REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
þ
Pre-Effective
Amendment No.
o
Post-Effective
Amendment No. 2
þ
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
þ
Amendment
No. 140
þ
(Check appropriate box or boxes)
SEPARATE ACCOUNT A
(Exact Name of Registrant)
PACIFIC LIFE & ANNUITY COMPANY
(Name of Depositor)
700 Newport Center Drive Newport Beach, California92660
(Address of Depositor’s Principal Executive Offices) (Zip Code)
(949) 219-3943 (Depositor’s Telephone Number, including Area Code)
Brandon J. Cage
Assistant Vice President
Pacific Life & Annuity Company
700 Newport Center Drive Newport Beach, California92660
(Name and address of agent for service)
Approximate Date of Proposed
Public Offering:
It is proposed that this filing will become effective (check appropriate box)
o
immediately upon filing pursuant to paragraph (b) of Rule 485
þ
on May 1, 2010, pursuant to paragraph (b) of Rule 485
o
60 days after filing pursuant to paragraph (a)(1) of Rule 485
o
on ___________, pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
o
This post-effective amendment designates a new date for a
previously filed post-effective amendment.
Title of securities being registered: Interests in the Separate
Account under Pacific Destinations individual flexible premium deferred
variable annuity contracts.
Pacific Destinations
is an individual flexible premium deferred variable annuity
contract issued by Pacific Life & Annuity Company.
This Prospectus
provides information you should know before buying a Contract.
It’s accompanied by current Prospectuses for the Funds that
provide the underlying Portfolios for the Variable Investment
Options offered under the Contract. The Variable Investment
Options are funded by Separate Account A of Pacific
Life & Annuity Company. Please read both Prospectuses
carefully, and keep them for future reference.
Here’s a list
of all the Investment Options currently available under your
Contract; the Variable Investment Options are listed according
to the underlying Funds:
VARIABLE
INVESTMENT OPTIONS
Pacific Select
Fund
International Value
Long/Short Large-Cap
International Small-Cap
Mid-Cap Value
Equity Index
Small-Cap Index
Small-Cap Equity
American
Funds®
Growth-Income
American
Funds®
Growth
Large-Cap Value
Floating Rate Loan
Small-Cap Growth
Short Duration Bond
Comstock
Growth LT
Focused 30
Mid-Cap Equity
International Large-Cap
Mid-Cap Growth
Real Estate
Small-Cap Value
Main
Street®
Core
Emerging Markets
Cash Management (formerly called Money Market) High Yield Bond
Managed Bond
AIM Variable Insurance
Funds
(Invesco Variable Insurance Funds) Invesco V.I. Global Multi-Asset
Fund Series II (formerly called AIM V.I. PowerShares
ETF Allocation Fund Series II)
AllianceBernstein Variable
Products Series Fund, Inc. AllianceBernstein VPS
Balanced Wealth Strategy
Portfolio Class B
BlackRock Variable Series Funds, Inc. BlackRock Global Allocation V.I. Fund Class III
BlackRock Capital Appreciation V.I. Fund Class III*
Franklin Templeton Variable Insurance Products Trust Franklin Templeton VIP Founding Funds Allocation Fund Class 4**
Mutual Global Discovery Securities Fund Class 2*
Templeton Global Bond Securities Fund Class 2*
GE Investments Funds,
Inc. GE Investments Total Return
Fund Class 3
Lord Abbett Series Fund, Inc. Lord Abbett International Core Equity Portfolio Class VC*
Lord Abbett Total Return Portfolio Class VC*
MFS® Variable Insurance Trust MFS® Investors Growth Stock Series – Service Class*
Effective
June 1, 2010, all Class 4 shares will become
Class 2 shares; thereafter, only Class 2 will be
available.
FIXED OPTION DCA Plus Fixed Option
You’ll find
more information about the Contract and Separate Account A in
the SAI dated May 1, 2010. The SAI has been filed with the
SEC and is considered to be part of this Prospectus because
it’s incorporated by reference. You’ll find a table of
contents for the SAI on page 62 of this Prospectus. You can
get a copy of the SAI without charge by calling or writing to
Pacific Life & Annuity Company or you can visit our
website at www.pacificlifeandannuity.com. You can also visit the
SEC’s website at www.sec.gov, which contains the SAI,
material incorporated into this Prospectus by reference, and
other information about registrants that file electronically
with the SEC.
This Contract is not
available in all states. This Prospectus is not an offer in any
state or jurisdiction where we are not legally permitted to
offer the Contract.
The Contract is
described in detail in this Prospectus and its Statement of
Additional Information (SAI). A Fund is described in its
Prospectus and its SAI. No one has the right to describe the
Contract or a Fund any differently than they have been described
in these documents.
You should be aware
that the Securities and Exchange Commission (SEC) has not
reviewed the Contract and does not guarantee that the
information in this Prospectus is accurate or complete.
It’s a criminal offense to say otherwise.
This material is not
intended to be used, nor can it be used by any taxpayer, for the
purpose of avoiding U.S. federal, state or local tax penalties.
Pacific Life & Annuity Company, its distributors and their
respective representatives do not provide tax, accounting or
legal advice. Any taxpayer should seek advice based on the
taxpayer’s particular circumstances from an independent tax
advisor.
This Contract is
not a deposit or obligation of, or guaranteed or endorsed by,
any bank. It’s not federally insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board, or any
other government agency. Investment in a Contract involves risk,
including possible loss of principal.
This overview tells
you some key things you should know about your Contract.
It’s designed as a summary only – please read
this Prospectus, your Contract and the Statement of Additional
Information (SAI) for more detailed information.
Rules about how
annuity contracts are described or administered are reflected in
your Contract and in Riders or Endorsements to your Contract.
This prospectus provides a description of the material rights
and obligations under the Contract. Your Contract (including any
riders and/or endorsements) represents the contractual agreement
between you and us. Any guarantees provided for under your
Contract or through optional riders are backed by our financial
strength and claims paying ability. You must look to the
strength of the insurance company with regard to such
guarantees. Your financial professional or financial
professional’s firm is not responsible for any Contract
guarantees.
In this Prospectus,
you and your mean the Contract Owner or
Policyholder. Pacific Life & Annuity,
PL&A, we, us and our refer to
Pacific Life & Annuity Company. Pacific Life,
PL and administrator means Pacific Life Insurance
Company. Contract means a Pacific Destinations variable
annuity contract, unless we state otherwise.
Some of the Terms
used in this Prospectus may be new to you. You will find a
glossary of certain terms in the TERMS USED IN THIS
PROSPECTUS section.
Pacific
Destinations Basics
An annuity contract may be appropriate if you are looking for
retirement income or you want to meet other long-term financial
objectives. Discuss with your financial professional whether a
variable annuity, optional benefits and underlying Investment
Options are appropriate for you, taking into consideration your
age, income, net worth, tax status, insurance needs, financial
objectives, investment goals, liquidity needs, time horizon,
risk tolerance and other relevant information. Together you can
decide if a variable annuity is right for you.
This Contract may not be the right one for you if you need to
withdraw money for short-term needs, because tax penalties for
early withdrawal may apply.
You should consider the Contract’s investment and income
benefits, as well as its costs.
Pacific Destinations is an annuity contract between you and
Pacific Life & Annuity Company (PL&A). Annuity
contracts have two phases, the accumulation phase and the
annuitization (income) phase. The two phases are discussed below.
This Contract is designed for long-term financial planning. It
allows you to invest money on a tax-deferred basis for
retirement or other goals, and/or to receive income in a variety
of ways, including a series of income payments for life or for a
specified period of years.
Non-Qualified and Qualified Contracts are available. You buy a
Non-Qualified Contract with “after-tax” dollars. You
buy a Qualified Contract under a qualified retirement or pension
plan, or some form of an individual retirement annuity or
account (IRA). It’s important to know that IRAs and
qualified plans are already tax-deferred which means the tax
deferral feature of a variable annuity does not provide a
benefit in addition to that already offered by an IRA or
qualified plan. An annuity contract should only be used to fund
an IRA or qualified plan to benefit from the annuity’s
features other than tax deferral.
Pacific Destinations is a variable annuity, which means that the
value of your Contract fluctuates depending on the performance
of the Investment Options you choose. The Contract allows you to
choose how often you make Investments (“Purchase
Payments”) and how much you add each time.
Your
Right to Cancel (“Free Look”)
During the Free Look period, you have the right to cancel your
Contract and return it with instructions to us or to your
financial professional for a refund. The amount refunded may be
more or less than the Purchase Payments you have made, depending
on the type of Contract you purchased. You will find a complete
description of the Free Look period that applies to your
Contract on the Contract’s cover sheet or notice that
accompanies your Contract. The Free Look period ends
10 days after you receive your Contract. If you are
replacing another annuity contract or life insurance policy,
your Free Look period ends 60 days after you receive your
Contract.
You will find more information about the Right to Cancel
(“Free Look”) period starting on page 35.
3
AN OVERVIEW OF
PACIFIC DESTINATIONS
The Accumulation
Phase
The Investment Options you choose and how they perform will
affect the value of your Contract during the accumulation phase,
as well as the amount available to annuitize on the Annuity
Date.
The accumulation phase begins on your Contract Date and
continues until your Annuity Date. During the accumulation
phase, you can put money in your Contract by making Purchase
Payments, and choose Investment Options in which to allocate
them. You can also take money out of your Contract by making a
withdrawal.
Investments
(“Purchase Payments”)
Your initial Purchase Payment must be at least $5,000 for a
Non-Qualified Contract and at least $2,000 for a Qualified
Contract. Additional Purchase Payments must be at least $250 for
a Non-Qualified Contract and $50 for a Qualified Contract.
You will find more information about Making Your Investments
(“Purchase Payments”) starting on page 15.
Investment
Options
Ask your financial professional to help you choose the right
Investment Options for your goals and risk tolerance. Any
financial firm or financial professional you engage to provide
advice and/or make transfers for you is not acting on our
behalf. We are not responsible for any investment decisions or
allocations you make, recommendations such financial
professionals make or any allocations or specific transfers they
choose to make on your behalf. Some broker-dealers may not allow
or may limit the amount you may allocate to certain Investment
Options.
You can choose from a variety of Variable Investment Options
(also called Subaccounts), each of which invests in a
corresponding Portfolio of a Fund. The value of each Portfolio
will fluctuate with the value of the investments it holds, and
returns are not guaranteed.
You can also choose any available fixed option that earns a
guaranteed rate of interest of at least 3% annually.
We allocate your Net Purchase Payments to the Investment Options
you choose. The value of your Contract will fluctuate during the
accumulation phase depending on the Investment Options you have
chosen. You bear the investment risk of any Variable Investment
Options you choose.
You will find more information about the Investment Options
and the Investment Advisers starting on page 11.
Transferring
Among Investment Options
You can transfer among Investment Options any time, subject to
certain limitations, until your Annuity Date without paying any
current income tax. Transfers are limited to 25 for each
calendar year. Only 2 transfers per month may involve the
Invesco V.I. Global Multi-Asset Fund, BlackRock Global
Allocation V.I. Fund, GE Investments Total Return Fund,
International Value, International Small-Cap, International
Large-Cap, Emerging Markets, Lord Abbett International Core
Equity Portfolio, Mutual Global Discovery Securities Fund, PIMCO
Global Multi-Asset, or Van Kampen LIT Global Tactical Asset
Allocation Investment Options. In addition, only 2 transfers
into or out of the American Funds Growth or American Funds
Growth-Income Investment Options may occur in any calendar
month. If you have used all 25 transfers in a calendar
year, you may make one additional transfer of all or a portion
of your Variable Account Value to the Cash Management Investment
Option before the start of the next calendar year. You can also
make systematic transfers by enrolling in our dollar cost
averaging, portfolio rebalancing or earnings sweep programs.
Transfers made under these systematic transfer programs or
transfers made by us to update a Portfolio Optimization Model
are excluded from the limitation. Some restrictions may apply to
transfers to or from any fixed option.
You will find more information about transfers and transfer
limitations starting on page 22.
Withdrawals
You can make full and partial withdrawals to supplement your
income or for other purposes. There is no withdrawal charge.
Some restrictions apply to making partial withdrawals from any
fixed option.
In general, you may have to pay income taxes on withdrawals or
other distributions from your Contract. If you’re under age
591/2,
a 10% federal tax penalty may also apply to taxable withdrawals.
You will find more information about withdrawals starting on
page 33.
The Income
Phase
The income phase of your Contract begins on your Annuity Date.
Generally, you can choose to surrender your Contract and receive
a single payment or you can annuitize your Contract and receive
a series of income payments over a fixed period or for life.
4
You can choose fixed or variable annuity payments, or a
combination of both. You can choose monthly, quarterly,
semi-annual or annual payments. We will make the income payments
to you or your designated payee. The Owner is responsible for
any tax consequences of any annuity payments.
If you choose variable annuity payments, the amount of the
payments will fluctuate depending on the performance of the
Variable Investment Options you choose. After your Annuity Date,
if you choose variable annuity payments, you can exchange your
Subaccount Annuity Units among the Variable Investment Options
up to 4 times in any 12-month period.
You will find more information about annuitization starting
on page 27 and annuity options available under the Contract
starting on page 28.
The Death
Benefit
Generally, the Contract provides a death benefit upon the first
death of an Owner or the death of the sole surviving Annuitant,
whichever occurs first, during the accumulation phase. Death
benefit proceeds are payable when we receive proof of death and
payment instructions in proper form. To whom we pay a death
benefit depends on who dies first and the type of Contract you
own.
You will find more information about the death benefit
starting on page 30.
Optional
Riders
Optional Riders are subject to availability. Before
purchasing any optional Rider, make sure you understand all of
the terms and conditions and consult with your financial
professional for advice on whether an optional Rider is
appropriate for you. We reserve the right to restrict the
purchase of an optional living benefit Rider to only Contract
issue in the future.
Stepped-Up
Death Benefit Rider (SDBR)
This optional Rider offers you the ability to lock in market
gains for your beneficiaries with a stepped-up death benefit,
which is the highest Contract Value on any previous Contract
Anniversary (prior to the oldest of the Owner’s or
Annuitant’s
81st
birthday) adjusted for additional Purchase Payments and
withdrawals. You can only buy the SDBR when you buy your
Contract.
You will find more information about the SDBR starting on
page 32.
Optional
Living Benefit Riders
You may purchase an optional Rider on the Contract Date or on
any Contract Anniversary (if available). In addition, if you
purchase a Rider within 60 days after the Contract Date or,
if available, within 60 days after any Contract
Anniversary, the Rider Effective Date will be that Contract Date
or Contract Anniversary.
At initial purchase and during the entire time that you own an
optional living benefit Rider, you must invest your entire
Contract Value in an asset allocation program or in Investment
Options we make available for these Riders. The allocation
limitations associated with these Riders may limit the number of
Investment Options that are otherwise available to you under
your Contract. See OTHER OPTIONAL RIDERS – General
Information – Investment Allocation
Requirements. Failure to adhere to the Investment Allocation
Requirements may cause your Rider to terminate.
Taking a withdrawal before a certain age or a withdrawal that is
greater than the allowed annual withdrawal amount under a
particular Rider, may result in adverse consequences such as a
reduction in Rider benefits or the failure to receive lifetime
withdrawals under a Rider.
Some optional riders allow for owner elected
Resets/Step-Ups.
If you elect to
Reset/Step-Up,
your election must be received, in a form satisfactory to us, at
our Service Center within 60 days after the Contract Anniversary
(“60 day period”) on which the
Reset/Step-Up
is effective. We may, at our sole discretion, allow
Resets/Step-Ups
after the 60 day period. We reserve the right to refuse a
Reset/Step-Up
request after the 60 day period regardless of whether we
may have allowed you or others to
Reset/Step-Up
in the past. Each Contract Anniversary starts a new 60 day
period in which a
Reset/Step-Up
may be elected.
There may be adverse consequences to taking a loan while an
optional Rider is in effect. If you have an existing loan on
your Contract, you should carefully consider whether an optional
Rider is appropriate for you.
Automatic
Income Builder Rider
This optional Rider lets you, before the Annuity Date, withdraw
up to 4%, 5%, or 6% (depending on your age) of your Protected
Payment Base per year, lock in market gains, and provides the
potential to withdraw up to the Protected Payment Amount for
life, if certain conditions are met. Lifetime withdrawals are
available if the oldest Owner (or Annuitant, in the case of a
Non-Natural Owner) was age
591/2
or older when the first withdrawal was taken after the Rider
Effective Date or the most recent Reset Date, whichever is
later.
5
AN OVERVIEW OF
PACIFIC DESTINATIONS
If you are older than
591/2
and if you delay taking withdrawals, this Rider also provides
the potential to receive a 0.10% increase in the withdrawal
percentage per year, which can increase the percentage that you
may withdraw each Contract Year without reducing your Protected
Payment Base. Once a withdrawal is taken, regardless of your age
when the withdrawal occurred, the 0.10% increase in the
withdrawal percentage will no longer be applied. Any previously
added 0.10% increase in the withdrawal percentage will be locked
in and will remain a part of your total withdrawal percentage.
If your total withdrawals in a Contract Year exceed the annual
withdrawal amount allowed under the Rider, then the Protected
Payment Base may decrease and the amount you may withdraw in the
future under the Rider may be reduced.
While this Rider is in effect, the aggregate Purchase Payments
under the Death Benefit Amount will be reduced by withdrawals in
a different manner than if you do not purchase this Rider. This
may result in a different Death Benefit Amount that is paid in
accordance with the Death Benefit Proceeds section. See
DEATH BENEFITS AND OPTIONAL DEATH BENEFIT RIDERS –
Death Benefits – Death Benefit Amount and
OTHER OPTIONAL RIDERS – Automatic Income Builder
Rider – Death Benefit Amount Adjustment. In
addition, taking a withdrawal that is greater than the allowed
annual withdrawal amount may reduce the aggregate Purchase
Payments under the Death Benefit Amount by an amount greater
than the amount withdrawn.
Beginning with the first
(1st)
anniversary of the Rider Effective Date or most recent Reset
Date, whichever is later, the Rider provides for Automatic
Resets or Owner-Elected Resets of the Protected Payment Base and
Remaining Protected Balance to an amount equal to 100% of the
Contract Value. Any reset may include a change in the annual
charge percentage (up to a maximum of 1.50%) associated with the
Rider. Protected Payment Base, Remaining Protected Balance,
Automatic Reset, Owner-Elected Resets and Reset Date are
described in OTHER OPTIONAL RIDERS – Automatic
Income Builder Rider.
This Rider is called the Guaranteed Withdrawal
Benefit III-A
Rider in the Rider attached to your Contract.
You will find more information about the Automatic Income
Builder Rider starting on page 37.
6
Fees and
Expenses
This section of the
overview explains the fees and expenses associated with your
Pacific Destinations Contract.
Contract
Transaction Expenses
The following describes the transaction fees and expenses that
you will pay when owning your Contract. Expenses are fixed under
the terms of your Contract. Premium taxes and/or other taxes may
also apply to your Contract. We generally charge state premium
taxes and/or other taxes when you annuitize your Contract, but
there are other times when we charge them to your Contract
instead. Please see your Contract for details.
Sales
Charge1
(as a percentage of Purchase Payment):
Cumulative
Value2
Sales
Charge
Less than $50,000
5.5%
$50,000 - $99,999
4.5%
$100,000 - $249,999
3.5%
$250,000 - $499,999
2.5%
$500,000 - $999,999
2.0%
$1,000,000 or greater
0.5%
Periodic
Expenses
The following describes the fees and expenses that you will pay
periodically during the time you own your Contract not including
Portfolio fees and expenses.
• Annual
Fee3
$
30.00
Separate
Account A Annual Expenses
(as a
percentage of the average daily Variable Account
Value4):
Without
With
Stepped-Up
Rider
Death Benefit
Rider
• Mortality and Expense Risk
Charge5
0.60%
0.60%
• Administrative
Fee5
0.15%
0.15%
• Stepped-Up Death Benefit Rider
Charge5,6
none
0.20%
• Total Separate Account A Annual Expenses
0.75%
0.95%
Loan Expenses (interest on Contract Debt) (Loans are only
available with certain Qualified Contracts.
See FEDERAL TAX ISSUES—Qualified Contracts—General
Rules—Loans on page 50):
• Loan Interest Rate
(net)7
2.00%
Optional Rider
Annual Expenses:
Current Charge
Maximum Charge
Percentage
Percentage
• Automatic Income Builder Rider
Charge8
1.05%
1.50%
1
A
sales charge will be deducted from all Purchase Payments. For
more information on the sales charge percentage that will be
applied to a Purchase Payment, see CHARGES, FEES AND
DEDUCTIONS—Sales Charge.
2
Cumulative
Value is the greater of the following: 1) the current Purchase
Payment plus your existing Contract Value; or 2) the total of
all Purchase Payments (including the current Purchase Payment)
made into your Contract less any withdrawals.
3
We
deduct an Annual Fee on each Contract Anniversary up to your
Annuity Date and when you make a full withdrawal if the Contract
Value on these days is less than $50,000 after deducting any
outstanding loan and interest (your Net Contract Value). See
CHARGES, FEES AND DEDUCTIONS.
4
The
Variable Account Value is the value of your Variable Investment
Options on any Business Day.
5
This
is an annual rate and is assessed on a daily basis. The daily
rate is calculated by dividing the annual rate by 365.
6
If
you buy the Stepped-Up Death Benefit Rider we add this charge to
the Mortality and Expense Risk Charge until your Annuity Date.
7
If
we process a loan on your Contract, we will charge you a gross
interest rate of 5.00% on your outstanding principal amount. We
will credit you the amount of 3.00% on any Contract Value
attributed to your Loan Account. The net amount of interest
you pay on your loan will be 2.00% annually. See FEDERAL TAX
ISSUES—Qualified Contracts—General
Rules—Loans.
8
If
you purchased the Automatic Income Builder Rider, the annual
charge is equal to the current charge percentage (divided by 4)
multiplied by the Protected Payment Base, deducted on a
quarterly basis. The Protected Payment Base is the amount used
to determine the allowable annual
7
AN OVERVIEW OF
PACIFIC DESTINATIONS
withdrawal
amount under the Rider. The initial Protected Payment Base is
equal to the initial Purchase Payment if purchased at Contract
issue or is equal to the Contract Value if the Rider is
purchased on a Contract Anniversary. For a complete explanation
of the Protected Payment Base, see OTHER OPTIONAL
RIDERS – Automatic Income Builder Rider. The
charge is deducted from your Contract Value on a quarterly
basis. The quarterly amount deducted may increase or decrease
due to changes in your Protected Payment Base. Your Protected
Payment Base may increase due to additional Purchase Payments,
decrease due to withdrawals or also change due to Resets. We
deduct this charge proportionately from your Investment Options
(excluding the DCA Plus Fixed Option) every quarter following
the Rider Effective Date, during the term of the Rider and while
the Rider is in effect, and when the Rider is terminated. We
will waive the annual charge if the Rider terminates as a result
of the death of an Owner or sole surviving Annuitant, upon full
annuitization of your Contract or after the Contract Value is
zero. The annual charge is only waived for the quarter that we
are notified of death or annuitization. See CHARGES, FEES AND
DEDUCTIONS – Optional Rider Charges.
8
Total Annual Fund
Operating Expenses
You will find more about the underlying Funds starting on
page 11, and in each underlying Fund Prospectus which
accompanies this Prospectus.
This table shows the minimum and maximum total annual operating
expenses paid by the Portfolios that you indirectly pay during
the time you own the Contract. This table shows the range
(minimum and maximum) of fees and expenses (including management
fees, shareholder servicing and/or distribution (12b-1) fees,
and other expenses) charged by any of the Portfolios, expressed
as an annual percentage of average daily net assets. The amounts
are based on expenses paid in the year ended December 31,2009, adjusted to reflect anticipated changes in fees and
expenses, or, for new Portfolios, are based on estimates for the
current fiscal year.
Each Variable Account of the Separate Account purchases shares
of the corresponding Fund Portfolio at net asset value. The net
asset value reflects the investment advisory fees and other
expenses that are deducted from the assets of the Portfolio. The
advisory fees and other expenses are not fixed or specified
under the terms of the Contract, and they may vary from year to
year. These fees and expenses are described in each Fund
Prospectus.
Minimum
Maximum
Range of total annual portfolio operating expenses
before any waivers or expense reimbursements
0.28%
2.62%
Range of total annual portfolio operating expenses
after any waivers or expense reimbursements
0.28%
1.56%
To help limit Fund expenses, Fund advisers have contractually
agreed to reduce investment advisory fees or otherwise reimburse
certain Portfolios of their respective Funds which may reduce
the Portfolio’s expenses. The range of expenses in the
first row above does not include the effect of any waiver
and/or
expense reimbursement arrangement. The range of expenses in the
second row above includes the effect of waiver
and/or
expense reimbursement arrangements that will remain in effect at
least through April 30, 2011. There can be no assurance
that expense waivers or reimbursements will be extended beyond
their current terms, and they may not cover certain expenses
such as extraordinary expenses. See each Fund prospectus for
complete information regarding annual operating expenses of that
Fund.
9
AN OVERVIEW OF
PACIFIC DESTINATIONS
Examples
The following examples are intended to help you compare the cost
of investing in your Contract with the cost of investing in
other variable annuity contracts. The maximum amounts reflected
below include the maximum periodic Contract expenses, Separate
Account annual expenses and the Portfolio with the highest fees
and expenses for the year ended December 31, 2009. The
maximum amounts also include the combination of optional Riders
whose cumulative maximum charge expenses totaled more than any
other optional Rider combination. The optional Riders included
are the SDBR and Automatic Income Builder Riders. The minimum
amounts reflected below include the minimum periodic Contract
expenses, Separate Account annual expenses and the Portfolio
with the lowest fees and expenses for the year ended
December 31, 2009. The minimum amounts do not include any
optional Riders.
The examples assume that you invest $10,000 in the Contract for
the time periods indicated. They also assume that your Purchase
Payment has a 5% return each year and assumes the maximum and
minimum fees and expenses of all of the Investment Options
available. Although your actual costs may be higher or lower,
based on these assumptions, your maximum and minimum costs would
be:
•
If you surrendered, annuitized, or left your money in your
Contract:
1 Year
3 Years
5 Years
10 Years
Maximum*
$1,024
$1,969
$2,910
$5,245
Minimum*
$673
$932
$1,211
$2,009
*
In calculating the examples above,
we used the maximum and minimum total operating expenses of all
the Portfolios as shown in the Fees And Expenses section
of each Fund Prospectus. For more information on fees and
expenses, see CHARGES, FEES AND DEDUCTIONS in this
Prospectus, and see each Fund Prospectus. See the FINANCIAL
HIGHLIGHTS section in this Prospectus for condensed
financial information about the Subaccounts.
Some broker-dealers may not allow or may limit the amount you
may allocate to certain Investment Options. Work with your
financial professional to help you choose the right Investment
Options for your investment goals and risk tolerance.
You may choose among the different Variable Investment Options
and the DCA Plus Fixed Option.
Each Variable Investment Option invests in a separate Portfolio
of a Fund. For your convenience, the following chart summarizes
some basic data about each Portfolio. This chart is only a
summary. For more complete information on each Portfolio,
including a discussion of the Portfolio’s investment
techniques and the risks associated with its investments, see
the applicable Fund Prospectus. No assurance can be given that a
Portfolio will achieve its investment objective. YOU SHOULD READ
EACH FUND PROSPECTUS CAREFULLY BEFORE INVESTING.
PACIFIC SELECT FUND
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
International Value
Seeks long-term capital appreciation primarily through
investment in equity securities of corporations domiciled in
countries with developed economies and markets other than the
U.S. Current income from dividends and interest will not be an
important consideration.
Invests primarily in a diversified portfolio of equity
securities of relatively large non-U.S. companies that the
manager believes to be undervalued.
AllianceBernstein L.P.
Long/Short Large-Cap
Seeks above-average total returns.
Invests at least 80% of its assets in securities of companies
with large market capitalizations.
Analytic Investors, LLC & J.P. Morgan Investment
Management, Inc.
International Small-Cap
Seeks long-term growth of capital.
Invests at least 80% of its assets in securities of companies
with small market capitalizations.
Batterymarch Financial Management, Inc.
Mid-Cap Value
Seeks long-term growth of capital.
Invests at least 80% of its assets in equity securities of
mid-capitalization companies.
BlackRock Capital Management, Inc.
Equity Index
Seeks to provide investment results that correspond to the total
return of common stocks that are publicly traded in the U.S.
Invests at least 80% of its assets in equity securities of
companies included in the portfolio’s applicable benchmark
index, including instruments representative of that index (such
as derivatives).
BlackRock Investment Management, LLC
Small-Cap Index
Seeks investment results that correspond to the total return of
an index of small-capitalization companies.
Invests at least 80% of its assets in securities of companies
with small market capitalizations included in the
portfolio’s applicable benchmark index, including
instruments representative of that index (such as derivatives).
BlackRock Investment Management, LLC
Small-Cap Equity
Seeks long-term growth of capital.
Invests at least 80% of its assets in securities of companies
with small market capitalizations, including instruments with
characteristics of small-capitalization equity securities (such
as derivatives).
BlackRock Investment Management, LLC & Franklin Advisory
Services, LLC
American Funds
Growth-Income
Seeks long-term growth of capital and income.
Invests all of its assets in Class 1 shares of the Growth-Income
Fund, a series of the American Funds Insurance
Series®,
a registered open-end investment company (Master Growth-Income
Fund).
Capital Research and Management Company
(adviser to the Master Growth-
Income Fund)
American Funds
Growth
Seeks long-term growth of capital.
Invests all of its assets in Class 1 shares of the Growth Fund,
a series of American Funds Insurance
Series®,
a registered open-end investment company (Master Growth Fund).
Capital Research and Management Company
(adviser to the Master Growth
Fund)
Large-Cap Value
Seeks long-term growth of capital; current income is of
secondary importance.
Invests at least 80% of its assets in common stocks of large
companies.
ClearBridge Advisors, LLC
Floating Rate Loan
Seeks to provide high level of current income.
Invests at least 80% of its assets in floating rate loans.
Eaton Vance Management
Small-Cap Growth
Seeks capital appreciation; no consideration is given to income.
Invests at least 80% of its assets in small-capitalization
equity securities.
Fred Alger Management, Inc.
Short Duration Bond
Seeks current income; capital appreciation
is of secondary importance.
Invests at least 80% of its assets in fixed income securities
(including derivatives on such securities).
Goldman Sachs Asset Management, L.P.
Comstock
Seeks long-term growth of capital.
Invests its assets in equity securities.
Invesco Advisers, Inc.
Invesco Ltd. has entered in to a definitive agreement to acquire
certain portfolios of the retail asset management business of
Morgan Stanley Investment Management Inc. (MSIM) (“the
Transaction”). The Transaction includes a sale of the asset
management business that sub-advises the Comstock Portfolio and
is subject to certain approvals and other conditions prior to
its expected closing in
mid-2010.
MSIM is the current subadviser to the Comstock Portfolio and
upon closing of the Transaction, Invesco Advisers, Inc. will
become the subadviser.
Growth LT
Seeks long-term growth of capital.
Invests in companies of any size. The portfolio principally
invests in equity securities but may also invest in debt
securities. The portfolio may invest up to 25% of its assets in
foreign securities (equity and debt), including emerging market
countries, denominated in a foreign currency and not publicly
traded in the U.S.
Janus Capital Management LLC
Focused 30
Seeks long-term growth of capital.
Invests primarily in domestic and foreign equity securities
(including common stock and warrants) selected for their growth
potential.
Janus Capital Management LLC
11
PACIFIC SELECT FUND
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
Mid-Cap Equity
Seeks capital appreciation.
Invests at least 80% of its assets in equity securities of
companies with medium market capitalizations.
Lazard Asset Management LLC
International Large-Cap
Seeks long-term growth of capital.
Invests at least 80% of its assets in securities of companies
with large market capitalizations.
MFS Investment Management
Mid-Cap Growth
Seeks long-term growth of capital.
Invests at least 80% of its assets in securities of companies
with medium market capitalizations.
Morgan Stanley Investment Management Inc.
Real Estate
Seeks current income and long-term capital appreciation.
Invests at least 80% of its assets in securities of companies
operating in the real estate and related industries.
Morgan Stanley Investment Management Inc.
Small-Cap Value
Seeks long-term growth of capital.
Invests at least 80% of its assets in small-capitalization
equity securities.
NFJ Investment Group LLC
Main Street Core
Seeks long-term growth of capital and income.
Invests in common stocks of companies of different
capitalization ranges, with a focus on U.S. companies with large
market capitalizations.
OppenheimerFunds, Inc.
Emerging Markets
Seeks long-term growth of capital.
Invests at least 80% of its assets in securities (including
American Depositary Receipts (ADRs)) of companies whose
principal activities are conducted in countries that are
generally regarded as emerging market countries.
OppenheimerFunds, Inc.
Cash Management (formerly called Money Market)
Seeks current income consistent with preservation of capital.
Invests in money market instruments that the portfolio manager
believes have minimal credit risk.
Pacific Asset Management
High Yield Bond
Seeks a high level of current income.
Invests at least 80% of its assets in non-investment grade (high
yield/high risk, sometimes called “junk” bonds) debt
instruments or in instruments with characteristics of
non-investment grade debt instruments.
Pacific Asset Management
Managed Bond
Seeks to maximize total return consistent with prudent
investment management.
Invests at least 80% of its assets in debt instruments,
including instruments with characteristics of debt instruments
(such as derivatives).
Pacific Investment Management Company LLC
Inflation Managed
Seeks to maximize total return consistent with prudent
investment management.
Invests its assets in fixed income securities.
Pacific Investment Management Company LLC
Pacific Dynamix –
Conservative Growth
Seeks current income and moderate growth of capital.
Targets an equity/debt blend of 40/60 through investment in
certain underlying portfolios of Pacific Select Fund.
Pacific Life Fund Advisors LLC
Pacific Dynamix –
Moderate Growth
Seeks long-term growth of capital and low to moderate income.
Targets an equity/debt blend of 60/40 through investment in
certain underlying portfolios of Pacific Select Fund.
Pacific Life Fund Advisors LLC
Pacific Dynamix –
Growth
Seeks moderately high, long-term growth of capital with low,
current income.
Targets an equity/debt blend of 80/20 through investment in
certain underlying portfolios of Pacific Select Fund.
Pacific Life Fund Advisors LLC
Dividend Growth (formerly called Diversified Research)
Seeks long-term growth of capital.
Invests at least 65% of its assets in equity securities of
dividend paying companies that the manager expects to increase
their dividends over time and also provide long-term
appreciation.
T. Rowe Price Associates, Inc.
Large-Cap Growth
Seeks long-term growth of capital; current income is of
secondary importance.
Invests at least 80% of its assets in equity securities of
large-capitalization companies.
UBS Global Asset Management (Americas) Inc.
Diversified Bond
Seeks to maximize total return consistent with prudent
investment management.
Invests at least 80% of its assets in fixed income securities.
Invesco V.I. Global
Multi-Asset
Fund Series II (formerly called AIM V.I. PowerShares ETF Allocation Fund
Series II)
Provide total return consistent with a moderate level of risk
relative to the broad stock market.
The fund invests in underlying funds that invest in U.S. and
international fixed-income, equity and commodities markets. The
fund may invest in affiliated and unaffiliated exchange-traded
funds (ETFs) and mutual funds, and in other securities. The fund
will invest at least 30% of its assets in underlying funds that
invest in fixed-income securities and cash.
Invesco Advisers, Inc.
ALLIANCEBERNSTEIN
VARIABLE PRODUCTS
SERIES FUND, INC.
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
AllianceBernstein VPS
Balanced Wealth
Strategy Portfolio
Class B
Maximize total return.
Invests in equity and debt securities. Targets a weighting of
60% equity securities and 40% debt securities with a goal of
providing moderate upside potential without excessive volatility.
AllianceBernstein L.P.
12
BLACKROCK VARIABLE
SERIES FUNDS, INC.
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
BlackRock Global
Allocation V.I. Fund
Class III
Seeks high total investment return.
A mix of U.S. and foreign equity, debt and money market
securities.
BlackRock Advisors, LLC
BlackRock Capital
Appreciation V.I. Fund
Class III*
Seeks long-term growth of capital.
Primarily in a diversified portfolio consisting of common stock
of U.S. companies believed to have shown above-average growth
rates in earnings over the long-term.
BlackRock Advisors, LLC
FRANKLIN TEMPLETON
VARIABLE INSURANCE
PRODUCTS TRUST
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
Franklin Templeton VIP
Founding Funds
Allocation Fund
Class 4
Seeks capital appreciation, with income as a secondary goal.
Normally invests equal portions in Class 1 shares of
Franklin Income Securities Fund, Mutual Shares Securities Fund
and Templeton Growth Securities Fund. The underlying funds
invest in both U.S. and foreign equity securities and debt
securities.
Franklin Templeton Services, LLC serves as the Fund’s
administrator.
On June 1, 2010 Class 4 shares of this fund will be exchanged
for Class 2 shares (“the Exchange”). The transfer of
Account Value from Class 4 to Class 2 on the Exchange date will
not count as a transfer as outlined under the Transfers and
Market-timing Restrictions – Transfers
subsection. Any existing systematic transfers, systematic
withdrawals or systematic Purchase Payments involving this fund
will be carried over to Class 2 shares, unless you instruct us
otherwise. On the Exchange date, all references in this
prospectus to Class 4 shares of this fund will be changed to
Class 2 shares.
Mutual Global Discovery
Securities Fund
Class 2*
Seeks capital appreciation.
Normally invests primarily in U.S. and foreign equity securities
that the manager believes are undervalued. The fund also
invests, to a lesser extent, in risk arbitrage securities and
distressed companies.
Franklin Mutual Advisers, LLC
Templeton Global Bond
Securities Fund
Class 2*
Seeks high current income, consistent with preservation of
capital. Capital appreciation is a secondary consideration.
Normally, invests at least 80% of its net assets in bonds, which
include debt securities of any maturity, such as bonds, notes,
bills and debentures.
Franklin Advisers, Inc.
GE INVESTMENTS
FUNDS, INC.
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
GE Investments Total Return Fund
Class 3
Highest total return, composed of current income and capital
appreciation, as is consistent with prudent investment risk.
Invests primarily in a combination of U.S. and foreign equity
and debt securities and cash.
GE Asset Management Incorporated
LORD ABBETT
SERIES FUND, INC.
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
Lord Abbett
International Core
Equity Portfolio
Class VC*
Seeks long-term capital appreciation.
Primarily invests in a diversified portfolio of equity
securities of large foreign companies that the portfolio
managers believe are undervalued.
Lord, Abbett & Co. LLC
Lord Abbett
Total Return Portfolio
Class VC*
Seeks income and capital appreciation to produce a high total
return.
Primarily invests in investment grade debt securities.
Lord, Abbett & Co. LLC
MFS VARIABLE
INSURANCE TRUST
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
MFS Investors Growth Stock Series –
Service Class*
Seeks capital appreciation.
Normally invests at least 80% of its net assets in equity
securities. Focuses on investing in the stocks of companies the
manager believes have above average earnings growth potential
compared to other companies.
Massachusetts Financial Services Company
MFS Value Series –
Service Class*
Seeks capital appreciation.
Normally invests primarily in equity securities. Focuses on
investing in the stocks of companies that the manager believes
are undervalued compared to their perceived worth.
Massachusetts Financial Services Company
PIMCO VARIABLE
INSURANCE TRUST
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
PIMCO Global
Multi-Asset Portfolio – Advisor Class*
Seeks total return which exceeds that of a blend of 60% MSCI
World Index, 40% Barclays Capital U.S. Aggregate Index.
Normally invests in other mutual funds (combination of
affiliated and unaffiliated funds), securities and other
instruments.
Pacific Investment Management Company, LLC
VAN KAMPEN LIFE
INVESTMENT TRUST
INVESTMENT GOAL
THE PORTFOLIO’S
MAIN INVESTMENTS
MANAGER
Van Kampen LIT
Global Tactical Asset
Allocation Portfolio
Class II
Seek capital appreciation over time.
Invests primarily in a diversified mix of equity securities and
fixed income securities of U.S. and
non-U.S.
issuers.
Van Kampen Asset Management
On
or about June 1, 2010, the Fund name will change to
“AIM Variable Insurance Funds (Invesco Variable Insurance
Funds)” and the Portfolio will change its name to the
“Invesco Van Kampen V.I. Global Tactical Asset
Allocation Fund Series II”. In addition, the manager
will change to Invesco Advisers, Inc. As a result, all
references in this prospectus to the “Van Kampen Life
Investment Trust” will be changed to the “AIM Variable
Insurance Funds (Invesco Variable Insurance Funds)” and the
“Van Kampen LIT Global Tactical Asset Allocation”
Portfolio will be changed to the “Invesco Van Kampen V.I.
Global Tactical Asset Allocation” Fund once the changes are
completed.
Pacific Life Fund Advisors LLC (PLFA), a subsidiary of Pacific
Life Insurance Company, is the investment adviser for the
Pacific Select Fund. PLFA and the Pacific Select Fund’s
Board of Trustees oversee the management of all the Pacific
Select Fund’s Portfolios, and PLFA also manages certain
portfolios directly. PLFA also does business under the name
“Pacific Asset Management” and manages the Pacific
Select Fund’s Cash Management and High Yield Bond
Portfolios under that name.
Invesco Advisers, Inc. is the investment adviser for the AIM
Variable Insurance Funds (Invesco Variable Insurance Funds).
AllianceBernstein L.P. is the investment adviser for the
AllianceBernstein Variable Products Series Fund, Inc.
BlackRock Advisors, LLC is the investment adviser for the
BlackRock Variable Series Funds, Inc. and has retained various
sub-advisors for its portfolios.
Franklin Templeton Services, LLC is the fund administrator for
the Franklin Templeton VIP Founding Funds Allocation Fund.
Franklin Mutual Advisers, LLC is the investment adviser for the
Mutual Global Discovery Securities Fund. Franklin Advisers, Inc.
is the investment adviser for the Templeton Global Bond
Securities Fund. These Portfolios are part of the Franklin
Templeton Variable Insurance Products Trust.
GE Asset Management Incorporated is the investment adviser for
the GE Investments Funds, Inc.
Lord, Abbett & Co. LLC is the investment adviser for
the Lord Abbett Series Fund, Inc.
Massachusetts Financial Services Company is the investment
adviser for the MFS Variable Insurance Trust.
Pacific Investment Management Company LLC is the investment
adviser for the PIMCO Variable Insurance Trust.
Van Kampen Asset Management is the investment adviser for the
Van Kampen Life Investment Trust. On or about June 1, 2010,
Invesco Advisers, Inc. will be the investment adviser, Invesco
Asset Management Deutschland GmbH will be the sub-adviser, and
the Fund name will change from the Van Kampen Life Investment
Trust to the AIM Variable Insurance Funds (Invesco Variable
Insurance Funds).
The DCA Plus Fixed Option offers you a guaranteed minimum
interest rate on amounts that you allocate to this option.
Amounts you allocate to this option, and your earnings credited
are held in our General Account. For more detailed information
about this option, see THE GENERAL ACCOUNT.
To purchase a Contract, you must work with your financial
professional to fill out an application and submit it along with
your initial Purchase Payment to Pacific Life &
Annuity Company at P.O. Box 2736, Omaha, Nebraska
68103-2736.
In those instances when we receive electronic transmission of
the information on the application from your financial
professional’s broker-dealer firm and our administrative
procedures with your broker-dealer so provide, we consider the
application to be received on the Business Day we receive the
transmission. If your application and Purchase Payment are
complete when received, or once they have become complete, we
will issue your Contract within 2 Business Days. If some
information is missing from your application, we may delay
issuing your Contract while we obtain the missing information.
However, we will not hold your initial Purchase Payment for more
than 5 Business Days without your permission. In any case,
we will not hold your initial Purchase Payment after
20 Business Days.
You may also purchase a Contract by exchanging your existing
annuity. You must submit all contracts to be exchanged when
you submit your application. Call your financial
professional or call us at 1-800-748-6907. Financial
professionals may call us at 1-877-441-2357.
We reserve the right to reject any application or Purchase
Payment for any reason, subject to any applicable
nondiscrimination laws and to our own standards and guidelines.
On your application, you must provide us with a valid U.S. tax
identification number for federal and state tax reporting
purposes.
The maximum age of a Contract Owner/Annuitant, including Joint
Owners/Annuitants and Contingent Annuitants, for which a
Contract will be issued is 85. The Contract Owner’s
age is calculated as of his or her last birthday. If any
Contract Owner or any sole Annuitant named in the application
for a Contract dies and we are notified of the death before we
issue the Contract, then we will return the amount we received.
If we are not notified of the death and we issue the Contract,
then the application for the Contract and/or any Contract issued
will be deemed cancelled and a refund will be issued. The amount
of the refund may be more or less than the initial Purchase
Payment received, or any other Purchase Payment we received in
connection with an exchange or transfer. The refund will be the
Contract Value based upon the next determined Accumulated Unit
Value (AUV) after we receive proof of death, in proper form, of
the Contract Owner or Annuitant, plus a refund of any amounts
that may have been deducted as Contract fees and charges or used
to pay premium taxes and/or any other taxes. Any refund may
subject the refunded assets to probate.
Your initial Purchase Payment must be at least $5,000 if you are
buying a Non-Qualified Contract, and at least $2,000 if you are
buying a Qualified Contract. Currently, we are not enforcing the
minimum initial Purchase Payment on Qualified Contracts but we
reserve the right to enforce the minimum initial Purchase
Payment on Qualified Contracts in the future. For Non-Qualified
Contracts, if the entire minimum initial Purchase Payment is not
included when you submit your application, you must submit a
portion of the required Contract minimum and/or establish a
pre-authorized checking plan (PAC). A PAC allows you to pay the
remainder of the required initial Purchase Payment in equal
installments over the first year. Further requirements for PAC
are discussed in the PAC form.
You must obtain our consent before making an initial or
additional Purchase Payment that will bring your aggregate
Purchase Payments over $1,000,000.
Making
Additional Purchase Payments
If your Contract is Non-Qualified, you may choose to invest
additional amounts in your Contract at any time. If your
Contract is Qualified, the method of contribution and
contribution limits may be restricted by the Qualified Plan or
the Internal Revenue Code (“the Code”). Each
additional Purchase Payment must be at least $250 for
Non-Qualified Contracts and $50 for Qualified Contracts.
Currently, we are not enforcing the minimum additional Purchase
Payment amounts but we reserve the right to enforce the minimum
additional Purchase Payment amounts in the future. Additional
Purchase Payments will be allocated according to the
instructions we have on file unless we receive specific
allocation instructions.
Forms of
Purchase Payment
Your initial and additional Purchase Payments may be sent by
personal or bank check or by wire transfer. Purchase Payments
must be made in a form acceptable to us before we can process
it. Acceptable forms of Purchase Payments are:
•
personal checks or cashier’s checks drawn on a
U.S. bank,
•
money orders and traveler’s checks in single denominations
of more than $10,000 if they originate in a U.S. bank,
•
third party payments when there is a clear connection of the
third party to the underlying transaction, and
•
wire transfers that originate in U.S. banks.
We will not accept Purchase Payments in the following forms:
•
cash,
•
credit cards or checks drawn against a credit card account,
•
money orders or traveler’s checks in single denominations
of $10,000 or less,
•
starter checks,
•
cashier’s checks, money orders, traveler’s checks or
personal checks drawn on non-U.S. banks, even if the
payment may be effected through a U.S. bank,
•
third party payments if there is not a clear connection of the
third party to the underlying transaction, and
•
wire transfers that originate from foreign bank accounts.
All unacceptable forms of Purchase Payments will be returned to
the payor along with a letter of explanation. We reserve the
right to reject or accept any form of payment. If you make
Purchase Payments by check other than a cashier’s check,
your payment of any withdrawal proceeds and any refund during
the “Right to Cancel” period may be delayed until we
receive confirmation in our Annuities administrative office that
your check has cleared.
You may allocate your Net Purchase Payments among any of the
available Investment Options. Allocations of your initial Net
Purchase Payment to the Investment Options you selected will be
effective on your Contract Date. Each additional Net Purchase
Payment will be allocated to the Investment Options according to
your allocation instructions in your application, or most recent
instructions, if any, subject to the terms described in
WITHDRAWALS – Right to Cancel (“Free
Look”). We reserve the right to require that your
allocation to any particular Investment Option must be at least
$500. We also reserve the right (with prior written notice) to
transfer any remaining
15
Account Value that is not at least $500 to your other
Investment Options on a pro rata basis relative to your most
recent allocation instructions.
If your Contract is issued in exchange for another annuity
contract or a life insurance policy, our administrative
procedures may vary.
The Service. Portfolio Optimization is an asset
allocation service that is offered at no additional charge for
use within this variable annuity. Asset allocation refers to the
manner that investments are distributed among asset classes to
help attain an investment goal. For your variable annuity,
Portfolio Optimization can help with decisions about how you
should allocate your Contract Value among available Investment
Options. The theory behind Portfolio Optimization is that
diversification among asset classes can help reduce volatility
over the long term.
As part of the Portfolio Optimization service, several asset
allocation models have been developed (“Portfolio
Optimization Models” or “Models”), each based on
different profiles of an investor’s willingness to accept
investment risk. If you decide to subscribe to the Portfolio
Optimization service and select one of the Portfolio
Optimization Models, your initial Net Purchase Payment (in the
case of a new application) or Contract Value, as applicable,
will be allocated to the Investment Options according to the
Model you select. Subsequent Net Purchase Payments, if allowed
under your Contract, will also be allocated accordingly, unless
you instruct us otherwise. If you choose, you can rebalance your
Contract Value quarterly, semi-annually, or annually, to the
current allocations of your Portfolio Optimization Model, since
changes in the net asset values of the underlying Portfolios
within each Model will alter your asset allocation over time. If
you also allocate part of your Net Purchase Payment or Contract
Value to Investment Options that are not currently included in
your Model and you elect periodic rebalancing, such amounts will
not be considered when rebalancing. If you subscribe to
Portfolio Optimization and elect periodic rebalancing, only the
Investment Options within your Model will be rebalanced.
If you subscribe to Portfolio Optimization, Pacific Life Fund
Advisors LLC (Adviser), an affiliate of PL&A, will serve as
your investment adviser for the service solely for purposes of
development of the Portfolio Optimization Models and periodic
updates of the Models.
On a periodic basis (typically annually), the Portfolio
Optimization Models are evaluated and the Models are updated, as
discussed below. If you subscribe to Portfolio Optimization,
your Contract Value or subsequent Net Purchase Payments, as
applicable, will automatically be reallocated in accordance with
the Model you select, as it is updated from time to time, based
on discretionary authority that you grant to the Adviser, unless
you instruct otherwise. For more information on the role of the
investment adviser for the Portfolio Optimization service,
please see the brochure from the Adviser’s Form ADV, the
SEC investment adviser registration form, which will be
delivered to Contract Owners at the time they apply for a
Contract. Please contact us if you would like to receive a copy
of this brochure. In developing and periodically updating the
Portfolio Optimization Models, the Adviser currently relies on
the recommendations of an independent third-party analytical
firm. The Adviser may change the firm that it uses from time to
time, or, to the extent permissible under applicable law, use no
independent firm at all.
The Portfolio Optimization Models. Five asset allocation
models are offered, each comprised of a carefully selected
combination of Investment Options (from among the underlying
Portfolios of Pacific Select Fund). Development of the Portfolio
Optimization models involves a multi-step process. First, an
optimization analysis is performed to determine the breakdown of
asset classes. Optimization analysis requires forecasting
returns, standard deviations and correlation coefficients of
asset classes over the desired investing horizon and an analysis
using a state-of-the art program and a statistical analytical
technique known as “mean-variance optimization”. Next,
after the asset class exposures are known, a determination is
made of how available Investment Options (underlying Portfolios)
can be used to implement the asset class level allocations. The
Investment Options are selected by evaluating the asset classes
represented by the underlying Portfolios and combining
Investment Options to arrive at the desired asset class
exposures. The Portfolio-specific analysis uses historical
returns-based style analysis and asset performance and
regression and attribution analyses. It may also include
portfolio manager interviews. Based on this analysis, Investment
Options are selected in a way intended to optimize potential
returns for each Model, given a particular level of risk
tolerance. This process could, in some cases, result in the
inclusion of an Investment Option in a Model based on its
specific asset class exposure or other specific optimization
factors, even where another Investment Option may have better
historical performance.
Periodic Updates of the Portfolio Optimization Model and
Notices of Updates. Each of the Portfolio Optimization
Models are evaluated periodically (generally, annually) to
assess whether the combination of Investment Options within each
Model should be changed to better seek to optimize the potential
return for the level of risk tolerance intended for the Model.
As a result of the periodic analysis, each Model may change.
Investment Options may be added to a Model (including Investment
Options not currently available), Investment Options may be
deleted from a Model, and the target allocation percentages for
the Investment Options may be changed.
When your Portfolio Optimization Model is updated, your Contract
Value (and subsequent Net Purchase Payments, if applicable) will
automatically be reallocated in accordance with the changes to
the Model you have selected. This means the allocation of your
Contract Value, and potentially the Investment Options in which
you are invested, will automatically change and your Contract
Value (and subsequent Net Purchase Payments, if applicable) will
automatically be reallocated among the Investment Options in
your updated Model (independently of any automatic rebalancing
you may have selected). The Adviser requires that you grant it
discretionary investment
16
authority to periodically reallocate your Contract Value (and
subsequent Net Purchase Payments, if applicable) in accordance
with the updated version of the Portfolio Optimization Model you
have selected, if you wish to participate in Portfolio
Optimization.
When the Adviser updates the Portfolio Optimizations Models, a
written notice of the updated Models will be sent to
participants at least 30 days in advance of the date the
Adviser intends the updated version of the Model to be
effective. You should carefully review these notices. If you
wish to accept the changes in your selected Model, you will not
need to take any action, as your Contract Value (or subsequent
Net Purchase Payments, if applicable) will automatically be
reallocated in accordance with the updated Model. If you do not
wish to accept the changes to your selected Model, you can
change to a different Model that is offered at the time or
withdraw from the Portfolio Optimization service. Some of the
optional riders available under your Contract have investment
allocation requirements. If you purchased any of these riders,
such riders may terminate if you do not allocate your Contract
Value consistent with the investment allocation requirements or
if you withdraw from the service. See OTHER OPTIONAL
RIDERS — General Information —
Investment Allocation Requirements.
Selecting a Portfolio Optimization Model. If you choose
to subscribe to the Portfolio Optimization service, you need to
determine which Portfolio Optimization Model is best for you.
Neither the Adviser nor its affiliates will make this decision.
You should consult with your financial professional on this
decision. Your financial professional can help you determine
which Model is best suited to your financial needs, investment
time horizon, and willingness to accept investment risk. You
should periodically review these factors with your financial
professional to determine if you should change Models to keep up
with changes in your personal circumstances. Your financial
professional can assist you in completing the proper forms to
subscribe to the Portfolio Optimization service or to change to
a different Model. You may, in consultation with your financial
professional, utilize analytical tools made available by the
Adviser, including an investor profile questionnaire, which asks
questions intended to help you or your financial professional
assess your financial needs, investment time horizon, and
willingness to accept investment risk. While the information may
assist you, it is your decision, in consultation with your
financial professional, to select a Model or to change to a
different Model, and the Adviser and its affiliates bear no
responsibility for this decision. You may change to a
different available Model at any time, subject to transfer and
market timing restrictions, with a proper written request or by
telephone or electronic instructions provided a valid
telephone/electronic authorization is on file with us.
Periodic Reports. Participants in the Portfolio
Optimization service will periodically be sent performance
information regarding the Investment Options within a selected
Model. This information may also be accessed online. Information
concerning the current Models is described below.
Risks. Although the Models are designed to optimize
returns given the various levels of risk, there is no assurance
that a Model portfolio will not lose money or that investment
results will not experience volatility. Investment performance
of your Contract Value could be better or worse by participating
in a Portfolio Optimization Model than if you had not
participated. A Model may perform better or worse than any
single Investment Option or asset class or other combinations of
Investment Options or asset classes. Model performance is
dependent upon the performance of the component Investment
Options (the selected underlying Portfolios). The timing of your
investment and the frequency of automatic rebalancing may affect
performance. Your Contract Value will fluctuate, and when
redeemed, may be worth more or less than the original cost.
A Portfolio Optimization Model may not perform as intended.
Although the Models are intended to optimize returns given
various levels of risk tolerance, portfolio, market and asset
class performance, as well as the correlation of risks and
returns among different asset classes, may differ in the future
from the historical performance and assumptions upon which the
Models are based, which could cause the Models to be ineffective
or less effective in reducing volatility.
Periodic updating of the Portfolio Optimization Models can cause
the underlying Portfolios to incur transactional expenses to
raise cash for money flowing out of the Portfolios or to buy
securities with money flowing into the Portfolios. These
expenses can adversely affect performance of the pertinent
Portfolios and the Models.
The Adviser may be subject to competing interests that have the
potential to influence its decision making with regard to
Portfolio Optimization. For example, one Portfolio may provide a
higher advisory fee to the Adviser than another Portfolio, and
provide the Adviser with incentive to use the Portfolio with the
higher fee as part of a Portfolio Optimization Model. In
addition, the Adviser may believe that certain Portfolios may
benefit from additional assets or could be harmed by
redemptions. As adviser to Pacific Select Fund, the Advisor has
duties to the Pacific Select Fund and its shareholders,
including those shareholders who do not subscribe to Portfolio
Optimization, and at times there may be some conflicts between
the interests of the different shareholders. The Adviser
monitors the Portfolios, and may, from time to time, recommend
to the Pacific Select Fund’s Board of Trustees a change in
portfolio management firm or strategy or the closure or merger
of a Portfolio, all of which could impact a Model. All Pacific
Select Fund Portfolios available as Investment Options, except
those expected to be liquidated or merged or that are asset
allocation oriented by structure (i.e. the Pacific Dynamix
Portfolios), are analyzed by the independent third party
analytical firm. The third party analytical firm determines the
number of Portfolios in a Model, the percent that any Portfolio
represents in a Model, and which Portfolios may be selected. The
Adviser will work with the analytical firm to resolve any
investment related matters derived from the analytical
firm’s recommendations. The Adviser believes that its
reliance on the recommendations of an independent third-party
analytical firm to develop and update the Models (as described
above) reduces or eliminates the potential for the Adviser to be
influenced by these competing interests, but there can be no
assurance of this.
17
The Advisor may, when it is not inconsistent with the interests
of participants, consider certain business factors of its
affiliates, Pacific Life Insurance Company and Pacific Life
& Annuity Company (together the “Insurers”). For
example, in certain of the Variable Products the Insurers offer
optional guaranteed lifetime income benefits or death benefits
under which the Insurers assume investment and other risks, and
their exposure and required reserves may be affected by gains or
losses incurred in the Variable Products. The Advisor’s
investment decisions in allocating monies to the available
Investment Options may be influenced by these factors. For
example, in volatile markets, the Insurers may benefit from
Models that are designed in a more conservative fashion, such as
by increasing allocations to fixed-income securities, so as to
help reduce potential losses. Alternatively, in flat markets,
the Insurers may benefit from Models that are designed in a more
aggressive fashion, such as by increasing allocations to equity
securities of various categories, seeking to generate gains.
While the investment process is intended to produce allocation
decisions that are in the best interests of participants,
participants should be aware that the Advisor’s investment
decisions may be influenced by this and other potential
conflicts of interests.
In addition to the Portfolio Optimization service, the Adviser
provides asset allocation advisory services to various mutual
funds. The asset allocation models may differ amongst these
groups, e.g., one group of funds may not have the same target
asset class allocations as the other group of funds or as the
Portfolio Optimization service.
The Adviser and its affiliates are under no contractual
obligation to continue this service and have the right to
terminate or change the Portfolio Optimization service at any
time. The Advisor may, in its discretion, cease offering one or
more of the Models at any time, reduce or expand the number of
available Models, or combine two or more Models into a single
Model. The Advisor may, in its discretion, add funds in addition
to or in lieu of Pacific Select Fund as a source of Investment
Options for the Models. The Advisor may, in its discretion,
manage the service through investment in single mutual fund
portfolios, including, but not limited to, portfolios that use
multiple strategies and/or invest in multiple asset classes, so
that a Model would be effected through investment in a single
portfolio, which could be a “fund-of-funds”, which may
charge fees and bear expenses in addition to fees and expenses
of the underlying funds. Once invested in single mutual fund
portfolios, the Advisor may discontinue active management of the
Models and allow asset allocation to be effected through the
single portfolios.
18
The Models. Information concerning the Portfolio
Optimization Models is described below. You should review this
information carefully with your financial professional before
selecting or changing a Model.
Model A
Model B
Model C
Model D
Model E
Conservative
Moderate-Conservative
Moderate
Moderate-Aggressive
Aggressive
Investor Profile
You are looking for a relatively stable investment and do not tolerate short-term market swings.
Your focus is on keeping pace with inflation and you can tolerate a moderate level of risk.
You want the opportunity for long-term moderate growth.
You want an investment that is geared for growth and are willing to accept above average risk.
You are an aggressive investor and can tolerate short-term market swings.
Shorter Investment Time
Horizon◄———►Longer
Investment Time Horizon
Investor Objective
Primarily preservation of capital
Moderate growth
Steady growth in asset values
Moderately high growth in asset values
High growth in asset values
Risk Characteristics
There may be some losses in the values of the investment as asset values fluctuate.
There may be some losses in the values of the investment from year to year.
There will probably be some losses in the values of the underlying investments from year to year.
Fluctuations in value should be less than those of the overall stock markets.
Some of these might be large, but the overall fluctuations in asset values should be less than those of the U.S. stock market.
Lower
Risk◄———►Higher
Risk
Asset Class Target Exposure
Model A
Model B
Model C
Model D
Model E
Cash Equivalents
7
%
5
%
2
%
—
—
Fixed Income
73
57
42
25
%
8
%
Domestic Equity
15
29
41
54
66
International Equity
5
9
15
21
26
Portfolio Optimization Model
Target Allocations
Model A
Model B
Model C
Model D
Model E
Small-Cap Growth
—
—
1
%
2
%
2
%
International Value
2
%
2
%
3
4
4
Long/Short Large-Cap
2
3
4
4
5
International Small-Cap
—
1
2
3
3
Equity Index
2
3
4
5
6
Small-Cap Index
—
—
—
—
2
Mid-Cap Value
—
2
3
3
4
Dividend Growth (formerly called Diversified Research)
The Custom Model program allows you, with the help of your
financial professional, to create your own asset allocation
model that will comply with the Investment Allocation
Requirements for certain optional living benefit Riders. (See
OTHER OPTIONAL RIDERS – General
Information – Investment Allocation
Requirements.) You will create your own model using the
parameters listed below.
Parameters. To create your model, you may select
Investment Options from the 4 Categories
(Categories A, B, C and D) listed below. You must allocate
at least 25% into each of Categories A, B, and C. You may
not allocate more than 15% into any one Investment Option within
Category A, B, or C. Category D is optional and you
are not required to allocate any part of your Net Purchase
Payment or Contract Value to this Category. If you choose to
allocate your Net Purchase Payment or Contract Value to
Category D, you are allowed to allocate up to 25% into any
one Investment Option within Category D. Allocation
percentages among the Categories must total 100%. The model you
create will be automatically rebalanced on a quarterly basis.
Example: Assume a $100,000 Net Purchase Payment.
Following the parameters and using the Investment Options listed
from the Categories below, you may allocate your Net Purchase
Payment as follows:
•
Category A – 15% to Diversified Bond, 10% to
Managed Bond and 5% to Cash Management,
•
Category B – 15% to Focused 30, 10% to Small-Cap
Index, 10% to Mid-Cap Growth, 5% to Large-Cap Growth and 5% to
Large-Cap Value, and
•
Category C – 10% to International Value, 10% to
International Large-Cap and 5% to Emerging Markets.
The total allocated is 100%: Category A = 30%,
Category B = 45% and Category C = 25%. If
you want to include all 4 Categories when creating your
model, you could adjust your allocation percentages in
Categories A, B and C and allocate up to 25% to any
combination of the Investment Options in Category D. Keep
in mind that you may select any Investment Option within a
Category and the allocation percentages among the Categories
must total 100%.
Category A – Fixed Income Investment
Options
Short Duration Bond
Cash Management
Managed Bond
High Yield Bond
Inflation Managed
Diversified Bond
Templeton Global Bond
Securities Fund
Lord Abbett Total Return
Portfolio
Category B – Domestic Equity Investment
Options
Small-Cap Growth
Equity Index
Small-Cap Index
Dividend Growth
Large-Cap Value
Growth LT
Focused 30
Mid-Cap Equity
Large-Cap Growth
Small-Cap Value
Main Street Core
Comstock
Mid-Cap Growth
Small-Cap Equity
Mid-Cap Value
BlackRock Capital
Appreciation V.I. Fund
MFS Investors Growth Stock
Series
MFS Value Series
Category C – International Equity and
Sector Investment Options
Franklin Templeton
VIP Founding Funds
Allocation Fund
GE Investments Total Return Fund
Pacific Dynamix – Conservative Growth
Pacific Dynamix – Moderate Growth
Pacific Dynamix – Growth
PIMCO Global Multi-Asset Portfolio
Van Kampen LIT Global
Tactical Asset
Allocation Portfolio
You may make transfers between Investment Options within a
particular Group or from one Group to another Group as long as
you follow the Custom Model parameters. Transfers made will be
subject to any transfer and market timing restrictions (see
HOW YOUR PURCHASE PAYMENTS ARE ALLOCATED –
Transfers and Market-timing Restrictions). Subsequent Net
Purchase Payments will be
20
allocated according to your current model allocation
instructions. Any withdrawals must be made on a pro rata basis
from each of the Investment Options you selected for your model.
You may terminate your participation in the Custom Model program
at any time. However, if you own an optional living benefit
rider and do not allocate your entire Contract Value to another
asset allocation model or Investment Options we make available
for the Riders, your Rider will terminate. If you allocate any
subsequent Net Purchase Payment or Contract Value inconsistent
with the Custom Model parameters, make transfers between
Investment Options outside the Custom Model parameters, or do
not make a withdrawal on a pro rata basis, you will no longer be
participating in the Custom Model program and your Rider will
terminate. Work with your financial professional and consider
your options before making any Investment Option transfers. Any
changes in the allocation percentages due to market performance
will not be a violation of the program, since the model you
created will automatically be rebalanced on a quarterly basis.
We are under no contractual obligation to continue this program
and have the right to terminate or change the Custom Model
program at any time.
Each time you allocate your Net Purchase Payment to a Variable
Investment Option, your Contract is credited with a number of
“Subaccount Units” in that Subaccount. The number of
Subaccount Units credited is equal to the amount you have
allocated to that Subaccount, divided by the “Unit
Value” of one Unit of that Subaccount.
Example: You allocate $600 to the Inflation Managed
Subaccount. At the end of the Business Day on which your
allocation is effective, the value of one Unit in the Inflation
Managed Subaccount is $15. As a result, 40 Subaccount Units
are credited to your Contract for your $600 ($600/$15 = 40).
Your
Variable Account Value Will Change
After we credit your Contract with Subaccount Units, the value
of those Units will usually fluctuate. This means that, from
time to time, your Net Purchase Payments allocated to the
Variable Investment Options may be worth more or less than the
original Net Purchase Payments to which those amounts can be
attributed. Fluctuations in Subaccount Unit Value will not
change the number of Units credited to your Contract.
Subaccount Unit Values will vary in accordance with the
investment performance of the corresponding Portfolio. For
example, the value of Units in the Equity Index Subaccount will
change to reflect the performance of the Equity Index Portfolio
(including that Portfolio’s investment income, its capital
gains and losses, and its expenses). Subaccount Unit Values are
also adjusted to reflect the Administrative Fee and applicable
Risk Charge imposed on the Separate Account.
We calculate the value of all Subaccount Units on each Business
Day.
Calculating
Subaccount Unit Values
We calculate the Unit Value of the Subaccount Units in each
Variable Investment Option at the close of the New York Stock
Exchange which usually closes at 4:00 p.m. Eastern Time on
each Business Day. At the end of each Business Day, the Unit
Value for a Subaccount is equal to:
Y × Z
where
(Y)
=
the Unit Value for that Subaccount as of the end of the
preceding Business Day; and
(Z)
=
the Net Investment Factor for that Subaccount for the period (a
“valuation period”) between that Business Day and the
immediately preceding Business Day.
The “Net Investment Factor” for a Subaccount for any
valuation period is equal to:
(A
¸
B) – C
where
(A)
=
the “per share value of the assets” of that Subaccount
as of the end of that valuation period, which is equal to: a+b+c
where
(a)
=
the net asset value per share of the corresponding Portfolio
shares held by that Subaccount as of the end of that valuation
period;
(b)
=
the per share amount of any dividend or capital gain
distributions made by each Fund for that Portfolio during that
valuation period; and
(c)
=
any per share charge (a negative number) or credit (a positive
number) for any income taxes and/or any other taxes or other
amounts set aside during that valuation period as a reserve for
any income and/or any other taxes which we determine to have
resulted from the operations of the Subaccount or Contract,
and/or any taxes attributable, directly or indirectly, to
Investments;
21
(B)
=
the net asset value per share of the corresponding Portfolio
shares held by the Subaccount as of the end of the preceding
valuation period; and
(C)
=
a factor that assesses against the Subaccount net assets for
each calendar day in the valuation period the basic Risk Charge
plus any applicable increase in the Risk Charge and the
Administrative Fee (see CHARGES, FEES AND DEDUCTIONS).
The Subaccount Unit Value may increase or decrease from one
valuation period to another.
Your initial Purchase Payment is effective on the day we issue
your Contract. Any additional Purchase Payment is effective on
the day we receive it in proper form. See ADDITIONAL
INFORMATION – Inquiries and Submitting Forms and
Requests.
The day your Purchase Payment is effective determines the Unit
Value at which Subaccount Units are attributed to your Contract.
In the case of transfers or withdrawals, the effective day
determines the Unit Value at which affected Subaccount Units are
debited and/or credited under your Contract. That Unit Value is
the value of the Subaccount Units next calculated after your
transaction is effective. Your Variable Account Value begins to
reflect the investment performance results of your new
allocations on the day after your transaction is effective.
Transfers are allowed 30 days after the Contract Date.
Currently, we are not enforcing this restriction but we reserve
the right to enforce it in the future. Once your Net Purchase
Payments are allocated to the Investment Options you selected,
you may transfer your Account Value less Loan Account Value from
any Investment Option to any other Investment Option, except the
DCA Plus Fixed Option. Transfers are limited to 25 for each
calendar year. Only 2 transfers in any calendar month may
involve any of the following Investment Options:
Invesco V.I. Global Multi-Asset Fund, BlackRock Global
Allocation V.I. Fund, GE Investments Total Return Fund,
International Value, International Small-Cap, International
Large-Cap, Emerging Markets, Lord Abbett International Core
Equity Portfolio, Mutual Global Discovery Securities Fund, PIMCO
Global Multi-Asset, or Van Kampen LIT Global Tactical Asset
Allocation. In addition, only 2 transfers into or out of
the American Funds Growth or American Funds Growth-Income
Investment Options may occur in any calendar month.
Transfers to or from a Variable Investment Option cannot be made
before the seventh calendar day following the last transfer to
or from the same Variable Investment Option. If the seventh
calendar day is not a Business Day, then a transfer may not
occur until the next Business Day. The day of the last transfer
is not considered a calendar day for purposes of meeting this
requirement. For example, if you make a transfer into the Equity
Index Variable Investment Option on Monday, you may not make any
transfers to or from that Variable Investment Option before the
following Monday. Transfers to or from the Cash Management
Variable Investment Option are excluded from this limitation.
For the purpose of applying the limitations, multiple transfers
that occur on the same day are considered 1 transfer. A
transfer of Account Value from the Loan Account back into your
Investment Options following a loan repayment is not considered
a transfer under these limitations. Transfers that occur as a
result of the DCA Plus program, the dollar cost averaging
program, the portfolio rebalancing program, the earnings sweep
program, approved corporate owned life insurance policy
rebalancing programs or an approved asset allocation service are
excluded from these limitations. Also, allocations of Net
Purchase Payments are not subject to these limitations.
If you have used all 25 transfers available to you in a
calendar year, you may no longer make transfers between the
Investment Options until the start of the next calendar year.
However, you may make 1 transfer of all or a portion of the
Account Value remaining in the Variable Investment Options into
the Cash Management Investment Option prior to the start of the
next calendar year.
There are no exceptions to the above transfer limitations in the
absence of an error by us, a substitution of Investment Options,
or reorganization of underlying Portfolios, or other
extraordinary circumstances.
If we deny a transfer request, we will notify your financial
professional via telephone. If you (or your financial
professional) request a transfer via telephone that exceeds the
above limitations, we will notify you (or your financial
professional) immediately.
Certain restrictions apply to any available fixed option. See
THE GENERAL ACCOUNT. Transfer requests are generally
effective on the Business Day we receive them in proper form,
unless you request a date in the future or a systematic transfer
program.
We have the right, at our option (unless otherwise required by
law), to require certain minimums in the future in connection
with transfers. These may include a minimum transfer amount and
a minimum Account Value, if any, for the Investment Option from
which the transfer is made or to which the transfer is made. If
your transfer request results in your having a remaining Account
Value in an Investment Option that is less than $500 immediately
after such transfer, we may (with prior written notice) transfer
that Account Value to your other Investment Options on a pro
rata basis, relative to your most recent allocation instructions.
22
We reserve the right (unless otherwise required by law) to limit
the size of transfers, to restrict transfers, to require that
you submit any transfer requests in writing, to suspend
transfers, and to impose further limits on the number and
frequency of transfers you can make. We also reserve the right
to reject any transfer request. Any policy we may establish with
regard to the exercise of any of these rights will be applied
uniformly to all Contract Owners.
Market-timing
Restrictions
The Contract is not designed to serve as a vehicle for frequent
trading in response to short-term fluctuations in the market.
Accordingly, organizations or individuals that use market-timing
investment strategies and make frequent transfers should not
purchase the Contract. Such frequent trading can disrupt
management of the underlying Portfolios and raise expenses. The
transfer limitations set forth above are intended to reduce
frequent trading. In addition, we monitor certain large
transaction activity in an attempt to detect trading that may be
disruptive to the Portfolios. In the event transfer activity is
found to be disruptive, certain future transactions by such
Contract Owners, or by a financial professional or other party
acting on behalf of one or more Contract Owners, will require
preclearance. Frequent trading and large transactions that are
disruptive to portfolio management can have an adverse effect on
Portfolio performance and therefore your Contract’s
performance. Such trading may also cause dilution in the value
of the Investment Options held by long-term Contract Owners.
While these issues can occur in connection with any of the
underlying Portfolios, Portfolios holding securities that are
subject to market pricing inefficiencies are more susceptible to
abuse. For example, Portfolios holding international securities
may be more susceptible to time-zone arbitrage which seeks to
take advantage of pricing discrepancies occurring between the
time of the closing of the market on which the security is
traded and the time of pricing of the Portfolios.
Our policies and procedures which limit the number and frequency
of transfers and which may impose preclearance requirements on
certain large transactions are applied uniformly to all Contract
Owners. However, there is a risk that these policies and
procedures will not detect all potentially disruptive activity
or will otherwise prove ineffective in whole or in part.
Further, we and our affiliates make available to our variable
annuity and variable life insurance Contract Owners underlying
funds not affiliated with us. We are unable to monitor or
restrict the trading activity with respect to shares of such
funds not sold in connection with our Contracts. In the event
the Board of Trustees/Directors of any underlying fund imposes a
redemption fee or trading (transfer) limitations, we will pass
them on to you.
We reserve the right to restrict, in our sole discretion and
without prior notice, transfers initiated by a market timing
organization or individual or other party authorized to give
transfer instructions on behalf of multiple Contract Owners.
Such restrictions could include:
•
not accepting transfer instructions from a financial
professional acting on behalf of more than one Contract
Owner, and
•
not accepting preauthorized transfer forms from market timers or
other entities acting on behalf of more than one Contract Owner
at a time.
We further reserve the right to impose, without prior notice,
restrictions on transfers that we determine, in our sole
discretion, will disadvantage or potentially hurt the rights or
interests of other Contract Owners; or to comply with any
applicable federal and state laws, rules and regulations.
Exchanges
of Annuity Units
Exchanges of Annuity Units in any Subaccount(s) to any other
Subaccount(s) after the Annuity Date are limited to 4 in any
12-month
period. See THE GENERAL ACCOUNT section in this
Prospectus and THE CONTRACTS AND THE SEPARATE ACCOUNT
section in the SAI.
We offer 4 systematic transfer options: dollar cost averaging,
DCA Plus, portfolio rebalancing, and earnings sweep. There is no
charge for these options and transfers under these options are
not counted towards your total transfers in a calendar year.
However, they are subject to the same requirements and
restrictions as non-systematic transfers. You can have only one
DCA Plus, dollar cost averaging, or earnings sweep program in
effect at one time. Only portfolio rebalancing is available
after you annuitize.
Dollar
Cost Averaging
Dollar cost averaging is a method in which you buy securities in
a series of regular purchases instead of in a single purchase.
This allows you to average the securities’ prices over
time, and may permit a “smoothing” of abrupt peaks and
drops in price. Prior to your Annuity Date, you may use dollar
cost averaging to transfer amounts, over time, from any
Investment Option with an Account Value of at least $5,000 to
one or more Variable Investment Options. Each transfer must be
for at least $250. Currently, we are not enforcing the minimum
Account Value and/or transfer amounts but we reserve the right
to enforce such minimum amounts in the future. Detailed
information appears in the SAI.
23
DCA
Plus
DCA Plus provides a way to transfer amounts monthly from the DCA
Plus Fixed Option to one or more Variable Investment Option(s)
over a period of up to one year. The initial minimum amount that
you may allocate to the DCA Plus Fixed Option is $5,000. The
minimum amount for subsequent Purchase Payments is $250.
Currently, we are not enforcing the initial or subsequent
Purchase Payment minimum amounts but we reserve the right to
enforce such minimum amounts in the future. Amounts allocated to
the DCA Plus Fixed Option are held in our General Account and
receive interest at rates declared periodically by us, but not
less than an annual rate of 3% (the “Guaranteed Interest
Rate”). The DCA Plus program can also be used with
allowable Asset Allocation Models or allowable Investment
Options to qualify for certain optional benefit riders offered
under your Contract. See THE GENERAL ACCOUNT.
Portfolio
Rebalancing
You may instruct us to maintain a specific balance of Variable
Investment Options under your Contract (e.g., 30% in
the Equity Index Subaccount, 40% in the Managed Bond Subaccount,
and 30% in the Growth LT Subaccount) prior to your Annuity
Date. Periodically, we will “rebalance” your values in
the elected Subaccounts to the percentages you have specified.
Rebalancing may result in transferring amounts from a Subaccount
earning a relatively higher return to one earning a relatively
lower return. You may choose to have rebalances made quarterly,
semi-annually or annually until your Annuity Date. Only Variable
Investment Options are available for rebalancing. Detailed
information appears in the SAI.
Earnings
Sweep
You may instruct us to make automatic periodic transfers of your
earnings from the Cash Management Subaccount to one or more
Variable Investment Options (other than the Cash Management
Subaccount). Detailed information appears in the SAI.
A front end sales charge (“sales charge”) will be
deducted from all initial and subsequent Purchase Payments that
you make. The sales charge is deducted from each Purchase
Payment before it is allocated to your Investment Options. The
sales charge is a percentage of each Purchase Payment and the
sales charge deducted will depend on your cumulative value on
the day we receive your Purchase Payment. The sales charge is
based on the following scale:
Cumulative
Value
Sales Charge
Less than $50,000
5.5%
$50,000 - $99,999
4.5%
$100,000 - $249,999
3.5%
$250,000 - $499,999
2.5%
$500,000 - $999,999
2.0%
$1,000,000 or greater
0.5%
Your cumulative value is defined as the greater of:
•
the current Purchase Payment plus your existing Contract Value,
OR
•
the total of all Purchase Payments (including the current
Purchase Payment) made into your Contract less any withdrawals.
Example: Let’s assume that you send us a
Purchase Payment for $25,000, your total Purchase Payments
(including the current Purchase Payment) are $235,000, and your
existing Contract Value is $240,000. To determine what the sales
charge will be for the current Purchase Payment, we will have to
determine your cumulative value. Your cumulative value, using
the definition above, will be the greater of the current
Purchase Payment ($25,000) plus the existing Contract Value
($240,000) which equals $265,000 or your total Purchase Payments
of $235,000 (including the current Purchase Payment of $25,000).
In this example, $265,000 was used (representing your existing
Contract Value plus the current Purchase Payment) because it is
higher than the total Purchase Payments made which are $235,000.
With a cumulative value of $265,000, the sales charge percentage
will be 2.5%. As a result, the sales charge will be $625
($25,000×2.5%=$625).
Subject to the internal eligibility requirements of your
financial professional’s firm, employees of a firm may be
eligible to purchase new Contracts and make additions to
existing Contracts without incurring a sales charge on their
Purchase Payments. We reserve the right to modify, suspend, or
terminate this program at any time.
24
Letter of
Intent
You may also reduce the sales charges deducted by using a Letter
of Intent (LOI). An LOI allows you to lower the sales charges by
indicating to us in writing the total amount of Purchase
Payments you plan to make during a
13-month
period starting from your Contract Date. When you submit an LOI,
we use the total amount of Purchase Payments you plan to submit
to determine the sales charges deducted. For example, let’s
assume that you made a $50,000 initial Purchase Payment and
submitted an LOI for $250,000 (which includes the $50,000
initial Purchase Payment) along with your application. This
makes your cumulative value equal to $250,000 for sales charge
purposes. The sales charge percentage applied to the $50,000
will be 2.5% based on a cumulative value of $250,000. As a
result, the sales charge will be $1,250
($50,000 × 2.5% = $1,250). In this
example, if an LOI was not submitted, the sales charge would be
$2,250 ($50,000 × 4.5% = $2,250).
If at the end of the 13-month period, you did not submit the
total amount of Purchase Payments you planned on as indicated in
your LOI (or if the LOI amount was not met and you surrender
before the
13-month
period is complete), we will deduct an additional sales charge.
We will recalculate the sales charge based on your actual
Purchase Payments and the additional sales charge will be
deducted proportionately from all of your Investment Options at
the end of the
13-month
period.
We reserve the right to modify, suspend or terminate this
program at any time.
We assess a charge against the assets of each Subaccount to
compensate for certain mortality and expense risks that we
assume under the Contract (the “Risk Charge”). The
risk that an Annuitant will live longer (and therefore receive
more annuity payments) than we predict through our actuarial
calculations at the time the Contract is issued is
“mortality risk.” We also bear mortality risk in
connection with death benefit payable under the Contract. The
risk that the expense charges and fees under the Contract and
Separate Account are less than our actual administrative and
operating expenses is called “expense risk.”
This Risk Charge is assessed daily at an annual rate equal to
0.60% of each Subaccount’s assets. This charge may not be
increased for the duration of your Contract.
The Risk Charge will stop at the Annuity Date if you select
fixed annuity payments. The base Risk Charge will continue after
the Annuity Date if you choose variable annuity payments, even
though we do not bear mortality risk if your Annuity Option is
Period Certain Only.
We will realize a gain if the Risk Charge exceeds our actual
cost of expenses and benefits, and will suffer a loss if such
actual costs exceed the Risk Charge. Any gain will become part
of our General Account. We may use it for any reason, including
covering sales expenses on the Contracts.
Increase
in Risk Charge if an Optional Death Benefit Rider is
Purchased
We increase your Risk Charge by an annual rate equal to 0.20% of
each Subaccount’s assets if you purchase the Stepped-Up
Death Benefit Rider (SDBR). The total Risk Charge annual rate
will be 0.80% if the SDBR is purchased. Any increase in your
Risk Charge will not continue after the Annuity Date. See
DEATH BENEFITS AND OPTIONAL DEATH BENEFIT RIDERS –
Death Benefits.
We charge an Administrative Fee as compensation for costs we
incur in operating the Separate Account, issuing and
administering the Contracts, including processing applications
and payments, and issuing reports to you and to regulatory
authorities.
The Administrative Fee is assessed daily at an annual rate equal
to 0.15% of the assets of each Subaccount. This rate is
guaranteed not to increase for the life of your Contract. A
correlation will not necessarily exist between the actual
administrative expenses attributable to a particular Contract
and the Administrative Fee paid in respect of that particular
Contract. The Administrative Fee will continue after the Annuity
Date if you choose any variable payout option. We do not intend
to realize a profit from this fee.
We will charge you an Annual Fee of $30 on each Contract
Anniversary prior to the Annuity Date, and at the time you
withdraw your entire Net Contract Value (on a pro rated basis
for that Contract Year) if your Net Contract Value is less than
$50,000 on that date. The fee is not imposed on amounts you
annuitize or on payment of death benefit proceeds. The fee
reimburses certain costs in administering the Contracts and the
Separate Account. We do not intend to realize a profit from this
fee. This fee is guaranteed not to increase for the life of your
Contract.
Your Annual Fee will be charged proportionately against your
Investment Options. Assessments against your Variable Investment
Options are made by debiting some of the Subaccount Units
previously credited to your Contract. That is, assessment of the
Annual Fee does not change the Unit Value for those Subaccounts.
Any portion of the Annual Fee we deduct from any of our fixed
options (if available under the Contract) will not be greater
than the annual interest credited in excess of that fixed
option’s minimum guaranteed interest rate.
If you purchase an optional Rider listed in the table below, we
will deduct an annual charge from your Investment Options
(excluding the DCA Plus Fixed Option) on a proportionate basis.
The charge is deducted every 3 months following the Rider
Effective Date (“Quarterly Rider Anniversary”). The
Rider charge will be deducted while the Rider remains in effect
and when the Rider terminates. The charge is deducted in arrears
each Quarterly Rider Anniversary.
If your Rider terminates on a Quarterly Rider Anniversary, the
entire charge for the prior quarter will be deducted from the
Contract Value on that anniversary. If the Rider terminates
prior to a Quarterly Rider Anniversary, we will prorate the
charge based on the Protected Payment Base as of the day the
Rider terminates. Such prorated amount will be deducted from the
Contract Value on the earlier of the day the Contract terminates
or on the Quarterly Rider Anniversary immediately following the
day the Rider terminates.
Any portion of the Rider’s charge we deduct from any fixed
option will not be greater than the annual interest credited in
excess of 3%. If you make a full withdrawal of the amount
available for withdrawal during a Contract Year, we will deduct
the charge from the final payment made to you.
An optional Rider annual charge percentage may change if a
Step-Up/Reset occurs under the Rider provisions. However, the
annual charge percentage will not exceed the maximum annual
charge percentage (indicated in the table below) for the
applicable Rider. You may elect to opt-out of a Reset and your
annual charge percentage will remain the same as it was before
the Reset. If an Automatic Reset or Owner-Elected Reset never
occurs, the annual charge percentage established on the Rider
Effective Date is guaranteed not to change.
Annual
Charge Percentage Table
Maximum Annual
To determine the amount to be
Current Annual
Charge Percentage
deducted, the Annual Charge
The Charge is
Optional Rider
Charge Percentage
Under the Rider
Percentage is multiplied by the:
deducted on each:
Automatic Income Builder
1.05%
1.50%
Protected Payment Base
Quarterly Rider Anniversary
See Mortality and Expense Risk Charge for the Stepped-Up
Death Benefit Rider charge information.
A tax may be imposed on your Purchase Payments (“premium
tax”) at the time your Purchase Payment is made, at the
time of a partial or full withdrawal, at the time any death
benefit proceeds are paid, at annuitization or at such other
time as taxes may be imposed. Currently, the state of
New York does not impose premium taxes on the sale of this
type of product. However, future changes in facts or state law
may require premium tax charges. Tax rates ranging from 0% to
3.5% are currently in effect, but may also change in the future.
If we pay any premium taxes attributable to Purchase Payments,
we will impose a similar charge against your Contract Value. We
normally will charge you when you annuitize some or all of your
Contract Value. We reserve the right to impose this charge for
applicable premium taxes and/or other taxes when you make a full
or partial withdrawal, at the time any death benefit proceeds
are paid, or when those taxes are incurred. For these purposes,
“premium taxes” include any state or local premium or
retaliatory taxes and any federal, state or local income,
excise, business or any other type of tax (or component thereof)
measured by or based upon, directly or indirectly, the amount of
Purchase Payments we have received. We currently base this
charge on your Contract Value, but we reserve the right to base
this charge on the amount of the transaction, the aggregate
amount of Purchase Payments we receive under your Contract, or
any other amount, that in our sole discretion we deem
appropriately reimburses us for premium taxes paid on this
Contract.
We may also charge the Separate Account or your Contract Value
for taxes attributable to the Separate Account or the Contract,
including income taxes attributable to the Separate Account or
to our operations with respect to the Contract, or taxes
attributable, directly or indirectly, to Purchase Payments.
Currently, we do not impose any such charges.
We may agree to waive or reduce charges under our Contracts, in
situations where selling and/or maintenance costs associated
with the Contracts are reduced, such as the sale of several
Contracts to the same Contract Owner(s), sales of large
Contracts, sales of Contracts in connection with a group or
sponsored arrangement or mass transactions over multiple
Contracts.
In addition, we may agree to waive or reduce some or all of such
charges and/or credit additional amounts under our Contracts, or
waive minimum Investment requirements for those Contracts sold
to persons who meet criteria established by us, who may include
current financial professionals and employees of broker/dealers
with a current selling agreement with us.
We will only waive or reduce such charges or credit additional
amounts on any Contract where expenses associated with the sale
or distribution of the Contract and/or costs associated with
administering and maintaining the Contract are reduced. Any
additional
26
amounts will be added to the Contract when we apply Purchase
Payments. We reserve the right to terminate waiver, reduced
charge and crediting programs at any time, including for issued
Contracts.
With respect to additional amounts as described above, in most
states you may not receive any amount credited if you return
your Contract during the Free Look period as described under
WITHDRAWALS – Right to Cancel (“Free
Look”).
Your Variable Account Value reflects advisory fees and other
expenses incurred by the various Portfolios of the Funds, net of
any applicable reductions and/or reimbursements. These fees and
expenses may vary. Each Fund is governed by its own Board of
Trustees, and your Contract does not fix or specify the level of
expenses of any Portfolio. A Fund’s fees and expenses are
described in detail in the applicable Fund Prospectus and SAI.
Some Investment Options available to you are “fund of
funds”. A fund of funds portfolio is a fund that invests in
other funds in addition to other investments that the portfolio
may make. Expenses of fund of funds Investment Options may be
higher than non fund of funds Investment Options due to the two
tiered level of expenses. See the Fund prospectuses for detailed
portfolio expenses and other information before investing.
When you submit the application for your Contract, you must
choose a sole Annuitant or Joint Annuitants. If you are buying a
Qualified Contract, you must be the sole Annuitant. If you are
buying a Non-Qualified Contract you may choose yourself
and/or
another person as Annuitant. Whether you have a sole or Joint
Annuitants, you may choose a Contingent Annuitant. The
Contingent Annuitant will not have any Contract benefits,
including death benefit proceeds, until becoming the sole
surviving Annuitant. You will not be able to add or change a
sole or Joint Annuitant after your Contract is issued. However,
if you are buying a Qualified Contract, you may add a Joint
Annuitant on the Annuity Date. You will be able to add or change
a Contingent Annuitant until your Annuity Date or the death of
your sole Annuitant or both Joint Annuitants, whichever occurs
first. However, once your Contingent Annuitant has become the
Annuitant under your Contract, no additional Contingent
Annuitant may be named. No Annuitant (Primary, Joint or
Contingent) may be named upon or after reaching his or her
86th birthday.
We reserve the right to require proof of age or survival of the
Annuitant(s). If the Contract is owned by a Non-Natural Owner,
you may not designate a Joint or Contingent Annuitant.
Annuitization occurs on the Annuity Date when you convert your
Contract from the accumulation phase to the annuitization
(income) phase. You may choose both your Annuity Date and your
Annuity Option. At the Annuity Date, you may elect to annuitize
some or all of your Net Contract Value, less any applicable
charge for premium taxes and/or other taxes, (the
“Conversion Amount”), as long as such Conversion
Amount annuitized is at least $2,000. We will send the annuity
payments to the payee that you designate.
If you annuitize only a portion of this available Contract
Value, you may have the remainder distributed, less any Contract
Debt, any applicable charge for premium taxes and/or other
taxes, any optional Rider charge, and any applicable Annual Fee.
This option of distribution may or may not be available, or may
be available for only certain types of Contracts. Currently, we
only allow this option on Qualified Contracts but we reserve the
right to make it available on other contract types in the
future. We will distribute your Net Contract Value, less any
applicable charge for premium taxes and/or other taxes, and any
Annual Fee to you in a single sum if the net amount of your
Contract Value available to convert to an annuity is less than
$2,000 on your Annuity Date. Distributions under your Contract
will have tax consequences. You should consult a qualified tax
adviser for information on full or partial annuitization.
If you annuitize only a portion of your Net Contract Value on
your Annuity Date, you may, at that time, have the option to
elect not to have the remainder of your Contract Value
distributed, but instead to continue your Contract with that
remaining Contract Value (a “continuing Contract”). If
this option is available, you would then choose a second Annuity
Date for your continuing Contract, and all references in this
Prospectus to your “Annuity Date” would, in connection
with your continuing Contract, be deemed to refer to that second
Annuity Date. The second Annuity Date may not be later than the
date specified in the Choosing Your Annuity Date section
of this Prospectus. This option may not be available, or may be
available only for certain types of Contracts. You should be
aware that some or all of the payments received before the
second Annuity Date may be fully taxable. We recommend that you
contact a qualified tax adviser for more information if you are
interested in this option.
You should choose your Annuity Date when you submit your
application or we will apply a default Annuity Date to your
Contract. You may change your Annuity Date by notifying us, in
proper form, at least ten Business Days prior to the earlier of
your current Annuity Date or your new Annuity Date. Your Annuity
Date cannot be earlier than your first Contract Anniversary.
Adverse federal tax consequences may result if you choose an
Annuity Date that is prior to an Annuitant’s attained
age 591/2.
See FEDERAL TAX ISSUES.
27
If you have a sole Annuitant, your Annuity Date must occur on or
before the later of his or her
90th
birthday or the tenth
(10th)
Contract Anniversary. If you have Joint Annuitants, your Annuity
Date must occur on or before the later of your younger Joint
Annuitant’s
90th
birthday or the tenth
(10th)
Contract Anniversary. Different requirements may apply as
required by the Code. We may, at our sole discretion, allow
you to extend your Annuity Date. We reserve the right, at any
time, to not offer any extension to your Annuity Date regardless
of whether we may have granted any extensions to you or to any
others in the past. Some Broker/Dealers may not allow their
clients to extend the Annuity Date beyond age 95.
If your Contract is a Qualified Contract, you may also be
subject to additional restrictions. In order to meet the Code
minimum distribution rules, your Required Minimum Distributions
(RMDs) may begin earlier than your Annuity Date. For instance,
under Section 401 of the Code (for Qualified Plans) and
Section 408 of the Code (for IRAs), the entire interest
under the Contract must be distributed to the Owner/Annuitant
not later than the Owner/Annuitant’s Required Beginning
Date (“RBD”), or distributions over the life of the
Owner/Annuitant (or the Owner/Annuitant and his or her
Beneficiary) must begin no later than the RBD. For more
information see FEDERAL TAX ISSUES.
If you have a Non-Qualified Contract and you do not choose an
Annuity Date when you submit your application, your Annuity Date
will be the later of your Annuitant’s
90th birthday
or the tenth
(10th)
Contract Anniversary. In the case of Joint Annuitants, your
Annuity Date will be the later of the younger Joint
Annuitant’s
90th birthday
or the tenth
(10th)
Contract Anniversary. Certain Qualified Contracts may require
distributions to occur at an earlier age.
If you have not specified an Annuity Option or do not instruct
us otherwise, at your Annuity Date your Net Contract Value, less
any charges for premium taxes
and/or other
taxes, will be converted (if this net amount is at least $2,000)
to a fixed annuity payout option.
If the net amount is less than $2,000, the entire amount will be
distributed. If you have a Non-Qualified Contract, or if you
have a Qualified Contract and are not married, your default
Annuity Option will be Life with a ten year Period
Certain. If you have a Qualified Contract and you are
married, your default Annuity Option will be Joint and
Survivor Life with survivor payments of 100%; your spouse
will automatically be named your Joint Annuitant.
You should carefully review the Annuity Options with a qualified
tax adviser, and, for Qualified Contracts, reference should be
made to the terms of the particular plan and the requirements of
the Code for pertinent limitations regarding annuity payments,
Required Minimum Distributions (“RMDs”), and other
matters.
You may make three basic decisions about your annuity payments.
First, you may choose whether you want those payments to be a
fixed-dollar amount and/or a variable-dollar amount. Second, you
may choose the form of annuity payments (see Annuity
Options below). Third, you may decide how often you want
annuity payments to be made (the “frequency” of the
payments). You may not change these selections after the Annuity
Date.
Fixed and
Variable Payment Options
You may choose fixed annuity payments based on a fixed rate and
the 1983a Annuity Mortality Table with the ages set back
10 years, variable annuity payments that vary with the
investment results of the Subaccounts you select, or you may
choose both, converting one portion of the net amount you
annuitize into fixed annuity payments and another portion into
variable annuity payments.
If you select fixed annuity payments, each periodic annuity
payment received will be equal to the initial annuity payment,
unless you select a Joint and Survivor Life annuity with reduced
survivor payments when the Primary Annuitant dies. Any net
amount you convert to fixed annuity payments will be held in our
General Account (but not under any fixed option).
If you select variable annuity payments, you may choose as many
Variable Investment Options as you wish. The amount of the
periodic annuity payments will vary with the investment results
of the Variable Investment Options selected and may be more or
less than a fixed payment option. After the Annuity Date,
Annuity Units may be exchanged among available Variable
Investment Options up to four times in any twelve-month period.
How your Contract converts into variable annuity payments is
explained in more detail in THE CONTRACTS AND THE SEPARATE
ACCOUNT section in the SAI.
Annuity
Options
Four Annuity Options are currently available under the Contract,
although additional options may become available in the future.
For other Annuity Options see OTHER OPTIONAL RIDERS.
1.
Life Only. Periodic payments are made to the
designated payee during the Annuitant’s lifetime. Payments
stop when the Annuitant dies.
28
2.
Life with Period Certain. Periodic payments
are made to the designated payee during the Annuitant’s
lifetime, with payments guaranteed for a specified period. You
may choose to have payments guaranteed from 5 through
30 years (in full years only). The guaranteed period may be
limited on Qualified Contracts based on your life expectancy.
If a Life with Period Certain annuity option provides for
payments of the same amount for different Periods Certain at
some ages, we will assume that your selection was for the
longest Period Certain available for your age.
3.
Joint and Survivor Life. Periodic payments are
made to the designated payee during the lifetime of the Primary
Annuitant. After the death of the Primary Annuitant, periodic
payments will continue to be made during the lifetime of the
secondary Annuitant named in the election. You may choose to
have the payments to the surviving secondary Annuitant equal
50%,
662/3%
or 100% of the original amount payable made during the lifetime
of the Primary Annuitant (you must make this election when you
choose your Annuity Option). If you elect a reduced payment
based on the life of the secondary Annuitant, fixed annuity
payments will be equal to 50% or
662/3%
of the original fixed payment payable during the lifetime of the
Primary Annuitant; variable annuity payments will be determined
using 50% or
662/3%,
as applicable, of the number of Annuity Units for each
Subaccount credited to the Contract as of the date of death of
the Primary Annuitant. Payments stop when both Annuitants have
died.
4.
Period Certain Only. Periodic payments are
made to the designated payee, guaranteed for a specified period.
You may choose to have payments guaranteed from 5 through
30 years (in full years only). The guaranteed period may be
limited on Qualified Contracts based on your life expectancy.
Periodic payment amounts will differ based on the Annuity Option
selected. Generally, the longer the possible payment period, the
lower the payment amount.
Additionally, if variable payments are elected under Annuity
Options 2 and 4, you may redeem all remaining guaranteed
variable payments after the Annuity Date. Also, under
Option 4, partial redemptions of remaining guaranteed
variable payments after the Annuity Date are available. If
you elect to redeem all remaining guaranteed variable payments
in a single sum, we will not make any additional variable
annuity payments during the Annuitant’s lifetime or the
remaining guaranteed period after the redemption. The amount
available upon a full redemption would be the present value of
any remaining guaranteed variable payments at the assumed
investment return. Full or partial redemptions of remaining
guaranteed variable payments are explained in more detail in the
SAI under THE CONTRACTS AND THE SEPARATE ACCOUNT.
If the Annuitant dies before the guaranteed payments under
Annuity Options 2 and 4 are completed, we will pay the
remainder of the guaranteed payments to the first person among
the following who is (1) living; or (2) an entity or
corporation entitled to receive the remainder of the guaranteed
payments:
•
the Owner;
•
the Joint Owner;
•
the Beneficiary; or
•
the Contingent Beneficiary.
If none are living (or if there is no entity or corporation
entitled to receive the remainder of the guaranteed payments),
we will pay the remainder of the guaranteed payments to the
Owner’s estate.
If the Owner dies on or after the Annuity Date, but payments
have not yet been completed, then distributions of the remaining
amounts payable under the Contract must be made at least as
rapidly as the method of distribution that was being used at the
date of the Owner’s death. All of the Owner’s rights
granted by the Contract will be assumed by the first among the
following who is (1) living; or (2) an entity or
corporation entitled to assume the Owner’s rights granted
by the Contract:
•
the Joint Owner;
•
the Beneficiary; or
•
the Contingent Beneficiary.
If none are living (or if there is no entity or corporation
entitled to assume the Owner’s rights granted by the
Contract), all of the Owner’s rights granted by the
Contract will be assumed by the Owner’s estate.
For Qualified Contracts, please refer to the Choosing Your
Annuity Date section in this Prospectus. If your Contract
was issued in connection with a Qualified Plan subject to
Title I of the Employee Retirement Income Security Act of
1974 (“ERISA”), your spouse’s consent may be
required when you seek any distribution under your Contract,
unless your Annuity Option is Joint and Survivor Life with
survivor payments of at least 50%, and your spouse is your Joint
Annuitant.
You may choose to have annuity payments made monthly, quarterly,
semi-annually, or annually. The amount of a variable payment
will be determined in each period on the date corresponding to
your Annuity Date, and payment will be made on the next
succeeding day.
Your initial annuity payment must be at least $20. Depending on
the net amount you annuitize, this requirement may limit your
options regarding the period and/or frequency of annuity
payments.
Amount of
the First Payment
Your Contract contains tables that we use to determine the
amount of the first annuity payment under your Contract, taking
into consideration the annuitized portion of your Net Contract
Value at the Annuity Date. This amount will vary, depending on
the annuity period and payment frequency you select. This amount
will be larger in the case of shorter Period Certain annuities
and smaller for longer Period Certain annuities. Similarly, this
amount will be greater for a Life Only annuity than for a Joint
and Survivor Life annuity, because we will expect to make
payments for a shorter period of time on a Life Only annuity. If
you do not choose the Period Certain Only annuity, this amount
will also vary depending on the age of the Annuitant(s) on the
Annuity Date and, for some Contracts, the sex of the
Annuitant(s).
For fixed annuity payments, the guaranteed income factors in our
tables are based on an annual interest rate of 3% and the 1983a
Annuity Mortality Table with the ages set back 10 years. If
you elect a fixed annuity, fixed annuity payments will be based
on the periodic income factors in effect for your Contract on
the Annuity Date which are at least the guaranteed income
factors under the Contract.
For variable annuity payments, the tables are based on an
assumed annual investment return of 4% and the 1983a Annuity
Mortality Table with the ages set back 10 years. If you
elect a variable annuity, your initial variable annuity payment
will be based on the applicable variable annuity income factors
in effect for your Contract on the Annuity Date which are at
least the variable annuity income factors under the Contract.
You may choose any other annuity option we may offer on the
option’s effective date. A higher assumed investment return
would mean a larger first variable annuity payment, but
subsequent payments would increase only when actual net
investment performance exceeds the higher assumed rate and would
fall when actual net investment performance is less than the
higher assumed rate. A lower assumed rate would mean a smaller
first payment and a more favorable threshold for increases and
decreases. If the actual net investment performance is a
constant 4% annually, annuity payments will be level. The
assumed investment return is explained in more detail in the SAI
under THE CONTRACTS AND THE SEPARATE ACCOUNT.
Death benefit proceeds may be payable before the Annuity Date on
proof of death of the sole surviving Annuitant or of any
Contract Owner while the Contract is in force. Any death benefit
payable will be calculated on the “Notice Date”, which
is the day on which we receive, in proper form, proof of death
and instructions regarding payment of death benefit proceeds. If
a Contract has multiple recipients, death benefit proceeds will
be calculated when we first receive proof of death and
instructions, in proper form, from any recipient. The death
benefit proceeds still remaining to be paid to other recipients
will fluctuate with the performance of the underlying Investment
Options.
Death
Benefit Proceeds
Death benefit proceeds will be payable on the Notice Date. Such
proceeds will be reduced by any charge for premium taxes and/or
other taxes and any Contract Debt. The death benefit proceeds
may be payable in a single sum, as an Annuity Option available
under the Contract, towards the purchase of any other Annuity
Option we then offer, or in any other manner permitted by the
IRS and approved by us. The Owner’s spouse may continue the
Contract (see Death Benefits – Spousal
Continuation). In addition, there may be legal requirements
that limit the recipient’s Annuity Options and the timing
of any payments. A recipient should consult a qualified tax
adviser before making a death benefit election.
The death benefit proceeds will be paid to the first among the
following who is (1) living; or (2) an entity or
corporation entitled to receive the death benefit proceeds, in
the following order:
•
Owner,
•
Joint Owner,
•
Beneficiary, or
•
Contingent Beneficiary.
If none are living (or if there is no entity or corporation
entitled to receive the death benefit proceeds), the proceeds
will be payable to the Owner’s Estate.
30
Death
Benefit Amount
The Death Benefit Amount as of any Business Day before the
Annuity Date is equal to the greater of:
•
your Contract Value as of that day, or
•
your aggregate Purchase Payments reduced by an amount for each
withdrawal, which is calculated by multiplying the aggregate
Purchase Payments received before each withdrawal by the ratio
of the amount of the withdrawal to the Contract Value
immediately prior to each withdrawal. The reduction made, when
the Contract Value is less than aggregate Purchase Payments made
into the Contract, may be greater than the actual amount
withdrawn.
We calculate the Death Benefit Amount as of the Notice Date and
the death benefit will be paid in accordance with the Death
Benefit Proceeds section above.
If you purchase the optional Automatic Income Builder Rider, and
while this Rider is in effect, the aggregate Purchase Payments
under the Death Benefit Amount will be reduced by withdrawals in
a different manner than if you did not purchase the Rider. This
may result in a different Death Benefit Amount that is paid in
accordance with the Death Benefit Proceeds section above. See
OTHER OPTIONAL RIDERS – Automatic Income Builder
Rider – Death Benefit Amount Adjustment.
If this Rider terminates before the death of an Owner or sole
surviving Annuitant, withdrawals while this Rider was in effect
will adjust the aggregate Purchase Payments under the Death
Benefit Amount on a proportionate basis.
See APPENDIX B: DEATH BENEFIT AMOUNT AND STEPPED-UP
DEATH BENEFIT RIDER (SDBR) SAMPLE CALCULATIONS.
Spousal
Continuation
Generally, a sole designated recipient who is the Owner’s
spouse may elect to become the Owner (and sole Annuitant if the
deceased Owner had been the Annuitant) and continue the Contract
until the earliest of the spouse’s death, the death of the
Annuitant, or the Annuity Date, except in the case of a
Qualified Contract issued under section 403 of the Code. On
the Notice Date, if the surviving spouse is deemed to have
continued the Contract, we will set the Contract Value equal to
the death benefit proceeds that would have been payable to the
spouse as the deemed Beneficiary/designated recipient of the
death benefit proceeds. This “Add-In Amount” is the
difference between the Contract Value and the death benefit
proceeds that would have been payable. The Add-In Amount will be
added to the Contract Value on the Notice Date. There will not
be an adjustment to the Contract Value if the Contract Value is
equal to or greater than the death benefit proceeds as of the
Notice Date. The Add-In Amount will be allocated among
Investment Options in accordance with the current allocation
instructions for the Contract and may be, under certain
circumstances, considered earnings. The Add-In Amount is not
treated as a new Purchase Payment. A Joint Owner who is the
designated recipient, but not the Owner’s spouse, may not
continue the Contract.
Example: On the Notice Date, the Owner’s
surviving spouse elects to continue the Contract. On that date,
the death benefit proceeds were $100,000 and the Contract Value
was $85,000. Since the surviving spouse elected to continue the
Contract in lieu of receiving the death benefit proceeds, we
will increase the Contract Value by an Add-In Amount of $15,000
($100,000–$85,000=$15,000). If the Contract Value on the
Notice Date was $100,000 or higher, then nothing would be added
to the Contract Value.
Death of
Annuitant
If a sole surviving Annuitant dies before the Annuity Date, the
amount of the death benefit will be equal to the Death
Benefit Amount as of the Notice Date and will be paid in
accordance with the Death Benefit Proceeds section.
If there is more than one Annuitant and an Annuitant who is not
an Owner dies, no death benefit proceeds will be payable. The
designated sole Annuitant will then be the first living person
in the following order:
•
a surviving Joint Annuitant, or
•
a surviving Contingent Annuitant.
Death of
Owner
If a Contract Owner dies before the Annuity Date, the amount of
the death benefit will be equal to the Death Benefit Amount
as of the Notice Date and will be paid in accordance with
the Death Benefit Proceeds section.
Non-Natural
Owner
If you are a Non-Natural Owner of a Contract other than a
Contract issued under a Qualified Plan as defined in
Section 401 or 403 of the Code, the Primary Annuitant will
be treated as the Owner of the Contract for purposes of the
Non-Qualified Contract Distribution Rules. If there is a
change in the Primary Annuitant prior to the Annuity Date, such
change will be treated as the death of the Owner. The Death
Benefit Amount will be: (a) the Contract Value, if the
Non-Natural Owner elects to maintain the Contract and reinvest
the Contract Value into the contract in the same amount as
immediately prior to the distribution; or (b) the Contract
Value, less any annual
31
fee and charges for premium taxes
and/or other
taxes, if the Non-Natural Owner elects a cash distribution and
will be paid in accordance with the Death Benefits
Proceeds section.
Non-Qualified
Contract Distribution Rules
The Contract is intended to comply with all applicable
provisions of Code Section 72(s) and any successor
provision, as deemed necessary by us to qualify the Contract as
an annuity contract for federal income tax purposes. If an Owner
of a Non-Qualified Contract dies before the Annuity Date,
distribution of the death benefit proceeds must begin within
1 year after the Owner’s death or complete
distribution within 5 years after the Owner’s death.
In order to satisfy this requirement, the designated recipient
must receive a final lump sum payment by the fifth anniversary
of the death of the Contract Owner, or elect to receive an
annuity for life or over a period that does not exceed the life
expectancy of the designated recipient with annuity payments
that start within 1 year after the Owner’s death or,
if permitted by the IRS, elect to receive a systematic
distribution over a period not exceeding the beneficiary’s
life expectancy using a method that would be acceptable for
purposes of calculating the minimum distribution required under
section 401(a)(9) of the Code. If an election to receive an
annuity is not made within 60 days of our receipt of proof,
in proper form, of the Owner’s death or, if earlier,
60 days (or shorter period as we permit) prior to the first
anniversary of the Owner’s death, the lump sum option will
be deemed elected, unless otherwise required by law. If the lump
sum option is deemed elected, we will consider that deemed
election as receipt of instructions regarding payment of the
death benefit proceeds. If a Non-Qualified Contract has Joint
Owners, this requirement applies to the first Contract Owner to
die.
The Owner may designate that the Beneficiary will receive death
benefit proceeds through annuity payments for life or life with
Period Certain. The Owner must designate the payment method in
writing in a form acceptable to us. The Owner may revoke the
designation only in writing and only in a form acceptable to us.
Once the Owner dies, the Beneficiary cannot revoke or modify the
Owner’s designation.
Qualified
Contract Distribution Rules
Under Internal Revenue Service regulations and our
administrative procedures, if the Contract is owned under a
Qualified Plan pursuant to Sections 401, 403 or
Sections 408, or 408A of the Code and the Annuitant dies
before the Required Beginning Date, the payment of any death
benefit proceeds must be made to the designated recipient in
accordance with one of two rules. One rule generally requires
the death benefit proceeds to commence distribution by
December 31 of the calendar year following the calendar
year of the Annuitant’s death and continue over the life of
his or her Beneficiary (the “life expectancy method”).
The second rule requires distribution of the entire death
benefit proceeds no later than December 31 of the calendar
year in which the fifth anniversary of the Annuitant’s
death falls (the “five-year rule”).
However, the life expectancy method and the five-year rule are
modified if the sole primary Beneficiary is a surviving spouse.
If the surviving spouse elects not to do an eligible rollover to
an IRA or another existing eligible plan in his or her name,
then he or she will be subject to the five-year rule. However,
the surviving spouse may waive the five-year requirement and
elect to take distributions over his or her life expectancy. If
the surviving spouse elects to defer the commencement of
required distributions beyond the first anniversary of the
Annuitant’s death, the surviving spouse may defer required
distributions until the later of:
•
December 31 of the year following the year the Annuitant
died, or
•
December 31 of the year in which the deceased Annuitant
would have turned
701/2.
Further, under our administrative procedures, if the required
distributions election is not received by us in good order by
December 31 of the year following the Annuitant’s
death or by December 31 of the year in which the Annuitant
would have attained age
701/2,
the lump sum option will be deemed by us to have been elected,
unless otherwise required by law. If the lump sum option is
deemed elected, we will treat that deemed election as receipt of
instructions regarding payment of death benefit proceeds.
If the Annuitant dies after the commencement of RMDs (except in
the case of a Roth IRA when RMDs do not apply) but before the
Annuitant’s entire interest in the Contract (other than a
Roth IRA) has been distributed, the remaining interest in
the Contract must be distributed to the designated recipient at
least as rapidly as under the distribution method in effect at
the time of the Annuitant’s death.
This optional Rider offers you the ability to lock in market
gains for your beneficiaries with a
stepped-up
death benefit, which is the highest Contract Value on any
previous Contract Anniversary (prior to the oldest of the
Owner’s or Annuitant’s
81st birthday)
increased by the amount of additional Purchase Payments and
decreased by withdrawals that you make.
Purchasing
the Rider
You may purchase this optional Rider at the time your
application is completed. You may not purchase the SDBR after
the Contract Date. The SDBR may only be purchased if the age of
each Owner and Annuitant is 75 or younger on the Contract Date.
32
How the
Rider Works
If you purchase the SDBR at the time your application is
completed, upon the death of the sole surviving Annuitant or the
first Owner, prior to the Annuity Date, the death benefit
proceeds will be equal to the greater of (a) or
(b) below:
(a)
the Death Benefit Amount as of the Notice Date.
The Death Benefit Amount as of any day before the Annuity Date
is equal to the greater of:
•
your Contract Value as of that day, or
•
your aggregate Purchase Payments reduced by an amount for each
withdrawal, which is calculated by multiplying the aggregate
Purchase Payments received before each withdrawal by the ratio
of the amount of the withdrawal to the Contract Value
immediately prior to each withdrawal. The reduction made, when
the Contract Value is less than aggregate Purchase Payments made
into the Contract, may be greater than the actual amount
withdrawn.
(b)
the Guaranteed Minimum Death Benefit Amount as of the Notice
Date.
The actual Guaranteed Minimum Death Benefit Amount is calculated
only when death benefit proceeds become payable as a result of
the death of the sole surviving Annuitant or the first death of
an Owner, prior to the Annuity Date and is determined as follows:
First we calculate what the Death Benefit Amount would have been
as of your first Contract Anniversary and each subsequent
Contract Anniversary that occurs prior to the oldest of the
Owner’s or Annuitant’s
81st
birthday (each of these Contract Anniversaries is a
“Milestone Date”).
We then adjust the Death Benefit Amount for each Milestone Date
by:
•
adding the aggregate amount of any Purchase Payments received by
us since the Milestone Date, and
•
subtracting an amount for each withdrawal that has occurred
since that Milestone Date, which is calculated by multiplying
the Death Benefit Amount before the withdrawal by the ratio of
the amount of each withdrawal that has occurred since that
Milestone Date, to the Contract Value immediately prior to the
withdrawal. The reduction made, when the Contract Value is less
than the Death Benefit Amount, may be greater than the actual
amount withdrawn.
The highest of these adjusted Death Benefit Amounts for each
Milestone Date, as of the Notice Date, is your Guaranteed
Minimum Death Benefit Amount if you purchase the SDBR.
Calculation of any actual Guaranteed Minimum Death Benefit
Amount is only made once death benefit proceeds become payable
under your Contract.
Any death benefit paid under this Rider will be paid in
accordance with the Death Benefit Proceeds section above.
See APPENDIX B: DEATH BENEFIT AMOUNT AND STEPPED-UP
DEATH BENEFIT RIDER (SDBR) SAMPLE CALCULATIONS.
Termination
The Rider will remain in effect until the earlier of:
•
the date a full withdrawal of the amount available for
withdrawal is made under the Contract,
•
the date death benefit proceeds become payable under the
Contract,
•
the date the Contract is terminated in accordance with the
provisions of the Contract, or
You may, on or prior to your Annuity Date, withdraw all or a
portion of the amount available under your Contract while the
Annuitants are living and your Contract is in force. You may
surrender your Contract and make a full withdrawal at any time.
If you surrender your Contract it will be terminated as of the
Effective Date of the withdrawal. Beginning 30 days after
your Contract Date, you also may make partial withdrawals from
your Investment Options at any time. Currently, we are not
requiring the
30-day
waiting period on partial withdrawals, but we reserve the right
to require a
30-day
waiting period on partial withdrawals in the future. You may
request to withdraw a specific dollar amount or a specific
percentage of an Account Value or your Net Contract Value. You
may choose to make your withdrawal from specified Investment
Options. If you do not specify Investment Options, your
withdrawal will be made from all of your Investment Options
proportionately. Each partial withdrawal must be for $500 or
more. Pre-authorized partial withdrawals must be
33
at least $250, except for pre-authorized withdrawals
distributed by Electronic Funds Transfer (EFT), which must be at
least $100. If your partial withdrawal from an Investment Option
would leave a remaining Account Value in that Investment Option
of less than $500, we also reserve the right, at our option and
with prior written notice, to transfer that remaining amount to
your other Investment Options on a proportionate basis relative
to your most recent allocation instructions. If your partial
withdrawal leaves you with a Net Contract Value of less than
$1,000, or if your partial withdrawal request is for an amount
exceeding the amount available for withdrawal, as described in
the Amount Available for Withdrawal section below, we
have the right, at our option, to terminate your Contract and
send you the withdrawal proceeds. However, we will not terminate
your Contract if you own an optional rider and a partial
withdrawal reduces the Net Contract Value to an amount less than
$1,000. Partial withdrawals from any fixed option in any
Contract Year may be subject to restrictions.
See THE GENERAL ACCOUNT.
Amount
Available for Withdrawal
The amount available to you for withdrawal is your Net Contract
Value (Contract Value less Contract Debt) at the end of the
Business Day on which your withdrawal request is effective, less
any applicable Annual Fee, optional Rider Charges, and charges
for premium taxes and/or other taxes. The amount we send to you
(your “withdrawal proceeds”) will also reflect any
required or requested federal and state income tax withholding.
See FEDERAL TAX ISSUES and THE GENERAL ACCOUNT. If
you own optional Riders, taking a withdrawal before a certain
age or a withdrawal that is greater than the allowed annual
withdrawal amount under a Rider, may result in adverse
consequences such as a reduction in Rider benefits or the
failure to receive lifetime withdrawals under the Rider.
You assume investment risk on Net Purchase Payments in the
Subaccounts. As a result, the amount available to you for
withdrawal from any Subaccount may be more or less than the
total Net Purchase Payments you have allocated to that
Subaccount.
Pre-Authorized
Withdrawals
If your Contract Value is at least $5,000, you may select the
pre-authorized withdrawal option, and you may choose monthly,
quarterly, semi-annual or annual withdrawals. Currently, we are
not enforcing the minimum Contract Value amount but we reserve
the right to enforce the minimum amount in the future. Each
withdrawal must be for at least $250, except for withdrawals
distributed by Electronic Funds Transfer (EFT), which must be at
least $100. Each pre-authorized withdrawal is subject to federal
income tax on its taxable portion and may be subject to a tax
penalty of 10% if you have not reached age
591/2.
Pre-authorized withdrawals cannot be used to continue the
Contract beyond the Annuity Date. See FEDERAL TAX ISSUES
and THE GENERAL ACCOUNT. Additional information and
options are set forth in the SAI.
Special
Requirements for Full Withdrawals and Payments to Third Party
Payees
Instructions for a full withdrawal and surrender of your
Contract in proper form includes, among other things, a return
of the original Contract or a lost contract affidavit. For your
convenience, our Withdrawal Request form includes a lost
contract affidavit for your use in providing us with your full
withdrawal and surrender instructions. If you wish to have a
full or partial withdrawal check made payable to a third-party
payee, you must provide complete instructions and an original
signature is required on the Withdrawal Request form or your
withdrawal request instructions. If you wish to withdraw the
entire amount available under your Contract, you must either
return your Contract to us or sign and submit a Withdrawal
Request form or a Lost Contract Affidavit if no Withdrawal
Request form is completed.
Special
Restrictions Under Qualified Plans
Qualified Plans may have additional rules regarding withdrawals
from a Contract purchased under such a Plan. In general, if your
Contract was issued under certain Qualified Plans, you may
not withdraw amounts attributable to contributions made
pursuant to a salary reduction agreement (as defined in
Section 402(g)(3)(A) of the Code) or to transfers from a
custodial account (as defined in Section 403(b)(7) of the
Code) except in cases of your:
•
severance from employment,
•
death,
•
disability as defined in Section 72(m)(7) of the Code,
•
reaching age
591/2,
or
•
hardship as defined for purposes of Section 401 of the Code.
These limitations do not affect certain rollovers or exchanges
between Qualified Plans, and do not apply to rollovers from
these Qualified Plans to an individual retirement account or
individual retirement annuity. In the case of a 403(b) plan,
these limitations do not apply to certain salary reduction
contributions made, and investment results earned, prior to
dates specified in the Code.
34
Hardship withdrawals under the exception provided above are
restricted to amounts attributable to salary reduction
contributions, and do not include investment results. This
additional restriction does not apply to salary reduction
contributions made, or investment results earned, prior to dates
specified in the Code.
Certain distributions, including rollovers, may be subject to
mandatory withholding of 20% for federal income tax and to a tax
penalty of 10% if the distribution is not transferred directly
to the trustee of another Qualified Plan, or to the custodian of
an individual retirement account or issuer of an individual
retirement annuity. See FEDERAL TAX ISSUES. Distributions
may also trigger withholding for state income taxes. The tax and
ERISA rules relating to withdrawals from Contracts issued to
Qualified Plans are complex. We are not the administrator of any
Qualified Plan. You should consult your qualified tax adviser
and/or your Plan Administrator before you withdraw any portion
of your Contract Value.
Effective
Date of Withdrawal Requests
Withdrawal requests are normally effective on the Business Day
we receive them in proper form. If you make Purchase Payments by
check and submit a withdrawal request immediately afterwards,
payment of your withdrawal proceeds may be delayed until we
receive confirmation in our Annuities administrative office that
your check has cleared.
All withdrawals, including pre-authorized withdrawals, will
generally have federal income tax consequences, which could
include tax penalties. You should consult with a qualified
tax adviser before making any withdrawal or selecting the
pre-authorized withdrawal option. See FEDERAL TAX
ISSUES.
You may return your Contract for cancellation and a refund
during your Free Look period. Your Free Look period is usually
the 10-day
period beginning on the day you receive your Contract. If you
are replacing another annuity contract or life insurance policy,
the Free Look period ends 60 days after you receive your
Contract.
The amount of your refund may be more or less than the Purchase
Payments you have made. If you return your Contract, it will be
cancelled as of the date we receive your Contract. You will then
receive a refund of your Contract Value, based upon the next
determined Accumulated Unit Value (AUV) after we receive your
Contract for cancellation, plus a refund of any amount that may
have been deducted as Contract fees and charges, and minus any
additional amount credited as described in CHARGES, FEES AND
DEDUCTIONS – Waivers and Reduced Charges. You bear
the investment risk on any additional amount credited.
If your Contract was issued as an IRA and you return your
Contract within 7 days after you receive it, we will return
the greater of your Purchase Payments (less any withdrawals
made) or the Contract Value.
Your Net Purchase Payments are allocated to the Investment
Options you indicated on your application, unless otherwise
required by state law. If state law requires that your Net
Purchase Payments must be allocated to Investment Options
different than you requested, we will comply with state
requirements. At the end of the Free Look period, we will
allocate your Net Purchase Payments based on your allocation
instructions.
You will find a complete description of the Free Look period and
amount to be refunded that applies to your Contract on the
Contract’s cover page.
Optional Riders are subject to availability. Before
purchasing any optional Rider, make sure you understand all of
the terms and conditions and consult with your financial
professional for advice on whether an optional Rider is
appropriate for you. We reserve the right to restrict the
purchase of an optional living benefit Rider to only Contract
issue in the future.
You may purchase an optional Rider on the Contract Date or on
any Contract Anniversary (if available). In addition, if you
purchase a Rider within 60 days after the Contract Date or,
if available, within 60 days after any Contract
Anniversary, the Rider Effective Date will be that Contract Date
or Contract Anniversary.
Taking a withdrawal before a certain age or a withdrawal that is
greater than the allowed annual withdrawal amount under a
particular Rider, may result in adverse consequences such as a
reduction in Rider benefits or the failure to receive lifetime
withdrawals under a Rider.
Some optional riders allow for owner elected
Resets/Step-Ups.
If you elect to
Reset/Step-Up,
your election must be received, in a form satisfactory to us, at
our Service Center within 60 days after the Contract Anniversary
(“60 day period”) on which the
Reset/Step-Up
is effective. We may, at our sole discretion, allow
Resets/Step-Ups
after the 60 day period. We reserve the right to refuse a
Reset/Step-Up
35
request after the 60 day period regardless of whether we
may have allowed you or others to
Reset/Step-Up
in the past. Each Contract Anniversary starts a new 60 day
period in which a
Reset/Step-Up
may be elected.
Some broker/dealers may limit their clients from purchasing some
optional benefits based upon the client’s age or other
factors. You should work with your financial professional to
decide whether an optional benefit is appropriate for you.
There may be adverse consequences to taking a loan while an
optional Rider is in effect. If you have an existing loan on
your Contract, you should carefully consider whether an optional
Rider is appropriate for you.
All references to Purchase Payments refer to gross Purchase
Payments unless otherwise specified.
Investment
Allocation Requirements
At initial purchase and during the entire time that you own an
optional living benefit Rider, you must allocate your entire
Contract Value to an asset allocation program or Investment
Options we make available for these Riders. You may allocate
your Contract Value according to the following requirements:
•
100% to one allowable Asset Allocation Model, OR
•
100% among allowable Investment Options.
You may also use the DCA Plus program to transfer amounts to an
Asset Allocation Model or among the Investment Options listed
below. Currently, the allowable Asset Allocation Models and
Investment Options are as follows:
Franklin Templeton VIP Founding Funds Allocation Fund
Custom Model
GE Investments Total Return Fund
Pacific Dynamix – Conservative Growth
Pacific Dynamix – Moderate Growth
Pacific Dynamix – Growth
PIMCO Global Multi-Asset Portfolio
Van Kampen LIT Global Tactical Asset Allocation Portfolio
You may transfer your entire Contract Value between an allowable
Asset Allocation Model and allowable Investment Options, between
allowable Asset Allocation Models or between allowable
Investment Options, subject to certain transfer limitations. See
HOW YOUR PURCHASE PAYMENTS ARE ALLOCATED –
Transfers and Market-timing Restrictions. Keep in mind that
you must allocate your entire Contract Value to either
one allowable Asset Allocation Model or among the
allowable Investment Options. If you do not allocate your
entire Net Purchase Payment or Contract Value according
to the requirements above, your Rider will terminate.
Allowable Asset Allocation Models – Portfolio
Optimization. You may transfer your entire
Contract Value to a different Portfolio Optimization Model
without affecting your Rider. However, if you change the
allocation percentages within the Portfolio Optimization Model
you have selected, including allocating any subsequent Purchase
Payments inconsistent with your Model’s target allocations,
you will no longer be participating in the Portfolio
Optimization program and your Rider will terminate. See HOW
YOUR PURCHASE PAYMENTS ARE ALLOCATED – Portfolio
Optimization for information about the program.
Allowable Asset Allocation Models – Custom
Model. You may also make transfers between the
Investment Options available under the Custom Model program as
long as you follow the Custom Model parameters. However, if you
make transfers, subsequent Purchase Payments or change the
allocation percentages within your Custom Model and they do not
comply with the Custom Model parameters, you will no longer be
participating in the Custom Model program and your Rider will
terminate. See HOW YOUR PURCHASE PAYMENTS ARE
ALLOCATED – Custom Model for information about the
program.
Allowable Investment Options. You may allocate
your entire Contract Value among any of the allowable Investment
Options listed in the table above.
By adding an optional living benefit Rider to your Contract, you
agree to the above referenced investment allocation requirements
for the entire period that you own a Rider. These requirements
may limit the number of Investment Options that are otherwise
available to you under your Contract. We reserve the right to
add, remove or change allowable asset allocation programs or
allowable Investment Options at any time. We may make such a
change due to a fund reorganization, fund substitution, or when
we believe a change is necessary to protect our ability to
provide the guarantees under these riders. If such a change is
required, we will provide you with reasonable notice
36
(generally 90 calendar days unless we are required to give less
notice) prior to the effective date of such change to allow you
to reallocate your Contract Value to maintain your rider
benefits. If you do not reallocate your Contract Value your
rider will terminate.
We will send you written notice in the event any transaction
made by you will involuntarily cause the Rider to terminate for
failure to invest according to the investment allocation
requirements. However, you will have 30 calendar days after the
date of our written notice (“30 day period”), to
instruct us to take appropriate corrective action to continue
participation in an allowable asset allocation program or
allowable Investment Options to continue the Rider.
You may purchase this optional Rider on the Contract Date or on
any Contract Anniversary (if available) if the age of each
Annuitant is 85 years or younger on the date of purchase and you
allocate your entire Contract Value according to the
Investment Allocation Requirements.
Rider
Terms
Annual RMD Amount – The amount required to be
distributed each Calendar Year for purposes of satisfying the
minimum distribution requirements of Code Section 401(a)(9)
(“Section 401(a)(9)”) and related Code provisions
in effect as of the Rider Effective Date.
Protected Payment Amount – The maximum amount
that can be withdrawn under this Rider without reducing the
Protected Payment Base.
If the oldest Owner (or Annuitant in the case of a Non-Natural
Owner) is
age 591/2
or older when the first withdrawal was taken or the most recent
reset, whichever is later, the Protected Payment Amount on any
day after the Rider Effective Date is equal to the withdrawal
percentage multiplied by the Protected Payment Base as of that
day, less cumulative withdrawals during the Contract Year.
If the oldest Owner (or Annuitant in the case of a Non-Natural
Owner) is younger than
age 591/2
when the first withdrawal was taken or the most recent reset,
whichever is later, the Protected Payment Amount on any day
after the Rider Effective Date is equal to the lesser of:
•
the withdrawal percentage multiplied by the Protected Payment
Base as of that day, less cumulative withdrawals during that
Contract Year, or
•
the Remaining Protected Balance as of that day.
The Protected Payment Amount will never be less than zero. The
initial Protected Payment Amount on the Rider Effective Date is
equal to the applicable withdrawal percentage (based on the
Owner’s age at the time of purchase) multiplied by the
Protected Payment Base.
Protected Payment Base – An amount used to
determine the Protected Payment Amount. The Protected Payment
Base will never be less than zero and will remain unchanged
except as otherwise described under the provisions of this
Rider. The initial Protected Payment Base is equal to the
initial Purchase Payment, if the Rider Effective Date is on the
Contract Date, or the Contract Value, if the Rider Effective
Date is on a Contract Anniversary.
Remaining Protected Balance – The amount
available for future withdrawals made under this Rider, unless
withdrawals are guaranteed until the death of an Owner or sole
surviving Annuitant. The Remaining Protected Balance will never
be less than zero. The initial Remaining Protected Balance is
equal to the initial Purchase Payment, if the Rider Effective
Date is on the Contract Date, or the Contract Value, if the
Rider Effective Date is on a Contract Anniversary.
Reset Date – Any Contract Anniversary after the
Rider Effective Date on which an Automatic Reset or an
Owner-Elected Reset occurs.
Rider Effective Date – The date the guarantees
and charges for the Rider become effective. If the Rider is
purchased within 60 days of the Contract Date, the Rider
Effective Date is the Contract Date. If the Rider is purchased
within 60 days of a Contract Anniversary, the Rider
Effective Date is the date of that Contract Anniversary.
How the
Rider Works
On any day, this Rider guarantees you can withdraw up to the
Protected Payment Amount, regardless of market performance,
until the Rider terminates. Lifetime withdrawals up to the
Protected Payment Amount may continue after the Remaining
Protected Balance is reduced to zero (0) if the oldest
Owner (or Annuitant in the case of a Non-Natural Owner) was
age 591/2
or older when the first withdrawal was taken after the Rider
Effective Date or the most recent Reset Date, whichever is
later. If a withdrawal was taken before age
591/2
and there was no subsequent Reset, the Rider will terminate once
the Remaining Protected Balance is reduced to zero (0). If
you are older than
591/2
and if you delay taking withdrawals, this Rider also provides
the potential to receive a 0.10% increase in the withdrawal
percentage per year, which can increase the percentage that you
may withdraw each Contract Year without reducing your Protected
Payment Base.
37
In addition, beginning with the first
(1st) anniversary
of the Rider Effective Date or most recent Reset Date, whichever
is later, the Rider provides for Automatic Annual Resets or
Owner-Elected Resets of the Protected Payment Base and Remaining
Protected Balance to an amount equal to 100% of the Contract
Value.
The Protected Payment Base and Remaining Protected Balance may
change over time. An Automatic Reset or Owner-Elected Reset will
increase or decrease the Protected Payment Base and Remaining
Protected Balance depending on the Contract Value on the Reset
Date. A withdrawal that is less than or equal to the Protected
Payment Amount will reduce the Remaining Protected Balance by
the amount of the withdrawal and will not change the Protected
Payment Base. If a withdrawal is greater than the Protected
Payment Amount and the Contract Value is less than the Protected
Payment Base, both the Protected Payment Base and Remaining
Protected Balance will be reduced by an amount that is greater
than the excess amount withdrawn. If a withdrawal is greater
than the Protected Payment Amount and the Contract Value is less
than the aggregate Purchase Payments under the Death Benefit
Amount, then the aggregate Purchase Payments will be reduced by
an amount greater than the amount withdrawn. For withdrawals
that are greater than the Protected Payment Amount, see the
Withdrawal of Protected Payment Amount subsection.
Amounts withdrawn under this Rider will reduce the Contract
Value by the amount withdrawn and will be subject to the same
conditions, limitations, restrictions and all other fees,
charges and deductions, if applicable, as withdrawals otherwise
made under the provisions of the Contract. Withdrawals under
this Rider are not annuity payouts. Annuity payouts generally
receive a more favorable tax treatment than other withdrawals.
If your Contract is a Qualified Contract, including a TSA/403(b)
Contract, you are subject to restrictions on withdrawals you may
take prior to a triggering event (e.g. reaching age
591/2,
separation from service, disability) and you should consult your
tax or legal advisor prior to purchasing this optional
guarantee, the primary benefit of which is guaranteeing
withdrawals. For additional information regarding withdrawals
and triggering events, see FEDERAL TAX ISSUES –
IRAs and Qualified Plans.
Withdrawal
Percentage
On or prior to the date of the first withdrawal (measured from
the later of the Rider Effective Date or most recent Reset Date)
the withdrawal percentage is determined as follows based on the
oldest Owner’s age (or Annuitant in the case of a
Non-Natural Owner):
Age
Withdrawal Percentage
Before
591/2
4.0%
591/2 - 69
4.0%
70 - 84
5.0%
85 and older
6.0%
If the first withdrawal (measured from the later of the Rider
Effective Date or most recent Reset Date) is taken on or
after
age 591/2,
the withdrawal percentage will automatically increase according
to the table above based on age as of the most recent Contract
Anniversary.
If the first withdrawal (measured from the later of the Rider
Effective Date or most recent Reset Date) is taken prior
to
age 591/2,
the withdrawal percentage will be 4.0% until the Remaining
Protected Balance is depleted and will remain unchanged unless a
Reset occurs. If an Automatic Reset or an Owner-Elected Reset
occurs and your first withdrawal after that Reset is taken on or
after age
591/2,
the withdrawal percentage will be the withdrawal percentage that
corresponds to the age at the time of the first withdrawal.
There is an opportunity for an increase in the withdrawal
percentage. The withdrawal percentage in the table above will
increase by 0.10% for each Rider year a withdrawal is not taken
beginning on the later of the Contract Anniversary following the
Owner’s
age 591/2
or the Rider Effective Date. In addition, the increase in the
withdrawal percentage will still be included as you reach a new
age band (for example, if your first withdrawal is taken after
age
591/2
and at age 69 your withdrawal percentage is 4.4%, then your
withdrawal percentage would be 5.4% the Contract Anniversary
immediately after you turn 70). However, once a withdrawal is
taken (including an RMD Withdrawal), regardless of the
Owner’s age when the withdrawal is taken, no further
increase in the withdrawal percentage will be available and
eligibility for the increase cannot be reinstated with a Reset.
The withdrawal percentage, including any 0.10% increase, will
not be reduced as a result of a Reset.
Withdrawal
of Protected Payment Amount
While this Rider is in effect, you may withdraw up to the
Protected Payment Amount each Contract Year, regardless of
market performance, until the Rider terminates. Any portion of
the Protected Payment Amount not withdrawn during a Contract
Year may not be carried over to the next Contract Year.
If a withdrawal does not exceed the Protected Payment Amount
immediately prior to that withdrawal, the Protected Payment Base
will remain unchanged. Immediately following the withdrawal the
Remaining Protected Balance will decrease by the withdrawal
amount.
Withdrawals Exceeding the Protected Payment
Amount. If a withdrawal (except an RMD withdrawal)
exceeds the Protected Payment Amount immediately prior to that
withdrawal, we will (immediately following the excess
withdrawal) reduce the Protected Payment Base on a proportionate
basis for the amount in excess of the Protected Payment Amount.
We will reduce the Remaining Protected Balance
38
either on a proportionate basis or by the total withdrawal
amount, whichever results in the lower Remaining Protected
Balance amount. (See example 4 in APPENDIX A: AUTOMATIC
INCOME BUILDER RIDER SAMPLE CALCULATIONS for a numerical
example of the adjustments to the Protected Payment Base,
Remaining Protected Balance and Protected Payment Amount as a
result of an excess withdrawal.) If a withdrawal is greater than
the Protected Payment Amount and the Contract Value is less than
the Protected Payment Base, both the Protected Payment Base and
Remaining Protected Balance will be reduced by an amount that is
greater than the excess amount withdrawn.
The amount available for withdrawal under the Contract must be
sufficient to support any withdrawal that would otherwise exceed
the Protected Payment Amount.
For information regarding taxation of withdrawals, see
FEDERAL TAX ISSUES.
Death
Benefit Amount Adjustment
While this Rider is in effect, the aggregate Purchase Payments
component of the Death Benefit Amount under the Contract (see
DEATH BENEFITS AND OPTIONAL DEATH BENEFIT RIDERS –
Death Benefits – Death Benefit Amount)
will be reduced by withdrawals based on either the amount
withdrawn (a dollar-for-dollar basis) or on a proportionate
basis. The calculation method used will depend on the amount
withdrawn at the time of the withdrawal as compared to your
Protected Payment Amount at the time of the withdrawal.
If a withdrawal does not exceed your Protected Payment
Amount immediately prior to that withdrawal, then the aggregate
Purchase Payments under the Death Benefit Amount will be reduced
by the amount of the withdrawal (dollar-for-dollar basis).
If a withdrawal (except an RMD withdrawal) exceeds the
Protected Payment Amount immediately prior to that withdrawal,
we will reduce the aggregate Purchase Payments under the Death
Benefit Amount by the amount of the withdrawal plus we will make
a proportionate reduction for the amount in excess of the
Protected Payment Amount.
See examples 5 and 6 in APPENDIX A: AUTOMATIC
INCOME BUILDER RIDER SAMPLE CALCULATIONS for numerical
examples of the adjustments to the Death Benefit Amount. If this
Rider terminates before the death of an Owner or sole surviving
Annuitant, withdrawals while this Rider was in effect will
adjust the aggregate Purchase Payments under the Death Benefit
Amount on a proportionate basis.
This Rider has no effect on the death benefit calculation under
the Stepped-Up Death Benefit Rider. A Reset does not alter the
adjustment calculation of the aggregate Purchase Payments under
the Death Benefit Amount. However, a Reset will change the
Protected Payment Base which is used to determine the annual
withdrawal amount under the Rider. See the Reset of Protected
Payment Base and Remaining Protected Balance subsection for
more information on Resets.
Required
Minimum Distributions
No adjustment will be made to the Protected Payment Base as a
result of a withdrawal that exceeds the Protected Payment Amount
immediately prior to the withdrawal, provided:
•
such withdrawal (an “RMD Withdrawal”) is for purposes
of satisfying the minimum distribution requirements of
Section 401(a)(9) and related Code provisions in effect at
that time,
•
you have authorized us to calculate and make periodic
distribution of the Annual RMD Amount for the Calendar Year
required based on the payment frequency you have chosen,
•
the Annual RMD Amount is based on this Contract only, and
•
only RMD withdrawals are made from the Contract during the
Contract Year.
Immediately following an RMD Withdrawal, the Remaining Protected
Balance will decrease by the RMD withdrawal amount. While this
Rider is in effect, an RMD Withdrawal will also reduce the
aggregate Purchase Payments under the Death Benefit Amount by
the RMD Withdrawal amount (dollar-for-dollar basis).
See FEDERAL TAX ISSUES – Qualified
Contracts – Required Minimum Distributions.
Depletion
of Contract Value
If a withdrawal (including an RMD withdrawal) does not exceed
the Protected Payment Amount immediately prior to the withdrawal
and reduces the Contract Value to zero, the following will apply:
•
if the oldest Owner (or Annuitant in the case of a Non-Natural
Owner):
•
was younger than
age 591/2
when the first withdrawal was taken under the Rider, after the
Rider Effective Date or the most recent Reset Date, whichever is
later, the Protected Payment Amount will be paid each year until
the Remaining Protected Balance is reduced to zero, or
39
•
was
age 591/2
or older when the first withdrawal was taken under the Rider
after the Rider Effective Date or the most recent Reset Date,
whichever is later, the Protected Payment Amount will be paid
each year until the day of the death of an Owner or the date of
death of the sole surviving Annuitant.
•
the Protected Payment Amount will be paid under a series of
pre-authorized withdrawals under a payment frequency as elected
by the Owner, but no less frequently than annually,
•
no additional Purchase Payments will be accepted under the
Contract,
•
any Remaining Protected Balance will not be available for
payment in a lump sum and will not be applied to provide
payments under an Annuity Option, and
•
the Contract will cease to provide any death benefit.
If the Owner or sole surviving Annuitant dies and the Contract
Value is zero as of the date of death, there is no death
benefit, however, any Remaining Protected Balance will be paid
to the Beneficiary through a series of pre-authorized
withdrawals with a payment frequency then in effect at the time
of the Owner’s or sole surviving Annuitant’s death.
If, however, the Remaining Protected Balance would be paid over
a period that exceeds the life expectancy of the Beneficiary,
the pre-authorized withdrawal amount will be adjusted so that
the withdrawal payments will be paid over a period that does not
exceed the Beneficiary’s life expectancy.
Depletion
of Remaining Protected Balance
If a withdrawal (including an RMD Withdrawal) reduces the
Remaining Protected Balance to zero and Contract Value remains,
the following will apply:
If the oldest Owner (or Annuitant in the case of a Non-Natural
Owner):
•
was younger than
age 591/2
when the first withdrawal was taken under the Rider after the
Rider Effective Date or the most recent Reset Date, whichever is
later, this Rider will terminate, or
•
was
age 591/2
or older when the first withdrawal was taken under the Rider
after the Rider Effective Date or the most recent Reset Date,
whichever is later, you may elect to withdraw up to the
Protected Payment Amount each year until the day of the death of
an Owner or the date of death of the sole surviving Annuitant.
If an Automatic or Owner-Elected Reset occurs, the Remaining
Protected Balance will be reinstated to an amount equal to the
Contract Value as of that Contract Anniversary.
Before your Remaining Protected Balance is zero, if you took
your first withdrawal before
age 591/2
and you would like to be eligible for lifetime payments under
the Rider, an Automatic or Owner-Elected Reset must occur and
your first withdrawal after that Reset must be taken on or
after
age 591/2.
See the Reset of Protected Payment Base and Remaining
Protected Balance subsection of this Rider. If you are
younger than
age 591/2
when the Remaining Protected Balance is zero and Contract Value
remains, the Rider will terminate and there is no opportunity
for a Reset.
If a withdrawal (except an RMD withdrawal) made from the
Contract exceeds the Protected Payment Amount, the Protected
Payment Base will be reduced according to the Withdrawals
Exceeding the Protected Payment Amount subsection.
Any death benefit proceeds to be paid to the Beneficiary from
remaining Contract Value will be paid according to the Death
Benefit provisions of the Contract.
Reset of
Protected Payment Base and Remaining Protected Balance
Regardless of which reset option is used, on and after each
Reset Date, the provisions of this Rider shall apply in the same
manner as they applied when the Rider was originally issued,
except that eligibility for the increase in the withdrawal
percentage cannot be reinstated with a Reset once a withdrawal
is taken. The limitations and restrictions on Purchase Payments
and withdrawals, the deduction of annual Charges and any future
reset options available on and after the Reset Date, will again
apply and will be measured from that Reset Date. A reset occurs
when the Protected Payment Base and Remaining Protected Balance
are changed to an amount equal to the Contract Value as of the
Reset Date.
Automatic Reset. On each Contract Anniversary while
this Rider is in effect and before the Annuity Date, we will
automatically reset the Protected Payment Base and Remaining
Protected Balance to an amount equal to 100% of the Contract
Value, if the Protected Payment Base is less than the Contract
Value on that Contract Anniversary. The annual charge percentage
may change as a result of any Automatic Reset (see CHARGES,
FEES AND DEDUCTIONS – Optional Rider Charges).
Automatic Reset – Opt-Out Election. Within
60 days after a Contract Anniversary on which an Automatic
Reset is effective, you have the option to reinstate the
Protected Payment Base, Remaining Protected Balance, Protected
Payment Amount and annual charge percentage to their respective
amounts immediately before the Automatic Reset. Any future
Automatic Resets will continue in accordance with the
Automatic Reset paragraph above. If you elect this
option, your opt-out election must be received, in a form
satisfactory to us, at our Service Center within the same
60 day period after the Contract Anniversary on which the
reset is effective.
40
Automatic Reset – Future
Participation. You may elect not to participate in
future Automatic Resets at any time. Your election must be
received, in a form satisfactory to us, at our Service Center,
while this Rider is in effect and before the Annuity Date. Such
election will be effective for future Contract Anniversaries. If
you previously elected not to participate in Automatic Resets,
you may re-elect to participate in future Automatic Resets at
any time. Your election to resume participation must be
received, in a form satisfactory to us, at our Service Center
while this Rider is in effect and before the Annuity Date. Such
election will be effective for future Contract Anniversaries as
described in the Automatic Reset paragraph above.
Owner-Elected Resets (Non-Automatic). You may, on
any Contract Anniversary, elect to reset the Remaining Protected
Balance and Protected Payment Base to an amount equal to 100% of
the Contract Value. An Owner-Elected Reset may be elected while
Automatic Resets are in effect. The annual charge percentage may
change as a result of this Reset.
If you elect this option, your election must be received, in a
form satisfactory to us, at our Service Center within
60 days after the Contract Anniversary on which the reset
is effective. The reset will be based on the Contract Value as
of that Contract Anniversary. Your election of this option
may result in a reduction in the Protected Payment Base,
Remaining Protected Balance and Protected Payment Amount.
Generally, the reduction will occur when your Contract Value is
less than the Protected Payment Base as of the Contract
Anniversary you elected the reset. You are strongly advised
to work with your financial professional prior to electing an
Owner-Elected Reset. We will provide you with written
confirmation of your election.
Subsequent
Purchase Payments
If we receive additional Purchase Payments after the Rider
Effective Date, we will increase the Protected Payment Base and
Remaining Protected Balance by the amount of the Purchase
Payments. However, for purposes of this Rider, we reserve the
right to restrict additional Purchase Payments that result in a
total of all Purchase Payments received on or after the later of
the first
(1st)
Contract Anniversary or most recent Reset Date to exceed
$100,000 without our prior approval. This provision only applies
if the Contract to which this Rider is attached permits Purchase
Payments after the first
(1st)
Contract Anniversary, measured from the Contract Date.
Annuitization
If you annuitize the Contract at the maximum Annuity Date
specified in your Contract and this Rider is still in effect at
the time of your election and a Life Only fixed annuity option
is chosen, the annuity payments will be equal to the greater of:
•
the Life Only fixed annual payment amount based on the terms of
your Contract, or
•
the Protected Payment Amount in effect at the maximum Annuity
Date.
If you annuitize the Contract at any time prior to the maximum
Annuity Date specified in your Contract, your annuity payments
will be determined in accordance with the terms of your
Contract. The Protected Payment Base, Remaining Protected
Balance and Protected Payment Amount under this Rider will not
be used in determining any annuity payments. Work with your
financial professional to determine if you should annuitize your
Contract before the maximum Annuity Date or stay in the
accumulation phase and continue to take withdrawals under the
Rider.
The annuity payments described in this subsection are available
to you even if your first withdrawal was taken prior to age
591/2
and no Resets have occurred.
Continuation
of Rider if Surviving Spouse Continues Contract
If the Remaining Protected Balance is zero when the Owner dies,
this Rider will terminate. If the Remaining Protected Balance is
greater than zero and the Owner dies while this Rider is in
effect, the surviving spouse of the deceased Owner may elect to
continue the Contract in accordance with its terms, and the
surviving spouse may continue to take withdrawals of the
Protected Payment Amount under this Rider, until the Remaining
Protected Balance is reduced to zero.
The surviving spouse may elect any of the reset options
available under this Rider for subsequent Contract
Anniversaries. If a reset takes place then the provisions of
this Rider will continue in full force and in effect for the
surviving spouse. The withdrawal percentage will be determined
based on the age of the surviving spouse and the new withdrawal
percentage may be higher or lower than what the withdrawal
percentage was prior to death. In addition, if the surviving
spouse is
591/2
when a reset occurs, the surviving spouse may take withdrawals
of the Protected Payment Amount (based on the new Protected
Payment Base and withdrawal percentage) for life.
Any 0.10% increase to the withdrawal percentage previously added
will apply but no further increases to the withdrawal percentage
will be added.
The surviving spouse may elect to receive any death benefit
proceeds instead of continuing the Contract and Rider (see
DEATH BENEFITS AND OPTIONAL DEATH BENEFIT RIDERS –
Death Benefits).
41
Termination
You cannot request a termination of the Rider. Except as
otherwise provided below, the Rider will automatically terminate
on the earliest of:
•
the day any portion of the Contract Value is no longer allocated
according to the Investment Allocation Requirements,
•
the day the Remaining Protected Balance is reduced to zero if
the oldest Owner (or Annuitant in the case of a Non-Natural
Owner), was younger than
591/2
when the first withdrawal was taken under the Rider after the
Rider Effective Date or the most recent Reset Date, whichever is
later,
•
the date of death of an Owner or the date of death of the sole
surviving Annuitant (except as provided under the
Continuation of Rider if Surviving Spouse Continues Contract
subsection),
•
for Contracts with a Non-Natural Owner, the date of the first
death of an Annuitant,
•
the day the Contract is terminated in accordance with the
provisions of the Contract,
•
the day we are notified of a change in ownership of the Contract
to a non-spouse Owner if the Contract is Non-Qualified
(excluding changes in ownership to or from certain trusts),
•
the day you exchange this Rider for another withdrawal benefit
Rider,
•
the Annuity Date (see the Annuitization subsection for
additional information), or
•
the day the Contract Value is reduced to zero as a result of a
withdrawal (except an RMD withdrawal) that exceeds the Protected
Payment Amount.
The Rider will not terminate the day the Remaining Protected
Balance is reduced to zero if the oldest Owner (or Annuitant in
the case of a Non-Natural Owner) was
age 591/2
or older when the first withdrawal was taken under the Rider
after the Rider Effective Date or the most recent Reset Date,
whichever is later.
The Rider and the Contract will not terminate the day the
Contract Value is zero and you begin taking pre-authorized
withdrawals of the Protected Payment Amount. In this case, the
Rider and the Contract will terminate:
•
the day the Remaining Protected Balance is reduced to zero if
the oldest Owner (or Annuitant in the case of a Non-Natural
Owner), was younger than
591/2
when the first withdrawal was taken under the Rider after the
Rider Effective Date or the most recent Reset Date, whichever is
later, or
•
the date of the first death of an Owner or the date of death of
the sole surviving Annuitant if the oldest Owner (or Annuitant
in the case of a Non-Natural Owner) was
age 591/2
or older when the first withdrawal was taken under the Rider
after the Rider Effective Date or the most recent Reset Date,
whichever is later.
If this Rider is terminated as a result of having any portion of
the Contract Value no longer allocated according to the
Investment Allocation Requirements, you must wait until a
Contract Anniversary that is at least one (1) year from the
Effective Date of termination before this Rider may be purchased
again (if available).
Sample
Calculations
Hypothetical sample calculations are in the attached APPENDIX
A: AUTOMATIC INCOME BUILDER RIDER SAMPLE CALCULATIONS. The
examples are based on certain hypothetical assumptions and are
for example purposes only. These examples are not intended to
serve as projections of future investment returns.
PL&A is a life insurance company based in Arizona. Our
operations include life insurance, annuity and institutional
products and various other insurance products and services. At
the end of 2009, we had total statutory assets of
$3,539.1 million.
PL&A is authorized to conduct life insurance and annuity
business in Arizona, New York and certain other states. Our
executive office is located at 700 Newport Center Drive,
Newport Beach, California92660.
PL&A was incorporated in 1982 under the name of Pacific
Financial Life Insurance Company. We merged with Pacific
Financial Life Insurance Company of Arizona and assumed the PM
Group Life Insurance Company in transferring domicile from
California to Arizona, which was completed in 1990. On
January 1, 1999, we changed our name to our current name,
Pacific Life & Annuity Company.
42
Our affiliate, Pacific Select Distributors, Inc. (PSD), serves
as the principal underwriter (distributor) for the Contracts.
PSD is located at 700 Newport Center Drive, Newport Beach,
California92660. We and PSD enter into selling agreements with
broker-dealers, whose financial professionals are authorized by
state insurance departments to sell the Contracts.
We may provide you with reports of our ratings both as an
insurance company and as to our claims-paying ability with
respect to our General Account assets.
Pacific Life Insurance Company administers the policies sold
under this Prospectus. At the end of 2009, Pacific Life had
$214.9 billion of individual life insurance and total
admitted assets of approximately $94.7 billion. Pacific
Life’s executive office is located at 700 Newport
Center Drive, Newport Beach, California92660.
Separate Account A was established on January 25, 1999
as a separate account of ours, and is registered with the SEC
under the Investment Company Act of 1940 (the “1940
Act”), as a type of investment company called a “unit
investment trust.”
Obligations arising under your Contract are our general
corporate obligations. We are also the legal owner of the assets
in the Separate Account. Assets of the Separate Account
attributed to the reserves and other liabilities under the
Contract and other contracts issued by us that are supported by
the Separate Account may not be charged with liabilities arising
from any of our other business; any income, gain or loss
(whether or not realized) from the assets of the Separate
Account are credited to or charged against the Separate Account
without regard to our other income, gain or loss.
We may invest money in the Separate Account in order to commence
its operations and for other purposes, but not to support
contracts other than variable annuity contracts. A portion of
the Separate Account’s assets may include accumulations of
charges we make against the Separate Account and investment
results of assets so accumulated. These additional assets are
ours and we may transfer them to our General Account at any
time; however, before making any such transfer, we will consider
any possible adverse impact the transfer might have on the
Separate Account. Subject to applicable law, we reserve the
right to transfer our assets in the Separate Account to our
General Account.
The Separate Account is not the sole investor in the Funds.
Investment in a Fund by other separate accounts in connection
with variable annuity and variable life insurance contracts may
create conflicts. See the accompanying Prospectus and the SAI
for the Funds for more information.
The following summary of federal income tax issues is based
on our understanding of current tax laws and regulations, which
may be changed by legislative, judicial or administrative
action. The summary is general in nature and is not intended as
tax advice. Moreover, it does not consider any applicable
foreign, state or local tax laws. We do not make any guarantee
regarding the tax status, federal, foreign, state or local, of
any Contract or any transaction involving the Contracts.
Accordingly, you should consult a qualified tax adviser for
complete information and advice before purchasing a Contract.
Additional tax information is included in the SAI.
Diversification
Requirements and Investor Control
Section 817(h) of the Code provides that the investments
underlying a variable annuity must satisfy certain
diversification requirements in order for the contract to be
treated as an annuity contract and qualify for tax deferral. We
believe the underlying Variable Investment Options for the
contract meet these requirements. Details on these
diversification requirements appear in the Pacific Select Fund
SAI.
In addition, for a variable annuity contract to qualify for tax
deferral, assets in the separate accounts supporting the
contract must be considered to be owned by the insurance company
and not by the contract owner. Under current U.S. tax law, if a
contract owner has excessive control over the investments made
by a separate account, or the underlying fund, the contract
owner will be taxed currently on income and gains from the
account or fund. In other words, in such a case of investor
control the contract owner would not derive the tax benefits
normally associated with variable annuities. For more
information regarding investor control, please refer to the
contract SAI.
Section 72 of the Code governs the taxation of annuities in
general, and we designed the Contracts to meet the requirements
of Section 72 of the Code. We believe that, under current
law, the Contract will be treated as an annuity for federal
income tax purposes if the Contract Owner is a natural person or
an agent for a natural person, and that we (as the issuing
insurance company), and not the Contract Owner(s), will be
treated as the owner of the investments underlying the Contract.
Accordingly, no tax should be payable by you as a Contract Owner
as a result of any increase in Contract Value until you receive
money under your Contract. You should, however, consider how
amounts will be taxed when you do receive them. The following
discussion assumes that your Contract will be treated as an
annuity for federal income tax purposes.
These general rules apply to Non-Qualified Contracts. As
discussed below, however, tax rules may differ for Qualified
Contracts and you should consult a qualified tax adviser if you
are purchasing a Qualified Contract.
Taxes
Payable
A Contract Owner is not taxed on the increases in the value of a
Contract until an amount is received or deemed to be received.
An amount could be received or deemed to be received, for
example, if there is a partial distribution, a lump sum
distribution, an Annuity payment or a material change in the
Contract. Increases in Contract Value that are received or
deemed to be received are taxable to the Contract Owner as
ordinary income. Distributions of net investment income or
capital gains that each Subaccount receives from its
corresponding Portfolio are automatically reinvested in such
Portfolio unless we, on behalf of the Separate Account, elect
otherwise. As noted above, you will be subject to federal income
taxes on the investment income from your Contract only when it
is distributed to you.
Non-Natural
Persons as Owners
If a contract is not owned or held by a natural person or as
agent for a natural person, the contract generally will not be
treated as an “annuity” for tax purposes, meaning that
the contract owner will be subject to current tax on annual
increases in Contract Value at ordinary income rates unless some
other exception applies. Certain entities, such as some trusts,
may be deemed to be acting as agents for natural persons.
Corporations, including S corps, C corps, LLCs,
partnerships and FLPs, and tax exempt entities are non-natural
persons that will not be deemed to be acting as agents for
natural persons.
Addition
of Optional Rider or Material Change to Contract
The addition of a rider to the Contract, or a material change in
the Contract’s provisions, such as a change in Contract
ownership or an assignment of the Contract, could cause it to be
considered newly issued or entered into for tax purposes, and
thus could cause a taxable event or the Contract to lose certain
grandfathered tax status. Please contact your tax adviser for
more information.
44
Taxes
Payable on Withdrawals Prior to the Annuity Date
Amounts you withdraw before annuitization, including amounts
withdrawn from your Contract Value in connection with partial
withdrawals for payment of any charges and fees, will be treated
first as taxable income to the extent that your Contract Value
exceeds the aggregate of your Purchase Payments reduced by
non-taxable amounts previously received (investment in the
Contract), and then as non-taxable recovery of your Purchase
Payments. Therefore, you include in your gross income the
smaller of: a) the amount of the partial withdrawal, or
b) the amount by which your Contract Value immediately
before you receive the distribution exceeds your investment in
the Contract at that time. If at the time of a partial
withdrawal your Contract Value does not exceed your investment
in the Contract, then the withdrawal will not be includable in
gross income and will simply reduce your investment in the
Contract. Exceptions to this rule are distributions in full
discharge of your Contract (a full surrender) or distributions
from contracts issued and investments made before
August 14, 1982.
The assignment or pledge of (or agreement to assign or pledge)
the value of the Contract for a loan will be treated as a
withdrawal subject to these rules.
You should consult your tax adviser for additional information
regarding taking a partial or a full distribution from your
Contract.
Multiple
Contracts (Aggregation Rule)
Multiple Non-Qualified Contracts that are issued after
October 21, 1988, by us or our affiliates to the same Owner
during the same calendar year are treated as one Contract for
purposes of determining the taxation of distributions (the
amount includible in gross income under Code Section 72(e))
prior to the Annuity Date from any of the Contracts. A Contract
received in a tax-free exchange under Code Section 1035 may
be treated as a new Contract for this purpose. For Contracts
subject to the Aggregation Rule, the values of the Contracts and
the investments in the Contracts should be added together to
determine the taxation under Code Section 72(e).
Withdrawals will be treated first as withdrawals of income until
all of the income from all such Contracts is withdrawn. The
Treasury Department has specific authority under Code Section
72(e)(11) to issue regulations to prevent the avoidance of the
income-out-first rules for withdrawals prior to the Annuity Date
through the serial purchase of Contracts or otherwise. As of the
date of this Prospectus there are no regulations interpreting
these aggregation provisions.
10% Tax
Penalty Applicable to Certain Withdrawals and Annuity
Payments
The Code provides that the taxable portion of a withdrawal or
other distribution may be subject to a tax penalty equal to 10%
of that taxable portion unless the withdrawal is:
•
made on or after the date you reach age
591/2,
•
made by a Beneficiary after your death,
•
attributable to your becoming disabled,
•
any payment made under an immediate annuity,
•
attributable to an investment in the Contract made prior to
August 14, 1982, or
•
any distribution that is a part of a series of substantially
equal periodic payments (Code Section 72(q) payments) made
(at least annually) over your life (or life expectancy) or the
joint lives (or life expectancies) of you and your designated
beneficiary.
Additional exceptions may apply to certain Qualified Contracts
(see Taxes Payable on Annuity Payments and the
applicable Qualified Contracts).
Taxes
Payable on Optional Rider Charges
It is our understanding that the charges relating to any
optional death benefit rider are not subject to current taxation
and we will not report them as such. However, the IRS may
determine that these charges should be treated as partial
withdrawals subject to current taxation to the extent of any
gain and, if applicable, the 10% tax penalty. We reserve the
right to report any optional death benefit rider charges as
partial withdrawals if we believe that we would be expected to
report them in accordance with IRS regulations.
Distributions
After the Annuity Date
After you annuitize, a portion of each annuity payment you
receive under a Contract generally will be treated as a partial
recovery of Investments (as used here, “Investments”
means the aggregate Purchase Payments less any amounts that were
previously received under the Contract but not included in
income) and will not be taxable. (In certain circumstances,
subsequent modifications to an initially-established payment
pattern may result in the imposition of a tax penalty.) The
remainder of each annuity payment will be taxed as ordinary
income. However, after the full amount of aggregate Investments
has been recovered, the full amount of each annuity payment will
be taxed as ordinary income. Exactly how an annuity payment is
divided into taxable and non-taxable portions depends on the
45
period over which annuity payments are expected to be received,
which in turn is governed by the form of annuity selected and,
where a lifetime annuity is chosen, by the life expectancy of
the Annuitant(s) or payee(s). Such a payment may also be subject
to a tax penalty.
Same-Sex
Spouses
Pursuant to Section 3 of the federal Defense of Marriage
Act (“DOMA”), same-sex marriages currently are not
recognized for purposes of federal law. Therefore, the favorable
income-deferral options afforded by federal tax law to an
opposite-sex spouse under Internal Revenue Code
sections 72(s) and 401(a)(9) are currently NOT available to
a same-sex spouse. Same-sex spouses who own or are considering
the purchase of annuity products that provide benefits based
upon status as a spouse should consult a tax advisor. To the
extent that an annuity contract or certificate accords to
spouses other rights or benefits that are not affected by DOMA,
same-sex spouses remain entitled to such rights or benefits to
the same extent as any annuity holder’s spouse.
Distributions
to Beneficiary After Contract Owner’s Death
Generally, the same tax rules apply to amounts received by the
Beneficiary as those that apply to the Contract Owner, except
that the early withdrawal tax penalty does not apply. Thus, any
annuity payments or lump sum withdrawal will be divided into
taxable and non-taxable portions.
If within sixty days after the date on which a lump sum death
benefit first becomes payable and the Beneficiary elects to
receive annuity or life expectancy payments in lieu of the lump
sum death benefit, then the Beneficiary will not be treated for
tax purposes as having received the lump sum death benefit in
the tax year it first becomes payable. Rather, in that case, the
Beneficiary will be taxed on the annuity or life expectancy
payments as they are received.
If death occurs after the Annuity Date, but before the
expiration of a period certain option, the Beneficiary will
recover the balance of the Investments as payments are made and
may be allowed a deduction on the final tax return for the
unrecovered Investments. A lump sum payment taken by the
Beneficiary in lieu of remaining monthly annuity payments is not
considered an annuity payment for tax purposes. The portion of
any lump sum payment to a Beneficiary in excess of aggregate
unrecovered Investments would be subject to income tax.
Contract
Owner’s Estate
Generally, any amount payable to a Beneficiary after the
Contract Owner’s death, whether before or after the Annuity
Date, will be included in the estate of the Contract Owner for
federal estate tax purposes. If the inclusion of the value of
the Contract triggers a federal estate tax to be paid, the
Beneficiary may be able to use a deduction called Income in
Respect of Decedent (IRD) in calculating the income taxes
payable upon receipt of the death benefit proceeds. In addition,
designation of a non-spouse Beneficiary who either is
371/2
or more years younger than a Contract Owner or is a grandchild
of a Contract Owner may have Generation Skipping Transfer Tax
(GSTT) consequences under section 2601 of the Code. You
should consult with a qualified tax advisor if you have
questions about federal estate tax, IRD, or GSTT.
Gifts of
Annuity Contracts
Generally, gifts of Non-Qualified Contracts prior to the annuity
start date will trigger tax reporting to the donor on the gain
on the Contract, with the donee getting a stepped-up basis for
the amount included in the donor’s income. The 10% early
withdrawal tax penalty and gift tax also may be applicable. This
provision does not apply to transfers between spouses or
incident to a divorce, or transfers to and from a trust acting
as agent for the Owner or the Owner’s spouse.
Tax
Withholding for Non-Qualified Contracts
Unless you elect to the contrary, any amounts you receive under
your Contract that are attributable to investment income will be
subject to withholding to meet federal income tax obligations.
For nonperiodic distributions, you will have the option to
provide us with withholding information at the time of your
withdrawal request. If you do not provide us with withholding
information, we will generally withhold 10% of the taxable
distribution amount and remit it to the IRS. For periodic
(annuity) payments, the rate of withholding will be determined
on the basis of the withholding information you provide to us
with your application. If you do not provide us with withholding
information, we are required to determine the withholding, from
every annuity payment, as if you are a married person with 3
exemptions.
Please call 1-800-748-6907 with any questions about the required
withholding information. Financial professionals may call us at
1-877-441-2357.
Tax
Withholding for
Non-resident
Aliens or Non U.S. Persons
Taxable distributions to Contract Owners who are non-resident
aliens or other non U.S. persons are generally subject to
U.S. federal income tax withholding at a 30% rate, unless a
lower treaty rate applies. Prospective foreign owners are
advised to consult with a tax advisor regarding the U.S., state
and foreign tax treatment of a Contract.
46
Exchanges
of Non-Qualified Contracts (1035 Exchanges)
You may make your initial or an additional Purchase Payment
through an exchange of an existing annuity contract or endowment
life insurance contract pursuant to Section 1035 of the Code (a
1035 exchange). The exchange can be effected by completing the
Transfer/ Exchange form, indicating in the appropriate section
of the form that you are making a 1035 exchange and submitting
any applicable Regulation 60 paperwork. The form is available by
calling your Financial professional or by calling our Contract
Owner number at
1-800-748-6907.
Financial professionals can call
1-877-441-2357.
Once completed, the form should be mailed to us, along with the
annuity contract or life insurance policy you are exchanging. If
you are making an initial Purchase Payment, a completed Contract
application should also be attached.
In general terms, Section 1035 of the Code provides that no
gain or loss is recognized when you exchange one annuity or life
insurance contract for another annuity contract. Transactions
under Section 1035, however, may be subject to special
rules and may require special procedures and record keeping,
particularly if the exchanged annuity contract was issued prior
to August 14, 1982. You should consult your tax adviser
prior to effecting a 1035 exchange.
Partial
1035 Exchanges
A partial exchange is the direct transfer of only a portion of
an existing annuity’s Contract Value to a new annuity
contract. Rev. Proc.
2008-24
adopted the provisions of
Notice 2003-51,
with some modifications, finalizing the guidelines for partial
1035 exchanges. Under Rev. Proc.
2008-24, the
24 month period is reduced to 12 months, so that a
partial exchange will be treated as tax-free under Code
Section 1035 if there are no distributions, from either
annuity, within 12 months of the partial 1035 exchange.
Alternatively, a partial 1035 exchange will be treated as
tax-free under Code Section 1035 if the taxpayer demonstrates
that any distribution taken within the 12 months is due to
a specifically identified condition that occurred between the
date of the partial transfer and the distribution (the
conditions are death, disability, attaining age
591/2,
divorce or loss of employment). Rev
Proc. 2008-24
removes the subjective element of Notice
2003-51
(whether the distribution was contemplated at the time of the
partial exchange). Also, Rev.
Proc. 2008-24
provides that if the partial exchange does not qualify as a
tax-free exchange under Code Section 1035, it will be
treated as a taxable distribution with a subsequent repurchase,
and that if the partial exchange is treated as tax-free under
Code Section 1035 and this Rev. Proc., the two contracts
will not be aggregated and treated as one contract, but rather
will be treated as two separate contracts for tax and penalty
purposes.
You should consult your tax adviser prior to effecting a partial
1035 exchange.
In general, in the case of Non-Qualified Contracts, if you are
an individual and expect to accumulate your Contract Value over
a relatively long period of time without making significant
withdrawals, there may be federal income tax advantages in
purchasing such a Contract. This is because any increase in
Contract Value is not subject to current taxation. Income taxes
are deferred until the money is withdrawn, at which point
taxation occurs only on the gain from the investment in the
Contract. With income taxes deferred, you may accumulate more
money over the long term through a variable annuity than you may
through non-tax-deferred investments. The advantage may be
greater if you decide to liquidate your Contract Value in the
form of monthly annuity payments after your retirement, or if
your tax rate is lower at that time than during the period that
you held the Contract, or both.
When withdrawals or distributions are taken from the variable
annuity, the gain is taxed as ordinary income. This may be a
potential disadvantage because money that had been invested in
other types of assets may qualify for a more favorable federal
tax rate. For example, in 2010 the tax rate applicable both to
the sale of capital gain assets held more than 1 year and
to the receipt of qualifying dividends by individuals is
generally 15% (5% for lower-income individuals). In contrast, an
ordinary income tax rate of up to 35% applies to taxable
withdrawals on distributions from a variable annuity in 2010.
Also, withdrawals or distributions taken from a variable annuity
may be subject to a tax penalty equal to 10% of the taxable
portion, although exceptions to the tax penalty may apply.
An owner of a variable annuity cannot deduct or offset losses on
transfers to or from Subaccounts, or at the time of any partial
withdrawals. If you surrender your Contract and your Net
Contract Value is less than the aggregate of your investments in
the Contract (reduced by any previous non-taxable
distributions), there may be a deductible ordinary income loss,
although the deduction may be limited. Consult with your tax
adviser regarding the impact of federal income taxes on your
specific situation.
Although the Separate Account is registered as an investment
company, it is not a separate taxpayer for purposes of the Code.
The earnings of the Separate Account are taxed as part of our
operations. No charge is made against the Separate Account for
our federal income taxes (excluding the charge for premium
taxes), but we will review, periodically, the question of
charges to the Separate Account or your Contract for such taxes.
Such a charge may be made in future years for any federal income
taxes that would be attributable to the Separate Account or to
our operations with respect to your Contract, or attributable,
directly or indirectly, to investments in your Contract.
47
Under current law, we may incur state and local taxes (in
addition to premium taxes) in several states. At present, these
taxes are not significant and they are not charged against the
Contract or the Separate Account. If there is a material change
in applicable state or local tax laws, the imposition of any
such taxes upon us that are attributable to the Separate Account
or to our operations with respect to your Contract may result in
a corresponding charge against the Separate Account or your
Contract.
Given the uncertainty of future changes in applicable federal,
state or local tax laws, we cannot appropriately describe the
effect a tax law change may have on taxes that would be
attributable to the Separate Account or your Contract.
The Contracts are available to a variety of Qualified Plans and
IRAs. Tax restrictions and consequences for Contracts under each
type of Qualified Plan and IRAs differ from each other and from
those for Non-Qualified Contracts. No attempt is made herein to
provide more than general information about the use of the
Contract with the various types of Qualified Plans and IRAs.
Participants under such Qualified Plans, as well as Contract
Owners, Annuitants and Beneficiaries, are cautioned that the
rights of any person to any benefits under such Qualified Plans
may be subject to the terms and conditions of the Plans
themselves or limited by applicable law, regardless of the terms
and conditions of the Contract issued in connection therewith.
Tax
Deferral
It is important to know that Qualified Plans such as 401(k)s, as
well as IRAs, are already tax-deferred. Therefore, an annuity
contract should be used to fund an IRA or Qualified Plan to
benefit from the annuity’s features other than tax
deferral. The other benefits of using a variable annuity to fund
a Qualified Plan or an IRA include the lifetime income options,
guaranteed death benefit options and the ability to transfer
among Investment Options without any sales charge. You should
consider if the Contract is a suitable investment if you are
investing through a Qualified Plan or IRA.
Taxes
Payable
Generally, amounts received from Qualified Contracts are taxed
as ordinary income under Section 72, to the extent that
they are not treated as a tax free recovery of contributions.
Different rules apply for Roth IRAs. Consult your tax advisor
before requesting a distribution from a Qualified Contract.
10% Tax
Penalty for Early Withdrawals
Generally, distributions from IRAs and Qualified Plans that
occur before you attain age
591/2
are subject to a 10% tax penalty imposed on the amount of the
distribution that is includable in gross income, with certain
exceptions. These exceptions include distributions:
•
made to a beneficiary after the owner’s/participant’s
death,
•
attributable to the owner/participant becoming disabled under
Section 72(m)(7),
•
that are part of a series of substantially equal periodic
payments (also referred to as SEPPs or 72(t) payments) made (at
least annually) over your life (or life expectancy) or the joint
lives (or joint life expectancies) of you and your designated
beneficiary,
•
for certain higher education expenses (IRAs only),
•
used to pay for certain health insurance premiums or medical
expenses (IRAs only),
•
for costs related to the purchase of your first home (IRAs
only), and
•
(except for IRAs) made to an employee after separation from
service after reaching age 55 (or age 50 in the case of a
qualified public safety employee).
Tax
Withholding for Qualified Contracts
Distributions from a Contract under a Qualified Plan (not
including an individual retirement annuity subject to Code
Section 408 or Code Section 408A) to an employee,
surviving spouse, or former spouse who is an alternate payee
under a qualified domestic relations order, in the form of a
lump sum settlement or periodic annuity payments for a fixed
period of fewer than 10 years are subject to mandatory
income tax withholding of 20% of the taxable amount of the
distribution, unless:
•
the distributee directs the transfer of such amounts in cash to
another Qualified Plan or a traditional IRA, or
•
the payment is a minimum distribution required under the Code.
The taxable amount is the amount of the distribution less the
amount allocable to after-tax contributions. All other types of
taxable distributions are subject to withholding unless the
distributee elects not to have withholding apply.
48
IRAs and
Other Qualified Contracts with Optional Benefit Riders
As of the date of this Prospectus, there are special
considerations for purchases of any optional living or death
benefit riders. IRS regulations state that Individual Retirement
Accounts (IRAs) may generally not invest in life insurance
contracts. We believe that these regulations do not prohibit the
optional living or death benefit riders from being added to your
Contract if it is issued as a Traditional IRA, Roth IRA, SEP IRA
or SIMPLE IRA. However, the law is unclear and it is possible
that a Contract that has optional living or death benefit riders
and is issued as a Traditional IRA, Roth IRA, or SIMPLE IRA
could be disqualified and may result in increased taxes to the
Owner.
Similarly, section 401 plans, section 403(b) annuities
and IRAs (but not Roth IRAs) can only offer incidental
death benefits. The Internal Revenue Service (IRS) could
take the position that the enhanced death benefits provided by
optional benefit riders are not incidental. In addition, to the
extent that the optional benefit riders alter the timing or the
amount of the payment of distributions under a Qualified
Contract, the riders cannot be paid out in violation of the
minimum distribution rules of the Code.
It is our understanding that the charges relating to the
optional benefit riders are not subject to current taxation and
we will not report them as such. However, the IRS may determine
that these charges should be treated as partial withdrawals
subject to current income taxation to the extent of any gain
and, if applicable, the 10% tax penalty. We reserve the right to
report the rider charges as partial withdrawals if we believe
that we would be expected to report them in accordance with IRS
regulations.
Required
Minimum Distributions
The regulations provide that you cannot keep assets in Qualified
Plans or IRAs indefinitely. Eventually they are required to be
distributed; at that time (the Required Beginning Date (RBD)),
Required Minimum Distributions (RMDs) are the amount that must
be distributed each year.
Under Section 401 of the Code (for Qualified Plans) and
Section 408 of the Code (for IRAs), the entire interest
under the Contract must be distributed to the Owner/Annuitant no
later than the Owner/Annuitant’s RBD, or distributions over
the life of the Owner/Annuitant (or the Owner/Annuitant and his
beneficiary) must begin no later than the RBD.
The RBD for distributions from a Qualified Contract maintained
for an IRA under Section 408 of the Code is generally
April 1 of the calendar year following the year in which
the Owner/Annuitant reaches
age 701/2.
The RBD for a Qualified Contract maintained for a qualified
retirement or pension plan under Section 401 of the Code or
a Section 403(b) annuity is April 1 of the calendar
year following the later of the year in which the
Owner/Annuitant reaches age
701/2,
or, if the plan so provides, the year in which the
Owner/Annuitant retires. There is no RBD for a Roth IRA
maintained pursuant to Section 408A of the Code.
The IRS issued Final and Temporary Regulations on April 17,2002 (“Final Regulations”). Effective January 1,2003, the IRS requires that all IRA holders and Qualified Plan
Participants (with one exception discussed below) use the
Uniform Lifetime Table to calculate their RMDs.
The Uniform Lifetime Table is based on a joint life expectancy
and uses the IRA owner’s actual age and assumes that the
beneficiary is 10 years younger than the IRA owner. Note
that under these Final Regulations, the IRA owner does not need
to actually have a named beneficiary when they turn age
701/2.
The exception noted above is for an IRA owner who has a spouse,
who is more than 10 years younger, as the sole beneficiary
on the IRA. In that situation, the spouse’s actual age (and
life expectancy) will be used in the joint life calculation.
If the Owner/Annuitant dies prior to his RBD or complete
distribution from the Qualified Contract, the remainder shall be
distributed as provided in the “Qualified Contract
Distribution Rules” section of this Prospectus. For
non-spouse beneficiaries, life expectancy is initially computed
by use of the Single Life Table of the Final Regulations
(Regulation
Section 1.401(a)(9)-9).
Subsequent life expectancy shall be calculated by reducing the
life expectancy of the Beneficiary by one in each following
calendar year.
For calendar year 2003 and thereafter, taxpayers (and the
underlying Qualified Plan) must rely on the Final and Temporary
Regulations (discussed above) for determining RMDs. If any
future guidance from the IRS is more restrictive than the
guidance in these Final and Temporary Regulations, the future
guidance will be issued without retroactive effect.
The method of distribution selected must comply with the minimum
distribution rules of Code Section 401(a)(9), and the
applicable proposed Regulations thereunder.
Actuarial
Value
In accordance with recent changes in laws and regulations, RMDs
may be calculated based on the sum of the contract value and the
actuarial value of any additional death benefits and benefits
from optional riders that you have purchased under the Contract.
As a result, RMDs may be larger than if the calculation were
based on the contract value only, which may in turn result in an
earlier (but not before the required beginning date)
distribution under the Contract and an increased amount of
taxable income distributed to the contract owner, and a
reduction of death benefits and the benefits of any optional
riders.
49
RMDs and
Annuity Options
Under the Final Regulations, for retirement plans that qualify
under Section 401 or 408 of the Code, the period elected
for receipt of RMDs as annuity payments under Annuity Options 2
and 4 generally may be:
•
no longer than the joint life expectancy of the Annuitant and
Beneficiary in the year that the Annuitant reaches age
701/2,
and
•
must be shorter than such joint life expectancy if the
Beneficiary is not the Annuitant’s spouse and is more than
10 years younger than the Annuitant.
Under Annuity Option 3, if the Beneficiary is not the
Annuitant’s spouse and is more than 10 years younger
than the Annuitant, the
662/3%
and 100% elections specified below may not be available. The
restrictions on options for retirement plans that qualify under
Sections 401 and 408 also apply to a retirement plan that
qualifies under Section 403(b) with respect to amounts that
accrued after December 31, 1986.
Loans
Certain Owners of Qualified Contracts may borrow against their
Contracts. Otherwise loans from us are not permitted. You may
request a loan from us, using your Contract Value as your only
security if yours is a Qualified Contract that is:
•
not subject to Title 1 of ERISA,
•
issued under Section 403(b) of the Code, and
•
issued under a Plan that permits Loans (a “Loan Eligible
Plan”).
You may have only one loan outstanding at any time. The minimum
loan amount is $1,000. Your Contract Debt at the effective date
of your loan may not exceed the lesser of:
•
50% of the amount available for withdrawal under this Contract
(see WITHDRAWALS – Optional Withdrawals –
Amount Available for Withdrawal), or
•
$50,000 less your highest outstanding Contract Debt during the
12-month
period immediately preceding the effective date of your loan.
If your request for a loan is processed, you will be charged
interest on your Contract Debt at a fixed annual rate equal to
5%. The amount held in the Loan Account to secure your loan will
earn a return equal to an annual rate of 3%.
Interest charges accrue on your Contract Debt daily, beginning
on the effective date of your loan. Interest earned on the Loan
Account Value accrues daily beginning on the day following the
effective date of the loan, and those earnings will be
transferred once a year to your Investment Options in accordance
with your most recent allocation instructions. Loan repayments
will not be reduced by sales charges. For more information about
loans, including the consequences of loans, loan procedures,
loan terms and repayment terms, see the SAI.
We may change these loan provisions to reflect changes in the
Code or interpretations thereof. We urge you to consult with
a qualified tax adviser prior to effecting any loan transaction
under your Contract.
The following is only a general discussion about types of
IRAs and Qualified Plans for which the Contracts are available.
We are not the administrator of any Qualified Plan. The plan
administrator and/or custodian, whichever is applicable, (but
not us) is responsible for all Plan administrative duties
including, but not limited to, notification of distribution
options, disbursement of Plan benefits, handling any processing
and administration of Qualified Plan loans, compliance
regulatory requirements and federal and state tax reporting of
income/distributions from the Plan to Plan participants and, if
applicable, Beneficiaries of Plan participants and IRA
contributions from Plan participants. Our administrative duties
are limited to administration of the Contract and any
disbursements of any Contract benefits to the Owner, Annuitant,
or Beneficiary of the Contract, as applicable. Our tax reporting
responsibility is limited to federal and state tax reporting of
income/distributions to the applicable payee and IRA
contributions from the Owner of a Contract, as recorded on our
books and records. The Qualified Plan (the plan administrator or
the custodian) is required to provide us with information
regarding individuals with signatory authority on the
Contract(s) owned. If you are purchasing a Qualified Contract,
you should consult with your plan administrator and/or a
qualified tax adviser. You should also consult with a qualified
tax adviser and/or plan administrator before you withdraw any
portion of your Contract Value.
Individual
Retirement Annuities (“IRAs”)
In addition to “traditional” IRAs established under
Code 408, there are SEP IRAs under Code Section 408(k), Roth
IRAs governed by Code Section 408A and SIMPLE IRAs
established under Code Section 408(p). Also, Qualified
Plans under Section 401 or 403(b) of the Code that include
after-tax employee contributions may be treated as deemed IRAs
subject to the same rules and limitations as traditional
50
IRAs. Contributions to each of these types of IRAs are subject
to differing limitations. The following is a very general
description of each type of IRA and other Qualified Plans.
Traditional
IRAs
Traditional IRAs are subject to limitations on the amount that
may be contributed each year, the persons who may be eligible to
contribute, when rollovers are available and when distributions
must commence. Depending upon the circumstances of the
individual, contributions to a traditional IRA may be made on a
deductible or non-deductible basis.
Annual contributions are generally allowed for persons who have
not attained
age 701/2
and who have compensation (as defined by the IRS) of at least
the contribution amount. Distributions of minimum amounts
specified by the Code must commence by April 1 of the
calendar year following the calendar year in which you attain
age
701/2.
Failure to make mandatory minimum distributions may result in
imposition of a 50% tax penalty on any difference between the
required distribution amount and the amount actually
distributed. Additional distribution rules apply after your
death.
You (or your surviving spouse if you die) may rollover funds
(such as proceeds from existing insurance policies, annuity
contracts or securities) from certain existing Qualified Plans
into your traditional IRA if those funds are in cash. This will
require you to liquidate any value accumulated under the
existing Qualified Plan. Mandatory withholding of 20% may apply
to any rollover distribution from your existing Qualified Plan
if the distribution is not transferred directly to your
traditional IRA. To avoid this withholding you should have cash
transferred directly from the insurance company or plan trustee
to your traditional IRA.
SIMPLE
IRAs
The Savings Incentive Match Plan for Employees of Small
Employers (“SIMPLE Plan”) is a type of IRA established
under Code Section 408(p)(2). Depending upon the SIMPLE
Plan, employers may make plan contributions into a SIMPLE IRA
established by each participant of the SIMPLE Plan. Like other
IRAs, a 10% tax penalty is imposed on certain distributions that
occur before an employee attains
age 591/2.
In addition, the tax penalty is increased to 25% for amounts
received or rolled to another IRA or Qualified Plan during the
2-year
period beginning on the date an employee first participated in a
qualified salary reduction arrangement pursuant to a SIMPLE Plan
maintained by their employer. Contributions to a SIMPLE IRA will
generally include employee salary deferral contributions and
employer contributions. Distributions from a SIMPLE IRA may be
transferred to another SIMPLE IRA tax free or may be eligible
for tax free rollover to a traditional IRA, a 403(b) or other
Qualified Plan after the required
2-year
period.
SEP-IRAs
A Simplified Employee Pension (SEP) is an employer sponsored
retirement plan under which an employer is allowed to make
contributions toward their employees’ retirement, as well
as their own retirement (if the employer is self-employed). A
SEP is a type of IRA established under Code Section 408(k).
Under a SEP, a separate IRA account called a SEP-IRA is set up
by or for each eligible employee and the employer makes the
contribution to the account. Like other IRAs, a 10% tax penalty
is imposed on certain distributions that occur before an
employee attains age
591/2.
Roth
IRAs
Section 408A of the Code permits eligible individuals to
establish a Roth IRA. Contributions to a Roth IRA are not
deductible, but withdrawals of amounts contributed and the
earnings thereon that meet certain requirements are not subject
to federal income tax. In general, Roth IRAs are subject to
limitations on the amount that may be contributed and the
persons who may be eligible to contribute and are subject to
certain required distribution rules on the death of the Contract
Owner. Unlike a traditional IRA, Roth IRAs are not subject to
minimum required distribution rules during the Contract
Owner’s lifetime. Generally, however, the amount remaining
in a Roth IRA must be distributed by the end of the fifth year
after the death of the Contract Owner/Annuitant or distributed
over the life expectancy of the Designated Beneficiary. The
owner of a traditional IRA may convert a traditional IRA into a
Roth IRA under certain circumstances. The conversion of a
traditional IRA to a Roth IRA will subject the amount of the
converted traditional IRA to federal income tax. Anyone
considering the purchase of a Qualified Contract as a Roth IRA
or a “conversion” Roth IRA should consult with a
qualified tax adviser.
In accordance with recent changes in laws and regulations, at
the time of either a full or partial conversion from a
Traditional IRA annuity to a Roth IRA annuity, the determination
of the amount to be reported as income will be based on the
annuity contract’s “fair market value”, which
will include all front-end loads and other non-recurring charges
assessed in the 12 months immediately preceding the
conversion, and the actuarial present value of any additional
contract benefits.
Tax
Sheltered Annuities (“TSAs”)
Employees of certain tax-exempt organizations, such as public
schools or hospitals, may defer compensation through an eligible
plan under Code Section 403(b). Salary deferral amounts
received from employers for these employees are excludable from
the employees’ gross income (subject to maximum
contribution limits). Distributions under these Contracts must
comply with certain limitations as to
51
timing, or result in tax penalties. Distributions from amounts
contributed to a TSA pursuant to a salary reduction arrangement,
may be made from a TSA only upon attaining age
591/2,
severance from employment, death, disability, or financial
hardship. Section 403(b) annuity distributions can be
rolled over to other Qualified Plans in a manner similar to
those permitted by Qualified Plans that are maintained pursuant
to Section 401 of the Code.
In accordance with Code Section 403(b) and final
regulations published on July 26, 2007 (“Final
Regulations”), as of January 1, 2009, we are required
to provide information regarding loans or hardship distributions
from your Contract to your 403(b) employer or an agent of your
403(b) employer, upon request. In addition, prior to processing
your request for a loan, a hardship distribution or a rollover,
we are required to verify certain information about you with
your 403(b) employer (or if applicable, former 403(b) employer).
401(k)
Plans; Pension and Profit-Sharing Plans
Qualified Plans may be established by an employer for certain
eligible employees under Section 401 of the Code. These
plans may be 401(k) plans, profit-sharing plans, or other
pension or retirement plans. Contributions to these plans are
subject to limitations. Rollover to other eligible plans may be
available. Please consult your Qualified Plans Summary Plan
description for more information.
We are the legal owner of the shares of the Portfolios held by
the Subaccounts. We may vote on any matter voted on at
shareholders’ meetings of the Funds. However, our current
interpretation of applicable law requires us to vote the number
of shares attributable to your Variable Account Value (your
“voting interest”) in accordance with your directions.
We will pass proxy materials on to you so that you have an
opportunity to give us voting instructions for your voting
interest. You may provide your instructions by proxy or in
person at the shareholders’ meeting. If there are shares of
a Portfolio held by a Subaccount for which we do not
receive timely voting instructions, we will vote those shares in
the same proportion as all other shares of that Portfolio held
by that Subaccount for which we have received timely
voting instructions. If we do not receive any voting
instructions for the shares in a Separate Account, we will vote
the shares in that Separate Account in the same proportion as
the total votes for all of our separate accounts for which
we’ve received timely instructions. If we hold shares of a
Portfolio in our General Account, we will vote such shares in
the same proportion as the total votes cast for all of our
separate accounts, including Separate Account A. We will vote
shares of any Portfolio held by our non-insurance affiliates in
the same proportion as the total votes for all separate accounts
of ours and our insurance affiliates. As a result of
proportional voting, the votes cast by a small number of
Contract Owners may determine the outcome of a vote.
We may elect, in the future, to vote shares of the Portfolios
held in Separate Account A in our own right if we are permitted
to do so through a change in applicable federal securities laws
or regulations, or in their interpretation.
The number of Portfolio shares that form the basis for your
voting interest is determined as of the record date set by the
Board of Trustees of the Fund. It is equal to:
•
your Contract Value allocated to the Subaccount corresponding to
that Portfolio, divided by
•
the net asset value per share of that Portfolio.
Fractional votes will be counted. We reserve the right, if
required or permitted by a change in federal regulations or
their interpretation, to amend how we calculate your voting
interest.
After your Annuity Date, if you have selected a variable
annuity, the voting rights under your Contract will continue
during the payout period of your annuity, but the number of
shares that form the basis for your voting interest, as
described above, will decrease throughout the payout period.
Transfer of Contract ownership may involve federal income tax
and/or gift tax consequences; you should consult a qualified tax
adviser before effecting such a transfer. A change to or from
joint Contract ownership is considered a transfer of ownership.
If your Contract is Non-Qualified, you may change Contract
ownership at any time while the Annuitant is living and prior to
your Annuity Date. You may name a different Owner or add or
remove a Joint Owner. A Contract cannot name more than two
Contract Owners at any time. Any newly-named Contract Owners,
including Joint Owners, must be under the age of 86 at the time
of change or addition. The Contract Owner(s) may make all
decisions regarding the Contract, including making allocation
decisions and exercising voting rights. Transactions under a
Contract with Joint Owners require approval from both Owners.
If your Contract is Qualified under Code Section 401, the
Qualified Plan must be the sole Owner of the Contract and the
ownership cannot be changed unless and until a triggering event
has been met under the terms of the Qualified Plan. Upon such
event, the
52
ownership can only be changed to the Annuitant. If your Contract
is Qualified under Code Sections 408 and 403(b), you must
be the sole Owner of the Contract and no changes can be made.
Annuitant
and Contingent or Joint Annuitant
Your sole Annuitant cannot be changed, and Joint Annuitants
cannot be added or changed, once your Contract is issued.
Certain changes may be permitted in connection with Contingent
Annuitants. See ANNUITIZATION – Selecting Your
Annuitant. There may be limited exceptions for certain
Qualified Contracts.
Beneficiaries
Your Beneficiary is the person(s) or entity who may receive
death benefit proceeds under your Contract or any remaining
annuity payments after the Annuity Date if the Annuitant or
Owner dies. You may change or remove your Beneficiary or add
Beneficiaries at any time prior to the death of the Annuitant or
Owner, as applicable. Any change or addition will generally take
effect only when we receive all necessary documents, in proper
form, at our Service Center and we record the change or
addition. Any change or addition will not affect any payment
made or any other action taken by us before the change or
addition was received and recorded.
Spousal consent may be required to change the Beneficiary of an
IRA. If you are considering removing a spouse as a Beneficiary,
it is recommended that you consult your legal or tax advisor
regarding any applicable state or federal laws prior to
requesting the change. If you have named your Beneficiary
irrevocably, you will need to obtain that Beneficiary’s
consent before making any changes. Qualified Contracts may have
additional restrictions on naming and changing Beneficiaries. If
your Contract was issued in connection with a Qualified Plan
subject to Title I of ERISA, contact your Plan
Administrator for details. We require that Contracts issued
under Code Section 401 name the Plan as Beneficiary. If you
leave no surviving Beneficiary or Contingent Beneficiary, your
estate may receive any death benefit proceeds under your
Contract.
If, in the judgment of our management, continued investment by
Separate Account A in one or more of the Portfolios becomes
unsuitable or unavailable, we may seek to alter the Variable
Investment Options available under the Contracts. We do not
expect that a Portfolio will become unsuitable, but
unsuitability issues could arise due to changes in investment
policies, market conditions, tax laws, or due to marketing or
other reasons.
Alterations of Variable Investment Options may take differing
forms. We reserve the right to substitute shares of any
Portfolio that were already purchased under any Contract (or
shares that were to be purchased in the future under a Contract)
with shares of another Portfolio, shares of another investment
company or series of another investment company, or another
investment vehicle. Required approvals of the SEC and the
Insurance Superintendent of the State of New York will be
obtained before any such substitutions are effected, and you
will be notified of any planned substitution.
We may add new Subaccounts to Separate Account A and any new
Subaccounts may invest in Portfolios of a Fund or in other
investment vehicles. Availability of any new Subaccounts to
existing Contract Owners will be determined at our discretion.
We will notify you, and will comply with the filing or other
procedures established by the Insurance Superintendent of the
State of New York, to the extent required by applicable law. We
also reserve the right, after receiving any required regulatory
approvals, to do any of the following:
•
cease offering any Subaccount;
•
add or change designated investment companies or their
portfolios, or other investment vehicles;
•
add, delete or make substitutions for the securities and other
assets that are held or purchased by the Separate Account or any
Variable Account;
•
permit conversion or exchanges between portfolios and/or classes
of contracts on the basis of Owners’ requests;
•
add, remove or combine Variable Accounts;
•
combine the assets of any Variable Account with any other of our
separate accounts or of any of our affiliates;
•
register or deregister Separate Account A or any Variable
Account under the 1940 Act;
•
operate any Variable Account as a managed investment company
under the 1940 Act, or any other form permitted by law;
•
run any Variable Account under the direction of a committee,
board, or other group;
•
restrict or eliminate any voting rights of Owners with respect
to any Variable Account or other persons who have voting rights
as to any Variable Account;
•
make any changes required by the 1940 Act or other federal
securities laws;
•
make any changes necessary to maintain the status of the
Contracts as annuities under the Code;
53
•
make other changes required under federal or state law relating
to annuities;
You may reach our service representatives at
1-800-748-6907
between the hours of 6:00 a.m. and 5:00 p.m., Pacific
time. Financial professionals may call us at 1-877-441-2357.
Please send your forms and written requests or questions to:
Pacific Life & Annuity Company
P.O. Box 2829
Omaha, Nebraska
68103-2829
If you are submitting a Purchase Payment or other payment by
mail, please send it, along with your application if you are
submitting one, to the following address or to the address
indicated on your Contract specification pages, if different:
Pacific Life & Annuity Company
P.O. Box 2736
Omaha, Nebraska
68103-2736
If you are using an overnight delivery service to send payments,
please send them to the following address or to the address
indicated on your Contract specification pages, if different:
Pacific Life & Annuity Company
1299 Farnam Street,
6th Floor,
AMF Omaha, Nebraska68102
The effective date of certain notices or of instructions is
determined by the date and time on which we “receive”
the notice or instructions. We “receive” this
information only when it arrives, in proper form, at the correct
mailing address set out above. In those instances when we
receive electronic transmission of the information on the
application from your financial professional’s
broker-dealer firm and our administrative procedures with your
broker-dealer so provide, we consider the application to be
received on the Business Day we receive the transmission. If the
address on your Contract specification pages is different and
our administrative procedures with your broker-dealer so
provide, in those instances when information regarding your
Purchase Payment is electronically transmitted to us by the
broker-dealer, we will consider the Purchase Payment to be
received by us on the Business Day we receive the transmission
of the information. Please call us at
1-800-748-6907
if you have any questions regarding which address you should
use. Financial professionals may call us at 1-877-441-2357.
We reserve the right to process any Purchase Payment received at
an incorrect address when it is received at either the address
indicated in your Contract specification pages or the
appropriate address indicated in the Prospectus.
Purchase Payments after your initial Purchase Payment, loan
requests, transfer requests, loan repayments and withdrawal
requests we receive before the close of the New York Stock
Exchange, which usually closes at 4:00 p.m. Eastern time, will
normally be effective at the end of the same Business Day that
we receive them in “proper form,” unless the
transaction or event is scheduled to occur on another day.
Generally, whenever you submit any other form, notice or
request, your instructions will be effective on the next
Business Day after we receive them in “proper form”
unless the transaction or event is scheduled to occur on another
day. “Proper form” means in a form satisfactory to us
and may require, among other things, a signature guarantee or
other verification of authenticity. We do not generally require
a signature guarantee unless it appears that your signature may
have changed over time or the signature does not appear to be
yours; or an executed application or confirmation of
application, as applicable, in proper form is not received by
us; or, to protect you or us. Requests regarding death benefit
proceeds must be accompanied by both proof of death and
instructions regarding payment satisfactory to us. You should
call your financial professional or us if you have questions
regarding the required form of a request.
You are automatically entitled to make certain transactions by
telephone or, to the extent available, electronically. You may
also authorize other people to make certain transaction requests
by telephone or, to the extent available, electronically by
sending us instructions in writing in a form acceptable to us.
We cannot guarantee that you or any other person you authorize
will always be able to reach us to complete a telephone or
electronic transaction; for example, all telephone lines may be
busy or access to our website may be unavailable during certain
periods, such as periods of substantial market fluctuations or
other drastic economic or market change, or telephones or the
Internet may be out of service or unavailable during severe
weather conditions or other emergencies. Under these
circumstances, you should submit your request in writing (or
other form acceptable to us). Transaction instructions we
receive by telephone or electronically before the close of the
New York Stock Exchange, which usually closes at 4:00 p.m.
Eastern time, on any Business Day will usually be effective at
the end of that day, and we will provide you confirmation of
each telephone or electronic transaction.
54
We have established procedures reasonably designed to confirm
that instructions communicated by telephone or electronically
are genuine. These procedures may require any person requesting
a telephone or electronic transaction to provide certain
personal identification upon our request. We may also record all
or part of any telephone conversation with respect to
transaction instructions. We reserve the right to deny any
transaction request made by telephone or electronically. You are
authorizing us to accept and to act upon instructions received
by telephone or electronically with respect to your Contract,
and you agree that, so long as we comply with our procedures,
neither we, any of our affiliates, nor any Fund, or any of their
directors, trustees, officers, employees or agents will be
liable for any loss, liability, cost or expense (including
attorneys’ fees) in connection with requests that we
believe to be genuine. This policy means that so long as we
comply with our procedures, you will bear the risk of loss
arising out of the telephone or electronic transaction
privileges of your Contract. If a Contract has Joint Owners,
each Owner may individually make telephone and/or electronic
transaction requests.
Subject to availability, you may authorize us to provide
prospectuses, prospectus supplements, annual and semi-annual
reports, quarterly statements and immediate confirmations, proxy
solicitation, privacy notice and other notices and documentation
in electronic format when available instead of receiving paper
copies of these documents by U.S. mail. You may enroll in
this service by so indicating on the application, via our
Internet website, or by sending us instructions in writing in a
form acceptable to us to receive such documents electronically.
Not all contract documentation and notifications may be
currently available in electronic format. You will continue to
receive paper copies of any documents and notifications not
available in electronic format by U.S. mail. In addition,
you will continue to receive paper copies of annual statements
if required by state or federal law. By enrolling in this
service, you consent to receive in electronic format any
documents added in the future. For jointly owned contracts, both
owners are consenting to receive information electronically.
Documents will be available on our Internet website. As
documents become available, we will notify you of this by
sending you an
e-mail
message that will include instructions on how to retrieve the
document. You must have ready access to a computer with Internet
access, an active
e-mail
account to receive this information electronically, and the
ability to read and retain it. You may access and print all
documents provided through this service.
If you plan on enrolling in this service, or are currently
enrolled, please note that:
•
We impose no additional charge for electronic delivery, although
your Internet provider may charge for Internet access.
•
You must provide a current
e-mail
address and notify us promptly when your
e-mail
address changes.
•
You must update any
e-mail
filters that may prevent you from receiving
e-mail
notifications from us.
•
You may request a paper copy of the information at any time for
no charge, even though you consented to electronic delivery, or
if you decide to revoke your consent.
•
For jointly owned contracts, both owners are consenting that the
primary owner will receive information electronically. (Only the
primary owner will receive
e-mail
notices.)
•
This election will be effective for all Contracts you currently
own or acquire in the future.
•
Electronic delivery will be cancelled if
e-mails are
returned undeliverable.
•
This consent will remain in effect until you revoke it.
We are not required to deliver this information electronically
and may discontinue electronic delivery in whole or in part at
any time. If you are currently enrolled in this service, please
call (800) 748-6907 if you would like to revoke your consent,
wish to receive a paper copy of the information above, or need
to update your
e-mail
address.
For withdrawals, including exchanges under Code
Section 1035 and other Qualified transfers, from the
Variable Investment Options or for death benefit payments
attributable to your Variable Account Value, we will normally
send the proceeds within 7 calendar days after your request
is effective or after the Notice Date, as the case may be. We
will normally effect periodic annuity payments on the day that
corresponds to the Annuity Date and will make payment on the
following day. Payments or transfers may be suspended for a
longer period under certain extraordinary circumstances. These
include: a closing of the New York Stock Exchange other than on
a regular holiday or weekend; a trading restriction imposed by
the SEC; or an emergency declared by the SEC. Amounts withdrawn
or transferred from any
fixed-rate
General Account Investment Option may be delayed for up to six
months after the request is effective. See THE GENERAL
ACCOUNT for more details.
Confirmations will be sent out for unscheduled Purchase Payments
and transfers, loans, loan repayments, unscheduled partial
withdrawals, a full withdrawal, optional living benefit rider
Automatic or Owner Elected Resets/Step-Ups, and on payment of
any death benefit proceeds. Periodically, we will send you a
statement that provides certain information pertinent to your
Contract. These
55
statements disclose Contract Value, Subaccount values, any fixed
option values, fees and charges applied to your Contract Value,
transactions made and specific Contract data that apply to your
Contract. Confirmations of your transactions under the
pre-authorized checking plan, dollar cost averaging, earnings
sweep, portfolio rebalancing, and pre-authorized withdrawal
options will appear on your quarterly account statements. Your
fourth-quarter statement will contain annual information about
your Contract Value and transactions. You may also access these
statements online.
If you suspect an error on a confirmation or quarterly
statement, you must notify us in writing as soon as possible to
ensure proper accounting to your Contract. When you write, tell
us your name, contract number and a description of the suspected
error. We assume transactions are accurate unless you notify us
otherwise within 30 days of receiving the transaction
confirmation or, if the transaction is first confirmed on the
quarterly statement, within 30 days of receiving the
quarterly statement. All transactions are deemed final and may
not be changed after the applicable 30 day period.
You will also be sent an annual report for the Separate Account
and the Funds and a list of the securities held in each
Portfolio of the Funds, as required by the 1940 Act; or more
frequently if required by law.
Contract Owner Mailings. To help reduce expenses,
environmental waste and the volume of mail you receive, only one
copy of Contract Owner documents (such as the prospectus,
supplements, announcements, and each annual and semi-annual
report) may be mailed to Contract Owners who share the same
household address (Householding). If you are already
participating, you may opt out by contacting us. Please allow 30
calendar days for regular delivery to resume. You may also elect
to participate in Householding by writing to us. The current
documents are available on our website any time or an individual
copy of any of these documents may be requested – see
the last page of this Prospectus for more information.
PSD, a broker-dealer and an affiliate of ours, pays various
forms of sales compensation to broker-dealers (including other
affiliates) that solicit applications for the Contracts. PSD
also may reimburse other expenses associated with the promotion
and solicitation of applications for the Contracts.
We offer the Contracts for sale through broker-dealers that have
entered into selling agreements with PSD. Broker-dealers sell
the Contracts through their financial professionals. PSD pays
compensation to broker-dealers for the promotion and sale of the
Contracts. The individual financial professional who sells you a
Contract typically will receive a portion of the compensation,
under the financial professional’s own arrangement with his
or her broker-dealer. Broker-dealers may receive aggregate
commissions of up to 6.00% of your aggregate Purchase Payments.
Under certain circumstances where PSD pays lower initial
commissions, certain broker-dealers that solicit applications
for Contracts may be paid an ongoing persistency trail
commission (sometimes called a residual) which will take into
account, among other things, the Account Value and the length of
time Purchase Payments have been held under a Contract. A trail
commission is not anticipated to exceed 0.50%, on an annual
basis, of the Account Value considered in connection with the
trail commission.
We may also provide compensation to broker-dealers for providing
ongoing service in relation to Contracts that have already been
purchased.
Additional
Compensation and Revenue Sharing
To the extent permitted by SEC and FINRA rules and other
applicable laws and regulations, selling broker-dealers may
receive additional payments in the form of cash, other special
compensation or reimbursement of expenses, sometimes called
“revenue sharing”. These additional compensation or
reimbursement arrangements may include, for example, payments in
connection with the firm’s “due diligence”
examination of the contracts, payments for providing conferences
or seminars, sales or training programs for invited financial
professionals and other employees, payments for travel expenses,
including lodging, incurred by financial professionals and other
employees for such seminars or training programs, seminars for
the public, advertising and sales campaigns regarding the
Contracts, and payments to assist a firm in connection with its
administrative systems, operations and marketing expenses and/or
other events or activities sponsored by the firms. Subject to
applicable FINRA rules and other applicable laws and
regulations, PSD and its affiliates may contribute to, as well
as sponsor, various educational programs, sales contests and/or
promotions in which participating firms and their salespersons
may receive prizes such as merchandise, cash, or other awards.
Such additional compensation may give us greater access to
financial professionals of the broker-dealers that receive such
compensation or may otherwise influence the way that a
broker-dealer and financial professional market the Contracts.
These arrangements may not be applicable to all firms, and the
terms of such arrangements may differ between firms. We provide
additional information on special compensation or reimbursement
arrangements involving selling firms and other financial
institutions in the Statement of Additional Information, which
is available upon request. Any such compensation will not result
in any additional direct charge to you by us.
The compensation and other benefits provided by PSD or its
affiliates may be more or less than the overall compensation on
similar or other products. This may influence your financial
professional or broker-dealer to present this Contract over
other investment options
56
available in the marketplace. You may ask your financial
professional about these differing and divergent interests, how
he/she is personally compensated and how his/her broker-dealer
is compensated for soliciting applications for the Contract.
We have entered into services agreements with certain Funds, or
Fund affiliates, which pay us for administrative and other
services, including, but not limited to, certain communications
and support services. The fees are based on an annual percentage
of average daily net assets of certain Fund portfolios purchased
by us at Contract Owner’s instructions. Currently, the fees
received do not exceed an annual percentage of 0.30% and each
Fund (or Fund affiliate) may not pay the same annual percentage
(some may pay significantly less). Because we receive such fees,
we may be subject to competing interests in making these Funds
available as Investment Options under the Contracts.
AllianceBernstein Investments, Inc. pays us for each
AllianceBernstein Variable Products Series Fund, Inc. portfolio
(Class B) held by our separate accounts. BlackRock
Distributors, Inc. pays us for each BlackRock Variable Series
Funds, Inc. portfolio (Class III) held by our separate
accounts. Franklin Templeton Services, LLC pays us for each
Franklin Templeton Variable Insurance Products Trust portfolio
(Class 2 and Class 4) held by our separate accounts. Invesco
Advisers, Inc. and its affiliates pay us for each AIM Variable
Insurance Funds (Invesco Variable Insurance Funds) portfolio
(Series II) held by our separate accounts. Lord Abbett
Series Fund, Inc. pays us for each Lord Abbett Series Fund, Inc.
portfolio (Class VC) held by our separate accounts.
Massachusetts Financial Services Company pays us for each MFS
Variable Insurance Trust portfolio (Service Class) held by our
separate accounts. Pacific Investment Management Company LLC
pays us for each PIMCO Variable Insurance Trust portfolio held
by our separate accounts. Van Kampen Funds Inc. pays us for each
Van Kampen Life Investment Trust portfolio (Class II) held
by our separate accounts. GE Investments Funds, Inc. pays us for
each GE Investments Funds, Inc. portfolio (Class 3) held by our
separate accounts.
PSD shall
pay American Funds Distributors, Inc. at a rate of 0.16% of
Purchase Payments up to $1.5 billion, 0.14% on Purchase
Payments on next $1.5 billion and 0.10% on Purchase
Payments made in excess, attributable to the Master Funds for
certain marketing assistance.
The term “replacement” has a special meaning in the
life insurance industry and is described more fully below.
Before you make your purchase decision, we want you to
understand how a replacement may impact your existing plan of
insurance.
A policy “replacement” occurs when a new policy or
contract is purchased and, in connection with the sale, an
existing policy or contract is surrendered, lapsed, forfeited,
assigned to the replacing insurer, otherwise terminated, or used
in a financed purchase. A “financed purchase” occurs
when the purchase of a new life insurance policy or annuity
contract involves the use of funds obtained from the values of
an existing life insurance policy or annuity contract through
withdrawal, surrender or loan.
There are circumstances in which replacing your existing life
insurance policy or annuity contract can benefit you. As a
general rule, however, replacement is not in your best interest.
Accordingly, you should make a careful comparison of the costs
and benefits of your existing policy or contract and the
proposed policy or contract to determine whether replacement is
in your best interest.
Reinstatements
If we are the issuer of a Contract that is being replaced, we
will reinstate the original Contract within 60 days of the
date of delivery of the replacing contract if the Owner decides
to keep the original Contract and:
•
we receive written proof that the replacing contract has been
cancelled, including the date of cancellation, and
•
the replacing insurer processes a check and forwards it to us.
The original Contract will be reinstated with its original
provisions and the amount of the check will be credited to the
Contract on the date that it is received.
The statements of assets and liabilities of Separate
Account A as of December 31, 2009, the related
statements of operations for the periods presented, the
statements of changes in net assets for each of the periods
presented and the financial highlights for each of the periods
presented are incorporated by reference in the Statement of
Additional Information from the Annual Report of Separate
Account A dated December 31, 2009. PL&A’s
financial statements as of December 31, 2009 and 2008 and
for each of the three years in the period ended
December 31, 2009 are contained in the Statement of
Additional Information.
Rule
12h-7 Representation
In reliance on the exemption provided by
Rule 12h-7
of the Securities Exchange Act of 1934
(“34 Act”), we do not intend to file periodic
reports as required under the 34 Act.
All amounts allocated to any fixed option become part of our
General Account. We have contracted with Pacific Life to
manage our General Account assets, subject to investment
policies, objectives, directions, and guidelines established by
our Board. You will not share in the investment experience of
General Account assets. Unlike the Separate Account, the General
Account is subject to liabilities arising from any of our other
business. Any guarantees provided for under the contract or
through optional riders are backed by our financial strength and
claims paying ability. You must look to the strength of the
insurance company with regard to such guarantees.
Because of exemptive and exclusionary provisions, interests in
the General Account under the Contract are not registered under
the Securities Act of 1933, as amended, and the General Account
has not been registered as an investment company under the 1940
Act. Any interest you have in a fixed option is not subject to
these Acts, and we have been advised that the SEC staff has not
reviewed disclosure in this Prospectus relating to any fixed
option. This disclosure may, however, be subject to certain
provisions of federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
Guarantee
Terms
When you allocate any portion of your Net Purchase Payments or
Contract Value to any fixed option, we guarantee you an interest
rate (a “Guaranteed Interest Rate”) for a specified
period of time (a “Guarantee Term”) of up to one year.
Guarantee Terms will be offered at our discretion.
Guaranteed Interest Rates for any fixed option may be changed
periodically for new allocations. Your allocation will receive
the Guaranteed Interest Rate in effect for that fixed option on
the effective date of your allocation. All Guaranteed Interest
Rates will credit interest daily at a rate that compounds over
one year to equal the annual effective rate. The Guaranteed
Interest Rate on your fixed option will remain in effect for the
Guarantee Term and will never be less than an annual rate of 3%.
Withdrawals
and Transfers
Prior to the Annuity Date, you may withdraw or transfer amounts
from any fixed option to one or more of the other Variable
Investment Options. No partial withdrawal or transfer may be
made from a fixed option within 30 days of the Contract
Date. Currently, we are not requiring the
30-day
waiting period on partial withdrawals and transfers, but we
reserve the right to require the
30-day
waiting period on partial withdrawals and transfers in the
future. If your withdrawal leaves you with a Net Contract Value
of less than $1,000, we have the right, at our option, to
terminate your Contract and send you the withdrawal proceeds.
However, we will not terminate your Contract if you own an
optional Rider and a partial withdrawal reduces the Net Contract
Value to an amount less than $1,000.
Amounts transferred or withdrawn from any fixed option may be
delayed, as described under ADDITIONAL
INFORMATION – Timing of Payments and Transactions.
Any amount delayed, so long as it is held under a fixed option,
will continue to earn interest at the Guaranteed Interest Rate
then in effect until that Guarantee Term has ended, and the
minimum guaranteed interest rate of 3% thereafter.
Before your Annuity Date, you can allocate all or some of your
Net Purchase Payments to the DCA Plus Fixed Option. The initial
minimum amount that you may allocate to the DCA Plus Fixed
Option is $5,000. Currently, we are not enforcing the minimum
amount you may allocate to the DCA Plus Fixed Option but we
reserve the right to enforce the minimum amount in the future.
You may not transfer any amount to the DCA Plus Fixed Option
from any other Investment Option. All Net Purchase Payments
allocated to the DCA Plus Fixed Option will earn interest at the
then current Guaranteed Interest Rate declared by us.
The DCA Plus Fixed Option Value on any Business Day is the DCA
Plus Fixed Option Value on the prior Business Day, increased by
any additions to the DCA Plus Fixed Option on that day as a
result of any:
•
interest, plus
•
Net Purchase Payments allocated to the DCA Plus Fixed Option,
plus
•
any additional amounts allocated to the DCA Plus Fixed Option,
and decreased by any deductions from the DCA Plus Fixed Option
on that day as a result of any;
•
transfers, including transfers to the Loan Account,
•
withdrawals,
•
amounts applied to provide an annuity, and
•
charges for premium taxes
and/or other
taxes and annual fees.
58
The DCA Plus program will automatically terminate at the end of
your DCA Plus Guarantee Term, or upon the earliest of:
•
the date death benefit proceeds become payable under the
Contract,
•
the date you transfer the entire amount from the DCA Plus Fixed
Option to another Investment Option,
•
the date the Contract is terminated, or
•
the Annuity Date.
At the end of the DCA Plus program, upon receipt of an
additional Purchase Payment that satisfies our minimum
allocation requirements, you may request, in a form satisfactory
to us, a new DCA Plus program.
We reserve the right to change the terms and conditions of the
DCA Plus program, but not a DCA Plus program you already have in
effect.
Guarantee
Terms
The day that the first Net Purchase Payment allocation is made
to the DCA Plus Fixed Option will begin the Guarantee Term. You
can choose a Guarantee Term of up to one year. Currently, we
offer Guarantee Terms of 6 or 12 months with monthly
transfers on the same day of each month thereafter to the
Variable Investment Options that you selected. The amount
transferred each month is equal to your DCA Plus Fixed Option
Value on that day divided by the remaining number of monthly
transfers in the Guarantee Term.
Example: On May 1, a Net Purchase Payment of
$10,000 is allocated entirely to the DCA Plus Fixed Option at a
then current Guaranteed Interest Rate of 5.00% with a Guarantee
Term of 6 months. On June 1, the value of the DCA Plus
Fixed Option is $10,041.52. On June 1, a transfer equal to
$1,673.59 (10,041.52/6) will be made according to your DCA Plus
transfer instructions. Your remaining DCA Plus Fixed Option
Value after the transfer is $8,367.93. On July 1, your DCA
Plus Fixed Option has now increased to $8,401.56. We will
transfer $1,680.31 ($8,401.56/5) to the Variable Investment
Options, leaving a remaining value of $6,721.25 in the DCA Plus
Fixed Option.
During the Guarantee Term, you can allocate all or a part of any
additional Net Purchase Payments to the DCA Plus Fixed Option.
Additional allocations must be at least $250. Each additional
allocation will be transferred to the Variable Investment
Options you select over the remaining Guarantee Term. Transfers
will be made from the DCA Plus Fixed Option Value attributed to
the oldest Investment allocation and each subsequent Net
Purchase Payment in the order received.
Example: (using the previous example): On
July 15, an additional $5,000 Net Purchase Payment is
allocated to the DCA Plus Option at a Guaranteed Interest Rate
of 4.00%. On August 1, your DCA Plus Fixed Option Value has
increased to $11,758.30. An amount equal to $2,939.58
($11,758.30/4) is transferred from the DCA Plus Fixed Option to
the Variable Investment Options. The remaining DCA Plus Fixed
Option Value is $8,818.72.
Transfers
DCA Plus transfers must be made on a monthly basis to the
Variable Investment Options. No transfers to the DCA Plus Fixed
Option may be made at any time. You cannot choose to transfer
other than monthly. Unless otherwise instructed, any additional
Net Purchase Payment we receive during a Guarantee Term will be
allocated to the Investment Options, including the DCA Plus
Fixed Option if so indicated, according to your most recent
allocation instructions.
If the Owner dies while transfers are being made from the DCA
Plus Fixed Option and the surviving spouse of the deceased Owner
elects to continue the Contract in accordance with its terms,
transfers will continue to be made from the DCA Plus Fixed
Option to the selected Variable Investment Options, until the
Guarantee Term ends.
Some of the terms
we’ve used in this Prospectus may be new to you.
We’ve identified them in the Prospectus by capitalizing the
first letter of each word. You will find an explanation of what
they mean below.
If you have any
questions, please ask your financial professional or call us at
1-800-748-6907.
Financial professionals may call us at
1-877-441-2357.
Account
Value –
The amount of your Contract Value allocated to a specified
Variable Investment Option or any fixed option.
Annual
Fee –
A $30 fee charged each year on your Contract Anniversary and at
the time of a full withdrawal, if your Net Contract Value is
less than $50,000 on that date.
Annuitant –
A person on whose life annuity payments may be determined. An
Annuitant’s life may also be used to determine certain
increases in death benefits, and to determine the Annuity Date.
A Contract may name a single (“sole”) Annuitant or two
(“Joint”) Annuitants, and may also name a
“Contingent” Annuitant. If you name Joint Annuitants
or a Contingent Annuitant, “the Annuitant” means the
sole surviving Annuitant, unless otherwise stated.
Annuity
Date –
The date specified in your Contract, or the date you later
elect, if any, for the start of annuity payments if the
Annuitant (or Joint Annuitants) is (or are) still living and
your Contract is in force; or if earlier, the date that annuity
payments actually begin.
Annuity
Option –
Any one of the income options available for a series of payments
after your Annuity Date.
Beneficiary –
A person who may have a right to receive the death benefit
payable upon the death of the Annuitant or a Contract Owner
prior to the Annuity Date, or may have a right to receive
remaining guaranteed annuity payments, if any, if the Annuitant
dies after the Annuity Date.
Business
Day –
Any day on which the value of an amount invested in a Variable
Investment Option is required to be determined, which currently
includes each day that the New York Stock Exchange is open for
trading and our administrative offices are open. The New York
Stock Exchange and our administrative offices are closed on
weekends and on the following holidays: New Year’s Day,
Martin Luther King Jr. Day, President’s Day, Good Friday,
Memorial Day, July Fourth, Labor Day, Thanksgiving Day and
Christmas Day, and the Friday before New Year’s Day, July
Fourth or Christmas Day if that holiday falls on a Saturday, the
Monday following New Year’s Day, July Fourth or Christmas
Day if that holiday falls on a Sunday, unless unusual business
conditions exist, such as the ending of a monthly or yearly
accounting period. In this Prospectus, “day” or
“date” means Business Day unless otherwise specified.
If any transaction or event called for under a Contract is
scheduled to occur on a day that is not a Business Day, such
transaction or event will be deemed to occur on the next
following Business Day unless otherwise specified. Any
systematic pre-authorized transaction scheduled to occur on
December 30 or December 31 where that day is not a
Business Day will be deemed an order for the last Business Day
of the calendar year and will be calculated using the applicable
Subaccount Unit Value at the close of that Business Day. Special
circumstances such as leap years and months with fewer than
31 days are discussed in the SAI.
Code –
The Internal Revenue Code of 1986, as amended.
Contingent
Annuitant –
A person, if named in your Contract, who will become your sole
surviving Annuitant if your existing sole Annuitant (or both
Joint Annuitants) should die before your Annuity Date. Special
restrictions apply for Contracts owned by Non-Natural Owners.
Contract
Anniversary –
The same date, in each subsequent year, as your Contract Date.
Contract
Date –
The date we issue your Contract. Contract Years, Contract
Semi-Annual Periods, Contract Quarters and Contract Months are
measured from this date.
Contract
Debt –
As of the end of any given Business Day, the principal amount
you have outstanding on any loan under your Contract, plus any
accrued and unpaid interest. Loans are only available on certain
Qualified Contracts.
Contract Owner,
Owner, Policyholder, you, or
your –
Generally, a person who purchases a Contract and makes the
Investments. A Contract Owner has all rights in the Contract,
including the right to make withdrawals, designate and change
beneficiaries, transfer amounts among Investment Options, and
designate an Annuity Option. If your Contract names Joint
Owners, both Joint Owners are Contract Owners and share all such
rights.
Contract
Value –
As of the end of any Business Day, the sum of your Variable
Account Value, any fixed option value, the value of any other
Investment Option added to the Contract by Rider or Endorsement,
and any Loan Account Value.
Contract
Year –
A year that starts on the Contract Date or on a Contract
Anniversary.
DCA Plus Fixed
Option –
If you allocate all or part of your Net Purchase Payments to the
DCA Plus Fixed Option, such amounts are held in our General
Account and receive interest at rates declared periodically (the
“Guaranteed Interest Rate”), but not less than an
annual rate of 3%.
DCA Plus Fixed
Option
Value –
The aggregate amount of your Contract Value allocated to the DCA
Plus Fixed Option.
Earnings –
As of the end of any Business Day, your Earnings equal your
Contract Value less your aggregate Purchase Payments, which are
reduced by withdrawals of prior Investments.
Fund –
Pacific Select Fund, AIM Variable Insurance Funds (Invesco
Variable Insurance Funds), AllianceBernstein Variable Products
Series Fund, Inc., BlackRock Variable Series Funds, Inc.,
Franklin Templeton Variable Insurance Products Trust, GE
Investments Funds, Lord Abbett Series Fund, Inc., MFS Variable
Insurance Trust, PIMCO Variable Insurance Trust,
and/or Van
Kampen Life Investment Trust.
General
Account –
Our General Account consists of all of our assets other than
those assets allocated to Separate Account A or to any of
our other separate accounts.
Guaranteed
Interest
Rate –
The interest rate guaranteed at the time of allocation (or
rollover) for the Guarantee Term on amounts allocated to a fixed
option. All Guaranteed Interest Rates are expressed as annual
rates and interest is accrued daily. The rate will not be less
than an annual rate of 3%.
Guarantee
Term –
The period during which an amount you allocate to any available
fixed option earns interest at a Guaranteed Interest Rate. These
terms are up to one-year for a fixed option.
Investment
(“Purchase
Payment”) –
An amount paid to us by or on behalf of a Contract Owner as
consideration for the benefits provided under the Contract
before a sales charge is deducted.
Investment
Option –
A Subaccount, any fixed option or any other Investment Option
added to the Contract by Rider or Endorsement.
Joint
Annuitant –
If your Contract is a Non-Qualified Contract, you may name two
Annuitants, called “Joint Annuitants,” in your
application for your Contract. Special restrictions apply for
Qualified Contracts and Contracts owned by Non-Natural Owners.
Loan
Account –
The Account in which the amount equal to the principal amount of
a loan and any interest accrued is held to secure any Contract
Debt.
Loan Account
Value –
The amount, including any interest accrued, held in the Loan
Account to secure any Contract Debt.
Net Contract
Value –
Your Contract Value less Contract Debt.
Net Purchase
Payment –
A Purchase Payment less a sales charge. This is the amount that
is allocated to the Investment Options you select.
Non-Natural
Owner –
A corporation, trust or other entity that is not a (natural)
person.
Non-Qualified
Contract –
A Contract other than a Qualified Contract.
Policyholder –
The Contract Owner.
60
Portfolio –
A separate portfolio of a Fund in which a Subaccount invests its
assets.
Primary
Annuitant –
The individual that is named in your Contract, the events in the
life of whom are of primary importance in affecting the timing
or amount of the payout under the Contract.
Purchase Payment
(“Investment”) –
An amount paid to us by or on behalf of a Contract Owner as
consideration for the benefits provided under the Contract
before a sales charge is deducted.
Qualified
Contract –
A Contract that qualifies under the Code as an individual
retirement annuity or account (IRA), or form thereof, or a
Contract purchased by a Qualified Plan, qualifying for special
tax treatment under the Code.
Qualified
Plan –
A retirement plan that receives favorable tax treatment under
Section 401, 403, 408 or 408A of the Code.
SEC –
Securities and Exchange Commission.
Separate Account
A (the “Separate
Account”) –
A separate account of ours registered as a unit investment trust
under the Investment Company Act of 1940, as amended (the
“1940 Act”).
Subaccount –
An investment division of the Separate Account. Each Subaccount
invests its assets in shares of a corresponding Portfolio.
Subaccount
Annuity
Unit –
Subaccount Annuity Units (or “Annuity Units”) are used
to measure variation in variable annuity payments. To the extent
you elect to convert all or some of your Contract Value into
variable annuity payments, the amount of each annuity payment
(after the first payment) will vary with the value and number of
Annuity Units in each Subaccount attributed to any variable
annuity payments. At annuitization (after any applicable premium
taxes and/or other taxes are paid), the amount annuitized to a
variable annuity determines the amount of your first variable
annuity payment and the number of Annuity Units credited to your
annuity in each Subaccount. The value of Subaccount Annuity
Units, like the value of Subaccount Units, is expected to
fluctuate daily, as described in the definition of Unit Value.
Subaccount
Unit –
Before your Annuity Date, each time you allocate an amount to a
Subaccount, your Contract is credited with a number of
Subaccount Units in that Subaccount. These Units are used for
accounting purposes to measure your Account Value in that
Subaccount. The value of Subaccount Units is expected to
fluctuate daily, as described in the definition of Unit Value.
Unit
Value –
The value of a Subaccount Unit (“Subaccount Unit
Value”) or Subaccount Annuity Unit (“Subaccount
Annuity Unit Value”). Unit Value of any Subaccount is
subject to change on any Business Day in much the same way that
the value of a mutual fund share changes each day. The
fluctuations in value reflect the investment results, expenses
of and charges against the Portfolio in which the Subaccount
invests its assets. Fluctuations also reflect charges against
the Separate Account. Changes in Subaccount Annuity Unit Values
also reflect an additional factor that adjusts Subaccount
Annuity Unit Values to offset our Annuity Option Table’s
implicit assumption of an annual investment return of 4%. The
effect of this assumed investment return is explained in detail
in the SAI. Unit Value of a Subaccount Unit or Subaccount
Annuity Unit on any Business Day is measured as of the close of
the New York Stock Exchange on that Business Day, which usually
closes at 4:00 p.m., Eastern time, although it occasionally
closes earlier.
Variable Account
Value –
The aggregate amount of your Contract Value allocated to all
Subaccounts.
Variable
Investment
Option –
A Subaccount (also called a Variable Account).
Redemptions of Remaining Guaranteed Variable Payments Under
Options 2 and 4
Corresponding Dates
Age and Sex of Annuitant
Systematic Transfer Programs
Pre-Authorized Withdrawals
Joint Annuitants on Qualified Contracts
More on Federal Tax Issues
Safekeeping of Assets
FINANCIAL STATEMENTS
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND INDEPENDENT
AUDITORS
To receive a current copy of the Pacific Destinations SAI
without charge, call (800) 748-6907. Financial professionals may
call us at
(877) 441-2357.
You may also complete the following and send it to:
Pacific Life & Annuity Company
Post Office Box 2829
Omaha, Nebraska
68103-2829
The examples provided are based on certain hypothetical
assumptions and are for example purposes only. Where Contract
Value is reflected, the examples do not assume any specific
return percentage. The examples have been provided to assist in
understanding the benefits provided by this Rider and to
demonstrate how Purchase Payments received and withdrawals made
from the Contract prior to the Annuity Date affect the values
and benefits under this Rider over an extended period of time.
There may be minor differences in the calculations due to
rounding. These examples are not intended to serve as
projections of future investment returns nor are they a
reflection of how your Contract will actually perform.
Example #1 –
Setting of Initial Values.
The values shown below are based on the following assumptions:
•
Initial Purchase Payment = $100,000
•
Rider Effective Date = Contract Date
•
Owner’s age on Rider Effective Date = 68
Protected
Protected
Remaining
Purchase
Contract Value
Payment
Payment
Protected
Payment
Withdrawal
after Activity
Base
Amount
Balance
Rider Effective Date
$100,000
$96,500
$100,000
$4,000
$100,000
On the Rider Effective Date, the initial values are set as
follows:
•
Protected Payment Base = Initial Purchase Payment = $100,000
Protected Payment Amount = Withdrawal percentage multiplied by
the Protected Payment Base = 4% × $100,000 = $4,000
•
Contract Value = Initial Purchase Payment less sales charge =
$96,500
Example #2 –
Subsequent Purchase Payments.
The values shown below are based on the following assumptions:
•
Initial Purchase Payment = $100,000
•
Rider Effective Date = Contract Date
•
Owner’s age on Rider Effective Date = 68
•
A subsequent Purchase Payment of $100,000 is received during
Contract Years 1 and 2.
•
No withdrawals taken.
•
Automatic Reset at Contract Years 2 and 3.
•
Each Contract Anniversary referenced in the table represents the
first day of the applicable Contract Year.
Protected
Protected
Remaining
Purchase
Contract Value
Payment
Payment
Protected
Payment
Withdrawal
after Activity
Base
Amount
Balance
Rider Effective Date
$100,000
$96,500
$100,000
$4,000
$100,000
Activity
$100,000
$193,000
$200,000
$8,000
$200,000
Year 2 Contract Anniversary
Prior to Automatic Reset
$207,000
$200,000
$8,200
$200,000
Year 2 Contract Anniversary
After Automatic Reset
$207,000
$207,000
$8,487
$207,000
Activity
$100,000
$307,000
$307,000
$12,587
$307,000
Year 3 Contract Anniversary
Prior to Automatic Reset
$321,490
$307,000
$15,964
$307,000
Year 3 Contract Anniversary
After Automatic Reset
$321,490
$321,490
$16,717
$321,490
Immediately after the $100,000 subsequent Purchase Payment
during Contract Year 1, the Protected Payment Base and Remaining
Protected Balance are increased by the Purchase Payment amount
to $200,000 ($100,000 + $100,000). The Protected Payment
Amount after the Purchase Payment is equal to $8,000 (4.0% of
the Protected Payment Base after the Purchase Payment).
Since no withdrawal occurred prior to Year 2 Contract
Anniversary, the withdrawal percentage is increased to 4.1%.
Additionally, because at Year 2 Contract Anniversary, the
Protected Payment Base was less than the Contract Value on that
Contract Anniversary (see balances at Year 2 Contract
Anniversary – Prior to Automatic Reset), an
automatic reset occurred which resets the Protected Payment Base
and
63
Remaining Protected Balance to an amount equal to 100% of the
Contract Value (see balances at Year 2 Contract
Anniversary – After Automatic Reset). As a result,
the Protected Payment Amount is equal to $8,487 (4.1% of the
reset Protected Payment Base).
Immediately after the $100,000 subsequent Purchase Payment
during Contract Year 2, the Protected Payment Base and Remaining
Protected Balance are increased by the Purchase Payment amount
to $307,000 ($207,000 + $100,000). The Protected Payment
Amount after the Purchase Payment is equal to $12,587 (4.1% of
the Protected Payment Base after the Purchase Payment).
At Year 3 Contract Anniversary, the withdrawal percentage is
increased to 5.2%. The withdrawal percentage increased from 4.1%
to 5.2% because during Contract Year 2 there were no
withdrawals (0.10% added to the withdrawal percentage) and the
Owner reached age 70 (1.0% added to the withdrawal
percentage). Additionally, because at Year 3 Contract
Anniversary, the Protected Payment Base was less than the
Contract Value on that Contract Anniversary (see balances at
Year 3 Contract Anniversary – Prior to Automatic
Reset), an Automatic Reset occurred which resets the
Protected Payment Base and Remaining Protected Balance to an
amount equal to 100% of the Contract Value (see balances at
Year 3 Contract Anniversary – After Automatic
Reset). As a result, the Protected Payment Amount is equal
to $16,717 (5.2% of the reset Protected Payment Base).
In addition to Purchase Payments, the Contract Value is further
subject to increases
and/or
decreases during each Contract Year as a result of additional
amounts credited, charges, fees and other deductions, and
increases
and/or
decreases in the investment performance of the Variable Account.
Example #3 –
Withdrawals Not Exceeding Protected Payment Amount.
The values shown below are based on the following assumptions:
•
Initial Purchase Payment = $100,000
•
Rider Effective Date = Contract Date
•
Owner’s age on Rider Effective Date = 68
•
A subsequent Purchase Payment of $100,000 is received during
Contract Years 1 and 2.
•
A withdrawal equal to or less than the Protected Payment Amount
is taken during Contract Year 3.
•
Automatic Reset at Contract Years 2, 3 and 4.
•
Each Contract Anniversary referenced in the table represents the
first day of the applicable Contract Year.
Protected
Protected
Remaining
Purchase
Contract Value
Payment
Payment
Protected
Payment
Withdrawal
after Activity
Base
Amount
Balance
Rider Effective Date
$100,000
$96,500
$100,000
$4,000
$100,000
Activity
$100,000
$193,000
$200,000
$8,000
$200,000
Year 2 Contact Anniversary
Prior to Automatic Reset
$207,000
$200,000
$8,200
$200,000
Year 2 Contact Anniversary
After Automatic Reset
$207,000
$207,000
$8,487
$207,000
Activity
$100,000
$307,000
$307,000
$12,587
$307,000
Year 3 Contact Anniversary
Prior to Automatic Reset
$321,490
$307,000
$15,964
$307,000
Year 3 Contact Anniversary
After Automatic Reset
$321,490
$321,490
$16,717
$321,490
Activity
$16,717
$327,277
$321,490
$0
$304,773
Year 4 Contact Anniversary
Prior to Automatic Reset
$327,277
$321,490
$16,717
$304,773
Year 4 Contact Anniversary
After Automatic Reset
$327,277
$327,277
$17,018
$327,277
For an explanation of the values and activities at the start of
and during Contract Years 1 and 2, refer to
Examples #1 and #2.
At Year 3 Contract Anniversary, since the Protected Payment
Base was less than the Contract Value on that Contract
Anniversary (see balances at Year 3 Contract
Anniversary – Prior to Automatic Reset), an
Automatic Reset occurred which resets the Protected Payment Base
and Remaining Protected Balance to an amount equal to 100% of
the Contract Value (see balances at Year 3 Contract
Anniversary – After Automatic Reset). As a result,
the Protected Payment Amount is equal to $16,717 (5.2% of the
reset Protected Payment Base).
As the withdrawal during Contract Year 3 did not
exceed the Protected Payment Amount immediately prior to the
withdrawal ($16,717):
•
the Protected Payment Base remains unchanged; and
•
the Remaining Protected Balance is reduced by the amount of the
withdrawal to $304,773 ($321,490 − $16,717).
Since a withdrawal occurred during Contract Year 3, the
withdrawal percentage will no longer increase as a result of
delaying withdrawals.
Because at the Year 4 Contract Anniversary, the Protected
Payment Base was less than the Contract Value on that Contract
Anniversary (see balances at Year 4 Contract
Anniversary – Prior to Automatic Reset), an
automatic reset occurred which resets the Protected Payment Base
and Remaining Protected Balance to an amount equal to 100% of
the Contract Value (see balances at Year 4 Contract
64
Anniversary – After Automatic Reset). As a
result, the Protected Payment Amount is equal to $17,018 (5.2%
of the reset Protected Payment Base).
Example #4 –
Withdrawals Exceeding Protected Payment Amount.
The values shown below are based on the following assumptions:
•
Initial Purchase Payment = $100,000
•
Rider Effective Date = Contract Date
•
Owner’s age on Rider Effective Date = 68
•
A subsequent Purchase Payment of $100,000 is received during
Contract Years 1 and 2.
•
A withdrawal greater than the Protected Payment Amount is taken
during Contract Year 3.
•
Automatic Resets at Contract Years 2, 3 and 4.
•
Each Contract Anniversary referenced in the table represents the
first day of the applicable Contract Year.
Contract
Protected
Protected
Remaining
Purchase
Value
Payment
Payment
Protected
Payment
Withdrawal
after Activity
Base
Amount
Balance
Rider Effective Date
$100,000
$96,500
$100,000
$4,000
$100,000
Activity
$100,000
$193,000
$200,000
$8,000
$200,000
Year 2 Contract Anniversary
Prior to Automatic Reset
$207,000
$200,000
$8,200
$200,000
Year 2 Contract Anniversary
After Automatic Reset
$207,000
$207,000
$8,487
$207,000
Activity
$100,000
$307,000
$307,000
$12,587
$307,000
Year 3 Contract Anniversary
Prior to Automatic Reset
$321,490
$307,000
$15,964
$307,000
Year 3 Contract Anniversary
After Automatic Reset
$321,490
$321,490
$16,717
$321,490
Activity
$30,000
$313,994
$308,437
$0
$291,490
Year 4 Contract Anniversary
Prior to Automatic Reset
$313,994
$308,437
$16,038
$291,490
Year 4 Contract Anniversary
After Automatic Reset
$313,994
$313,994
$16,327
$313,994
For an explanation of the values and activities at the start of
and during Contract Years 1 and 2, refer to Examples #1
and #2.
At Year 3 Contract Anniversary, since the Protected Payment
Base was less than the Contract Value on that Contract
Anniversary (see balances at Year 3 Contract
Anniversary – Prior to Automatic Reset), an
Automatic Reset occurred which resets the Protected Payment Base
and Remaining Protected Balance to an amount equal to 100% of
the Contract Value (see balances at Year 3 Contract
Anniversary – After Automatic Reset). As a result,
the Protected Payment Amount is equal to $16,717 (5.2% of the
reset Protected Payment Base).
As the withdrawal during Contract Year 3 exceeded
the Protected Payment Amount immediately prior to the withdrawal
($16,717), the Protected Payment Base is reduced to $308,437 and
the Remaining Protected Balance is reduced to $291,490. The
reduction in the Protected Payment Base and the Remaining
Protected Balance is calculated as follows:
First, determine the excess withdrawal amount. The excess
withdrawal amount is the total withdrawal amount less the
Protected Payment Amount. Numerically, the excess withdrawal
amount is $13,283 (total withdrawal amount – Protected
Payment Amount; $30,000 − $16,717 = $13,283).
Second, determine the ratio for the proportionate reduction. The
ratio is the excess withdrawal amount determined above divided
by (Contract Value prior to the withdrawal – Protected
Payment Amount). The Contract Value prior to the withdrawal was
$343,994, which equals the $313,994 after the withdrawal plus
the $30,000 withdrawal amount. Numerically, the ratio is 4.06%
($13,283
¸
($343,994 − $16,717); $13,283
¸
$327,277 = 0.0406 or 4.06%).
Third, determine the new Protected Payment Base. The Protected
Payment Base will be reduced on a proportionate basis. The
Protected Payment Base is multiplied by 1 less the ratio
determined above. Numerically, the new Protected Payment Base is
$308,437 (Protected Payment Base ×
(1-ratio);
$321,490 ×
(1-4.06%);
$321,490 × 95.94% = $308,437).
Fourth, determine the new Remaining Protected Balance. The
Remaining Protected Balance is reduced either on a proportionate
basis or by the total withdrawal amount, whichever results in
the lower Remaining Protected Balance amount.
To determine the proportionate reduction, the Remaining
Protected Balance immediately before the withdrawal is reduced
by the Protected Payment Amount and then multiplied by 1
less the ratio determined above. Numerically, after the
proportionate reduction, the new Remaining Protected Balance is
$292,399 ((Remaining Protected Balance immediately before the
withdrawal – Protected Payment Amount) ×
(1-ratio);
($321,490 − $16,717)
× (1-4.06%);
$304,773 × 95.94% = $292,399).
65
To determine the total withdrawal amount reduction, the
Remaining Protected Balance immediately before the withdrawal is
reduced by the total withdrawal amount. Numerically, after the
Remaining Protected Balance is reduced by the total withdrawal
amount, the new Remaining Protected Balance is $291,490
(Remaining Protected Balance immediately before the
withdrawal – total withdrawal amount;
$321,490 − $30,000 = $291,490).
Therefore, since $291,490 (total withdrawal amount method) is
less than $292,399 (proportionate method) the new Remaining
Protected Balance is $291,490.
Since a withdrawal occurred during Contract Year 3, the
withdrawal percentage will no longer increase as a result of
delaying withdrawals.
Because at the Beginning of Contract Year 4, the Protected
Payment Base was less than the Contract Value on that Contract
Anniversary (see balances at Beginning of Contract
Year 4 – Prior to Automatic Reset), an
automatic reset occurred which resets the Protected Payment Base
and Remaining Protected Balance to an amount equal to 100% of
the Contract Value (see balances at Beginning of Contract
Year 4 – After Automatic Reset). As a result,
the Protected Payment Amount is equal to $16,327 (5.2% of the
reset Protected Payment Base).
Example
#5 – Death Benefit Amount Adjustment for a Withdrawal
That Does Not Exceed the Protected Payment Amount.
This example shows how the aggregate Purchase Payments under the
Death Benefit Amount is adjusted for a withdrawal that does not
exceed the Protected Payment Amount. This table assumes that the
Protected Payment Amount is $4,000 prior to the withdrawal. Each
Contract Anniversary referenced in the table represents the
first day of the applicable Contract Year.
Contract
Death
Protected
Purchase
Value after
Benefit
Payment
Payment
Withdrawal
Activity
Amount1
Amount
Rider Effective Date
$100,000
$96,500
$100,000
$4,000
Year 2 Contract Anniversary
$80,000
$100,000
$4,000
Activity
$3,000
$77,000
$97,000
$1,000
1
The greater of the Contract Value or the aggregate Purchase
Payments represents the Death Benefit Amount.
Because the $3,000 withdrawal in Contract Year 2 was less than
the Protected Payment Amount, the aggregate Purchase Payments
are reduced by the $3,000 withdrawal to $97,000.
If death were to occur at this point, the Death Benefit Amount
would be $97,000 since the aggregate Purchase Payments ($97,000)
are greater than the Contract Value ($77,000).
Example
#6 – Death Benefit Amount Adjustment for a Withdrawal
That Exceeds the Protected Payment Amount.
The values shown below are based on the following assumptions:
•
Initial Purchase Payment = $100,000
•
Protected Payment Amount prior to withdrawal in year 2 = $4,000
•
A withdrawal greater than the Protected Payment Amount is taken
during Contract Year 2.
•
Each Contract Anniversary referenced in the table represents the
first day of the applicable Contract Year.
Contract
Death
Protected
Purchase
Value after
Benefit
Payment
Payment
Withdrawal
Activity
Amount1
Amount
Rider Effective Date
$100,000
$96,500
$100,000
$4,000
Year 2 Contract Anniversary
$80,000
$100,000
$4,000
Activity
$10,000
$70,000
$88,426
$0
1
The greater of the Contract Value or the aggregate Purchase
Payments represents the Death Benefit Amount.
As the withdrawal during Contract Year 2 exceeded the Protected
Payment Amount immediately prior to the withdrawal ($4,000), the
aggregate Purchase Payments under the Death Benefit Amount
(“aggregate Purchase Payments”) are reduced to
$88,426. The reduction in the aggregate Purchase Payments is
calculated as follows:
First, determine the excess withdrawal amount. The excess
withdrawal amount is the total withdrawal amount less the
Protected Payment Amount (prior to the withdrawal). Numerically,
the excess withdrawal amount is $6,000 (total withdrawal
amount – Protected Payment Amount;
$10,000 − $4,000 = $6,000).
Second, determine the ratio for the proportionate reduction. The
ratio is the excess withdrawal amount determined above divided
by (Contract Value – Protected Payment Amount).
Numerically, the ratio is 7.89%
($6,000 / ($80,000 − $4,000);
$6,000 /$76,000 = 0.0789 or 7.89%).
66
Third, determine the new aggregate Purchase Payments amount. The
aggregate Purchase Payments amount (prior to the withdrawal)
less the Protected Payment Amount (prior to the withdrawal) is
multiplied by 1 less the ratio determined above. Numerically,
the new aggregate Purchase Payments amount is $88,426 (aggregate
Purchase Payments-Protected Payment Amount × (1-ratio);
($100,000 − $4,000) × (1-7.89%); $96,000
× 92.11% = $88,426).
If death were to occur at this point, the Death Benefit Amount
would be $88,426 since the aggregate Purchase Payments ($88,426)
are greater than the Contract Value ($70,000).
Example
#7 – RMD Withdrawals.
This is an example of the effect of cumulative RMD Withdrawals
during the Contract Year that exceed the Protected Payment
Amount established for that Contract Year and its effect on the
Protected Payment Base and Remaining Protected Balance. The
Annual RMD Amount is based on the entire interest of your
Contract as of the previous
year-end.
This table assumes quarterly withdrawals of only the Annual RMD
Amount during the Contract Year. The calculated Annual RMD
amount for the Calendar Year is $7,500 and the Contract
Anniversary is May 1 of each year.
Annual
Protected
Protected
Remaining
Activity
RMD
Non-RMD
RMD
Payment
Payment
Protected
Date
Withdrawal
Withdrawal
Amount
Base
Amount
Balance
05/01/2006
Contract
Anniversary
$0
$100,000
$5,000
$100,000
01/01/2007
$7,500
03/15/2007
$1,875
$100,000
$3,125
$98,125
05/01/2007
Contract
Anniversary
$100,000
$5,000
$98,125
06/15/2007
$1,875
$100,000
$3,125
$96,250
09/15/2007
$1,875
$100,000
$1,250
$94,375
12/15/2007
$1,875
$100,000
$0
$92,500
01/01/2008
$8,000
03/15/2008
$2,000
$100,000
$0
$90,500
05/01/2008
Contract
Anniversary
$100,000
$5,000
$90,500
Since the RMD Amount for 2008 increases to $8,000, the quarterly
withdrawals of the RMD Amount increase to $2,000, as shown by
the RMD withdrawal on March 15, 2008. Because all
withdrawals during the Contract Year were RMD Withdrawals, there
is no adjustment to the Protected Payment Base for exceeding the
Protected Payment Amount. The only effect is a reduction in the
Remaining Protected Balance equal to the amount of each
withdrawal. In addition, each contract year the Protected
Payment Amount is reduced by the amount of each withdrawal until
the Protected Payment Amount is zero.
This chart assumes quarterly withdrawals of the Annual RMD
Amount and other
non-RMD
Withdrawals during the Contract Year. The calculated Annual RMD
amount and Contract Anniversary are the same as above.
67
Annual
Protected
Protected
Remaining
Activity
RMD
Non-RMD
RMD
Payment
Payment
Protected
Date
Withdrawal
Withdrawal
Amount
Base
Amount
Balance
05/01/2006
Contract
Anniversary
$0
$100,000
$5,000
$100,000
01/01/2007
$7,500
03/15/2007
$1,875
$100,000
$3,125
$98,125
04/01/2007
$2,000
$100,000
$1,125
$96,125
05/01/2007
Contract
Anniversary
$100,000
$5,000
$96,125
06/15/2007
$1,875
$100,000
$3,125
$94,250
09/15/2007
$1,875
$100,000
$1,250
$92,375
11/15/2007
$4,000
$96,900
$0
$88,300
On 3/15/07
there was an RMD Withdrawal of $1,875 and on
4/1/07 a
non-RMD
Withdrawal of $2,000. Because the total withdrawals during the
Contract Year
(5/1/06
through
4/30/07) did
not exceed the Protected Payment Amount of $5,000 there was no
adjustment to the Protected Payment Base. The only effect is a
reduction in the Remaining Protected Balance and the Protected
Payment Amount equal to the amount of each withdrawal. On
5/1/07, the
Protected Payment Amount was
re-calculated
(5% of the Protected Payment Base) as of that Contract
Anniversary.
On 11/15/07,
there was a
non-RMD
Withdrawal ($4,000) that caused the cumulative withdrawals
during the Contract Year ($7,750) to exceed the Protected
Payment Amount ($5,000). As the withdrawal exceeded the
Protected Payment Amount immediately prior to the withdrawal
($1,250), and assuming the Contract Value was $90,000
immediately prior to the withdrawal, the Protected Payment Base
is reduced to $96,900 and the Remaining Protected Balance is
reduced to $88,300. The Protected Payment Base and Remaining
Protected Balance will be reduced by the following calculation:
First, determine the excess withdrawal amount. The excess
withdrawal amount is the total withdrawal amount less the
Protected Payment Amount. Numerically, the excess withdrawal
amount is $2,750 (total withdrawal amount – Protected
Payment Amount; $4,000 − $1,250 = $2,750).
Second, determine the ratio for the proportionate reduction. The
ratio is the excess withdrawal amount determined above divided
by (Contract Value – Protected Payment Amount).
Numerically, the ratio is 3.10% ($2,750
¸
($90,000 − $1,250); $2,750
¸
$88,750 = 0.0310 or 3.10%).
Third, determine the new Protected Payment Base. The Protected
Payment Base will be reduced on a proportionate basis. The
Protected Payment Base is multiplied by 1 less the ratio
determined above. Numerically, the new Protected Payment Base is
$96,900 (Protected Payment Base x
(1-ratio);
$100,000 ×
(1-3.10%);
$100,000 × 96.90% = $96,900).
Fourth, determine the new Remaining Protected Balance. The
Remaining Protected Balance is reduced either on a proportionate
basis or by the total withdrawal amount, whichever results in
the lower Remaining Protected Balance amount.
To determine the proportionate reduction, the Remaining
Protected Balance is reduced by the Protected Payment Amount and
then multiplied by 1 less the ratio determined above.
Numerically, after the proportionate reduction, the Remaining
Protected Balance is $88,300 ((Remaining Protected
Balance – Protected Payment Amount) x
(1-ratio);
($92,375 − $1,250) × (1-3.10%); $91,125 ×
96.90% = $88,300).
To determine the total withdrawal amount reduction, the
Remaining Protected Balance is reduced by the total withdrawal
amount. Numerically, after the Remaining Protected Balance is
reduced by the total withdrawal amount, the Remaining Protected
Balance is $88,375 (Remaining Protected Balance –
total withdrawal amount; $92,375 −
$4,000 = $88,375).
Therefore, since $88,300 (proportionate method) is less than
$88,375 (total withdrawal amount method) the new Remaining
Protected Balance is $88,300.
Example #8 –
Lifetime Income.
The values shown below are based on the following assumptions:
•
Initial Purchase Payment = $100,000
•
Rider Effective Date = Contract Date
•
Owner’s age on Rider Effective Date = 65
•
No subsequent Purchase Payments are received.
68
•
Withdrawals, are taken each Contract Year:
•
Equal to 4% of the Protected Payment Base in Contract Years
1-5
(age 65-69)
•
Equal to 5% of the Protected Payment Base in Contract Years
6-20
(age 70-84)
•
Equal to 6% of the Protected Payment Base in Contract Years
21-35
(age 85-99)
•
No Automatic Reset or Owner-Elected Reset is assumed during the
life of the Rider.
Protected
Protected
Remaining
Contract
End of Year
Payment
Payment
Protected
Year
Withdrawal
Contract Value
Base
Amount
Balance
1
$4,000
$99,000
$100,000
$4,000
$96,000
2
$4,000
$97,970
$100,000
$4,000
$92,000
3
$4,000
$96,909
$100,000
$4,000
$88,000
4
$4,000
$95,816
$100,000
$4,000
$84,000
5
$4,000
$94,691
$100,000
$4,000
$80,000
6
$5,000
$92,532
$100,000
$5,000
$75,000
7
$5,000
$90,308
$100,000
$5,000
$70,000
8
$5,000
$88,017
$100,000
$5,000
$65,000
9
$5,000
$85,657
$100,000
$5,000
$60,000
10
$5,000
$83,227
$100,000
$5,000
$55,000
11
$5,000
$80,724
$100,000
$5,000
$50,000
12
$5,000
$78,146
$100,000
$5,000
$45,000
13
$5,000
$75,490
$100,000
$5,000
$40,000
14
$5,000
$72,755
$100,000
$5,000
$35,000
15
$5,000
$69,937
$100,000
$5,000
$30,000
16
$5,000
$67,035
$100,000
$5,000
$25,000
17
$5,000
$64,046
$100,000
$5,000
$20,000
18
$5,000
$60,968
$100,000
$5,000
$15,000
19
$5,000
$57,797
$100,000
$5,000
$10,000
20
$5,000
$54,531
$100,000
$5,000
$5,000
21
$6,000
$50,167
$100,000
$6,000
$0
22
$6,000
$45,672
$100,000
$6,000
$0
23
$6,000
$41,042
$100,000
$6,000
$0
24
$6,000
$36,273
$100,000
$6,000
$0
25
$6,000
$31,361
$100,000
$6,000
$0
26
$6,000
$26,302
$100,000
$6,000
$0
27
$6,000
$21,091
$100,000
$6,000
$0
28
$6,000
$15,724
$100,000
$6,000
$0
29
$6,000
$10,196
$100,000
$6,000
$0
30
$6,000
$4,501
$100,000
$6,000
$0
31
$6,000
$0
$100,000
$6,000
$0
32
$6,000
$0
$100,000
$6,000
$0
33
$6,000
$0
$100,000
$6,000
$0
34
$6,000
$0
$100,000
$6,000
$0
35
$6,000
$0
$100,000
$6,000
$0
On the Rider Effective Date, the initial values are set as
follows:
•
Protected Payment Base = Initial Purchase
Payment = $100,000
Protected Payment Amount = 4% of Protected Payment
Base = $4,000
Because the amount of each withdrawal does not exceed the
Protected Payment Amount immediately prior to the withdrawal:
(a) the Protected Payment Base remains unchanged; and
(b) the Remaining Protected Balance is reduced by the
amount of each withdrawal.
Since a withdrawal occurred during Contract Year 1, no
increases are added to the withdrawal percentage due to delaying
withdrawals.
Since it was assumed that the Owner was
age 591/2
or older when the first withdrawal was taken, withdrawals of 4%,
5% and 6% of the Protected Payment Base, respectively, will
continue to be paid each year (even after the Contract Value and
Remaining Protected Balance have been reduced to zero) until the
day of the first death of an Owner or the date of death of the
sole surviving Annuitant (death of any Annuitant for Non-Natural
Owners), whichever occurs first.
The examples provided are based on certain hypothetical
assumptions and are for example purposes only. Where Contract
Value is reflected, the examples do not assume any specific
return percentage. They have been provided to assist in
understanding the death benefit amount under the Contract and
the optional Stepped-Up Death Benefit Rider and to demonstrate
how Purchase Payments and withdrawals made from the Contract may
effect the values and benefits. There may be minor differences
in the calculations due to rounding. These examples are not
intended to reflect what your actual death benefit proceeds will
be or serve as projections of future investment returns nor are
they a reflection of how your Contract will actually perform.
Death
Benefit Amount
The values shown below are based on the following assumptions:
•
Initial Purchase Payment = $100,000
•
Rider Effective Date = Contract Date
•
A subsequent Purchase Payment of $25,000 is received in Contract
Year 3.
•
A withdrawal of $35,000 is taken during Contract Year 6.
•
A withdrawal of $10,000 is taken during Contract Year 11.
Beginning
Purchase
Return of
of Contract
Payments
Withdrawal
Purchase
Year
Received
Amount
Contract
Value1
Payments1
1
$100,000
$96,500
$100,000
2
$103,000
$100,000
3
$106,090
$100,000
Activity
$25,000
$133,468
$125,000
4
$134,458
$125,000
5
$138,492
$125,000
6
$142,647
$125,000
Activity
$35,000
$110,844
$95,000
7
$111,666
$95,000
8
$103,850
$95,000
9
$96,580
$95,000
10
$89,820
$95,000
11
$10,000
$73,530
$83,629
12
$68,383
$83,629
13
$63,596
$83,629
14
Death
Occurs
$59,144
$83,629
1
The greater of the Contract Value or the adjusted Return of
Purchase Payments represents the Death Benefit Amount.
On the Rider effective date, the initial values are set as
follows:
•
Return of Purchase Payment = Initial Purchase
Payment = $100,000
•
Contract Value = Initial Purchase Payment less sales
charge = $96,500
During Contract Year 3, an additional Purchase Payment of
$25,000 was made. The Return of Purchase Payment amount
increased to $125,000. The Contract Value increased to $133,468.
During Contract Year 6, a withdrawal of $35,000 was made.
This withdrawal reduced the Return of Purchase Payment amount on
a pro rata basis to $95,000 and decreased the Contract Value to
$110,844. Numerically, the new Return of Purchase Payment amount
is calculated as follows:
First, determine the ratio for the proportionate reduction. The
ratio is the withdrawal amount divided by the Contract Value
prior to the withdrawal ($145,844, which equals the $110,844
Contract Value after the withdrawal plus the $35,000 withdrawal
amount). Numerically, the ratio is 24.00%
($35,000 ¸
$145,844 = 0.2400 or 24.00%).
70
Second, determine the new Return of Purchase Payment amount. The
Return of Purchase Payment amount prior to the withdrawal is
multiplied by 1 less the ratio determined above. Numerically,
the new Return of Purchase Payment amount is $95,000 (Return of
Purchase Payment amount prior to the withdrawal ×
(1-ratio);
$125,000 ×
(1-24.00%);
$125,000 × 76.00% = $95,000).
During Contract Year 11, a withdrawal of $10,000 was made.
This withdrawal reduced the Return of Purchase Payment amount on
a pro rata basis to $83,629 and decreased the Contract Value.
Numerically, the new Return of Purchase Payment amount is
calculated as follows:
First, determine the ratio for the proportionate reduction. The
ratio is the withdrawal amount divided by the Contract Value
prior to the withdrawal ($85,530, which equals the $73,530
Contract Value after the withdrawal plus the $10,000 withdrawal
amount). Numerically, the ratio is 11.97%
($10,000 ¸
$83,530 = 0.1197 or 11.97%).
Second, determine the new Return of Purchase Payment amount. The
Return of Purchase Payment amount prior to the withdrawal is
multiplied by 1 less the ratio determined above. Numerically,
the new Return of Purchase Payment amount is $83,629 (Return of
Purchase Payment prior to the withdrawal × (1-ratio);
$95,000 × (1-11.97%); $95,000 × 88.03% = $83,629).
During Contract Year 14, death occurs. The Death Benefit
Amount will be the Return of Purchase Payments reduced by an
amount for each withdrawal ($83,629) because that amount is
greater than the Contract Value ($59,144).
Using the table above, if death occurred in Contract
Year 7, the Death Benefit Amount would be the Contract
Value ($111,666) because that amount is greater than the Return
of Purchase Payment (reduced by an amount for withdrawals) of
$95,000.
Stepped-Up
Death Benefit Rider
•
Initial Purchase Payment = $100,000
•
Rider Effective Date = Contract Date
•
A subsequent Purchase Payment of $25,000 is received in Contract
Year 3.
•
A withdrawal of $35,000 is taken during Contract Year 6.
•
Annual
Step-Ups
occur on each of the first seven Contract Anniversaries.
Guaranteed
Minimum
Beginning
Purchase
Return of
(Stepped-Up)
of Contract
Payments
Withdrawal
Contract
Purchase
Death Benefit
Year
Received
Amount
Value1
Payments1
Amount
1
$100,000
$96,500
$100,000
$100,000
2
$103,000
$100,000
$103,000
3
$106,090
$100,000
$106,090
Activity
$25,000
$133,468
$125,000
$131,090
4
$134,458
$125,000
$134,458
5
$138,492
$125,000
$138,492
6
$142,647
$125,000
$142,647
Activity
$35,000
$110,844
$95,000
$108,412
7
$111,666
$95,000
$111,666
8
$103,850
$95,000
$111,666
9
$96,580
$95,000
$111,666
Death
Occurs
$89,820
$95,000
$111,666
1
The greater of the Contract Value or the adjusted Return of
Purchase Payments represents the Death Benefit Amount.
On the Rider effective date, the initial values are set as
follows:
•
Return of Purchase Payment = Initial Purchase
Payment = $100,000
Contract Value = Initial Purchase Payment less sales
charge = $96,500
During Contract Year 3, an additional Purchase Payment of
$25,000 was made. This results in an increase in the Return of
Purchase Payment amount to $125,000. The Contract Value
increased to $133,468 and the Guaranteed Minimum (Stepped-Up)
Death Benefit Amount increased to $131,090.
During Contract Year 6, a withdrawal of $35,000 was made.
This withdrawal reduced the Return of Purchase Payment amount on
a pro rata basis to $95,000 and decreased the Contract Value to
$110,844. In addition, the Guaranteed Minimum (Stepped-Up) Death
Benefit
71
Amount was reduced on a pro rata basis to $108,412.
Numerically, the new Return of Purchase Payment and Guaranteed
Minimum (Stepped-Up) Death Benefit Amount is calculated as
follows:
First, determine the ratio for the proportionate reduction. The
ratio is the withdrawal amount divided by the Contract Value
prior to the withdrawal ($145,844, which equals the $110,844
Contract Value after the withdrawal plus the $35,000 withdrawal
amount). Numerically, the ratio is 24.00%
($35,000 ¸
$145,844 = 0.2400 or 24.00%)
Second, determine the new Return of Purchase Payment amount. The
Return of Purchase Payment amount prior to the withdrawal is
multiplied by 1 less the ratio determined above. Numerically,
the new Return of Purchase Payment amount is $95,000 (Return of
Purchase Payment amount prior to the withdrawal ×
(1-ratio);
$125,000 ×
(1-24.00%);
$125,000 × 76.00% = $95,000).
Third, determine the new Guaranteed Minimum (Stepped-Up) Death
Benefit Amount. The Guaranteed Minimum (Stepped-Up) Death
Benefit Amount prior to the withdrawal is multiplied by 1 less
the ratio determined above. Numerically, the new Guaranteed
Minimum (Stepped-Up) Death Benefit Amount is $108,412
(Guaranteed Minimum (Stepped-Up) Death Benefit Amount prior to
the withdrawal ×
(1-ratio);
$142,647 ×
(1-24.00%);
$142,647 × 76.00% = $108,412).
During Contract Year 9, death occurs. The death benefit
proceeds are the greater of the Death Benefit Amount (Contract
Value or Return of Purchase Payments adjusted for withdrawals)
or the Guaranteed Minimum (Stepped-Up) Death Benefit Amount. The
Death Benefit Amount is $95,000 because the Return of Purchase
Payment Amount ($95,000) is greater than the Contract Value
($89,820). The death benefit proceeds are equal to the
Guaranteed Minimum (Stepped-Up) Death Benefit Amount of $111,666
because it is greater than the Death Benefit Amount (Return of
Purchase Payments of $95,000).
The Pacific Destinations variable annuity Contract is offered by Pacific Life & Annuity Company, 700 Newport Center Drive. P.O. Box 9000, Newport Beach, California92660.
If you have any questions about the Contract, please ask your financial professional or contact us.
You will find more information about the Pacific Destinations variable annuity contract and Separate Account A in the Statement of Additional Information (SAI) dated May 1, 2010. The SAI has been filed with the SEC and is considered to be part of this Prospectus because it is incorporated by reference. In this Prospectus, you will find the table of contents for the SAI on page 62. You can get a copy of the SAI at no charge by calling or writing to us, or by contacting the SEC. The SEC may charge you a fee for this information.
How to Contact Us
Call or write to us at: Pacific Life & Annuity Company P.O. Box 2829 Omaha, Nebraska68103-2829
Contract Owners: 1-800-748-6907 Financial Professionals: 1-877-441-2357 6 a.m. through 5 p.m. Pacific time
Send Purchase Payments, other payments and application forms to the following address:
By overnight delivery service Pacific Life & Annuity Company 1299 Farnam Street, 6th Floor, AMF Omaha, Nebraska68102
How to Contact the SEC
Commission’s Public Reference Section
100 F Street, NE
Washington, D.C. 20549
1-202-551-8090
Website: www.sec.gov
e-mail: publicinfo@sec.gov
FINRA Public Disclosure Program
The Financial Industry Regulatory Authority (FINRA) provides
investor protection education through its website and printed
materials. The FINRA regulation website address is
www.finra.org. An investor brochure that includes information
describing the Public Disclosure program may be obtained from
FINRA. The FINRA Public Disclosure hotline number is
(800) 289-9999.
FINRA does not charge a fee for the Public Disclosure program
services.
Pacific Destinations (the “Contract”) is a variable
annuity contract offered by Pacific Life & Annuity Company
(“PL&A”).
This Statement of Additional Information (“SAI”) is
not a Prospectus and should be read in conjunction with the
Contract’s Prospectus, dated May 1, 2010, and any
supplement thereto, which is available without charge upon
written or telephone request to PL&A. Terms used in this
SAI have the same meanings as in the Prospectus, and some
additional terms are defined particularly for this SAI. This SAI
is incorporated by reference into the Contract’s Prospectus.
From time to time, our reports or other communications to
current or prospective Contract Owners or our advertising or
other promotional material may quote the performance (yield and
total return) of a Subaccount. Quoted results are based on past
performance and reflect the performance of all assets held in
that Subaccount for the stated time period. Quoted results
are neither an estimate nor a guarantee of future investment
performance, and do not represent the actual experience of
amounts invested by any particular Contract Owner.
Total
Returns
A Subaccount may advertise its “average annual total
return” over various periods of time. “Total
return” represents the average percentage change in value
of an investment in the Subaccount from the beginning of a
measuring period to the end of that measuring period.
“Annualized” total return assumes that the total
return achieved for the measuring period is achieved for each
full year period. “Average annual” total return is
computed in accordance with a standard method prescribed by the
SEC, and is also referred to as “standardized return.”
Average
Annual Total Return
To calculate a Subaccount’s average annual total return for
a specific measuring period, we first take a hypothetical $1,000
investment in that Subaccount, at its applicable Subaccount Unit
Value (the “initial payment”) and we compute the
ending redeemable value of that initial payment at the end of
the measuring period based on the investment experience of that
Subaccount (“full withdrawal value”). The full
withdrawal value reflects the effect of all recurring fees and
charges applicable to a Contract Owner under the Contract,
including the Risk Charge, the asset-based Administrative Fee
and the applicable sales charge, but does not reflect any
charges for applicable premium taxes
and/or any
other taxes, any optional Rider charge, any non-recurring fees
or charges, or any increase in the Risk Charge for an optional
Death Benefit Rider. The Annual Fee is also taken into account,
assuming an average Contract Value of $45.000. The redeemable
value is then divided by the initial payment and this quotient
is raised to the 365/N power (N represents the number of days in
the measuring period), and 1 is subtracted from this result.
Average annual total return is expressed as a percentage.
T = (ERV/P)(365/N)
− 1
where
T
=
average annual total return
ERV
=
ending redeemable value
P
=
hypothetical initial payment of $1,000
N
=
number of days
Average annual total return figures will be given for recent
1-,
3-,
5- and
10-year
periods (if applicable), and may be given for other periods as
well (such as from commencement of the Subaccount’s
operations, or on a year-by-year basis).
When considering “average” total return figures for
periods longer than one year, it is important to note that the
relevant Subaccount’s annual total return for any one year
in the period might have been greater or less than the average
for the entire period.
Aggregate
Total Return
A Subaccount may use “aggregate” total return figures
along with its “average annual” total return figures
for various periods; these figures represent the cumulative
change in value of an investment in the Subaccount for a
specific period. Aggregate total returns may be shown by means
of schedules, charts or graphs and may indicate subtotals of the
various components of total return. The SEC has not prescribed
standard formulas for calculating aggregate total return.
Total returns may also be shown for the same periods that do not
take into account the sales charge or the Annual Fee.
1
Non-Standardized
Total Returns
We may also calculate non-standardized total returns which may
or may not reflect any Annual Fee, sales charge, increases in
Risk Charge for an optional Death Benefit Rider, charges for
premium taxes and/or any other taxes, any charge for an optional
Rider, or any non-recurring fees or charge.
Standardized return figures will always accompany any
non-standardized returns shown.
Yields
Cash
Management Subaccount
The “yield” (also called “current yield”) of
the Cash Management Subaccount is computed in accordance with a
standard method prescribed by the SEC. The net change in the
Subaccount’s Unit Value during a seven-day period is
divided by the Unit Value at the beginning of the period to
obtain a base rate of return. The current yield is generated
when the base rate is “annualized” by multiplying it
by the fraction
365/7;
that is, the base rate of return is assumed to be generated each
week over a 365-day period and is shown as a percentage of the
investment. The “effective yield” of the Cash
Management Subaccount is calculated similarly but, when
annualized, the base rate of return is assumed to be reinvested.
The effective yield will be slightly higher than the current
yield because of the compounding effect of this assumed
reinvestment.
The formula for effective yield is: [(Base Period Return +
1) (To the power of
365/7)]
− 1.
Realized capital gains or losses and unrealized appreciation or
depreciation of the assets of the underlying Cash Management
Portfolio are not included in the yield calculation. Current
yield and effective yield do not reflect the deduction of
charges for any applicable premium taxes and/or any other taxes,
any increase in the Risk Charge for an optional Death Benefit
Rider, any charges for an optional Rider or any non-recurring
fees or charges, but do reflect a deduction for the Annual Fee,
the Risk Charge, and the asset-based Administrative Fee and
assume an average Contract Value of $45,000.
Other
Subaccounts
“Yield” of the other Subaccounts is computed in
accordance with a different standard method prescribed by the
SEC. The net investment income (investment income less expenses)
per Subaccount Unit earned during a specified one-month or
30-day period is divided by the Subaccount Unit Value on the
last day of the specified period. This result is then annualized
(that is, the yield is assumed to be generated each month or
each 30-day
period for a year), according to the following formula, which
assumes semi-annual compounding:
YIELD = 2[(
a – b
cd
+ 1)6
− 1]
where:
a
=
net investment income earned during the period by the Portfolio
attributable to the Subaccount.
b
=
expenses accrued for the period (net of reimbursements).
c
=
the average daily number of Subaccount Units outstanding during
the period that were entitled to receive dividends.
d
=
the Unit Value of the Subaccount Units on the last day of the
period.
The yield of each Subaccount reflects the deduction of all
recurring fees and charges applicable to the Subaccount, such as
the Risk Charge, the asset-based Administrative Fee and the
Annual Fee (assuming an average Contract Value of $45,000), but
does not reflect any sales charge, any charge for applicable
premium taxes
and/or any
other taxes, increase in the Risk Charge for an optional Death
Benefit Rider, any charges for an optional Rider, or any
non-recurring fees or charges.
The Subaccounts’ yields will vary from time to time
depending upon market conditions, the composition of each
Portfolio and operating expenses of the Fund allocated to each
Portfolio. Consequently, any given performance quotation should
not be considered representative of the Subaccount’s
performance in the future. Yield should also be considered
relative to changes in Subaccount Unit Values and to the
relative risks associated with the investment policies and
objectives of the various Portfolios. In addition, because
performance will fluctuate, it may not provide a
2
basis for comparing the yield of a Subaccount with certain bank
deposits or other investments that pay a fixed yield or return
for a stated period of time.
Performance
Comparisons and Benchmarks
In advertisements and sales literature, we may compare the
performance of some or all of the Subaccounts to the performance
of other variable annuity issuers in general and to the
performance of particular types of variable annuities investing
in mutual funds, or series of mutual funds, with investment
objectives similar to each of the Subaccounts. This performance
may be presented as averages or rankings compiled by Lipper
Analytical Services, Inc. (“Lipper”), or Morningstar,
Inc. (“Morningstar”), which are independent services
that monitor and rank the performance of variable annuity
issuers and mutual funds in each of the major categories of
investment objectives on an industry-wide basis. Lipper’s
rankings include variable life issuers as well as variable
annuity issuers. The performance analyses prepared by Lipper and
Morningstar rank such issuers on the basis of total return,
assuming reinvestment of dividends and distributions, but do not
take sales charges, redemption fees or certain expense
deductions at the separate account level into consideration. In
addition, Morningstar prepares risk adjusted rankings, which
consider the effects of market risk on total return performance.
We may also compare the performance of the Subaccounts with
performance information included in other publications and
services that monitor the performance of insurance company
separate accounts or other investment vehicles. These other
services or publications may be general interest business
publications such as The Wall Street Journal, Barron’s,
Business Week, Forbes, Fortune, and Money.
In addition, our reports and communications to Contract Owners,
advertisements, or sales literature may compare a
Subaccount’s performance to various benchmarks that measure
the performance of a pertinent group of securities widely
regarded by investors as being representative of the securities
markets in general or as being representative of a particular
type of security. We may also compare the performance of the
Subaccounts with that of other appropriate indices of investment
securities and averages for peer universes of funds or data
developed by us derived from such indices or averages. Unmanaged
indices generally assume the reinvestment of dividends or
interest but do not generally reflect deductions for investment
management or administrative costs and expenses.
Tax
Deferred Accumulation
In reports or other communications to you or in advertising or
sales materials, we may also describe the effects of
tax-deferred compounding on the Separate Account’s
investment returns or upon returns in general. These effects may
be illustrated in charts or graphs and may include comparisons
at various points in time of returns under the Contract or in
general on a tax-deferred basis with the returns on a taxable
basis. Different tax rates may be assumed.
In general, individuals who own annuity contracts are not taxed
on increases in the value under the annuity contract until some
form of distribution is made from the contract. Thus, the
annuity contract will benefit from tax deferral during the
accumulation period, which generally will have the effect of
permitting an investment in an annuity contract to grow more
rapidly than a comparable investment under which increases in
value are taxed on a current basis. The following chart
illustrates this benefit by comparing accumulation under a
variable annuity contract with accumulations from an investment
on which gains are taxed on a current ordinary income basis.
The chart shows accumulations on an single Net Purchase Payment
of $10,000, assuming hypothetical annual returns of 0%, 4% and
8%, compounded annually, and a tax rate of 33%. The values shown
for the taxable investment do not include any deduction for
management fees or other expenses but assume that taxes are
deducted annually from investment returns. The values shown for
the variable annuity do not reflect the deduction of contractual
expenses such as the Risk Charge (equal to an annual rate of
0.60% of average daily account value), the Administrative Fee
(equal to an annual rate of 0.15% of average daily account
value), the Annual Fee (equal to $30 per year if your Net
Contract Value is less than $50,000), any increase in the Risk
Charge for an optional Death Benefit Rider (equal to a maximum
annual rate of 0.20% of average daily Account Value), other
optional Rider charges (equal to a maximum annual rate of 1.50%
of the Protected Payment Base), a charge for premium taxes
and/or other taxes, or any underlying Fund expenses.
3
The rates of return illustrated are hypothetical and are not an
estimate or guarantee of performance. Actual tax rates may vary
for different assets (e.g. capital gains and qualifying dividend
income) and taxpayers from that illustrated. Withdrawals by and
distributions to Contract Owners who have not reached age
591/2 may
be subject to a tax penalty of 10%.
Pacific Select Distributors, Inc., our subsidiary, acts as the
distributor of the Contracts and offers the Contracts on a
continuous basis. PSD is located at 700 Newport Center Drive,
Newport Beach, California92660. PSD is registered as a
broker-dealer with the SEC and is a member of FINRA. We pay PSD
for acting as distributor under a Distribution Agreement. We and
PSD enter into selling agreements with broker-dealers whose
registered representatives are authorized by the Insurance
Superintendent of the State of New York to solicit applications
for the Contracts. Because the Contract was not offered before
2010, PSD was not paid any underwriting commissions with regard
to this Contract.
PSD or an affiliate pays various sales compensation to
broker-dealers that solicit applications for the Contracts. PSD
or an affiliate also may provide reimbursement for other
expenses associated with the promotion and solicitation of
applications for the Contracts. Your financial professional
typically receives a portion of the compensation that is payable
to his or her broker-dealer in connection with the Contract,
depending on the agreement between your financial professional
and his or her firm. PL&A is not involved in determining
that compensation arrangement, which may present its own
incentives or conflicts. You may ask your financial professional
how he/she will personally be compensated for the transaction.
Under certain circumstances where PSD pays lower initial
commissions, certain broker-dealers that solicit applications
for Contracts may be paid an ongoing persistency trail
commission (sometimes called a residual). The mix of Purchase
Payment-based versus trail commissions varies depending upon our
agreement with the selling broker-dealer and the commission
option selected by your financial professional or broker-dealer.
In addition to the Purchase Payment-based and trail commissions
described above, we
and/or an
affiliate may pay additional cash compensation from our own
resources in connection with the promotion and solicitation of
applications for the Contracts by some, but not all,
broker-dealers. The range of additional cash compensation based
on Purchase Payments generally does not exceed 0.40% and
trailing compensation based on Account Value generally does not
exceed 0.10% on an annual basis. Such additional compensation
may give PL&A greater access to financial professionals of
the broker-dealers that receive such compensation. While this
greater access provides the opportunity for training and other
educational programs so that your financial professional may
serve you better, this additional compensation also may afford
PL&A a “preferred” status at the recipient
broker-dealer and provide some other marketing benefit such as
website placement, access to financial professional lists, extra
marketing assistance or other heightened visibility and access
to the broker-dealer’s sales force that may otherwise
influence the way that the broker-dealer and the financial
professional market the Contracts.
As of December 31, 2009, the following firms have
arrangements in effect with the Distributor pursuant to which
the firm is entitled to receive a revenue sharing payment:
AMCORE Investments Inc., American Portfolios Financial Services
Inc., AmTrust Investment Services Inc., Askar Corporation,
Bancwest Investment Services Inc., Banc of America Investment
Services Inc., C C O Investment Services Corp, Capital
Investment Brokerage Inc., Capital Investment Group Inc.,
C U N A Brokerage Services Inc.,
C U S O Financial Services LP, Centaurus
Financial, Inc., Chevy Chase Financial Services Corp., Citigroup
Global Markets Inc., Colonial Brokerage Inc., Commonwealth
Financial Network, B B V A Compass Investment
Solutions Inc., Essex National Securities Inc., F S C
Securities Corporation, Fifth Third Securities Inc., Financial
Network Investment Corp., First Allied Securities Inc., First
Heartland Capital Inc., First Tennessee Brokerage Inc., Geneos
Wealth Management Inc., Great American Advisors Inc.,
I N G Financial Partners Inc., Infinex Investments
Inc., Invest Financial Corporation, Investacorp Inc., Investment
Centers of America Inc., Investment Professionals Inc.,
J J B Hilliard, W L Lyons Inc., Jacques
Financial L L C, Janney Montgomery Scott Inc., Key
Investment Services L L C, L P L Financial
Corp., Lincoln Financial Advisors Corp., Lincoln Financial
Securities Corp., M & T Securities Inc.,
M Holdings Securities Inc., M M L Investors
Services Inc., Merrill Lynch, Pierce, Fenner & Smith,
Morgan Keegan & Company Inc., Morgan
Stanley & Co. Incorporated, Multi-Financial Securities
Corp., Mutual Of Omaha Investor Services Inc., NF P
Securities Inc., National Planning Corporation, NEXT Financial
Group Inc., P N C Investments L L C, Park
Avenue Securities LLC., Primevest Financial Services Inc.,
ProEquities Inc., R B C Capital Markets Corporation,
Raymond James & Associates Inc., Raymond James
Financial Services Inc., Robert W Baird &
5
Company Inc., Royal Alliance Associates Inc., S I I
Investments Inc., Sagepoint Financial Inc., Securian Financial
Services Inc., Securities America, Sigma Financial Corp.,
Signator Investors Inc., Sorrento Pacific Financial
L L C, Sterne Agee Financial Services Inc., Sterne,
Agee & Leach Inc., Stifel Nicolaus & Company
Inc., Suntrust Investment Services Inc., Tower Square Securities
Inc., Transamerica Financial Advisors Inc., Triad Advisors Inc.,
U B S Financial Services Inc., U S Bancorp
Investments Inc., Unionbanc Investment Services L L C,
United Planners’ Financial Services of America,
V S R Financial Services Inc., Vision Investment
Services Inc., Securities Financial Network L L C,
Wachovia Securities L L C, Walnut Street Securities,
Wells Fargo Investments LLC, Wescom Financial Services
L L C, Woodbury Financial Services Inc., Zions Direct
Inc.
We or our affiliates may also pay override payments, expense
allowances and reimbursements, bonuses, wholesaler fees, and
training and marketing allowances. Such payments may offset the
broker-dealer’s expenses in connection with activities that
it is required to perform, such as educating personnel and
maintaining records. Financial professionals may also receive
non-cash compensation such as expense-paid educational or
training seminars involving travel within and outside the U.S.
or promotional merchandise.
All of the compensation described in this section, and other
compensation or benefits provided by us or our affiliates, may
be more or less than the overall compensation on similar or
other products and may influence your financial professional or
broker-dealer to present this Contract over other investment
options. You may ask your financial professional about these
potential conflicts of interests and how he/she and his/her
broker-dealer are compensated for selling the Contract.
Portfolio Managers of the underlying Portfolios available under
this Contract may from time to time bear all or a portion of the
expenses of conferences or meetings sponsored by PL&A or
PSD that are attended by, among others, representatives of PSD,
who would receive information and/or training regarding the
Fund’s Portfolios and their management by the Portfolio
Managers in addition to information respecting the variable
annuity and/or life insurance products issued by PL&A and
its affiliates. Other persons may also attend all or a portion
of any such conferences or meetings, including directors,
officers and employees of PL&A, officers and trustees of
Pacific Select Fund, and spouses/guests of the foregoing. The
Pacific Select Fund Board of Trustees may hold meetings
concurrently with such a conference or meeting. The Pacific
Select Fund pays for the expenses of the meetings of its Board
of Trustees, including the pro rata share of expenses for
attendance by the Trustees at the concurrent conferences or
meetings sponsored by PL&A or PSD. Additional expenses and
promotional items may be paid for by PL&A and/or Portfolio
Managers. PSD serves as the Pacific Select Fund Distributor.
The Unit Value of the Subaccount Units in each Variable
Investment Option is computed at the close of the New York
Stock Exchange, which is usually 4:00 p.m. Eastern time on
each Business Day. The initial Unit Value of each Subaccount was
$10 on the Business Day the Subaccount began operations. At the
end of each Business Day, the Unit Value for a Subaccount is
equal to:
Y × Z
where
(Y)
=
the Unit Value for that Subaccount as of the end of the
preceding Business Day; and
(Z)
=
the Net Investment Factor for that Subaccount for the period (a
“valuation period”) between that Business Day and the
immediately preceding Business Day.
The “Net Investment Factor” for a Subaccount for any
valuation period is equal to:
(A
¸
B) − C
where
(A)
=
the “per share value of the assets” of that Subaccount
as of the end of that valuation period, which is equal to: a+b+c
where
(a)
=
the net asset value per share of the corresponding Portfolio
shares held by that Subaccount as of the end of that valuation
period;
(b)
=
the per share amount of any dividend or capital gain
distributions made by the Fund for that Portfolio during that
valuation period; and
(c)
=
any per share charge (a negative number) or credit (a
positive number) for any income taxes or other amounts set aside
during that valuation period as a reserve for any income and/or
any other taxes which we determine to have resulted from the
operations of the Subaccount or Contract, and/or any taxes
attributable, directly or indirectly, to Investments;
(B)
=
the net asset value per share of the corresponding Portfolio
shares held by the Subaccount as of the end of the preceding
valuation period; and
(C)
=
a factor that assesses against the Subaccount net assets for
each calendar day in the valuation period, the basic Risk Charge
plus any applicable increase in the Risk Charge and the
Administrative Fee (see the CHARGES, FEES AND DEDUCTIONS
section in the Prospectus).
As explained in the Prospectus, the Annual Fee, if applicable,
will be charged proportionately against your Investment Options.
Assessments against your Variable Investment Options are
assessed against your Variable Account Value through the
automatic debit of Subaccount Units; the Annual Fee decreases
the number of Subaccount Units attributed to your Contract but
does not alter the Unit Value for any Subaccount.
Variable
Annuity Payment Amounts
The following steps show how we determine the amount of each
variable annuity payment under your Contract.
First:
Pay Applicable Premium Taxes
When you convert your Net Contract Value into annuity payments,
you must pay any applicable charge for premium taxes and/or any
other taxes on your Contract Value (unless applicable law
requires those taxes to be paid at a later time). We assess this
charge by reducing your Account Value proportionately, relative
to your Account Value in each Subaccount and in any fixed
option, in an amount equal to the aggregate amount of the
charges. The remaining amount of your available Net Contract
Value may be used to provide variable annuity payments.
Alternatively, your remaining available Net Contract Value may
be used to provide fixed annuity payments, or it may be divided
to provide both fixed and variable annuity payments. You may
also choose to withdraw some or all of your remaining Net
Contract Value, less any applicable optional Rider Charge,
Annual Fee and any charges for premium taxes and/or any other
taxes without converting this amount into annuity payments.
7
Second:
The First Variable Payment
We begin by referring to your Contract’s Option Table for
your Annuity Option (the “Annuity Option Table”). The
Annuity Option Table allows us to calculate the dollar amount of
the first variable annuity payment under your Contract, based on
the amount applied toward the variable annuity. The number that
the Annuity Option Table yields will be based on the
Annuitant’s age (and, in certain cases, sex) and assumes a
4% rate of return, as described in more detail below.
Example: Assume a man is 65 years of age at his
Annuity Date and has selected a lifetime annuity with monthly
payments guaranteed for 10 years. According to the Annuity
Option Table, this man should receive an initial monthly payment
of $5.20 for every $1,000 of his Contract Value (reduced by
applicable charges) that he will be using to provide variable
payments. Therefore, if his Contract Value after deducting
applicable fees and charges is $100,000 on his Annuity Date and
he applies this entire amount toward his variable annuity, his
first monthly payment will be $520.00.
You may choose any other Annuity Option Table that assumes a
different rate of return which we offer at the time your Annuity
Option is effective.
Third:
Subaccount Annuity Units
For each Subaccount, we use the amount of the first variable
annuity payment under your Contract attributed to each
Subaccount to determine the number of Subaccount Annuity Units
that will form the basis of subsequent payment amounts. First,
we use the Annuity Option Table to determine the amount of that
first variable payment for each Subaccount. Then, for each
Subaccount, we divide that amount of the first variable annuity
payment by the value of one Subaccount Annuity Unit (the
“Subaccount Annuity Unit Value”) as of the end of the
Annuity Date to obtain the number of Subaccount Annuity Units
for that particular Subaccount. The number of Subaccount Annuity
Units used to calculate subsequent payments under your Contract
will not change unless exchanges of Annuity Units are made, (or
if the Joint and Survivor Annuity Option is elected and the
Primary Annuitant dies first) but the value of those Annuity
Units will change daily, as described below.
Fourth:
The Subsequent Variable Payments
The amount of each subsequent variable annuity payment will be
the sum of the amounts payable based on each Subaccount. The
amount payable based on each Subaccount is equal to the number
of Subaccount Annuity Units for that Subaccount multiplied by
their Subaccount Annuity Unit Value at the end of the Business
Day in each payment period you elected that corresponds to the
Annuity Date.
Each Subaccount’s Subaccount Annuity Unit Value, like its
Subaccount Unit Value, changes each day to reflect the net
investment results of the underlying investment vehicle, as well
as the assessment of the Risk Charge at an annual rate of 0.60%
and the Administrative Fee at an annual rate of 0.15%. In
addition, the calculation of Subaccount Annuity Unit Value
incorporates an additional factor; as discussed in more detail
below, this additional factor adjusts Subaccount Annuity Unit
Values to correct for the Option Table’s implicit assumed
annual investment return on amounts applied but not yet used to
furnish annuity benefits. Any increase in your Risk Charge for
an optional death benefit rider is not charged on and after the
Annuity Date.
Different Subaccounts may be selected for your Contract before
and after your Annuity Date, subject to any restrictions we may
establish. Currently, you may exchange Subaccount Annuity Units
in any Subaccount for Subaccount Annuity Units in any other
Subaccount(s) up to four times in any twelve month period after
your Annuity Date. The number of Subaccount Annuity Units in any
Subaccount may change due to such exchanges. Exchanges following
your Annuity Date will be made by exchanging Subaccount Annuity
Units of equivalent aggregate value, based on their relative
Subaccount Annuity Unit Values.
Understanding
the “Assumed Investment Return” Factor
The Annuity Option Table incorporates a number of implicit
assumptions in determining the amount of your first variable
annuity payment. As noted above, the numbers in the Annuity
Option Table reflect certain actuarial assumptions based on the
Annuitant’s age, and, in some cases, the Annuitant’s
sex. In addition, these numbers assume
8
that the amount of your Contract Value that you convert to a
variable annuity will have a positive net investment return of
4% each year during the payout of your annuity; thus 4% is
referred to as an “assumed investment return.”
The Subaccount Annuity Unit Value for a Subaccount will increase
only to the extent that the investment performance of that
Subaccount exceeds the Risk Charge, the Administrative Fee, and
the assumed investment return. The Subaccount Annuity Unit Value
for any Subaccount will generally be less than the Subaccount
Unit Value for that same Subaccount, and the difference will be
the amount of the assumed investment return factor.
Example: Assume the net investment performance of a
Subaccount is at a rate of 4.00% per year (after deduction
of the 0.60% Risk Charge and the 0.15% Administrative Fee). The
Subaccount Unit Value for that Subaccount would increase at a
rate of 4.00% per year, but the Subaccount Annuity
Unit Value would not increase (or decrease) at all. The net
investment factor for that 4% return [1.04] is then divided by
the factor for the 4% assumed investment return [1.04] and 1 is
subtracted from the result to determine the adjusted rate of
change in Subaccount Annuity Unit Value:
1.04
1.04
= 1; 1 − 1 = 0; 0 × 100% = 0%.
If the net investment performance of a Subaccount’s assets
is at a rate less than 4.00% per year, the Subaccount Annuity
Unit Value will decrease, even if the Subaccount Unit Value is
increasing.
Example: Assume the net investment performance of a
Subaccount is at a rate of 2.60% per year (after deduction of
the 0.60% Risk Charge and the 0.15% Administrative Fee). The
Subaccount Unit Value for that Subaccount would increase at a
rate of 2.60% per year, but the Subaccount Annuity Unit Value
would decrease at a rate of 1.35% per year. The net
investment factor for that 2.6% return [1.026] is then divided
by the factor for the 4% assumed investment return [1.04] and 1
is subtracted from the result to determine the adjusted rate of
change in Subaccount Annuity Unit Value:
The assumed investment return will always cause increases in
Subaccount Annuity Unit Values to be somewhat less than if the
assumption had not been made, will cause decreases in Subaccount
Annuity Unit Values to be somewhat greater than if the
assumption had not been made, and will (as shown in the example
above) sometimes cause a decrease in Subaccount Annuity Unit
Values to take place when an increase would have occurred if the
assumption had not been made. If we had assumed a higher
investment return in our Annuity Option tables, it would produce
annuities with larger first payments, but the increases in
subaccount annuity payments would be smaller and the decreases
in subsequent annuity payments would be greater; a lower assumed
investment return would produce annuities with smaller first
payments, and the increases in subsequent annuity payments would
be greater and the decreases in subsequent annuity payments
would be smaller.
Redemptions
of Remaining Guaranteed Variable Payments Under Options 2 and
4
If variable payments are elected under Annuity Options 2
and 4, you may redeem all remaining guaranteed variable
payments after the Annuity Date. Also, under Option 4,
partial redemptions of remaining guaranteed variable payments
after the Annuity Date are available. If you elect to redeem
all remaining guaranteed variable payments in a single sum, we
will not make any additional variable annuity payments during
the Annuitant’s lifetime or the remaining guaranteed period
after the redemption. The amount available upon a full
redemption would be the present value of any remaining
guaranteed variable payments at the assumed investment return.
The variable payment amount we use in calculating the present
value is determined by summing an amount for each Subaccount,
which we calculate by multiplying your Subaccount Annuity Units
by the Annuity Unit Value next computed after we receive your
redemption request. This variable payment amount is then
discounted at the assumed investment return from each future
Annuity Payment date that falls within the payment guaranteed
period. The sum of these discounted remaining variable payment
amounts is the present value of remaining guaranteed variable
payments.
If you elect to redeem all remaining guaranteed variable
payments in a single sum, we will not make any additional
variable annuity payments during the remaining guaranteed period
after the redemption.
9
If you elect to redeem a portion of the remaining guaranteed
variable payments in a single sum, we will reduce the number of
Annuity Units for each Subaccount by the same percentage as the
partial redemption value bears to the amount available upon a
full redemption.
Redemption of remaining guaranteed variable payments will not
affect the amount of any fixed annuity payments.
Corresponding
Dates
If any transaction or event under your Contract is scheduled to
occur on a “corresponding date” that does not exist in
a given calendar period, the transaction or event will be deemed
to occur on the following Business Day. In addition, as stated
in the Prospectus, any event scheduled to occur on a day that is
not a Business Day will occur on the next succeeding Business
Day.
Example: If your Contract is issued on
February 29 in year 1 (a leap year), your Contract
Anniversary in years 2, 3 and 4 will be on March 1.
Example: If your Annuity Date is July 31 and
you select monthly annuity payments, the payments received will
be based on valuations made on July 31, August 31,
October 1 (for September), October 31, December 1
(for November), December 31, January 31, March 1
(for February), March 31, May 1 (for April),
May 31 and July 1 (for June).
Age and
Sex of Annuitant
The Contracts generally provide for sex-distinct annuity income
factors in the case of life annuities. Statistically, females
tend to have longer life expectancies than males; consequently,
if the amount of annuity payments is based on life expectancy,
they will ordinarily be higher if an annuitant is male than if
an annuitant is female. Certain states’ regulations
prohibit sex-distinct annuity income factors, and Contracts
issued in those states will use unisex factors. In addition,
Contracts issued in connection with Qualified Plans are required
to use unisex factors.
We may require proof of your Annuitant’s age and sex before
or after commencing annuity payments. If the age or sex (or
both) of your Annuitant are incorrectly stated in your Contract,
we will correct the amount payable to equal the amount that the
annuitized portion of the Contract Value under that Contract
would have purchased for your Annuitant’s correct age and
sex. If we make the correction after annuity payments have
started, and we have made overpayments based on the incorrect
information, we will deduct the amount of the overpayment, with
interest at 3% a year, from any payments due then or later; if
we have made underpayments, we will add the amount, with
interest at 3% a year, of the underpayments to the next payment
we make after we receive proof of the correct age and/or sex.
Additionally, we may require proof of the Annuitant’s or
Owner’s age before any payments associated with the Death
Benefit provisions of your Contract are made. If the age or sex
of the Annuitant is incorrectly stated in your Contract, we will
base any payment associated with the Death Benefit provisions on
your Contract on the Annuitant’s or Owner’s correct
age or sex.
Systematic
Transfer Programs
The fixed option(s) are not available in connection with
portfolio rebalancing. If you are using the earnings sweep, you
may also use portfolio rebalancing only if you selected the Cash
Management Subaccount. You may not use dollar cost averaging,
DCA Plus, and the earnings sweep at the same time. Only
portfolio rebalancing is available after you annuitize. The
systematic transfer options are subject to the same requirements
and restrictions as non-systematic transfers. In addition, no
fixed option(s) may be used as the target Investment Option
under any systematic transfer program.
Dollar
Cost Averaging
When you request dollar cost averaging, you are authorizing us
to make periodic reallocations of your Contract Value without
waiting for any further instruction from you. You may request to
begin or stop dollar cost averaging at any time prior to your
Annuity Date; the effective date of your request will be the day
we receive notice from you in a form satisfactory to us. Your
request may specify the date on which you want your first
transfer to be made. Your first
10
transfer may not be made until 30 days after your Contract
Date, and if you specify an earlier date, your first transfer
will be delayed until one calendar month after the date you
specify. If you request dollar cost averaging on your
application for your Contract and you fail to specify a date for
your first transfer, your first transfer will be made one period
after your Contract Date (that is, if you specify monthly
transfers, the first transfer will occur 30 days after your
Contract Date; quarterly transfers, 90 days after your
Contract Date; semi-annual transfers, 180 days after your
Contract Date; and if you specify annual transfers, the first
transfer will occur on your Contract Anniversary). If you stop
dollar cost averaging, you must wait 30 days before you may
begin this option again. Currently, we are not enforcing the
30 day waiting period but we reserve the right to enforce
such waiting period in the future.
Your request to begin dollar cost averaging must specify the
Investment Option you wish to transfer money from (your
“source account”). You may choose any one Investment
Option as your source account. The Account Value of your source
account must be at least $5,000 for you to begin dollar cost
averaging. Currently, we are not enforcing the minimum Account
Value but we reserve the right to enforce such minimum amounts
in the future.
Your request to begin dollar cost averaging must also specify
the amount and frequency of your transfers. You may choose
monthly, quarterly, semiannual or annual transfers. The amount
of your transfers may be specified as a dollar amount or a
percentage of your source Account Value; however, each transfer
must be at least $250. Currently, we are not enforcing the
minimum transfer amount but we reserve the right to enforce such
minimum amounts in the future. Dollar cost averaging transfers
are not subject to the same requirements and limitations as
other transfers.
Finally, your request must specify the Variable Investment
Option(s) you wish to transfer amounts to (your
“target account(s)”). If you select more than one
target account, your dollar cost averaging request must specify
how transferred amounts should be allocated among the target
accounts. Your source account may not also be a target account.
Your dollar cost averaging transfers will continue until the
earlier of:
•
your request to stop dollar cost averaging is effective, or
•
your source Account Value is zero, or
•
your Annuity Date.
If, as a result of a dollar cost averaging transfer, your source
Account Value falls below any minimum Account Value we may
establish, we have the right, at our option, to transfer that
remaining Account Value to your target account(s) on a
proportionate basis relative to your most recent allocation
instructions. We may change, terminate or suspend the dollar
cost averaging option at any time.
Portfolio
Rebalancing
Portfolio rebalancing allows you to maintain the percentage of
your Contract Value allocated to each Variable Investment Option
at a pre-set level prior to annuitization.
For example, you could specify that 30% of your Contract Value
should be in the Equity Index Subaccount, 40% in the Managed
Bond Subaccount, and 30% in the Growth LT Subaccount.
Over time, the variations in each Subaccount’s investment
results will shift this balance of these Subaccount Value
allocations. If you elect the portfolio rebalancing feature, we
will automatically transfer your Subaccount Value back to the
percentages you specify.
You may choose to have rebalances made quarterly, semi-annually
or annually. Only portfolio rebalancing is available after you
annuitize.
Procedures for selecting portfolio rebalancing are generally the
same as those discussed in detail above for selecting dollar
cost averaging: You may make your request at any time prior to
your Annuity Date and it will be effective when we receive it in
a form satisfactory to us. If you stop portfolio rebalancing,
you must wait 30 days to begin again. Currently, we are not
enforcing the 30-day waiting period but we reserve the right to
enforce such waiting period in the future. If you specify a date
fewer than 30 days after your Contract Date, your first
rebalance will be delayed one month, and if you request
rebalancing on your application but do not specify a date for
the first rebalance, it will occur
11
one period after your Contract Date, as described above under
Dollar Cost Averaging. We may change, terminate or suspend the
portfolio rebalancing feature at any time.
Earnings
Sweep
An earnings sweep automatically transfers the earnings
attributable to the Cash Management Subaccount (the “sweep
option”) to one or more other Variable Investment Options
(your “target option(s)”). The Account Value of your
sweep option will be required to be at least $5,000 when you
elect the earnings sweep. Currently, we are not enforcing the
minimum Account Value but we reserve the right to enforce such
minimum amounts in the future.
You may choose to have earnings sweeps occur monthly, quarterly,
semi-annually or annually until you annuitize. At each earnings
sweep, we will automatically transfer your accumulated earnings
attributable to your sweep option for the previous period
proportionately to your target option(s). That is, if you select
a monthly earnings sweep, we will transfer the sweep option
earnings from the preceding month; if you select a semi-annual
earnings sweep, we will transfer the sweep option earnings
accumulated over the preceding 6 months. Earnings sweep
transfers are not subject to the same requirements and
limitations as other transfers.
To determine the earnings, we take the change in the sweep
option’s Account Value during the sweep period, add any
withdrawals or transfers out of the sweep option Account that
occurred during the sweep period, and subtract any allocations
to the sweep option Account during the sweep period. The result
of this calculation represents the “total earnings”
for the sweep period.
If, during the sweep period, you withdraw or transfer amounts
from the sweep option Account, we assume that earnings are
withdrawn or transferred before any other Account Value.
Therefore, your “total earnings” for the sweep period
will be reduced by any amounts withdrawn or transferred during
the sweep option period. The remaining earnings are eligible for
the sweep transfer.
Procedures for selecting the earnings sweep are generally the
same as those discussed in detail above for selecting dollar
cost averaging and portfolio rebalancing: You may make your
request at any time and it will be effective when we receive it
in a form satisfactory to us. If you stop the earnings sweep,
you must wait 30 days to begin again. Currently, we are not
enforcing the 30-day waiting period but we reserve the right to
enforce such waiting period in the future. If you specify a date
fewer than 30 days after your Contract Date, your first
earnings sweep will be delayed one month, and if you request the
earnings sweep on your application but do not specify a date for
the first sweep, it will occur one period after your Contract
Date, as described above under Dollar Cost Averaging.
If, as a result of an earnings sweep transfer, your source
Account Value falls below $500, we have the right, at our
option, to transfer that remaining Account Value to your target
account(s) on a proportionate basis relative to your most recent
allocation instructions. We may change, terminate or suspend the
earnings sweep option at any time.
Pre-Authorized
Withdrawals
You may specify a dollar amount for your pre-authorized
withdrawals, or you may specify a percentage of your Contract
Value or an Account Value. You may direct us to make your
pre-authorized withdrawals from one or more specific Investment
Options. If you do not give us these specific instructions,
amounts will be deducted proportionately from your Account Value
in each Investment Option.
Procedures for selecting pre-authorized withdrawals are
generally the same as those discussed in detail above for
selecting dollar cost averaging, portfolio rebalancing, and
earnings sweeps: You may make your request at any time and it
will be effective when we receive it in a form satisfactory to
us. If you stop the pre-authorized withdrawals, you must wait
30 days to begin again. Currently, we are not enforcing the
30-day waiting period but we reserve the right to enforce such
waiting period in the future.
If your pre-authorized withdrawals cause your Account Value in
any Investment Option to fall below $500, we have the right, at
our option, to transfer that remaining Account Value to your
other Investment Options on a proportionate basis relative to
your most recent allocation instructions. If your pre-authorized
withdrawals cause your Contract Value to fall below $1,000, we
may, at our option, terminate your Contract and send you the
remaining withdrawal proceeds.
12
Each pre-authorized withdrawal is subject to any applicable
charge for premium taxes and/or other taxes, to federal income
tax on its taxable portion, and, if you have not reached age
591/2,
may be subject to a 10% federal tax penalty.
Joint
Annuitants on Qualified Contracts
On your Annuity Date, if your Contract was issued in connection
with a Qualified Plan subject to Title I of the Employee
Retirement Income Security Act of 1974 (“ERISA”), and
you change your marital status after your Contract Date, you may
be permitted to add a Joint Annuitant and to change your Joint
Annuitant. Generally speaking, you may be permitted to add a new
spouse as a Joint Annuitant, and you may be permitted to remove
a Joint Annuitant who is no longer your spouse.
More on
Federal Tax Issues
Section 817(h) of the Code provides that the investments
underlying a variable annuity must satisfy certain
diversification requirements. Details on these diversification
requirements appear in the Pacific Select Fund SAI. We believe
the underlying Variable Investment Options for the Contract meet
these requirements. On March 7, 2008, the Treasury Department
issued Final Regulations under Section 817(h). These Final
Regulations do not provide guidance concerning the extent to
which you may direct your investments to particular divisions of
a separate account. Such guidance may be included in regulations
or revenue rulings under Section 817(d) relating to the
definition of a variable contract. We reserve the right to make
such changes as we deem necessary or appropriate to ensure that
your Contract continues to qualify as an annuity for tax
purposes. Any such changes will apply uniformly to affected
Contract Owners and will be made with such notice to affected
Contract Owners as is feasible under the circumstances.
For a variable life insurance contract or a variable annuity
contract to qualify for tax deferral, assets in the separate
accounts supporting the contract must be considered to be owned
by the insurance company and not by the contract owner. Under
current U.S. tax law, if a contract owner has excessive control
over the investments made by a separate account, or the
underlying fund, the contract owner will be taxed currently on
income and gains from the account or fund. In other words, in
such a case of “investor control” the contract owner
would not derive the tax benefits normally associated with
variable life insurance or variable annuities.
Generally, according to the IRS, there are two ways that
impermissible investor control may exist. The first relates to
the design of the contract or the relationship between the
contract and a separate account or underlying fund. For example,
at various times, the IRS has focused on, among other factors,
the number and type of investment choices available pursuant to
a given variable contract, whether the contract offers access to
funds that are available to the general public, the number of
transfers that a contract owner may make from one investment
option to another, and the degree to which a contract owner may
select or control particular investments.
With respect to this first aspect of investor control, we
believe that the design of our contracts and the relationship
between our contracts and the Portfolios satisfy the current
view of the IRS on this subject, such that the investor control
doctrine should not apply. However, because of some uncertainty
with respect to this subject and because the IRS may issue
further guidance on this subject, we reserve the right to make
such changes as we deem necessary or appropriate to reduce the
risk that your contract might not qualify as a life insurance
contract or as an annuity for tax purposes.
The second way that impermissible investor control might exist
concerns your actions. Under the IRS pronouncements, you may not
select or control particular investments, other than choosing
among broad investment choices such as selecting a particular
Portfolio. You may not select or direct the purchase or sale of
a particular investment of a Separate Account, a Subaccount (or
Variable Investment Option), or a Portfolio. All investment
decisions concerning the Separate Accounts and the Subaccounts
must be made by us, and all investment decisions concerning the
underlying Portfolios must be made by the portfolio manager for
such Portfolio in his or her sole and absolute discretion, and
not by the contract owner. Furthermore, under the IRS
pronouncements, you may not enter into an agreement or
arrangement with a portfolio manager of a Portfolio or
communicate directly or indirectly with such a portfolio manager
or any related investment officers concerning the selection,
quality, or rate of return of any specific investment or group
of investments held by a Portfolio, and you may not enter into
any such agreement or arrangement or have any such communication
with us or PLFA.
13
Finally, the IRS may issue additional guidance on the investor
control doctrine, which might further restrict your actions or
features of the variable contract. Such guidance could be
applied retroactively. If any of the rules outlined above are
not complied with, the IRS may seek to tax you currently on
income and gains from a Portfolio such that you would not derive
the tax benefits normally associated with variable life
insurance or variable annuities. Although highly unlikely, such
an event may have an adverse impact on the fund and other
variable contracts. We urge you to consult your own tax adviser
with respect to the application of the investor control doctrine.
Loans
Certain Owners of Qualified Contracts may borrow against their
Contracts. Otherwise loans from us are not permitted. You may
request a loan from us, using your Contract Value as your only
security if your Qualified Contract is:
•
not subject to Title 1 of ERISA,
•
issued under Section 403(b) of the Code, and
•
permits loans under its terms (a “Loan Eligible Plan”).
You will be charged interest on your Contract Debt at a fixed
annual rate equal to 5%. The amount held in the Loan Account to
secure your loan will earn a return equal to an annual rate of
3%.
Interest charges accrue on your Contract Debt daily, beginning
on the effective date of your loan. Interest earned on the Loan
Account Value accrue daily beginning on the day following the
effective date of the loan, and those earnings will be
transferred once a year to your Investment Options in accordance
with your most recent allocation instructions.
We may change these loan provisions to reflect changes in the
Code or interpretations thereof.
Tax and
Legal Matters
The tax and ERISA rules relating to Contract loans are complex
and in many cases unclear. For these reasons, and because the
rules vary depending on the individual circumstances, these
loans are processed by your Plan Administrator. We urge you
to consult with a qualified tax adviser prior to effecting any
loan transaction under your Contract.
Generally, interest paid on your loan under a 403(b)
tax-sheltered annuity will be considered non-deductible
“personal interest” under Section 163(h) of the
Code, to the extent the loan comes from and is secured by your
pre-tax contributions, even if the proceeds of your loan are
used to acquire your principal residence.
Loan
Procedures
Your loan request must be submitted on our Non-ERISA TSA
Application and Loan Agreement Form. You may submit a loan
request 30 days after your Contract Date and before your
Annuity Date. However, before requesting a new loan, you must
wait 30 days after the last payment of a previous loan. If
approved, your loan will usually be effective as of the end of
the Business Day on which we receive all necessary documentation
in proper form. We will normally forward proceeds of your loan
to you within 7 calendar days after the effective date of
your loan.
In order to secure your loan, on the effective date of your
loan, we will transfer an amount equal to the principal amount
of your loan into an account called the “Loan
Account.” The Loan Account is held under the General
Account. To make this transfer, we will transfer amounts
proportionately from your Investment Options based on your
Account Value in each Investment Option.
As your loan is repaid, a portion, corresponding to the amount
of the repayment of any amount then held as security for your
loan, will be transferred from the Loan Account back into your
Investment Options relative to your most recent allocation
instructions.
A transfer from the Loan Account back into your Investment
Options following a loan repayment is not considered a transfer
under the transfer limitations as stated in the HOW YOUR
PURCHASE PAYMENTS ARE ALLOCATED – Transfers and
Market-timing Restrictions section in the Prospectus.
14
Loan
Terms
You may have only one loan outstanding at any time. The minimum
loan amount is $1,000. Your Contract Debt at the effective date
of your loan may not exceed the lesser of:
•
50% of the amount available for withdrawal under this Contract
(see the WITHDRAWALS – Optional
Withdrawals – Amount Available for
Withdrawal in the Prospectus), or
•
$50,000 less your highest outstanding Contract Debt during the
12-month period immediately preceding the effective date of your
loan.
You should refer to the terms of your particular Loan Eligible
Plan for any additional loan restrictions. If you have other
loans outstanding pursuant to other Loan Eligible Plans, the
amount you may borrow may be further restricted. We are not
responsible for making any determination (including loan amounts
permitted) or any interpretation with respect to your Loan
Eligible Plan.
If you purchase any optional living benefit rider (including any
and all previous, current, and future versions), there may be
adverse consequences to taking a loan while an optional living
benefit rider is in effect. If you have an existing loan on your
Contract, you should carefully consider whether an optional
living benefit rider is appropriate for you.
Repayment
Terms
Your loan, including principal and accrued interest, generally
must be repaid in quarterly installments. An installment will be
due in each quarter on the date corresponding to the effective
date of your loan, beginning with the first such date following
the effective date of your loan. See the Qualified
Contracts – Loans section in the Prospectus.
Example: On May 1, we receive your loan
request, and your loan is effective. Your first quarterly
payment will be due on August 1.
Adverse tax consequences may result if you fail to meet the
repayment requirements for your loan. You must repay principal
and interest of any loan in substantially equal payments over
the term of the loan. Generally, the term of the loan will be
5 years from the effective date of the loan. However, if
you have certified to us that your loan proceeds are to be used
to acquire a principal residence for yourself, you may request a
loan term of 30 years. In either case, however, you must
repay your loan prior to your Annuity Date. If you elect to
annuitize (or withdraw) your Net Contract Value while you have
an outstanding loan, we will deduct any Contract Debt from your
Contract Value at the time of the annuitization (or withdrawal)
to repay the Contract Debt.
You may prepay your entire loan at any time. If you do so, we
will bill you for any unpaid interest that has accrued through
the date of payoff. Your loan will be considered repaid only
when the interest due has been paid. Subject to any necessary
approval of state insurance authorities, while you have Contract
Debt outstanding, we will treat all payments you send us as
Investments unless you specifically indicate that your payment
is a loan repayment or include your loan payment notice with
your payment. To the extent allowed by law, any loan repayments
in excess of the amount then due will be applied to the
principal balance of your loan. Such repayments will not change
the due dates or the periodic repayment amount due for future
periods. If a loan repayment is in excess of the principal
balance of your loan, any excess repayment will be refunded to
you. Repayments we receive that are less than the amount then
due will be returned to you, unless otherwise required by law.
If we have not received your full payment by its due date, we
will declare the entire remaining loan balance in default. At
that time, we will send written notification of the amount
needed to bring the loan back to a current status. You will have
60 days from the date on which the loan was declared in
default (the “grace period”) to make the required
payment.
If the required payment is not received by the end of the grace
period, the defaulted loan balance plus accrued interest will be
withdrawn from your Contract Value, if amounts under your
Contract are eligible for distribution. In order for an
amount to be eligible for distribution from a TSA funded by
salary reductions you must meet one of five triggering events.
The triggering events are:
•
attainment of age
591/2,
•
severance from employment,
15
•
death,
•
disability, and
•
financial hardship (with respect to contributions only, not
income or earnings on these contributions).
If those amounts are not eligible for distribution, the
defaulted loan balance plus accrued interest will be considered
a Deemed Distribution and will be withdrawn when such Contract
Values become eligible. In either case, the Distribution or the
Deemed Distribution will be considered a currently taxable
event, and may be subject to federal tax withholding and may
be subject to a 10% federal tax penalty.
If there is a Deemed Distribution under your Contract and to the
extent allowed by law, any future withdrawals will first be
applied as repayment of the defaulted Contract Debt, including
accrued interest and charges for applicable taxes. Any amounts
withdrawn and applied as repayment of Contract Debt will first
be withdrawn from your Loan Account, and then from your
Investment Options on a proportionate basis relative to the
Account Value in each Investment Option. If you have an
outstanding loan that is in default, the defaulted Contract Debt
will be considered a withdrawal for the purpose of calculating
any Death Benefit Amount and/or Guaranteed Minimum Death Benefit.
The terms of any such loan are intended to qualify for the
exception in Code Section 72(p)(2) so that the distribution
of the loan proceeds will not constitute a distribution that is
taxable to you. To that end, these loan provisions will be
interpreted to ensure and maintain such tax qualification,
despite any other provisions to the contrary. Subject to any
regulatory approval, we reserve the right to amend your Contract
to reflect any clarifications that may be needed or are
appropriate to maintain such tax qualification or to conform any
terms of our loan arrangement with you to any applicable changes
in the tax qualification requirements. We will send you a copy
of any such amendment. If you refuse such an amendment, it may
result in adverse tax consequences to you.
Safekeeping
of Assets
We are responsible for the safekeeping of the assets of the
Separate Account. These assets are held separate and apart from
the assets of our General Account and our other separate
accounts.
The statements of assets and liabilities of Separate
Account A as of December 31, 2009, the related
statements of operations for the periods presented, the
statements of changes in net assets for each of the periods
presented and the financial highlights for each of the periods
presented are incorporated by reference in the Statement of
Additional Information from the Annual Report of Separate
Account A dated December 31, 2009. PL&A’s
financial statements as of December 31, 2009 and 2008 and
for each of the three years in the period ended
December 31, 2009 are attached. These financial statements
should be considered only as bearing on the ability of PL&A
to meet its obligations under the Contracts and not as bearing
on the investment performance of the assets held in the Separate
Account.
The financial statements of Separate Account A of Pacific
Life & Annuity Company as of December 31, 2009
and for each of the periods presented have been audited by
Deloitte & Touche LLP, 695 Town Center Drive, Costa Mesa,
CA92626, independent registered public accounting firm, as
stated in their report included in the Annual Report of Separate
Account A dated December 31, 2009, which is
incorporated by reference in this Registration Statement.
The financial statements of Pacific Life & Annuity
Company as of December 31, 2009 and 2008 and for each of
the three years in the period ended December 31, 2009 have
been audited by Deloitte & Touche LLP, 695 Town Center
Drive, Costa Mesa, CA92626, independent auditors, as stated in
their report appearing herein.
16
Form
No. 33015-10A
INDEPENDENT AUDITORS’ REPORT
Pacific Life & Annuity Company:
We have audited the accompanying statements of financial condition of Pacific Life & Annuity
Company (the Company) as of December 31, 2009 and 2008, and the related statements of
operations, stockholder’s equity and cash flows for each of the three years in the period
ended December 31, 2009. 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 auditing standards generally accepted in the United
States of America. 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 consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the
financial position of Pacific Life & Annuity Company as of December 31, 2009 and 2008, and the
results of its operations and its cash flows for each of the three years in the period ended
December 31, 2009 in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the financial statements, in 2009, the Company changed its method of
accounting and reporting for other than temporary impairments of debt and equity securities.
Other than temporary impairments, consisting of $2,214 in total,
net of $1,710 recognized in
other comprehensive income (loss) for the year ended December 31, 2009
(504
)
(8,581
)
(2,917
)
Other income
508
615
2,788
TOTAL REVENUES
579,671
246,960
257,105
BENEFITS AND EXPENSES
Policy benefits paid or provided
404,882
291,321
203,088
Interest credited to policyholder account balances
7,152
4,274
3,980
Commission expenses
50,935
21,003
15,350
Operating expenses
20,665
14,057
11,817
TOTAL BENEFITS AND EXPENSES
483,634
330,655
234,235
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME TAXES
Net income (loss) excluding discontinued operations
$
65,750
($51,751
)
$
17,492
Adjustments to reconcile net income (loss) excluding discontinued operations
to net cash provided by operating activities:
Undistributed (income) loss from other investments
6,136
4,177
(1,545
)
Net accretion on fixed maturity securities
(6,407
)
(6,559
)
(5,454
)
Depreciation and other amortization
332
4
194
Deferred income taxes
24,164
(20,796
)
4,605
Net realized investment (gain) loss
(97,807
)
100,411
6,548
Other than temporary impairments
504
8,581
2,917
Net change in deferred policy acquisition costs
1,410
(21,698
)
(26,648
)
Interest credited to policyholder account balances
7,152
4,274
3,980
Change in accrued investment income
(9,206
)
(2,291
)
(2,166
)
Change in future policy benefits
309,472
214,586
151,817
Other operating activities, net
16,977
(12,501
)
(767
)
NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
DISCONTINUED OPERATIONS
318,477
216,437
150,973
Net cash provided by (used in) operating activities of discontinued operations
59
227
(4,004
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
318,536
216,664
146,969
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity and equity securities available for sale:
Purchases
(671,852
)
(140,813
)
(212,697
)
Sales
27,193
4,435
80,581
Maturities and repayments
39,279
50,317
38,401
Repayments of mortgage loans
1,370
1,704
194
Fundings of mortgage loans
(70,525
)
(65,562
)
(51,431
)
Other investing activity, net
(5,442
)
12,540
7,475
NET CASH USED IN INVESTING ACTIVITIES
(679,977
)
(137,379
)
(137,477
)
(Continued)
See Notes to Financial Statements
PLA-5
Pacific Life & Annuity Company
STATEMENTS OF CASH FLOWS
Years Ended December 31,
(Continued)
2009
2008
2007
(In Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Policyholder account balances:
Deposits
$
423,891
$
148,011
$
138,800
Withdrawals
(125,335
)
(147,908
)
(132,532
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
298,556
103
6,268
Net change in cash and cash equivalents
(62,885
)
79,388
15,760
Cash and cash equivalents, beginning of year
142,796
63,408
47,648
CASH AND CASH EQUIVALENTS, END OF YEAR
$
79,911
$
142,796
$
63,408
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid (received), net
($2,779
)
($4,366
)
$
10,124
Interest paid
$
0
$
0
$
22
See Notes to Financial Statements
PLA-6
Pacific Life & Annuity Company
NOTES TO FINANCIAL STATEMENTS
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Pacific Life & Annuity Company (the Company) is a stock life insurance company domiciled in
the State of Arizona and a wholly owned subsidiary of Pacific Life Insurance Company (Pacific
Life), a stock life insurance company domiciled in the state of Nebraska. The Company offers
variable universal life (VUL) insurance, universal life (UL) insurance, term insurance,
structured settlement annuities, and variable annuities. The Company is licensed to sell
certain of its products in the state of New York.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP). The Company
prepares its regulatory financial statements based on accounting practices prescribed or
permitted by the Insurance Department of the State of Arizona (AZ DOI). These financial
statements materially differ from those filed with regulatory authorities (Note 2).
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities as
of the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In developing these estimates, management makes subjective and complex judgments that are
inherently uncertain and subject to material change as facts and circumstances develop.
Management has identified the following estimates as significant, as they involve a higher
degree of judgment and are subject to a significant degree of variability:
•
The fair value of investments in the absence of quoted market values
•
Investment impairments
•
The fair value of and accounting for derivatives
•
The capitalization and amortization of deferred policy acquisition costs (DAC)
•
The liability for future policyholder benefits
•
Accounting for income taxes and the valuation of deferred income tax assets and
liabilities and unrecognized tax benefits
•
Accounting for reinsurance transactions
•
Litigation and other contingencies
Certain reclassifications have been made to the 2008 and 2007 financial statements to conform
to the 2009 financial statement presentation.
The Company has evaluated events subsequent to December 31, 2009 and through March 26, 2010,
the date the financial statements were available to be issued. The Company has not evaluated
subsequent events after that date for presentation in these financial statements.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective September 30, 2009, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (Codification) as the single source of authoritative
U.S. GAAP. The Codification does not create new accounting and reporting guidance, rather it
reorganized then-existing U.S. GAAP pronouncements into approximately 90 Topics within a
consistent structure. All guidance in the Codification carries an equal level of authority.
After the effective date of the Codification, all nongrandfathered accounting literature not
included in the Codification is superseded and deemed nonauthoritative. Adoption of the
Codification also changed how the Company references U.S. GAAP in its financial statements.
In April 2009, the FASB issued additional guidance under the Codification’s Fair Value
Measurements and Disclosures Topic. This update relates to determining fair values when there
is no active market or where the price inputs being used represent distressed sales. The
Company early adopted this guidance on March 31, 2009. This update provides additional
guidance for estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased. Also included is guidance on
PLA-7
identifying circumstances that indicate a transaction is not orderly. The adoption of this
guidance resulted in an increase of $21.4 million to the estimated fair value and a resulting
decrease of $21.4 million to gross unrealized investment loss of residential mortgage-backed
securities (RMBS) as of March 31, 2009. As of December 31, 2009, the year to date effect of
this adoption was an increase of $7.0 million to the estimated fair value and a decrease of
$7.0 million to the gross unrealized investment loss of RMBS. See Note 8 for information on
the Company’s fair value measurements and expanded disclosures.
In April 2009, the FASB issued additional guidance under the Codification’s Investments – Debt
and Equity Securities Topic. For debt securities, this guidance replaces the management
assertion that it has the intent and ability to hold an impaired debt security until recovery
with the requirement that management assert if it either has the intent to sell the debt
security or if it is more likely than not the entity will be required to sell the debt
security before recovery of its amortized cost basis. If management intends to sell the debt
security or it is more likely than not the entity will be required to sell the debt security
before recovery of its amortized cost basis, an other than temporary impairment (OTTI) shall
be recognized in earnings equal to the entire difference between the debt security’s amortized
cost basis and its fair value at the reporting date. After the recognition of an OTTI, the
debt security is accounted for as if it had been purchased on the measurement date of the
OTTI, with an amortized cost basis equal to the previous amortized cost basis less the OTTI
recognized in earnings. The update also changes the presentation in the financial statements
of non credit related impairment amounts for instruments within its scope. When the entity
asserts it does not have the intent to sell the security and it is more likely than not it
will not have to sell the security before recovery of its amortized cost basis, only the
credit related impairment losses are to be recognized in earnings and non credit losses are to
be recognized in other comprehensive income (loss) (OCI). Additionally, this update provides
for enhanced presentation and disclosure of OTTIs of debt and equity securities in the
financial statements. The Company early adopted this guidance effective January 1, 2009,
resulting in an after tax decrease to OCI of $1.3 million and an after tax increase to
retained earnings of $1.3 million.
Effective January 1, 2007, the FASB issued additional guidance to the Codification’s Financial
Services – Insurance Topic. This guidance governs the accounting for DAC on internal
replacements on insurance and investment contracts. This guidance defines an internal
replacement as a modification in product benefits, features, rights, or coverages that occur
by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a
contract, or by the election of a feature or coverage within a contract. The adoption of this
guidance resulted in a reduction to DAC and the Company recorded a cumulative effect
adjustment of $350,000, after tax, which was recorded as a reduction to retained earnings
during the year ended December 31, 2007.
INVESTMENTS
Fixed maturity and equity securities available for sale are reported at estimated fair value,
with unrealized gains and losses, net of adjustments related to DAC, future policy benefits
and deferred income taxes, recorded as a component of OCI. For mortgage-backed securities and
asset-backed securities included in fixed maturity securities available for sale, the Company
recognizes income using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When estimates of prepayments change, the
effective yield is recalculated to reflect actual payments to date and anticipated future
payments. For fixed rate securities, the net investment in the securities is adjusted to the
amount that would have existed had the new effective yield been applied since the acquisition
of the securities. These adjustments are reflected in net investment income. Trading
securities are reported at estimated fair value with changes in estimated fair value included
in net realized investment gain (loss).
Investment income consists primarily of interest and dividends, net investment income from
partnership interests, prepayment fees on fixed maturity securities and mortgage loans, and
income from certain derivatives. Interest is recognized on an accrual basis and dividends are
recorded on the ex-dividend date. Amortization of premium and accretion of discount on fixed
maturity securities is recorded using the effective interest method.
The Company’s available for sale securities are regularly assessed for OTTIs. If a decline in
the estimated fair value of an available for sale security is deemed to be other than
temporary, the OTTI is recorded equal to the difference between the estimated fair value and
net carrying amount of the security. If the OTTI for a debt security is attributable to both
credit and other factors, then the OTTI is bifurcated and the non credit related portion is
recorded to OCI while the credit portion is recorded as a net realized investment loss. If
the OTTI is related to credit factors only, it is recorded as a net realized investment loss.
The evaluation of OTTIs is a quantitative and qualitative process subject to significant
estimates and management judgment. The Company has rigorous controls and procedures in place
to monitor securities and identify those that are subject to greater analysis for OTTIs. The
Company has an investment impairment committee comprised of investment and accounting
professionals that reviews and evaluates securities for potential OTTIs at least on a
quarterly basis.
PLA-8
In evaluating whether a decline in value is other than temporary, the Company considers many
factors including, but not limited to, the following: the extent and duration of the decline
in value; the reasons for the decline (credit event, currency, or interest-rate related,
including spread widening); the ability and intent to hold the investment for a period of time
to allow for a recovery of value; and the financial condition of and near-term prospects of
the issuer.
Analysis of the probability that all cash flows will be collected under the contractual terms
of a fixed maturity security and determination as to whether the Company does not intend to
sell the security and that it is more likely than not that the Company will not be required to
sell the security before recovery of the investment were key factors in determining whether a
fixed maturity security is other than temporarily impaired.
For mortgage-backed and asset-backed securities, scrutiny was placed on the performance of the
underlying collateral and projected future cash flows. In projecting future cash flows, the
Company incorporates inputs from third-party sources and applies reasonable judgment in
developing assumptions used to estimate the probability and timing of collecting all
contractual cash flows.
In evaluating investment grade perpetual preferred securities, which do not have final
contractual cash flows, the Company applied OTTI considerations used for debt securities,
placing emphasis on the probability that all cash flows will be collected under the
contractual terms of the security and the Company’s intent and ability to hold the security to
allow for a recovery of value. Perpetual preferred securities are reported as equity
securities as they are structured in equity form, but have significant debt-like
characteristics, including periodic dividends, call features, and credit ratings and pricing
similar to debt securities. The SEC Issues Letter Clarifying Other-Than-Temporary Impairment
Guidance for Perpetual Preferred Securities issued on October 15, 2008 states that if an
investor holds a perpetual preferred security with an estimated fair value below cost that is
not attributable to the credit deterioration of the issuer, then the investor would not be
required to recognize an OTTI by asserting that it has the intent and ability to continue
holding the security for a sufficient period to allow for an anticipated recovery in market
value.
Realized gains and losses on investment transactions are determined on a specific
identification basis and are included in net realized investment gain (loss).
Mortgage loans on real estate are carried at their unpaid principal balance, net of deferred
origination fees and write-downs. Mortgage loans are considered to be impaired when
management estimates that based upon current information and events, it is probable that the
Company will not be able to collect amounts due according to the contractual terms of the
mortgage loan agreement. For mortgage loans deemed to be impaired, a write-down is taken for
the difference between the carrying amount and the Company’s estimate of the present value of
the expected future cash flows discounted at the current market rate and recorded in net
realized investment gain (loss). The Company had no impaired loans or write-downs during the
years ended December 31, 2009, 2008 and 2007. Policy loans are stated at unpaid principal
balances.
Other investments primarily consist of partnership and joint venture interests, derivative
instruments and non-marketable equity securities. Partnership and joint venture interests
where the Company does not have a controlling interest or a majority ownership are recorded
under the cost or equity method of accounting depending on the equity ownership position.
All derivatives, whether designated in hedging relationships or not, are required to be
recorded at estimated fair value. If the derivative is designated as a cash flow hedge, the
effective portion of changes in the estimated fair value of the derivative is recorded in OCI
and recognized in earnings when the hedged item affects earnings. If the derivative is
designated as a fair value hedge, the changes in the estimated fair value of the derivative
and the hedged item are recognized in net realized investment gain (loss). The change in
value of the hedged item associated with the risk being hedged is reflected as an adjustment
to the carrying amount of the hedged item. For derivative instruments not designated as
hedges, the change in estimated fair value of the derivative is recorded in net realized
investment gain (loss). Estimated fair value exposure is calculated based on the aggregate
estimated fair value of all derivative instruments with each counterparty, net of collateral
received, in accordance with legally enforceable counterparty master netting agreements (Note
5).
The periodic cash flows for all hedging derivatives are recorded consistent with the hedged
item on an accrual basis. For derivatives that are hedging securities, these amounts are
included in net investment income. For derivatives that are hedging liabilities, these
amounts are included in interest credited to policyholder account balances. For derivatives
not designated as hedging instruments, the periodic cash flows are reflected in net realized
investment gain (loss) on an accrual basis. Upon termination of a cash flow hedging
relationship, the accumulated amount in OCI is amortized into net investment income or
interest credited to policyholder account balances over the remaining life of the hedged item.
Upon termination of a fair value hedging
PLA-9
relationship, the accumulated adjustment to the carrying value of the hedged item is amortized
into net investment income, interest expense or interest credited to policyholder account
balances over its remaining life.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all investments with an original maturity of three months or
less.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new insurance business, principally commissions, medical examinations,
underwriting, policy issue and other expenses, all of which vary with and are primarily
associated with the production of new business, are deferred and recorded as an asset commonly
referred to as DAC. DAC related to internally replaced contracts (as defined in the
Codification’s Financial Services – Insurance Topic) is immediately written off to expense and
any new deferrable expenses associated with the replacement are deferred if the contract
modification substantially changes the contract. However, if the contract modification does
not substantially change the contract, the existing DAC asset remains in place and any
acquisition costs associated with the modification are immediately expensed. As of December31, 2009 and 2008, the carrying value of DAC was $90.1 million and $95.2 million,
respectively.
For UL, variable annuities and other investment-type contracts, acquisition costs are
amortized through earnings in proportion to the present value of estimated gross profits
(EGPs) from projected investment, mortality and expense margins, and surrender charges over
the estimated lives of the contracts. Actual gross margins or profits may vary from
management’s estimates, which can increase or decrease the rate of DAC amortization. DAC
related to traditional policies is amortized through earnings over the premium-paying period
of the related policies in proportion to premium revenues recognized, using assumptions and
estimates consistent with those used in computing policy reserves. DAC related to certain
unrealized components in OCI, primarily unrealized gains and losses on securities available
for sale, is recorded directly to equity through OCI.
Significant assumptions in the development of EGPs include investment returns, surrender and
lapse rates, rider utilization, interest spreads, and mortality margins. The Company’s
long-term assumption for the underlying separate account investment return ranges up to 8.0%.
A change in the assumptions utilized to develop EGPs results in a change to amounts expensed
in the reporting period in which the change was made by adjusting the DAC balance to the level
DAC would have been had the EGPs been calculated using the new assumptions over the entire
amortization period. In general, favorable experience variances result in increased expected
future profitability and may lower the rate of DAC amortization, whereas unfavorable
experience variances result in decreased expected future profitability and may increase the
rate of DAC amortization. All critical assumptions utilized to develop EGPs are evaluated at
least annually and necessary revisions are made to certain assumptions to the extent that
actual or anticipated experience necessitates such a prospective change.
The Company defers sales inducements and amortizes them over the life of the policy using the
same methodology and assumptions used to amortize DAC. The Company offers a sales inducement
to the policyholder where the policyholder receives a bonus credit, typically ranging from
0.5% to 8.0% of each deposit. The capitalized sales inducement balance included in the DAC
asset was $9.0 million and $6.0 million as of December 31, 2009 and 2008, respectively.
Cumulative pre-tax effect of adoption of new
accounting principle
(538
)
Additions:
Capitalized during the year
38,408
30,222
32,179
Amortization:
Allocated to commission expenses
(32,627
)
(6,532
)
(4,674
)
Allocated to operating expenses
(7,191
)
(1,992
)
(857
)
Total amortization
(39,818
)
(8,524
)
(5,531
)
Allocated to OCI
(3,686
)
747
(411
)
Balance, December 31
$
90,068
$
95,164
$
72,719
FUTURE POLICY BENEFITS
Annuity reserves, which consist primarily of structured settlement annuities, are equal to the
present value of estimated future payments using pricing assumptions, as applicable, for
interest rates, mortality, morbidity, retirement age and expenses (Note 6). Interest rate
assumptions ranged from 0.94% to 7.73%.
The Company offers a rider on certain variable annuity contracts that guarantees net principal
over a ten-year holding period, as well as riders on certain variable annuity contracts that
guarantee a minimum withdrawal benefit over specified periods, subject to certain
restrictions. These variable annuity guaranteed living benefits (GLBs) are considered
embedded derivatives and are recorded in future policy benefits (Note 6).
Policy charges assessed against policyholders that represent compensation to the Company for
services to be provided in future periods, or unearned revenue reserves (URR), are recognized
in revenue over the expected life of the contract using the same methods and assumptions used
to amortize DAC. Unearned revenue related to certain unrealized components in OCI, primarily
unrealized gains and losses on securities available for sale, is recorded directly to equity
through OCI.
Life insurance reserves are valued using the net level premium method on the basis of
actuarial assumptions appropriate at policy issue. Mortality and persistency assumptions are
generally based on the Company’s experience, which, together with interest and expense
assumptions, include a margin for possible unfavorable deviations. Interest rate assumptions
ranged from 3.0% to 7.7%. Future dividends for participating business are provided for in the
liability for future policy benefits.
Estimates of future policy benefit reserves and liabilities are continually reviewed and, as
experience develops, are adjusted as necessary. Such changes in estimates are included in
earnings for the period in which such changes occur.
POLICYHOLDER ACCOUNT BALANCES
Policyholder account balances on UL and investment-type contracts, such as annuity and deposit
liabilities, are valued using the retrospective deposit method and are equal to accumulated
account values, which consist of deposits received, plus interest credited, less withdrawals
and assessments (Note 6). Interest credited to these contracts primarily ranged from 2.00% to
9.00%.
REINSURANCE
The Company has ceded reinsurance agreements with other insurance companies to limit potential
losses, reduce exposure arising from larger risks, provide additional capacity for future
growth, and assumed reinsurance agreements intended to offset reinsurance
PLA-11
costs. As part of a
strategic alliance, the Company also reinsures risks associated with policies written by an
independent producer group through modified coinsurance and yearly renewable term arrangements
with this producer group’s reinsurance company.
All assets associated with business reinsured on a modified coinsurance basis remain with, and
under the control of, the Company. As part of its risk management process, the Company
routinely evaluates its reinsurance programs and may change retention limits, reinsurers or
other features at any time.
Reinsurance accounting is utilized for ceded transactions when risk transfer provisions have
been met. To meet risk transfer requirements, a reinsurance contract must include insurance
risk, consisting of both underwriting and timing risk, and a reasonable possibility of a
significant loss to the reinsurer.
Reinsurance premiums ceded and reinsurance recoveries on benefits and claims incurred are
deducted from their respective revenue and benefit and expense accounts. Prepaid reinsurance
premiums, included in other assets, are premiums that are paid in advance for future coverage.
Reinsurance recoverables, included in other assets, include balances due from reinsurance
companies for paid and unpaid losses. Amounts receivable and payable are offset for account
settlement purposes for contracts where the right of offset exists.
Reinsurance receivables primarily include amounts associated with the reinsurance of a
terminated block of long-term disability. Reinsurance receivables were $0.7 million and $0.5
million as of December 31, 2009 and 2008, respectively. Reinsurance payables were $3.1
million and $5.2 million as of December 31, 2009 and 2008, respectively.
The ceding of risk does not discharge the Company from its primary obligations to
contract owners. To the extent that the assuming companies become unable to meet their
obligations under reinsurance contracts, the Company remains contingently liable. Each
reinsurer is reviewed to evaluate its financial stability before entering into each
reinsurance contract and throughout the period that the reinsurance contract is in place.
The components of insurance premiums presented in the statements of operations are as
follows:
Insurance premiums, annuity contracts with life contingencies and term insurance contracts,
are recognized as revenue when due. Benefits and expenses are matched against such revenues
to recognize profits over the lives of the contracts. This matching is accomplished by
providing for reserves and liabilities for future policy benefits, expenses of contract
administration and the amortization of DAC.
Receipts for UL and investment-type contracts are reported as deposits to either policyholder
account balances or separate account liabilities, and are not included in revenue. Policy
fees consist of mortality charges, surrender charges and expense charges that have been earned
and assessed against related account values during the period and also includes the
amortization of URR. The timing of policy fee revenue recognition is determined based on the
nature of the fees. Benefits and expenses include policy benefits and claims incurred in the
period that are in excess of related policyholder account balances, interest credited to
policyholder account balances, expenses of contract administration and the amortization of
DAC.
DEPRECIATION AND AMORTIZATION
Certain other assets are depreciated or amortized on the straight-line method over periods
ranging from three to 10 years. Depreciation and amortization of certain other assets are
included in operating expenses.
PLA-12
INCOME TAXES
The Company is taxed as a life insurance company for Federal income tax purposes and is
included in the consolidated Federal income tax return of its ultimate parent, Pacific Mutual
Holding Company (PMHC). The Company is allocated tax expense or benefit based principally on
the effect of including its operations in the consolidated return under a tax sharing
agreement. Amounts receivable under the tax sharing agreement as of December 31, 2009 and
2008 were $2.9 million and $11.5 million and are included in other assets. 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. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years the differences are
expected to be recovered or settled.
CONTINGENCIES
Each reporting cycle the Company evaluates all identified contingent matters on an individual
basis. A loss is recorded if probable and reasonably estimable. The Company establishes
reserves for these contingencies at the best estimate, or, if no one number within the range
of possible losses is more probable than any other, the Company records an estimated reserve
at the low end of the range of losses. See Note 14.
SEPARATE ACCOUNTS
Separate accounts primarily include variable annuity and life contracts, as well as other
guaranteed and non-guaranteed accounts. Separate account assets are recorded at estimated
fair value and represent legally segregated contract holder funds. A separate account
liability is recorded equal to the amount of separate account assets. Deposits to separate
accounts, investment income and realized and unrealized gains and losses on the separate
account assets accrue directly to contract holders and, accordingly, are not reflected in the
statements of operations or cash flows. Amounts charged to the separate account for
mortality, surrender and expense charges are included in revenues as policy fees.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments, disclosed in Notes 4, 5, and 8, has been
determined using available market information and appropriate valuation methodologies.
However, considerable judgment is often required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented may not be indicative of the
amounts the Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant effect on the estimated
fair value amounts.
2.
STATUTORY FINANCIAL INFORMATION AND DIVIDEND RESTRICTIONS
STATUTORY ACCOUNTING PRACTICES
The Company prepares its regulatory statutory financial statements in accordance with
statutory accounting practices prescribed or permitted by the AZ DOI, which is a comprehensive
basis of accounting other than U.S. GAAP. Statutory accounting practices primarily differ
from U.S. GAAP by charging policy acquisition costs to expense as incurred, establishing
future policy benefit liabilities using different actuarial assumptions, as well as valuing
investments and certain assets and accounting for deferred income taxes on a different basis.
The Company does not have any permitted statutory accounting practices.
STATUTORY NET INCOME (LOSS) AND SURPLUS
Statutory net income (loss) of the Company was $117.5 million, ($115.6) million and $1.9
million for the years ended December 31, 2009, 2008 and 2007, respectively. Statutory capital
and surplus of the Company was $371.0 million and $287.8 million as of December 31, 2009 and
2008, respectively.
RISK-BASED CAPITAL
Risk-based capital is a method developed by the National Association of Insurance
Commissioners to measure the minimum amount of capital appropriate for an insurance company to
support its overall business operations in consideration of its size and
PLA-13
risk profile. 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. Additionally, certain risks are required to be measured
using actuarial cash flow modeling techniques, subject to formulaic minimums. The adequacy of
a company’s actual capital is measured by a comparison to the risk-based capital results.
Companies below minimum risk-based capital requirements are classified within certain levels,
each of which requires specified corrective action. As of December 31, 2009 and 2008, the
Company exceeded the minimum risk-based capital requirements.
DIVIDEND RESTRICTIONS
The maximum amount of ordinary dividends that can be paid by the Company to Pacific Life
without restriction cannot exceed the lesser of 10% of statutory surplus as regards to
policyholders, or the statutory net gain from operations. Based on this limitation and 2009
statutory results, the Company could pay $22.9 million in dividends to Pacific Life in 2010
without prior regulatory approval. No dividends were paid during 2009, 2008 and 2007.
OTHER
The Company has reinsurance contracts in place with a reinsurer whose financial stability has
been deteriorating. In January 2009, the reinsurer’s domiciliary state regulator issued an
order of supervision, which requires the regulator’s consent to any transaction outside the
normal course of business. The Company will continue to monitor the events surrounding this
reinsurer and evaluate its options to deal with any further deterioration of this reinsurer’s
financial condition. As of December 31, 2009, statutory reserves ceded to this reinsurer were
insignificant.
3.
DISCONTINUED OPERATIONS
On April 27, 2005 (Closing Date), the Company and Pacific Life sold their group insurance
business to an unrelated third-party. The transaction is structured as a coinsurance
arrangement whereby the Company and Pacific Life cedes to the buyer future premiums received
for their existing group insurance business and the buyer assumes future claim liabilities
following the Closing Date. Group insurance business liabilities arising prior to the Closing
Date were not reinsured. The buyer also obtained renewal rights for the existing business as
of the Closing Date.
Operating results of discontinued operations were as follows:
Group insurance business liabilities consisted of other liabilities of $0.9 million and $1.4
million as of December 31, 2009 and 2008, respectively.
PLA-14
4.
INVESTMENTS
The net carrying amount, gross unrealized gains and losses, and estimated fair value of fixed
maturity and equity securities available for sale are shown below. The net carrying amount
represents amortized cost adjusted for credit related OTTIs. See Note 8 for information on
the Company’s fair value measurement and disclosure.
U.S. Treasury securities and obligations of
U.S. government authorities and agencies
$
6,113
$
82
$
6,195
Obligations of states and political subdivisions
32,005
286
$
2,229
30,062
Corporate securities
768,794
29,877
63,506
735,165
RMBS
217,623
4,784
55,193
167,214
Commercial mortgage-backed securities
36,429
510
1,987
34,952
Other asset-backed securities
9,995
1,314
8,681
Total fixed maturity securities
$
1,070,959
$
35,539
$
124,229
$
982,269
Perpetual preferred securities
$
11,319
$
16
$
5,057
$
6,278
Other equity securities
3
6
3
6
Total equity securities
$
11,322
$
22
$
5,060
$
6,284
PLA-15
The net carrying amount and estimated fair value of fixed maturity securities available
for sale as of December 31, 2009, by contractual repayment date of principal, are shown below.
Expected maturities may differ from contractual maturities as borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Net
Carrying
Gross Unrealized
Estimated
Amount
Gains
Losses
Fair Value
(In Thousands)
Due in one year or less
$
110,041
$
1,404
$
3,973
$
107,472
Due after one year through five years
181,871
5,963
8,065
179,769
Due after five years through ten years
281,184
20,590
5,357
296,417
Due after ten years
805,117
70,540
14,118
861,539
1,378,213
98,497
31,513
1,445,197
Mortgage-backed and asset-backed securities
312,496
7,023
37,828
281,691
Total
$
1,690,709
$
105,520
$
69,341
$
1,726,888
PLA-16
The following tables present the number of investments, estimated fair value and gross
unrealized losses on investments where the estimated fair value has declined and remained
continuously below the net carrying amount for less than twelve months and for twelve months
or greater. Included in the tables are gross unrealized losses for fixed maturity securities
available for sale and other securities, which include equity securities available for sale,
cost method investments, and non-marketable securities.
The Company has evaluated fixed maturity and other securities with gross unrealized losses and
determined that the unrealized losses are temporary and that the Company does not intend to
sell the securities and it is more likely than not that the Company will not be required to
sell the securities before recovery of their net carrying amounts.
Prime mortgages are loans made to borrowers with strong credit histories, whereas sub-prime
mortgage lending is the origination of residential mortgage loans to customers with weak
credit profiles. Alt-A mortgage lending is the origination of residential mortgage loans to
customers who have good credit ratings, but have limited documentation for their source of
income or some other standard input used to underwrite the mortgage loan. The slowing U.S.
housing market, greater use of affordability mortgage products and
relaxed underwriting standards by some originators for these loans have led to higher
delinquency and loss rates, especially within the 2007 and 2006 vintage years.
PLA-18
The table below illustrates the breakdown of non-agency RMBS and commercial mortgage-backed
securities (CMBS) by investment rating from independent rating agencies and vintage year of
the underlying collateral as of December 31, 2009.
Net
Rating as % of
Vintage Breakdown
Carrying
Estimated
Net Carrying
2004 and
Rating
Amount
Fair Value
Amount
Prior
2005
2006
2007
2008
2009
($ In Thousands)
Prime RMBS:
AAA
$
46,256
$
41,528
29
%
24
%
5
%
A
8,741
7,093
5
%
4
%
1
%
BAA
64,365
48,546
41
%
20
%
21
%
BA and below
39,512
27,313
25
%
12
%
6
%
7
%
Total
$
158,874
$
124,480
100
%
24
%
37
%
31
%
8
%
0
%
0
%
Alt-A RMBS:
AAA
$
10,373
$
9,946
67
%
34
%
33
%
BA and below
5,022
3,365
33
%
17
%
16
%
Total
$
15,395
$
13,311
100
%
34
%
33
%
17
%
16
%
0
%
0
%
Sub-prime RMBS:
AAA
$
4,025
$
3,555
100
%
100
%
Total
$
4,025
$
3,555
100
%
100
%
0
%
0
%
0
%
0
%
0
%
CMBS:
AAA
$
44,559
$
46,340
90
%
70
%
20
%
AA
5,000
4,952
10
%
10
%
Total
$
49,559
$
51,292
100
%
70
%
0
%
0
%
0
%
0
%
30
%
PL&A is a member of Federal Home Loan Bank of San Francisco (FHLB). As of December 31,2009, no assets are pledged as collateral. As of December 31, 2009, the Company holds $3.0
million of FHLB stock.
Major categories of investment income (loss) and related investment expense are summarized as
follows:
In accordance with additional guidance under the Codification’s Investments – Debt and
Equity Securities Topic effective January 1, 2009, the Company began recording the credit loss
portion of OTTI adjustments in earnings and the portion related to other factors in OCI. The
table below details the amount of OTTIs attributable to credit losses recorded in earnings for
which a portion was recognized in OCI (In Thousands).
The table below presents separately the gross unrealized losses on investments for which OTTI
has been recorded in earnings in current or prior periods and the gross unrealized losses on
temporarily impaired investments for which no OTTI has been recorded.
As of December 31, 2009 and 2008, fixed maturity securities of $6.3 million and $6.2 million,
respectively, were on deposit with state insurance departments to satisfy regulatory
requirements.
Mortgage loans totaled $226.2 million and $156.2 million as of December 31, 2009 and 2008,
respectively. Mortgage loans are collateralized by real estate properties primarily located
throughout the U.S. As of December 31, 2009, approximately 29%, 15%,
PLA-21
12% and 11% of the
collateral properties were located in California, Washington, Texas and Illinois,
respectively. As of December 31, 2009, 4% of the collateral properties were located in
Canada. There were no defaults during the years ended December 31, 2009, 2008 and 2007. The
Company did not have mortgage loans with accrued interest more than 180 days past due as of
December 31, 2009 and 2008.
5.
DERIVATIVES AND HEDGING ACTIVITIES
The Company primarily utilizes derivative instruments to manage its exposure to interest rate
risk, foreign currency risk, credit risk, and equity risk. Derivative instruments are also
used to manage the duration mismatch of assets and liabilities. The Company utilizes a
variety of derivative instruments including swaps, foreign exchange forward contracts, caps,
floors and options. In addition, certain insurance products offered by the Company contain
features that are accounted for as derivatives.
Accounting for derivatives and hedging activities requires companies to recognize all
derivative instruments as either assets or liabilities at fair value in the statements of
financial condition. In accordance with accounting for derivatives and hedging activities,
the Company applies hedge accounting by designating derivative instruments as either fair
value or cash flow hedges on the date the Company enters into a derivative contract. The
Company formally documents at inception all relationships between hedging instruments and
hedged items, as well as its risk management objectives and strategy for undertaking various
hedge transactions. In this documentation, the Company specifically identifies the asset,
liability, firm commitment, or forecasted transaction that has been designated as a hedged
item and states how the hedging instrument is expected to hedge the risks related to the
hedged item. The Company formally assesses and measures effectiveness of its hedging
relationships both at the hedge inception and on an ongoing basis in accordance with its risk
management policy.
DERIVATIVES DESIGNATED AS CASH FLOW HEDGES
The Company primarily uses foreign currency interest rate swaps, forward starting interest
rate swaps and interest rate swaps to manage its exposure to variability in cash flows due to
changes in foreign currencies and the benchmark interest rate. These cash flows include those
associated with existing assets and liabilities, as well as the forecasted interest cash flows
related to anticipated investment purchases and liability issuances. Such anticipated
investment purchases and liability issuances are considered probable to occur and are
generally completed within 22 years of the inception of the hedge.
Foreign currency interest rate swap agreements are used to convert a fixed or floating rate,
foreign-denominated asset or liability to a U.S. dollar fixed rate asset or liability. The
foreign currency interest rate swaps involve the exchange of an initial principal amount in
two currencies, and the agreement to re-exchange the currencies at a future date at an agreed
exchange rate. There are also periodic exchanges of interest payments in the two currencies
at specified intervals, calculated using agreed upon rates and the exchanged principal
amounts. The main currencies that the Company hedges are the Euro, British Pound, and
Canadian Dollar.
Forward starting interest rate swaps are used to hedge the variability in the future interest
receipts or payments stemming from the anticipated purchase of fixed rate securities or
issuance of fixed rate liabilities due to changes in benchmark interest rates. These
derivatives are predominantly used to lock in interest rate levels to match future cash flow
characteristics of assets and liabilities. Forward starting interest rate swaps involve the
exchange, at specified intervals, of interest payments resulting from the difference between
fixed and floating rate interest amounts calculated by reference to an underlying notional
amount to begin at a specified date in the future for a specified period of time. Generally,
no cash is exchanged at the outset of the contract and no principal payments are made by
either party. The notional amounts of the contracts do not represent future cash
requirements, as the Company intends to close out open positions prior to their effective
dates.
Interest rate swap agreements are used to convert a floating rate asset or liability to a
fixed rate to hedge the variability of cash flows of the hedged asset or liability due to
changes in benchmark interest rates. These derivatives are predominantly used to better match
the cash flow characteristics of certain assets and liabilities. These agreements involve the
exchange, at specified intervals, of interest payments resulting from the difference between
fixed rate and floating rate interest amounts calculated by
reference to an underlying notional amount. Generally, no cash is exchanged at the outset of
the contract and no principal payments are made by either party.
When a derivative is designated as a cash flow hedge, the effective portion of changes in the
estimated fair value of the derivative is recorded in OCI and recognized in earnings when the
hedged item affects earnings, and the ineffective portion of changes in the estimated fair
value of the derivative is recorded in net realized investment gain (loss). For the years
ended December 31, 2009,
PLA-22
2008 and 2007, the Company had net gain of zero, $0.5 million and
zero, respectively, reclassified from accumulated other comprehensive income (loss) (AOCI) to
earnings resulting from the discontinuance of cash flow hedges due to forecasted transactions
that were no longer probable of occurring. Over the next twelve months, the Company
anticipates that $0.2 million of deferred losses on derivative instruments in AOCI will be
reclassified to earnings. For the years ended December 31, 2009, 2008 and 2007, all of the
Company’s hedged forecasted transactions were determined to be probable of occurring.
The Company had the following outstanding derivatives designated as cash flow hedges:
Notional amount represents a standard of measurement of the volume of derivatives. Notional
amount is not a quantification of market risk or credit risk and is not recorded in the
statements of financial condition. Notional amounts generally represent those amounts used to
calculate contractual cash flows to be exchanged and are not paid or received, except for
certain contracts such as currency swaps.
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS
The Company has certain insurance contracts that are considered to have embedded derivatives.
When it is determined that the embedded derivative possesses economic and risk characteristics
that are not clearly and closely related to those of the host contract and that a separate
instrument with the same terms would qualify as a derivative instrument, it is separated from
the host contract and accounted for as a stand-alone derivative. The changes in the estimated
fair value of the derivatives not designated as hedging instruments are recognized in net
realized investment gain (loss).
The Company offers a rider on certain variable annuity contracts that guarantees net principal
over a ten-year holding period, as well as riders on certain variable annuity contracts that
guarantee a minimum withdrawal benefit over specified periods, subject to certain
restrictions. These variable annuity GLBs are considered embedded derivatives and are
recorded in future policy benefits.
The Company had the following outstanding derivatives not designated as hedging instruments:
Derivative instruments are recorded in the Company’s statements of financial condition at fair
value and are presented as assets or liabilities determined by calculating the net position
for each derivative counterparty by legal entity, taking into account income accruals and net
cash collateral.
PLA-23
The following table summarizes the gross asset or liability derivative fair value and excludes
the impact of offsetting asset and liability positions held with the same counterparty, cash
collateral payables and receivables and income accruals. See Note 8.
Total derivatives designated as hedging instruments
3,383
35,220
361
Derivatives not designated as hedging instruments:
Other
181
(1)
$
296
(4)
Embedded derivatives:
Variable annuity GLB embedded derivatives
24,441
111,609
(2)
Other
260
20
(3)
Total derivatives not designated as hedging
instruments
181
24,701
111,925
Total derivatives
$
3,564
$
35,220
$
25,062
$
111,925
Location on the statements of financial condition:
(1)
Other investments
(2)
Future policy benefits
(3)
Policyholder account balances
(4)
Other liabilities
Net cash collateral received from counterparties was $1.4 million and $7.0 million as of
December 31, 2009 and 2008, respectively. This unrestricted cash collateral is included in
cash and cash equivalents and the obligation to return it is netted against the estimated fair
value of derivatives in other investments or other liabilities. Net cash collateral pledged
to counterparties was zero as of December 31, 2009 and 2008. If the net estimated fair value
exposure to the counterparty is positive, the amount is reflected in other investments,
whereas, if the net estimated fair value exposure to the counterparty is negative, the
estimated fair value is included in future policy benefits or other liabilities, depending on
the nature of the derivative.
PLA-24
The following table summarizes amounts recorded in the financial statements for derivatives
designated as cash flow hedges. Gains and losses include the changes in estimated fair value
of the derivatives and amounts realized on terminations. The amounts presented do not include
the periodic net coupon settlements of the derivatives.
The following table summarizes amounts recorded in net realized investment gain (loss) for
derivatives not designated as hedging instruments. Gains and losses include the changes in
estimated fair value of the derivatives and amounts realized on terminations. As of December31, 2009, the Company has no net derivatives positions that have an aggregate market value
that is negative and has not posted any collateral.
Derivatives not designated as hedging instruments:
Foreign currency interest rate swaps
($38
)
Interest rate swaps
($245
)
Other
($235
)
(777
)
Embedded derivatives:
Variable annuity GLB embedded derivatives
87,168
(105,035
)
(8,111
)
Other
(110
)
108
Total
$
86,823
($105,949
)
($8,149
)
CREDIT EXPOSURE AND CREDIT RISK RELATED CONTINGENT FEATURES
Credit exposure is measured on a counterparty basis as the net positive aggregate estimated
fair value, net of collateral received, if any. The credit exposure for over the counter
derivatives as of December 31, 2009 was $1.9 million. The maximum exposure to any single
counterparty was $1.0 million at December 31, 2009.
For all derivative contracts other than GLBs, the Company enters into master agreements that
may include a termination event clause associated with the Company’s insurer financial
strength ratings. If the Company’s insurer financial strength rating falls
PLA-25
below a specified
level, as defined within each counterparty master agreement or, in most cases, if one of the
rating agencies ceases to provide an insurer financial strength rating, the counterparty can
terminate the master agreement with payment due based on the estimated fair value of the
underlying derivatives. As of December 31, 2009, the Company’s insurer financial strength
ratings were above the specified level.
If the Company’s insurer financial strength rating were to fall below the next investment
grade from its current standing, the counterparties to the derivative instruments could
request immediate and ongoing full overnight collateralization on derivative instruments in
net liability positions.
As of December 31, 2009, the Company has no net derivative positions that have an aggregate
market value that is negative and has not posted any collateral. The Company attempts to
limit its credit exposure by dealing with creditworthy counterparties, establishing risk
control limits, executing legally enforceable master netting agreements, and obtaining
collateral where appropriate. In addition, each counterparty is reviewed to evaluate its
financial stability before entering into each agreement and throughout the period that the
financial instrument is owned. All of the Company’s credit exposure from derivative contracts
is with investment grade counterparties. The Company has not incurred any losses on
derivative financial instruments due to counterparty nonperformance.
6.
POLICYHOLDER LIABILITIES
FUTURE POLICY BENEFITS
The detail of the liability for future policy benefits is as follows:
SEPARATE ACCOUNTS AND VARIABLE ANNUITY GUARANTEED BENEFIT FEATURES
The Company issues variable annuity contracts through separate accounts for which investment
income and investment gains and losses accrue directly to, and investment risk is borne by,
the contract holder (traditional variable annuities). These contracts also include various
types of guaranteed minimum death benefit (GMDB) and GLB features. For a discussion of
certain GLBs accounted for as embedded derivatives, see Note 5.
The GMDBs provide a specified minimum return upon death. Many of these death benefits are
spousal, whereby a death benefit will be paid upon death of the first spouse. The survivor
has the option to terminate the contract or continue it and have the death benefit paid into
the contract and a second death benefit paid upon the survivor’s death. The GMDB features
include those where the Company contractually guarantees to the contract holder either (a)
return of no less than total deposits made to the contract less any partial withdrawals
(return of net deposits), (b) the highest contract value on any contract anniversary date
through age 80 minus any payments or withdrawals following the contract anniversary
(anniversary contract value), or (c) the highest of contract value on certain specified dates
or total deposits made to the contract less any partial withdrawals plus a minimum return
(minimum return).
The guaranteed minimum income benefit (GMIB) is a GLB that provides the contract holder with a
guaranteed annuitization value after 10 years. Annuitization value is generally based on
deposits adjusted for withdrawals plus a minimum return. In general, the GMIB requires
contract holders to invest in an approved asset allocation strategy.
Information in the event of death on the various GMDB features outstanding was as follows (the
Company’s variable annuity contracts with guarantees may offer more than one type of guarantee
in each contract; therefore, the amounts listed are not mutually exclusive):
The determination of GMDB and GMIB liabilities is based on models that involve a range of
scenarios and assumptions, including those regarding expected market rates of return and
volatility, contract surrender rates and mortality experience. The following table summarizes
the GMDB and GMIB liabilities, which are recorded in future policy benefits, and changes in
these liabilities, which are reflected in policy benefits paid or provided:
The Codification’s Fair Value Measurements and Disclosures Topic establishes a hierarchy that
prioritizes the inputs of valuation methods used to measure fair value for financial assets
and financial liabilities that are carried at fair value. The hierarchy consists of the
following three levels that are prioritized based on observable and unobservable inputs.
Level 1
Unadjusted quoted prices for identical instruments in active markets. Level 1
financial instruments would include securities that are traded in an active exchange
market.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar
instruments in active markets; quoted prices for identical or similar instruments on
inactive markets; and model-derived valuations for which all significant inputs are
observable market data. Level 2 instruments include most corporate debt securities and
U.S. government and agency mortgage-backed securities that are valued by models using
inputs that are derived principally from or corroborated by observable market data.
Level 3
Valuations derived from valuation techniques in which one or more significant
inputs are unobservable. Level 3 instruments include less liquid securities for which
significant inputs are not observable in the market, such as highly structured securities
and variable annuity GLB embedded derivatives that require significant management
assumptions or estimation in the fair value measurement.
This hierarchy requires the use of observable market data when available.
PLA-28
The following tables present, by fair value hierarchy level, the Company’s financial assets
and liabilities that are carried at fair value as of December 31, 2009 and 2008.
U.S. Treasury securities and obligations of
U.S. government authorities and agencies
$
6,195
$
6,195
Obligations of states and political subdivisions
30,062
30,062
Corporate securities
553,430
$
181,735
735,165
RMBS
56,734
110,480
167,214
CMBS
34,952
34,952
Other asset-backed securities
8,681
8,681
Total fixed maturity securities
690,054
292,215
982,269
Perpetual preferred securities
6,006
272
6,278
Other equity securities
6
6
Total equity securities
6,006
278
6,284
Cash equivalents
$
142,100
142,100
Other investments
2,958
2,958
Derivatives
35,220
35,220
Separate account assets (3)
996,829
10,602
1,007,431
Total
$
1,138,929
$
731,280
$
306,053
$
2,176,262
Liabilities:
Derivatives
$
296
$
111,629
$
111,925
Total
$
296
$
111,629
$
111,925
(1)
Netting adjustments represent the impact of offsetting asset and liability
positions held with the same counterparty, as permitted by guidance for offsetting in the
Codification’s Derivatives and Hedging Topic.
(2)
Trading securities are presented in other investments in the statements of
financial condition.
(3)
Separate account assets are measured at fair value. Investment performance
related to separate account assets is offset by corresponding amounts credited to
contract holders whose liability is reflected in the separate account liabilities.
Separate account liabilities are measured to equal the fair value of separate account
assets as prescribed by guidance in the Codification’s Financial Services – Insurance
Topic for accounting and reporting of certain non traditional long-duration contracts and
separate accounts. Separate account assets as presented in the table above differ from
the amounts presented in the statements of financial condition because cash and
receivables for securities are not subject to the guidance under the Codification’s Fair
Value Measurements and Disclosures Topic.
PLA-30
FAIR VALUE MEASUREMENT
The Codification’s Fair Value Measurements and Disclosures Topic defines fair value as the
price that would be received to sell the asset or paid to transfer the liability at the
measurement date. This “exit price” notion is a market-based measurement that requires a
focus on the value that market participants would assign for an asset or liability.
The following section describes the valuation methodologies used by the Company to measure
various types of financial instruments at fair value.
FIXED MATURITY, EQUITY AND TRADING SECURITIES
The fair values of fixed maturity securities available for sale, equity securities available
for sale and trading securities are determined by management after considering external
pricing sources and internal valuation techniques.
For publicly traded securities with sufficient trading volume, prices are obtained from
third-party pricing services. For structured or complex securities that are traded
infrequently, prices are obtained from independent brokers or are valued internally using
various valuation techniques. Such techniques include matrix model pricing and internally
developed models, which incorporate observable market data, where available. Matrix model
pricing measures fair value using cash flows, which are discounted using observable market
yield curves provided by a major independent data service. The matrix model determines the
discount yield based upon significant factors that include the security’s weighted average
life and rating.
Where matrix model pricing is not used, particularly for RMBS and other asset-backed
securities, other internally derived valuation models are utilized. The inputs used to
measure fair value in the internal valuations include, but are not limited to, benchmark
yields, issuer spreads, bids, offers, reported trades, and estimated projected cash flows that
incorporate significant inputs such as defaults and delinquency rates, severity,
subordination, vintage and prepayment speeds.
For non-agency RMBS backed by prime, sub-prime and Alt-A collateral, the Company has
determined that there has been a significant decrease in the volume and level of transaction
activity indicating the need for a valuation technique not solely based on observable
transactions and/or quoted market prices. As permitted by guidance in the Codification’s Fair
Value Measurements and Disclosures Topic beginning March 31, 2009, the Company determines the
estimated fair value for these assets utilizing an internally developed weighting of
valuations derived from internal pricing models and independent pricing services. This
approach utilizes multiple valuation techniques incorporating an income approach (maximizing
the use of relevant observable inputs and minimizing the use of unobservable inputs) and a
market approach (based on data provided by independent pricing services) producing a result
more representative of an investment’s fair value as compared to a single valuation
technique. The income approach incorporates cash flows for each investment adjusted for
expected losses assuming various interest rate and housing price-level scenarios. The
adjusted cash flows are discounted using a risk premium that market participants would demand
given the risk in the modeled cash flows. The risk premium utilized is reflective of an
orderly transaction between market participants under current market conditions and includes
considerations such as liquidity and structure risk. These internally generated prices are
then reviewed in conjunction with prices obtained from multiple independent pricing services.
The internally generated prices are weighted with the prices obtained from independent pricing
services, with consideration given to the relative range of values that are most
representative of fair value under current conditions. These securities have been classified
as Level 3 financial assets.
Prices obtained from independent third-parties are generally evaluated based on the inputs
indicated above. The Company’s management analyzes and evaluates these prices and determines
whether they are reasonable estimates of fair value. Management’s analysis may include, but
is not limited to, review of third-party pricing methodologies and inputs, analysis of recent
trades, and development of internal models utilizing observable market data of comparable
securities. Based on this analysis, prices received from third-parties may be adjusted if the
Company determines that there is a more appropriate fair value based on available market
information.
Most securities priced by a major independent third-party service have been classified as
Level 2, as management has verified that the inputs used in determining their fair values are
market observable and appropriate. Other externally priced securities for which fair value
measurement inputs are not sufficiently transparent, such as securities valued based on broker
quotations, have been classified as Level 3. Internally valued securities, including adjusted
prices received from independent third-parties, where significant management assumptions have
been utilized in determining fair value, have been classified as Level 3.
PLA-31
CASH EQUIVALENTS
Cash equivalents include, but are not limited to, corporate discount notes and money market
mutual funds. The fair value of cash equivalents is measured at amortized cost due to the
short-term, highly liquid nature of these securities, which have original maturities of three
months or less. These investments are classified as Level 1.
OTHER INVESTMENTS
Other investments include non-marketable equity securities that do not have readily
determinable fair values. Certain significant inputs used in determining the fair value of
these equities are based on management assumptions or contractual terms with another party
that cannot be readily observable in the market. These investments are classified as Level 3
assets.
DERIVATIVE INSTRUMENTS
Derivative instruments are reported at fair value using pricing valuation models, which
utilize market data inputs or independent broker quotations. Excluding embedded derivatives,
as of December 31, 2009, 99% of derivatives based upon notional values were priced by
valuation models, which utilize independent market data. The remaining derivatives were
priced by broker quotations. The derivatives are valued using mid-market inputs that are
predominantly observable in the market. Inputs used to value derivatives include, but are not
limited to, interest swap rates, foreign currency forward and spot rates, and credit spreads
and correlations. In accordance with the Codification’s Fair Value Measurements and
Disclosures Topic, a credit valuation analysis was performed for all derivative positions to
measure the risk that one of the counterparties to the transaction will be unable to perform
under the contractual terms (nonperformance risk), and was determined to be immaterial as of
December 31, 2009.
The Company performs a monthly analysis on derivative valuations, which includes both
quantitative and qualitative analysis. Examples of procedures performed include, but are not
limited to, review of pricing statistics and trends, analyzing the impacts of changes in the
market environment, and review of changes in market value for each derivative including those
derivatives priced by brokers.
Derivative instruments classified as Level 2 primarily include interest rate, currency and
certain credit default swaps. The derivative valuations are determined using pricing models
with inputs that are observable in the market or can be derived principally from or
corroborated by observable market data.
Derivative instruments classified as Level 3 include embedded derivatives in certain insurance
contracts. These derivatives are valued using pricing models, which utilize both observable
and unobservable inputs and, to a lesser extent, broker quotations. A derivative instrument
containing Level 1 or Level 2 inputs will be classified as a Level 3 financial instrument in
its entirety if it has at least one significant Level 3 input.
The Company utilizes derivative instruments to manage the risk associated with certain assets
and liabilities. However, the derivative instrument may not be classified within the same
fair value hierarchy level as the associated assets and liabilities. Therefore, the realized
and unrealized gains and losses on derivatives reported in Level 3 may not reflect the
offsetting impact of the realized and unrealized gains and losses of the associated assets and
liabilities.
VARIABLE ANNUITY GLB EMBEDDED DERIVATIVES
Fair values for variable annuity GLB and related reinsurance embedded derivatives are
calculated based upon significant unobservable inputs using internally developed models
because active, observable markets do not exist for those items. As a result, variable
annuity GLB embedded derivatives are categorized as Level 3. Below is a description of the
Company’s fair value methodologies for these embedded derivatives.
The Company’s fair value is calculated as an aggregation of fair value and additional risk
margins including Behavior Risk Margin, Mortality Risk Margin and Credit Standing Adjustment.
The resulting aggregation is reconciled or calibrated, if necessary, to market information
that is, or may be, available to the Company, but may not be observable by other market
participants, including reinsurance discussions and transactions. Each of the components
described below are unobservable in the market place and requires subjectivity by the Company
in determining their value.
PLA-32
•
Behavior Risk Margin: This component adds a margin that market
participants would require for the risk that the Company’s assumptions about
policyholder behavior used in the fair value model could differ from actual
experience.
•
Mortality Risk Margin: This component adds a margin in mortality
assumptions, both for decrements for policyholders with GLBs, and for expected payout
lifetimes in guaranteed minimum withdrawal benefits.
•
Credit Standing Adjustment: This component makes an adjustment that market
participants would make to reflect the chance that GLB obligations will not be
fulfilled (nonperformance risk).
SEPARATE ACCOUNT ASSETS
Separate account assets are primarily invested in mutual funds. Separate account assets are
valued in the same manner, and using the same pricing sources and inputs, as the equity
securities available for sale of the Company. Mutual funds are included in Level 1. Level 3
assets include any investments where fair value is based on management assumptions or obtained
from independent third-parties and fair value measurement inputs are not sufficiently
transparent.
LEVEL 3 RECONCILIATION
The tables below present reconciliations of the beginning and ending balances of the Level 3
financial assets and liabilities that have been measured at fair value on a recurring basis
using significant unobservable inputs.
Purchases,
Total Gains or Losses
Transfers
Sales,
In and/or
Issuances,
Unrealized
January 1,
Included in
Included in
Out of
and
December 31,
Gains
2009
Earnings
OCI
Level 3
Settlements
2009
Still Held (1)
(In Thousands)
Assets:
Obligations of states and
political subdivisions
($472
)
($4,528
)
$
5,000
Foreign governments
$
3
722
4,350
$
5,075
Corporate securities
$
181,735
3,264
7,086
(75,046
)
32,027
149,066
RMBS
110,480
514
18,291
14,006
(1,945
)
141,346
CMBS
(160
)
14,982
14,822
Total fixed maturity securities
292,215
3,781
25,467
(61,218
)
50,064
310,309
Perpetual preferred securities
272
(158
)
(31
)
3,040
3,123
Other securities
6
454
501
(1,550
)
589
Total other securities
278
296
470
1,490
589
3,123
Other investments
2,958
93
3,051
Derivatives, net
(111,629
)
86,989
120
(24,520
)
$
86,989
Separate account assets (2)
10,602
1,884
1,925
14,411
2,458
Total
$
194,424
$
92,950
$
26,030
($59,728
)
$
52,698
$
306,374
$
89,447
PLA-33
Purchases,
Transfers
Sales,
Total Gains or Losses
In and/or
Issuances,
Unrealized
January 1,
Included in
Included in
Out of
and
December 31,
Losses
2008
Earnings
OCI
Level 3
Settlements
2008
Still Held (1)
(In Thousands)
Assets:
Corporate securities
$
95,923
$
189
($12,339
)
$
80,823
$
17,139
$
181,735
RMBS
(28
)
(4,221
)
114,212
517
110,480
Total fixed maturity securities
95,923
161
(16,560
)
195,035
17,656
292,215
Perpetual preferred securities
1,696
(1,371
)
(53
)
272
Other securities
64
(50
)
(8
)
6
Total other securities
1,760
(1,421
)
(61
)
278
Other investments
2,592
(442
)
808
2,958
Derivatives, net
(6,643
)
(104,986
)
(111,629
)
($104,986
)
Separate account assets(2)
9,622
(3,278
)
4,258
10,602
(3,867
)
Total
$
103,254
($109,966
)
($16,621
)
$
195,035
$
22,722
$
194,424
($108,853
)
(1)
Represents the net amount of total gains or losses for the period, recorded in
earnings, attributable to the change in unrealized gains (losses) relating to assets and
liabilities classified as Level 3 were still held as of December 31, 2009 and 2008.
(2)
The realized/unrealized gains (losses) included in net income (loss) for
separate account assets are offset by an equal amount for separate account liabilities,
which results in a net zero impact on net income (loss) for the Company.
The Company did not have any nonfinancial assets or liabilities measured at fair value on a
nonrecurring basis resulting from impairments as of December 31, 2009. The Company has not
made any changes in the valuation methodologies for nonfinancial assets and liabilities.
The carrying amount and estimated fair value of the Company’s financial instruments that are
not carried at fair value under the Codification’s Financial Instruments Topic are as follows:
The following methods and assumptions were used to estimate the fair value of these financial
instruments as of December 31, 2009 and 2008:
MORTGAGE LOANS
The estimated fair value of the mortgage loan portfolio is determined by discounting the
estimated future cash flows using current rates that are applicable to similar credit quality,
property type and average maturity of the composite portfolio.
PLA-34
POLICY LOANS
The carrying amounts of policy loans are a reasonable estimate of their fair values because
interest rates are generally variable and based on current market rates.
OTHER INVESTED ASSETS
Included in other invested assets are private equity investments in which the estimated fair
value of private equity investments is based on the ownership percentage of the underlying
equity of the investments.
ANNUITY AND DEPOSIT LIABILITIES
The estimated fair value of annuity and deposit liabilities approximates carrying value and
primarily includes policyholder deposits and accumulated credited interest.
9.
OTHER COMPREHENSIVE INCOME (LOSS)
The Company displays comprehensive income (loss) and its components on the statements of
equity. Unrealized gains and losses on derivatives and securities available for sale are the
only components of OCI. The disclosure of the gross components of OCI and related taxes are
as follows:
Provision (benefit) for income taxes from continuing operations
30,287
(31,944
)
5,378
Benefit from income taxes from discontinued operations
(11
)
(167
)
(522
)
Total
$
30,276
($32,111
)
$
4,856
A reconciliation of the provision (benefit) for income taxes from continuing operations based
on the Federal corporate statutory tax rate of 35% to the provision (benefit) for income taxes
from continuing operations reflected in the statements of operations is as follows:
Provision (benefit) for income taxes at the statutory rate
$
33,613
($29,293
)
$
8,004
Separate account dividends received deduction
(2,593
)
(2,573
)
(2,290
)
Nontaxable investment income
(715
)
(744
)
(526
)
Other
(18
)
666
190
Provision (benefit) for income taxes from continuing operations
$
30,287
($31,944
)
$
5,378
During the years ended December 31, 2009, 2008 and 2007, the Company paid an insignificant
amount of interest and penalties to state tax authorities.
PLA-36
The net deferred tax (liability) asset included in other liabilities and other assets as of
December 31, 2009 and 2008, respectively, is comprised of the following tax effected
temporary differences:
Deferred tax asset (liability) from continuing operations, net
(14,195
)
10,664
Deferred taxes on cumulative change in accounting principle
801
106
Deferred taxes on other comprehensive income
(14,424
)
19,292
Net deferred tax asset (liability)
($27,818
)
$
30,062
The tax net operating loss carryforwards relate to Federal tax losses incurred in 2008 with a
15-year carryforward.
The Codification’s Income Taxes Topic requires the reduction of deferred tax assets by a
valuation allowance if, based on the weight of available evidence, it is more likely than not
that a portion or all of the deferred tax assets will not be realized. Based on management’s
assessment, it is more likely than not that deferred tax assets will be realized through
future taxable earnings.
PMHC and its subsidiaries file income tax returns in U.S. Federal and various state
jurisdictions. PMHC is under continuous audit by the Internal Revenue Service (IRS) and is
audited periodically by some state taxing authorities. The IRS has completed audits of
PMHC’s tax returns through the tax years ended December 31, 2005 and has commenced audits for
tax years 2006, 2007 and 2008. The State of California recently concluded audits for tax
years 2003 and 2004 without a material assessment. The Company does not expect the Federal
and state audits to result in any material assessments.
PLA-37
11.
SEGMENT INFORMATION
The Company has three operating segments: Investment Management, Annuities and Life
Insurance. These segments are managed separately and have been identified based on
differences in products and services offered. All other activity is included in the Corporate
and Other segment.
The Investment Management segment provides structured settlement annuities issued in
conjunction with personal injury awards through a nationwide network of brokers. Effective
January 1, 2010, the Investment Management segment’s products were moved into the Annuities
segment of the Company.
The Annuities segment’s principal products include variable and fixed annuities and are
offered through multiple distribution sources. Distribution channels include independent
planners, financial institutions and national/regional wirehouses.
The Life Insurance segment provides life insurance products through multiple distribution
channels operating in the upper income and corporate markets. Principal products include UL,
VUL, and term life. Distribution channels include regional life offices, broker-dealer firms,
wirehouses and M Financial, an association of independently owned and operated insurance and
financial producers.
The Corporate and Other segment primarily includes investment income, expenses and assets not
attributable to the operating segments. The Corporate and Other segment also includes the
elimination of intersegment transactions. The group insurance business is included in the
Corporate and Other segment as discontinued operations (Note 3).
The Company uses the same accounting policies and procedures to measure segment net income
(loss) and assets as it uses to measure its net income (loss) and assets. Net investment
income and net realized investment gain (loss) are allocated based on invested assets
purchased and held as is required for transacting the business of that segment. Overhead
expenses are allocated based on services provided. Interest expense is allocated based on the
short-term borrowing needs of the segment and is included in net investment income. The
provision (benefit) for income taxes is allocated based on each segment’s actual tax provision
(benefit).
The operating segments are allocated equity based on formulas determined by management and
receive a fixed interest rate return on interdivision debentures supporting the allocated
equity. The debenture amount is reflected as investment expense in net investment income in
the Corporate and Other segment and as investment income in the operating segments.
The Company generates substantially all of its revenues and net income from customers located
in the U.S. As of December 31, 2009 and 2008, the Company had foreign investments with an
estimated fair value of $282.2 million and $156.8 million, respectively. Revenues derived
from any customer did not exceed 10% of total revenues for the years ended December 31, 2009,
2008 and 2007.
PLA-38
The following is segment information as of and for the year ended December 31, 2009:
Investment
Life
Corporate
Management
Annuities
Insurance
and Other
Total
REVENUES
(In Thousands)
Insurance premiums
$
346,958
$
3,342
$
350,300
Policy fees
3,179
$
17,426
16,834
37,439
Net investment income
79,727
6,769
2,155
$
5,470
94,121
Net realized investment gain (loss)
3,613
94,838
(719
)
75
97,807
OTTIs
(504
)
(504
)
Other income
51
3
454
508
Total revenues
433,528
119,036
22,066
5,041
579,671
BENEFITS AND EXPENSES
Policy benefits
401,186
(23
)
3,719
404,882
Interest credited
6,335
817
7,152
Commission expenses
13,562
32,290
5,083
50,935
Operating expenses
4,031
13,527
1,709
1,398
20,665
Total benefits and expenses
418,779
52,129
11,328
1,398
483,634
Income from continuing operations
before provision for income taxes
14,749
66,907
10,738
3,643
96,037
Provision for income taxes
5,162
21,088
3,571
466
30,287
Income from continuing operations
9,587
45,819
7,167
3,177
65,750
Discontinued operations, net of taxes
(23
)
(23
)
Net income
$
9,587
$
45,819
$
7,167
$
3,154
$
65,727
Total assets
$
1,412,660
$
1,883,206
$
186,626
$
204,280
$
3,686,772
DAC
2,022
75,690
12,356
90,068
Separate account assets
1,350,331
103,881
1,454,212
Policyholder and contract liabilities
1,272,987
409,439
39,297
1,721,723
Separate account liabilities
1,350,331
103,881
1,454,212
PLA-39
The following is segment information as of and for the year ended December 31, 2008:
Investment
Life
Corporate
Management
Annuities
Insurance
and Other
Total
REVENUES
(In Thousands)
Insurance premiums
$
239,448
$
3,286
$
242,734
Policy fees
4,026
$
17,908
15,153
37,087
Net investment income
55,025
1,775
1,879
$
16,837
75,516
Net realized investment gain (loss)
918
(100,743
)
(16
)
(570
)
(100,411
)
OTTIs
(3,685
)
(1,784
)
(3,112
)
(8,581
)
Other income
43
(66
)
638
615
Total revenues
295,775
(81,126
)
19,156
13,155
246,960
BENEFITS AND EXPENSES
Policy benefits
282,674
2,027
6,620
291,321
Interest credited
3,659
615
4,274
Commission expenses
10,109
3,960
6,934
21,003
Operating expenses
3,315
5,808
3,771
1,163
14,057
Total benefits and expenses
296,098
15,454
17,940
1,163
330,655
Income (loss) from continuing operations
before provision (benefit) for income taxes
(323
)
(96,580
)
1,216
11,992
(83,695
)
Provision (benefit) for income taxes
(464
)
(35,958
)
412
4,066
(31,944
)
Income (loss) from continuing operations
141
(60,622
)
804
7,926
(51,751
)
Discontinued operations, net of taxes
(300
)
(300
)
Net income (loss)
$
141
($60,622
)
$
804
$
7,626
($52,051
)
Total assets
$
1,006,093
$
1,091,939
$
150,963
$
309,224
$
2,558,219
DAC
2,141
78,581
14,442
95,164
Separate account assets
929,785
79,712
1,009,497
Policyholder and contract liabilities
958,231
194,547
40,714
1,193,492
Separate account liabilities
929,785
79,712
1,009,497
PLA-40
The following is segment information for the year ended December 31, 2007:
Investment
Life
Corporate
Management
Annuities
Insurance
and Other
Total
REVENUES
(In Thousands)
Insurance premiums
$
166,392
$
163
$
166,555
Policy fees
1,828
$
15,034
7,211
24,073
Net investment income
43,891
2,755
1,367
$
25,141
73,154
Net realized investment loss
(1,440
)
(4,469
)
(639
)
(6,548
)
OTTIs
(2,917
)
(2,917
)
Other income
37
2,545
87
119
2,788
Total revenues
207,791
15,865
8,828
24,621
257,105
BENEFITS AND EXPENSES
Policy benefits
201,378
351
1,359
203,088
Interest credited
3,539
441
3,980
Commission expenses
6,737
6,871
1,742
15,350
Operating expenses
2,564
6,728
13
2,512
11,817
Total benefits and expenses
210,679
17,489
3,555
2,512
234,235
Income (loss) from continuing operations
before provision (benefit) for income taxes
(2,888
)
(1,624
)
5,273
22,109
22,870
Provision (benefit) for income taxes
(1,119
)
(2,654
)
1,565
7,586
5,378
Income (loss) from continuing operations
(1,769
)
1,030
3,708
14,523
17,492
Discontinued operations, net of taxes
(70
)
(70
)
Net income (loss)
($1,769
)
$
1,030
$
3,708
$
14,453
$
17,422
12.
TRANSACTIONS WITH AFFILIATES
Pacific Life provides general administrative and investment management services to the Company
under an administrative services agreement and product contract services under a separate
services agreement. Amounts charged by Pacific Life to the Company for these services were
$16.2 million, $15.2 million and $16.5 million for the years ended December 31, 2009, 2008 and
2007, respectively.
On May 1, 2007, Pacific Life and the Company formed a two member limited liability company,
Pacific Life Fund Advisors LLC (PLFA), which became the investment adviser for the Pacific
Select Fund, the investment vehicle provided to the Company’s variable life insurance
policyholders and variable annuity contract owners. Prior to May 1, 2007, Pacific Life served
in this capacity and the Company provided certain investment options and other administrative
services under a services agreement for which the Company earned a service fee from Pacific
Life. PLFA is owned 99% by Pacific Life and 1% by the Company.
Prior to May 1, 2007, service fees earned by the Company of $2.6 million and related expenses
of $0.7 million under the administrative services agreement described above were recorded in
other income and operating expenses, respectively. Subsequent to May 1, 2007, these revenues
and expenses are being recorded at either PLFA or Pacific Select Distributors, Inc. (PSD), a
wholly owned subsidiary of Pacific Life and distributor of the Company’s variable life
insurance and variable annuity products. Earnings from PLFA to the Company, included in net
investment income, for the years ended December 31, 2009 and 2008 and the period May 1, 2007
to December 31, 2007, amounted to $2.0 million, $2.1 million and $1.3 million, respectively.
PLA-41
Revenues earned by PSD are passed onto the Company as a reduction of commission expense paid
to PSD on the Company’s variable annuity and variable life insurance products. Commission
expense reductions amounted to $2.2 million, $2.2 million and $1.4 million for the years ended
December 31, 2009 and 2008 and the period May 1, 2007 to December 31, 2007, respectively.
The Company has an agreement with Pacific Life to borrow up to $20 million at variable
interest rates. The Company did not utilize this borrowing facility during 2009 and 2008.
During 2008, the Company transferred $5.6 million of deferred compensation and postretirement
liabilities to Pacific Life that related to the group insurance employees (Note 3).
13.
DEBT
The Company maintains a $40 million reverse repurchase line of credit with a commercial bank.
These borrowings are at variable rates of interest based on collateral and market conditions.
There was no debt outstanding in connection with this line of credit as of December 31, 2009
and 2008.
The Company is a member of the FHLB. The Company is eligible to borrow from the FHLB amounts
based on a percentage of statutory capital and surplus and could borrow amounts up to $102.8
million. Of this amount, half, or $51.4 million, can be borrowed for terms other than
overnight, out to a maximum term of nine months. These borrowings are at variable rates of
interest, collateralized by certain mortgage loan and government securities. As of December31, 2009 and 2008, the Company had no debt outstanding with the FHLB.
14.
COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has outstanding commitments to make investments primarily in fixed maturity
securities, mortgage loans, limited partnerships and other investments for $12.5 million
during the year ending December 31, 2010.
The Company leased office facilities under various noncancelable operating leases prior to the
sale of the group insurance business (Note 3). Substantially all operating leases were
transferred to the buyer. The Company is contingently liable until March 31, 2013 for certain
future rent and expense obligations, not to exceed $15 million, related to one of these
leases. Rent expense, which was included in discontinued operations, was zero for the year
ended December 31, 2009 and insignificant for the years ended December 31, 2008 and 2007.
CONTINGENCIES — LITIGATION
The Company is a respondent in a number of legal proceedings, some of which involve
allegations for extra-contractual damages. Although the Company is confident of its position
in these matters, success is not a certainty and it is possible that in any case a judge or
jury could rule against the Company. In the opinion of management, the outcome of such
proceedings is not likely to have a material adverse effect on the Company’s financial
statements.
CONTINGENCIES — IRS REVENUE RULING
On August 16, 2007, the IRS issued Revenue Ruling 2007-54, which provided the IRS’
interpretation of tax law regarding the computation of the separate account Dividends Received
Deduction (DRD). On September 25, 2007, the IRS issued Revenue Ruling 2007-61, which
suspended Revenue Ruling 2007-54 and indicated the IRS would address the proper interpretation
of tax law in a regulation project that is on the IRS’ priority guidance plan. Although no
guidance has been issued, if the IRS ultimately adopts the interpretation contained in Revenue
Ruling 2007-54, the Company could lose a substantial amount of DRD tax benefits, which could
have a material adverse effect on the Company’s financial statements.
PLA-42
CONTINGENCIES — OTHER
In the course of its business, the Company provides certain indemnifications related to
dispositions, investments, lease agreements or other transactions that are triggered by, among
other things, breaches of representations, warranties or covenants provided by the Company.
These obligations are typically subject to time limitations that vary in duration, including
contractual limitations and those that arise by operation of law, such as applicable statutes
of limitation. Because the amounts of these types of indemnifications often are not
explicitly stated, the overall maximum amount of the obligation under such indemnifications
cannot be reasonably estimated. The Company has not made material payments for these types of
indemnifications. The estimated maximum potential amount of future payments under these
obligations is not determinable due to the lack of a stated maximum liability for certain
matters, and therefore, no related liability has been recorded. Management believes that
judgments, if any, against the Company related to such matters are not likely to have a
material adverse effect on the Company’s financial statements.
Most of the jurisdictions in which the Company is admitted to transact business require life
insurance companies to participate in guaranty associations, which are organized to pay
contractual benefits owed pursuant to insurance policies issued by insolvent life insurance
companies. These associations levy assessments, up to prescribed limits, on all member
companies in a particular state based on the proportionate share of premiums written by
member companies in the lines of business in which the insolvent insurer operated. The
Company has not received notification of any insolvency that is expected to result in a
material guaranty fund assessment.
See Note 5 for discussion of contingencies related to derivative instruments.
PLA-43
PART II
Part C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a)
Financial Statements
Part A: None
Part B:
(1)
Registrant’s Financial Statements
Audited Financial Statements dated as of December 31,2009 and for each of the periods presented which are incorporated by
reference from the 2009 Annual Report include the following for Separate Account A:
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
(2)
Depositor’s Financial Statements
Audited Financial Statements dated as of
December 31, 2009 and 2008, and for each of the three years in the
period ended December 31, 2009, included in Part B include the following for Pacific Life & Annuity Company:
Independent Auditors’ Report
Statements of Financial Condition
Statements of Operations
Statements of Stockholder’s Equity
Statements of Cash Flows
Notes to Financial Statements
(b)
Exhibits
1.
(a)
Minutes of Action of Board of Directors of PM Group
Life Insurance Company (PM Group) (PL&A) dated July1, 1998.1
II-1
2.
Not applicable
3.
(a)
Distribution Agreement between Pacific Life & Annuity Company
(PL&A) and Pacific Select Distributors, Inc. (PSD)1
(b)
Form of Selling Agreement between Pacific Life & Annuity
Company (PL&A), PSD and Various Broker-Dealers3
Portfolio Optimization
Enrollment/Rider Request Form (Form No. N2150-6B)3
6.
(a)
Articles of Incorporation of PM Group Life1
(b)
Amended and Restated Articles of Incorporation of PL&A1
(c)
By-laws of Pacific Life & Annuity Company1
7.
Not applicable
8.
(a)
Pacific Select Fund Participation Agreement and
Addendums thereto (to add the Strategic Value and Focused 30
Portfolios, add nine new Portfolios, and add the Equity Income and
Research Portfolios)1
(b)
Administrative Agreement Between Pacific Life & Annuity
Company (PL&A) and Pacific Life Insurance Company (“Pacific
Life”)1
(c)
Fund Participation Agreement Between Pacific Life & Annuity Company,
Pacific Select Distributors, Inc., American Funds Insurance Series, American Funds
Distributors, and Capital Research and Management Company.2
(d)
Exhibit B to
the Pacific Select Fund Participation Agreement (to add International
Small-Cap and Diversified Bond)3
(e)
Form of AllianceBernstein Variable
Products Series Fund, Inc. Participation
Agreement4
(f)
Form of BlackRock Variable Series
Fund, Inc. Participation
Agreement4
(1) Amendment to Participation Agreement
(g)
Form of Franklin Templeton Variable
Insurance Products Trust Participation
Agreement4
(1) First Amendment to Participation Agreement
(h)
Form of AllianceBernstein
Investments, Inc. Administrative Services
Agreement4
(i)
Form of BlackRock Distributors,
Inc. Administrative Services
Agreement4
(1) Amendment to Administrative Services Agreement
(j)
Form of Franklin Templeton
Services, LLC Administrative Services
Agreement4
(1) First Amendment to Administrative Services Agreement
(k)
Form of AIM Variable Insurance
Funds Participation
Agreement5
(l)
Form of Invesco Aim Distributors,
Inc. Distribution Services
Agreement5
(m)
Form of Invesco Aim Advisors, Inc.
Administrative Services
Agreement5
(n)
Form of GE Investments Funds, Inc.
Participation Agreement5
(1) Amendment to Participation Agreement
(o)
Form of GE Investment Distributors,
Inc. Distribution and Services
Agreement
(Amended and Restated)
(p)
Form of Van Kampen Life Investment
Trust Participation Agreement5
(q)
Form of Van Kampen Funds, Inc.
Shareholder Service Agreement5
(r)
Form of Van Kampen Asset Management
Administrative Services Letter Agreement5
(s)
Form of GE Investments Funds, Inc.
Investor Services Agreement
(1) First Amendment to Investor Services Agreement
(t)
Form of PIMCO Variable Insurance
Trust Participation Agreement
(u)
Form of Allianz Global Investors
Distributors LLC Selling Agreement
(v)
Form of PIMCO LLC Services
Agreement
(w)
Form of MFS Variable Insurance
Trust Participation Agreement
(1) First Amendment to Participation Agreement
(x) Form of MFS
Variable Insurance Trust Administrative Services Agreement
9.
Opinion and Consent of legal officer of Pacific Life & Annuity Company as to
the legality of Contracts being registered.6
II-2
10.
Consent of Independent
Registered Public Accounting Firm and Consent of Independent
Auditors
Pacific Life & Annuity Company is an Arizona Stock Life Insurance Company
wholly-owned by Pacific Life Insurance Company (a Nebraska Stock Life
Insurance Company) which is wholly-owned by Pacific LifeCorp (a Delaware
Stock Holding Company) which is, in turn, 100% owned by Pacific
Mutual Holding Company (a Nebraska Mutual Insurance Holding Company).
II-4
Item 27. Number of Contractholders
Pacific
Destinations – Approximately
0 Qualified
0 Non Qualified
Item 28. Indemnification
(a)
The Distribution Agreement between Pacific Life & Annuity Company and
Pacific Select Distributors, Inc. (PSD), formerly called Pacific
Mutual Distributors, Inc. (PMD) provides substantially as follows:
Pacific Life & Annuity Company hereby agrees to indemnify and hold
harmless PMD and its officers and directors, and employees for any
expenses (including legal expenses), losses, claims, damages, or
liabilities incurred by reason of any untrue or alleged untrue
statement or representation of a material fact or any omission or
alleged omission to state a material fact required to be stated to
make other statements not misleading, if made in reliance on any
prospectus, registration statement, post-effective amendment thereof,
or sales materials supplied or approved by Pacific Life & Annuity
Company or the Separate Account. Pacific Life & Annuity Company shall
reimburse each such person for any legal or other expenses reasonably
incurred in connection with investigating or defending any such loss,
liability, damage, or claim. However, in no case shall Pacific Life &
Annuity Company be required to indemnify for any expenses, losses,
claims, damages, or liabilities which have resulted from the willful
misfeasance, bad faith, negligence, misconduct, or wrongful act of
PMD.
PMD hereby agrees to indemnify and hold harmless Pacific Life &
Annuity Company, its officers, directors, and employees, and the
Separate Account for any expenses, losses, claims, damages, or
liabilities arising out of or based upon any of the following in
connection with the offer or sale of the contracts: (1) except for
such statements made in reliance on any prospectus, registration
statement or sales material supplied or approved by Pacific Life &
Annuity Company or the Separate Account, any untrue or alleged untrue
statement or representation is made; (2) any failure to deliver a
currently effective prospectus; (3) the use of any unauthorized sales
literature by any officer, employee or agent of PMD or Broker; (4) any
willful misfeasance, bad faith, negligence, misconduct or wrongful
act. PMD shall reimburse each such person for any legal or other
expenses reasonably incurred in connection with investigating or
defending any such loss, liability, damage, or claim.
(b)
The Form of Selling Agreement between Pacific Life & Annuity Company,
Pacific Select Distributors, Inc. (PSD), formerly called Pacific
Mutual Distributors, Inc. (PMD) and Various Broker-Dealers and Agency (Selling Entities) provides
substantially as follows:
Pacific Life & Annuity Company and PSD agree to indemnify and hold harmless Selling Entities,
their officers, directors, agents and employees, against any and all losses, claims, damages, or
liabilities to which they may become subject under the Securities Act, the Exchange Act, the
Investment Company Act of 1940, or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a
material fact or any omission or alleged omission to state a material fact required to be stated or
necessary to make the statements made not misleading in the registration statement for the
Contracts or for the shares of Pacific Select Fund (the “Fund”) filed pursuant to the Securities
Act, or any prospectus included as a part thereof, as from time to time amended and supplemented,
or in any advertisement or sales literature provided by Pacific Life & Annuity Company and PSD.
II-5
Selling Entities agree to, jointly and severally, hold harmless and indemnify Pacific Life &
Annuity Company and PSD and any of their respective affiliates, employees, officers, agents and
directors (collectively, “Indemnified Persons”) against any and all claims, liabilities and
expenses (including, without limitation, losses occasioned by any rescission of any Contract
pursuant to a “free look” provision or by any return of initial purchase payment in connection with
an incomplete application), including, without limitation, reasonable attorneys’ fees and expenses
and any loss attributable to the investment experience under a Contract, that any Indemnified
Person may incur from liabilities resulting or arising out of or based upon (a) any untrue or
alleged untrue statement other than statements contained in the registration statement or
prospectus relating to any Contract, (b)(i) any inaccurate or misleading, or allegedly inaccurate
or misleading sales material used in connection with any marketing or solicitation relating to any
Contract, other than sales material provided preprinted by Pacific Life & Annuity Company or PSD,
and (ii) any use of any sales material that either has not been specifically approved in writing by
Pacific Life & Annuity Company or PSD or that, although previously approved in writing by Pacific
Life & Annuity Company or PSD, has been disapproved, in writing by either of them, for further use,
or (c) any act or omission of a Subagent, director, officer or employee of Selling Entities,
including, without limitation, any failure of Selling Entities or any Subagent to be registered as
required as a broker/dealer under the 1934 Act, or licensed in accordance with the rules of any
applicable SRO or insurance regulator.
II-6
Item 29. Principal Underwriters
(a)
PSD also acts as principal underwriter for Pacific Select
Variable Annuity Separate Account, Separate Account B, Pacific
Corinthian Variable Separate Account, Pacific Select Separate
Account, Pacific Select Exec Separate Account, COLI Separate
Account, COLI II Separate Account, COLI III Separate Account, COLI IV
Separate Account, COLI V Separate Account, Separate Account A of Pacific Life & Annuity
Company, Pacific Select Exec Separate Account of Pacific Life &
Annuity Company, Separate Account I of Pacific Life Insurance
Company, Separate Account I of Pacific Life & Annuity Company.
(b)
For information regarding PSD, reference is made to Form B-D, SEC File No.
8-15264, which is herein incorporated by reference.
(c)
PSD retains no compensation or net discounts or commissions from the Registrant.
Item 30. Location of Accounts and Records
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of
1940 and the rules under that section will be maintained by Pacific
Life Insurance Company at 700 Newport Center Drive, Newport Beach,
California92660.
Item 31. Management Services
Not applicable
Item 32. Undertakings
The registrant hereby undertakes:
(a)
to file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial
statements in this registration statement are never more than 16
months old for so long as payments under the variable annuity
contracts may be accepted, unless otherwise permitted.
(b)
to include either (1) as a part of any application to purchase a
contract offered by the prospectus, a space that an applicant can
check to request a Statement of Additional Information, or (2) a post
card or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a Statement of
Additional Information, or (3) to deliver a Statement of Additional
Information with the Prospectus.
(c)
to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request.
II-7
Additional Representations
(a) The Registrant and its Depositor are relying upon American Council of
Life Insurance, SEC No-Action Letter, SEC Ref. No. 1P-6-88 (November 28, 1988)
with respect to annuity contracts offered as funding vehicles for retirement
plans meeting the requirements of Section 403(b) of the Internal Revenue Code,
and the provisions of paragraphs (1)-(4) of this letter have been complied
with.
(b) REPRESENTATION PURSUANT TO SECTION 26(f) OF THE INVESTMENT COMPANY
ACT OF 1940: Pacific Life & Annuity Company and the sponsoring insurance
company of the Registrant represent that the fees and charges to be deducted
under the Variable Annuity Contract (“Contract”) described in the prospectus
contained in this registration statement are, in the aggregate, reasonable in
relation to the services rendered, the expenses expected to be incurred, and
the risks assumed in connection with the Contract.
II-8
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it
meets the requirements of Securities Act Rule 485(b) for
effectiveness of this Registration Statement and has caused this
Post-Effective Amendment No. 2 to the Registration Statement on Form
N-4 to be signed on its behalf by the
undersigned thereunto duly authorized in the City of Newport Beach, and the
State of California on this
23rd day
of April, 2010.
SEPARATE ACCOUNT A
(Registrant)
By:
PACIFIC LIFE & ANNUITY COMPANY
By:
James T. Morris*
Director, Chairman, President and Chief Executive Officer
By:
PACIFIC LIFE & ANNUITY COMPANY
(Depositor)
By:
James T. Morris*
Director, Chairman, President and Chief Executive Officer
Pursuant to the requirements
of the Securities Act of 1933, Post-Effective Amendment No. 2 to the Registration Statement
has been signed below by the following persons in the
capacities and on the dates indicated:
Signature
Title
Date
James T. Morris*
Director, Chairman, President and Chief Executive
Officer
(Powers of
Attorney are contained in
Pre-Effective Amendment No. 1 of the Registration Statement filed on
Form N-4 for Separate Account A, File No. 333-160773, Accession No.
0000950123-09-045612, filed on September 24, 2009, as Exhibit 13.)
II-9
Dates Referenced Herein and Documents Incorporated by Reference
