Business
Protective Life Insurance Company ("Protective"), a stock life insurance company, was founded in 1907. Protective is a wholly owned subsidiary of Protective Life Corporation ("PLC"), an insurance holding company whose common stock is traded on the New York Stock Exchange (symbol: PL). Protective provides financial services through the production, distribution, and administration of insurance and investment products.
DESCRIPTION OF THE CONTRACT
The Contract
The [ ] Contract is a modified guaranteed annuity contract issued by Protective. Generally, this prospectus describes certificates issued under an allocated group modified guaranteed annuity contract issued by Protective to the Protective Life MGA Trust. Bankers Trust Co., N.A. of Des Moines, Iowa is the Contract Holder, as the Trustee of the Protective Financial Insurance Trust. Eligible Owners include account holders of broker-dealers that have entered into a distribution agreement to offer the Contract. Eligible Owners also include employers and other entities and organized groups acceptable to us. The certificate we issue to an Owner summarizes the provisions of the group modified guaranteed annuity contract.
The provisions of the group modified guaranteed annuity contract control whether or not they are included in the certificate.
We will provide a copy of the group modified guaranteed annuity contract to an Owner upon request.
In states where we do not issue a group contract, we will issue an individual modified guaranteed annuity contract directly to the Owner. In this prospectus, we will refer to both the certificates under the group Contract and the individual Contracts as a "Contract," and we will use the term "Owner" to describe the owners of group Contract certificates as well as the owners of individual Contracts. (See "Parties to the Contract.")
Contracts are either Qualified or Non-Qualified. Qualified Contracts are used to fund pension and retirement programs that receive favorable tax treatment under Sections 401, 408 or 408A of the Internal Revenue Code. These include H.R. 10 (Keogh) Plans, individual retirement accounts or annuities (IRAs), or corporate pension and profit sharing plans. Non-Qualified Contracts may also enjoy tax favored status. (See "Federal Tax Matters".)
Parties to the Contract
Company:
Protective Life Insurance Company, also referred to as "we," "us" and "our."
Owner:
The person or persons who own a group Contract certificate (sometimes called "Participants" in our contract language and literature) or who own an individual Contract. An Owner is entitled to exercise all rights and privileges provided in the Contract, without the consent of a group Contract Holder. Individuals as well as non-natural persons, such as corporations or trusts, may own a Contract; two persons may own a Contract together. (See "Federal Tax Matters, Tax Deferral During Accumulation Period," for more information on non-natural Owners.) In this prospectus, we may refer to Owners as "you" or "your."
Generally, you may assign or transfer your Non-Qualified Contract to a new Owner by making a written request to our administrative office. An assignment or transfer of ownership, however, may result in tax liability to you. (See "Other Contract Provisions, Assignment or Transfer of a Contract" and "Federal Tax Matters, Taxation of Interest Withdrawals and Partial and Full Surrenders".)
Beneficiary:
The person or persons who may receive the benefits of a Contract upon the death of an Owner. We will treat the surviving Owner of a jointly owned Contract as the primary Beneficiary. If there is no surviving Owner, the primary Beneficiary is the person or persons so designated by the Owner and
6
named in our records. The contingent Beneficiary is the person or persons designated by the Owner and named in our records to be Beneficiary if no primary Beneficiary is living. In the case of some Qualified Contracts, Treasury Department regulations may restrict who may be designated as a Beneficiary.
If no Beneficiary designation is in effect or if no Beneficiary is living at the time of an Owner's death, the Beneficiary will be the estate of the deceased Owner. If an Owner dies on or after the Annuity Commencement Date, the Beneficiary will become the new Owner.
Unless designated irrevocably, the Owner may change the Beneficiary by written notice prior to any Owner's death. If a Beneficiary is designated irrevocably, that Beneficiary's written consent is required before the Owner can change the Beneficiary designation or exercise certain other rights. Your request will be effective on the day you sign it. We will not be liable for any payments made to a former Beneficiary, however, unless we have first notified you that we have received your written request and all necessary written consents at our Administrative Office.
Annuitant:
The person on whose life annuity income payments may be based. The Owner is the Annuitant unless the Owner designates another person as the Annuitant.
You may change the Annuitant by written notice prior to the Annuity Commencement Date. If changing Annuitants, you cannot select an Annuitant whose 95
th
birthday comes before the end of any Guaranteed Period or the Annuity Commencement Date without our prior approval. If any Owner is not a natural person and changes the Annuitant, the change will be treated as the death of the Owner and the Death Benefit will be paid to the Beneficiary. (See "Death Benefit".)
If an Annuitant who is not an Owner dies before the Annuity Commencement Date, the first Owner named on the application will become the new Annuitant unless the Owner had designated otherwise.
Payee:
The person or persons who, generally at the designation of the Owner, receive annuity income payments under the Contract.
Issuing a Contract
You purchase a Contract by completing an application and making an Annuity Deposit of at least $25,000. We will apply your initial Annuity Deposit to the appropriate Guaranteed Period and issue your Contract as soon as is practical after we receive your Annuity Deposit and all of the necessary application information at our Administrative Office. We do not always receive your Annuity Deposit on the day that you sign your application or give the Annuity Deposit to your sales representative. In some circumstances, such as when you purchase a Contract in exchange for an existing annuity contract from another company, we may not receive your Annuity Deposit for a substantial period of time after you sign your application.
If we do not receive all of the necessary application information at our Administrative Office when we receive your Annuity Deposit, we will hold your Annuity Deposit while we attempt to complete the application. If the necessary application information is not complete after a reasonable time, we will inform you of the reason for the delay and we will return your Annuity Deposit unless you specifically consent to our holding it until the application is complete. Once we have all of your necessary application information, we will apply your Annuity Deposit to the appropriate Guaranteed Periods and issue a Contract.
The date we apply your initial Annuity Deposit to the appropriate Guaranteed Periods is the Effective Date for the Contract. You will begin to earn interest under the Contract as of this date. The Contract Year is based on the anniversary of your Effective Date.
After we issue a Contract, you may make additional Annuity Deposits of at least $10,000 each. Regardless of how many Annuity Deposits you make, we will generally only issue one Contract. We have the right to decline any application or any Annuity Deposit. When we sell Contracts to retirement plans or in connection with retirement plans, those retirement plans may or may not qualify for special tax treatment under the Internal Revenue Code.
7
Right to Cancel
You may cancel your Contract by returning it to us with a written cancellation request within the number of days after receiving it that your Contract specifies. Unless otherwise provided by law, this period will never be less than 10 days. You must return the Contract and cancellation request to our Administrative Office or to the sales representative who sold it to you. If you return the Contract by mail, the effective date of the return will be the postmark date on your properly addressed and postage paid envelope. In the State of Connecticut, non-written requests are also accepted.
Upon receiving your returned Contract and cancellation request, we will cancel the Contract and treat it as if it had never been issued. Your Contract will specify the amount we will return upon cancellation. Depending on the laws of the state in which the Contract is delivered, the amount we will return will generally equal either 1) your total Annuity Deposit(s), or 2) the Account Value, adjusted by the Market Value Adjustment formula, on the date we receive your cancellation request.
Annuity Deposits
The Annuity Deposit is the premium payment you send us to purchase or add to a Contract. Generally, we will accept an Annuity Deposit if the Guaranteed Period to which it is allocated ends before the Annuity Commencement Date and we have the right not to accept any Annuity Deposit if we so choose. We also have the right to limit the total Annuity Deposits we accept without prior approval. Currently, this amount is $2,000,000. You can make an Annuity Deposit in the form of a check made out to Protective Life Insurance Company or by any other method we deem acceptable.
You allocate Annuity Deposits, less any applicable premium tax, to one or more of the Guaranteed Periods available when you make the Annuity Deposit. You must allocate at least $10,000 to each Guaranteed Period you choose and you may not select a Guaranteed Period that extends beyond the Annuity Commencement Date.
Guaranteed Periods and Sub-Accounts
A Guaranteed Period is the period of years during which we will credit the Guaranteed Interest Rate to a Sub-Account. Currently, we offer a variety of Guaranteed Periods up to 15 years, though all Guaranteed Periods may not be available at all times or in all states. You may not select a Guaranteed Period that extends past the Annuity Commencement Date for your Contract.
Initial Guaranteed Period
We will establish a Sub-Account for each Guaranteed Period to which you allocate an Annuity Deposit. Each Sub-Account earns interest at the Guaranteed Interest Rate in effect for that Guaranteed Period from the date the Annuity Deposit is credited to the Sub-Account through the end of the Guaranteed Period or until the Sub-Account is surrendered, if earlier.
Subsequent Guaranteed Periods
At the end of a Guaranteed Period, you may select from the following options:
1. Surrender all or part of your ending Sub-Account Value without a surrender charge or Market Value Adjustment;
2. Instruct us to apply the ending Sub-Account Value to one or more subsequent Guaranteed Periods that you select from the Guaranteed Periods we are then offering; or
3. Do nothing and allow a 1-year subsequent Guaranteed Period automatically to begin.
Surrenders at the end of a Guaranteed Period
To surrender your ending Sub-Account Value, you must request the surrender in writing no later than 10 days after the end of the expiring Guaranteed Period. If you surrender your ending Sub-Account Value, any surrendered amount may be subject to income taxes, and a 10% IRS penalty tax
8
may apply if you are not yet 59
1
/
2
years old. (See "Federal Tax Matters, Taxation of Interest Withdrawals and Partial and Full Surrenders" and "Penalty Tax on Premature Distributions".)
Selecting a subsequent Guaranteed Period
To apply the ending Sub-Account Value to one or more subsequent Guaranteed Periods, you must give us written instructions as to the Guaranteed Periods that you select no later than 10 days after the end of the expiring Guaranteed Period. You may select a subsequent Guaranteed Period only from the Guaranteed Periods we are offering at the time you make your selection. No subsequent Guaranteed Period may extend past the Annuity Commencement Date for your Contract. At least $10,000 must be allocated to any subsequent Guaranteed Period.
Automatic subsequent Guaranteed Periods
Unless you instruct otherwise, the Sub-Account Value at the end of an expiring Guaranteed Period will be automatically allocated to a Sub-Account with a 1-year Guaranteed Period. The subsequent Guaranteed Period, however, will not extend past the Annuity Commencement Date. The new Sub-Account will earn interest at the Guaranteed Interest Rate in effect for that 1-year subsequent Guaranteed Period when your Sub-Account Value is allocated to it, although this rate may be nominal. We will not assess a surrender charge or apply a Market Value Adjustment to surrenders from this 1-year Guaranteed Period.
Guaranteed Interest Rates in subsequent Guaranteed Periods
Your beginning Sub-Account Value for any subsequent Guaranteed Period earns interest at the rate that is in effect for that subsequent Guaranteed Period on the date the subsequent Guaranteed Period begins. Guaranteed Interest Rates for subsequent Guaranteed Periods may differ from Guaranteed Interest Rates for initial Guaranteed Periods of the same duration.
Guaranteed Interest Rates
From time to time and at our sole discretion we set Guaranteed Interest Rates for each available Guaranteed Period. A Guaranteed Interest Rate credited to a Sub-Account will not change during the Guaranteed Period. We may, at our discretion, offer higher interest rates on Annuity Deposits, renewals, or both if your aggregate Annuity Deposits or Account Value equals or exceeds certain breakpoints on the date a Sub-Account is established.
In determining Guaranteed Interest Rates, we consider the interest rates available on the types of instruments in which the Company intends to invest the proceeds attributable to the Contracts. (See "Investments by Protective"). In addition, we may also consider various other factors in determining Guaranteed Interest Rates, including but not limited to the following factors: regulatory and tax requirements; sales commissions and administrative expenses the Company incurs; general economic trends; and competitive factors.
Protective Life Insurance Company makes the final determination as to Guaranteed Interest Rates it declares. We cannot predict nor do we guarantee what future interest rates we will declare.
Aggregation of Other [ ] Contracts to Determine Interest Rate
If we are offering a higher interest rate on Annuity Deposits, renewals, or both for aggregate Annuity Deposits or Account Values when you purchase your [ ] contract, we will aggregate the aggregate Annuity Deposits or Account Values of the [ ] contracts that you own, or own as a joint owner, for the purpose of determining the interest rate to be credited to each Guaranteed Period in your new contract. We also will aggregate the aggregate Annuity Deposits or Account Values of the [ ] contracts that you own, or own as a joint owner, when determining the credited interest rate for Guaranteed Periods in your contracts at the beginning of a subsequent Guaranteed Period in your contracts. In general, we will aggregate all Qualified Contracts of the same type such as all contracts held in individual retirement arrangements. We will also aggregate all
9
contracts that are not issued for use with qualified retirement plans. We will not aggregate contracts across different types of qualified plans or across different employer-provided qualified retirement plans, nor will we aggregate Qualified Contracts with non-qualified. We may suspend, amend, or terminate the aggregation at any time without notice. The interest rate for a guaranteed period will remain fixed for the remainder of the guaranteed period, however, and will not be reduced if we terminate these aggregation policies or if you surrender one contract before the end of the guaranteed period in one or more other contracts which were aggregated. Furthermore, by stating that we may choose to aggregate certain contracts, we are not obligating ourselves to offer a higher interest rate on Annuity Deposits, renewals, or both.
Compounding of Interest
The Guaranteed Interest Rate we declare for each Sub-Account is the annual effective interest rate for the Sub-Account, which means the declared interest rate includes the effects of compounding. Interest compounds daily in the Sub-Account for the duration of the Guaranteed Period. Below is an illustration of how interest is credited during each year of a five-year Guaranteed Period. For the purposes of this example, we have made assumptions as indicated.
Please note that the following example assumes no surrenders or withdrawals of any amount and no premium tax due on issuance. A Market Value Adjustment and surrender charge may apply to any full or partial surrender you make prior to the end of a Guaranteed Period (See "Surrenders"). The hypothetical interest rates are for purposes of illustration only and we do not intend them as a prediction of any future interest rates we may declare under the Contract. The actual interest rates we declare for any Guaranteed Period may be more or less than what we have used in this illustration.
Example of Compounding at the Guaranteed Interest Rate
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Deposit:
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$
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100,000
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Guaranteed Period:
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5
Years
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Guaranteed Interest Rate:
|
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3.75
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%
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|
|
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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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Beginning of Year 1 Account Value:
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$
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100,000.00
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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x
(1 + Guaranteed Interest Rate):
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1.0375
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|
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|
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|
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|
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|
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|
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= End or Year 1 Account Value:
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$
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103,750.00
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|
|
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|
|
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Beginning of Year 2 Account Value:
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$
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103,750.00
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|
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|
|
|
|
|
|
|
|
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x
(1 + Guaranteed Interest Rate):
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|
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1.0375
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|
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= End of Year 2 Account Value:
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$
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107,640.63
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Beginning of Year 3 Account Value:
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$
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107,640.63
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x
(1 + Guaranteed Interest Rate):
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1.0375
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= End of Year 3 Account Value:
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$
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111,677.15
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Beginning of Year 4 Account Value:
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$
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111,677.15
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x
(1 + Guaranteed Interest Rate):
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1.0375
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= End of Year 4 Account Value:
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$
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115,865.04
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Beginning of Year 5 Account Value:
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$
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115,865.04
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x
(1 + Guaranteed Interest Rate):
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1.0375
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= End of Year 5 Account Value:
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$
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120,209.98
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Total Interest Credited in Guaranteed Period: $120,209.98 – $100,000 = $20,209.98
Account Value at End of Guaranteed Period: $100,000 + $20,209.98 = $120,209.98
10
Interest Withdrawals
Once each Contract year, you may instruct us to send you all or a portion of the interest credited to your Sub-Accounts during the prior Contract year. Your instructions must be in writing. Currently, for most Guaranteed Periods, you may establish automatic interest withdrawals that are paid to you monthly, quarterly, semi-annually or annually. We reserve the right to limit automatic interest withdrawals to one per Contract year upon notice to you.
Interest withdrawals remove money from your Sub-Account that would otherwise have been compounding interest on a daily basis. Because of this interruption of interest compounding, the more you withdraw, the less interest your Sub-Account will generate over time. Larger withdrawals reduce the compounding of interest more than smaller withdrawals; frequent withdrawals hinder the compounding process more than infrequent withdrawals; and earlier withdrawals reduce your interest more than later withdrawals would.
We will not impose a surrender charge or Market Value Adjustment on interest withdrawals but interest withdrawals may be subject to federal and state income tax and a 10% penalty tax. In addition, interest withdrawals from Contracts issued as Tax-Sheltered Annuities are prohibited in certain circumstances. (See "Federal Tax Matters".)
Account Values
The value of a Sub-Account at any time is equal to the amounts that were allocated to that Sub-Account, plus any interest credited to it, minus any interest withdrawals and surrenders (including any surrender charges, Market Value Adjustment and premium tax). The sum of the Sub-Account Values in your Contract is called the Account Value and represents the total value of your Contract.
The Net Sub-Account Value is equal to the Sub-Account Value modified by any Market Value Adjustment, minus surrender charges, and premium tax that would apply in the case of a full surrender of the Sub-Account. The Net Account Value, which is the sum of all the Net Sub-Account Values under your Contract, is the amount you would be entitled to receive if you made a full surrender of your Contract. For this reason, the Net Account Value is sometimes called the "Surrender Value" of a Contract.
SURRENDERS
Surrenders
Surrenders and Partial Surrenders
You may surrender your entire Contract at any time before Annuity payments begin. You may surrender part of the Contract before Annuity payments begin if the value of each remaining Sub-Account is at least $10,000 after the surrender.
Your surrender request must be in writing and, if you request a partial surrender, you must specify the Sub-Accounts from which the partial surrender will be taken. If you have more than one Sub-Account with the same Guaranteed Period, you must take the partial surrender from the Sub-Account with the shortest time remaining until maturity.
Partial and full surrenders from Contracts issued as Tax-Sheltered Annuities are prohibited in certain circumstances. (See "Federal Tax Matters".)
Taxes May Apply
Amounts surrendered may be subject to federal and state income taxes.
The taxable amount of a surrender may, under certain circumstances, be subject to a 10% federal tax penalty.
In the case of Qualified Contracts, federal tax law imposes restrictions on the form and manner in which benefits may be paid. For example, surrenders from Qualified Contracts may require your spouse's consent
11
even if your spouse is not an Owner. (See "Federal Tax Matters".) Premium tax may also apply. (See "Premium Tax".) You should consult your tax advisor about the effect a surrender from the Contract may have on your taxes.
Delay of Payments
We may delay payment of a surrender for up to six months from the date we receive your written request, or for the period permitted by state insurance law, if shorter.
Surrender Value
The surrender value is the amount available to you upon a surrender or partial surrender. The surrender value is calculated as of the date we receive your surrender request using the following formula:
Surrender Value = A – S – M – P, where
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A
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=
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the amount of account value you surrender;
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S
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=
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the amount of the surrender charge;
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M
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=
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the amount of the Market Value Adjustment;
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P
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=
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the amount of any applicable premium tax.
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Surrender Charges
Surrenders and partial surrenders may be subject to a surrender charge. Generally, we will assess a surrender charge if you take a surrender during the first seven years of any Guaranteed Period.
The surrender charge applies to renewal Guaranteed Periods, as well as initial Guaranteed Periods.
We calculate the surrender charge separately for each Sub-Account. We determine the amount of the surrender charge for a Sub-Account as follows: first, we subtract any amount available as an interest withdrawal from the surrender amount you request; then we multiply the result by the appropriate surrender charge percentage from the table below. The surrender charge percentage is determined based on the age of the Sub-Account from which the surrender is taken.
Number of Completed Years
In a Guaranteed Period
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Surrender Charge
Percentage
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0
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6
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%
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1
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6
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%
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2
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5
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%
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3
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4
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%
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4
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3
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%
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5
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2
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%
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6
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1
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%
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7
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or more
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0
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%
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We will include the surrender charge in the amount we deduct from the Sub-Account to satisfy your surrender request. The total surrender charge for your surrender is the sum of the surrender charges for the Sub-Accounts from which you make your surrender.
We do not apply the surrender charge after the first seven years of any Guaranteed Period or from any amount available as an interest withdrawal. Also, we do not apply a surrender charge to surrenders you request at the end of a Sub-Account's Guaranteed Period if we receive your written surrender request no later than 10 days after the end of the Guaranteed Period. No surrender charge will apply to surrenders from Sub-Accounts associated with a 1-year subsequent Guaranteed Period.
12
The Market Value Adjustment
We will apply a Market Value Adjustment if you request a full or partial surrender before the end of a Sub-Account's Guaranteed Period. The Market Value Adjustment reflects the relationship between market interest rates available when a Sub-Account was established and the interest rates available at the time of the surrender from that Sub-Account, as measured by an independent index called the Treasury Rate. The Treasury Rate is the annual effective interest rate credited to certain United States Treasury instruments and it is published by Bloomberg L.P., a nationally recognized service. On the fifteenth day and the last day of each month we will identify a Treasury Rate for each Guaranteed Period. For the purpose of determining the Market Value Adjustment during the cancellation period, we will identify a Treasury Rate each day. We will be consistent in the method we use to identify the Treasury Rate and the determination is binding upon any Owner, Annuitant and Beneficiary.
The Market Value Adjustment formula contains a 0.25% set percentage factor that compensates us for certain expenses and losses that we may incur, either directly or indirectly, as a result of the surrender. Another factor in the formula decreases the effect of the Market Value Adjustment as the Sub-Account matures by taking into consideration the number of months remaining in the Guaranteed Period from which the surrender is taken.
Like the surrender charge, the Market Value Adjustment is calculated separately for each Sub-Account. We determine the amount of the Market Value Adjustment for each Sub-Account by subtracting any amount available as an interest withdrawal from the surrender amount requested, and then multiplying the result by the Market Value Adjustment percentage derived from the formula below:
Market Value Adjustment Percentage = (C – I + 0.25%)
x
(N/12), where
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C
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=
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the current Treasury Rate established for the same term as the Guaranteed Period from which the surrender is taken;
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I
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=
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the initial Treasury Rate for the Guaranteed Period from which the surrender is taken;
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N
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=
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the number of months remaining in the Guaranteed Period from which the surrender is taken.
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The Market Value Adjustment may increase or decrease the surrender value. If the applicable Treasury Rate at the time of the surrender is more than 0.25% lower than the Treasury Rate associated with the Sub-Account, the Market Value Adjustment will increase the surrender value. Otherwise, the Market Value Adjustment will decrease the Surrender Value.
We will include the Market Value Adjustment in the amount we deduct from the Sub-Account to satisfy your surrender request. The total Market Value Adjustment for your surrender is the sum of the Market Value Adjustments to the Sub-Accounts from which the surrender is taken.
We do not apply the Market Value Adjustment to the withdrawal of interest credited to your Sub-Accounts during the prior Contract year. See "Description of the Contract, Interest Withdrawals." When calculating the Market Value Adjustment, we subtract any amount available as an interest withdrawal before we apply the Market Value Adjustment. If we receive your written surrender request no later than 10 days after the end of a Sub-Account's Guaranteed Period, we do not apply the Market Value Adjustment to surrenders from that Sub-Account. No market value adjustment will apply to surrenders from Sub-Accounts associated with a 1-year subsequent Guaranteed Period.
Please note that the following example assumes no interest withdrawals, no premium tax due on issuance, and no surrenders other than those shown in the example. The hypothetical interest rates are for purposes of illustration only and we do not intend them as a prediction of any future interest rates we may declare under the Contract. The actual interest rates we declare for any Guaranteed Period may be more or less than what we have used in this illustration.
13
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES FULL SURRENDER AFTER COMPLETION OF YEAR 3
|
Interest Guarantee Period (years):
|
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3
|
|
5
|
|
7
|
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Total
|
|
|
Initially –
|
|
|
Annuity Deposit:
|
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$
|
10,000
|
|
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$
|
10,000
|
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$
|
10,000
|
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$
|
30,000
|
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Guaranteed Interest Rate:
|
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3.50
|
%
|
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3.75
|
%
|
|
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4.00
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%
|
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|
|
|
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Year 1 –
|
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Beginning of Year Account Value:
|
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$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
30,000
|
|
|
|
x
(1 + Guaranteed Interest Rate):
|
|
|
1.0350
|
|
|
|
1.0375
|
|
|
|
1.0400
|
|
|
|
|
|
|
|
= End of Year Account Value:
|
|
$
|
10,350.00
|
|
|
$
|
10,375.00
|
|
|
$
|
10,400.00
|
|
|
$
|
31,125.00
|
|
|
|
– Beginning of Year Account Value:
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
30,000
|
|
|
|
= Interest Earned during Year:
|
|
$
|
350.00
|
|
|
$
|
375.00
|
|
|
$
|
400.00
|
|
|
$
|
1,125.00
|
|
|
|
Year 2 –
|
|
|
Beginning of Year Account Value:
|
|
$
|
10,350.00
|
|
|
$
|
10,375.00
|
|
|
$
|
10,400.00
|
|
|
$
|
31,125.00
|
|
|
|
x
(1 + Guaranteed Interest Rate):
|
|
|
1.0350
|
|
|
|
1.0375
|
|
|
|
1.0400
|
|
|
|
|
|
|
|
= End of Year Account Value:
|
|
$
|
10,712.25
|
|
|
$
|
10,764.06
|
|
|
$
|
10,816.00
|
|
|
$
|
32,292.31
|
|
|
|
– Beginning of Year Account Value:
|
|
$
|
10,350.00
|
|
|
$
|
10,375.00
|
|
|
$
|
10,400.00
|
|
|
$
|
31,125.00
|
|
|
|
= Interest Earned during Year:
|
|
$
|
362.25
|
|
|
$
|
389.06
|
|
|
$
|
416.00
|
|
|
$
|
1,167.31
|
|
|
|
Year 3 –
|
|
|
Beginning of Year Account Value:
|
|
$
|
10,712.25
|
|
|
$
|
10,764.06
|
|
|
$
|
10,816.00
|
|
|
$
|
32,292.31
|
|
|
|
x
(1 + Guaranteed Interest Rate):
|
|
|
1.0350
|
|
|
|
1.0375
|
|
|
|
1.0400
|
|
|
|
|
|
|
|
= End of Year Account Value:
|
|
$
|
11,087.18
|
|
|
$
|
11,167.71
|
|
|
$
|
11,248.64
|
|
|
$
|
33,503.53
|
|
|
|
– Beginning of Year Account Value:
|
|
$
|
10,712.25
|
|
|
$
|
10,764.06
|
|
|
$
|
10,816.00
|
|
|
$
|
32,292.31
|
|
|
|
= Interest Earned during Year:
|
|
$
|
374.93
|
|
|
$
|
403.65
|
|
|
$
|
432.64
|
|
|
$
|
1,211.22
|
|
|
|
After Completion of Year 3 –
|
|
|
Account Value:
|
|
$
|
11,087.18
|
|
|
$
|
11,167.71
|
|
|
$
|
11,248.64
|
|
|
$
|
33,503.53
|
|
|
|
– Prior Year's Interest:
|
|
$
|
374.93
|
|
|
$
|
403.65
|
|
|
$
|
432.64
|
|
|
$
|
1,211.22
|
|
|
= Amount Subject to Surrender Charge and
Market Value Adjustment:
|
|
$
|
10,712.25
|
|
|
$
|
10,764.06
|
|
|
$
|
10,816.00
|
|
|
$
|
32,292.31
|
|
|
|
Surrender Charge Percentage:
|
|
|
0
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
x
Subjected Amount:
|
|
$
|
10,712.25
|
|
|
$
|
10,764.06
|
|
|
$
|
10,816.00
|
|
|
$
|
32,292.31
|
|
|
|
= Surrender Charge:
|
|
$
|
0.00
|
|
|
$
|
430.56
|
|
|
$
|
432.64
|
|
|
$
|
863.20
|
|
|
|
Number of Months Remaining in the Guaranteed Period:
|
|
|
—
|
|
|
|
24
|
|
|
|
48
|
|
|
|
|
|
|
|
Example #1 — Increasing Interest Rate Environment
|
|
|
Current Treasury Rate:
|
|
|
4.50
|
%
|
|
|
5.00
|
%
|
|
|
5.50
|
%
|
|
|
|
|
|
|
– Initial Treasury Rate:
|
|
|
3.75
|
%
|
|
|
4.25
|
%
|
|
|
4.75
|
%
|
|
|
|
|
|
|
+ 0.25
%:
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
|
|
|
|
|
|
x
Number Months Remaining / 12:
|
|
|
0.00
|
|
|
|
2.00
|
|
|
|
4.00
|
|
|
|
|
|
|
|
= Market Value Adjustment Percentage:
|
|
|
0.00
|
%
|
|
|
2.00
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
x
Subjected Amount:
|
|
$
|
10,712.25
|
|
|
$
|
10,764.06
|
|
|
$
|
10,816.00
|
|
|
$
|
32,292.31
|
|
|
|
= Market Value Adjustment:
|
|
$
|
0.00
|
|
|
$
|
215.28
|
|
|
$
|
432.64
|
|
|
$
|
647.92
|
|
|
|
Account Value:
|
|
$
|
11,087.18
|
|
|
$
|
11,167.71
|
|
|
$
|
11,248.64
|
|
|
$
|
33,503.53
|
|
|
|
– Surrender Charge:
|
|
$
|
0.00
|
|
|
$
|
430.56
|
|
|
$
|
432.64
|
|
|
$
|
863.20
|
|
|
|
– Market Value Adjustment:
|
|
$
|
0.00
|
|
|
$
|
215.28
|
|
|
$
|
432.64
|
|
|
$
|
647.92
|
|
|
|
= Net Account Value:
|
|
$
|
11,087.18
|
|
|
$
|
10,521.87
|
|
|
$
|
10,383.36
|
|
|
$
|
31,992.41
|
|
|
|
Example #2 — Decreasing Interest Rate Environment
|
|
|
Current Treasury Rate:
|
|
|
3.00
|
%
|
|
|
3.50
|
%
|
|
|
4.00
|
%
|
|
|
|
|
|
|
– Initial Treasury Rate:
|
|
|
3.75
|
%
|
|
|
4.25
|
%
|
|
|
4.75
|
%
|
|
|
|
|
|
|
+ 0.25
%:
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
|
|
|
|
|
|
x
Number Months Remaining / 12:
|
|
|
0.00
|
|
|
|
2.00
|
|
|
|
4.00
|
|
|
|
|
|
|
|
= Market Value Adjustment Percentage:
|
|
|
0.00
|
%
|
|
|
–1.00
|
%
|
|
|
–2.00
|
%
|
|
|
|
|
|
|
x
Subjected Amount:
|
|
$
|
10,712.25
|
|
|
$
|
10,764.06
|
|
|
$
|
10,816.00
|
|
|
$
|
32,292.31
|
|
|
|
= Market Value Adjustment:
|
|
$
|
0.00
|
|
|
$
|
(107.64
|
)
|
|
$
|
(216.32
|
)
|
|
$
|
(323.96
|
)
|
|
|
Account Value:
|
|
$
|
11,087.18
|
|
|
$
|
11,167.71
|
|
|
$
|
11,248.64
|
|
|
$
|
33,503.53
|
|
|
|
– Surrender Charge:
|
|
$
|
0.00
|
|
|
$
|
430.56
|
|
|
$
|
432.64
|
|
|
$
|
863.20
|
|
|
|
– Market Value Adjustment:
|
|
$
|
0.00
|
|
|
$
|
(107.64
|
)
|
|
$
|
(216.32
|
)
|
|
$
|
(323.96
|
)
|
|
|
= Net Account Value:
|
|
$
|
11,087.18
|
|
|
$
|
10,844.79
|
|
|
$
|
11,032.32
|
|
|
$
|
32,964.29
|
|
|
14
Premium Tax
Premium tax (including related retaliatory taxes and fees, if any) will be deducted when applicable. If your Contract is subject to a premium tax, we will deduct it according to applicable law from either your Annuity Deposits when received, upon a full or partial surrender, from the amount applied to an annuity option, or from the Death Benefit. The current rate of premium tax ranges up to 3.50%.
DEATH BENEFIT
Death of an Owner
If any Owner dies prior to the Annuity Commencement Date while the Contract is in force, we will pay a death benefit to the Beneficiary. If there are joint Owners to a Contract and one dies prior to the Annuity Commencement Date, the surviving Owner will be the Beneficiary. If there is no Beneficiary living or named, we will pay the death benefit to the estate of the deceased Owner. If any Owner is not a natural person, the death of the Annuitant or a change in the Annuitant will be treated as the death of an Owner. We will not pay a death benefit if an Owner dies after the Annuity Commencement Date. (See "Death of the Owner or Annuitant After the Annuity Commencement Date," page 18.)
Determining the Death Benefit
We will determine the death benefit as of the date we receive due proof of an Owner's death. If we receive a claim for the death benefit in good order and within 12 months of the date of the Owner's death, the death benefit will be the greater of the Net Account Value or the Account Value less applicable premium tax. If we receive the claim more than 12 months after the date of death, the death benefit will be the Net Account Value. If a death benefit is payable because an Owner who is not a natural person changes the Annuitant, the death benefit will be the Net Account Value.
Paying the Death Benefit
Only one death benefit is payable under a Contract, even though the Contract may, under some circumstances, continue beyond the time of an Owner's death.
The death benefit may be taken in one lump sum immediately, in which event the Contract will terminate. If the death benefit is not taken immediately as a lump sum, the entire interest in the Contract must be distributed under one of the following options:
(1) the entire interest must be distributed over the life of the Beneficiary, or over a period not extending beyond the life expectancy of the Beneficiary, with distributions beginning within one year of the Owner's death; or
(2) the entire interest must be distributed within five years of the Owner's death.
If there is more than one Beneficiary, these provisions apply to each Beneficiary individually.
If the Beneficiary is the deceased Owner's spouse, the surviving spouse may choose, in lieu of taking the death benefit, to continue the Contract and become the new Owner. The surviving spouse may then select a new Beneficiary. Upon the surviving spouse's death, the death benefit will become payable to the new Beneficiary and must then be distributed to the new Beneficiary in one sum immediately or according to option 1 or 2, described above.
The death benefit provisions of your Contract will be interpreted to comply with the requirements of Section 72(s) of the Internal Revenue Code. We reserve the right to endorse your Contract, as necessary, to conform to regulatory requirements. We will send you a copy of any endorsement containing such Contract modifications.
15
ANNUITY BENEFITS
Annuity Commencement Date
You may select an Annuity Commencement Date when you purchase a Contract. The Annuity Commencement Date may not be earlier than the end of any Guaranteed Period nor later than the Annuitant's 95
th
birthday without our prior consent. If you do not select one, the Annuity Commencement Date will be the end of the Contract year immediately before the Annuitant's 95
th
birthday.
You may change the Annuity Commencement Date, subject to some general restrictions:
• You must request the change in writing.
• We must receive the written request at least 30 days before the new Annuity Commencement Date you requested.
• The new Annuity Commencement Date may not come before the end of any existing Guaranteed Period.
• Unless we agree prior to the change, the new Annuity Commencement Date may not be later than the Annuitant's 95
th
birthday.
Once our Administrative Office notifies you that we have received and approved your written request to change the Annuity Commencement Date, the change will be made effective as of the date you signed the request.
Annuity Commencement Dates that occur after the Annuitant's 85
th
birthday may have adverse income tax consequences so you should consult your tax advisor before requesting an Annuity Commencement Date at these advanced ages (See "Federal Tax Matters, Tax Deferral During Accumulation Period".). You may be required to begin distributions from Qualified Contracts before the Annuity Commencement Date. (See "Federal Tax Matters, Qualified Retirement Plans".)
Annuity Options
On the Annuity Commencement Date we will apply part or all of the Net Account Value to the annuity option you have selected. If you have not selected an annuity option, we will apply your Net Account Value to Option 2 — Life Income with Payments for a 10-year fixed period. You may select from the following annuity options. For Qualified Contracts, additional annuity options may apply with certain restrictions.
•
Option 1 — Payments for a Fixed Period.
We will make equal monthly payments for any period not less than five years nor more than 30 years. The amount of each payment depends upon the total amount applied, the period selected and the interest rate we are using when the annuity payments are determined.
•
Option 2 — Life Income with Payments for a Fixed Period.
We will make equal monthly payments based on the life of 1 or 2 named Annuitants. Payments will continue for the lifetime of the Annuitant(s) with payments guaranteed for either 10 or 20 years. Payments stop at the end of the selected fixed period or when the last surviving named Annuitant dies, whichever is later.
•
Option 3 — Payments for a Fixed Amount.
We will make equal monthly payments for a fixed amount. The amount of each payment may not be less than $10 for each $1,000 of Net Account Value applied to the annuity option. Each month we will credit interest on the unpaid balance and add that interest to it. We will set the interest rate in our sole discretion, but it will not be less than an annual effective rate of 4%. Payments will continue until the amount we hold runs out. The last payment will be for the balance only.
Other annuity options may be available on your Annuity Commencement Date.
16
Annuity Payments
We will use the Annuitant's age on the Annuity Commencement Date to determine the amount of the payments under the annuity option you select. We calculate the amount of each annuity payment using the Annuity Tables published in the Contract. Those tables are based on the 1983 Individual Annuitant Mortality Table A projected four years with interest credited at 4% per annum. One year will be deducted from the attained age of the Annuitant for every three completed years beyond the year 1987. If, at the time you select an annuity option, we offer more favorable options or rates, the higher benefits will apply.
Generally, we will make the first annuity payment one month after the Annuity Commencement Date. We will make subsequent payments according to the payment mode you select. We reserve the right to pay the Net Account Value in a lump sum if it is less than $5,000, and to change the frequency of your annuity payments if at any time the annuity payment is less than our current minimum payment amount.
As a condition for making the first annuity payment, we may require proof of the Annuitant's age and gender. As a condition for continuing to make annuity payments that are based on the life of an Annuitant, we may at any time require proof that the Annuitant is still living. You may not surrender this Contract after annuity payments begin.
Death of the Owner or Annuitant After the Annuity Commencement Date
If any Owner or Annuitant dies on or after the Annuity Commencement Date and before all the annuity payments have been made, we will distribute any remaining payments at least as rapidly as under the annuity option in effect on the date of death. After the death of an Annuitant, we will make any remaining payments to the Beneficiary unless you specified otherwise before the Annuitant died.
INVESTMENTS BY PROTECTIVE
Protective's investment philosophy is to maintain a portfolio that is matched to its liabilities with respect to yield, risk, and cash flow characteristics. The types of assets in which Protective may invest are governed by state laws that prescribe permissible investment assets. Within the parameters of these laws, Protective invests its assets giving consideration to such factors as liquidity needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.
In establishing Guaranteed Interest Rates, Protective intends to take into account, among other things, the yields available on the instruments in which it intends to invest the proceeds from the Contracts. (See "Guaranteed Interest Rates".) Protective's investment strategy with respect to the proceeds attributable to the Contracts will be to primarily invest in investment-grade debt instruments having durations tending to match the applicable Guaranteed Periods. It is also anticipated that some portion of the portfolio will be invested in commercial mortgages. Protective may also invest in lower than investment-grade debt instruments.
Investment-grade debt instruments in which Protective intends to invest the proceeds from the Contracts include:
Securities issued by the United States Government or its agencies or instrumentalities, which issues may or may not be guaranteed by the United States Government.
Mortgage-backed and corporate debt securities that have an investment grade, at the time of purchase, within the four highest grades assigned by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, A, Baa), Standard & Poor's Corporation ("S&P") (AAA, AA, A, or BBB) or any other nationally recognized rating service. Protective considers bonds rated Baa or higher by Moody's or BBB or higher by S&P to be investment grade. As of September 30, 2008, 94.7% of bonds in which Protective invests were considered investment grade; 30.3% of these bonds were rated Baa or BBB.
17
Mortgage-backed securities are based upon residential mortgages which have been pooled into securities. Mortgage-backed securities may have greater cash flow volatility as a result of the pass-through of prepayments of principal on the underlying loans. Prepayments of principal on the underlying residential loans can be expected to accelerate with decreases in interest rates and diminish with increases in interest rates.
Debt obligations which have a Moody's or Standard & Poor's rating below investment grade may comprise a portion of the portfolio. Risks associated with investments in less than investment-grade debt obligations may be significantly higher than risks associated with investments in debt securities rated investment grade. Risk of loss upon default by the borrower is significantly greater with respect to such debt obligations than with other debt securities because these obligations may be unsecured or subordinated to other creditors. Additionally, there is often a thinly traded market for such securities and current market quotations are frequently not available for some of these securities. Issuers of less than investment grade debt obligations usually have higher levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than investment-grade issuers. Fixed maturity securities rated BBB may have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of the issuer to make principal and interest payments than is the case with higher rated fixed maturity securities.
Protective's primary mortgage lending emphasis has been on small commercial mortgage loans to finance shopping centers that provide for the necessities of life. Protective has been making this type of loan for many years with little principal loss over that time.
The federal government or its instrumentalities does not guarantee the Contracts. Protective backs the guarantees associated with the Contracts.
While the foregoing generally describes our investment strategy with respect to the proceeds attributable to the Contracts, we are not obligated to invest the proceeds attributable to the Contracts according to any particular strategy, except as may be required by the insurance laws of Tennessee and other states in which we operate. Contract owners do not participate in the investment performance of these assets. The risk of investment gain or loss is borne entirely by the Company.
OTHER CONTRACT PROVISIONS
Non-Participating
The Contract does not share in our surplus or profits and does not pay dividends.
Notice
All instructions and requests to change or assign a Contract must be in a written form acceptable to us and signed by the Owner. The instruction, change or assignment will relate back to and take effect on the date it was signed, but we will not be responsible for following any instruction or making any change or assignment before we receive it and acknowledge it through our Administrative Office. Send correspondence to: Investment Products Services, P. O. Box 10648, Birmingham, Alabama 35202-0648.
Reports
At least once each year, we will send you a report showing the current AccountValue, Sub-Account Values, interest credited and any other information required by law.
18
Transactions and Modification of the Contract
Currently, you must make any request for a change or transaction under your Contract in writing and on a form acceptable to Protective. Changes and transactions under your Contract include actions such as: making additional Annuity Deposits; requesting surrenders or interest withdrawals; changing the Annuity Commencement Date, annuity option, or Annuitant; or making a death benefit claim.
No one is authorized to modify or waive any term or provision of the Contract unless we agree and unless it is signed by our President, Vice President or Secretary. We reserve the right to change or modify the provisions of the Contract to conform to any applicable laws, rules or regulations issued by a government agency, or to assure the Contract continues to qualify as an annuity under the Internal Revenue Code. We will send you a copy of any endorsement that modifies your Contract and will obtain all necessary approvals including, where required, that of the Owner.
Assignment or Transfer of a Contract
You have the right to assign or transfer a Contract if it is permitted by applicable law. Generally, you do not have the right to assign or transfer a Qualified Contract. We do not assume responsibility for any assignment or transfer. Any claim made under an assignment or transfer is subject to proof of the nature and extent of the assignee's or transferee's interest before we make a payment. Assignments and transfers have federal income tax consequences. An assignment or transfer may result in the Owner recognizing taxable income. (See, "Federal Tax Matters, Taxation of Interest Withdrawals and Partial and Full Surrenders".)
Facility of Payment
If the Annuitant or Beneficiary is incapable of giving a valid receipt for any payment, we may make payment to whomever has assumed his or her care and principal support. Any such payment shall fully discharge us to the extent of that payment.
Protection of Proceeds
To the extent permitted by law, no benefits payable under a Contract will be subject to the claims of creditors of any payee.
Error in Age or Gender
When a Contract benefit depends upon any person's age or gender, we may require proof of such. We may suspend the benefit until we receive that proof. When we receive satisfactory proof, we will make any payments that were due during the period of suspension. Where the use of unisex mortality rates is required, we will not determine or adjust benefits based on gender.
If, after we receive proof of age and gender (where applicable), we determine that the information you furnished to us was not correct, we will adjust the benefits under your Contract to that which would have been due based upon the correct information. If we underpaid a benefit because of the error, we will make up the underpayment in a lump sum. If the error resulted in an overpayment, we will deduct the amount of the overpayment from any current or future payment due under the Contract. We will deduct up to the full amount of any current or future payment until the overpayment has been fully repaid. Underpayments and overpayments will bear interest at an annual effective rate of 3%.
Suspension of Contracts
Under certain circumstances, we may be required by law to reject an Annuity Deposit, freeze a Contract, or both. Under these circumstances, we would refuse to honor any request for withdrawals, surrenders, or death benefits. Once frozen, we would hold any Account Value in an interest bearing account until we receive instructions from the appropriate regulatory or law enforcement authorities.
19
DISTRIBUTION OF THE CONTRACTS
Distribution
We have entered into an agreement with Investment Distributors, Inc. ("IDI") under which IDI has agreed to distribute the Contracts on a "best efforts" basis. Under the agreement, IDI serves as principal underwriter (as defined under Federal securities laws and regulations) for the Contracts. IDI is a Tennessee corporation and was established in 1993. IDI, a wholly-owned subsidiary of PLC, is an affiliate of and shares the same address as Protective. IDI is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of the Financial Industry Regulatory Authority ("FINRA").
IDI, together with Protective, enters into distribution agreements with other broker-dealers, including ProEquities, Inc., an affiliate of Protective Life and IDI, (collectively, "Selling Broker- Dealers") for the sale of the Contracts. Registered representatives of the Selling Broker-Dealers sell the Contracts directly to individuals and groups who have established accounts with them. Registered representatives of the Selling Broker-Dealers must be licensed as insurance agents by applicable state insurance authorities and appointed as agents of Protective in order to sell the Contracts. IDI may also offer the Contracts directly to members of certain other eligible groups or other eligible individuals.
We pay commissions and additional asset-based compensation to Selling Broker-Dealers through IDI. IDI does not retain any commission payment or other amounts as principal underwriter for the Contracts. We may pay some or all of IDI's operating and other expenses, however.
We offer the Contract on a continuous basis. While we anticipate continuing to offer the Contracts, we reserve the right to discontinue the offering at any time.
Selling Broker-Dealers
We pay commissions and may provide some form of non-cash compensation to all Selling Broker- Dealers in connection with the promotion and sale of the Contracts. A portion of any payments made to Selling Broker-Dealers may be passed on to their registered representatives in accordance with their internal compensation programs. We may use any of our corporate assets to pay commissions and other costs of distributing the Contracts, including any profit from the fees and charges imposed under the Contracts. Commissions and other incentives or payments described below are not charged directly to Contract owners. We intend to recoup commissions and other sales expenses through fees and charges deducted under the Contracts or from our general account.
Compensation Paid to All Selling Broker-Dealers.
We pay commissions as a percentage of each Annuity Deposit and on the Sub-Account Value transferred to a subsequent Guaranteed Period (other than the 1-year Guaranteed Period). While the amount and timing of commissions may vary depending on the distribution agreement, we do not expect them to exceed 4% of any Annuity Deposit or transfer of Sub-Account Value. In the normal course of business, we may also provide non-cash compensation in connection with the promotion of the Contracts, including conferences and seminars (including travel, lodging, and meals in connection therewith), and items of relatively small value, such as promotional gifts, meals, or tickets to sporting or entertainment events.
The registered representative who sells you the Contract typically receives a portion of the compensation we pay to his or her Selling Broker-Dealer, depending on the agreement between the Selling Broker-Dealer and your registered representative and the Selling Broker-Dealer's internal compensation program. These programs may include other types of cash and non-cash compensation and other benefits.
If you would like information about what your registered representative and the Selling Broker-Dealer for whom he or she works may receive in connection with your purchase of a Contract, please ask your registered representative.
Additional Compensation Paid to Selected Selling Broker-Dealers.
In addition to ordinary commissions and non-cash compensation, we may pay additional asset-based compensation to selected Selling Broker-Dealers. These payments may be (1) additional amounts as a percentage of Annuity
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Deposits we receive under the Contracts and other contracts we sell, such as our variable insurance products, (2) additional "trail" commissions, which are periodic payments as a percentage of the Account Values of the Contracts and of the contract and policy values or variable account values of our variable insurance products; and/or (3) marketing allowances as a percentage of fixed annuity assets under management relating to the Contracts. Some or all of these additional asset-based compensation payments may be conditioned upon the Selling Broker-Dealer producing a specified amount of new Annuity Deposits [(including purchase payments and/or premiums for our variable insurance products)] and/or maintaining a specified amount of Annuity Value (including contract and policy value for our variable insurance products) with us.
The Selling Broker-Dealers to whom we pay additional asset-based compensation may provide preferential treatment with respect to our products (including the Contracts) in their marketing programs. Preferential treatment of our products by a Selling Broker-Dealer may include any or all of the following: (1) enhanced marketing of our products over non-preferred products; (2) increased access to the Selling Broker-Dealer's registered representatives; and (3) payment of higher compensation to registered representatives for selling our products (including the Contracts) than for selling non-preferred products.
These additional asset-based compensation arrangements are not offered to all Selling Broker- Dealers. These arrangements are designed to specially encourage the sale of our products (and/or our affiliates' products) by such Selling Broker-Dealers. The prospect of receiving, or the receipt of, additional asset-based compensation may provide Selling Broker-Dealers and/or their registered representatives with an incentive to favor sales of our Contracts over other market value adjusted annuities or other investments (as well as favoring our variable insurance products over other variable insurance products) with respect to which a Selling Broker-Dealer does not receive additional compensation, or receives lower levels of additional compensation. You may wish to take such payment arrangements into account when considering and evaluating any recommendation relating to the Contracts.
If you would like information about what your registered representative and the Selling Broker-Dealer for whom he or she works may receive in connection with your purchase of a Contract, please ask your registered representative.
We may also pay to selected Selling Broker-Dealers, including those listed above as well as others, additional compensation in the form of (1) payments for participation in meetings and conferences that include presentations about our products (including the Contracts), and (2) payments to help defray the costs of sales conferences and educational seminars for the Selling Broker-Dealers' registered representatives.
Arrangements with Affiliated Selling Broker-Dealer.
In addition to the ordinary commissions and non-cash compensation that we pay to all Selling Broker-Dealers, including ProEquities, Inc., we or our parent company, PLC, pay some of the operating and other expenses of ProEquities, Inc., such as paid-in-capital and certain overhead expenses. Additionally, employees of ProEquities, Inc. may be eligible to participate in various employee benefit plans offered by PLC.
FEDERAL TAX MATTERS
Introduction
The following discussion of the federal income tax treatment of the Contracts is not exhaustive, does not purport to cover all situations, and is not intended as tax advice. The federal income tax treatment of the Contracts is unclear in certain circumstances, and a qualified tax adviser should always be consulted with regard to the application of law to individual circumstances. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Department regulations, and interpretations existing on the date of this Prospectus. These authorities, however, are subject to change by Congress, the Treasury Department, and judicial decisions.
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This discussion does not address state or local tax consequences associated with the purchase of the Contracts. In addition,
the Company makes no guarantee regarding any tax treatment — federal, state or local — of any Contract or of any transaction involving a Contract.
Protective's Tax Status
Protective is taxed as a life insurance company under the Code. The assets underlying the Contracts will be owned by Protective, and the income derived from such assets will be includible in Protective's income for federal income tax purposes.
Taxation of Annuities in General
Tax Deferral During Accumulation Period
Under existing provisions of the Code (and except as described below), the Contracts should be treated as annuities and any increase in an Owner's Account Value is generally not taxable to the Owner or Annuitant until received, either in the form of annuity payments as contemplated by the Contracts, or in some other form of distribution.
As a general rule, Contracts held by "non-natural persons" such as a corporation, trust or other similar entity, as opposed to a natural person, are not treated as annuity contracts for federal tax purposes. The income on such Contracts (as defined in the tax law) is taxed as ordinary income that is received or accrued by the Owner during the taxable year. There are several exceptions to this general rule for Contracts held by non-natural persons. First, Contracts will generally be treated as held by a natural person if the nominal owner is a trust or other entity which holds the Contract as an agent for a natural person. Thus, if a group Contract is held by a trust or other entity as an agent for Certificate owners who are individuals, those individuals should be treated as owning an annuity for federal income tax purposes. However, this special exception will not apply in the case of any employer who is the nominal owner of a Contract under a non-qualified deferred compensation arrangement for its employees.
In addition, exceptions to the general rule for non-natural Contract owners will apply with respect to (1) Contracts acquired by an estate of a decedent by reason of the death of the decedent, (2) Contracts issued in connection with certain Qualified Plans, (3) Contracts purchased by employers upon the termination of certain Qualified Plans, (4) certain Contracts used in connection with structured settlement agreements, and (5) Contracts purchased with a single premium when the annuity starting date is no later than a year from purchase of the Contract and substantially equal periodic payments are made, not less frequently than annually, during the annuity period.
If the Contract's Annuity Commencement Date occurs (or is scheduled to occur) at a time when the Annuitant has reached an advanced age,
e.g.
, past age 85, it is possible that the Contract would not be treated as an annuity for federal income tax purposes. In that event, any increases in the Account Value could be currently includable in the Owner's income.
The remainder of this discussion assumes that the Contract will constitute an annuity for federal tax purposes.
Taxation of Interest Withdrawals and Partial and Full Surrenders
In the case of an interest withdrawal or partial surrender, amounts received generally are includible in income to the extent the Owner's Account Value before the interest withdrawal or partial surrender exceeds his or her "investment in the contract." Amounts received under an automatic interest withdrawal program are treated as partial surrenders. In the case of a full surrender, amounts received are includible in income to the extent they exceed the investment in the contract. For these purposes the investment in the contract at any time equals the premiums paid under the Contract (to the extent such premium payments were neither deductible when made nor excludable from income as, for example, in
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the case of certain contributions to Qualified Contracts) less any amounts previously received from the Contract which were not includible in income.
Other than in the case of Qualified Contracts (which generally cannot be assigned or pledged), any assignment or pledge of (or agreement to assign or pledge) any portion of the Account Value is treated as a partial surrender of such amount or portion. The investment in the contract is increased by the amount includible as income with respect to such assignment or pledge, though it is not affected by any other aspect of the assignment or pledge (including its release). If an Owner transfers a Contract without adequate consideration to a person other than the Owner's spouse (or to a former spouse incident to divorce), the Owner will be taxed on the difference between the Account Value and the investment in the contract at the time of transfer. In such case, the transferee's investment in the contract will be increased to reflect the increase in the transferor's income.
There is some uncertainty regarding the treatment of the Market Value Adjustment for purposes of determining the amount includible in income as a result of any interest withdrawal, partial surrender, assignment or pledge or transfer without adequate consideration. Congress has given the Internal Revenue Service ("IRS") regulatory authority to address this uncertainty. However, as of the date of this Prospectus, the IRS has not issued any regulations addressing these determinations.
Taxation of Annuity Payments
Normally, the portion of each annuity payment taxable as ordinary income is equal to the excess of the payment over the excludable amount. The excludable amount is the amount determined by multiplying (1) the payment by (2) the ratio of the investment in the contract, adjusted for any period certain or refund feature, to the total expected value of annuity payments for the term of the Contract (determined under Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using this ratio, annuity payments will be fully taxable. If annuity payments cease because of the death of the Annuitant and before the total amount of the investment in the contract is recovered, the unrecovered amount generally will be allowed as a deduction to the Annuitant in his last taxable year.
There may be special income tax issues present in situations where the Owner and the Annuitant are not the same person and are not married to one another. A tax advisor should be consulted in these situations.
Annuity payments may be subject to federal income tax withholding requirements. (See "Federal Income Tax Withholding.") In addition, in the case of annuity payments from certain Qualified Plans, mandatory withholding requirements may apply, unless a "direct rollover" of such annuity payments is made. (See "Direct Rollover Rules.")
Example of Determination of Excludable Amount
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Assumptions:
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Investment in contract:
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$70,000
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Annuity option selected:
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10 year certain period
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Payment frequency:
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monthly, with the initial payment made immediately upon annuitization
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Hypothetical payment:
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$1,000
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Calculations:
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Total payments =
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Hypothetical payment multiplied by the number of payments to be made: $1,000
x
120 = $120,000
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Exclusion ratio =
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Cost basis divided by the total payments: $70,000 ÷ $120,000 = 58.33%
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Excludable amount =
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Exclusion ratio multiplied by the hypothetical payment: 58.33%
x
$1,000 = $583.30
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Taxation of Death Benefit Proceeds
Prior to the Annuity Commencement Date, amounts may be distributed from a Contract because of the death of an Owner or, in certain circumstances, the death of the Annuitant. Such Death Benefit proceeds are includible in income as follows: (1) if distributed in a lump sum, they are taxed in the same manner as a full surrender, as described above, or (2) if distributed under an Annuity option, they are taxed in the same manner as annuity payments, as described above. After the Annuity Commencement Date, if a guaranteed period exists under an Annuity option and the Annuitant dies before the end of that period, payments made to the Beneficiary for the remainder of that period are includible in income as follows: (1) if received in a lump sum, they are includible in income to the extent that they exceed the unrecovered investment in the contract at that time, or (2) if distributed in accordance with the existing Annuity option selected, they are fully excludable from income until the remaining investment in the contract is deemed to be recovered, and all annuity payments thereafter are fully includible in income.
Proceeds payable on death may be subject to federal income tax withholding requirements. (See "Federal Income Tax Withholding".) In addition, in the case of such proceeds from certain Qualified Contracts, mandatory withholding requirements may apply, unless a "direct rollover" of such proceeds is made. (See "Direct Rollover Rules".)
Penalty Tax on Premature Distributions
Where a Contract has not been issued in connection with a Qualified Plan, there generally is a 10% penalty tax on the taxable amount of any payment from the Contract unless the payment is: (a) received on or after the Owner reaches age 59
1
/
2
; (b) attributable to the Owner becoming disabled (as defined in the tax law); (c) made on or after the death of the Owner or, if an Owner is not an individual, on or after the death of the primary annuitant (as defined in the tax law); (d) made as part of a series of substantially equal periodic payments (not less frequently than annually) for the life (or life expectancy) of the Owner or the joint lives (or joint life expectancies) of the Owner and a designated beneficiary (as defined in the tax law); or (e) made under a Contract purchased with a single premium when the Annuity Commencement Date is no later than a year from purchase of the Contract and substantially equal periodic payments are made, not less frequently than annually, during the annuity period. Certain other exceptions to the 10% penalty tax not described herein may also apply. (Similar rules, described below, generally apply in the case of Qualified Contracts.)
Aggregation of Contracts
In certain circumstances, the IRS may determine the amount of an annuity payment or an interest withdrawal or a partial surrender or a full surrender from a Contract that is includible in income by combining some or all of the annuity contracts owned by an individual which are not issued in connection with a Qualified Plan. For example, if a person purchases a Contract offered by this Prospectus and also purchases at approximately the same time an immediate annuity issued by
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Protective, the IRS may treat the two contracts as one contract. In addition, if a person purchases two or more deferred annuity contracts from the same insurance company (or its affiliates) during any calendar year, all such contracts will be treated as one contract for purposes of determining whether any payment not received as an annuity (including interest withdrawals and surrenders prior to the Annuity Commencement Date) is includible in income. The effects of such aggregation are not always clear; however, it could affect the time when income is taxable and the amount which might be subject to the 10% penalty tax described above.
Exchanges of Annuity Contracts
We may issue the Contract in exchange for all or part of another annuity contract that you own. Such an exchange will be tax free if certain requirements are satisfied. If the exchange is tax free, your investment in the contract immediately after the exchange will generally be the same as that of the annuity contract exchanged, increased by any additional purchase payment made as part of the exchange. Your Account Value immediately after the exchange may exceed your investment in the contract. That excess may be includable in income should amounts subsequently be withdrawn or distributed from the Contract (
e.g.
, as a partial surrender, full surrender, annuity payment, or death benefit).
If you exchange part of an existing contract for the Contract, and within 12 months of the exchange you receive a payment (
e.g.
, you make a withdrawal) from either contract, the exchange may not be treated as a tax free exchange. Rather, the exchange may be treated as if you had made a partial surrender from the existing contract and then purchased the Contract. In these circumstances, some or all of the amount exchanged into the Contract could be includible in your income and subject to a 10% penalty tax. There are various circumstances in which a partial exchange followed by receipt of a payment within 12 months of the exchange is unlikely to affect the tax free treatment of the exchange.
You should consult your tax advisor in connection with an exchange of all or part of an annuity contract for the Contract, especially if you may make a withdrawal from either contract within 12 months after the exchange.
Loss of Interest Deduction Where Contracts Are Held by or for the Benefit of Certain Non-natural Persons
In the case of Contracts issued after June 8, 1997 to a non-natural taxpayer (such as a corporation or a trust), or held for the benefit of such an entity, a portion of otherwise deductible interest may not be deductible by the entity, regardless of whether the interest relates to debt used to purchase or carry the Contract. However, this interest deduction disallowance does not affect Contracts where the income on such Contracts is treated as ordinary income that is received or accrued by the Owner during the taxable year. Entities that are considering purchasing the Contract, or entities that will be Beneficiaries under a Contract, should consult a tax advisor.
Qualified Retirement Plans
In General
The Contracts are also designed for use in connection with certain types of retirement plans which receive favorable treatment under the Code. Those who are considering the purchase of a Contract for use in connection with a Qualified Plan should consider, in evaluating the suitability of the Contract, that the Contract requires an initial Annuity Deposit of at least $25,000. Numerous special tax rules apply to participants in Qualified Plans and to Contracts used in connection with Qualified Plans. Therefore, no attempt is made in this prospectus to provide more than general information about the use of the Contracts with the various types of Qualified Plans. State income tax rules applicable to Qualified Plans and Qualified Contracts often differ from federal income rules, and this prospectus does not describe any of these differences. Those who intend to use the Contract in connection with Qualified Plans should seek competent advice.
The tax rules applicable to Qualified Plans vary according to the type of plan and the terms and conditions of the plan itself. For example, both the amount of the contribution that may be made, and
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the tax deduction or exclusion that the Owner may claim for such contribution, are limited under Qualified Plans and vary with the type of plan. Also, in the case of interest withdrawals, full and partial surrenders, and annuity payments under Qualified Contracts, there may be no "investment in the contract" and the total amount received may be taxable.
If a Contract is issued in connection with a Qualified Plan, the Owner and the Annuitant generally must be the same person and generally may not be changed. Additionally, for Contracts issued in connection with Qualified Plans subject to the Employee Retirement Income Security Act ("ERISA"), the spouse or ex-spouse of the Owner will have rights in the Contract. In such a case, the Owner may need the consent of the spouse or ex-spouse to change annuity options, elect an interest withdrawal, or make a partial or full surrender of the Contract.
In the case of Qualified Contracts, special rules apply to the time at which distributions must commence and the form in which the distributions must be paid. For example, the length of any fixed period may be limited in some circumstances to satisfy certain minimum distribution requirements under the Code. Due to the presence of a Market Value Adjustment there may be in some circumstances uncertainty as to the amount of required minimum distributions. Failure to comply with minimum distribution requirements applicable to Qualified Plans will result in the imposition of an excise tax. This excise tax generally equals 50% of the amount by which a minimum required distribution exceeds the actual distribution from the Qualified Plan. In the case of Individual Retirement Accounts or Annuities ("IRAs"), distributions of minimum amounts (as specified in the tax law) must generally commence by April 1 of the calendar year following the calendar year in which the Owner attains age 70
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/
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. In the case of certain other Qualified Plans, distributions of such minimum amounts generally must commence by the later of this date or April 1 of the calendar year following the calendar year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of payments from Qualified Contracts. There are exceptions to this penalty tax which vary depending on the type of Qualified Plan. In the case of an IRA, exceptions provide that the penalty tax does not apply to a payment (a) received on or after the Owner reaches age 59
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, (b) received on or after the Owner's death or because of the Owner's disability (as defined in the tax law), or (c) made as part of a series of substantially equal periodic payments (not less frequently than annually) for the life (or life expectancy) of the Owner or for the joint lives (or joint life expectancies) of the Owner and the Owner's designated Beneficiary (as defined in the tax law). These exceptions, as well as certain others not described herein, generally apply to taxable distributions from other Qualified Plans (although, in the case of plans qualified under sections 401 and 403, exception "c" above for substantially equal periodic payments applies only if the Owner has separated from service). In addition, the penalty tax does not apply to certain distributions from IRAs which are used for qualified first time home purchases or for higher education expenses. Special conditions must be met for these two exceptions to the penalty tax. Those wishing to take a distribution from an IRA for these purposes should consult their tax advisor.
When issued in connection with a Qualified Plan, a Contract will be amended as generally necessary to conform to the requirements of the plan. However, Owners, Annuitants, and Beneficiaries are cautioned that the rights of any person to any benefits under Qualified Plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the Contract. In addition, the Company shall not be bound by terms and conditions of Qualified Plans to the extent such terms and conditions contradict the Contract, unless the Company consents.
Following are brief descriptions of various types of Qualified Plans in connection with which Protective will generally issue a Contract.
Individual Retirement Accounts and Annuities.
Section 408 of the Code permits eligible individuals to contribute to an individual retirement program known as an IRA. IRAs are subject to limits on the amounts that may be contributed and deducted, the persons who may be eligible and on the time when
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distributions may commence. Also, subject to the direct rollover and mandatory withholding requirements (discussed below), distributions from certain Qualified Plans may be "rolled over" on a tax-deferred basis into an IRA. The Contract may not, however, be used in connection with a "Coverdell Education Savings Account" (formerly known as an "Education IRA") under Section 530 of the Code, a "Simplified Employee Pension" under Section 408(k) of the Code, or as a "SIMPLE IRA" under Section 408(p) of the Code.
Roth IRAs.
Section 408A of the Internal Revenue Code permits eligible individuals to contribute to a type of IRA known as a "Roth IRA." Roth IRAs are generally subject to the same rules as non-Roth IRAs, but differ in several respects. Among the differences is that, although contributions to a Roth IRA are not deductible, "qualified distributions" from a Roth IRA will be excludable from income.
A qualified distribution is a distribution that satisfies two requirements:
• First, the distribution must be made in a taxable year that is at least five years after the first taxable year for which a contribution was made to any Roth IRA established for the Owner.
• Second, the distribution must be either:
1) made after the Owner reaches age 59
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2
;
2) made after the Owner's death;
3) attributable to the Owner being disabled; or
4) a qualified first-time homebuyer distribution within the meaning of Section 72(t)(2)(F) of the Internal Revenue Code.
In addition, distributions from Roth IRAs need not commence when the Owner reaches age 70
1
/
2
. A Roth IRA may accept a "qualified rollover contribution" from a non-Roth IRA. A Roth IRA may accept a rollover contribution from a "designated Roth account" maintained under a Qualified Plan, and a Roth IRA also may accept a rollover contribution from a qualified pension plan under Section 401(a) of the Code, qualified annuity plan under Section 403(a) of the Code, Section 403(b) tax-sheltered annuity or custodial account, or governmental plan under Section 457(b) of the Code. Special rules apply to rollovers from Qualified Plans and designated Roth accounts under Qualified Plans. You should seek competent advice before making such a rollover.
Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-SharingPlans.
Sections 401(a) and 403(a) of the Code permit corporate employers to establish various types of tax-favored retirement plans for employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed individuals also to establish such tax-favored retirement plans for themselves and their employees. Such retirement plans may permit the purchase of the Contract in order to provide benefits under the plans. Corporate and self-employed pension and profit sharing plans are also subject to nondiscrimination rules. The nondiscrimination rules generally require that benefits, rights or features of the plan not discriminate in favor of highly compensated employees. In evaluating whether the Contract is suitable for purchase in connection with such a plan, you should consider the effect of the $25,000 minimum Annuity Deposit requirement, and of the higher discretionary interest rate that may be credited to Annuity Deposits of $100,000 or more, on the plan's compliance with applicable nondiscrimination requirements. Violation of these rules can cause loss of the plan's tax favored status under the Code. Employers intending to use the Contract in connection with such plans should seek competent advice.
Section 403(b).
Section 403(b) of the Code permits public school employees and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code to have their employers purchase annuity contracts for them and, subject to certain limitations, to exclude the amount of purchase payments from gross income for tax purposes.
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Purchasers of the Contracts for use as a "Section 403(b) annuity contract" should seek competent advice as to eligibility, limitations on permissible amounts of purchase payments and other tax consequences associated with the Contracts. Section 403(b) annuity contracts contain restrictions on withdrawals of (i) contributions made pursuant to a salary reduction agreement in years beginning after December 31, 1988, (ii) earnings on those contributions, and (iii) earnings after December 31, 1988, on amounts attributable to salary reduction contributions held as of December 31, 1988. These amounts can be paid only if the employee has reached age 59
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, had a severance from employment, died, become disabled, in the case of hardship, or if the amount is a "qualified reservist distribution" under Section 72(t)(2)(G) of the Code. Amounts permitted to be distributed in the event of hardship are limited to actual contributions; earnings thereon can not be distributed on account of hardship. In addition, in the case of contracts issued on or after January 1, 2009, a section 403(b) contract is permitted to distribute retirement benefits (other than those attributable to salary reduction contributions) to a participant no earlier than upon the earlier of the participant's severance from employment or upon the prior occurrence of some event, such as after a fixed number of years, the attainment of a stated age, or disability. (These limitations on withdrawals and distributions do not apply to the extent Protective is directed to transfer some or all of the Account Value to the issuer of another Section 403(b) annuity contract or into a Section 403(b)(7) custodial account.)
Section 403(b) plans are subject to nondiscrimination rules. The nondiscrimination rules generally require that benefits, rights or features of the plan not discriminate in favor of highly compensated employees. In evaluating whether the Contract is suitable for purchase in connection with a tax sheltered annuity plan, you should consider the effect of the $25,000 minimum Annuity Deposit requirement, and of the higher discretionary interest rate that may be credited to Annuity Deposits of $100,000 or more, on the plan's compliance with applicable nondiscrimination requirements. Violation of these rules can cause loss of the plan's tax favored status under the Internal Revenue Code. Employers intending to use the Contract in connection with such plans should seek competent advice.
New income tax regulations impose a written plan requirement and an information sharing requirement on Section 403(b) contracts (including Section 403(b) annuity contracts and Section 403(b)(7) custodial accounts). In particular, a rollover to a Section 403(b) contract from an eligible retirement plan, a transfer to a Section 403(b) plan from another Section 403(b) plan, and the exchange of a Section 403(b) contract for another Section 403(b) contract under the same Section 403(b) plan must be permitted under the Section 403(b) plan pursuant to which the contract is maintained. In addition, the issuer of the Section 403(b) contract and the employer maintaining the Section 403(b) plan must agree to provide each other, from time to time, with information necessary for the Section 403(b) contract, or any other contact to which contributions have been made by the employer, to satisfy Section 403(b) and other tax requirements.
These new requirements apply to a contract received in an exchange that occurs after September 24, 2007, although such a contract need not satisfy these requirements before January 1, 2009 (the general effective date of the new regulations). Hence, if a new rollover, transfer, or exchange into a Section 403(b) contract is made before January 1, 2009, and the written plan and information sharing requirements are not satisfied by that date, the contract will fail to qualify as a Section 403(b) contract as of January 1, 2009, absent eligibility for certain transitional relief. In that event, there may be adverse tax consequences to the contract owner, including current taxation of amounts that would otherwise be tax deferred.
In light of the limitations in the new income tax regulations, Protective generally will not accept rollovers, transfers, or exchanges into a Section 403(b) annuity contract after September 24, 2007, absent satisfaction of the written plan and information sharing requirements or eligibility for transitional relief. If you wish to make a rollover, transfer, or exchange from your Section 403(b) annuity contract with Protective to another Section 403(b) contract, you should consider that the recipient contract will fail to qualify as a Section 403(b) contract as of January 1, 2009, if the requirements applicable to Section 403(b) contracts, including the written plan and information sharing requirements, are not
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satisfied as of that date. Before making a rollover, transfer, or exchange to another Section 403(b) contract, you should consult your tax advisor about the tax consequences to you in the event that the written plan and information sharing requirements are not satisfied as of January 1, 2009.
Direct Rollover Rules
In the case of Contracts used in connection with a pension, profit-sharing, or annuity plan qualified under Sections 401(a) or 403(a) of the Code, or in the case of a Section 403(b) tax-sheltered annuity, any "eligible rollover distribution" from the Contract will be subject to direct rollover and mandatory withholding requirements. An eligible rollover distribution generally is any taxable distribution from a qualified pension plan under Section 401(a) of the Code, qualified annuity plan under Section 403(a) of the Code, or Section 403(b) tax-sheltered annuity or custodial account, excluding certain amounts (such as minimum distributions required under Section 401(a)(9) of the Code, distributions which are part of a "series of substantially equal periodic payments" made for life or a specified period of 10 years or more, or hardship distributions as defined in the tax law).
Under these requirements, withholding at a rate of 20% will be imposed on any eligible rollover distribution. In addition, the Owner in these qualified retirement plans cannot elect out of withholding with respect to an eligible rollover distribution. However, this 20% withholding will not apply if, instead of receiving the eligible rollover distribution, the Owner elects to have amounts directly transferred to certain Qualified Plans (such as to an IRA). Special rules apply to the rollover of any after-tax amounts. Prior to receiving an eligible rollover distribution, you will receive a notice (from the plan administrator or Protective) explaining generally the direct rollover and mandatory withholding requirements and how to avoid the 20% withholding by electing a direct transfer.
Federal Income Tax Withholding
Protective will withhold and remit to the U.S. government a part of the taxable portion of each distribution made under a Contract unless the distributee notifies Protective at or before the time of the distribution that he or she elects not to have any amounts withheld. In certain circumstances, Protective may be required to withhold tax. The withholding rates applicable to the taxable portion of periodic annuity payments (other than the eligible rollover distributions) are the same as the withholding rates generally applicable to payments of wages. The withholding rate applicable to the taxable portion of non-periodic payments (including withdrawals prior to the Annuity Commencement Date) and conversions of, or rollovers from, non-Roth IRAs and Qualified Plans to Roth IRAs is 10%. Regardless of whether you elect not to have federal income tax withheld, you are still liable for payment of federal income tax on the taxable portion of the payment. As described above, the withholding rate applicable to eligible rollover distributions is 20%.
LEGAL PROCEEDINGS
To the knowledge and in the opinion of management, there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of PLC and Protective, to which PLC or Protective or any of its subsidiaries is a party or of which any of PLC or Protective's properties is the subject. For additional information regarding legal proceedings see "Risk Factors and Cautionary Factors that may Affect Future Results" included in Protective's Annual Report on Form 10-K which is incorporated by reference herein. See "Requesting Documents."
