EXHIBIT (10-3)
The Procter & Gamble Executive Group Life Insurance Policy

 

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MEMORANDUM OF UNDERSTANDING
This memorandum dated as of December 30, 1997, reflects the understanding and
agreement between The Procter & Gamble Company as policyholder
(“Policyholder/P&G”) of a Flexible Premium Group Variable Life Insurance Policy
(the “Policy”) and Metropolitan Life Insurance Company (“Carrier/Metropolitan”).
Policyholder and Carrier understand and agree that the following is in no way
inconsistent with the Policy:
Qualification of the Policy as Life Insurance (IRC Sections 7702 and 101)
Assuming insurable interest by the Policyholder, Carrier will administer the
Policy to qualify as a life insurance contract under Section 7702 of the
Internal Revenue Code (the “IRC”), to have a bona fide element of risk, and to
provide death benefits under the Policy that will be excludible from taxable
income to the extent provided under IRC section 101(a). On or before the date of
this memorandum, Carrier has provided an opinion from outside counsel addressed
to Policyholder that the Policy complies with the requirements of section 7702.
See Exhibit 1.
Qualification of the Policy as a Variable Contract
Subject to the conditions stated below, Carrier will administer the Policy to
(a) be a “variable contract” within the meaning of Section 817(d) of the
Internal Revenue Code and (b) be based on one or more segregated asset accounts,
the assets of which are owned by Carrier and are adequately diversified, as
required by Internal Revenue Code Section 817(h).
Policyholder may determine the percentage of premium payments and/or policy cash
value that is allocated to a specific separate account and will have the right
to reallocate amounts among the separate accounts as provided in the Policy. The
Policyholder shall not have the right to manage the assets of the separate
accounts or to direct the purchase or sale of specific investment assets and
will not communicate directly or in any manner with respect to these separate
accounts with any of the managers or sub investment managers of the separate
accounts.
Metropolitan will be the investment manager for any Separate Accounts under this
Policy. Separate Accounts may have sub-investment managers chosen by
Metropolitan.
The Policy will state that the assets held in each Separate Account will be
maintained solely for the liabilities of the participants in that Separate
Account. The Carrier will make provision that the income, gains and losses of
each Separate Account shall be credited to or charged against that Separate
Account’s assets and none of the assets held in a Separate Account will be
charged as chargeable with liabilities arising out of any other business of the
Carrier or used for purposes unrelated to the terms and provisions of that
Separate Account. On or before the date of this

 

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memorandum, Carrier has provided a letter from its counsel addressed to
Policyholder on these issues. See Exhibit 2.
Underwriting
Based on the census in the November 11, 1998 illustrations, current participants
who are domestic actives and retirees will be covered under Carrier’s Guaranteed
Issue program for the plan benefit and cost recovery amounts in effect on the
date the Policy is issued.
Future new participants will be subject to the following “Active at Work”
criteria:

•   not been absent from work due to illness or medical treatment for a period
of more than 5 consecutive days in the last 3 months; and   •   are actively at
work, full time performing all duties of regular occupation, at customary place
of employment.

The guaranteed issue limit upon entry into the plan by new participants will be
$2 million. Based on the current plan design, death benefits under the Policy
may be increased without additional underwriting:

•   by reason of promotional increases verified by P&G, and       by up to 15%
per year (with any unused portion of such increment rolling forward for five
years on a cumulative basis) to reflect compensation (salary and bonus)
increases,

subject to a lifetime guaranteed issue limit of $5,000,000 per life, which limit
will be reviewed at least every five years and (absent retention, reinsurance or
adverse selection constraints) adjusted to accommodate anticipated plan benefit
and cost recovery amounts. Amounts in excess of the guaranteed issue limits
will, at Carrier’s request, be subject to underwriting.
Carrier will not deny claims by reason of the suicide exclusion provision of the
Policy. Carrier acknowledges, accepts and agrees to be bound by consents to
insurance, beneficiary designations and assignments in effect under P&G’s
executive life insurance program.
Cost of Term Insurance Charges
The Cost of Term Insurance charges (“COI”) for the current active population and
new entrants (meeting the “active at work” requirements) will be based on 90% of
Carrier’s current Corporate Universal Life Guaranteed Issue, Sex Distinct,
Unismoker rates. The current retirees will have rates equal to 120% of Carrier’s
Corporate Universal Life Guaranteed Issue, Sex Distinct, Unismoker rates.

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P & G will have COI rates equal to the foregoing unless Carrier’s Corporate
Universal Life Guaranteed Issue, Sex Distinct, Unismoker rates are increased to
the maximum rates of 1980 CSO table (Table A for males and Table G for females).
Only at that time will the rates under this Policy for actives and new entrants
be increased to up to 100% of Corporate Universal Life Guaranteed Issue, Sex
Distinct, Unismoker rates, with a corresponding change in the COI for current
retirees. Any future changes in COI rates will be determined based on changes in
Corporate Universal Life Guaranteed Issue Rates. Metropolitan shall inform the
Policyholder in writing at least 60 days in advance of any changes in such
rates.
The Guaranteed Issue, Sex Distinct COI rates are the rates that Metropolitan
charges in Individual Executive Pooled Policies which are selected by the
Guaranteed Issue Underwriting procedure and are filed with the state Insurance
Departments. The Corporate Universal Life Product is one of those policies
included in this pool. Any changes in these rates are required to be filed with
the state Insurance Departments and must be justifiable in terms of experience
of the Guaranteed Issue mortality pool. Therefore, the insured employees of this
Policy join the mortality pool which is the aggregate of all insured executives
who are selected by the Guaranteed Issue Underwriting procedure. The future
determination of the COI of this pool is by the mortality experience of the pool
in total and is not by the mortality experience of each case or a subgroup of
insured lives of the pool. Any changes in these rates must apply to all policies
which are charged the Guaranteed Issue COI rates, including the Policy.
Upon reasonable notice from Policyholder, Metropolitan will develop COI charges,
retention and retrospective deductions based on the demographics of insured
lives in the plan at that time.
The guaranteed maximum COI will never exceed those based on the 1980 CSO Table
(Table A for males and Table G for females).
Enhanced Policy Administration
At Policyholder’s request, Carrier will provide enhanced administrative services
with respect to the Policy. Such services will include:

A.   Program Analysis

  1.   Prepare feasibility studies and recommendations of various funding level
alternatives.     2.   Provide financial analysis of the program.

B.   Program Establishment

  1.   Provide specimen documents to and reviewing specimen documents with
Policyholder’s legal counsel and auditors.

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  2.   Prepare financial projections and, where applicable, proxy statement text
with respect to the program.     3.   Coordinate and establish program
implementation and administration, and set up records and other systems for the
program.     4.   Process section 1035 exchange.

C.   Program Documentation. Provide program documentation, including:

  1.   Program explanation (including original assumptions).     2.   Insurance
schedule.     3.   Funding assumptions and corporate composite projections.    
4.   Participant census.     5.   Individual participant information.     6.  
Definition of Payment procedures.

  a.   Premiums     b.   Death benefits.     c.   Withdrawals/surrenders.     d.
  Loans

D.   Program Servicing

  1.   Provide periodic reports on program and policy financial status.     2.  
Provide information for possible program modifications.     3.   Provide ongoing
program coordination.     4.   Compile updated program data with assistance from
Policyholder.

  a.   New participants     b.   Terminations     c.   Retirees     d.   Deaths

  5.   Determine current and ongoing funding requirements.

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  6.   Assist with enrollment of new participants.     7.   Prepare detailed
annual reviews of program experience to include:

  a.   Corporate composite projections     b.   Program participant census
including insurance amount

  8.   Compile composite billing for program.     9.   Timely provide assistance
to accountants and auditors for reporting program transactions on financial
statements and/or tax return and other reports or analyses as reasonably
required from time to time by Policyholder.     10.   Advise the Policyholder of
transactions necessary or desirable to meet program goals and commitments.    
11.   Execute quarterly social security sweeps.     12.   Annually determine and
provide to Policyholder the amount of imputed taxable income for each
participant.     13.   Conduct annual performance review.

E.   Performance Criteria       Carrier’s enhanced policy administration will be
subject to performance criteria mutually agreed by Carrier and Policyholder from
time to time.

F.   Termination of Enhanced Policy Administration.       Policyholder may
terminate Carrier’s enhanced policy administration at any time on written
notice.

Policy Expenses

•   Front End Load Charges

  1.   State Premium Tax - state premium tax will be handled as a pass-through.
Taxes will be assessed based upon the Insureds’ state of residence as of the
date of issue of the Policy.     2.   Policy DAC Tax -1.20%

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  3.   Other Charge - if enhanced policy administration is in effect, a one time
set-up charge of $100,000 in the aggregate for all Policies in the program, in
the first policy year.

•   Mortality and Expense (M&E) Charge

      The M&E risk charge is assessed against the average monthly value of the
total policy cash value in all separate accounts and is deducted monthly. The
following M&E risk charge is based upon a 4-tier sliding scale and applies for
any period when enhanced policy administration is in effect:

         
First $50 million
    0.250 %
Next $200 million
    0.150 %
Next $250 million
    0.125 %
Over $500 million
    0.100 %

      Under the foregoing schedule, Carrier will not take into consideration the
combined assets in both policies (VEBA Plan and the Split Dollar Plan) for
purposes of calculating the monthly M&E expenses for this Policy. Carrier would,
however, take the assets under this Policy into consideration when determining
the M&E under the VEBA policy.         For any period when enhanced policy
administration is not in effect, the M&E risk charge is as follows:

         
First $250 million
    0.175 %
Next $500 million
    0.150 %
Next $250 million
    0.125 %
Over $1000 million
    0.100 %

      Under this schedule, Carrier will take into consideration the combined
assets on both policies (VEBA Plan and the Split Dollar Plan) in calculating the
monthly M&E risk charge for both policies.

•   Investment Management Fees

      Investment management fees for each separate account are assessed against
the average monthly value of the policy cash value in a separate account. In
calculating the monthly fee per separate account Carrier will take into
consideration the combined assets in both policies (VEBA Plan and the Split
Dollar Plan) which are invested in the same separate account(s). The investment
management fees for the current commingled separate accounts can be found in the
Offering Memorandum.

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•   Custody and Securities Accounting/Valuation

      There are no separate charges for these functions for the commingled
separate accounts. However, there are pass through charges for these functions
for single customer accounts.

•   Policy Administration Charge

      Currently, and as illustrated, the Policy Administration Charge is a per
insured life charge of $5.00 per month in all policy years. The current charge
may be reduced by the Carrier from time to time, and reductions in the Carrier’s
costs incurred to service the Policy will be commensurately reflected in the
current charge. The guaranteed maximum monthly charge for administration is
$5.00 per insured.

Changes in Pricing for Other Than the Cost of Insurance Charges
Carrier will not change the charges or fees related to factors under its
control. Changes based on external factors may be reflected in the Policy.
For purposes of this paragraph, Carrier’s profit goals and the contribution of
Specialized Benefit Resources organization to overhead are not external factors.
The external factors that may be reflected include (i) Federal and State
legislation and state insurance statutory and regulatory changes, and (ii) after
the first three policy years, increase in investment management, custody and
securities accounting/valuation charges pertaining to P&G single-customer
accounts by the providers of these services.
Any increase in price due to external factors will be documented and the price
increase, if appropriate, will be only to recover the increased cost of the
Carrier. With respect to any increase in charges pursuant to this section, P&G
may audit the relevant records of Metropolitan pursuant to an appropriate
nondisclosure document.
Governing Law
The validity, construction, interpretation, and effect of this memorandum of
understanding and the Policy shall be governed by the laws of the state of Ohio,
without regard to Ohio’s choice of law rules.
Changes to this Memorandum
Except with respect to changes mandated by state and federal law and as
otherwise specifically provided in this Memorandum or the Policy, this
Memorandum may be changed only by mutual agreement among the affected parties.

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Notices
Unless and until the parties give written notice otherwise, whenever this
Memorandum provides for notices or consents in writing to be given by one of the
parties hereto to the other, such notices or consent will be given when
addressed and delivered to the following or their successors:

                 
(1)
  The Procter & Gamble Company     (2 )   Metropolitan Life Insurance Co.
 
  Global Pensions           Specialized Benefit Resources
 
  Two Procter & Gamble Plaza           485B Route One South, Suite 420
 
  Cincinnati, Ohio 45202-3315           Iselin, New Jersey 08830
 
  Attn: Clare Clark, Group Manager           Attn: G. Denis Dwyer, Vice
President

All such notices or consents must be sent by U.S. Certified Mail, Return Receipt
Requested.

                  Agreed:            
 
                THE PROCTER & GAMBLE COMPANY       METROPOLITAN LIFE    
 
          INSURANCE COMPANY    
 
               
By:
  /s/ C. S. Clark   By:   /s/ John J. Ryan    
 
               
 
               
 
  Group Manager Global Pensions       Vice President    
 
               
 
  (Title)       (Title)    
 
               
 
  C. S. Clark       John J. Ryan    
 
               
 
  (Print or Type Name)       (Print or Type Name)    
 
               
 
  Dec. 30, 1997       Dec. 30, 1997    
 
               
 
  (Date)       (Date)    

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