI Separate Account-3 as of December 31, 1994, and the results of its operations and its changes in contract owners' equity for each of the years in the three year period then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in Schedule I is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. KPMG Peat Marwick LLP Columbus, Ohio February 3, 1995 65 67 NATIONWIDE VLI SEPARATE ACCOUNT-3 STATEMENT OF ASSETS, LIABILITIES AND CONTRACT OWNERS' EQUITY December 31, 1994
Assets: Investments at market value: Nationwide SAT -- Capital Appreciation Fund (NWCapApp) 224,900 shares (cost $2,428,903) ................................................................... $ 2,455,906 Nationwide SAT -- Government Bond Fund (NWGvtBd) 128,019 shares (cost $1,420,293) ................................................................... 1,305,795 Nationwide SAT -- Money Market Fund (NWMyMkt) 467,737 shares (cost $467,737) ..................................................................... 467,737 Nationwide SAT -- Total Return Fund (NWTotRet) 710,405 shares (cost $7,222,030) ................................................................... 6,890,932 Neuberger & Berman Advisers Management Trust -- Balanced Portfolio (NBBal) 58,151 shares (cost $866,450) ...................................................................... 843,766 TCI Portfolios, Inc. -- TCI Advantage (TCIAdv) 127,425 shares (cost $681,932) ..................................................................... 698,291 ----------- Total assets ............................................................................... 12,662,427 Accounts payable ............................................................................................ 1,314 ----------- Contract owners' equity ..................................................................................... $12,661,113 ===========
Contract owners' equity represented by: Units Unit Value ----- ---------- Nationwide SAT-- Capital Appreciation Fund ......................... 214,216 $ 11.465403 $ 2,456,073 Nationwide SAT-- Government Bond Fund .............................. 102,657 12.720514 1,305,850 Nationwide SAT-- Money Market Fund ................................. 41,687 11.176411 465,911 Nationwide SAT-- Total Return Fund ................................. 485,095 14.205723 6,891,125 Neuberger & Berman Advisers Management Trust-- Balanced Portfolio ...................................... 73,175 11.531273 843,801 TCI Portfolios, Inc.-- TCI Advantage ............................... 35,575 11.321934 402,778 TCI Portfolios, Inc. -- TCI Advantage -- Initial Funding by Depositor (note 1a) ........................... 25,000 11.822996 295,575 ======= =========== ----------- $12,661,113 ===========
See accompanying notes to financial statements. 66 68 NATIONWIDE VLI SEPARATE ACCOUNT-3 STATEMENTS OF OPERATIONS AND CHANGES IN CONTRACT OWNERS' EQUITY Years Ended December 31, 1994, 1993 and 1992
1994 1993 1992 ------ ------ ------ Investment activity: Reinvested capital gains and dividends........................ $ 494,868 145,831 22,132 ----------- ---------- ---------- Gain (loss) on investments: Proceeds from redemptions of mutual fund shares............ 4,179,645 3,254,854 1,555,161 Cost of mutual fund shares sold............................ (4,147,943) (3,222,467) (1,550,278) ----------- ---------- ---------- Realized gain on investments............................... 31,702 32,387 4,883 Change in unrealized gain (loss) on investments............ (556,146) 107,861 (8,756) ----------- ---------- ---------- Net gain (loss) on investments.......................... (524,444) 140,248 (3,873) ----------- ---------- ---------- Net investment activity........................ (29,576) 286,079 18,259 ----------- ---------- ---------- Equity transactions: Purchase payments received from contract owners............... 8,317,542 6,745,862 1,368,570 Surrenders (note 2d).......................................... (172,813) (114,800) (2,366) Death Benefits (note 4)....................................... (17,276) -- -- Policy loans (net of repayments) (note 5)..................... (85,214) (6,841) (5,000) ----------- ---------- ---------- Net equity transactions........................ 8,042,239 6,624,221 1,361,204 ----------- ---------- ---------- Expenses: Deductions for surrender charges (note 2d).................... (59,849) (44,036) -- Redemptions to pay cost of insurance charges and administrative charges (notes 2b and 2c) .............. (2,524,466) (1,065,559) (124,254) Deductions for asset charges (note 3)......................... (80,632) (24,233) (2,807) ----------- ---------- ---------- Total expenses................................. (2,664,947) (1,133,828) (127,061) ----------- ---------- ---------- Net change in contract owners' equity............................ 5,347,716 5,776,472 1,252,402 Contract owners' equity beginning of period...................... 7,313,397 1,536,925 284,523 ----------- ---------- ---------- Contract owners' equity end of period............................ $12,661,113 7,313,397 1,536,925 =========== ========== ==========
See accompanying notes to financial statements. 67 69 NATIONWIDE VLI SEPARATE ACCOUNT-3 NOTES TO FINANCIAL STATEMENTS December 31, 1994, 1993 and 1992 (1) Summary of Significant Accounting Policies (a) Organization The Nationwide VLI Separate Account--3 (the Account) was established pursuant to a resolution of the Board of Directors of Nationwide Life Insurance Company (the Company) on August 8, 1984. The Account has been registered as a unit investment trust under the Investment Company Act of 1940. On August 21, 1991, the Company (Depositor) transferred to the Account 50,000 shares of TCI Portfolios, Inc.--TCI Advantage, for which it was credited with 25,000 accumulation units. The value of the accumulation units purchased by the Company on August 21, 1991 was $250,000. (b) The Contracts Flexible premium life insurance contracts with a front-end sales load, a surrender charge and certain other fees have been purchased. See note 2 for a discussion of policy charges. Contract owners may invest in the following funds: Funds of the Nationwide Separate Account Trust (Nationwide SAT) (managed for a fee by an affiliated investment adviser); Nationwide SAT -- Capital Appreciation Fund (NWCapApp) Nationwide SAT -- Government Bond Fund (NWGvtBd) Nationwide SAT -- Money Market Fund (NWMyMkt) Nationwide SAT -- Total Return Fund (NWTotRet) Neuberger & Berman Advisers Management Trust -- Balanced Portfolio (NBBal) TCI Portfolios, Inc. -- TCI Advantage (TCIAdv) At December 31, 1994, contract owners have invested in all of the above funds. The contract owners' equity is affected by the investment results of each fund and certain policy charges (see note 2). The accompanying financial statements include only contract owners' purchase payments pertaining to the variable portions of their contracts and exclude any purchase payments for fixed dollar benefits, the latter being included in the accounts of the Company. (c) Security Valuation, Transactions and Related Investment Income The market value of investments is based on the closing bid prices at December 31, 1994. The cost of investments sold is determined on a specific identification basis. Investment transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income is recorded on the ex-dividend date. (d) Federal Income Taxes Operations of the Account form a part of, and are taxed with, operations of the Company, which is taxed as a life insurance company under the provisions of the Internal Revenue Code. The Company does not provide for income taxes within the Account. Taxes are the responsibility of the contract owner upon termination or withdrawal. (2) Policy Charges (a) Deductions from Premium On flexible premium life insurance contracts, the Company deducts a charge for state premium taxes equal to 2.5% of all premiums received to cover the payment of these premium taxes. Additionally, the Company deducts a front-end sales load of up to 3.5% from each premium payment received. The Company may at its sole discretion reduce this sales loading. (b) Cost of Insurance A cost of insurance charge is assessed monthly against each contract. The amount of the charge is based upon age, sex, rate class and net amount at risk (death benefit less total contract value). 68 70 (c) Administrative Charges For flexible premium contracts, the Company currently deducts a monthly administrative charge of $25 during the first policy year and $5 per month thereafter (may deduct up to $7.50, maximum) to recover policy maintenance, accounting, record keeping and other administrative expenses. Additionally, the Company deducts an increase charge of $2.04 per year per $1,000 applied to any increase in the specified amount during the first 12 months after the increase becomes effective. The above charges are assessed against each contract by liquidating units. (d) Surrenders Policy surrenders result in a redemption of the contract value from the Separate Account and payment of the surrender proceeds to the contract owner or designee. The surrender proceeds consist of the contract value, less any outstanding policy loans, and less a surrender charge, if applicable. The amount of the charge is based upon a specified percentage of the initial surrender charge which varies by issue age, sex and rate class. For flexible premium contracts, the charge is 100% of the initial surrender charge in the first year, declining to 30% of the initial surrender charge in the ninth year. No surrender charge is assessed on any contract surrendered after the ninth year. The Company may waive the surrender charge for certain contracts in which the sales expenses normally associated with the distribution of a contract are not incurred. (3) Asset Charges The Company deducts a charge equal to an annual rate of .80%, with certain exceptions, to cover mortality and expense risk charges related to operations. This charge is assessed through the unit value calculation. (4) Death Benefits Death benefits result in a redemption of the contract value from the Separate Account and payment of the death benefit proceeds, less any outstanding policy loans and policy charges, to the legal beneficiary. The excess of the death benefit proceeds over the contract value on the date of death is paid by the Company's general account. (5) Policy Loans (Net of Repayments) Contract provisions allow contract owners to borrow 90% of a policy's cash surrender value. The contract is charged 6% on the outstanding loan and is due and payable in advance on the policy anniversary. At the time the loan is granted, the amount of the loan plus interest, if any, is transferred from the Account to the Company's general account as collateral for the outstanding loan. Collateral amounts in the general account are credited with the stated rate of interest in effect at the time the loan is made, subject to a guaranteed minimum rate. Interest credited is paid by the Company's general account to the Account. Loan repayments result in a transfer of collateral back to the Account. (6) Schedule I Schedule I presents the components of the change in the unit values, which are the basis for contract owners' equity. This schedule is presented in the following format: - Beginning unit value - Jan. 1 - Reinvested capital gains and dividends (This amount reflects the increase in the unit value due to capital gains and dividend distributions from the underlying mutual funds.) - Unrealized gain (loss) (This amount reflects the increase (decrease) in the unit value resulting from the market appreciation (depreciation) of the fund.) - Asset charges (This amount reflects the decrease in the unit value due to the charges discussed in note 3.) - Ending unit value - Dec. 31 - Percentage increase (decrease) in unit value. 69 71
NATIONWIDE VLI SEPARATE ACCOUNT-3 Schedule I SCHEDULES OF CHANGES IN UNIT VALUE Years Ended December 31, 1994, 1993 and 1992 NWCapApp NWGvtBd NWMyMkt NWTotRet NBBal TCIAdv TCIAdv+ -------- --------- --------- ---------- ------- -------- --------- 1994 Beginning unit value - Jan. 1 $11.662121 13.250482 10.845265 14.167308 12.027618 11.295721 11.701906 Reinvested capital gains and dividends .184927 .833925 .419275 .717782 .469287 .297670 .309969 Unrealized gain (loss) (.289863) (1.261429) .000000 (.565055) (.872191) (.181209) (.188879) Asset charges (.091782) (.102464) (.088129) (.114312) (.093441) (.090248) .000000 Ending unit value - Dec. 31 $11.465403 12.720514 11.176411 14.205723 11.531273 11.321934 11.822996 Percentage increase (decrease) in unit value* (a) (2)% (4)% 3% 0% (4)% 0% 1% 1993 Beginning unit value - Jan.1 $10.725293 12.196370 10.639809 12.875439 11.389202 10.657984 10.953160 Reinvested capital gains and dividends .261975 .781559 .291848 .527331 .175648 .223352 .230690 Unrealized gain (loss) .761628 .376228 .000000 .873117 .555361 .502395 .518056 Asset charges (.086775) (.103675) (.086392) (.108579) (.092593) (.088010) .000000 Ending unit value - Dec. 31 $11.662121 13.250482 10.845265 14.167308 12.027618 11.295721 11.701906 Percentage increase (decrease) in unit value* (a) 9% 9% 2% 10% 6% 6% 7% 1992 Beginning unit value - Jan. 1 $10.000000 11.398284 10.372248 11.998073 10.625331 11.163943 11.380926 Reinvested capital gains and dividends .117198 1.220229 .351875 .453040 .284792 .210350 .215518 Unrealized gain (loss) .663590 (.327900) .000000 .523204 .566044 (.631056) (.643284) Asset charges (.055495) (.094243) (.084314) (.098878) (.086965) (.085253) .000000 Ending unit value - Dec. 31 $10.725293 12.196370 10.639809 12.875439 11.389202 10.657984 10.953160 Percentage increase (decrease) in unit value* (a) 7%(b) 7% 3% 7% 7% (5)% (4)%
*An annualized rate of return cannot be determined as: (a) Asset charges do not include the policy charges discussed in note 2; and (b) This investment option was not utilized for the entire period indicated. +For Depositor, see note 1a. See accompanying independent auditors' report. 70 72 INDEPENDENT AUDITORS' REPORT The Board of Directors Nationwide Life Insurance Company: We have audited the accompanying consolidated balance sheets of Nationwide Life Insurance Company (a wholly owned subsidiary of Nationwide Corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholder's equity and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Participating insurance and the related surplus are discussed in note 13. The Company and its counsel are of the opinion that the ultimate ownership of the participating surplus in excess of the contemplated equitable policyholder dividends belongs to the shareholder. The accompanying consolidated financial statements are presented on such basis. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nationwide Life Insurance Company and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in note 2 to the consolidated financial statements, in 1994 the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. In 1993, the Company adopted the provisions of SFAS No. 109, Accounting for Income Taxes and SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. KPMG Peat Marwick LLP Columbus, Ohio February 27, 1995 71 73 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Consolidated Balance Sheets December 31, 1994 and 1993 (000's omitted)
Assets 1994 1993 ------ ----------- ---------- Investments (notes 5, 8 and 9): Securities available-for-sale, at fair value: Fixed maturities (cost $8,318,865 in 1994) $ 8,045,906 - Equity securities (cost $18,373 in 1994; $8,263 in 1993) 24,713 16,593 Fixed maturities held-to-maturity, at amortized cost (fair value $3,602,310 in 1994; $10,886,820 in 1993) 3,688,787 10,120,978 Mortgage loans on real estate 4,222,284 3,871,560 Real estate 252,681 253,831 Policy loans 340,491 315,898 Other long-term investments 63,914 118,490 Short-term investments (note 14) 131,643 41,797 ----------- ----------- 16,770,419 14,739,147 ----------- ----------- Cash 7,436 21,835 Accrued investment income 220,540 190,886 Deferred policy acquisition costs 1,064,159 811,944 Deferred Federal income tax 36,515 - Other assets 790,603 636,161 Assets held in Separate Accounts (note 8) 12,222,461 9,006,388 ----------- ----------- $31,112,133 25,406,361 =========== =========== Liabilities and Shareholder's Equity ------------------------------------ Future policy benefits and claims (notes 6 and 8) 16,321,461 14,092,255 Policyholders' dividend accumulations 338,058 322,686 Other policyholder funds 72,770 71,959 Accrued Federal income tax (note 7): Current 13,126 12,294 Deferred - 31,659 ----------- ----------- 13,126 43,953 ----------- ----------- Other liabilities 235,778 217,952 Liabilities related to Separate Accounts (note 8) 12,222,461 9,006,388 ----------- ----------- 29,203,654 23,755,193 ----------- ----------- Shareholder's equity (notes 3, 4, 7 and 13): Capital shares, $1 par value. Authorized 5,000 shares, issued and outstanding 3,815 shares 3,815 3,815 Paid-in additional capital 622,753 422,753 Unrealized gains (losses) on securities available-for-sale, net of adjustment to deferred policy acquisition costs of $82,525 ($0 in 1993) and net of deferred Federal income tax benefit of $64,425 ($1,583 expense in 1993) (119,668) 6,747 Retained earnings 1,401,579 1,217,853 ----------- ----------- 1,908,479 1,651,168 ----------- ----------- Commitments and contingencies (notes 9 and 16) $31,112,133 25,406,361 =========== ===========
See accompanying notes to consolidated financial statements. 72 74 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Consolidated Statements of Income Years ended December 31, 1994, 1993 and 1992 (000's omitted)
1994 1993 1992 ---------- ---------- ---------- Revenues (note 17): Traditional life insurance premiums $ 209,538 215,715 226,888 Accident and health insurance premiums 324,524 312,655 430,009 Universal life and investment product policy charges 239,021 188,057 148,464 Net investment income (note 5) 1,289,501 1,204,426 1,120,157 Net ceded commissions from disposition of credit life and credit accident and health business (note 12) - - 27,115 Realized gains (losses) on investments (notes 5 and 14) (16,384) 113,673 (19,315) ---------- ---------- ---------- 2,046,200 2,034,526 1,933,318 ---------- ---------- ---------- Benefits and expenses: Benefits and claims 1,279,763 1,236,906 1,319,735 Provision for policyholders' dividends on participating policies (note 13) 46,061 53,189 61,834 Amortization of deferred policy acquisition costs 94,744 102,134 99,197 Other operating costs and expenses 352,402 329,396 321,993 ---------- ---------- ---------- 1,772,970 1,721,625 1,802,759 ---------- ---------- ---------- Income before Federal income tax and cumulative effect of changes in accounting principles 273,230 312,901 130,559 ---------- ---------- ---------- Federal income tax (note 7): Current expense 79,847 75,124 47,402 Deferred expense (benefit) 9,657 31,634 (13,660) ---------- ---------- ---------- 89,504 106,758 33,742 ---------- ---------- ---------- Income before cumulative effect of changes in accounting principles 183,726 206,143 96,817 Cumulative effect of changes in accounting principles, net of tax (note 3) - 5,365 - ---------- ---------- ---------- Net income $ 183,726 211,508 96,817 ========== ========== ==========
See accompanying notes to consolidated financial statements. 73 75 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Consolidated Statements of Shareholder's Equity Years ended December 31, 1994, 1993 and 1992 (000's omitted)
Unrealized gains (losses) Paid-in on securities Total Capital additional available-for- Retained shareholder's shares capital sale, net earnings equity --------- ----------- -------------- ---------- ------------- 1992: Balance, beginning of year $ 3,815 311,753 96,048 933,179 1,344,795 Dividends paid to shareholder - - - (5,846) (5,846) Net income - - - 96,817 96,817 Unrealized losses on equity securities, net of deferred Federal income tax - - (5,524) - (5,524) --------- ----------- -------------- ---------- ------------- Balance, end of year $ 3,815 311,753 90,524 1,024,150 1,430,242 ========= =========== ============== ========== ============= 1993: Balance, beginning of year 3,815 311,753 90,524 1,024,150 1,430,242 Capital contributions - 111,000 - - 111,000 Dividends paid to shareholder - - - (17,805) (17,805) Net income - - - 211,508 211,508 Unrealized losses on equity securities, net of deferred Federal income tax - - (83,777) - (83,777) --------- ----------- -------------- ---------- ------------- Balance, end of year $ 3,815 422,753 6,747 1,217,853 1,651,168 ========= =========== ============== ========== ============= 1994: Balance, beginning of year 3,815 422,753 6,747 1,217,853 1,651,168 Capital contribution - 200,000 - - 200,000 Net income - - - 183,726 183,726 Adjustment for change in accounting for certain investments in debt and equity securities, net of adjustment to deferred policy acquisition costs and deferred Federal income tax (note 3) - - 216,915 - 216,915 Unrealized losses on securities available-for-sale, net of adjustment to deferred policy acquisition costs and deferred Federal income tax - - (343,330) - (343,330) --------- ----------- -------------- ---------- ------------- Balance, end of year $ 3,815 622,753 (119,668) 1,401,579 1,908,479 ========= =========== ============== ========== =============
See accompanying notes to consolidated financial statements. 74 76 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Consolidated Statements of Cash Flows Years ended December 31, 1994, 1993 and 1992 (000's omitted)
1994 1993 1992 ---------- ---------- ---------- Cash flows from operating activities: Net income $ 183,726 211,508 96,817 Adjustments to reconcile net income to net cash provided by operating activities: Capitalization of deferred policy acquisition costs (264,434) (191,994) (177,928) Amortization of deferred policy acquisition costs 94,744 102,134 99,197 Amortization and depreciation 6,207 11,156 5,607 Realized losses (gains) on invested assets, net 15,949 (113,648) 19,092 Deferred Federal income tax benefit (2,166) (6,006) (13,105) Increase in accrued investment income (29,654) (4,218) (11,518) (Increase) decrease in other assets (112,566) (549,277) 6,132 Increase in policyholder account balances 1,038,641 509,370 19,087 Increase in policyholders' dividend accumulations 15,372 17,316 18,708 Increase (decrease) in accrued Federal income tax payable 832 16,838 (15,723) Increase in other liabilities 17,826 26,958 73,512 Other, net (19,303) (11,745) (10,586) ---------- ---------- ---------- Net cash provided by operating activities 945,174 18,392 109,292 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from maturity of securities available-for-sale 579,067 - - Proceeds from sale of securities available-for-sale 247,876 247,502 27,844 Proceeds from maturity of fixed maturities held-to-maturity 516,003 1,192,093 1,030,397 Proceeds from sale of fixed maturities - 33,959 123,422 Proceeds from repayments of mortgage loans on real estate 220,744 146,047 259,659 Proceeds from sale of real estate 46,713 23,587 22,682 Proceeds from repayments of policy loans and sale of other invested assets 134,998 59,643 99,189 Cost of securities available-for-sale acquired (2,569,672) (12,550) (12,718) Cost of fixed maturities held-to-maturity acquired (675,835) (2,016,831) (2,687,975) Cost of mortgage loans on real estate acquired (627,025) (475,336) (654,403) Cost of real estate acquired (15,962) (8,827) (137,843) Policy loans issued and other invested assets acquired (118,012) (76,491) (97,491) ---------- ---------- ---------- Net cash used in investing activities (2,261,105) (887,204) (2,027,620) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from capital contributions 200,000 111,000 - Dividends paid to shareholder - (17,805) (5,846) Increase in universal life and investment product account balances 3,640,958 2,249,740 2,468,236 Decrease in universal life and investment product account balances (2,449,580) (1,458,504) (575,180) ---------- ---------- ---------- Net cash provided by financing activities 1,391,378 884,431 1,887,210 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 75,447 15,619 (31,118) Cash and cash equivalents, beginning of year 63,632 48,013 79,131 ---------- ---------- ---------- Cash and cash equivalents, end of year $ 139,079 63,632 48,013 ========== ========== ==========
See accompanying notes to consolidated financial statements. 75 77 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements December 31, 1994, 1993 and 1992 (000 s omitted) (1) Organization and Description of Business ---------------------------------------- Nationwide Life Insurance Company (NLIC) is a wholly owned subsidiary of Nationwide Corporation (Corp.). Wholly-owned subsidiaries of NLIC include Financial Horizons Life Insurance Company (FHLIC), West Coast Life Insurance Company (WCLIC), National Casualty Company and subsidiaries (NCC), Nationwide Financial Services, Inc. (NFS), and effective December 31, 1994, Employers Life Insurance Company of Wausau and subsidiary (ELICW). NLIC and its subsidiaries are collectively referred to as "the Company". NLIC, FHLIC, WCLIC and ELICW are life and accident and health insurers and NCC is a property and casualty insurer. The Company is licensed in all 50 states, the District of Columbia, the Virgin Islands and Puerto Rico. The Company offers a full range of life, health and annuity products through exclusive agents and other distribution channels and is subject to competition from other insurers throughout the United States. The Company is subject to regulation by the Insurance Departments of states in which it is licensed, and undergoes periodic examinations by those departments. The following is a description of the most significant risks facing life and health insurers and how the Company mitigates those risks: LEGAL/REGULATORY RISK is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those recorded in the consolidated financial statements. The Company mitigates this risk by offering a wide range of products and by operating throughout the United States, thus reducing its exposure to any single product or jurisdiction, and also by employing underwriting practices which identify and minimize the adverse impact of this risk. CREDIT RISK is the risk that issuers of securities owned by the Company or mortgagors on mortgage loans on real estate owned by the Company will default or that other parties, including reinsurers, which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible. INTEREST RATE RISK is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. The Company mitigates this risk by charging fees for non-conformance with certain policy provisions, by offering products that transfer this risk to the purchaser, and/or by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to borrow funds or sell assets prior to maturity and potentially recognize a gain or loss. (2) Summary of Significant Accounting Policies ------------------------------------------ The significant accounting policies followed by the Company that materially affect financial reporting are summarized below. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) which differ from statutory accounting practices prescribed or permitted by regulatory authorities. See note 4. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and revenues and expenses for the period. Actual results could differ significantly from those estimates. The estimates susceptible to significant change are those used in determining the liability for future policy benefits and claims and those used in determining valuation allowances for mortgage loans on real estate and real estate. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. 76 78 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued (a) Consolidation Policy -------------------- The December 31, 1994, 1993 and 1992 consolidated financial statements include the accounts of NLIC and its wholly owned subsidiaries FHLIC, WCLIC, NCC and NFS. The December 31, 1994 consolidated balance sheet also includes the accounts of ELICW, which was acquired by NLIC effective December 31, 1994. See Note 14. All significant intercompany balances and transactions have been eliminated. (b) Valuation of Investments and Related Gains and Losses ----------------------------------------------------- Prior to January 1, 1994, the Company classified fixed maturities in accordance with the then existing accounting standards, and accordingly, fixed maturity securities were carried at amortized cost, adjusted for amortization of premium or discount, since the Company had both the ability and intent to hold those securities until maturity. Equity securities were carried at fair value with the unrealized gains and losses, net of deferred Federal income tax, reported as a separate component of shareholder's equity. In May 1993, the Financial Accounting Standards Board (FASB) issued STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 115 - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS 115). SFAS 115 requires fixed maturities and equity securities to be classified as either held-to-maturity, available-for-sale, or trading. The Company has no trading securities. The Company adopted SFAS 115 as of January 1, 1994, with no effect on consolidated net income. See note 3 regarding the effect on consolidated shareholder's equity. Fixed maturity securities are classified as held-to- maturity when the Company has the positive intent and ability to hold the securities to maturity and are stated at amortized cost. Fixed maturity securities not classified as held-to-maturity and all equity securities are classified as available-for-sale and are stated at fair value, with the unrealized gains and losses, net of adjustments to deferred policy acquisition costs and deferred Federal income tax, reported as a separate component of shareholder's equity. The adjustment to deferred policy acquisition costs represents the change in amortization of deferred policy acquisition costs that would have been required as a charge or credit to operations had such unrealized amounts been realized. Mortgage loans on real estate are carried at the unpaid principal balance less valuation allowances. The Company provides valuation allowances for impairments of mortgage loans on real estate based on a review by portfolio managers. Loans in foreclosure and loans considered in-substance foreclosed as of the balance sheet date are placed on non-accrual status and written down to the fair value of the existing property to derive a new cost basis. Real estate is carried at cost less accumulated depreciation and valuation allowances. Other long-term investments are carried on the equity basis, adjusted for valuation allowances. Realized gains and losses on the sale of investments are determined on the basis of specific security identification. Estimates for valuation allowances and other than temporary declines are included in realized gains and losses on investments. In May, 1993, the FASB issued STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 114 - ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN (SFAS 114). SFAS 114, which was amended by STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 118 - ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME RECOGNITION AND DISCLOSURE in October, 1994, requires the measurement of impaired loans be based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The impact on the consolidated financial statements of adopting SFAS 114 as amended is not expected to be material. Previously issued consolidated financial statements shall not be restated. The Company will adopt SFAS 114 as amended in 1995. 77 79 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued (c) Revenues and Benefits --------------------- TRADITIONAL LIFE INSURANCE PRODUCTS: Traditional life insurance products include those products with fixed and guaranteed premiums and benefits and consist primarily of whole life, limited-payment life, term life and certain annuities with life contingencies. Premiums for traditional life insurance products are recognized as revenue when due and collected. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the life of the contract. This association is accomplished by the provision for future policy benefits and the deferral and amortization of policy acquisition costs. UNIVERSAL LIFE AND INVESTMENT PRODUCTS: Universal life products include universal life, variable universal life and other interest-sensitive life insurance policies. Investment products consist primarily of individual and group deferred annuities, annuities without life contingencies and guaranteed investment contracts. Revenues for universal life and investment products consist of cost of insurance, policy administration and surrender charges that have been earned and assessed against policy account balances during the period. Policy benefits and claims that are charged to expense include benefits and claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. ACCIDENT AND HEALTH INSURANCE: Accident and health insurance premiums are recognized as revenue over the terms of the policies. Policy claims are charged to expense in the period that the claims are incurred. (d) Deferred Policy Acquisition Costs --------------------------------- The costs of acquiring new business, principally commissions, certain expenses of the policy issue and underwriting department and certain variable agency expenses have been deferred. For traditional life and individual health insurance products, these deferred acquisition costs are predominantly being amortized with interest over the premium paying period of the related policies in proportion to the ratio of actual annual premium revenue to the anticipated total premium revenue. Such anticipated premium revenue was estimated using the same assumptions as were used for computing liabilities for future policy benefits. For universal life and investment products, deferred policy acquisition costs are being amortized with interest over the lives of the policies in relation to the present value of estimated future gross profits from projected interest margins, cost of insurance, policy administration and surrender charges. For years in which gross profits are negative, deferred policy acquisition costs are amortized based on the present value of gross revenues. Beginning January 1, 1994, deferred policy acquisition costs are adjusted to reflect the impact of unrealized gains and losses on fixed maturity securities available-for-sale. See note 2(b). (e) Separate Accounts ----------------- Separate Account assets and liabilities represent contractholders' funds which have been segregated into accounts with specific investment objectives. The investment income and gains or losses of these accounts accrue directly to the contractholders. The activity of the Separate Accounts is not reflected in the consolidated statements of income and cash flows except for the fees the Company receives for administrative services and risks assumed. (f) Future Policy Benefits ---------------------- Future policy benefits for traditional life and individual health policies have been calculated using a net level premium method based on estimates of mortality, morbidity, investment yields and withdrawals which were used or which were being experienced at the time the policies were issued, rather than the assumptions prescribed by state regulatory authorities. See note 6. Future policy benefits for annuity policies in the accumulation phase, universal life and variable universal life policies have been calculated based on participants' contributions plus interest credited less applicable contract charges. Future policy benefits and claims for group long-term disability policies are the present value (primarily discounted at 5.5%) of amounts not yet due on reported claims and an estimate of amounts to be paid on incurred but unreported claims. The impact of reserve discounting is not material. Future policy benefits and claims on other group health policies are not discounted. 78 80 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued (g) Participating Business ---------------------- Participating business represents approximately 45% (48% in 1993 and 1992) of the Company's ordinary life insurance in force, 72% (72% in 1993; 71% in 1992) of the number of policies in force, and 41% (45% in 1993 and 1992) of life insurance premiums. The provision for policyholder dividends is based on current dividend scales. Future dividends are provided for ratably in future policy benefits based on dividend scales in effect at the time the policies were issued. Dividend scales are approved by the Board of Directors. Income attributable to participating policies in excess of policyholder dividends is accounted for as belonging to the shareholder. See note 13. (h) Federal Income Tax ------------------ NLIC, FHLIC, WCLIC and NCC file a consolidated Federal income tax return with Nationwide Mutual Insurance Company (NMIC), the majority shareholder of Corp. Through 1994, ELICW filed a consolidated Federal income tax return with Employers Insurance of Wausau A Mutual Company. Beginning in 1995, ELICW will file a separate Federal income tax return. In 1993, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 109 - ACCOUNTING FOR INCOME TAXES, which required a change from the deferred method of accounting for income tax of APB Opinion 11 to the asset and liability method of accounting for income tax. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized. Prior to 1993, the Company applied the deferred method of accounting for income tax which recognized deferred income tax for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of calculation. Under the deferred method, deferred tax is not adjusted for subsequent changes in tax rates. See note 7. The Company has reported the cumulative effect of the change in method of accounting for income tax in the 1993 consolidated statement of income. See note 3. (i) Reinsurance Ceded ----------------- Reinsurance premiums ceded and reinsurance recoveries on benefits and claims incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported on a gross basis. (j) Cash Equivalents ---------------- For purposes of the consolidated statements of cash flows, the Company considers all short-term investments with original maturities of three months or less to be cash equivalents. (k) Reclassification ---------------- Certain items in the 1993 and 1992 consolidated financial statements have been reclassified to conform to the 1994 presentation. 79 81 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued (3) Changes in Accounting Principles -------------------------------- Effective January 1, 1994, the Company changed its method of accounting for certain investments in debt and equity securities in connection with the issuance of a new accounting standard by the FASB as described in Note 2(b). As of January 1, 1994, the company classified fixed maturity securities with amortized cost and fair value of $6,593,844 and $7,024,736, respectively, as available-for-sale and recorded the securities at fair value. Previously, these securities were recorded at amortized cost. The effect as of January 1, 1994 has been recorded as a direct credit to shareholder's equity as follows: Excess of fair value over amortized cost of fixed maturity securities available-for-sale $430,892 Adjustment to deferred policy acquisition costs (97,177) Deferred Federal income tax (116,800) -------- $216,915 ========
During 1993, the Company adopted accounting principles in connection with the issuance of two accounting standards by the FASB. The effect as of January 1, 1993, the date of adoption, has been recognized in the 1993 consolidated statement of income as the cumulative effect of changes in accounting principles, as follows: Asset/liability method of recognizing income tax (note 7) $ 26,344 Accrual method of recognizing postretirement benefits other than pensions (net of tax benefit of $11,296), (note 11) (20,979) -------- Net cumulative effect of changes in accounting principles $ 5,365 ========
(4) Basis of Presentation --------------------- The consolidated financial statements have been prepared in accordance with GAAP. Annual Statements for NLIC and FHLIC, WCLIC, ELICW and NCC, filed with the Department ofInsurance of the State of Ohio, California Department of Insurance, Wisconsin Insurance Department and Michigan Bureau of Insurance, respectively, are prepared on the basis of accounting practices prescribed or permitted by such regulatory authorities. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Company has no material permitted statutory accounting practices. The following reconciles the statutory net income of NLIC as reported to regulatory authorities to the net income as shown in the accompanying consolidated financial statements:
1994 1993 1992 -------- ------- ------- Statutory net income $ 76,532 185,943 33,812 Adjustments to restate to the basis of GAAP: Consolidating statutory net income of subsidiaries 14,350 19,545 21,519 Increase in deferred policy acquisition costs, net 167,166 89,860 78,731 Future policy benefits (76,310) (70,640) (63,355) Deferred Federal income tax (expense) benefit (9,657) (31,634) 13,660 Equity in earnings of affiliates 1,013 7,121 4,618 Valuation allowances and other than temporary declines accounted for directly in surplus 6,275 (6,638) 3,402 Interest maintenance reserve (7,332) 13,754 7,588 Cumulative effect of changes in accounting principles, net of tax - 5,365 - Other, net 11,689 (1,168) (3,158) -------- ------- ------- Net income per accompanying consolidated statements of income $183,726 211,508 96,817 ======== ======= =======
80 82 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued The following reconciles the statutory capital shares and surplus of NLIC as reported to regulatory authorities to the shareholder's equity as shown in the accompanying consolidated financial statements:
1994 1993 1992 ---------- -------- -------- Statutory capital shares and surplus $1,262,861 992,631 647,307 Add (deduct) cumulative effect of adjustments: Deferred policy acquisition costs 1,064,159 811,944 722,084 Nonadmitted assets and furniture and equipment charged to income in the year of acquisition, net of accumulated depreciation 16,120 22,573 15,712 Asset valuation reserve 153,387 105,596 138,727 Interest maintenance reserve 18,843 21,069 7,315 Future policy benefits (310,302) (238,231) (167,591) Deferred Federal income tax, including effect of changes in accounting principles in 1993 36,515 (31,659) (82,724) Cumulative effect of change in accounting principles for postretirement benefits other than pensions, gross - (32,275) - Difference between amortized cost and fair value of fixed maturity securities available-for-sale, gross (272,959) - - Other, net (60,145) (480) 149,412 ---------- ---------- ---------- Shareholder's equity per accompanying consolidated balance sheets $1,908,479 1,651,168 1,430,242 ========== ========== ==========
(5) Investments ----------- An analysis of investment income by investment type follows for the years ended December 31:
1994 1993 1992 ---------- -------- -------- Gross investment income: Securities available-for-sale: Fixed maturities $ 674,346 - - Equity securities 550 7,230 6,949 Fixed maturities held-to-maturity 193,009 800,255 754,876 Mortgage loans on real estate 376,783 364,810 334,769 Real estate 40,280 39,684 27,410 Short-term 6,990 5,080 7,298 Other 42,831 33,832 30,717 ---------- -------- -------- Total investment income 1,334,789 1,250,891 1,162,019 Less investment expenses 45,288 46,465 41,862 ---------- ---------- ---------- Net investment income $1,289,501 1,204,426 1,120,157 ========== ========== ==========
An analysis of the change in gross unrealized gains (losses) on securities available-for-sale and fixed maturities held-to-maturity follows for the years ended December 31:
1994 1993 1992 ---------- -------- -------- Securities available-for-sale: Fixed maturities $ (703,851) - - Equity securities (1,990) (128,837) (9,195) Fixed maturities held-to-maturity (421,427) 223,392 17,774 ----------- -------- -------- $(1,127,268) 94,555 8,579 =========== ======== ========
81 83 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued An analysis of realized gains (losses) on investments by investment type follows for the years ended December 31:
1994 1993 1992 ---------- -------- -------- Realized on disposition of investments: Securities available-for-sale: Fixed maturities $(13,720) - - Equity securities 1,427 129,728 7,215 Fixed maturities - 21,159 13,399 Mortgage loans on real estate (16,130) (17,763) (30,334) Real estate and other 5,765 (12,813) (12,997) ---------- -------- -------- (22,658) 120,311 (22,717) ---------- -------- -------- Valuation allowances: Securities available-for-sale: Fixed maturities 6,600 - - Fixed maturities - (934) 1,792 Mortgage loans on real estate (4,332) (10,478) (5,969) Real estate and other 4,006 4,774 7,579 ---------- -------- -------- 6,274 (6,638) 3,402 ---------- -------- -------- $(16,384) 113,673 (19,315) ========== ======== ========
The amortized cost and estimated fair value of securities available-for-sale and fixed maturities held-to-maturity were as follows as of December 31, 1994:
Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ----------- ---------- ---------- ---------- Securities available-for-sale ----------------------------- Fixed maturities: US Treasury securities and obligations of US government corporations and agencies $ 393,156 1,794 (18,941) 376,009 Obligations of states and political subdivisions 2,202 55 (21) 2,236 Debt securities issued by foreign governments 177,910 872 (9,205) 169,577 Corporate securities 4,201,738 50,405 (128,698) 4,123,445 Mortgage-backed securities 3,543,859 18,125 (187,345) 3,374,639 ----------- ---------- ---------- ---------- Total fixed maturities 8,318,865 71,251 (344,210) 8,045,906 Equity securities 18,373 6,636 (296) 24,713 ----------- ---------- ---------- ---------- $8,337,238 77,887 (344,506) 8,070,619 =========== ========== ========== ========== Fixed maturity securities held-to-maturity ------------------------------------------ Obligations of states and political subdivisions $ 11,613 92 (255) 11,450 Debt securities issued by foreign governments 16,131 111 (39) 16,203 Corporate securities 3,661,043 34,180 (120,566) 3,574,657 ----------- ---------- ---------- ---------- $3,688,787 34,383 (120,860) 3,602,310 =========== ========== ========== ==========
82 84 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued The amortized cost and estimated fair value of investments of fixed maturity securities were as follows as of December 31, 1993:
Gross Gross Amortized unrealized unrealized Estimated cost gains losses fair value ----------- ---------- ---------- ---------- US Treasury securities and obligations of US government corporations and agencies $ 287,738 18,204 (392) 305,550 Obligations of states and political subdivisions 16,519 2,700 (5) 19,214 Debt securities issued by foreign governments 137,092 7,719 (1,213) 143,598 Corporate securities 6,819,355 647,778 (15,648) 7,451,485 Mortgage-backed securities 2,860,274 121,721 (15,022) 2,966,973 ----------- ---------- ---------- ---------- $10,120,978 798,122 (32,280) 10,886,820 =========== ========== ========== ==========
As of December 31, 1993 the net unrealized gain on equity securities, before providing for deferred Federal income tax, was $8,330, comprised of gross unrealized gains of $8,345 and gross unrealized losses of $15. The amortized cost and estimated fair value of fixed maturity securities available-for-sale and fixed maturity securities held-to-maturity as of December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated cost fair value ---------- ----------- Fixed maturity securities available-for-sale -------------------------------------------- Due in one year or less $ 294,779 294,778 Due after one year through five years 2,553,825 2,490,886 Due after five years through ten years 1,382,311 1,327,089 Due after ten years 544,091 558,514 ---------- ----------- 4,775,006 4,671,267 Mortgage-backed securities 3,543,859 3,374,639 ---------- ----------- $8,318,865 8,045,906 ========== =========== Fixed maturity securities held-to-maturity ------------------------------------------ Due in one year or less $ 333,517 333,000 Due after one year through five years 1,953,179 1,942,260 Due after five years through ten years 1,080,069 1,013,083 Due after ten years 322,022 313,967 ---------- ----------- $3,688,787 3,602,310 ========== ===========
Proceeds from the sale of securities available-for-sale during 1994 were $247,876, while proceeds from sales of investments in fixed maturity securities during 1993 were $33,959 ($123,422 during 1992). Gross gains of $3,406 ($2,413 in 1993 and $3,194 in 1992) and gross losses of $21,866 ($39 in 1993 and $513 in 1992) were realized on those sales. Investments that were non-income producing for the twelve month period preceding December 31, 1994 amounted to $11,513 ($13,158 for 1993) and consisted of $11,111 ($10,907 in 1993) in real estate and $402 ($2,251 in 1993) in other long-term investments. Real estate is presented at cost less accumulated depreciation of $29,275 in 1994 ($24,717 in 1993) and valuation allowances of $27,330 in 1994 ($31,357 in 1993). Other valuation allowances are $0 in 1994 ($6,680 in 1993) on fixed maturities and $47,892 in 1994 ($42,350 in 1993) on mortgage loans on real estate. 83 85 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued The Company generally initiates foreclosure proceedings on all mortgage loans on real estate delinquent sixty days. Foreclosures of mortgage loans on real estate were $37,187 in 1994 ($39,281 in 1993) and mortgage loans on real estate in process of foreclosure or in-substance foreclosed as of December 31, 1994 totaled $19,878 ($24,658 as of December 31, 1993), which approximates fair value. Investments with an amortized cost of $11,137 and $11,383 as of December 31, 1994 and 1993, respectively, were on deposit with various regulatory agencies as required by law. (6) Future Policy Benefits and Claims --------------------------------- The liability for future policy benefits for traditional life and individual health policies has been established based upon the following assumptions: Interest rates: Interest rates vary as follows:
Year of issue Life Health ------------- ---- ------ 1994 7.2 %, not graded - permanent contracts with loan provisions; 5.0% 6.0%, not graded - all other contracts 1984-1993 7.4% to 10.5%, not graded 5.0% to 6% 1966-1983 6% to 8.1%, graded over 20 years to 4% to 6.6% 3.5% to 6% 1965 and prior generally lower than post 1965 issues 3.5% to 4%
Withdrawals: Rates, which vary by issue age, type of coverage and policy duration, are based on Company experience. Mortality: Mortality and morbidity rates are based on published tables, modified for the Company's actual experience. The liability for future policy benefits for investment contracts (approximately 81% and 80% of the total liability for future policy benefits as of December 31, 1994 and 1993, respectively) has been established based on policy term, interest rates and various contract provisions. The average interest rate credited on investment product policies was 6.5%, 7.0% and 7.5% for the years ended December 31, 1994, 1993 and 1992, respectively. Future policy benefits and claims for group long-term disability policies are the present value (primarily discounted at 5.5%) of amounts not yet due on reported claims and an estimate of amounts to be paid on incurred but unreported claims. The impact of reserve discounting is not material. Future policy benefits and claims on other group health policies are not discounted. Activity in the liability for unpaid claims and claim adjustment expenses is summarized for the years ended December 31:
1994 1993 1992 --------- -------- -------- Balance as of January 1 $591,258 760,312 672,581 Less reinsurance recoverables 429,798 547,786 445,934 --------- -------- -------- Net balance as of January 1 161,460 212,526 226,647 --------- -------- -------- Incurred related to: Current year 273,299 309,721 360,545 Prior years (26,156) (26,248) (17,433) --------- -------- -------- Total incurred 247,143 283,473 343,112 --------- -------- -------- Paid related to: Current year 175,700 208,978 226,886 Prior years 73,889 125,561 130,347 --------- -------- -------- Total paid 249,589 334,539 357,233 --------- -------- -------- Unpaid claims of ELICW (note 14) 40,223 - - --------- -------- -------- Net balance as of December 31 199,237 161,460 212,526 Plus reinsurance recoverables 457,694 429,798 547,786 --------- -------- -------- Balance as of December 31 $656,931 591,258 760,312 ======== ======== ========
84 86 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued As a result of changes in estimates for insured events of prior years, the provision for claims and claim adjustment expenses decreased in each of the three years ended December 31, 1994 due to lower-than-anticipated costs to settle accident and health claims. (7) Federal Income Tax ------------------ Prior to 1984, the Life Insurance Company Income Tax Act of 1959 as amended by the Deficit Reduction Act of 1984 (DRA), permitted the deferral from taxation of a portion of statutory income under certain circumstances. In these situations, the deferred income was accumulated in the Policyholders' Surplus Account (PSA). Management considers the likelihood of distributions from the PSA to be remote; therefore, no Federal income tax has been provided for such distributions in the consolidated financial statements. The DRA eliminated any additional deferrals to the PSA. Any distributions from the PSA, however, will continue to be taxable at the then current tax rate. The balance of the PSA is approximately $35,344 as of December 31, 1994. The Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 109 - ACCOUNTING FOR INCOME TAXES (SFAS 109), as of January 1, 1993. See note 3. The 1992 consolidated financial statements have not been restated to apply the provisions of SFAS 109. The significant components of deferred income tax expense for the years ended December 31 are as follows:
1994 1993 ------ ------ Deferred income tax expense (exclusive of the effects of other components listed below) $9,657 29,930 Adjustments to deferred income tax assets and liabilities for enacted changes in tax laws and rates - 1,704 ------ ------ $9,657 31,634 ====== ======
For the year ended December 31, 1992, the deferred income tax benefit results from timing differences in the recognition of income and expense for income tax and financial reporting purposes. The primary sources of those timing differences were deferred policy acquisition costs (deferred expense of $16,457) and reserves for future policy benefits (deferred benefit of $32,045). Total Federal income tax expense for the years ended December 31, 1994, 1993 and 1992 differs from the amount computed by applying the U.S. Federal income tax rate to income before tax as follows:
1994 1993 1992 ---- ---- ---- Amount % Amount % Amount % ------- ---- -------- ---- ------- ---- Computed (expected) tax expense $95,631 35.0 $109,515 35.0 $44,390 34.0 Tax exempt interest and dividends received deduction (194) (0.1) (2,322) (0.7) (4,172) (3.2) Current year increase in U.S. Federal income tax rate - - 1,704 0.5 - - Real estate valuation allowance adjustment - - - - (3,463) (2.7) Other, net (5,933) (2.1) (2,139) (0.7) (3,013) (2.3) ------- ---- -------- ---- ------- ---- Total (effective rate of each year) $89,504 32.8 $106,758 34.1 $33,742 25.8 ======= ==== ======== ==== ======= ====
Total Federal income tax paid was $87,576, $58,286 and $63,124 during the years ended December 31, 1994, 1993 and 1992, respectively. 85 87 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued The tax effects of temporary differences that give rise to significant components of the net deferred tax asset (liability) as of December 31, 1994 and 1993 are as follows:
1994 1993 -------- --------- Deferred tax assets: Future policy benefits $124,044 129,995 Fixed maturity securities available-for-sale 95,536 - Liabilities in Separate Accounts 94,783 64,722 Mortgage loans on real estate and real estate 25,632 24,020 Other policyholder funds 7,137 7,759 Other assets and other liabilities 57,528 41,390 -------- --------- Total gross deferred tax assets 404,660 267,886 -------- --------- Deferred tax liabilities: Deferred policy acquisition costs 317,224 243,731 Fixed maturities, equity securities and other long-term investments 3,620 11,137 Other 47,301 44,677 -------- --------- Total gross deferred tax liabilities 368,145 299,545 -------- --------- Net deferred tax asset (liability) $ 36,515 (31,659) ======== =========
The Company has determined that valuation allowances are not necessary as of December 31, 1994 and 1993 and January 1, 1993 (date of adoption of SFAS 109) based on its analysis of future deductible amounts. All future deductible amounts can be offset by future taxable amounts or recovery of Federal income tax paid within the statutory carryback period. In addition, for future deductible amounts for securities available-for-sale, affiliates of the Company which are included in the same consolidated Federal income tax return hold investments that could be sold for capital gains that could offset capital losses realized by the Company should securities available-for-sale be sold at a loss. (8) Disclosures about Fair Value of Financial Instruments ----------------------------------------------------- STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 107 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (SFAS 107) requires disclosure of fair value information about existing on and off-balance sheet financial instruments. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments. SFAS 107 excludes certain assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Although insurance contracts, other than policies such as annuities that are classified as investment contracts, are specifically exempted from SFAS 107 disclosures, estimated fair value of policy reserves on insurance contracts are provided to make the fair value disclosures more meaningful. The tax ramifications of the related unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. The following methods and assumptions were used by the Company in estimating its fair value disclosures: CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS: The carrying amount reported in the balance sheets for these instruments approximate their fair value. 86 88 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued INVESTMENT SECURITIES: Fair value for fixed maturity securities is based on quoted market prices, where available. For fixed maturity securities not actively traded, fair value is estimated using values obtained from independent pricing services or, in the case of private placements, is estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. The fair value for equity securities is based on quoted market prices. SEPARATE ACCOUNT ASSETS AND LIABILITIES: The fair value of assets held in Separate Accounts is based on quoted market prices. The fair value of liabilities related to Separate Accounts is the amount payable on demand. MORTGAGE LOANS ON REAL ESTATE: The fair value for mortgage loans on real estate is estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Fair value for mortgages in default is valued at the estimated fair value of the underlying collateral. INVESTMENT CONTRACTS: Fair value for the Company's liabilities under investment type contracts is disclosed using two methods. For investment contracts without defined maturities, fair value is the amount payable on demand. For investment contracts with known or determined maturities, fair value is estimated using discounted cash flow analysis. Interest rates used are similar to currently offered contracts with maturities consistent with those remaining for the contracts being valued. POLICY RESERVES ON INSURANCE CONTRACTS: Included are disclosures for individual life, universal life and supplementary contracts with life contingencies for which the estimated fair value is the amount payable on demand. Also included are disclosures for the Company's limited payment policies, which the Company has used discounted cash flow analyses similar to those used for investment contracts with known maturities to estimate fair value. POLICYHOLDERS' DIVIDEND ACCUMULATIONS AND OTHER POLICYHOLDER FUNDS: The carrying amount reported in the consolidated balance sheets for these instruments approximates their fair value. Carrying amount and estimated fair value of financial instruments subject to SFAS 107 and policy reserves on insurance contracts were as follows as of December 31:
1994 1993 ---- ---- Carrying Estimated Carrying Estimated amount fair value amount fair value ----------- ----------- ----------- ----------- Assets ------ Investments: Securities available-for-sale: Fixed maturities $ 8,045,906 8,045,906 - - Equity securities 24,713 24,713 16,593 16,593 Fixed maturities held-to-maturity 3,688,787 3,602,310 10,120,978 10,886,820 Mortgage loans on real estate 4,222,284 4,173,284 3,871,560 4,175,271 Policy loans 340,491 340,491 315,898 315,898 Short-term investments 131,643 131,643 41,797 41,797 Cash 7,436 7,436 21,835 21,835 Assets held in Separate Accounts 12,222,461 12,222,461 9,006,388 9,006,388 Liabilities ----------- Investment contracts 12,189,894 11,657,556 10,332,661 10,117,288 Policy reserves on insurance contracts 3,170,085 2,934,384 2,945,120 2,873,503 Policyholders' dividend accumulations 338,058 338,058 322,686 322,686 Other policyholder funds 72,770 72,770 71,959 71,959 Liabilities related to Separate Accounts 12,222,461 11,807,331 9,006,388 8,714,586
87 89 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued (9) Additional Financial Instruments Disclosures -------------------------------------------- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business through management of its investment portfolio. These financial instruments include commitments to extend credit in the form of loans. These instruments involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. Commitments to fund fixed rate mortgage loans on real estate are agreements to lend to a borrower, and are subject to conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a deposit. Commitments extended by the Company are based on management's case-by-case credit evaluation of the borrower and the borrower's loan collateral. The underlying mortgage property represents the collateral if the commitment is funded. The Company's policy for new mortgage loans on real estate is to lend no more than 80% of collateral value. Should the commitment be funded, the Company's exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amounts of these commitments less the net realizable value of the collateral. The contractual amounts also represent the cash requirements for all unfunded commitments. Commitments on mortgage loans on real estate of $243,200 extending into 1995 were outstanding as of December 31, 1994. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK: The Company grants mainly commercial mortgage loans on real estate to customers throughout the United States. The Company has a diversified portfolio with no more than 22% (23% in 1993) in any geographic area and no more than 2% (2% in 1993) with any one borrower. The summary below depicts loans by remaining principal balance as of each December 31:
Apartment Office Warehouse Retail & other Total -------- --------- --------- --------- ---------- 1994: East North Central $109,233 103,499 540,686 191,489 944,907 East South Central 24,298 10,803 127,845 76,897 239,843 Mountain 3,150 13,770 140,358 39,682 196,960 Middle Atlantic 61,299 53,285 140,847 30,111 285,542 New England 10,536 43,282 139,131 4 192,953 Pacific 195,393 210,930 397,911 68,768 873,002 South Atlantic 87,150 81,576 424,150 210,354 803,230 West North Central 127,760 11,766 80,854 4,738 225,118 West South Central 51,013 84,796 184,923 194,788 515,520 -------- --------- --------- --------- ---------- $669,832 613,707 2,176,705 816,831 4,277,075 ======== ========= ========= ========= Less valuation allowances and unamortized discount 54,791 ---------- Total mortgage loans on real estate, net $4,222,284 ========== 1993: East North Central $109,208 108,478 470,755 158,964 847,405 East South Central 27,562 1,460 117,341 69,991 216,354 Mountain 3,228 4,742 105,560 23,065 136,595 Middle Atlantic 56,664 52,766 132,821 15,414 257,665 New England 10,565 48,398 142,530 8 201,501 Pacific 174,409 185,116 389,428 65,497 814,450 South Atlantic 112,640 58,165 391,102 238,337 800,244 West North Central 104,933 13,458 78,408 3,917 200,716 West South Central 50,955 47,103 183,420 161,033 442,511 -------- --------- ------- --------- ---------- $650,164 519,686 2,011,365 736,226 3,917,441 ======== ========= ========= ========= Less valuation allowances and unamortized discount 45,881 ---------- Total mortgage loans on real estate, net $3,871,560 ==========
88 90 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued (10) Pension Plan ------------ NLIC, FHLIC, WCLIC, NCC, and NFS participate together with other affiliated companies, in a pension plan covering all employees who have completed at least one thousand hours of service within a twelve-month period and who have met certain age requirements. Plan contributions are invested in a group annuity contract of NLIC. Benefits are based upon the highest average annual salary of any three consecutive years of the last ten years of service. The Company funds pension costs accrued for direct employees plus an allocation of pension costs accrued for employees of affiliates whose work efforts benefit the Company. Pension costs charged to operations by the Company during the years ended December 31, 1994, 1993 and 1992 were $10,451, $6,702 and $4,613, respectively. The Company's net accrued pension expense as of December 31, 1994 and 1993 was $1,836 and $1,472, respectively. The net periodic pension cost for the plan as a whole for the years ended December 31, 1994, 1993 and 1992 follows:
1994 1993 1992 -------- -------- -------- Service cost (benefits earned during the period) $64,740 47,694 44,343 Interest cost on projected benefit obligation 73,951 70,543 68,215 Actual return on plan assets (21,495) (105,002) (62,307) Net amortization and deferral (62,150) 20,832 (24,281) -------- -------- -------- Net periodic pension cost $55,046 34,067 25,970 ======== ======== ======== Basis for measurements, net periodic pension cost: Weighted average discount rate 5.75% 6.75% 7.25% Rate of increase in future compensation levels 4.50% 4.75% 5.25% Expected long-term rate of return on plan assets 7.00% 7.50% 8.00%
Information regarding the funded status of the plan as a whole as of December 31, 1994 and 1993 follows:
1994 1993 ---------- ---------- Accumulated benefit obligation: Vested $ 914,850 972,475 Nonvested 7,570 10,227 ---------- ---------- $ 922,420 982,702 ========== ========== Projected benefit obligation for services rendered to date 1,305,547 1,292,477 Plan assets at fair value 1,241,771 1,208,007 ---------- ---------- Plan assets less than projected benefit obligation (63,776) (84,470) Unrecognized prior service cost 46,201 49,551 Unrecognized net losses 39,408 55,936 Unrecognized net assets at January 1, 1987 (21,994) (24,146) ---------- ---------- Net accrued pension expense $ (161) (3,129) ========== ========== Basis for measurements, funded status of plan: Weighted average discount rate 7.50% 5.75% Rate of increase in future compensation levels 6.75% 4.50%
89 91 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued (11) Postretirement Benefits Other Than Pensions ------------------------------------------- In addition to the defined benefit pension plan, NLIC, FHLIC, WCLIC, NCC and NFS participate with other affiliated companies in life and health care defined benefit plans for qualifying retirees. Postretirement life and health care benefits are contributory and available to full time employees who have attained age 55 and have accumulated 15 years of service with the Company after reaching age 40. Postretirement life insurance contributions are based on age and coverage amount of each retiree. Postretirement health care benefit contributions are adjusted annually and contain cost-sharing features such as deductibles and coinsurance. The accounting for the health care plan anticipates future cost-sharing changes to the written plan that are consistent with the Company's expressed intent to increase the retiree contribution amount annually for expected health care inflation. The Company's policy is to fund the cost of health care benefits in amounts determined at the discretion of management. The Company began funding in 1994. Plan assets are invested in group annuity contracts of NLIC. Effective January 1, 1993, the Company adopted the provisions of STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 106 - EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (SFAS 106), which requires the accrual method of accounting for postretirement life and health care insurance benefits based on actuarially determined costs to be recognized over the period from the date of hire to the full eligibility date of employees who are expected to qualify for such benefits. Postretirement benefit cost for 1992, which was recorded on a cash basis, has not been restated. The Company elected to immediately recognize its estimated accumulated postretirement benefit obligation as of January 1, 1993. Accordingly, a noncash charge of $32,275 ($20,979 net of related income tax benefit) was recorded in the consolidated statement of income as a cumulative effect of a change in accounting principle. See note 3. The adoption of SFAS 106, including the cumulative effect of the change in accounting principle, increased the expense for postretirement benefits by $35,277 to $36,544 in 1993. Net periodic postretirement benefit cost for 1994 was $4,627. The Company's accrued postretirement benefit obligation as of December 31, 1994 and 1993 was $36,001 and $35,277, respectively. Actuarial assumptions for the measurement of the December 31, 1994 accumulated postretirement benefit obligation include a discount rate of 8% and an assumed health care cost trend rate of 11%, uniformly declining to an ultimate rate of 6% over 12 years. Actuarial assumptions for the measurement of the December 31, 1993 accumulated postretirement benefit obligation and the 1994 net periodic postretirement benefit cost include a discount rate of 7% and an assumed health care cost trend rate of 12%, uniformly declining to an ultimate rate of 6% over 12 years. Actuarial assumptions used to determine the accumulated postretirement benefit obligation as of January 1, 1993 and the 1993 net periodic postretirement benefit cost include a discount rate of 8% and an assumed health care cost trend rate of 14%, uniformly declining to an ultimate rate of 6% over 12 years. Information regarding the funded status of the plan as a whole as of December 31, 1994 and 1993 follows:
1994 1993 --------- --------- Accumulated postretirement benefit obligation: Retirees $ 76,677 90,312 Fully eligible, active plan participants 22,013 24,833 Other active plan participants 59,089 84,103 --------- --------- Accumulated postretirement benefit obligation 157,779 199,248 Plan assets at fair value 49,012 - --------- --------- Plan assets less than accumulated postretirement benefit obligation (108,767) (199,248) Unrecognized net (gains) losses (41,497) 15,128 --------- --------- Accrued postretirement benefit obligation $(150,264) (184,120) ========= =========
90 92 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued The amount of net periodic postretirement benefit cost for the plan as a whole for the years ended December 31, 1994 and 1993 is as follows:
1994 1993 ------- ------- Net periodic postretirement benefit cost: Service cost - benefits attributed to employee service during the year $ 8,586 7,090 Interest cost on accumulated postretirement benefit obligation 14,011 13,928 Actual return on plan assets (1,622) - Net amortization and deferral 1,622 - ------- ------ Net periodic postretirement benefit cost $22,597 21,018 ======= ======
The health care cost trend rate assumption has a significant effect on the amounts reported. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1994 and 1993 by $8,109 and $15,621, respectively, and the net periodic postretirement benefit cost for the years ended December 31, 1994 and 1993 by $866 and $2,377, respectively. (12) Portfolio Transfer of Credit Life and Credit Accident and Health ---------------------------------------------------------------- On March 13, 1992, WCLIC entered into an assignment and assumption agreement with American Bankers Life Assurance Company of Florida (ABLAC) under which ABLAC assumed, by portfolio transfer, substantially all of WCLIC's credit life and accident and health policies in force as of January 1, 1992. A pre-tax loss of approximately $15,000 was recognized from this transaction in 1992. The loss represents approximately $34,000 of amortization of deferred policy acquisition costs, less approximately $27,000 in ceded commissions earned, plus death benefits incurred and other expenses. Under the terms defined in the assignment and assumption agreement, WCLIC is contingently liable for adverse development of claims activity up to a defined limit. As of December 31, 1994, WCLIC has provided for a contingent liability based on the development of claims experience through December 31, 1994. As of December 31, 1993, WCLIC had provided for the maximum contingent liability in the absence of conclusive claims experience development. (13) Regulatory Risk-Based Capital, Retained Earnings and Dividend ------------------------------------------------------------- Restrictions ------------ Each insurance company's state of domicile imposes minimum risk-based capital requirements that were developed by the NAIC. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of the company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level risk-based capital, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. NLIC and each of its insurance subsidiaries exceed the minimum risk-based capital requirements. In accordance with the requirements of the New York statutes, the Company has agreed with the Superintendent of Insurance of that state that so long as participating policies and contracts are held by residents of New York, no profits on participating policies and contracts in excess of the larger of (a) ten percent of such profits or (b) fifty cents per year per thousand dollars of participating life insurance in force, exclusive of group term, at the year-end shall inure to the benefit of the shareholders. Such New York statutes further provide that so long as such agreement is in effect, such excess of profits shall be exhibited as "participating policyholders' surplus" in annual statements filed with the Superintendent and shall be used only for the payment or apportionment of dividends to participating policyholders at least to the extent required by statute or for the purpose of making up any loss on participating policies. In the opinion of counsel for the Company, the ultimate ownership of the entire surplus, however classified, of the Company resides with the shareholder, subject to the usual requirements under state laws and regulations that certain deposits, reserves and minimum surplus be maintained for the protection of the policyholders until all policy contracts are discharged. 91 93 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued Based on the opinion of counsel with respect to the ownership of its surplus, the Company is of the opinion that the earnings attributable to participating policies in excess of the amounts paid as dividends to policyholders belong to the shareholder rather than the policyholders, and such earnings are so treated by the Company. The amount of shareholder's equity other than capital shares was $1,904,664, $1,647,353, and $1,426,427 as of December 31, 1994, 1993 and 1992, respectively. The amount thereof not presently available for dividends to the shareholder due to the New York restrictions and to adjustments relating to GAAP was $929,934, $954,037 and $841,583 as of December 31, 1994, 1993 and 1992, respectively. Ohio law limits the payment of dividends to shareholders. The maximum dividend that may be paid by the Company without prior approval of the Director of the Department of Insurance of the State of Ohio is limited to the greater of statutory gain from operations of the preceding calendar year or 10% of statutory shareholder's surplus as of the prior December 31. Therefore, $1,707,110, of shareholder's equity, as presented in the accompanying consolidated financial statements, is restricted as to dividend payments in 1995. California law limits the payment of dividends to shareholders of WCLIC. The maximum dividend that may be paid by WCLIC without prior approval of the Commissioner of the State of California Department of Insurance is limited to the greater of WCLIC's statutory net income of the preceding calendar year or 10% of WCLIC's statutory shareholder's surplus as of the prior December 31. Therefore, $126,489 of WCLIC's shareholder's equity is restricted as to dividend payments in 1995. Wisconsin law limits the payment of dividends to shareholders of ELICW. The maximum dividend that may be paid by ELICW without prior approval of the Commissioner of the State of Wisconsin is limited to the greater of ELICW's statutory net income of the preceding calendar year or 10% of ELICW s statutory surplus as of the prior December 31, Therefore, $135,369 of ELICW's shareholder's equity is restricted as to dividend payments in 1995. Michigan law limits the payment of dividends to shareholders of NCC. The maximum dividend that may be paid by NCC without prior approval of the Commissioner of the State of Michigan Bureau of Insurance is limited to the greater of NCC's statutory net income, not including realized capital gains, of the preceding calendar year or 10% of NCC's statutory shareholder's surplus as of the prior December 31. Therefore, $66,564 of NCC's shareholder's equity is restricted as to dividend payments in 1995. In addition, prior approval is not required for a dividend which does not increase gross leverage to a point in excess of the United States consolidated industry average for the most recent available year. (14) Transactions With Affiliates ---------------------------- Effective December 31, 1994, NLIC purchased all of the outstanding shares of ELICW from Wausau Service Corporation (WSC) for an amount approximating $165,000, subject to specified adjustments, if any, subsequent to year end. NLIC transferred fixed maturity securities and cash with a fair value of $155,000 to WSC on December 28, 1994, which resulted in a realized loss of $19,239 on the disposition of the securities. An accrual approximating $10,000 is reflected in the accompanying consolidated balance sheet. The purchase price approximated both the historical cost basis and fair value of net assets of ELICW. ELICW has and will continue to share home office, other facilities, equipment and common management and administrative services with WSC. The deferred compensation annuity line of business of the Company is primarily sold through Public Employees Benefit Services Corporation (PEBSCO). The Company paid PEBSCO commissions and administrative fees of $26,699, $22,681 and $20,146 in 1994, 1993 and 1992, respectively. PEBSCO is a wholly owned subsidiary of Corp. The Company and NEA Valuebuilder Investor Services, Inc. (NEAVIS) have contracted with the National Education Association (NEA) to provide individual annuity contracts to be marketed exclusively to members of the NEA. The Company paid NEAVIS a marketing development fee of $11,095, $9,229 and $6,426 in 1994, 1993 and 1992, respectively. NEAVIS is a wholly owned subsidiary of Corp. The Company shares home office, other facilities, equipment and common management and administrative services with affiliates. 92 94 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued The Company participates in intercompany repurchase agreements with affiliates whereby the seller will transfer securities to the buyer at a stated value. Upon demand or a stated period, the securities will be repurchased by the seller at the original sales price plus a price differential. Transactions under the agreements during 1994 and 1993 were not material. During 1993, the Company sold equity securities with a market value $194,515 to NMIC, resulting in a realized gain of $122,823. With the proceeds, the Company purchased securities with a market value of $194,139 and cash of $376 from NMIC. Intercompany reinsurance contracts exist between NLIC and NMIC, NLIC and WCLIC, NLIC and NCC, WCLIC and NMIC and WCLIC and ELICW as of December 31, 1994. These contracts are immaterial to the consolidated financial statements. NCC participates in several 100% quota share reinsurance agreements with NMIC. NCC serves as the licensed insurer as required for an affiliated excess and surplus lines company and cedes 100% of direct written premiums to NMIC. In 1989, NCC transferred 100% of assets and unearned premiums and loss reserves related to a discontinued block of assumed reinsurance to NMIC (95.3%) and Nationwide Mutual Fire Insurance Company (4.7%). Effective January 1, 1993, NCC entered into a 100% quota share reinsurance agreement to cede to NMIC 100% of all written premiums not subject to any other reinsurance agreements. As a result of these agreements, and in accordance with STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 113 - ACCOUNTING AND REPORTING FOR REINSURANCE OF SHORT-DURATION AND LONG-DURATION CONTRACTS, the following amounts are included in the consolidated financial statements as of December 31, 1994 and 1993 for reinsurance ceded:
1994 1993 -------- -------- Reinsurance recoverable $575,721 533,401 Unearned premium reserves (118,092) (102,644) Loss and claim reserves (371,974) (352,303) Loss and expense reserves (85,655) (78,454) -------- -------- $ 0 0 ======== ========
The ceding of reinsurance does not discharge the original insurer from primary liability to its policyholder. The insurer which assumes the coverage assumes the related liability and it is the practice of insurers to treat insured risks, to the extent of reinsurance ceded, as though they were risks for which the original insurer is not liable. Management believes the financial strength of NMIC reduces to an acceptable level any risk to NCC under these intercompany reinsurance agreements. The Company and various affiliates entered into agreements with Nationwide Cash Management Company (NCMC) and California Cash Management Company (CCMC), both affiliates, under which NCMC and CCMC act as common agents in handling the purchase and sale of short-term securities for the respective accounts of the participants. Amounts on deposit with NCMC and CCMC were $92,531 and $28,683 at December 31, 1994 and 1993, respectively, and are included in short-term investments on the accompanying consolidated balance sheets. (15) Bank Lines of Credit -------------------- As of December 31, 1994 and 1993, NLIC had $120,000 of confirmed but unused bank lines of credit which support a $100,000 commercial paper borrowing authorization. Additionally, NFS had $27,000 of confirmed but unused bank lines of credit. 93 95 NATIONWIDE LIFE INSURANCE COMPANY AND SUBSIDIARIES (a wholly owned subsidiary of Nationwide Corporation) Notes to Consolidated Financial Statements, Continued (16) Contingencies ------------- The Company is a defendant in various lawsuits. In the opinion of management, the effects, if any, of such lawsuits are not expected to be material to the Company's financial position or results of operations. (17) Major Lines of Business ----------------------- The Company operates in the life and accident and health lines of business in the life insurance and property and casualty insurance industries. Life insurance operations include whole life, universal life, variable universal life, endowment and term life insurance and annuity contracts issued to individuals and groups. Accident and health operations also provide coverage to individuals and groups. The following table summarizes the revenues and income before Federal income tax and cumulative effect of changes in accounting principles for the years ended December 31, 1994, 1993 and 1992 and assets as of December 31, 1994, 1993 and 1992, by line of business.
1994 1993 1992 ----------- ---------- ---------- Revenues: Life insurance $ 1,577,809 1,479,956 1,406,417 Accident and health 345,544 339,764 475,290 Investment income allocated to capital and surplus 122,847 214,806 51,611 ----------- --------- --------- Total $ 2,046,200 2,034,526 1,933,318 =========== ========= ========= Income before Federal income tax and cumulative effect of changes in accounting principles: Life insurance 141,650 83,917 78,627 Accident and health 13,220 15,043 436 Investment income allocated to capital and surplus 118,360 213,941 51,496 ----------- --------- --------- Total $ 273,230 312,901 130,559 =========== ========= ========= Assets: Life insurance 28,351,628 22,982,186 19,180,561 Accident and health 852,026 773,007 343,535 Capital and surplus 1,908,479 1,651,168 1,430,242 ----------- --------- --------- Total $31,112,133 25,406,361 20,954,338 =========== ========= =========
Included in life insurance revenues are premiums from certain annuities with life contingencies of $20,134 ($35,341 and $54,066 for the years ended December 31, 1993 and 1992, respectively) as well as universal life and investment product policy charges of $239,021 ($188,057 and $148,464 for the years ended December 31, 1993 and 1992 respectively) for the year ended December 31, 1994. Allocations of investment income and certain general expenses were based on a number of assumptions and estimates, and reported operating results would change by line if different methods were applied. Investment income and realized gains allocable to policyholders in 1994 were $1,193,292 and $1,775, respectively. (18) Subsequent Event ---------------- On January 30, 1995, FHLIC received approval from the Ohio Secretary of State to change its name to Nationwide Life and Annuity Insurance Company. 94 -----END PRIVACY-ENHANCED MESSAGE-----