485BPOS 1 ipva.htm IPVA PEA ipva-c121.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing
                                                                                                                                                                                     Registration No. 333-116220 
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549 
FORM N-4 
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 
Pre-Effective Amendment No. 
Post-Effective Amendment No. 12 
and/or 
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 
                                                                       Amendment No. 
(Check appropriate box or boxes) 
Principal Life Insurance Company Separate Account B 
-------------------------------------------------------------------------------- 
(Exact Name of Registrant) 
Principal Life Insurance Company 
-------------------------------------------------------------------------------- 
(Name of Depositor) 
The Principal Financial Group, Des Moines, Iowa 50392 
-------------------------------------------------------------------------------- 
(Address of Depositor's Principal Executive Offices) (Zip Code) 
(515) 248-3842 
------------------------------------------------------------------------------- 
Depositor's Telephone Number, including Area Code 
M. D. Roughton, 
The Principal Financial Group, Des Moines, Iowa 50392 
-------------------------------------------------------------------------------- 
(Name and Address of Agent for Service) 
Title of Securities Being Registered: Principal Investment Plus Variable AnnuitySM Contract 

It is proposed that this filing will become effective (check appropriate box) 
__X__      immediately upon filing pursuant to paragraph (b) of Rule 485 
               on (date) pursuant to paragraph (b) of Rule 485 
               60 days after filing pursuant to paragraph (a)(1) of Rule 485 
               on (date) pursuant to paragraph (a)(1) of Rule 485 
               75 days after filing pursuant to paragraph (a)(2) of Rule 485 
               on (date) pursuant to paragraph (a)(2) of Rule 485 
If appropriate, check the following box: 
                   This post-effective amendment designates a new effective date for a previously filed post-effective amendment. 

PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYSM 
Prospectus dated May 1, 2009

This prospectus describes Principal Investment Plus Variable Annuity, an individual, flexible premium, deferred variable annuity (the “Contract”), issued by Principal Life Insurance Company (“the Company”, “we”, “our” or “us”).

This prospectus provides information about the Contract and the Principal Life Insurance Company Separate Account B (“Separate Account”) that you, as owner, should know before investing. The prospectus should be read and retained for future reference. Additional information about the Contract and the Separate Account is included in the Statement of Additional Information (“SAI”), dated May 1, 2009, which has been filed with the Securities and Exchange Commission (the “SEC”) and is considered a part of this prospectus. The table of contents of the SAI is at the end of this prospectus. You may obtain a free copy of the SAI by writing or calling: Principal Investment Plus Variable AnnuitySM, Principal Financial Group, P. O. Box 9382, Des Moines, Iowa 50306-9382, Telephone: 1-800-852-4450. You can also visit the SEC’s website at www.sec.gov, which contains the SAI, material incorporated into this prospectus by reference, and other information about registrants that file electronically with the SEC.

An investment in the Contract is not a deposit or obligation of any bank and is not insured or guaranteed by any bank, the Federal Deposit Insurance Corporation or any other government agency.

You generally may allocate your investment in the Contract among the following investment options: dollar cost averaging fixed accounts (“DCA Plus Accounts”), a Fixed Account and the divisions of the Separate Account. The DCA Plus Accounts and the Fixed Account are a part of our General Account. Each division of the Separate Account invests in shares of a corresponding mutual fund (the “underlying mutual funds”). A list of the underlying mutual funds available under the Contract is shown on the following pages.

Your accumulated value will vary according to the investment performance of the underlying mutual funds in which your selected division(s) are invested. We do not guarantee the investment performance of the underlying mutual funds.

The Contract, certain Contract features and/or some of the investment options may not be available in all states or through all broker dealers. In addition, some optional features may restrict your ability to elect certain other optional features.

The Contract is available with or without the Premium Payment Credit Rider. This rider applies credits to the accumulated value for premium payments made in contract year one. The amount of the credit may be more than offset by the additional charges associated with it (higher surrender charges, a longer surrender charge period and increased annual expenses). A Contract without this rider will cost less. You should review your own circumstances to determine whether this rider is suitable for you. To assist you in making that determination, we have highlighted in grey boxes those portions of this prospectus pertaining to the rider.

NOTE: We recapture the premium payment credit if you return the Contract during the examination offer period or request full annuitization of the Contract prior to the third contract anniversary. You take the risk that the recaptured amount may exceed the then current value of the credit(s). This risk occurs when your investment options have experienced negative investment performance (i.e., have lost value) since the credit was applied. In that situation, you would be worse off than if you had not purchased the Premium Payment Credit Rider.

Subject to state availability, if your Contract was purchased on or after May 20, 2006 you have the right to partially annuitize a portion of your accumulated value.

These securities have not been approved or disapproved by the SEC or any state securities commission nor has the SEC or any state securities commission passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

This prospectus is valid only when accompanied by the current prospectuses for the underlying mutual funds. These prospectuses should be kept for future reference. This prospectus is not an offer to sell, or solicitation of an offer to buy, the Contract in states in which the offer or solicitation may not be lawfully made. No person is authorized to give any information or to make any representation in connection with this Contract other than those contained in this prospectus.

The underlying mutual funds are listed on the next page.

2 Principal Investment Plus Variable Annuity SM 
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The following underlying mutual funds are available under the Contract(1):

AIM Variable Insurance Funds — Series I  Principal Variable Contracts Fund — Class 1 (cont.) 
   • AIM V.I. Basic Value Fund     • International Emerging Markets Account 
   • AIM V.I. International Growth Fund     • International SmallCap Account 
   • AIM V.I. Small Cap Equity Fund     • LargeCap Blend Account II 
AllianceBernstein Variable Products Series Fund — Class A     • LargeCap Growth Account 
   • AllianceBernstein Small Cap Growth Portfolio     • LargeCap Growth Account I 
American Century Variable Portfolios, Inc.     • LargeCap S&P 500 Index Account 
   • Inflation Protection Fund — Class II     • LargeCap Value Account 
   • Ultra Fund — Class II     • LargeCap Value Account II 
   • Vista Fund — Class I     • LargeCap Value Account III 
Dreyfus Investment Portfolios — Service Shares     • MidCap Blend Account 
   • Technology Growth Portfolio     • MidCap Growth Account I 
Fidelity Variable Insurance Products — Service Class 2     • MidCap Value Account II 
   • Contrafund® Portfolio     • Money Market Account 
   • Equity-Income Portfolio     • Mortgage Securities Account 
   • Growth Portfolio     • Principal LifeTime 2010 Account 
   • Mid Cap Portfolio     • Principal LifeTime 2020 Account 
   • Overseas Portfolio     • Principal LifeTime 2030 Account 
Goldman Sachs Variable Insurance Trust — Institutional     • Principal LifeTime 2040 Account 
Class     • Principal LifeTime 2050 Account 
   • Structured Small Cap Equity Fund     • Principal LifeTime Strategic Income Account 
   • MidCap Value Fund     • Real Estate Securities Account 
MFS Variable Insurance Trust     • Short-Term Bond Account 
   • MFS Utilities Series — S Class*     • Short-Term Income Account 
   • MFS Value Series — S Class     • SmallCap Growth Account II 
Neuberger Berman Advisers Management Trust     • SmallCap Value Account I 
   • Partners Portfolio — I Class     • Strategic Asset Management Balanced Account Portfolio 
   • Small-Cap Growth Portfolio — S Class     • Strategic Asset Management Conservative Balanced Portfolio 
   • Socially Responsive Portfolio — I Class     • Strategic Asset Management Conservative Growth Portfolio 
PIMCO Variable Insurance Trust     • Strategic Asset Management Flexible Income Portfolio 
   • All Asset Portfolio Account — Adm Class*     • Strategic Asset Management Strategic Growth Portfolio 
   • Total Returns Portfilio — Adm Class*     • West Cost Equity Account 
Principal Variable Contracts Funds — Class 1  T. Rowe Price Equity Series, Inc. 
   • Asset Allocation Account     • T. Rowe Price Blue Chip Growth Portfolio — II 
   • Bond & Mortgage Securities Account     • T. Rowe Price Health Sciences Portfolio — II 
   • Diversified International Account  Van Eck Worldwide Insurance Trust 
   • Equity Income Account     • Worlwide Hard Assets Fund - S Class* 
   • Government & High Quality Bond Account   

* Investment options available beginning May 18, 2009

Principal Investment Plus Variable Annuity SM  3 
www.principal.com   

                                                                                                             TABLE OF CONTENTS   
Glossary  8 
Summary of Expense Information  10 
Examples  16 
Summary  16 
Corporate Organization and Operation  19 
The Contract  21 
   How To Buy a Contract  21 
   Premium Payments  21 
   Right to Examine the Contract (free look)  22 
   The Accumulation Period  23 
   Automatic Portfolio Rebalancing (APR)  26 
   Telephone and Internet (Electronic) Services  26 
   Surrenders  27 
   Death Benefit  29 
   The Annuitization Period  31 
Charges and Deductions  34 
   Surrender Charge  34 
   Transaction Fee  36 
   Premium Taxes  36 
   Annual Fee  36 
   Separate Account Annual Expenses  36 
   Charges for Rider Benefits  37 
         Premium Payment Credit Rider  37 
         Enhanced Death Benefit Rider  38 
         GMWB 1 (Investment Protector Plus) Rider  38 
         GMWB 2-SL and GMWB 2-SL/JL (Investment Protector Plus 2 — Single Life/Joint Life) Rider  38 
   Special Provisions for Group or Sponsored Arrangements  39 
Rider Benefits  39 
   Premium Payment Credit Rider  40 
   Enhanced Death Benefit Rider  42 

4 Principal Investment Plus Variable Annuity SM 
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   Waiver of Surrender Charge Rider  43 
   GMWB (Investment Protector Plus) Riders  44 
   GMWB 2 Rider (Investment Protector Plus 2 Rider)  56 
Table Comparing GMWB Riders  66 
Fixed Account and DCA Plus Accounts  68 
   Fixed Account  68 
   Dollar Cost Averaging Plus Program (DCA Plus Program)  69 
General Provisions  70 
   The Contract  70 
   Delay of Payments  70 
   Misstatement of Age or Gender  71 
   Assignment  71 
   Change of Owner or Annuitant  71 
   Beneficiary  71 
   Contract Termination  72 
   Reinstatement  72 
   Reports  72 
   Important Information about Customer Identification Procedures  72 
   Rights Reserved by the Company  73 
   Frequent Trading and Market-timing (Abusive Trading Practices)  73 
   Distribution of the Contract  74 
   Performance Calculation  74 
Federal Tax Matters  75 
Mutual Fund Diversification  77 
State Regulation  78 
General Information  78 
   Reservation of Rights  78 
   Legal Opinions  78 
   Legal Proceedings  78 
   Other Variable Annuity Contracts  78 
   Payments to Financial Intermediaries  78 

Principal Investment Plus Variable Annuity SM  5 
www.principal.com   

   Service Arrangements and Compensation  79 
   Independent Registered Public Accounting Firm  79 
   Financial Statements  79 
Table of Separate Account Divisions  80 
Registration Statement  91 
Customer Inquiries  91 
Table of Contents of the SAI  92 
Appendix A — Principal Variable Annuity Exchange Offer  93 
Appendix B — Condensed Financial Information  98 
Appendix C — GMWB 1 Examples  100 
Appendix D — GMWB 2-SL and GMWB 2-SL/JL Examples  117 
Appendix E — GMWB Investment Options  124 
Appendix F — Enhanced Death Benefit Rider Examples  128 

6 Principal Investment Plus Variable Annuity SM 
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GLOSSARY

accumulated value – an amount equal to the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated value plus the Separate Account division accumulated value.

anniversary – the same date and month of each year following the contract date.

annuitant – the person, including any joint annuitant, on whose life the annuity benefit payment is based. This person may or may not be the owner.

annuitization – application of a portion or all of the accumulated value to an annuity benefit payment option to make income payments.

annuitization date – the date all of the owner’s accumulated value is applied to an annuity benefit payment option.

contract date – the date that the Contract is issued and which is used to determine contract years.

contract year – the one-year period beginning on the contract date and ending one day before the contract anniversary and any subsequent one-year period beginning on a contract anniversary (for example, if the contract date is June 5, 2009, the first contract year ends on June 4, 2010, and the first contract anniversary falls on June 5, 2010).

data page – that portion of the Contract which contains the following: owner and annuitant data (names, gender, annuitant age); the contract issue date; maximum annuitization date; contract charges and limits; benefits; and a summary of any optional benefits chosen by the contract owner.

Dollar Cost Averaging Plus (DCA Plus) Account – an account which earns guaranteed interest for a specific amount of time.

Dollar Cost Averaging Plus (DCA Plus) accumulated value – the amount of your accumulated value which is in the DCA Plus Account(s).

Dollar Cost Averaging Plus (DCA Plus) Program – a program through which your DCA Plus accumulated value is transferred from a DCA Plus Account to the investment options over a specified period of time.

Fixed Account – an account which earns guaranteed interest.

Fixed Account accumulated value – the amount of your accumulated value which is in the Fixed Account.

good order – an instruction or request is in good order when it is received in our home office, or other place we may specify, and has such clarity and completeness that we do not have to exercise any discretion to carry out the instruction or request. We may require that the instruction or request be given in a certain form.

investment options – the DCA Plus Accounts, Fixed Account and Separate Account divisions.

joint annuitant – an annuitant whose life determines the annuity benefit under this Contract. Any reference to the death of the annuitant means the death of the first annuitant to die.

joint owner – an owner who has an undivided interest with the right of survivorship in this Contract with another owner. Any reference to the death of the owner means the death of the first owner to die.

non-qualified contract – a Contract which does not qualify for favorable tax treatment as a Qualified Plan, Individual Retirement Annuity, Roth IRA, SEP IRA, Simple-IRA or Tax Sheltered Annuity.

Principal Investment Plus Variable Annuity SM  GLOSSARY  7 
www.principal.com     

notice – any form of communication received by us, at the home office, either in writing or in another form approved by us in advance.

Your notices may be mailed to us at: Principal Life Insurance Company P O Box 9382 Des Moines, Iowa 50306-9382

owner – the person, including joint owner, who owns all the rights and privileges of this Contract.

premium payments – the gross amount you contributed to the Contract.

qualified plans – retirement plans which receive favorable tax treatment under Section 401 or 403(a) of the Internal Revenue Code.

Separate Account Division (division(s)) – a part of the Separate Account which invests in shares of an underlying mutual fund. (Referred to in the marketing materials as “sub-accounts.”)

Separate Account division accumulated value – the amount of your accumulated value in all divisions.

surrender charge – the charge deducted upon certain partial surrenders or total surrender of the Contract before the annuitization date.

surrender value – accumulated value less any applicable surrender charge, rider fees, annual fee, transaction fees and any premium tax or other taxes.

transfer – moving all or a portion of your accumulated value to or from one investment option or among several investment options. Simultaneous transfers are considered to be one transfer for purposes of calculating the transfer fee, if any.

underlying mutual fund – a registered open-end investment company, or a separate division or portfolio thereof, in which a division invests.

unit – the accounting measure used to calculate the value of a division. unit value – a measure used to determine the value of an investment in a division. valuation date – each day the New York Stock Exchange (“NYSE”) is open for trading and trading is not restricted.

valuation period – the period of time from one determination of the value of a unit of a division to the next. Each valuation period begins at the close of normal trading on the NYSE, generally 4:00 p.m. Eastern Time, on each valuation date and ends at the close of normal trading of the NYSE on the next valuation date.

we, our, us – Principal Life Insurance Company. We are also referred to throughout this prospectus as the Company.

you, your – the owner of this Contract, including any joint owner.

8 GLOSSARY  Principal Investment Plus Variable Annuity SM 
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SUMMARY OF EXPENSE INFORMATION

The tables below describe the fees and expenses that you will pay when buying, owning and surrendering the Contract. The expenses for a Contract with the Premium Payment Credit Rider are higher than the expenses for the Contract without the Premium Payment Credit Rider.

The following table describes the fees and expenses you will pay at the time you buy the Contract, surrender the Contract or transfer cash value between investment options.

                                                                               Contract owner transaction expenses(1) 
 
Sales charge imposed on premium payments (as a percentage  • None 
       of premium payments)   
 
Maximum deferred surrender charge for Contracts without the  • 6% 
       Premium Payment Credit Rider (as a percentage of amount   
       surrendered)(2)   
 
Maximum deferred surrender charge for Contracts with the  • 8% 
       Premium Payment Credit Rider (as a percentage of amount   
       surrendered)(3)   
 
Transaction Fees for each unscheduled partial surrender   
• guaranteed maximum  • the lesser of $25 or 2% of each 
    unscheduled partial surrender after 
    the 12th unscheduled partial 
    surrender in a contract year 
• current  • $0 
 
Transaction Fee(4) for each unscheduled transfer   
• guaranteed maximum  • the lesser of $30 or 2% of each 
     unscheduled transfer after the first 
     unscheduled transfer in a contract 
     year 
• current  • $0 
 
State Premium Taxes (vary by state)   
• guaranteed maximum  • 3.5% of premium payments made 
• current  • 0% 

Principal Investment Plus Variable Annuity SM  SUMMARY OF EXPENSE INFORMATION  9 
www.principal.com     

The following table describes the fees and expenses that are deducted periodically during the time that you own the Contract, not including underlying mutual fund fees and expenses.

Periodic Expenses
 
Annual Fee (waived for Contracts with accumulated value of  • the lesser of $30 or 2.00% of the 
       $30,000 or more)    accumulated value 
 
Separate Account Annual Expenses (as a percentage of average   
       daily separate account accumulated value)   
• Maximum   
     Mortality and Expense Risks Charge  1.25% 
     Administration Charge  0.15% 
     Total Separate Account Annual Expense  1.40% 
• Current   
     Mortality and Expense Risks Charge  1.25% 
     Administration Charge  0.00% 
     Total Separate Account Annual Expense  1.25% 
 
Optional Riders(5)
 
Premium Payment Credit Rider   
• Maximum  • an annual charge of 0.60% of the 
     average daily accumulated value 
      in the Separate Account divisions, 
      deducted daily, plus a reduction of 
      up to 0.60% of the Fixed Account 
       interest rate 
• Current  • an annual charge of 0.60% of the 
     average daily accumulated value 
      in the divisions, deducted daily 
      (with no reduction of the Fixed 
      Account interest rate) 
 
Enhanced Death Benefit Rider (as a percentage of average   
quarterly accumulated value)   
• Maximum annual charge  • 0.30% 
• Current annual charge  • 0.25% 
 
GMWB 1 Rider (as a percentage of average quarterly Investment   
Back remaining withdrawal benefit base(6) )   
• Maximum annual charge  • 0.85% 
• Current annual charge for riders issued(8) before February 16,   
       2009  • 0.60% 
 
• Current annual charge for riders issued(8) on or after February  • 0.80% 
       16, 2009   
 
GMWB 2-SL Rider (as a percentage of average quarterly   
Investment Back withdrawal benefit base(7) )   
• Maximum annual charge  • 1.00% 
• Current annual charge  • 0.75% 

10  SUMMARY OF EXPENSE INFORMATION  Principal Investment Plus Variable Annuity SM 
    1-800-852-4450 

GMWB 2 -SL/JL Rider (as a percentage of average quarterly     
  Investment Back withdrawal benefit base(7) )     
•  Maximum annual charge  •  1.00% 
•  Current annual charge for riders issued(8) before February 16,     
  2009  •  0.75% 
•  Current annual charge for riders issued(8) on or after February  •  0.95% 
  16, 2009     

This table shows the minimum and maximum total operating expenses charged by the underlying mutual funds that you may pay periodically during the time that you own the contract. More detail concerning the fees and expenses of each underlying mutual fund is contained in its prospectus.

Minimum and Maximum Annual Underlying Mutual Fund Operating Expenses 
                                                          as of December 31, 2008     
 
  Minimum  Maximum 
 
 Total annual underlying mutual fund operating expenses  0.30%  1.80% 
 (expenses that are deducted from underlying mutual fund     
 assets, including management fees, distribution and/or service     
 (12b-1) fees and other expenses)     
(1) For additional information about the fees and expenses described in the table, see CHARGES AND DEDUCTIONS.   
(2) Surrender charge without the Premium Payment Credit Rider (as a percentage of amounts surrendered):   

Table of surrender charges without the Premium Payment Credit Rider
Number of completed contract years  Surrender charge applied to all premium 
since each premium payment was made  payments received in that contract year 
0 (year of premium payment)  6% 
1  6% 
2  6% 
3  5% 
4  4% 
5  3% 
6  2% 
7 and later  0% 

Principal Investment Plus Variable Annuity SM  SUMMARY OF EXPENSE INFORMATION  11 
www.principal.com     

(3)Surrender charge with the Premium Payment Credit Rider (as a percentage of amounts surrendered):

                     Table of surrender charges with the Premium Payment Credit Rider 
Number of completed contract years  Surrender charge applied to all premium 
since each premium payment was made  payments received in that contract year 
0 (year of premium payment)  8% 
1  8% 
2  7% 
3  6% 
4  5% 
5  4% 
6  3% 
7  2% 
8  1% 
9 and later  0% 

(4) Please note that in addition to the fees shown, the Separate Account and/or sponsors of the underlying mutual funds may adopt requirements pursuant to rules and/or regulations adopted by federal and/or state regulators which require us to collect additional transfer fees and/or impose restrictions on transfers.

(5) Not all riders are available in all states or through all broker dealers and may be subject to additional restrictions. Some rider provisions may vary from state to state.

(6) The GMWB 1 rider charge is taken quarterly as a percentage of the average quarterly Investment Back remaining withdrawal benefit base. The current quarterly charge for riders issued on or after February 16, 2009, is 0.20% . The current quarterly charge for riders issued before February 16, 2009, is 0.15% . If the maximum charge were imposed, it would be taken quarterly at 0.2125% . The Investment Back remaining withdrawal benefit base is the amount available for future withdrawal benefit payments (see RIDER BENEFITS - GMWB Riders, Investment Protector Plus Rider).

(7) The GMWB 2-SL and the GMWB 2-SL/JL rider charge is taken quarterly as a percentage of the average quarterly Investment Back withdrawal benefit base. The current quarterly charge for riders issued on or after February 16, 2009, is 0.2375% . The current quarterly charge for riders issued before February 16, 2009, is 0.1875% . If the maximum charge were imposed, it would be taken quarterly at 0.25% . The Investment Back withdrawal benefit base is the amount on which the withdrawal benefit payment is based and is calculated on each rider anniversary (seeRIDER BENEFITS — GMWB Riders, Investment Protector Plus 2 Rider).

(8) A rider is “issued” before February 16, 2009, if the rider application is dated before February 16, 2009.

12  SUMMARY OF EXPENSE INFORMATION  Principal Investment Plus Variable Annuity SM 
    1-800-852-4450 

The following table shows the annual fees and expenses charged by each underlying mutual fund (as a percentage of average net assets) as discussed in each fund’s current prospectus for the fiscal year ended December 31, 2008. If you elect a GMWB rider, your investment options for premium payments and accumulated value will be restricted (for restrictions see OPTIONAL RIDER BENEFITS — GMWB Riders)

        Acquired     
               Fund     
        (“Underlying     
        Fund”)     
  Management    12b-1 Other  Fees and  Total Gross    Contractual
Underlying Mutual Funds         Fees     Fees(1)    Expenses Expenses  Expenses(2)    NetExpenses
   AIM V.I. Basic Value Fund — Series I Shares  0.68%(3)  N/A  0.35%  0.00%  1.03%  % 
   AIM V.I. International Growth Fund — Series I Shares  0.71(3)  N/A  0.35  0.02  1.08  1.07 
   AIM V.I. Small Cap Equity Fund — Series I Shares  0.75(4)  N/A  0.34  0.01  1.10  1.13 
   AllianceBernstein VPS Small Cap Growth Portfolio — Class A  0.75  N/A  1.05    1.80   
   American Century VP Inflation Protection Fund — Class II  0.48(5)  0.25  0.01(6)    0.74   
   American Century VP Ultra Fund — Class II  0.90(5)  0.25  0.01(6)    1.16   
   American Century VP Vista Fund — Class I  1.00(7)  N/A  0.01(6)    1.01   
   Dreyfus IP Technology Growth Portfolio — Service Shares  0.75  0.25  0.10  0.01  1.11   
   Fidelity VIP Contrafund Portfolio — Service Class 2  0.56  0.25  0.10    0.91  0.90 
   Fidelity VIP Equity-Income Portfolio — Service Class 2  0.46  0.25  0.11    0.82   
   Fidelity VIP Growth Portfolio — Service Class 2(8)  0.56  0.25  0.12    0.93  0.92 
   Fidelity VIP Mid Cap Portfolio — Service Class 2(8)  0.56  0.25  0.12    0.93  0.92 
   Fidelity VIP Overseas Portfolio — Service Class 2  0.71  0.25  0.16    1.12  1.09 
   Goldman Sachs VIT Structured Mid Cap Value Fund — Institutional             
   Class  0.80  N/A  0.04    0.84   
   Goldman Sachs VIT Structured Small Cap Equity Fund —             
   Institutional Class  0.75  N/A  0.31    1.06  0.86 
   Lehman Brothers High Income Bond Portfolio(9) — S Class 0.78(10)    0.25  1.24    2.27  1.12 
   MFS VIT Utilities — Service Shares  0.72  0.25  0.09    1.06   
   MFS VIT Value — Service Shares  0.75  0.25  0.09    1.09   
   Neuberger Berman AMT Partners Portfolio — I Class  0.84  NA  0.11    0.95   
   Neuberger Berman AMT Small Cap Growth — S Class  1.15  0.25  0.58    1.98  1.43 
   Neuberger Berman AMT Socially Responsive Portfolio — Class I  0.83  N/A  0.09    0.92   
   PIMCO VIT All Asset — Adm Class(11)(12)(13)(14)  0.58  N/A  0.00  0.76  1.34  1.32 
   PIMCO VIT Total Returns — Adm Class(10)  0.65  N/A  0.23    0.88   
   Principal VCF Asset Allocation Account — Class 1  0.80  N/A  0.02  0.03  0.85   
   Principal VCF Bond & Mortgage Securities Account — Class 1  0.44(15)  N/A  0.01(15)    0.45   
   Principal VCF Diversified International Account — Class 1  0.85(15)  N/A  0.16(15)    1.01   
 
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Principal VCF Equity Income Account — Class 1  0.55(15)  N/A  0.01(15)  0.05  0.61   
Principal VCF Government & High Quality Bond Account — Class 1  0.46(15)  N/A  0.01(15)    0.47   
Principal VCF International Emerging Markets — Class 1  1.25(15)  N/A  0.37(15)    1.62   
Principal VCF International SmallCap Account — Class 1  1.20(15)  N/A  0.30(15)    1.50   
Principal VCF LargeCap Blend Account II — Class 1  0.75(15)(16)  N/A  0.03(15)    0.78   
Principal VCF LargeCap Growth Account — Class 1  0.68  N/A  0.02(15)    0.70   
Principal VCF LargeCap Growth Account I — Class 1  0.78(15)(17)  N/A  0.02(15)    0.80   
Principal VCF LargeCap S&P 500 Index Account — Class 1  0.25  N/A  0.05(15)    0.30   
Principal VCF LargeCap Value Account — Class 1  0.60  N/A  0.02(15)  0.01  0.63   
Principal VCF LargeCap Value Account III — Class 1  0.75(18)  N/A  0.01    0.76   
Principal VCF MidCap Blend Account — Class 1  0.61(17)  N/A  0.01(15)    0.62   
Principal VCF MidCap Growth Account I — Class 1  0.90  N/A  0.04(15)    0.94   
Principal VCF MidCap Value Account II — Class 1(20)  1.05  N/A  0.03(15)    1.08  1.01 
Principal VCF Money Market Account — Class 1  0.43  N/A  0.02    0.45   
Principal VCF Mortgage Securities Account — Class 1  0.50  N/A  0.01    0.51   
Principal VCF Principal LifeTime 2010 Account — Class 1  0.12(19)  N/A  0.04(15)  0.65  0.81   
Principal VCF Principal LifeTime 2020 Account — Class 1  0.12(19)  N/A  0.01  0.71  0.84   
Principal VCF Principal LifeTime 2030 Account — Class 1  0.12(19)  N/A  0.04  0.76  0.92   
Principal VCF Principal LifeTime 2040 Account — Class 1  0.12(19)  N/A  0.09(15)  0.78  0.99   
Principal VCF Principal LifeTime 2050 Account — Class 1  0.12(19)  N/A  0.13(15)  0.80  1.05   
Principal VCF Principal LifeTime Strategic Income Account — Class 1  0.12(19)  N/A  0.06(15)  0.52  0.70   
Principal VCF Real Estate Securities Account — Class 1  0.90(15)  N/A  0.03(15)    0.93   
Principal VCF Short-Term Bond Account — Class 1  0.49(15)  N/A  0.03(15)    0.52   
Principal VCF Short-Term Income Account - Class 1  0.50  N/A  0.03(15)    0.53   
Principal VCF SmallCap Growth Account II — Class 1  1.00(21)  N/A  0.08(15)    1.08   
Principal VCF SmallCap Value Account I — Class 1(20)  1.10(15)(23)  N/A  0.05(15)  0.03  1.18  1.04 
Principal VCF Strategic Asset Management Balanced Portfolio — Class 1  0.25(15)  N/A  0.01(15)  0.66  0.92   
Principal VCF Strategic Asset Management Conservative Balanced  Portfolio — Class 1  0.25(15)  N/A  0.02(15)  0.62  0.89   
Principal VCF Strategic Asset Management Conservative Growth Portfolio — Class 1  0.25(15)  N/A  0.01(15)  0.70  0.96   
Principal VCF Strategic Asset Management Flexible Income  Portfolio — Class 1  0.25(15)  N/A  0.01(15)  0.58  0.84   

14  SUMMARY OF EXPENSE INFORMATION  Principal Investment Plus Variable Annuity SM 
    1-800-852-4450 

Principal VCF Strategic Asset Management Strategic Growth             
Portfolio — Class 1  0.25(15)  N/A  0.02(15)  0.73  1.00   
Principal VCF West Coast Equity Account — Class 1  0.63  N/A  0.04    0.67   
T. Rowe Price Blue Chip Growth Portfolio — II  0.85  0.25      1.10   
T. Rowe Price Health Sciences Portfolio — II  0.95  0.25      1.20   
Van Eck Worldwide Hard Assets Fund — S Class(23)  0.88  0.25  1.87  0.01  3.01  1.46 

(1) Because the 12b-1 fee is charged as an ongoing fee, over time, the fee will increase the cost of your investment and may cost you more than paying other types of sales charges

(2) The Company and Princor Financial Services Corporation may receive a portion of the underlying fund expenses for recordkeeping, marketing and distribution services

(3) The Fund's advisor has contractually agreed, through at least April 30, 2010, to waive advisory fees and/or reimburse expenses of Series I shares to the extent necessary to limit Total Annual Fund Operating Expenses of Series I shares to 1.30% of average daily net assets.

(4) The Fund's advisor has contractually agreed, through at least April 30, 2010, to waive advisory fees and/or reimburse expenses of Series I shares to the extent necessary to limit Total Annual Fund Operating Expenses of Series I shares to 1.15% of average daily net assets.

(5) The fund pays the advisor a single, unified management fee for arranging all services necessary for the fund to operate. The fee shown is based on assets during the fund’s most recent fiscal year. The fund has a stepped fee schedule. As a result, the fund’s unified management fee rate generally decreases as strategy assets increase and increases as strategy assets decrease. For more information about the unified management fee, including an explanation of strategy assets, see The Investment Advisor under Management.

(6) Other expenses include the fees and expenses of the fund’s independent directors and their legal counsel, interest, and, if applicable, acquired fund fees and expenses.

(7) The fund pays the advisor a single, unified management fee for arranging all services necessary for the fund to operate. For more information about the unified management fee, see The Investment Advisor under Management.

(8) A portion of the brokerage commissions that the fund pays may be reimbursed and used to reduce the fund's expenses.

In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce the fund's custodian expenses. Including these reductions, the total class operating expenses would have been x.xx% (See "Net Expense Ratio after FMR Reimbursement and Reductions" column for class' %). These offsets may be discontinued at any time.

(9) The Investment Adviser has voluntarily agreed to waive a portion of its Management fee equal to 0.02% of the Fund's average daily net assets. “Other Expenses” include transfer agency fees and expenses equal on an annualized basis to 0.02% of the average daily net assets of the Fund’s Service Shares, plus all other ordinary expenses not detailed above. The Investment Adviser has voluntarily agreed to reduce or limit “Other Expenses” (excluding management fees, distribution and service fees, transfer agency fees and expenses, taxes, interest, brokerage fees and litigation, indemnification, shareholder meeting and other extraordinary expenses exclusive of any custody and transfer agent fee credit reductions) equal on an annualized basis to 0.114% of the Fund’s average daily net assets. The expense reductions may be modified or terminated at any time at the option of the Investment Adviser without shareholder approval.

(10) "Other Expenses" reflect interest expense. Interest expense is based on the amounts incurred during the Portfolio's most recent fiscal year as a result of entering into certain investment, such as reverse repurchase agreements. This interest expense is required to be treated as an expense of the Portfolio for accounting purposes, but the amount of the interest expense (if any) will vary with the Portfolio's use of those investments (like reverse repurchase agreements) as an investment strategy.

(11) Acquired Fund Fees and Expense (Underlying Fund Expenses) for the Portfolio are based upon an allocation of the Portfolio's Assets among the Underlying Funds and upon the total annual operating expenses of the Institutional Class shares of these underlying Funds. Acquired Fund Fees and Expenses (Underlying Fund Expenses) will vary with changes in the expenses of the Underlying Funds, as well as allocation of the Portfolio's assets, and may be higher or lower than those shown above.

(12) PIMCO has contractually agreed until 5/1/2010, for the All Asset Portfolio to reduce its advisory fee to the extent that the Underlying Fund Expenses attributable to advisory and administrative fees exceed 0.64% of the total assets invested in Underlying Funds. PIMCO may recoup these waiver in future periods, not exceeding three years, provided total expenses, including such recoupment, does not exceed the annual expense limit.

(13) The Expense Reduction, as described in footnote 4 above, is implemented based on a calculation of Underlying Fund Expenses attributable to management fees that is different from the calculation of Acquired Fund Fees and Expenses (Underlying Fund Expenses) listed in the table above and described in footnote 3.

(14) The Total Annual Portfolio Operating Expenses do not match the Ratio of Expense to Average Net Assets of the Portfolio, as set forth in the Financial Highlights table of the shareholder report, because the Ratio of Expenses to Average Net Assets reflects the operating expenses of the Portfolio and does not include Underlying Fund Expenses.

(15) Management Fees and/or Other Expenses have been restated to reflect expenses being deducted from current assets.

(16) Effective July 1, 2009 Principal will contractually limit the Account's Management Fees through the period ending April 30, 2011.The expense limit will reduce the Fund's Management Fees by 0.018% (expressed as a percent of average net assets on an annualized basis).

(17) Effective July 1, 2009 Principal will contractually limit the Account's Management Fees through the period ending April 30, 2011. The expense limit will reduce the Fund's Management Fees by 0.016% (expressed as a percent of average net assets on an annualized basis).

(18) Effective July 1, 2009 Principal will contractually limit the Account's Management Fees through the period ending April 30, 2011. The expense limit will reduce the Fund's Management Fees by 0.012% (expressed as a percent of average net assets on an annualized basis).

(19) Effective July 1, 2009, the Fund's Management Fees will be reduced to 0.03% . This reduction is not reflected in the expense table or the expense examples.

(20) Principal has contractually agreed to limit the Account's expenses attributable to Class 1 shares and, if necessary,

Principal Investment Plus Variable Annuity SM  SUMMARY OF EXPENSE INFORMATION  15 
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pay expenses normally payable by the Account, excluding interest expense, through the period ending April 30, 2010.

The expense limits will maintain a total level of operating expenses, not including acquired fund fees and expenses or interest expense, (expressed as a percent of average net assets on an annualized basis) not to exceed 1.01% for Class 1 shares.

(21) Effective July 1, 2009 Principal will contractually limit the Account's Management Fees through the period ending April 30, 2011.

The expense limit will reduce the Fund's Management Fees by 0.02% (expressed as a percent of average net assets on an annualized basis). (22) Effective July 1, 2009 Principal will contractually limit the Account's Management Fees through the period ending April 30, 2011.

The expense limit will reduce the Fund's Management Fees by 0.02% (expressed as a percent of average net assets on an annualized basis). (23) For the period May 1, 2009 through April 30, 2010, the Adviser contractually agreed to waive fees and reimburse certain operating expenses (excluding interest, dividends paid on securities sold short, trading expenses, taxes and extraordinary expenses) to the extent Total Annual Fund Operating Expenses exceed 1.45% of average daily net assets.The agreement to limit the Total Annual Fund Operating Expenses is limited to the Fund's direct operating expenses and, therefore, does not apply to AFFE, which are indirect expenses incurred by the Fund through its investments in underlying funds.

16  SUMMARY OF EXPENSE INFORMATION  Principal Investment Plus Variable Annuity SM 
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EXAMPLES

These examples are intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts. These costs include contract owner transaction expenses, contract fees, Separate Account annual expenses, and underlying mutual fund fees and expenses.

The example reflects the maximum charges imposed if you were to purchase the Contract with the GMWB 2-SL/JL Rider, as well as the Premium Payment Credit Rider and the Enhanced Death Benefit Rider.

The example assumes:

• a $10,000 investment in the Contract for the time periods indicated; • a 5% return each year;

• an annual contract fee of $30 (expressed as a percentage of the average accumulated value);

• the minimum and maximum annual underlying mutual fund operating expenses as of December 31, 2008 (without voluntary waivers of fees by the underlying funds, if any);

• the GMWB 2-SL/JL rider was added to the Contract at issue;

• the Premium Payment Credit Rider was added to the Contract at issue and the Premium Payment Credit Rider surrender charge schedule is applied; and

• the Enhanced Death Benefit Rider was added to the Contract at issue.

Although your actual costs may be higher or lower, based on these assumptions, your costs would be as shown below:


SUMMARY

This prospectus describes an individual flexible premium deferred variable annuity offered by the Company. The Contract is designed to provide individuals with retirement benefits, including:

• non-qualified retirement programs; and

• Individual Retirement Annuities (“IRA”), Simplified Employee Pension plans (“SEPs”) and Savings Incentive Match Plan for Employees (“SIMPLE”) IRAs adopted according to Section 408 of the Internal Revenue Code (see

FEDERAL TAX MATTERS — IRA, SEP and SIMPLE-IRA and Rollover IRAs). The Contract does not provide any additional tax deferral if you purchase it to fund an IRA or other investment vehicle that already provides tax deferral.

For information on how to purchase the Contract, please see THE CONTRACT — How to Buy a Contract.

This is a brief summary of the Contract’s features. More detailed information follows later in this prospectus.

Principal Investment Plus Variable Annuity SM  SUMMARY OF EXPENSE INFORMATION  17 
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Investment Limitations

  • Initial premium payment must be $5,000 or more for non-qualified contracts.
  • Initial premium payment must be $2,000 for all other contracts.
  • Each subsequent premium payment must be at least $500.
  • If you are a member of a retirement plan covering three or more persons and premium payments are made through an automatic investment program, the initial and subsequent premium payments for the Contract must average at least $100 and not be less than $50.

You may allocate your net premium payments to the investment options.

  • A complete list of the divisions may be found in TABLE OF SEPARATE ACCOUNT DIVISIONS. Each division invests in shares of an underlying mutual fund. More detailed information about the underlying mutual funds may be found in the current prospectus for each underlying mutual fund.
  • The investment options also include the Fixed Account and the DCA Plus Accounts.

Transfers

During the accumulation period:

  • a dollar amount or percentage of transfer must be specified;
  • a transfer may occur on a scheduled or unscheduled basis;
  • transfers to the Fixed Account are not permitted if a transfer has been made from the Fixed Account to a division within six months; and
  • transfers into DCA Plus Accounts are not permitted.

During the annuity benefit payment period, transfers are not permitted (no transfers once payments have begun).

See THE CONTRACT — The Accumulation Period, Division Transfers and FIXED ACCOUNT AND DCA ACCOUNT — Fixed Account, Fixed Account Transfers, Total and Partial Surrenders for additional restrictions.

This section does not apply to transfers under the DCA Plus Program (see FIXED ACCOUNT AND DCA PLUS ACCOUNTS — Dollar Cost Averaging (DCA) Plus Program, Scheduled DCA Plus Transfers and Unscheduled DCA Plus Transfers).

Surrenders

During the accumulation period:

  		•  a dollar amount must be specified;
  		• surrendered amounts may be subject to surrender charge;
     
  		• for Contracts without the Premium Payment Credit Rider, the maximum surrender charge is 6% of the amount(s) surrendered.
     
  		• for Contracts with the Premium Payment Credit Rider, the maximum surrender charge is 8% of the amount(s) surrendered.
  		• total surrenders may be subject to an annual Contract fee;
  		• during a contract year, partial surrenders less than the Contract’s earnings or 10% of premium payments are not subject to a surrender charge; and
  		• surrenders before age 59½ may involve an income tax penalty (see FEDERAL TAX MATTERS).

    See THE CONTRACT — Surrenders and FIXED ACCOUNT AND DCA ACCOUNT — Fixed Account, Fixed Account Transfers, Total and Partial Surrenders and DCA Plus Surrenders for additional information.

    18  SUMMARY OF EXPENSE INFORMATION  Principal Investment Plus Variable Annuity SM 
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    Charges and Deductions

    • There is no sales charge on premium payments.
    • A contingent deferred surrender charge is imposed on certain total or partial surrenders.
    • An annual mortality and expense risks charge equal to 1.25% of amounts in the Separate Account divisions is imposed daily.
    • The daily Separate Account administration charge currently is zero but we reserve the right to assess a charge not to exceed 0.15% of Separate Account division value(s) annually.
    • The optional riders are available at an additional charge (see CHARGES AND DEDUCTIONS — Charges for Rider Benefits).
    • Contracts with an accumulated value of less than $30,000 are subject to an annual fee of the lesser of $30 or 2% of the accumulated value. Currently we do not charge the annual fee if your accumulated value is $30,000 or more. If you own more than one variable annuity contract with us, then all the contracts you own or jointly own may be aggregated on each contract’s anniversary to determine if the $30,000 minimum has been met and whether that contract will be charged.
    • Certain states and local governments impose a premium tax. We reserve the right to deduct the amount of the tax from premium payments or the accumulated value.

    See CHARGES AND DEDUCTIONS for additional information.

    Annuity Benefit Payments

    • You may choose from several fixed annuity benefit payment options which are described in THE CONTRACT — The Annuitization Period, Annuity Benefit Payment Options.
    • Payments are made to the owner (or beneficiary depending on the annuity benefit payment option selected). You should carefully consider the tax implications of each annuity benefit payment option (see THE CONTRACT — The Annuitization Period, Annuity Benefit Payment Options and FEDERAL TAX MATTERS).

    Death Benefit

    • If the owner dies before the annuitization date, a death benefit is payable (see Death Benefit).
    • The death benefit may be paid as either a single payment or under an annuity benefit payment option (see Death Benefit).
    • If the annuitant dies after the annuitization date, payments will continue only as provided by the annuity benefit payment option in effect.

    Examination Offer Period (free look)

    You may return the Contract during the examination offer period, which is generally 10 days from the date you receive the Contract. The examination offer period may be longer in certain states.

    • The amount refunded will be a full refund of your accumulated value plus any contract charges and premium taxes you paid (but not fees and charges assessed by the underlying funds), unless state law requires otherwise.
    • The amount refunded may be more or less than the premium payments made.
    • We recapture the full amount of any premium payment credit or exchange credit.

    See THE CONTRACT — Right to Examine the Contract (free look) for additional information.

    CORPORATE ORGANIZATION AND OPERATION

    Principal Life Insurance Company

    Principal Life Insurance Company is a stock life insurance company with authority to transact life and annuity business in all states of the United States and the District of Columbia. Our home office is located at: Principal Financial Group, Des Moines, Iowa 50392. We are a wholly owned subsidiary of Principal Financial Services, Inc., which in turn, is a wholly owned direct subsidiary of Principal Financial Group, Inc., a publicly-traded company.

    Principal Investment Plus Variable Annuity SM  CORPORATE ORGANIZATION AND OPERATION  19 
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    On June 24, 1879, we were incorporated under Iowa law as a mutual assessment life insurance company named Bankers Life Association. We became a legal reserve life insurance company and changed our name to Bankers Life Company in 1911. In 1986, we changed our name to Principal Mutual Life Insurance Company. In 1998, we became Principal Life Insurance Company, a subsidiary stock life insurance company of Principal Mutual Holding Company, as part of a reorganization into a mutual insurance holding company structure. In 2001, Principal Mutual Holding Company converted to a stock company through a process called demutualization, resulting in our current organizational structure.

    Principal Life Insurance Company Separate Account B

    The Separate Account was established under Iowa law on January 12, 1970 and was registered as a unit investment trust with the SEC on July 17, 1970. This registration does not involve SEC supervision of the investments or investment policies of the Separate Account. We do not guarantee the investment results of the Separate Account. There is no assurance that the value of your Contract will equal the total of the payments you make to us.

    The Separate Account is not affected by the rate of return of our general account or by the investment performance of any of our other assets. Any income, gain, or loss (whether or not realized) from the assets of the Separate Account are credited to or charged against the Separate Account without regard to our other income, gains, or losses. Obligations arising from the Contract, including the promise to make annuity benefit payments, are general corporate obligations of the Company. Assets of the Separate Account attributed to the reserves and other liabilities under the Contract may not be charged with liabilities arising from any of our other businesses.

    The Separate Account is divided into divisions. The assets of each division invest in a corresponding underlying mutual fund. New divisions may be added and made available. Divisions may also be eliminated from the Separate Account following SEC approval.

    The Underlying Mutual Funds

    The underlying mutual funds are registered under the Investment Company Act of 1940 as open-end investment management companies. The underlying mutual funds provide the investment vehicles for the Separate Account. A full description of the underlying mutual funds, the investment objectives, policies and restrictions, charges and expenses and other operational information are contained in the accompanying prospectuses (which should be read carefully before investing) and the Statement of Additional Information (“SAI”). You may request additional copies of these documents without charge from your registered representative or by calling us at 1-800-852-4450.

    We purchase and sell shares of the underlying mutual fund for the Separate Account at their net asset value. Shares represent interests in the underlying mutual fund available for investment by the Separate Account. Each underlying mutual fund corresponds to one of the divisions. The assets of each division are separate from the others. A division’s performance has no effect on the investment performance of any other division.

    The underlying mutual funds are NOT available to the general public directly. The underlying mutual funds are available only as investment options in variable life insurance policies or variable annuity contracts issued by life insurance companies and qualified plans. Some of the underlying mutual funds have been established by investment advisers that manage publicly traded mutual funds having similar names and investment objectives. While some of the underlying mutual funds may be similar to, and may in fact be modeled after publicly traded mutual funds, you should understand that the underlying mutual funds are not otherwise directly related to any publicly traded mutual fund. Consequently, the investment performance of any underlying mutual fund may differ substantially from the investment performance of a publicly traded mutual fund.

    The Table of Separate Account Divisions included later in this prospectus contains a brief summary of the investment objectives and a listing of the advisor and, if applicable, sub-advisor for each division.

    20  CORPORATE ORGANIZATION AND OPERATION  Principal Investment Plus Variable Annuity SM 
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    Deletion or Substitution of Divisions

    We reserve the right to make certain changes if, in our judgment, the changes best serve your interests or are appropriate in carrying out the purpose of the Contract. Any changes are made only to the extent and in the manner permitted by applicable laws. Also, when required by law, we will obtain your approval of the changes and approval from any appropriate regulatory authority. Approvals may not be required in all cases. Examples of the changes we may make include:

  		•  transfer assets from one division to another division;
  		• add, combine or eliminate divisions; or
  		• substitute the shares of a division for shares in another division:
     
  		• if shares of a division are no longer available for investment; or
     
  		• if, in our judgment, investment in a division becomes inappropriate considering the purposes of the division.

    If we eliminate or combine existing divisions or transfer assets from one division to another, you may change allocation percentages and transfer any value in an affected division to another division(s) without charge. You may exercise this exchange privilege until the later of 60 days after a) the effective date of the change, or b) the date you receive notice of the options available. You may only exercise this right if you have any value in the affected division(s).

    Voting Rights

    We vote shares of the underlying mutual funds owned by the Separate Account according to the instructions of owners.

    We will notify you of shareholder meetings of the mutual funds underlying the divisions in which you hold units. We will send you proxy materials and instructions for you to provide voting instructions to us. We will arrange for the handling and tallying of proxies received from you and other owners. If you give no voting instructions, we will vote those shares in the same proportion as shares for which we received instructions.

    We determine the number of fund shares that you may instruct us to vote by allocating one vote for each $100 of accumulated contract value in the division. Fractional votes are allocated for amounts less than $100. We determine the number of underlying fund shares you may instruct us to vote as of the record date established by the mutual fund for its shareholder meeting. In the event that applicable law changes or we are required by regulators to disregard voting instructions, we may decide to vote the shares of the underlying mutual funds in our own right.

    NOTE: Because there is no required minimum number of votes, a small number of votes can have a disproportionate effect.

    THE CONTRACT

    The Principal Investment Plus Variable Annuity is significantly different from a fixed annuity. As the owner of a variable annuity, you assume the risk of investment gain or loss (as to amounts in the divisions) rather than the Company. The Separate Account division accumulated value under a variable annuity is not guaranteed and varies with the investment performance of the underlying mutual funds.

    Based on your investment objectives, you direct the allocation of premium payments and accumulated values. There can be no assurance that your investment objectives will be achieved.

    The following descriptions are based on provisions of the Contract offered by this prospectus. You should refer to the actual Contract and the terms and limitations of any qualified plan which is to be funded by the Contract. Qualified plans are subject to several requirements and limitations which may affect the terms of any particular Contract or the advisability of taking certain action permitted by the Contract.

    Principal Investment Plus Variable Annuity SM  THE CONTRACT  21 
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    How to Buy a Contract

    If you want to buy a Contract, you must submit an application and make an initial premium payment. If you are buying the Contract to fund a SIMPLE-IRA or SEP, an initial premium payment is not required at the time you send in the application. If the application is complete and the Contract applied for is suitable, the Contract is issued. If the completed application is received in good order, the initial premium payment is credited within two valuation days after the later of receipt of the application or receipt of the initial premium payment at our home office. If the initial premium payment is not credited within five valuation days, it is refunded unless we have received your permission to retain the premium payment until we receive the information necessary to issue the Contract.

    The date the Contract is issued is the contract date. The contract date is the date used to determine contract years, regardless of when the Contract is delivered.

    Tax-qualified retirement arrangements, such as IRAs, SEPs, and SIMPLE-IRAs, are tax-deferred. You derive no additional benefit from the tax deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax qualified retirement arrangement to benefit from the annuity’s features other than tax deferral. These features may include guaranteed lifetime income, death benefits without surrender charges, guaranteed caps on fees, and the ability to transfer among investment options without sales or withdrawal charges.

    Premium Payments

    • The initial premium payment must be at least $5,000 for non-qualified retirement programs.
    • All other initial premium payments must be at least $2,000.
    • If you are making premium payments through a payroll deduction plan or through a bank (or similar financial institution) account under an automated investment program, your initial and subsequent premium payments must be at least $100.
    • All premium payments are subject to a surrender charge period that begins in the contract year each premium payment is received.
    • Subsequent premium payments must be at least $500 and can be made until the annuitization date.
    • Premium payments are to be made by personal or financial institution check (for example, a bank or cashier’s check). We reserve the right to refuse any premium payment that we feel presents a fraud or money laundering risk. Examples of the types of premium payments we will not accept are cash, money orders, starter checks, travelers checks, credit card checks, and foreign checks.
    • If you are a member of a retirement plan covering three or more persons, the initial and subsequent premium payments for the Contract must average at least $100 and cannot be less than $50.
    • The total of all premium payments may not be greater than $2,000,000 without our prior approval.
    • The State of Washington does not allow premium payments to be made after the first contract year on Contracts issued in Washington with the Premium Payment Credit Rider attached.

    Premium Payment Credit

    Subject to availability, we will apply a credit for premium payments made during your first contract year to your accumulated value if you elect the Premium Payment Credit Rider. See RIDER BENEFITS — Premium Payment Credit Rider for more information.

    Principal Variable Annuity Exchange Offer (“exchange offer”)

    Commencing August 1, 2009, owners of an eligible Principal Variable Annuity contract may elect to exchange their Principal Variable Annuity contract (“old contract”) for a new Principal Investment Plus Variable Annuity contract ("new contract") subject to the exchange offer terms and conditions. It may not be in your best interest to participate in the exchange offer. It is recommended that you consult with your tax advisor and financial professional before electing to participate in the exchange offer.

    22  THE CONTRACT  Principal Investment Plus Variable Annuity SM 
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    You are eligible to participate in the exchange offer when:

    • your old contract is not subject to any surrender charges;
    • the exchange offer is available in your state; and
    • your old contract has reached the contract anniversary following August 1, 2009.

    See Appendix A for further details about the exchange offer.

    Exchange Credit (for exchanges from our fixed deferred annuities)

    If you own a fixed deferred annuity issued by us and are no longer subject to surrender charges, you may transfer the accumulated value, without charge, to the Contract described in this prospectus. We will add 1% of the fixed annuity contract’s surrender value at the time of exchange to this Contract’s accumulated value. There is no charge or cost to you for this exchange credit.

    This exchange credit is allocated among the Contract’s investment options in the same ratio as your allocation of premium payments. The credit is treated as earnings. We recover the 1% exchange credit if you exercise your right to return the Contract during the examination offer period (see Right to Examine the Contract (free look) below).

    NOTE: The exchange may not be suitable for you if you do not want to accept market risk. Fixed deferred annuities provide a fixed rate of accumulation. This Contract provides Separate Account divisions. The value of this Contract will increase or decrease depending on the investment performance of the Separate Account divisions you select.

    NOTE: The charges and provisions of a fixed annuity contract and this Contract differ. The charges for this Contract are typically higher than charges for a fixed annuity and will increase further if you elect the Premium Payment Credit Rider, a GMWB rider or other optional rider. In some instances, your existing fixed annuity contract may have benefits that are not available under this Contract.

    NOTE: This exchange credit may not be available in all states. In addition, we reserve the right to change or discontinue the exchange credit. You may obtain more specific information regarding the exchange credit from your registered representative or by calling us at 1-800-852-4450.

    Right to Examine the Contract (free look)

    It is important to us that you are satisfied with the purchase of your Contract. Under state law, you have the right to return the Contract for any reason during the examination offer period (a “free look”). The examination offer period is the later of 10 days after the Contract is delivered to you, or such later date as specified by applicable state law.

    Although we currently allocate your initial premium payments to the investment options you have selected, we reserve the right to allocate initial premium payments to the Money Market Division during the examination offer period. In addition, we are required to allocate initial premium payments to the Money Market Division if the contract is issued in California and the owner is age 60 or older. After the examination offer period expires, your accumulated value will be converted into units of the divisions according to your allocation instructions. The units allocated will be based on the unit value next determined for each division.

    To exercise your free look, you must return the Contract and a written request to us before the close of business on the last day of the examination offer period. If you send the request (properly addressed and postage prepaid) in good order to the home office, the date of the postmark is used to determine if the examination offer period has expired.

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    If you properly exercise your free look, we will cancel the Contract and we will return your current accumulated value plus any premium tax charge deducted, less any applicable federal and state income tax withholding, and depending on the state in which the Contract was issued, any applicable fees and charges. The amount returned may be higher or lower than the premium payment(s) applied during the examination offer period. Some states require us to return your premium payment(s). In these states, we will return the greater of your premium payments or your current accumulated value plus any premium tax charge deducted, less any applicable federal and state income tax withholding and, depending upon the state in which the Contract was issued, any applicable fees and charges.

    Please note that we recapture the premium payment credit if you decide to return the Contract during the examination offer period. We recover the full amount of the premium payment credit; therefore, the refunded amount could be less than your initial premium payment.

    If you are purchasing this Contract to fund an IRA, SIMPLE-IRA, or SEP-IRA and you return it on or before the seventh day of the examination offer period, we will return the greater of:

    • the total premium payment(s) made; or
    • your accumulated value plus any premium tax charge deducted, less any applicable federal and state income tax withholding and depending upon the state in which the Contract was issued, any applicable fees and charges.

    You may obtain more specific information regarding the free look from your registered representative or by calling us at 1-800-852-4450.

    The Accumulation Period

    The Value of Your Contract

    The accumulated value of your Contract is the total of the Separate Account division accumulated value plus the DCA Plus Account(s) accumulated value plus the Fixed Account accumulated value. The DCA Plus Accounts and Fixed Account are described in the section titled FIXED ACCOUNT AND DCA PLUS ACCOUNTS.

    There is no guaranteed minimum Separate Account division accumulated value. The value reflects the investment experience of the divisions that you choose and also reflects your premium payments, partial surrenders, surrender charges, partial annuitizations and the Contract expenses deducted from the Separate Account.

    The Separate Account division accumulated value changes from day to day. To the extent the accumulated value is allocated to the Separate Account divisions, you bear the investment risk. At the end of any valuation period, your Contract’s value in a division is:

    • the number of units you have in a division multiplied by
    • the value of a unit in the division.

    The number of units is equal to the total units purchased by allocations to the division from:

    • your initial premium payment;
    • subsequent premium payments;
    • your exchange credit;
    • premium payment credits; and
    • transfers from another investment option

    minus units sold:

    • for partial surrenders and/or partial annuitizations from the division;
    • as part of a transfer to another division or the Fixed Account; and
    • to pay contract charges and fees.

    Unit values are calculated each valuation date at the close of normal trading of the NYSE. To calculate the unit value of a division, the unit value from the previous valuation date is multiplied by the division’s net investment factor for the current valuation period. The number of units does not change due to a change in unit value.

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    The net investment factor measures the performance of each division. The net investment factor for a valuation period is [(a plus b) divided by (c)] minus d where:

    a = the share price (net asset value) of the underlying mutual fund at the end of the valuation period;

    b = the per share amount of any dividend* (or other distribution) made by the mutual fund during the valuation period;

    c = the share price (net asset value) of the underlying mutual fund at the end of the previous valuation period; and

    d = the total Separate Account annual expenses.

    *      When an investment owned by an underlying mutual fund pays a dividend, the dividend increases the net asset value of a share of the underlying mutual fund as of the date the dividend is recorded. As the net asset value of a share of an underlying mutual fund increases, the unit value of the corresponding division also reflects an increase. Payment of a dividend under these circumstances does not increase the number of units you own in the division.

    The Separate Account charges are calculated by dividing the annual amount of the charge by 365 and multiplying by the number of days in the valuation period.

    Premium Payments

  		•  On your application, you direct how your premium payments will be allocated to the investment options.
  		• Allocations must be in percentages.
  		• Percentages must be in whole numbers and total 100%.
  		• Subsequent premium payments are allocated according to your then current allocation instructions.
  		• Changes to the allocation instructions are made without charge.
     
  		• A change is effective on the next valuation period after we receive your new instructions in good order.
     
  		• You can change the current allocations and future allocation instructions by:
       
  		• mailing your instructions to us;
       
  		• calling us at 1-800-852-4450 (if telephone privileges apply);
       
  		• faxing your instructions to us at 1-866-894-2087; or
       
  		• visiting www.principal.com.
  		• Changes to premium payment allocations do not result in the transfer of any existing investment option accumulated values. You must provide specific instructions to transfer existing accumulated values.
  		• Premium payments are credited on the basis of the unit value next determined after we receive a premium payment.
  		• If no premium payments are made during two consecutive calendar years and the accumulated value is less than $2,000, we reserve the right to terminate the Contract (see GENERAL INFORMATION — Reservation of Rights).

    Division Transfers

  		•  You may request an unscheduled transfer or set up a scheduled transfer by
     
  		• mailing your instructions to us;
     
  		• calling us at 1-800-852-4450 (if telephone privileges apply);
     
  		• faxing your instructions to us at 1-866-894-2087; or
     
  		• visiting www.principal.com.
  		• You must specify the dollar amount or percentage to transfer from each division.
  		• The minimum transfer amount is the lesser of $100 or the value of your division.
  		• In states where allowed, we reserve the right to reject transfer instructions from someone providing them for multiple contracts for which he or she is not the owner.

    You may not make a transfer to the Fixed Account if:

    • a transfer has been made from the Fixed Account to a division within six months; or
    • following the transfer, the Fixed Account value would be greater than $1,000,000.
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    Unscheduled Transfers

    You may make unscheduled division transfers from one division to another division or to the Fixed Account.

    • Transfers are not permitted into DCA Plus Accounts.
    • The transfer is made, and the values are determined, as of the end of the valuation period in which we receive your request.
    • We reserve the right to impose a fee of the lesser of $30 or 2% of the amount transferred on each unscheduled transfer after the first unscheduled transfer in a contract year.

    Limitations on Unscheduled Transfers. We reserve the right to reject excessive exchanges or purchases if the trade would disrupt the management of the Separate Account, any division of the Separate Account or any underlying mutual fund. In addition, we may suspend or modify transfer privileges in our sole discretion at any time to prevent market timing efforts that could disadvantage other owners. These modifications could include, but not be limited to:

    • requiring a minimum time period between each transfer;
    • imposing a transfer fee;
    • limiting the dollar amount that an owner may transfer at any one time; or
    • not accepting transfer requests from someone providing requests for multiple Contracts for which he or she is not the owner.

    Scheduled Transfers (Dollar Cost Averaging)

    • You may elect to have transfers made on a scheduled basis.
    • There is no charge for scheduled transfers and no charge for participating in the scheduled transfer program.
    • You must specify the dollar amount of the transfer.
    • You select the transfer date (other than the 29th, 30th or 31st) and the transfer period (monthly, quarterly, semi- annually or annually).
    • If the selected date is not a valuation date, the transfer is completed on the next valuation date.
    • Transfers are not permitted into DCA Plus Accounts.
    • If you want to stop a scheduled transfer, you must provide us notice prior to the date of the scheduled transfer.
    • Transfers continue until your value in the division is zero or we receive notice to stop the transfers.
    • We reserve the right to limit the number of divisions from which simultaneous transfers are made. In no event will it ever be less than two.

    Scheduled transfers are designed to reduce the risks that result from market fluctuations. They do this by spreading out the allocation of your money to investment options over a longer period of time. This allows you to reduce the risk of investing most of your money at a time when market prices are high. The results of this strategy depend on market trends and are not guaranteed.

    Example:       
    Month  Amount Invested  Share Price  Shares Purchased 
    January  $100  $25.00  4 
    February  $100  $20.00  5 
    March  $100  $20.00  5 
    April  $100  $10.00  10 
    May  $100  $25.00  4 
    June  $100  $20.00  5 
    Total  $600  $120.00  33 

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    In the example above, the average share price is $20.00 [total of share prices ($120.00) divided by number of purchases (6)]. The average share cost is $18.18 [amount invested ($600.00) divided by number of shares purchased (33)].

    Automatic Portfolio Rebalancing (APR)

  		•  APR allows you to maintain a specific percentage of your Separate Account division accumulated value in specified divisions over time.
  		• You may elect APR at any time after the examination offer period has expired.
  		• APR is not available for values in the Fixed Account or the DCA Plus Accounts.
  		• APR is not available if you have arranged scheduled transfers from the same division.
  		• There is no charge for APR transfers and no charge for participating in the APR program.
  		• APR will be done on the frequency you specify:
     
  		• quarterly (on a calendar year or contract year basis); or
     
  		• semiannually or annually (on a contract year basis).
  		• You may rebalance by
     
  		• mailing your instructions to us;
     
  		• calling us at 1-800-852-4450 (if telephone privileges apply);
     
  		• faxing your instructions to us at 1-866-894-2087; or
     
  		• visiting www.principal.com.
  		• Divisions are rebalanced at the end of the next valuation period following your request.
    Example:  You elect APR to maintain your Separate Account division accumulated value with 50% in the 
      LargeCap Value Division and 50% in the Bond & Mortgage Securities Division. At the end of the 
      specified period, 60% of the values are in the LargeCap Value Division, with the remaining 40% in 
      the Bond & Mortgage Securities Division. By rebalancing, units from the LargeCap Value Division 
      are redeemed and applied to the Bond & Mortgage Securities Division so that 50% of the Separate 
      Account division accumulated value is once again in each division. 

    Telephone and Internet (Electronic) Services

    If you elect telephone services or you elect internet (electronic) services and satisfy our internet service requirements (which are designed to ensure compliance with federal UETA and E-SIGN laws), instructions for the following transactions may be given to us via the telephone or internet:

    • make premium payment allocation changes;
    • set up Dollar Cost Averaging (DCA) scheduled transfers;
    • make transfers; and
    • make changes to APR.

    Neither the Company nor the Separate Account is responsible for the authenticity of telephone service or internet transaction requests. We reserve the right to refuse telephone service or internet transaction requests. You are liable for a loss resulting from a fraudulent telephone or internet order that we reasonably believe is genuine. We follow procedures in an attempt to assure genuine telephone service or internet transactions. If these procedures are not followed, we may be liable for loss caused by unauthorized or fraudulent transactions. The procedures may include recording telephone service transactions, requesting personal identification (name, address, security phrase, password, daytime telephone number, or birth date) and sending written confirmation to your address of record.

    Instructions received via our telephone services and/or the internet are binding on both owners if the Contract is jointly owned.

    If the Contract is owned by a business entity or a trust, an authorized individual (with the proper password) may use telephone and/or internet services. Instructions provided by the authorized individual are binding on the owner.

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    We reserve the right to modify or terminate telephone service or internet transaction procedures at any time. Whenever reasonably feasible, we will provide you with prior notice (by mail or by email, if previously authorized by you) if we modify or terminate telephone service or internet transaction procedures. In some instances, it may not be reasonably feasible to provide prior notice if we modify or terminate telephone service or internet transaction procedures; however, any modification or termination will apply to all Contract owners in a non-discriminatory fashion.

    Telephone Services

    Telephone services are available to you. Telephone services may be declined on the application or at any later date by providing us with written notice. You may also elect telephone authorization for your registered representative by providing us written notice.

    If you elect telephone privileges, instructions

    • may be given by calling us at 1-800-852-4450 while we are open for business (generally, between 8 a.m. and 6 p.m. Eastern Time on any day that the NYSE is open).
    • that are in good order and received by us before the close of a valuation period will receive the price next determined (the value as of the close of that valuation period).
    • that are in good order and received by us after the close of valuation period will receive the price next determined (the value as of the close of that next valuation period).
    • that are not in good order when received by us will be effective the next valuation day that we receive good order instructions.

    Internet

    Internet services are available to you if you register for a secure login on the Principal Financial Group web site, www.principal.com. You may also elect internet authorization for your registered representative by providing us written notice.

    If you register for internet privileges, instructions

    • that are in good order and received by us before the close of a valuation period will receive the price next determined (the value as of the close of that valuation period).
    • that are in good order and received by us after the close of a valuation period will receive the price next determined (the value as of the close of the next valuation period).
    • that are not in good order when received by us will be effective the next valuation day that we receive good order instructions.

    Surrenders

    You may surrender your Contract by providing us notice. Surrender requests may be sent to us at: Principal Life Insurance Company P O Box 9382 Des Moines, Iowa 50306-9382

    Surrenders result in the redemption of units and your receipt of the value of the redeemed units minus any applicable surrender charge and fees. The values are determined as of the end of the valuation period in which we receive your request. Surrenders from the Separate Account are generally paid within seven days of the effective date of the request for surrender (or earlier if required by law). However, certain delays in payment are permitted (see Delay of Payments). Surrenders before age 59½ may involve an income tax penalty (see FEDERAL TAX MATTERS).

    You may specify surrender allocation percentages with each partial surrender request. If you do not provide us with specific percentages, we will use your premium payment allocation percentages for the partial surrender. Surrenders may be subject to a surrender charge (see CHARGES AND DEDUCTIONS — Surrender Charge).

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    Total Surrender

    • You may surrender the Contract at any time before the annuitization date.
    • You receive the cash surrender value at the end of the valuation period during which we receive your surrender request.
    • The cash surrender value is your accumulated value minus any applicable surrender charges and fee(s) (contract fee and/or prorated share of the charge(s) for optional rider(s)).
    • We reserve the right to require you to return the Contract.
    • The written consent of all collateral assignees and irrevocable beneficiaries must be obtained prior to surrender.

    Unscheduled Partial Surrender

    • You may surrender a part of your accumulated value at any time before the annuitization date.
    • You must specify the dollar amount of the surrender (which must be at least $100).
    • The surrender is effective at the end of the valuation period during which we receive your written request for surrender.
    • The surrender is deducted from your investment options according to your surrender allocation percentages.
    • If surrender allocation percentages are not specified, we use your premium payment allocation percentages.
    • We surrender units from your investment options to equal the dollar amount of the surrender request plus any applicable surrender charge and transaction fee, if any.
    • Your accumulated value after the unscheduled partial surrender must be equal to or greater than $5,000 (we reserve the right to change the minimum remaining accumulated value but it will not be greater than $10,000).
    • The written consent of all collateral assignees and irrevocable beneficiaries must be obtained prior to surrender.

    Scheduled Partial Surrender

    • You may elect partial surrenders from any of your investment options on a scheduled basis.
    • Your accumulated value must be at least $5,000 when the scheduled partial surrenders begin.
    • You may specify monthly, quarterly, semi-annually or annually and choose a surrender date (other than the 29th, 30th or 31st).
    • If the selected date is not a valuation date, the partial surrender is completed on the next valuation date.
    • We surrender units from your investment options to equal the dollar amount of the partial surrender request plus any applicable partial surrender charge.
    • The partial surrenders continue until your value in the investment option is zero or we receive written notice to stop the partial surrenders.
    • The written consent of all collateral assignees and irrevocable beneficiaries must be obtained prior to partial surrender.
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    Death Benefit

    This Contract provides a death benefit upon the death of the owner. The Contract will not provide death benefits upon the death of an annuitant unless the annuitant is also an owner or the owner is not a natural person.

    The following tables illustrate the various situations and the resulting death benefit payment if death occurs before the annuitization date.

    If you die and...  And... Then... 
     
    You are the sole owner  Your spouse is  The beneficiary(ies) receive the death benefit under the Contract. 
      not named as a   
      primary  If a beneficiary dies before you, on your death we will make equal 
      beneficiary  payments to the surviving beneficiaries unless you provided us with 
        other written instructions. If no beneficiary(ies) survive you, the 
        death benefit is paid to your estate in a single payment. 
     
        Upon your death, only your beneficiary(ies’) right to the death 
        benefit will continue; all other rights and benefits under the Contract 
        will terminate. 
     
    You are the sole owner  Your spouse is  Your spouse may either 
      named as a  a. continue the Contract; or 
      primary  b. receive the death benefit under the Contract. 
      beneficiary   
        All other beneficiaries receive the death benefit under the Contract. 
     
        If a beneficiary dies before you, on your death we will make equal 
        payments to the surviving beneficiaries unless you provided us with 
        other written instructions. If no beneficiary(ies) survive you, the 
        death benefit is paid to your estate in a single payment. 
     
        Unless your spouse elects to continue the Contract, only your 
        spouse’s and any other beneficiary(ies’) right to the death benefit 
        will continue; all other rights and benefits under the Contract will 
        terminate. 
     
    You are a joint owner  The surviving  The surviving owner receives the death benefit under the Contract. 
      joint owner is not   
      your spouse  Upon your death, only the surviving owner’s right to the death 
        benefit will continue; all other rights and benefits under the Contract 
        will terminate. 
     
    You are a joint owner  The surviving  Your spouse may either 
      joint owner is  a. continue the Contract; or 
      your spouse  b. receive the death benefit under the Contract. 
     
        Unless the surviving spouse owner elects to continue the Contract, 
        upon your death, only your spouse’s right to the death benefit will 
        continue; all other rights and benefits under the rider and the 
        Contract will terminate. 

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    If...  And...  Then... 
     
    The annuitant dies  The owner is not  The beneficiary(ies) receive the death benefit under the Contract. 
      a natural person   
        If a beneficiary dies before the annuitant, on the annuitant’s death 
        we will make equal payments to the surviving beneficiaries unless 
        the owner provided us with other written instructions. 
     
        Upon the annuitant’s death, only the beneficary(ies) right to the 
        death benefit will continue; all other rights and benefits under the 
        Contract will terminate. 

    Before the annuitization date, you may give us written instructions for payment under a death benefit option. If we do not receive your instructions, the death benefit is paid according to instructions from the beneficiary(ies). The beneficiary(ies) may elect to apply the death benefit under an annuity benefit payment option or receive the death benefit as a single payment. Generally, unless the beneficiary(ies) elects otherwise, we pay the death benefit in a single payment, subject to proof of your death.

    No surrender charge applies when a death benefit is paid.

    Standard Death Benefit Formula

    The amount of the standard death benefit is the greatest of a, b or c, where:

    a = the accumulated value on the date we receive proof of death and all required documents;

    b = the total of premium payments minus an adjustment for each partial surrender (and any applicable surrender charges and fees) and each partial annuitization made prior to the date we receive proof of death and all required documents; and

    c = the highest accumulated value on any contract anniversary that is wholly divisible by seven (for example, contract anniversaries 7, 14, 21, 28, etc.) plus any premium payments since that contract anniversary and minus any partial surrenders (and any applicable surrender charges and fees) made after that contract anniversary.

    The adjustment for each partial surrender (and any applicable surrender charges and fees) and for each partial annuitization made prior to the date we receive proof of death and all required documents is equal to (x divided by y) multiplied by z, where: x = the amount of the partial surrender (and any applicable surrender charges and fees) or the amount of the partial annuitization; and y = the accumulated value immediately prior to the partial surrender or partial annuitization; and z = the amounts determined in b or c above immediately prior to the partial surrender or partial annuitization.

    Example: Your accumulated value is $10,000 and you take a partial surrender of $2,000 (20% of your accumulated value). For purposes of calculating the death benefit, we reduce the amounts determined in b or c above by 20%.

    Enhanced Death Benefit

    Subject to availability in your state, you may enhance the “death benefit” by electing the Enhanced Death Benefit Rider, which provides you with the greater of the enhanced death benefit or the standard death benefit. See RIDER BENEFITS — Enhanced Death Benefit Rider for more information.

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    Payment of Death Benefit

    The death benefit is usually paid within five business days of our receiving all required documents (including proof of death) to process the claim. Payment is made according to benefit instructions provided by you. Some states require this payment to be made in less than five business days. Under certain circumstances, this payment may be delayed (see GENERAL PROVISIONS — Delay of Payments). We pay interest (as required by state law) on the death benefit from the date we receive all required documents until payment is made or until the death benefit is applied under an annuity benefit payment option.

    NOTE: Proof of death includes: a certified copy of a death certificate; a certified copy of a court order; a written statement by a medical doctor; or other proof satisfactory to us.

    The accumulated value remains invested in the divisions until the valuation period during which we receive the required documents. If more than one beneficiary is named, each beneficiary’s portion of the death benefit remains invested in the divisions until the valuation period during which we receive the required documents for that beneficiary. After payment of all of the death benefit, the Contract is terminated.

    The Annuitization Period

    Annuitization Date

    You may specify an annuitization date in your application. You may change the annuitization date with our prior approval. The request must be in writing. You may not select an annuitization date later than the maximum annuitization date found on the data pages. If you do not specify an annuitization date, the annuitization date is the maximum annuitization date shown on the data pages.

    Full Annuitization

    Any time after the first contract year, you may annuitize your Contract by electing to receive payments under an annuity benefit payment option. If the accumulated value on the annuitization date is less than $2,000 or if the amount applied under an annuity benefit payment option is less than the minimum requirement, we may pay out the entire amount in a single payment. The contract would then be canceled. You may select when you want the payments to begin (within the period that begins the business day following our receipt of your instruction and ends one year after our receipt of your instructions).

    Once payments begin under the annuity benefit payment option you choose, the option may not be changed. In addition, once payments begin, you may not surrender or otherwise liquidate or commute any of the portion of your accumulated value that has been annuitized.

    Depending on the type of annuity benefit payment option selected, payments that are initiated either before or after the annuitization date may be subject to penalty taxes (see FEDERAL TAX MATTERS). You should consider this carefully when you select or change the annuity benefit payment commencement date.

    Partial Annuitization

    If you purchased your Contract prior to May 20, 2006 or your Contract is issued in a state which has not yet approved the partial annuitization endorsement, partial annuitization is not available and all references to “partial annuitization” within this prospectus do not apply to your Contract.

    Subject to state availability, if you purchase the Contract on or after May 20, 2006, you have the right to partially annuitize a portion of your accumulated value. A full list of states in which partial annuitization is available may be obtained from your registered representative or by calling us at 1-800-852-4450.

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    After the first contract year and prior to the annuitization date, you may annuitize a portion of your accumulated value by sending us a notice.

    If you have elected the Premium Payment Credit Rider, the amount of the partial annuitization during each of contract years two and three is limited to no more than 10% of the accumulated value as of the most recent contract anniversary.

    The minimum partial annuitization amount is $2,000. Any partial annuitization request that reduces the accumulated value to less than $5,000 will be treated as a request for full annuitization.

    You may select one of the annuity benefit payment options listed below. Once payments begin under the option you selected, the option may not be changed. In addition, once payments begin you may not surrender or otherwise liquidate or commute any portion of your accumulated value that has been annuitized.

    Annuity Benefit Payment Options

    We offer fixed annuity benefit payments only. No surrender charge is imposed on any portion of your accumulated value that has been annuitized.

    You may choose from several fixed annuity benefit payment options. Payments will be made on the frequency you choose. You may elect to have your annuity benefit payments made on a monthly, quarterly, semiannual or annual basis. The dollar amount of the payments is specified for the entire payment period according to the option selected. There is no right to take any total or partial surrenders after the annuitization date.

    The amount of the fixed annuity benefit payment depends on the:

    • amount of accumulated value applied to the annuity benefit payment option;
    • annuity benefit payment option selected; and
    • age and gender of the annuitant (unless fixed income option is selected).

    Annuity benefit payments are determined in accordance with annuity tables and other provisions contained in the Contract. The annuity benefit payment tables contained in this Contract are based on the Annuity 2000 Mortality Table. These tables are guaranteed for the life of the Contract. The amount of the initial payment is determined by applying all or a portion of the accumulated value as of the date of the application to the annuity table for the annuitant’s annuity benefit payment option, gender, and age.

    Annuity benefit payments generally are higher for male annuitants than for female annuitants with an otherwise identical Contract. This is because statistically females have longer life expectancies than males. In certain states, this difference may not be taken into consideration in determining the payment amount. Additionally, Contracts with no gender distinctions are made available for certain employer-sponsored plans because, under most such plans, gender discrimination is prohibited by law.

    You may select an annuity benefit payment option by written request only. Your selection of an annuity benefit payment option for a partial annuitization must be in writing and may not be changed after payments begin. Your selection of an annuity benefit payment option for any portion not previously annuitized may be changed by written request prior to the annuitization date.

    If an annuity benefit payment option is not selected, we will automatically apply:

    • for Contracts with one annuitant — Life Income with payments guaranteed for a period of 10 years.
    • for Contracts with joint annuitants — Joint and Full Survivor Life Income with payments guaranteed for a period of 10 years.
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    The available annuity benefit payment options for both full and partial annuitizations include:

    • Fixed Period Income – Level payments are made for a fixed period. You may select a range from 5 to 30 years 
           (state variations may apply). If the annuitant dies before the selected period expires, payments continue to you or 
           the person(s) you designate until the end of the fixed period. Payments stop after all guaranteed payments are 
           made. 
     
    • Life Income – Level payments continue for the annuitant’s lifetime. NOTE: There is no death benefit value 
           remaining or further payments when the annuitant dies. If you defer the first payment date, it is possible that 
           you would receive no payments if the annuitant dies before the first payment date. 
     
    • Life Income with Period Certain – Level payments continue during the annuitant’s lifetime with a guaranteed 
           payment period of 5 to 30 years. If the annuitant dies before all of the guaranteed payments have been made, the 
           guaranteed payments continue to you or the person(s) you designate until the end of the guaranteed payment 
           period. 
     
    • Joint and Survivor – Payments continue as long as either the annuitant or the joint annuitant is alive. You may 
           also choose an option that lowers the amount of income after the death of a joint annuitant. It is possible that you 
           would only receive one payment under this option if both annuitants die before the second payment is due. If you 
           defer the first payment date, it is possible that you would receive no payments if both the annuitants die before the 
           first payment date. NOTE: There is no death benefit value remaining or further payments after both 
           annuitants die. 
     
    • Joint and Survivor with Period Certain – Payments continue as long as either the annuitant or the joint annuitant 
           is alive with a guaranteed payment period of 5 to 30 years. You may choose an option that lowers the amount of 
           income after the death of a joint annuitant. If both annuitants die before all guaranteed payments have been made, 
           the guaranteed payments continue to you or the person(s) you designate until the end of the guaranteed payment 
           period. 

    Other annuity benefit payment options may be available.

    Supplementary Contract

    When you annuitize all or a portion of your accumulated value, we issue a supplementary fixed annuity contract that provides an annuity benefit payment based on the amount you have annuitized and the annuity benefit payment option that you have selected. The date of the first payment under the supplementary contract is the effective date of that supplementary contract unless you select a date for the first payment that is later than the supplementary contract effective date. The first annuity benefit payment must be made within one year of the supplementary contract effective date.

    Tax Considerations Regarding Annuity Benefit Payment Options

    If you own one or more tax qualified annuity contracts, you may avoid tax penalties if payments from at least one of your tax qualified contracts begin no later than April 1 following the calendar year in which you turn age 70½. The required minimum distribution payment must be in equal (or substantially equal) amounts over your life or over the joint lives of you and your designated beneficiary. These required minimum distribution payments must be made at least once a year. Tax penalties may apply at your death on certain excess accumulations. You should confer with your tax advisor about any potential tax penalties before you select an annuity benefit payment option or take other distributions from the Contract.

    Additional rules apply to distributions under non-qualified contracts (see FEDERAL TAX MATTERS — Required Distributions for Non-Qualified Contracts).

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    Death of Annuitant (During the Annuity Benefit Payment Period)

    If the annuitant dies during the annuity benefit payment period, remaining payments are made to the owner throughout the guaranteed payment period, if any, or for the life of any joint annuitant, if any. If the owner is the annuitant, remaining payments are made to the contingent owner. In all cases the person entitled to receive payments also receives any rights and privileges under the annuity benefit payment option.

    CHARGES AND DEDUCTIONS

    Certain charges are deducted under the Contract. If the charge is not sufficient to cover our costs, we bear the loss. If the expense is more than our costs, the excess is profit to the Company. We expect a profit from all the fees and charges listed below, except the Annual Fee and Premium Tax. For a summary, see SUMMARY EXPENSE INFORMATION.

    In addition to the charges under the Contract, there are also deductions from and expenses paid out of the assets of the underlying mutual funds which are described in the underlying mutual funds’ prospectuses.

    Surrender Charge

    No sales charge is collected or deducted when premium payments are applied under the Contract. A surrender charge is assessed on certain total or partial surrenders. The amounts we receive from the surrender charge are used to cover some of the expenses of the sale of the Contract (primarily, commissions, as well as other promotional or distribution expenses). If the surrender charge collected is not enough to cover the actual costs of distribution, the costs are paid from the Company’s General Account assets which include profit, if any, from the mortality and expense risks charge.

    NOTE: If you plan to make multiple premium payments, you need to be aware that each premium payment has its own surrender charge period (shown below). The surrender charge for any total or partial surrender is a percentage of all the premium payments surrendered which were received by us during the contract years prior to the surrender. The applicable percentage which is applied to the premium payments surrendered is determined by the following tables.

    Surrender Charge for Contracts without the Premium Payment Credit Rider (as a percentage of amounts surrendered):

    Number of completed contract years  Surrender charge applied to all 
    since each premium payment  premium payments received in 
    was made  that contract year 
    0 (year of premium payment)  6% 
    1  6% 
    2  6% 
    3  5% 
    4  4% 
    5  3% 
    6  2% 
    7 and later  0% 

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    Surrender Charge for Contracts with the Premium Payment Credit Rider (as a percentage of amounts surrendered):

    Number of completed contract years  Surrender charge applied to all 
    since each premium payment  premium payments received in 
    was made  that contract year 
    0 (year of premium payment)  8% 
    1  8% 
    2  7% 
    3  6% 
    4  5% 
    5  4% 
    6  3% 
    7  2% 
    8  1% 
    9 and later  0% 

    Each premium payment begins in year 0 for purposes of calculating the percentage applied to that premium payment. However, premium payments are added together by contract year for purposes of determining the applicable surrender charge. If your contract year begins April 1 and ends March 31 the following year, all premium payments received during that period are considered to have been made in that contract year.

    NOTE: Regarding Contracts written in the states of Alabama, Massachusetts, and Washington:

    • For contracts without the Premium Payment Credit Rider, surrender charges are applicable to premium payments made in the first three contract years.
    • For Contracts with the Premium Payment Credit Rider, surrender charges are applicable only to premium payments made in the first contract year.

    For purpose of calculating surrender charges, we assume that surrenders and transfers are made in the following order:

    • first from premium payments no longer subject to a surrender charge;
    • then from the free surrender privilege (first from the earnings, then from the oldest premium payments (i.e., on a first-in, first-out basis)) described below; and
    • then from premium payments subject to a surrender charge on a first-in, first-out basis.

    NOTE: Partial surrenders may be subject to both a surrender charge and a transaction fee.

    Free Surrender Privilege

    The free surrender privilege is an amount normally subject to a surrender charge that may be surrendered without a charge. The free surrender privilege is the greater of:

    • earnings in the Contract (earnings equal accumulated value less unsurrendered premium payments as of the date of the surrender); or
    • 10% of the premium payments, decreased by any partial surrenders and partial annuitizations since the last contract anniversary.
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    Any amount not taken under the free surrender privilege in a contract year is not added to the amount available under the free surrender privilege for any following contract year(s).

    Unscheduled partial surrenders of the free surrender privilege may be subject to the transaction fee described below. Waiver of Surrender Charge The surrender charge does not apply to:

    • amounts applied under an annuity benefit payment option; or
    • payment of any death benefit, however, the surrender charge does apply to premium payments made by a surviving spouse after an owner’s death; or
    • amounts distributed to satisfy the minimum distribution requirement of Section 401(a)9 of the Internal Revenue Code, provided that the amount surrendered does not exceed the minimum distribution amount which would have been calculated based on the value of this Contract alone; or
    • an amount transferred from a Contract used to fund an IRA to another annuity contract issued by the Company to fund an IRA of the participant’s spouse when the distribution is made pursuant to a divorce decree.

    In addition, the Waiver of Surrender Charge Rider is automatically added to your Contract at issue. This rider waives the surrender charge on surrenders made after the first Contract anniversary if the original owner or original annuitant has a critical need. See RIDER BENEFITS — Waiver of Surrender Charge Rider for more information.

    Transaction Fee

    We reserve the right to charge a transaction fee of the lesser of $25 or 2% of each unscheduled partial surrender after the 12th unscheduled partial surrender in a contract year. The transaction fee would be deducted from the accumulated value remaining in the investment option(s) from which the amount is surrendered, on a pro rata basis.

    We also reserve the right to charge a transaction fee on each unscheduled transfer after the first unscheduled transfer in a contract year. The transfer fee would be deducted from the investment option(s) from which the amount is transferred, on a pro rata basis.

    Premium Taxes

    We reserve the right to deduct an amount to cover any premium taxes imposed by states or other jurisdictions. Any deduction is made from either a premium payment when we receive it, or the accumulated value when you request a surrender (total or partial) or you request application of the accumulated value (full or partial) to an annuity benefit payment option. Premium taxes range from 0% in most states to as high as 3.50% .

    Annual Fee

    Contracts with an accumulated value of less than $30,000 are subject to an annual Contract fee of the lesser of $30 or 2% of the accumulated value. Currently, we do not charge the annual fee if your accumulated value is $30,000 or more. If you own more than one variable annuity contract with us, all the Contracts you own or jointly own are aggregated, on each Contract’s anniversary, to determine if the $30,000 minimum has been met and whether that Contract will be charged. The fee is deducted from the investment option that has the greatest value. The fee is deducted on each Contract anniversary and upon total surrender of the Contract. The fee assists in covering administration costs, primarily costs to establish and maintain the records which relate to the Contract.

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    Separate Account Annual Expenses

    Mortality and Expense Risks Charge

    We assess each division with a daily charge for mortality and expense risks. The annual rate of the charge is 1.25% of the average daily net assets of the Separate Account divisions. We agree not to increase this charge for the duration of the Contract. This charge is assessed only prior to the annuitization date. This charge is assessed daily when the value of a unit is calculated.

    This charge is intended to compensate us for the mortality risk on the Contract. We have a mortality risk in that we guarantee payment of a death benefit in a single payment or under an annuity benefit payment option. We do not impose a surrender charge on a death benefit payment, which is an additional mortality risk.

    This charge is also intended to cover our expenses, primarily related to operation of the Contract, including

    • furnishing periodic Contract statements, confirmations and other customer communications;
    • preparation and filing of regulatory documents (such as this prospectus);
    • preparing, distributing and tabulating proxy voting materials related to the underlying mutual funds; and
    • providing computer, actuarial and accounting services.

    If the mortality and expense risks charge is not enough to cover our costs, we bear the loss. If the mortality and expense risks charge is more than our costs, the excess is profit to the Company.

    Administration Charge

    Currently, we do not impose a Separate Account administration charge. We reserve the right to assess each Separate Account division with a daily administration charge that is guaranteed not to exceed the annual rate of 0.15% of the average daily net asset value of the divisions. We will provide prior written notice in the event that we exercise our right to assess the administration charge.

    In the event that we assess the administration charge, it would be imposed in order to cover our costs for administration of the Contract that are not covered in the mortality and expense risk charge, above. In the event that we assess an administration charge, it would not be imposed after the annuitization date of the Contract. In the event that we assess an administration charge, it would be assessed daily against the Separate Account division values in the same manner as the mortality and expense risks charge, above.

    Charges for Rider Benefits

    Subject to certain conditions, you may add one or more of the following optional riders to your Contract. Detailed information concerning the optional riders may be obtained from your registered representative or by calling us at 1-800-852-4450.

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    Premium Payment Credit Rider

    The maximum annual charge for this rider is 0.60% of the average daily net assets of the Separate Account divisions and a reduction of 0.60% of the Fixed Account interest rate. We currently impose the maximum charge against the average daily net assets of the Separate Account divisions, but do not currently impose the Fixed Account interest rate reduction. We will provide prior written notice in the event that we decide to exercise our right to reduce the Fixed Account interest rate.

    If you elect the Premium Payment Credit Rider, the rider charge is assessed until completion of your 8th contract year (and only prior to the annuitization date) even if the credit(s) have been recovered. This charge is assessed daily against the Separate Account division values in the same manner as the mortality and expense risks charge, above. After the 8th Contract anniversary, your Contract accumulated value is moved to units in your chosen divisions that do not include this rider charge. This move of division units will not affect your accumulated value. It will, however, result in a smaller number of division units but those units will have a higher unit value. We will notify you when the division units move because of discontinuation of the rider charge.

    The rider charge is intended to cover our cost for the credit(s).

    Enhanced Death Benefit Rider

    The annual charge for this rider is 0.25% of the accumulated value (0.15% in New York and Washington). The charge is taken quarterly at a quarterly rate of 0.0625% (0.0375% in New York and Washington) of the average accumulated value during the calendar quarter. We reserve the right to increase this charge to an annual maximum of 0.30% (0.075% quarterly) of the average accumulated value during the calendar quarter.

    The charge is deducted through the redemption of units from your accumulated value in the same proportion as the surrender allocation percentages. If this rider is purchased after the beginning of a quarter, this charge is prorated according to the number of days it is in effect during the quarter. Upon termination of this rider or upon your death (annuitant’s death, if the owner is not a natural person), this charge will be based on the number of days this rider is in effect during the quarter.

    The rider charge is intended to reimburse us for the cost of the potentially greater death benefit provided by this rider.

    GMWB 1 (Investment Protector Plus) Rider

    For GMWB 1 riders issued on or after February 16, 2009, the current annual charge for the rider is 0.80% of the average quarterly Investment Back remaining withdrawal benefit base. The charge is taken quarterly, at 0.20%, based on the average quarterly Investment Back remaining withdrawal benefit base during the calendar quarter. A rider is "issued" on or after February 16, 2009 if the rider application is dated on or after February 16, 2009.

    For GMWB 1 riders issued before February 16, 2009, the current annual charge for the rider is 0.60% of the average quarterly Investment Back remaining withdrawal benefit base. The charge is taken quarterly, at 0.15%, based on the average quarterly Investment Back remaining withdrawal benefit base during the calendar quarter. A rider is "issued" before February 16, 2009 if the rider application is dated before February 16, 2009.

    We reserve the right to increase the rider charge up to a maximum annual charge of 0.85% (0.2125% quarterly) of the average quarterly Investment Back remaining withdrawal benefit base. If you elect a GMWB Step-Up, you will be charged the then current rider charge.

    At the end of each calendar quarter, the rider charge is deducted through the redemption of units from your accumulated value in the same proportion as the surrender allocation percentages. If this rider is purchased after the beginning of a calendar quarter, the rider charge is prorated according to the number of days this rider is in effect

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    during the quarter. Upon termination of this rider, the rider charge will be based on the number of days this rider is in effect during the calendar quarter.

    The rider charge is intended to reimburse us for the cost of the protection provided by this rider.

    GMWB 2-SL and GMWB 2-SL/JL (Investment Protector Plus 2 — Single Life/Joint Life) Rider

    For GMWB 2-SL/JL riders issued on or after February 16, 2009, the current annual charge for the rider is 0.95% of the average quarterly Investment Back withdrawal benefit base. For GMWB 2-SL riders, the current annual charge for the rider is 0.75% of the average quarterly Investment Back withdrawal benefit base. The charge is taken quarterly, at 0.2375% (for GMWB 2-SL/JL) and 0.1875% (for GMWB 2-SL), based on the average quarterly Investment Back withdrawal benefit base during the calendar quarter. A rider is "issued" on or after February 16, 2009 if the rider application is dated on or after February 16, 2009.

    For GMWB 2 riders issued before February 16, 2009, the current annual charge for the rider is 0.75% of the average quarterly Investment Back withdrawal benefit base. The charge is taken quarterly at 0.1875%, based on the average quarterly Investment Back withdrawal benefit base during the calendar quarter. The annual charge for the rider will increase to 0.95% of the average quarterly Investment Back withdrawal benefit base at the end of the calendar quarter following the contract's 2010 anniversary unless you decline the increased rider charge (opting out of future GMWB Step-Ups). For example, if your 2010 contract anniversary is March 1, 2010, the increased rider charge will be effective beginning March 31, 2010 unless you decline the rider charge prior to March 31, 2010. A rider is "issued" before February 16, 2009 if the rider application is dated before February 16, 2009.

    At the time of a rider charge increase, you have the following options:

    • Accept the increased rider charge and continue to be eligible to receive a Step-Up at each rider anniversary; or
    • Decline the increased rider charge by sending us notice that you are opting out of the Step-Up feature of this rider and electing to remain at your current rider charge. Once you opt out of the Step-Up feature, you will no longer be eligible for any future Step-Ups and the feature cannot be added back to this rider.

    At the end of each calendar quarter, the rider charge is deducted through the redemption of units from your accumulated value in the same proportion as the surrender allocation percentages. If this rider is purchased after the beginning of a calendar quarter, the rider charge is prorated according to the number of days this rider is in effect during the quarter. Upon termination of this rider, the rider charge will be based on the number of days this rider is in effect during the calendar quarter.

    We reserve the right to increase the rider charge up to a maximum annual charge of 1.00% (0.25% quarterly) of the average quarterly Investment Back withdrawal benefit base.

    The rider charge is intended to reimburse us for the cost of the protection provided by this rider.

    Special Provisions for Group or Sponsored Arrangements

    Where permitted by state law, Contracts may be purchased under group or sponsored arrangements as well as on an individual basis.

    Group Arrangement – program under which a trustee, employer or similar entity purchases Contracts covering a group of individuals on a group basis.

    Sponsored Arrangement – program under which an employer permits group solicitation of its employees or an association permits group solicitation of its members for the purchase of Contracts on an individual basis.

    The charges and deductions described above may be reduced or eliminated for Contracts issued in connection with group or sponsored arrangements. The rules in effect at the time the application is approved will determine if

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    reductions apply. Reductions may include but are not limited to sales of Contracts without, or with reduced, mortality and expense risks charges, annual fees or surrender charges.

    Eligibility for and the amount of these reductions are determined by a number of factors, including the number of individuals in the group, the amount of expected premium payments, total assets under management for the owner, the relationship among the group’s members, the purpose for which the Contract is being purchased, the expected persistency of the Contract, and any other circumstances which, in our opinion, are rationally related to the expected reduction in expenses. Reductions reflect the reduced sales efforts and administration costs resulting from these arrangements. We may modify the criteria for and the amount of the reduction in the future. Modifications will not unfairly discriminate against any person, including affected owners and other owners with contracts funded by the Separate Account.

    RIDER BENEFITS

    Subject to certain conditions, you may elect to add one or more of the optional riders described below to your Contract.

    Not all riders are available in all states or through all broker dealers and may be subject to additional restrictions. Some rider provisions may vary from state to state. We may withdraw or prospectively restrict the availability of any rider at any time. For information regarding availability of any rider, you may contact your registered representative or call us at 1-800-852-4450.

    See CHARGES AND DEDUCTIONS — Charges for Rider Benefits for current and maximum rider charges.

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    Premium Payment Credit Rider

    The Premium Payment Credit Rider applies credits to the accumulated value for premium payments made in contract year one. This rider can only be elected at the time the Contract is issued. Once this rider is elected, it cannot be terminated. There is a charge for this rider (see CHARGES AND DEDUCTIONS) as well as an increased surrender charge and longer surrender charge period.

    If you elect this rider, the following provisions apply to the Contract:

    • We will apply a credit of 5% of the premium payment to your accumulated value for each premium payment received during your first contract year. The credit is applied to the Contract on the same date the related premium payment is applied to the Contract. For example, if you make a premium payment of $10,000 in your first contract year, a credit amount of $500 will be added to your accumulated value (5% x $10,000).
    • No credit(s) are applied for premium payments made after the first contract year.
    • For Contracts issued in the state of Washington, no premium payments are allowed after the first contract year for Contracts issued with the Premium Payment Credit Rider.
    • The premium payment credit is allocated among the investment options according to your then current premium payment allocations.
    • We recapture the credit(s) if you exercise your right to return the Contract during the examination offer period or if you request full annuitization of the Contract prior to the third Contract anniversary.
    • The amount we recapture may be more than the current value of the credit(s). If your investment options have experienced negative investment performance (i.e., have lost value) you bear the loss for the difference between the original value of the credit(s) and the current (lower) value of the credit(s).
    • No partial annuitizations are allowed in contract year one.
    • Partial annuitizations are restricted in each of contract years two and three to no more than 10% of the accumulated value as of the most recent Contract anniversary.
    • Credits are considered earnings under the Contract, not premium payments.
    • All premium payments are subject to the 9-year surrender charge table and higher surrender charge (see
      CHARGES AND DEDUCTIONS — Surrender Charge).
    • The Premium Payment Credit Rider cannot be cancelled and the associated surrender charge period and percentages cannot be changed.
    • The DCA Plus Program is not available to you if you elect this rider.

    If you elect the Premium Payment Credit Rider, your unit values will be lower than if you did not elect the rider. The difference reflects the annual charge for the Premium Payment Credit Rider. After the 8th Contract anniversary, your accumulated value is moved to units in your chosen divisions that do not include this rider charge. This move of division units will not affect your accumulated value. It will, however, result in a smaller number of division units but those units will have a higher unit value. We will notify you when the division units move because of discontinuation of the rider charge. The following example is provided to assist you in understanding this adjustment.

      Sample Division  Number of Units in   
      Unit Value  Sample Division  Accumulated Value 
    Prior to the one time adjustment  25.560446  1,611.0709110  $ 41,179.69 
    After the one time adjustment  26.659024  1,544.6811189  $ 41,179.69 

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    You should carefully examine the Premium Payment Credit Rider to decide if this rider is suitable for you. There are circumstances under which you would be worse off for having received the credit. In making this determination, you should consider the following factors:

    • the length of time you plan to own your Contract (this rider increases the amount and duration of the surrender charges, see CHARGES AND DEDUCTIONS — Surrender Charge);
    • the frequency, amount and timing of any partial surrenders (this rider increases the amount and duration of the surrender charges);
    • the timing and amount of partial annuitizations;
    • the amount and timing of your premium payment(s). Any premium payments made after the first contract year are subject to the rider’s higher Separate Account charges even though no credit is applied to those premium payments; and
    • the higher Separate Account charges reduce investment performance.

    The charges used to recoup our cost for the premium payment credit(s) include the surrender charge and the Premium Payment Credit Rider charge (see CHARGES AND DEDUCTIONS). We expect to make a profit from these charges.

    The following tables demonstrate hypothetical surrender values for Contracts with and without this rider but do not show the impact of partial surrenders or partial annuitizations. The tables are based on:

  		•  a $25,000 initial premium payment and no additional premium payments;
  		• the deduction of maximum Separate Account annual expenses:
     
  		• Contracts with the Premium Payment Credit Rider:
      
  		• 2.00% annually for the first eight contract years
      
  		• 1.40% annually after the first eight contract years
     
  		• Contracts without the Premium Payment Credit Rider:
      
  		• 1.40% annually for all contract years.
  		• the deduction of the arithmetic average of the underlying mutual fund expenses as of December 31, 2008;
  		• 0%, 5% and 10% annual rates of return before charges; and
  		• payment of the $30 annual contract fee (while the Contract’s value is less than $30,000).
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                       0% Annual Return  5% Annual Return                10% Annual Return 
      Surrender Value  Surrender Value  Surrender Value  Surrender Value  Surrender Value  Surrender Value 
      Without  With  Without  With  Without  With 
    Contract  Premium Payment Premium Payment     Premium Payment  Premium Payment  Premium Payment    Premium Payment    
    Year  Credit Rider  Credit Rider  Credit Rider  Credit Rider  Credit Rider  Credit Rider 
    1  $ 23,075.31  $ 23,615.89  $ 24,250.31  $ 24,823.39  $ 25,425.31  $ 26,077.06 
    2  $ 22,513.98  $ 22,903.26  $ 24,866.67  $ 25,306.60  $ 27,422.19  $ 28,063.37 
    3  $ 21,965.71  $ 22,425.73  $ 25,449.52  $ 26,075.91  $ 29,641.83  $ 30,440.20 
    4  $ 21,631.57  $ 21,953.84  $ 26,408.82  $ 26,873.16  $ 32,281.81  $ 32,967.50 
    5  $ 21,298.75  $ 21,487.64  $ 27,368.55  $ 27,681.76  $ 35,105.20  $ 35,655.90 
    6  $ 20,967.36  $ 21,027.17  $ 28,347.27  $ 28,501.95  $ 38,126.10  $ 38,516.81 
    7  $ 20,637.48  $ 20,572.46  $ 29,345.48  $ 29,363.97  $ 41,359.64  $ 41,562.42 
    8  $ 20,489.10  $ 20,123.54  $ 30,643.70  $ 30,238.69  $ 45,072.16  $ 44,805.82 
    9  $ 19,982.63  $ 19,802.09  $ 31,463.26  $ 31,310.79  $ 48,531.23  $ 48,532.81 
    10  $ 19,487.93  $ 19,482.30  $ 32,304.75  $ 32,404.88  $ 52,255.75  $ 52,526.65 
    15  $ 17,181.76  $ 17,176.75  $ 36,862.04  $ 36,976.30  $ 75,630.76  $ 76,022.82 
    20  $ 15,131.55  $ 15,127.10  $ 42,062.23  $ 42,192.62  $ 109,461.84  $ 110,029.29 

    The better your Contract’s investment performance, the more advantageous the Premium Payment Credit Rider becomes due to the effect of compounding. However, Contracts with the Premium Payment Credit Rider are subject to both a greater surrender charge and a longer surrender charge period than Contracts issued without this rider (see CHARGES AND DEDUCTIONS — Surrender Charge). If you surrender your Contract with the Premium Payment Credit Rider while subject to a surrender charge, your surrender value will be less than the surrender value of a Contract without this rider.

    Enhanced Death Benefit Rider

    The Enhanced Death Benefit Rider provides you with the greater of the enhanced death benefit (described below) or the standard death benefit (see THE CONTRACT — Death Benefit, Standard Death Benefit Formula). This rider can only be elected at the time the Contract is issued. You may terminate this rider at any time. Once this rider is terminated, it cannot be reinstated. The rider charge is discussed in CHARGES AND DEDUCTIONS — Charges for Rider Benefits, Enhanced Death Benefit Rider.

    Before you purchase an Enhanced Death Benefit Rider, please consider the following:

    • Although the rider provides an opportunity for increased death benefit payments to your beneficiaries, it does not provide you with increased annuity benefit payments or accumulated value.
    • The rider is generally more advantageous to younger owners since the rider lock-in occurs on the later of the contract anniversary following the oldest owner’s 75th birthday and five years after the rider effective date; the younger an owner is when the rider is elected, the longer the time period for potentially increasing accumulated value before the rider lock-in.
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    Prior to the annuitization date and prior to the lock-in date (the later of the Contract anniversary following the oldest 
    owner’s 75th birthday or five years after the rider effective date), the enhanced death benefit is the greatest of a, b or 
    c, where: 
     
    a = 1 minus 2 where: 
                     1 = the total of premium payments made since the rider effective date increased at a 5% effective annual 
                     interest rate; and 
                     2 = an adjustment for each partial surrender and each partial annuitization made since the rider effective date 
                     increased at a 5% effective annual interest rate. 
    b = (1 plus 2) minus 3 where: 
                     1 = the highest accumulated value on any Contract anniversary since the rider effective date; 
                     2 = any premium payments received since that Contract anniversary; and 
                     3 = an adjustment for each partial surrender and each partial annuitization made since that Contract 
                     anniversary. 
    c = the standard death benefit (see THE CONTRACT — Death Benefits, Standard Death Benefit Formula) 
     
    After the lock-in date but prior to the annuitization date, the enhanced death benefit is the greatest of d, e or f, where: 
     
    d = (1 plus 2) minus 3 where: 
                     1 = the value from item a above as of the lock-in date 
                     2 = any premium payments received since the lock-in date 
                     3 = an adjustment for each partial surrender and each partial annuitization made since the lock-in date. 
    e = (1 plus 2) minus 3 where: 
                     1 = the value from item b above as of the lock-in date 
                     2 = any premium payments received since the lock-in date 
                     3 = an adjustment for each partial surrender and each partial annuitization made since the lock-in date. 
    f = the standard death benefit. 
     
    The adjustment for each partial surrender or partial annuitization is (1 divided by 2) multiplied by 3, where: 

                     1 = the amount of the partial surrender (plus surrender charge, if any) or the amount of the partial annuitization; 
                     2 = the accumulated value immediately prior to the partial surrender or partial annuitization; and 
                     3 = the amounts determined in items a or b (e or f after the lock-in date) immediately prior to the partial 
                               surrender or partial annuitization. 
     
    NOTE: For contracts issued in New York and Washington — under this rider, if the original owner dies before the 
                       annuitization date and before the lock-in date, the enhanced death benefit payable to the beneficiary is the 
                       greater of items b or c above. If the original owner dies before the annuitization date and after the lock-in date, 
                       the enhanced death benefit payable to the beneficiary is the greater of items e or f above. 
     
    See Appendix F for examples. 
     
     
     
    Waiver of Surrender Charge Rider 
     
    The Waiver of Surrender Charge Rider waives the surrender charge on surrenders made after the first Contract 
    anniversary if the original owner or original annuitant has a critical need. This rider is automatically made a part of the 
    Contract at issue. There is no charge for this rider. 

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    The benefits under the Waiver of the Surrender Charge Rider are available for a critical need if the following conditions are met:

    • the original owner or original annuitant has a critical need (NOTE: A change of ownership will terminate this rider; once terminated the rider may not be reinstated.); and
    • the critical need did not exist before the contract date.

    For the purposes of this rider, the following definitions apply:

    • critical need — owner’s or annuitant’s confinement to a health care facility, terminal illness diagnosis or total and permanent disability. If the critical need is confinement to a health care facility, the confinement must continue for at least 60 consecutive days after the contract date and the surrender must occur within 90 days of the confinement’s end.
    • health care facility — a licensed hospital or inpatient nursing facility providing daily medical treatment and keeping daily medical records for each patient (not primarily providing just residency or retirement care). This does not include a facility primarily providing drug or alcohol treatment, or a facility owned or operated by the owner, annuitant or a member of their immediate families.
    • terminal illness — sickness or injury that results in the owner’s or annuitant’s life expectancy being 12 months or less from the date notice to receive a distribution from the Contract is received by the Company. In Texas and New Jersey, terminal illness is not included in the criteria for critical need.
    • total and permanent disability — a disability that occurs after the contract date but before the original owner or annuitant reaches age 65 and qualifies to receive social security disability benefits. In New York, a different definition of total and permanent disability applies. In Oregon, total and permanent disability is not included in the criteria for critical need.

    NOTE: The Waiver of Surrender Charge Rider is not available in Massachusetts.

    You may obtain more specific information regarding the Waiver of Surrender Charge Rider from your registered representative or by calling us at 1-800-852-4450.

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      GMWB (Investment Protector Plus) Riders

    GMWB Overview

    This prospectus offers two different GMWB riders — GMWB 1 (Investor Protector Plus) and GMWB 2 (Investor Protector Plus 2). There are two versions of GMWB 2 (GMWB 2 - SL and GMWB 2 - SL/JL). The availability of each rider depends on when you purchase your Contract and your state of residence. We offer different GMWB riders so that you can choose the level of benefits and charges that make the most sense for you. The important differences among the GMWB 1 Rider and the two versions of the GMWB 2 Rider are discussed below and are set forth in a comparative chart at the end of the section of this prospectus on GMWB riders. The availability and eligibility requirements of each rider are shown below.

    Name of Rider  GMWB 1  GMWB 2 - SL  GMWB 2 - SL/JL 
     
    Marketing Name  Investment Protector Plus Rider  Investment Protector Plus 2 Rider  Investment Protector Plus 2 Rider 
     
    Availability    Available after June 8, 2007 and not   
        available after January 21, 2008 unless   
        GMWB 2-SL/JL was not approved in  Available after January 21, 2008 if 
      Available after March 1, 2005  your state  approved in your state 
     
    Eligibility    The owner(s) (or the annuitant(s) if the  The owner(s) (or the annuitant(s) if the 
      The oldest owner (or oldest annuitant  owner is not a natural person) must be  owner is not a natural person) must be 
      if the owner is not a natural person)  at least age 45 and younger than age  at least age 45 and younger than age 
      must be younger than age 81  81  81 

    You may add only one GMWB rider to your Contract. You may elect a GMWB rider only when you purchase the Contract. We reserve the right, in our sole discretion, to elect in the future to allow Contract owners to add the rider after issue. If we make this election, we will give written notice and our offer will not be unfairly discriminatory.

    The rider benefits and charges vary depending on which rider you select. (See CHARGES AND DEDUCTIONS —Charges for Rider Benefits for details on charges for each GMWB rider.)

    The riders do not restrict or change your right to take — or not take — withdrawals under the Contract. All withdrawals reduce the Contract accumulated value by the amount withdrawn and are subject to the same conditions, limitations, fees, charges and deductions as withdrawals otherwise taken under the provisions of the Contract; e.g., withdrawals will be subject to surrender charges if they exceed the free surrender amount (see CHARGES AND DEDUCTIONS —Surrender Charge, Free Surrender Privilege). However, any withdrawals may have an impact on the value of your rider’s benefits.

    We use certain defined terms in our description of the riders. For your convenience, we have included definitions of those terms in the GMWB Glossary, below.

    GMWB Overview — Benefits

    A GMWB rider allows you to take certain guaranteed annual withdrawals during the Contract accumulation phase, regardless of your Contract accumulated value. A GMWB rider also allows your beneficiary(ies) to choose a death benefit under the Contract or any death benefit available under the rider.

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    GMWB riders are designed to help protect you against the risk of a decrease in the Contract accumulated value due to market declines by providing an Investment Back withdrawal option. A “For Life” withdrawal option helps to protect you against the risks of a declining market as well as the risk of outliving your money. Each of our GMWB Riders provides the flexibility of both the For Life withdrawal option and the Investment Back withdrawal option. You are not required to choose between these two withdrawal options unless your Contract accumulated value is zero or you reach the maximum annuitization date.

    For Life withdrawal benefit payments are available (i) on the rider effective date if the oldest owner (or oldest annuitant, if the Contract owner is not a natural person) is at least age 59 ½ or (ii) on the Contract anniversary following the date that the oldest owner (or oldest annuitant, if applicable) attains age 59 ½. The percentage to determine the annual For Life withdrawal benefit payment ranges from 3% to 6.50% of the For Life withdrawal benefit base.

    The Investment Back withdrawal benefit payments are available as of the rider effective date. The percentage to determine the annual Investment Back withdrawal benefit payment is set at 7% of the Investment Back withdrawal benefit base.

    When a GMWB rider is issued, the annual guaranteed withdrawal benefit payments for each of the withdrawal options are determined based on your initial premium payment. Credits (a premium payment credit or exchange credit), if any, are not included when determining the initial rider withdrawal benefit payments; such credits, however, are included in the Contract accumulated value. On each Contract anniversary, a new guaranteed withdrawal benefit payment is determined for each withdrawal option. The annual withdrawal benefit payment is adjusted upward to reflect any additional premium payments, GMWB Bonuses, and Step-Ups during the preceding contract year, and adjusted downward to reflect any excess withdrawals made during the preceding contract year.

    The GMWB riders offer a Step-Up feature that is either annual or once every five years, depending on which rider you select. A Step-Up can increase your rider withdrawal benefit payments if your Contract accumulated value increases. The Contract accumulated value increases whenever additional premium payments are made, the division values rise with market growth, or credits (premium payment credits or exchange credit) are applied.

    The GWMB riders also offer a GMWB Bonus that differs between the riders. A GMWB Bonus rewards you for not taking a withdrawal in certain early years of the rider. A GMWB Bonus amount will provide a modest increase to your rider withdrawal benefit payments. The GMWB Bonus does not increase your Contract accumulated value.

    GMWB Overview — Rider Restrictions/Limitations

    Once elected, a GMWB rider may not be terminated for five contract years.

    There is a charge for a GMWB rider which varies depending on the rider you choose. All of the riders provide that a rider charge can increase (up to the guaranteed maximum charge for the rider shown at SUMMARY OF EXPENSE INFORMATION — Periodic Expenses).

    Election of a GMWB rider results in restriction of your Contract investment options to the more limited GMWB investment options (see Appendix E). The GMWB investment options reflect a balanced investment objective that is intended to support the rider guarantees. If your investment objective is aggressive growth, the rider investment restrictions may not support your investment objective. We reserve the right to modify the list of available GMWB investment options from time to time, subject to compliance with applicable regulations.

    A GMWB rider does not limit or restrict your ability to take withdrawals from your Contract. If you take withdrawals in an amount that exceeds an available withdrawal benefit payment (excess withdrawal), you will shorten the life of the rider, lower the withdrawal benefit payments and/or cause the rider to terminate for lack of value unless you make additional premium payments or the rider has a Step-Up. See GMWB 1 Rider (Investor Protector Plus) — Excess Withdrawals.

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    Factors To Consider Before You Buy A GMWB Rider

    A GMWB rider generally will not be appropriate if you

    • do not intend to take any withdrawals from your Contract;
    • intend to allocate a significant portion of your Contract accumulated value to the Fixed or DCA Accounts;
    • have an aggressive growth investment objective; or
    • anticipate you will take withdrawals prior to the oldest owner’s age 59 ½ or that exceed the rider withdrawal benefit payments of 7% of total premium payments for the Investment Back withdrawal option and 3 to 6.50% of total premium payments for the For Life withdrawal option, depending on the rider.

    Before you purchase a GMWB rider, you should carefully consider the following:

    • The features of a GMWB rider may not be purchased separately. As a result, you may pay for rider features that you never use.
    • Although the GMWB riders are designed to permit you to recover at least your premium payments, if you take withdrawals that exceed the rider’s withdrawal limits (excess withdrawals), you will shorten the life of the rider, lower the withdrawal benefit payments and/or cause the rider to terminate for lack of value.
    • The rider is not a guarantee that the withdrawal benefit payments will be sufficient to meet your future income needs.
    • The rider is not a guarantee that you will receive any return on your premium payments.
    • The rider is not a guarantee that your investment is protected against loss of purchasing power due to inflation.
    • The fee for a GMWB rider may increase over time due to GMWB Step-Ups, but will not exceed the maximum fee for the particular GMWB rider.
    • A GMWB rider restricts your investment options to a range of investment options that reflect a generally balanced investment objective. The Contract’s aggressive growth investment options are either limited or not available if you elect a GMWB rider.
    • Once elected, you may not terminate a GMWB rider until the fifth contract anniversary following the rider effective date.

    You should review the terms of the GMWB riders carefully and work with your registered representative to decide which GMWB rider, if any, is appropriate for you based on a thorough analysis of your particular needs, financial objectives, investment goals, time horizons and risk tolerance.

    Which GMWB Rider May Be Appropriate For You

    The GMWB 1 Rider may be appropriate if you:

    • Want to protect against the risk that your Contract accumulated value could fall below your original investment due to market decline.
    • Want to protect against the risk of outliving your income.
    • Are too young to purchase the GMWB 2 SL/JL rider.
    • Want our lowest-cost GMWB rider.
    • Do not plan to take withdrawals for at least five years after the rider effective date and want to take advantage of the five-year GMWB Bonus of 5% of premium payments.
    • Want a For Life withdrawal benefit payment percentage that is not dependent on your age when you take your first withdrawal.
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    The GMWB 2 SL/JL Rider may be appropriate if you:

    • Want to protect against the risk that your Contract accumulated value could fall below your original investment due to market decline.
    • Want to benefit from potential annual increases in your rider values that match the growth of your Contract accumulated value.
    • Want to protect against the risk of you or your spouse outliving your income.
    • Want to defer taking withdrawals for a shorter period and receive an accelerated GMWB Bonus rate as compared to the GMWB 1 rider: the GMWB 2 Bonus period is 3 years at 7%, 6%, and 5% of premium payments vs. the GMWB 1 Bonus period of 5 years at 5% annually of the premium payments.
    • Want to take advantage of the higher tiered For Life withdrawal benefit payment percentages by deferring your withdrawals to age 70 or later.
    • Are willing to pay a higher cost for the flexibility provided by these features.

    GMWB Glossary

    We use the following definitions to describe the features of a GMWB rider:

    • Excess Withdrawal — the portion of a withdrawal that exceeds the available withdrawal benefit payment for a withdrawal option.
    • GMWB Bonus — a bonus credited to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal option, provided certain conditions are met.
    • GMWB Step-Up — an increase to the withdrawal benefit base and/or remaining withdrawal benefit base for each withdrawal option to an amount equal to your Contract’s accumulated value on the most recent Contract anniversary, provided certain conditions are met.
    • Remaining withdrawal benefit base — the amount available for future withdrawal benefit payments under a withdrawal option. The remaining withdrawal benefit base for each withdrawal option is calculated separately.
    • Required minimum distribution (“RMD”) amount — the amount required to be distributed each calendar year for purposes of satisfying the RMD rules of Section 401(a)(9) of the Internal Revenue Code of 1986, as amended, and related Code provisions in effect as of the rider effective date.
    • Rider effective date — the date the rider is issued.
    • Withdrawal — any partial surrender (including surrender charges, if any) and/or any partial annuitization of your Contract’s accumulated value.
    • Withdrawal benefit base — the basis for determining the withdrawal benefit payment available each year under a withdrawal option. The withdrawal benefit base for each withdrawal option is calculated separately.
    • Withdrawal benefit payment — the amount that we guarantee you may withdraw each contract year under a withdrawal option.

    GMWB 1 Rider (Investment Protector Plus Rider)

    The following is a description of the GMWB 1 Rider. Most of the following description is also applicable to the GMWB 2 riders. Any differences are referred to in GMWB 2 Rider (Investment Protector Plus 2 Rider).

    Eligibility for the GMWB 1 Rider is set out in the chart under GMWB — Overview above. The charge for the rider is set out in SUMMARY OF EXPENSE INFORMATION, above.

    To help you better understand the various features of the GMWB 1 Rider and to demonstrate how premium payments received and withdrawals taken from the Contract affect the values and benefits under the rider, we have provided several examples in Appendix C.

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    Withdrawal Options

    For Life Withdrawal Option. This option is intended to help you avoid the risk of out-living your money. You are eligible to take For Life withdrawal benefit payments beginning (i) on the rider effective date if the oldest owner (or the oldest annuitant, if the Contract owner is not a natural person) is at least age 59 ½ or (ii) on the contract anniversary following the date that the oldest owner (or the oldest annuitant, if applicable) attains age 59 ½. Once eligible, you may withdraw an amount up to the annual For Life withdrawal benefit payment until the earlier of the date of your death (annuitant’s death, where applicable) or the date the For Life withdrawal benefit base reduces to zero. (See GMWB Death Provisions for a description of application of rider benefits after your death.)

    Investment Back Withdrawal Option. This option is intended to allow a more rapid recovery of your premium payments (approximately 14 years). You are eligible to take Investment Back withdrawal benefit payments beginning on the rider effective date. You may withdraw an amount up to the annual Investment Back withdrawal benefit payment until the earlier of the date of your death (annuitant’s death if the owner is not a natural person) or the date the Investment Back remaining withdrawal benefit base equals zero. (See GMWB Death Provisions for a description of application of rider benefits after your death.)

    Calculating the Withdrawal Benefit Payments

    The For Life withdrawal benefit payment is equal to 5% of the For Life withdrawal benefit base. The Investment Back withdrawal benefit payment is equal to 7% of the Investment Back withdrawal benefit base.

    The GMWB For Life withdrawal benefit payment percentage is different under the GMWB 2 Rider. Please see GMWB 2 Rider (Investment Protector Plus 2 Rider) for more information.

    Withdrawal Benefit Base

    Each withdrawal option has its own withdrawal benefit base, which is used to calculate the annual withdrawal benefit payment for that option. We calculate the withdrawal benefit base for the Investment Back and the For Life withdrawal options separately on

    • the rider effective date and
    • each contract anniversary.

    The initial withdrawal benefit base for both withdrawal options is equal to the initial premium payment.

    On each contract anniversary, the withdrawal benefit base for each withdrawal option is

    • increased dollar-for-dollar by any additional premium payments made since the previous contract anniversary and any GMWB Bonus credited since the previous contract anniversary; and
    • decreased to reflect any excess withdrawals taken since the previous contract anniversary (the reduction will be greater than dollar-for-dollar, if the Contract accumulated value is less than the withdrawal benefit base at the time of the excess withdrawal). See Excess Withdrawals, below, for information about the negative effect that excess withdrawals have on the riders.

    For examples showing how the GMWB 1 Rider withdrawal benefit bases are calculated for each of the withdrawal options, please see Appendix C.

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    Remaining Withdrawal Benefit Base

    Each withdrawal option has its own remaining withdrawal benefit base. The remaining withdrawal benefit base is used to determine the amount available for future withdrawal benefit payments under each withdrawal option. We calculate the For Life and the Investment Back remaining withdrawal benefit bases separately on

    • the rider effective date,
    • when a premium payment is made,
    • when any applicable GMWB Bonus is credited, and
    • when a withdrawal is taken.

    The initial remaining withdrawal benefit base for both withdrawal options is equal to the initial premium payment (and likewise equal to the initial withdrawal benefit base) on the rider effective date.

    After the rider effective date, the remaining withdrawal benefit base for each withdrawal option will be

    • increased dollar-for-dollar by each additional premium payment made and each GMWB Bonus credited;
    • decreased dollar-for-dollar for each withdrawal benefit payment taken; and
    • decreased to reflect any excess withdrawals taken since the previous contract anniversary (the reduction will be greater than dollar-for-dollar, as shown below, if the Contract accumulated value is less than the remaining withdrawal benefit base at the time of the excess withdrawal). See Excess Withdrawals, below, for information about the negative effect that excess withdrawals have on the riders.

    For examples showing how the remaining withdrawal benefit bases are calculated for the GMWB 1 Rider, please see

    Appendix C.

    Excess Withdrawals

    Excess withdrawals reduce withdrawal benefit payments, the withdrawal benefit bases, and the remaining withdrawal benefit bases for the two withdrawal options. The reductions can be greater than dollar-for-dollar when the Contract accumulated value is less than the applicable rider withdrawal benefit base at the time of the excess withdrawal, as shown below.

    Effect on withdrawal benefit base. Excess withdrawals will reduce each of the withdrawal benefit bases in an amount equal to the greater of:

    • the excess withdrawal, or
    • the result of (a divided by b) multiplied by c, where:

    a = the amount withdrawn that exceeds the available withdrawal benefit payment prior to the withdrawal;

    b = the Contract accumulated value after the withdrawal benefit payment is deducted, but prior to deducting the amount of the excess withdrawal; and

    c = the withdrawal benefit base prior to the adjustment for the excess withdrawal.

    Effect on remaining withdrawal benefit base. Excess withdrawals will reduce each of the remaining withdrawal benefit bases according to the same formula as described above, except that c is the remaining withdrawal benefit base prior to the adjustment for the excess withdrawal.

    NOTE: All withdrawals taken prior to the date that the oldest owner (oldest annuitant, if applicable) has met the For Life age eligibility requirement are excess withdrawals.

    NOTE: For riders purchased prior to March 25, 2008, on qualified contracts, withdrawals taken prior to November 22, 2008, to satisfy the required minimum distribution for a Contract that exceed the applicable withdrawal benefit payment, will be deemed excess withdrawals. (See Required Minimum Distribution, below.)

    For examples showing the effect of excess withdrawals under the GMWB 1 Rider, please see Appendix C.

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    Required Minimum Distributions (RMD)

    Tax-qualified Contracts are subject to certain federal tax rules requiring that RMD be taken on a calendar year basis (i.e., compared to a contract year basis), usually beginning after age 70 ½.

    If you are eligible for and enroll in our RMD Program for GMWB Riders, as discussed below, a withdrawal taken to satisfy RMD for the Contract (an “RMD amount”) that exceeds a withdrawal benefit payment for that contract year will not be deemed an excess withdrawal.

    RMD Program. Eligibility in the RMD Program for GMWB Riders is determined by satisfaction of the following requirements:

    • your Contract may not have the Enhanced Death Benefit Rider;
    • the amount required to be distributed each calendar year for purposes of satisfying the RMD rules of the Internal Revenue Code is based only on this Contract (the “RMD amount”); and
    • you have elected scheduled withdrawal payments.

    NOTE: Although enrollment in the RMD Program for GMWB Riders does not prevent you from taking an unscheduled withdrawal, an unscheduled withdrawal will cause you to lose the RMD Program protections for the remainder of the contract year. This means that any withdrawals (scheduled or unscheduled) that exceed applicable withdrawal benefit payments will be treated as excess withdrawals, even if the purpose is to take the RMD amount. You will automatically be re-enrolled in the RMD Program for GMWB Riders on your next contract anniversary.

    We reserve the right to modify or eliminate the RMD Program for GMWB Riders; for example, if there is a change to the Internal Revenue Code or Internal Revenue Service rules or interpretations relating to RMD, including the issuance of relevant IRS guidance. We will send you at least 30 days advance notice of any change in or elimination of the RMD Program for GMWB Riders. Any modifications or elimination of the RMD Program for GMWB Riders will take effect after notice. If we exercise our right to modify or eliminate the RMD Program for GMWB Riders, then any withdrawal in excess of a withdrawal benefit payment after the effective date of the program’s modification or elimination will be deemed an excess withdrawal.

    You may obtain more information regarding our RMD Program for GMWB Riders by contacting your registered representative or by calling us at 1-800-852-4450.

    Effect of Withdrawals

    See GMWB Overview, above, for general information about the effect of withdrawals on your Contract accumulated value. The rider does not require you to take an available withdrawal benefit payment. If you want to take advantage of the rider’s GMWB Bonus features, withdrawals cannot be taken during the period the GMWB Bonus is available.

    If you elect not to take an available withdrawal benefit payment, that amount will not be carried forward to the next contract year.

    Each time you take a withdrawal, it is reflected immediately in your Contract accumulated value and in the remaining withdrawal benefit base for each of the withdrawal options and is reflected on the next contract anniversary in the withdrawal benefit base for each of the withdrawal options. Any withdrawals that exceed the available withdrawal benefit payments for either withdrawal option are excess withdrawals. See Excess Withdrawals for information about the negative effect of excess withdrawals.

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    Effect of the Contract Accumulated Value Reaching Zero Under the Rider

    In the event that the Contract accumulated value reduces to zero, you must elect either

    • the Investment Back withdrawal option (only available if the Investment Back remaining withdrawal benefit base is greater than zero); or
    • the For Life withdrawal option (only available if the For Life withdrawal benefit base is greater than zero).

    The For Life withdrawal option allows you to spread your withdrawal benefit payments over your lifetime. The Investment Back withdrawal option provides a faster pay out of withdrawal benefit payments.

    We will pay the withdrawal benefit payments under the withdrawal option you have elected as follows:

  		•  If you elect the Investment Back withdrawal option, you will receive fixed scheduled payments each year in the amount of the Investment Back withdrawal benefit payment until the Investment Back remaining withdrawal benefit base is zero. If there is any Investment Back remaining withdrawal benefit base at the time of your death, we will continue payments as described in GMWB Death Provision below.
  		• If you elect the For Life withdrawal option, you will receive fixed scheduled payments each year in the amount of the For Life withdrawal benefit payment, until the later of
     
  		• the date the For Life remaining withdrawal benefit base is zero; or
     
  		• the date of your death (annuitant’s death if the owner is not a natural person).

    If there is any For Life remaining withdrawal benefit base at the time of your death, we will continue payments as described in GMWB Death Provision below.

    NOTE: In the event that the Contract accumulated value reduces to zero, the withdrawal benefit payments elected above will continue, but all other rights and benefits under this rider and the Contract (including the death benefits) will terminate, and no additional premium payments will be accepted.

    We will send you prior written notice whenever reasonably feasible if your Contract accumulated value is approaching zero.

    The Effect of the Contract Accumulated Value Reaching Zero under the Rider is different under the GMWB 2 Rider. Please see the description under GMWB 2 Rider (Investment Protector Plus 2 Rider).

    Effect of Reaching the Maximum Annuitization Date Under the Rider

    On or before the maximum annuitization date, you must elect one of the Contract or rider payment options described below.

    1.      Contract payment options:
     
  		• Payments resulting from applying the Contract accumulated value to an annuity benefit payment option.
     
  		• Payment of the Contract accumulated value as a single payment.
    2.      GMWB payment options:
     
  		• You may elect the Investment Back withdrawal option and receive fixed scheduled payments each year in the amount of the Investment Back withdrawal benefit payment, until the Investment Back remaining withdrawal benefit base is zero. If there is any Investment Back remaining withdrawal benefit base at the time of your death (death of the first annuitant to die if the owner is not a natural person), we will continue payments as described in GMWB Death Provision below.
     
  		• You may elect the For Life withdrawal option and receive fixed scheduled payments each year in the amount of the For Life withdrawal benefit payment, until the later of
       
  		• the date the For Life remaining withdrawal benefit base is zero; or
       
  		• the date of your death (the death of the first annuitant to die if the owner is not a natural person).
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    If there is any For Life remaining withdrawal benefit base at the time of your death, we will continue payments as described in GMWB Death Provision below.

    The For Life withdrawal option allows you to spread your withdrawal benefit payments over your lifetime. The Investment Back withdrawal option provides a faster pay out of rider withdrawal benefit payments.

    We will send you written notice at least 30 days prior to the maximum annuitization date and ask you to select one of the available payment options listed above. If we have not received your election as of the maximum annuitization date, we will automatically apply your Contract accumulated value to an annuity benefit payment option as described in THE CONTRACT — The Annuitization Period, Annuity Benefit Payment Options.

    GMWB Bonus

    On each of the first five contract anniversaries following the rider effective date, we will credit a bonus of 5% of premium payments as of the contract anniversary (“GMWB Bonus”) to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal option provided that you have not taken any withdrawals since the rider effective date.

    The GMWB Bonus is no longer available after the earlier of

    • the fifth contract anniversary following the rider effective date; or
    • the date you take a withdrawal following the rider effective date.

    NOTE: The GMWB Bonus is used only for purposes of calculating the withdrawal benefit bases and the remaining withdrawal benefit bases. The GMWB Bonus is not added to your Contract accumulated value.

    For an example of how the GMWB Bonus works under the GMWB 1 Rider, please see Appendix C.

    The GMWB Bonus feature is different under the GMWB 2 Rider. Please see the discussion under the GMWB 2 Rider (Investment Protector Plus Rider 2) for more information.

    GMWB Step-Up

    Beginning with the fifth contract anniversary after the rider effective date, if your Contract accumulated value is greater than the Investment Back remaining withdrawal benefit base, you may elect to increase (“Step-Up”) the withdrawal benefit bases and remaining withdrawal benefit bases. The GMWB Step-Up resets the withdrawal benefit base and increases the remaining withdrawal benefit base for both the Investment Back and For Life withdrawal options to your Contract accumulated value on the most recent contract anniversary.

    To elect the GMWB Step-Up, you must notify us within 30 days after your fifth contract anniversary following the rider effective date. If you do not elect to Step-Up at that time, you are eligible to take a GMWB Step-up election within the 30-day period following any subsequent contract anniversary, based on the Contract accumulated value on that contract anniversary. Once you have elected to Step-Up, you must wait five contract years to make another Step-Up.

    By electing a GMWB Step-Up, you agree to accept the then current rider charge. If you do not elect a GMWB Step-Up, the charge for this rider will not change (See CHARGES AND DEDUCTIONS - Charges for Rider Benefits).

    If your surviving spouse continues your Contract with this rider attached (see Spousal Continuation, below), your surviving spouse may elect a special GMWB Step-Up at the time of making the spousal election. The special GMWB Step-Up and then current rider charge will be applied on the next contract anniversary and a new five-year Step-Up period will begin. If your surviving spouse does not elect the special GMWB Step-Up, the Step-Up feature will continue according to the terms of the rider, and the charge for the rider will not change.

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    If your rider has an effective date on or after June 15, 2008, it will provide that (1) if your Investment Back remaining withdrawal benefit base reduces to zero, your rider is no longer eligible for any future Step-Ups of the remaining withdrawal benefit bases under either withdrawal option, even if you make subsequent premium payments; and (2) the surviving spouse special Step-Up provision is no longer available.

    For an example of how the GMWB 1 Rider Step-Up works, please see Appendix C.

    The GMWB Step-Up feature is different under the GMWB 2 Rider. Please see the discussion under the GMWB 2 Rider (Investment Protector Plus Rider 2) for more information.

    GMWB Investment Options

    The GMWB investment options are shown in Appendix E. While a GMWB rider is in effect, the investment options you may select are restricted. The limited investment options available under a GMWB rider are intended to support the rider’s guarantees with a balanced investment objective. If your investment goal is aggressive growth, a GMWB rider may not be appropriate for you. It is your responsibility to select your GMWB investment option. You may wish to ask your financial advisor to assist you in making your selection. We reserve the right to modify the list of available GMWB investment options, subject to compliance with applicable regulations.

    As described in Appendix E, the GMWB investment options include Self-Build Models. We may from time to time change the Self-Build Models. However, your existing Self-Build Models will not be changed and you may continue to maintain your existing Self-Build Models.

    GMWB Death Provision

    When the Contract Accumulated Value is Greater than Zero. The following table illustrates the various situations and the resulting outcomes if your Contract accumulated value is greater than zero at your death.

    If you die and... And...  Then... 
     
    You are the sole owner  Your spouse  The primary beneficiary(ies) must elect one of the following: 
      is not named   
      as a primary  a. receive the death benefit under the Contract*; or 
      beneficiary  b. receive the Investment Back remaining withdrawal benefit 
        base as a series of payments.** 
     
        Upon your death, only your beneficiary(ies)’s right to the above- 
        selected payments will continue; all other rights and benefits 
        under the rider and Contract will terminate. 

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    You are the sole owner  Your spouse  Your spouse may 
      is named as     
      a primary  a. continue the contract with or without this rider as set forth 
      beneficiary  below in Spousal Continuation; or 
        b. elect one of the following: 
               •  receive the death benefit under the Contract*; 
               •  receive the Investment Back remaining withdrawal 
          benefit base as a series of payments.** 
     
        All other primary beneficiaries must elect one of the options 
                                                                            listed above in b.
     
        Unless your spouse elects to continue the contract with this 
        rider, only your spouse’s and beneficiary(ies)’s right to the 
        above-selected payments will continue; all other rights and 
        benefits under the rider and Contract will terminate. 
     
    You are a joint owner  The  The surviving owner must elect one of the following: 
      surviving     
      joint owner  a. receive the death benefit under the Contract*; or 
      is not your  b. receive the Investment Back remaining withdrawal benefit 
      spouse  base as a series of payments.** 
     
        Upon your death, only the surviving owner’s right to the above- 
        selected payments will continue; all other rights and benefits 
        under the rider and Contract will terminate. 
     
    You are a joint owner  The  Your spouse may 
      surviving     
      joint owner  a. continue the contract with or without this rider as set forth 
      is your  below in Spousal Continuation; or 
      spouse  b. elect one of the following: 
               •  receive the death benefit under the Contract*; 
               •  receive the Investment Back remaining withdrawal 
          benefit base as a series of payments.** 
     
        Unless the surviving spouse owner elects to continue the 
        contract with this rider, upon your death, only your spouse’s 
        right to the above-selected payments will continue; all other 
        rights and benefits under the rider and Contract will terminate. 

    *Please see THE CONTRACT — Death Benefit for an explanation of the Contract’s death benefit and payment options available for the Contract’s death benefit.

    **We will make payments in an amount and frequency acceptable to us. If a surviving owner or beneficiary chooses a periodic payment, it must be at least $100 per payment until the Investment Back remaining withdrawal benefit base is zero.

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    If...  And...  Then... 
     
    The annuitant dies  The owner is  The beneficiary(ies) receive the death benefit under the 
      not a natural  Contract. 
      person   
        If a beneficiary dies before the annuitant, on the annuitant’s 
        death we will make equal payments to the surviving 
        beneficiaries unless the owner provided us with other written 
        instructions. If no beneficiary(ies) survive the annuitant, the 
        death benefit is paid to the owner. 
     
        Upon the annuitant’s death, only the beneficiary(ies) right to the 
        death benefit will continue; all other rights and benefits under 
        the Contract will terminate. 

    The GMWB Death Provision is different under the GMWB 2-SL/JL Rider. Please see the discussion under the GMWB 2 Rider (Investment Protector Plus 2 Rider) for more information.

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    When the Contract Accumulated Value is Zero. The following table illustrates the various situations and the resulting outcomes if your Contract accumulated value is zero at your death but the rider still has value.

    If you die and... And...  Then... 
     
    You are the sole  You elected the  We will continue payments to your beneficiary(ies) 
    owner  For Life  according to the schedule established when you made 
      withdrawal  your election until the For Life remaining withdrawal 
      option*  benefit base reduces to zero. 
     
    You are the sole  You elected  We will continue payments to your beneficiary(ies) 
    owner  the Investment  according to the schedule established when you made 
      Back  your election until the Investment Back remaining 
      withdrawal  withdrawal benefit base reduces to zero. 
      option*   
     
    You are a joint owner  You elected the  We will continue payments to the surviving joint owner 
      For Life  according to the schedule established when you made 
      withdrawal  your election until the For Life remaining withdrawal 
      option*  benefit base reduces to zero. 
     
        Upon the surviving joint owner’s death, we will continue 
        payments to the beneficiary(ies) according to the schedule 
        established when you made your election until the For Life 
        remaining withdrawal benefit base reduces to zero. 
     
    You are a joint owner  You elected  We will continue payments to the surviving joint owner 
      the Investment  according to the schedule established when you made 
      Back  your election until the Investment Back remaining 
      withdrawal  withdrawal benefit base reduces to zero. 
      option*   
        Upon the surviving joint owner’s death, we will continue 
        payments to the beneficiary(ies) according to the schedule 
        established when you made your election until the 
        Investment Back remaining withdrawal benefit base 
                                                                               reduces to zero.

    *      Please see Effect of the Contract Accumulated Value Reaching Zero, above, for details regarding election of the For Life withdrawal option or the Investment Back withdrawal option.
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    If...  And...  Then... 
     
    The annuitant dies  The owner is  The beneficiary(ies) receive the death benefit under the 
      not a natural  Contract. 
      person   
     
      The owner  We will continue payments to the owner’s beneficiary(ies) 
      elected the For  according to the schedule established when the owner 
      Life Withdrawal  made its election until the For Life remaining withdrawal 
      option*  benefit base reduces to zero. 
     
      The owner  We will continue payments to the owner’s beneficiary(ies) 
      elected the  according to the schedule established when the owner 
      Investment  made its election until the Investment Back remaining 
      Back  withdrawal benefit base reduces to zero. 
      withdrawal   
      option*   

    Spousal Continuation

    If you die while this rider is in effect and if your surviving spouse elects to continue the Contract in accordance with its terms, the surviving spouse may also elect to continue this rider if

    1.      the Contract accumulated value is greater than zero;
    2.      the Contract and this rider have not been previously continued; and
    3.      your spouse is either
      a.      your primary beneficiary, if you were the sole owner; or
      b.      the surviving joint owner, if there were joint owners.

    If your spouse elects to continue the contract with this rider, your spouse may take withdrawals under the Investment Back withdrawal option until the Investment Back remaining withdrawal benefit base reduces to zero. The For Life withdrawal option terminates upon your death. All other provisions of this rider will continue as in effect on the date of your death.

    If your spouse elects to continue the Contract without this rider, this rider and all rights, benefits and charges under this rider will terminate and cannot be reinstated.

    NOTE: Although spousal continuation may be available under federal tax laws for a subsequent spouse, this rider may be continued one time only.

    The GMWB Spousal Continuation feature is different under the GMWB 2 rider. Please see the discussion under

    GMWB 2 Rider (Investment Protector Plus Rider 2) for more information.

    Effect of Divorce on the Rider

    Generally, in the event of a divorce, the spouse who retains ownership of the Contract will continue to be entitled to all rights and benefits of this rider while the former spouse will no longer have any such rights or be entitled to any benefits under this rider. If you take a withdrawal to satisfy a court order to pay a portion of the Contract to your former spouse, any portion of such withdrawal that exceeds the available withdrawal benefit payments will be deemed an excess withdrawal under this rider.

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    Termination and Reinstatement of the Rider

    You may not terminate this rider prior to the 5th contract anniversary following the rider effective date.

    We will terminate this rider upon the earliest to occur of

    • the date you send us notice to terminate the rider (after the 5th contract anniversary following the rider effective date). This will terminate the rider, not the Contract.
    • the date you fully annuitize, fully surrender or otherwise terminate the Contract.
    • the date the Investment Back remaining withdrawal benefit base and the For Life withdrawal benefit base are both zero.
    • the date the contract owner is changed (annuitant is changed if the owner is not a natural person), except a change in owner due to a spousal continuation of the rider as described above in Spousal Continuation.
    • the date your surviving spouse elects to continue the Contract without this rider.

    If this rider terminates for any reason other than full surrender of the Contract, this rider may not be reinstated.

    If you surrender the Contract with this rider attached and the Contract is later reinstated, this rider also must be reinstated. At the time this rider is reinstated, we will deduct rider charges scheduled during the period of termination and make any other adjustments necessary to reflect any changes in the amount reinstated and the contract accumulated value as of the date of termination.

    The GMWB Termination and Reinstatement feature is different under the GMWB 2 rider. Please see the following description for more information.

    GMWB 2 Rider (Investment Protector Plus 2 Rider)

    Overview

    This prospectus describes two versions of the GMWB 2 rider. One version, GMWB 2-SL, provides for only “Single Life” For Life withdrawal benefit payments; the second version, GMWB 2-SL/JL, differs from the first in only one respect —it permits an election of “Joint Life” For Life withdrawal benefit payments or “Single Life” withdrawal benefit payments. We treat your GMWB 2 rider as the GMWB 2-SL/JL version if the “Joint Life” provisions were approved in your state as of your rider effective date.

    To help you better understand the various features of the GMWB 2 rider and to demonstrate how premium payments made and withdrawals taken from the Contract affect the values and benefits under the rider, we have provided several examples in Appendix D.

    There are a few important differences and many similarities between the GMWB 2 rider and the GMWB 1 rider. We note the circumstances under which each rider may be most appropriate for you under GMWB (Investment Protector Plus) Riders — GMWB Overview. At the end of the description of GMWB riders we provide a chart that compares their features. Except as noted below, the provisions of the GMWB 2 rider and the GMWB 1 rider are similar, and we refer you to the description of those provisions under GMWB 1 Rider (Investment Protector Plus Rider).

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    The important differences between the current versions of the GMWB 2 rider and the GMWB 1 rider are:

    Maximum annual rider charge. The GMWB 2 rider has a maximum annual rider charge (1.00% of the Investment Back withdrawal benefit base) that is greater than the GMWB 1 maximum annual rider charge (0.85% of the Investment Back remaining withdrawal benefit base).

    Minimum age. The GMWB 2 rider has a minimum age requirement of 45 years; the GMWB 1 rider has no minimum age requirement.

    Bonus feature. The GMWB 2 rider has a Bonus feature (described below) that credits a percentage of the premium payments to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal option on the first three contract anniversaries following the effective date of the rider (7% on the first contract anniversary, 6% on the second contract anniversary, and 5% on the third contract anniversary). The GMWB 1 rider has a Bonus feature that credits 5% of the premium payments on the first five contract anniversaries.

    Step-Up feature. The GMWB 2 rider has a Step-Up feature (described below) that is automatic and applies annually; the GMWB 1 rider has a Step-Up feature that must be elected by the owner and applies at five-year intervals.

    The GMWB 2-SL/JL rider and the GMWB 1 rider (effective date on or after June 15, 2008) provide that the remaining withdrawal benefit bases are no longer eligible for any future step-ups after reducing to zero. In other versions of the riders, the remaining withdrawal benefit bases continue to be eligible for step-up after reducing to zero.

    For Life withdrawal benefit payment percentages. The GMWB 2 rider has a tiered “Single Life” For Life withdrawal option with withdrawal benefit payment percentages ranging from 3.50% to 6.50% depending on age at first withdrawal. If you have the GMWB 2-SL/JL rider, “Joint Life” For Life withdrawal benefit payment percentages are also available ranging from 3.0% to 6.0% depending on age at first withdrawal (as described below with respect to the “Single Life” and “Joint Life” election). The GMWB 1 rider has a flat 5% withdrawal benefit payment percentage that applies at all ages.

    Spousal continuation. The GMWB 2-SL/JL rider provides that the Investment Back and the For Life withdrawal options may be available to an eligible spouse who continues the Contract with the rider; the GMWB 1 rider and the GMWB 2-SL rider make available only the Investment Back withdrawal option under such circumstances.

    GMWB Bonus

    The GMWB 2 Bonus differs from the GMWB 1 Bonus. Under the GMWB 1 Bonus feature, we credit 5% of premium payments to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal option on the first five contract anniversaries provided you have not taken any withdrawals since the rider effective date.

    Under the GMWB 2 Bonus, on each of the first three contract anniversaries following the rider effective date, we will credit a bonus (“GMWB 2 Bonus”) to the withdrawal benefit base and the remaining withdrawal benefit base for each withdrawal option provided you have not taken any withdrawals since the rider effective date.

    The GMWB 2 Bonus is equal to the total of all premium payments made prior to the applicable contract anniversary multiplied by the applicable percentage shown in the chart below. If the contract date and the rider effective date are different, the GMWB 2 Bonus is equal to the Contract accumulated value on the rider effective date plus premium payments made between the rider effective date and the contract anniversary, multiplied by the applicable percentage shown in the chart below.

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    Contract Anniversary   
    following the  GMWB Bonus 
    rider effective date  Percentage 
    1  7.00% 
    2  6.00% 
    3  5.00% 

    The GMWB 2 Bonus is no longer available after the earlier of

    • the third contract anniversary following the rider effective date; or
    • the date you take a withdrawal following the rider effective date.

    NOTE: The GMWB 2 Bonus is used only for purposes of calculating the withdrawal benefit bases and the remaining withdrawal benefit bases for each withdrawal option. The GMWB 2 Bonus is not added to your Contract accumulated value.

    GMWB Step-Up

    The GMWB 2 Step-Up differs from the GMWB 1 Step-Up. The GMWB 2 Step-Up is automatic and applies annually; the GMWB 1 Step-Up must be elected by the owner and applies at five-year intervals. Under the GMWB 2 rider, unless an owner opts out of the automatic GMWB 2 Step-Up, the rider charge will increase if our then current rider charge is higher than when the rider was purchased. The rider charge will never be greater than the maximum GMWB 2 rider charge (1.00% of the Investment Back withdrawal benefit base).

    The GMWB 2 Step-Up operates as follows. On each contract anniversary following the rider effective date, you are eligible for a GMWB 2 Step-Up if you satisfy the following requirements:

    1.      the contract anniversary occurs before the later of
      a.      the contract anniversary following the date the oldest owner (oldest annuitant if the owner is not a natural person) attains age 80; or
      b.      ten years after the rider effective date;
    2.      you have not declined any increases in the rider charge;
    3.      you have not fully annuitized the Contract; and
    4.      if your rider is GMWB 2-SL/JL, the remaining withdrawal benefit base has not reduced to zero during the life of the rider.

    We determine eligibility for a GMWB 2 Step-Up of the withdrawal benefit base and remaining withdrawal benefit base for each withdrawal option separately. You are eligible for a GMWB 2 Step-Up of the withdrawal benefit base if you meet the first three requirements and for a GMWB 2 Step-Up of the remaining withdrawal benefit base if you meet all four requirements. If you fail to meet the fourth requirement for GMWB 2-SL/JL (if the remaining withdrawal benefit base for a withdrawal option reduces to zero), that remaining withdrawal benefit base is no longer eligible for any future GMWB 2 Step-Ups, even if you (or your surviving spouse who continues the Contract with this rider) make subsequent premium payments.

    If you satisfy the eligibility requirements on a contract anniversary and your Contract accumulated value is greater than the applicable withdrawal benefit base, we will Step-Up the applicable withdrawal benefit base and remaining withdrawal benefit base to your Contract accumulated value on that contract anniversary. We will not reduce your withdrawal benefit base or remaining withdrawal benefit base if your Contract accumulated value on a contract anniversary is less than a withdrawal benefit base.

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    If you are eligible for a GMWB 2 Step-Up of a withdrawal benefit base or remaining withdrawal benefit base, you will be charged the then current rider charge. You may choose to opt out of the GMWB 2 Step-Up feature of this rider if the charge for your rider will increase. We will send you advance notice if the charge for your rider will increase in order to give you the opportunity to opt out of the GMWB 2 Step-Up feature. Once you opt out, the GMWB 2 Step-Up feature cannot be added back to the rider.

    Under GMWB 2-SL, a surviving spouse who continues the Contract with this rider attached may elect a special GMWB Step-Up at the time of making the spousal continuation. The special GMWB Step-Up is only available if you did not previously opt out of the GMWB Step-Up feature. If your spouse elects the special GMWB Step-Up, we will step-up the applicable remaining withdrawal benefit base and withdrawal benefit base to your Contract accumulated value as of the date the spousal continuation election is received by us in good order. Following the special GMWB Step-Up, the GMWB Step-Up feature will continue according to the terms of this rider and your surviving spouse will be charged the then current rider charge. If your surviving spouse continues your Contract with this rider attached and does not elect the special GMWB Step-Up, the GMWB Step-Up feature will continue according to the terms of this rider.

    For Life Withdrawal Benefit Payments

    The GMWB 2 rider contains For Life withdrawal benefit payments that differ from those provided by the GMWB 1 rider.

    Under the GMWB 2-SL rider, For Life withdrawal benefit payments are “Single Life”.

    Under the GMWB 2-SL/JL rider, For Life withdrawal benefit payments are automatically calculated as “Single Life” unless you provide notice and good order instructions to select “Joint Life” For Life withdrawal benefit payments. If eligible, you may elect “Joint Life” For Life withdrawal benefit payments anytime on or before your first withdrawal following the rider effective date. Once you take this first withdrawal, you cannot change your election of “Single Life” or “Joint Life” For Life withdrawal benefit payments under the GMWB 2-SL/JL rider, regardless of any change in life events.

    GMWB 2 “Single Life” For Life withdrawal benefit payments. “Single Life” For Life withdrawal benefit payments are based on one covered life. The covered life for “Single Life” is the

    a.      owner if there is only one owner;
    b.      annuitant if the owner is not a natural person;
    c.      youngest joint owner if there are joint owners; or
    d.      youngest annuitant if there are joint annuitants and the owner is not a natural person.

    In addition, the covered life must satisfy this rider’s issue age requirements on the date the covered life is designated in accordance with the terms of this rider.

    “Single Life” or “Joint Life” For Life withdrawal benefit payments may be taken until the earlier of the date of the death of the first owner to die (first annuitant, if applicable) or the date the For Life withdrawal benefit base reduces to zero.

    GMWB 2-SL/JL “Joint Life” For Life withdrawal benefit payments. “Joint Life” For Life withdrawal benefit payments are based on two covered lives. You may only elect “Joint Life” For Life withdrawal benefit payments if there are two eligible covered lives. There can be no more than two covered lives. The “Joint Life” election is not available if the owner is not a natural person.

    The covered lives for “Joint Life” are

    a.      the owner and the owner’s spouse, if there is only one owner, provided the spouse is named as a primary beneficiary; or
    b.      the joint owners, provided the joint owners are each other’s spouse.

    NOTE: For purposes of this rider, “spouse” means the person who is recognized as the owner’s spouse and is eligible to make a spousal election under federal tax laws.

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    NOTE: At the time a covered life is designated, that covered life must satisfy this rider’s issue age requirements on the date the covered life is designated.

    “Joint Life” For Life withdrawal benefit payments will continue until the earlier of the date of the death of the last covered life to die or the date the “For Life” withdrawal benefit base reduces to zero.

    Calculating the For Life Withdrawal Benefit Payment

    The For Life withdrawal benefit payment is an amount equal to a percentage multiplied by the For Life withdrawal benefit base.

    The initial For Life withdrawal benefit payment percentage depends on whether you have elected “Single Life” or “Joint Life” and the age of the covered life on the date of the first withdrawal:

    • “Single Life”:

    Age of Covered Life  For Life Withdrawal 
    at First Withdrawal  Benefit Payment Percentage 
    45-49  3.50% 
    50-54  4.00% 
    55-59  4.50% 
    60-69  5.00% 
    70-74  5.50% 
    75-79  6.00% 
    80+  6.50% 

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    • “Joint Life”:

    Age of Younger   
    Covered Life  For Life Withdrawal 
    at First Withdrawal  Benefit Payment Percentage 
    45-49  3.00% 
    50-54  3.50% 
    55-59  4.00% 
    60-69  4.50% 
    70-74  5.00% 
    75-79  5.50% 
    80+  6.00% 

    Because the For Life withdrawal benefit payments are tiered based on the age of the younger covered life at the time of the first withdrawal, you should carefully choose when you take the first withdrawal following the rider effective date. Once a withdrawal is taken, the For Life withdrawal benefit payment percentage is locked in for the life of this rider. In addition, when you take your first withdrawal, your election of “Single Life” or “Joint Life” remains locked in and cannot be changed. For example, if you have elected “Joint Life” For Life withdrawal benefit payments under GMWB 2-SL/JL and take the first withdrawal when the younger covered life is age 46, your For Life withdrawal benefit payment percentage will be locked in at 3.00% for the remaining life of this rider and cannot be changed.

    Covered Life Change under GMWB 2-SL. Any ownership change (annuitant change if the owner is not a natural person) before the annuitization date will result in termination of this rider, except for a change in owner due to a spousal continuation of the rider as described above in Spousal Continuation under GMWB 1.

    Covered Life Change under GMWB 2-SL/JL. Any ownership, beneficiary designation or other contract or rider change before the annuitization date which would cause a change in a covered life (a “Change”) will result in termination of this rider, except for the following permissible Changes:

    1.      Spousal continuation of this rider as described below in Spousal Continuation.
    2.      If withdrawals have not been taken and you have not previously elected to continue this rider as provided in Spousal Continuation, then
      a.      you may add a joint owner or primary beneficiary to your Contract as a covered life, provided that the new joint owner or primary beneficiary is an eligible covered life as set forth above.
      b.      you may remove a joint owner or primary beneficiary as a covered life.
      c.      the For Life withdrawal benefit payment percentage will be based on the age of the covered lives and will lock in at the percentage applicable on the date of your first withdrawal.
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    3.      If withdrawals have been taken and you have locked in “Single Life” For Life withdrawal benefit payments, then
      a.      you may remove a joint owner as a covered life;
      b.      you may add a primary beneficiary to your Contract; however, you may not add a primary beneficiary as a covered life for purposes of this rider.
      c.      the For Life withdrawal benefit payment percentage will remain locked in at the percentage applicable on the date of your first withdrawal and will not be reset to reflect the removal of the covered life. For Life withdrawal benefit payments will cease upon your death.
    4.      If withdrawals have been taken and you have locked in “Joint Life” For Life withdrawal benefit payments, then
      a.      you may remove a joint owner or primary beneficiary as a covered life;
      b.      you may add a primary beneficiary to your Contract; however, you may not add a primary beneficiary as a covered life for purposes of this rider.
      c.      the For Life withdrawal benefit payment percentage will remain locked in at the percentage applicable on the date of your first withdrawal and will not be reset to reflect the removal of the covered life. For Life withdrawal benefit payments will cease upon your death.
    5.      If you have previously elected to continue this rider as provided in Spousal Continuation, then you may add a primary beneficiary to your Contract; however, you may not add a primary beneficiary as a covered life for purposes of this rider.

    No Change is effective until approved by us in writing. Upon our approval, the Change is effective as of the date you signed the notice requesting the Change.

    An assignment of the Contract or this rider shall be deemed a request for a Change. If the Change is not one of the above permissible Changes, this rider will be terminated as of the date of the assignment.

    Effect of the Contract Accumulated Value Reaching Zero under the Rider

    The effect of the Contract accumulated value reaching zero is the same as with the GMWB 1 rider, except as follows:

  		•  If you have taken withdrawal benefit payments prior to the Contract accumulated value reaching zero, your For Life withdrawal option is either “Joint Life” or “Single Life”, depending on your election at the time of your first withdrawal.
  		• If you have not taken withdrawal benefit payments prior to the Contract accumulated value reaching zero, you must elect either
     
  		• the “Single Life” For Life withdrawal option: you will receive fixed scheduled payments each year in the amount of the For Life withdrawal benefit payment, until the later of
       
  		• the date the For Life remaining withdrawal benefit base is zero; or
       
  		• the date of your death (annuitant’s death if the owner is not a natural person).
     
  		• the “Joint Life” For Life withdrawal option: you will receive fixed scheduled payments each year in the amount of the For Life withdrawal benefit payment, until the later of
       
  		• the date the For Life remaining withdrawal benefit base is zero; or
       
  		• the date of the death of the last covered life to die.

    If there is any For Life remaining withdrawal benefit base at the time of your death, we will continue payments as described below.

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    Death Provisions when the Contract accumulated value is zero

    The death provisions for the GMWB 2-SL rider are the same as GMWB 1, described above.

    The GMWB 2-SL/JL rider’s death provisions differ from GMWB 2-SL because of the availability of either “Single Life” or “Joint Life” For Life withdrawal benefit payments. The following table illustrates the various situations and the resulting outcomes associated with your death if the Contract accumulated value is zero at your death.

    If you die and... And...  Then... 
     
    You are the sole owner  You elected the  We will continue payments to your beneficiary(ies) according 
      “Single Life” For  to the schedule established when you made your election 
      Life withdrawal  until the For Life remaining withdrawal benefit base reduces 
      option*  to zero. 
     
    You are the sole owner  You elected the  We will continue payments to the surviving covered life 
      “Joint Life” For  according to the schedule established when you made your 
      Life withdrawal  election until the date of the surviving covered life’s death. 
      option*   
        Upon the surviving covered life’s death, we will continue 
        payments to your beneficiary(ies) according to the schedule 
        established when you made your election until the For Life 
        remaining withdrawal benefit base reduces to zero. 
     
    You are the sole owner  You elected the  We will continue payments to your beneficiary(ies) according 
      Investment Back  to the schedule established when you made your election 
      withdrawal option*  until the Investment Back remaining withdrawal benefit base 
        reduces to zero. 
     
    You are a joint owner  You elected the  We will continue payments to the surviving joint owner 
      “Single Life” For  according to the schedule established when you made your 
      Life withdrawal  election until the For Life remaining withdrawal benefit base 
      option*  reduces to zero. 
     
        Upon the surviving joint owner’s death, we will continue 
        payments to your beneficiary(ies) according to the schedule 
        established when you made your election until the For Life 
        remaining withdrawal benefit base reduces to zero. 
     
    You are a joint owner  You elected the  We will continue payments to the surviving covered life 
      “Joint Life” For  according to the schedule established when you made your 
      Life withdrawal  election until the date of the surviving covered life’s death. 
      option*   
        Upon the surviving covered life’s death, we will continue 
        payments to your beneficiary(ies) according to the schedule 
        established when you made your election until the For Life 
        remaining withdrawal benefit base reduces to zero. 

    68  RIDER BENEFITS  Principal Investment Plus Variable Annuity SM 
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    You are a joint owner  You elected the  We will continue payments to the surviving joint owner 
      Investment Back  according to the schedule established when you made your 
      withdrawal option*  election until the Investment Back remaining withdrawal 
        benefit base reduces to zero. 
     
        Upon the surviving joint owner’s death, we will continue 
        payments to your beneficiary(ies) according to the schedule 
        established when you made your election until the Investment 
        Back remaining withdrawal benefit base reduces to zero. 

    *      Please see Effect of the Contract Accumulated Value Reaching Zero under the Rider for details regarding election of the For Life withdrawal option or the Investment Back withdrawal option.

    NOTE: The “Joint Life” For Life withdrawal option is not available if the owner is a not a natural person.

    If...  And...  Then... 
     
    The annuitant dies  The owner is not a  The beneficiary(ies) receive the death benefit under the 
      natural person  Contract. 
     
      The owner elected  We will continue payments to the owner’s beneficiary(ies) 
      the “Single Life”  according to the schedule established when the owner made 
      For Life  its election until the For Life remaining withdrawal benefit 
      Withdrawal  base reduces to zero. 
      option*   
     
     
      The owner elected  We will continue payments to the owner’s beneficiary(ies) 
      the Investment  according to the schedule established when the owner made 
      Back withdrawal  its election until the Investment Back remaining withdrawal 
      option*  benefit base reduces to zero. 

    Termination and Reinstatement

    The termination and reinstatement provisions of the GMWB 2 rider and the GMWB 1 rider are the same in most respects. The GMWB 2-SL/JL rider differs in two respects from the GMWB 2-SL rider and the GMWB 1 rider. The GMWB 2-SL/JL rider provides two additional situations in which we will terminate the rider: (1) if the Investment Back remaining withdrawal benefit base is zero and there are no eligible covered lives and (2) if you make an impermissible change in a covered life. These provisions do not appear in the GMWB 2-SL rider or in the GWMB 1 rider.

    Spousal Continuation

    The provisions of the GMWB 2-SL/JL rider that deal with spousal continuation are substantially the same as those of the GMWB 1 rider and the GMWB 2-SL rider. The only significant difference is the GMWB 2-SL/JL rider provides that the Investment Back and the For Life withdrawal options may be available to an eligible spouse who continues the Contract with the rider; the other GMWB riders make available only the Investment Back withdrawal options under such circumstances.

    Principal Investment Plus Variable Annuity SM  RIDER BENEFITS  69 
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    The following table illustrates the various changes and the resulting outcomes associated with continuation of the GMWB 2-SL/JL rider by an eligible surviving spouse.

    If you die and...  And...  Then if your spouse continues this rider... 
     
    No withdrawals have  Your spouse  Your spouse may take withdrawals under either withdrawal 
    been taken since the  meets the  option as follows: 
    rider effective date  minimum issue   
      age requirement  a. The For Life withdrawal option will be available until the 
             earlier of the death of your spouse or the For Life withdrawal 
             benefit base reduces to zero. For Life withdrawal benefits will 
             automatically be calculated as “Single Life” and your spouse 
             will be the sole covered life. Your spouse may not add a new 
             covered life or elect “Joint Life”. The For Life withdrawal 
             benefit percentage will be based on your spouse’s age and 
             will lock in at the “Single Life” percentage applicable on the 
             date of your spouse’s first withdrawal. 
     
        b. The Investment Back withdrawal option will continue to be 
             available until the Investment Back remaining withdrawal 
             benefit base is zero. 
     
        c. All other provisions of this rider will continue as in effect on 
             the date of your death. 
     
    No withdrawals have  Your spouse  The For Life withdrawal option terminates upon your death. 
    been taken since the  does not meet   
    rider effective date  the minimum  Your spouse may take withdrawals under the Investment Back 
      issue age  withdrawal option as follows: 
      requirement   
        a. The Investment Back withdrawal option will continue to be 
             available until the Investment Back remaining withdrawal 
             benefit base reduces to zero. 
     
        b. All other provisions of this rider will continue as in effect on 
             the date of your death. 

    70  RIDER BENEFITS  Principal Investment Plus Variable Annuity SM 
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    If you die and  And  And  Then if your spouse continues this rider 
     
    Withdrawals have  You have    The For Life withdrawal option terminates upon 
    been taken since  locked in    your death. 
    the rider effective  “Single Life”     
    date  For Life    Your spouse may take withdrawals under the 
      withdrawal    Investment Back withdrawal option as follows: 
      benefits     
          a. The Investment Back withdrawal option will 
               continue to be available until the Investment 
               Back remaining withdrawal benefit base reduces 
               to zero. 
     
          b. All other provisions of this rider will continue as in 
               effect on the date of your death 
     
    Withdrawals have  You have  Your spouse is  Your spouse may take withdrawals under either 
    been taken since  locked in  the surviving  withdrawal option as follows: 
    the rider effective  “Joint Life”  covered life   
    date  For Life    a. The For Life withdrawal option will continue to be 
      withdrawal         available until the earlier of the death of your 
      benefits         spouse or the For Life withdrawal benefit base 
               reduces to zero. For Life withdrawal benefits will 
               continue to be calculated as “Joint Life”. The For 
               Life withdrawal benefit percentage will remain 
               locked in at the “Joint Life” percentage applicable 
               on the date of your first withdrawal and will not be 
               reset to reflect your death. 
     
          b. The Investment Back withdrawal option will 
               continue to be available until the Investment 
               Back remaining withdrawal benefit base reduces 
               to zero. 
     
          c. All other provisions of this rider will continue as in 
               effect on the date of your death. 
     
    Withdrawals have  You have  There is no  The For Life withdrawal option terminates upon 
    been taken since  locked in  surviving  your death. 
    the rider effective  “Joint Life”  covered life   
    date  For Life    Your spouse may take withdrawals under the 
      withdrawal    Investment Back withdrawal option as follows: 
      benefits     

    a.      The Investment Back withdrawal option will continue to be available until the Investment Back remaining withdrawal benefit base reduces to zero.
    b.      All other provisions of this rider will continue as in effect on the date of your death.
    Principal Investment Plus Variable Annuity SM  RIDER BENEFITS  71 
    www.principal.com     

    The following table summarizes and compares the features of the GMWB riders.

    TABLE COMPARING GMWB RIDERS

    Name of Rider    GMWB 1  GMWB 2 - SL  GMWB - SL/JL 
     
    Marketing    Investment Protector Plus  Investment Protector Plus 2  Investment Protector Plus 2 
    Name    Rider  Rider  Rider 
     
    Rider Issue    0 – 80  45 – 80  45 – 80 
    Age         
     
    Rider  •     Current annual charge is  • Current annual charge is  • Current annual charge is 
    Charge       0.80% of the Investment         0.75% of the Investment         0.95% of the Investment 
           Back remaining withdrawal         Back withdrawal benefit         Back withdrawal benefit 
           benefit base for riders         base.         base for riders issued on or 
           issued on or after February  • Maximum annual charge is         after February 16, 2009. 
    Note: A rider       16, 2009.         1.00% of the Investment  • Current annual charge is 
    is deemed to  •     Current annual charge is         Back withdrawal benefit         0.75% of the Investment 
    have been       0.60% of the Investment         base.         Back withdrawal benefit 
    issued before       Back remaining withdrawal           base for riders issued 
    February 16,       benefit base for riders           before February 16, 2009. 
    2009, if the       issued before February 16,    • Maximum annual charge is 
    rider       2009.           1.00% of the Investment 
    application is  •     Maximum annual charge is           Back withdrawal benefit 
    dated before       0.85% of the Investment  *This rider is no longer         base. 
    February 16,       Back remaining withdrawal  available.   
    2009.       benefit base.     
     
    Guaranteed  •     Investment Back  • Same as GMWB 1  • Same as GMWB 1 
    Minimum  •     For Life     
    Withdrawal         
    Benefits         
     
    Annual  •     Investment Back — 7% of  • Investment Back — same  • Investment Back — Same 
    Withdrawal       the Investment Back         as GMWB 1         as GMWB 1 
    Limits       withdrawal benefit base  • For Life — tiered  • “Single Life” — same as 
      •     For Life — 5% of the For         percentage based on age         GMWB 2-SL 
           Life withdrawal benefit base         at first withdrawal,  • “Joint Life” - tiered 
                 beginning at 3.50% and         percentages based on age 
                 capping at a maximum of         at first withdrawal, 
                 6.50% of the For Life         beginning at 3.00% and 
                 withdrawal benefit base         capping at a maximum of 
                   6.00% of the For Life 
                   withdrawal benefit base 
     
    For Life  •     Single Life only  • Same as GMWB 1  • Single Life or Joint Life 
    Withdrawal  •     Available the contract  • Same age eligibility         (your life and the lifetime of 
    Benefit       anniversary following the         restriction as GMWB 1         your eligible spouse) 
    Payments       date the oldest owner turns    • For Life withdrawal benefit 
           59 1/2 — all withdrawals           payments default to 
           prior to that contract           “Single Life” unless “Joint 
           anniversary are excess           Life” is elected 
           withdrawals under the For    • Same age eligibility 
           Life withdrawal option           restriction as GMWB 1 

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    Termination  • You may terminate this  • Same as GMWB 1  • Same as GMWB 1 
             Rider anytime after the 5th     
             contract anniversary     
             following the rider effective     
             date     

    GMWB Step-  •  Optional GMWB Step-Up  •  Automatic annual GMWB  • Same as GMWB 2-SL 
    Up    that you may elect    Step-Up available until the  • A remaining withdrawal 
        beginning with the 5th    later of (a) the Contract         benefit base under a 
        contract anniversary. Once    Anniversary prior to age 80         withdrawal option is not 
        you have elected a GMWB    or (b) 10 years after the         eligible for Step-Up after it 
        Step-Up, you must wait at    rider effective date.         reduces to zero, even if 
        least 5 contract years to  •  There are no restrictions on         additional premium 
        elect another GMWB Step-    Step-Ups of the remaining         payments are made. 
        Up.    withdrawal benefit bases   
      •  Rider effective dates on or    after reducing to zero.   
        after June 15, 2008: the       
        remaining withdrawal       
        benefit bases are not       
        eligible for Step-Ups after       
        the Investment Back       
        remaining withdrawal       
        benefit base reduces to       
        zero, even if additional       
        premium payments are       
        made.       
     
    GMWB  •  If no withdrawals are taken,  •  If no withdrawals are taken,  • Same as GMWB 2-SL 
    Bonus    a GMWB Bonus of 5% is    a GMWB Bonus is applied   
        applied to the benefit bases    to the benefit bases on   
        each year on the contract    each contract anniversary   
        anniversary for the first 5    as shown below.   
        years.  •  Year 1 — 7.00% of   
            premium payments   
          •  Year 2 — 6.00% of   
            premium payments   
          •  Year 3 — 5.00% of   
            premium payments   
     
    Investment  •  You must select one of the  •  Same as GMWB 1  • Same as GMWB 1 
    Restrictions    GMWB investment options;       
        there are no additional       
        restrictions on allocations to       
        the Fixed Account or DCA       
        Plus Accounts.       

    Principal Investment Plus Variable Annuity SM  RIDER BENEFITS  73 
    www.principal.com     

    Spousal  •  At the death of the first  • Same as GMWB 1  • Same as GMWB 1 
    Continuation    owner to die, a spouse who    • The Investment Back 
        is a joint owner or primary           withdrawal option 
        beneficiary may continue           continues; the For Life 
        the contract with or without           withdrawal option 
        this rider           continues for eligible 
      •  Only the Investment Back           spouses. 
        withdrawal option     
        continues; the For Life     
        withdrawal option     
        terminates.     

    FIXED ACCOUNT AND DCA PLUS ACCOUNTS

    This prospectus is intended to serve as a disclosure document only for the Contract as it relates to the Separate Account and contains only selected information regarding the fixed account and DCA Plus Accounts. The Fixed Account and the DCA Plus Accounts are a part of our general account. Because of exemptions and exclusions contained in the Securities Act of 1933 and the Investment Company Act of 1940, the Fixed Account, the DCA Plus Accounts, and any interest in them, are not subject to the provisions of these acts. As a result the SEC has not reviewed the disclosures in this prospectus relating to the Fixed Account and the DCA Plus Accounts. However, disclosures relating to them are subject to generally applicable provisions of the federal securities laws relating to the accuracy and completeness of statements made in prospectuses.

    Our obligations with respect to the Fixed Account and DCA Plus Accounts are supported by our general account. The general account is the assets of the Company other than those assets allocated to any of our Separate Accounts. Subject to applicable law, we have sole discretion over the assets in the general account. Separate Account expenses are not assessed against any Fixed Account or DCA Plus Account values. You can obtain more information concerning the Fixed Account and DCA Plus Accounts from your registered representative or by calling us at 1-800-852-4450.

    We reserve the right to refuse premium payment allocations and transfers from the other investment options to the Fixed Account and premium payment allocations to the DCA Plus Accounts. We will send you a written notice at least 30 days prior to the date we exercise this right. We will also notify you if we lift such restrictions.

    Fixed Account

    The Company guarantees that premium payments allocated and amounts transferred to the Fixed Account earn interest at the interest rate in effect on the date it is received or transferred. This rate applies to each premium payment or amount transferred through the end of the contract year.

    Each contract anniversary, we declare a renewal interest rate that applies to the Fixed Account value in existence at that time. This rate applies until the end of the contract year. Interest is earned daily and compounded annually at the end of each contract year. Once credited, the interest is guaranteed and becomes part of the Fixed Account accumulated value from which deductions for fees and charges may be made.

    NOTE 1: We reserve the right to reduce the Fixed Account interest rate by up to 0.60% if you elect the Premium Payment Credit Rider.

    NOTE 2: Transfers and surrenders from the Fixed Account are subject to certain limitations as to frequency and amount. See FIXED ACCOUNT AND DCA PLUS ACCOUNT - Fixed Account Transfers, Total and Partial Surrenders.

    NOTE 3: We may defer payment of surrender proceeds payable out of the Fixed Account for up to six months. See

    GENERAL PROVISIONS - Delay of Payments.

    74  FIXED ACCOUNT AND DCA PLUS ACCOUNTS  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    Fixed Account Accumulated Value

    Your Fixed Account accumulated value on any valuation date is equal to:

    • premium payments or credits allocated to the Fixed Account;
    • plus any transfers to the Fixed Account from the other investment options;
    • plus interest credited to the Fixed Account;
    • minus any surrenders or applicable surrender charges or partial annuitizations from the Fixed Account;
    • minus any transfers to the Separate Account.

    Fixed Account Transfers, Total and Partial Surrenders

    Transfers and surrenders from the Fixed Account are subject to certain limitations. In addition, surrenders from the Fixed Account may be subject to a charge (see GLOSSARY — Surrender Charge).

    You may transfer amounts from the Fixed Account to the divisions before the annuitization date and as provided below. The transfer is effective on the valuation date following our receipt of your instructions. You may transfer amounts on either a scheduled or unscheduled basis. You may not make both scheduled and unscheduled Fixed Account transfers in the same contract year.

    Unscheduled Fixed Account Transfers. The minimum transfer amount is $100 (or entire Fixed Account accumulated value if less than $100). Once per contract year, within the 30 days following the contract anniversary date, you can:

  		•  transfer an amount not to exceed 25% of your Fixed Account accumulated value; or
  		• transfer up to 100% of your Fixed Account accumulated value if:
     
  		• your Fixed Account accumulated value is less than $1,000; or
     
  		• a minus b is greater than 1% where:
       
  		• a = the weighted average of your Fixed Account interest rates for the preceding contract year; and
       
  		• b = the renewal interest rate for the Fixed Account.

    Scheduled Fixed Account Transfers (Fixed Account Dollar Cost Averaging). You may make scheduled transfers on a monthly basis from the Fixed Account to the Separate Account as follows:

    • You may establish scheduled transfers by sending a written request or by telephoning the home office at 1-800- 852-4450.
    • Transfers occur on a date you specify (other than the 29th, 30th or 31st of any month).
    • If the selected date is not a valuation date, the transfer is completed on the next valuation date.
    • Scheduled transfers are only available if the Fixed Account accumulated value is $5,000 or more at the time the scheduled transfers begin.
    • Scheduled monthly transfers of an amount not to exceed 2% of your Fixed Account accumulated value at the beginning of the contract year or the current Fixed Account accumulated value will continue until the Fixed Account accumulated value is zero or until you notify us to discontinue the transfers.
    • The minimum transfer amount is $100.
    • If the Fixed Account accumulated value is less than $100 at the time of transfer, the entire Fixed Account accumulated value will be transferred.
    • If you stop the transfers, you may not start transfers again without our prior approval.

    Dollar Cost Averaging Plus Program (DCA Plus Program)

    Premium payments allocated to the DCA Plus Accounts earn the interest rate in effect at the time each premium payment is received. A portion of your DCA Plus Account accumulated value is periodically transferred (on the 28th of each month) to Separate Account divisions or to the Fixed Account. If the 28th is not a valuation date, the transfer occurs on the next valuation date. The transfers are allocated according to your DCA Plus allocation instructions. Transfers into a DCA Plus Account are not permitted. There is no charge for participating in the DCA Plus Program.

    Principal Investment Plus Variable Annuity SM  FIXED ACCOUNT AND DCA PLUS ACCOUNTS  75 
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    NOTE: If you elect the Premium Payment Credit Rider, you may not participate in the DCA Plus Program.

    DCA Plus Premium Payments

    You may enroll in the DCA Plus Program by allocating a minimum premium payment of $1,000 into a DCA Plus Account and selecting investment options into which transfers will be made. Subsequent premium payments of at least $1,000 are permitted. You can change your DCA Plus allocation instructions during the transfer period. Automatic portfolio rebalancing does not apply to DCA Plus Accounts.

    DCA Plus premium payments receive the fixed interest rate in effect on the date each premium payment is received by us. The fixed interest rate remains in effect for the remainder of the 6-month or 12-month DCA Plus Program.

    Selecting a DCA Plus Account

    DCA Plus Accounts are available in either a 6-month transfer program or a 12-month transfer program. The 6-month transfer program and the 12-month transfer program generally will have different credited interest rates. You may enroll in both a 6-month and 12-month DCA Plus Program. However, you may only participate in one 6-month and one 12-month DCA Plus Program at a time. Under the 6-month transfer program, all premium payments and accrued interest must be transferred from the DCA Plus Account to the selected investment options in no more than 6 months. Under the 12-month transfer program, all premium payments and accrued interest must be transferred to the selected investment options in no more than 12 months.

    We will transfer an amount each month which is equal to your DCA Plus Account value divided by the number of months remaining in your transfer program. For example, if four scheduled transfers remain in the six-month transfer program and the DCA Plus Account accumulated value is $4,000, the transfer amount would be $1,000 ($4,000 / 4).

    DCA Plus Transfers

    Transfers are made from DCA Plus Accounts to the investment options according to your allocation instructions. The transfers begin after we receive your premium payment and completed enrollment instructions. Transfers occur on the 28th of the month and continue until your entire DCA Plus Account accumulated value is transferred.

    Unscheduled DCA Plus Transfers. You may make unscheduled transfers from DCA Plus Accounts to the investment options. A transfer is made, and values determined, as of the end of the valuation period in which we receive your request.

    DCA Plus Surrenders. You may take scheduled or unscheduled surrenders from DCA Plus Accounts. Premium payments earn interest according to the corresponding rate until the surrender date. Surrenders are subject to any applicable surrender charge.

    GENERAL PROVISIONS

    The Contract

    The entire Contract is made up of the Contract, amendments, riders and endorsements and data pages. Only our corporate officers can agree to change or waive any provisions of a Contract. Any change or waiver must be in writing and signed by an officer of the Company.

    76  GENERAL PROVISIONS  Principal Investment Plus Variable Annuity SM 
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    Delay of Payments

    Surrenders are generally taken within seven days after we receive your instruction for a surrender in a form acceptable to us. This period may be shorter where required by law. However, payment of any amount upon total or partial surrender, death, annuitization of the accumulated value or the transfer to or from a division may be deferred during any period when the right to sell mutual fund shares is suspended as permitted under provisions of the Investment Company Act of 1940 (as amended).

    The right to sell shares may be suspended during any period when:

  		•  trading on the NYSE is restricted as determined by the SEC or when the NYSE is closed for other than weekends and holidays; or
  		• an emergency exists, as determined by the SEC, as a result of which:
     
  		• disposal by a mutual fund of securities owned by it is not reasonably practicable;
     
  		• it is not reasonably practicable for a mutual fund to fairly determine the value of its net assets; or
     
  		• the SEC permits suspension for the protection of security holders.

    If payments are delayed the transfer will be processed on the first valuation date following the expiration of the permitted delay unless we receive your written instructions to cancel your surrender, annuitization, or transfer. Your written instruction must be received in the home office prior to the expiration of the permitted delay. The transaction will be completed within seven business days.

    In addition, we reserve the right to defer payment of that portion of your accumulated value that is attributable to a premium payment made by check for a reasonable period of time (not to exceed 15 business days) to allow the check to clear the banking system.

    We may also defer payment of surrender proceeds payable out of the Fixed Account for a period of up to six months.

    Misstatement of Age or Gender

    If the age or, where applicable, gender of the annuitant has been misstated, we adjust the annuity benefit payment under your Contract to reflect the amount that would have been payable at the correct age and gender. If we make any overpayment because of incorrect information about age or gender, or any error or miscalculation, we deduct the overpayment from the next payment or payments due. Underpayments are added to the next payment.

    Assignment

    If your Contract is part of your qualified plan, IRA, SEP, or SIMPLE-IRA, you may not assign ownership.

    You may assign ownership of your non-qualified Contract. Each assignment is subject to any payments made or action taken by the Company prior to our notification of the assignment. We assume no responsibility for the validity of any assignment. An assignment or pledge of a Contract may have adverse tax consequences.

    An assignment must be made in writing and filed with us at our home office. The irrevocable beneficiary(ies), if any, must authorize any assignment in writing. Your rights, as well as those of the annuitant and beneficiary, are subject to any assignment on file with us. Any amount paid to an assignee is treated as a partial surrender and is paid in a single payment.

    Change of Owner or Annuitant

    If your Contract is part of your qualified plan, IRA, SEP, and SIMPLE-IRA you may not change either the owner or the annuitant.

    Principal Investment Plus Variable Annuity SM  GENERAL PROVISIONS  77 
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    You may change the owner and/or annuitant of your non-qualified Contract at any time. Your request must be in writing and approved by us. After approval, the change is effective as of the date you signed the request for change. If ownership is changed, the benefits under certain riders may be affected. We reserve the right to require that you send us the Contract so that we can record the change.

    If an annuitant who is not an owner dies while the Contract is in force, a new annuitant may be named unless the owner is a corporation, trust or other entity.

    Beneficiary

    While this Contract is in force, you have the right to name or change a beneficiary. This may be done as part of the application process or by sending us a written request. Unless you have named an irrevocable beneficiary, you may change your beneficiary designation by sending us notice.

    Contract Termination

    We reserve the right to terminate the Contract and make a single payment (without imposing any charges) to you if your accumulated value at the end of the accumulation period is less than $2,000. Before the Contract is terminated, we will send you a notice to increase the accumulated value to $2,000 within 60 days. Termination of the Contracts will not unfairly discriminate against any owner.

    Reinstatement

    If you have replaced this Contract with an annuity contract from another company and want to reinstate this Contract, the following apply: • we reinstate the Contract effective on the original surrender date; • if you had the Premium Payment Credit Rider on the original Contract, the 9-year surrender charge period applies to the reinstated Contract. The remaining surrender charge period, if any, is calculated based on the number of years since the original contract date; • we apply the amount received from the other company and the amount of the surrender charge you paid when you surrendered the Contract; • these amounts are priced on the valuation date the money from the other company is received by us; • commissions are not paid on the reinstatement amounts; and • new data pages are sent to your address of record.

    NOTE: Reinstatement is only available if you have surrendered your Contract for your full accumulated value. Any payments you make after a partial surrender or partial annuitization will be deemed new premium payments.

    Reports

    We will mail to you a statement, along with any reports required by state law, of your current accumulated value at least once per year prior to the annuitization date. After the annuitization date, any reports will be mailed to the person receiving the annuity benefit payments.

    Quarterly statements reflect purchases and redemptions occurring during the quarter as well as the balance of units owned and accumulated values.

    Important Information About Customer Identification Procedures

    To help the government fight the funding of terrorism and money laundering activities, Federal law requires financial institutions to obtain, verify, and record information that identifies each person who applies for a Contract. When you apply for a Contract, we will ask for your name, address, date of birth, and other information that will allow us to verify your identity. We may also ask to see your driver’s license or other identifying documents.

    78  GENERAL PROVISIONS  Principal Investment Plus Variable Annuity SM 
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    If concerns arise with verification of your identification, no transactions will be permitted while we attempt to reconcile the concerns. If we are unable to verify your identity within 30 days of our receipt of your original premium payment, the Contract will be terminated and any value surrendered in accordance with normal redemption procedures.

    Rights Reserved by the Company

    We reserve the right to make certain changes if, in our judgment, they best serve the interests of you and the annuitant or are appropriate in carrying out the purpose of the Contract. Any changes will be made only to the extent and in the manner permitted by applicable laws. Also, when required by law, we will obtain your approval of the changes and approval from any appropriate regulatory authority. Approvals may not be required in all cases. Examples of the changes the Company may make include:

  		•  transfer assets in any division to another division or to the Fixed Account;
  		• add, combine or eliminate a division(s);
  		• substitute the units of a division for the units of another division:
     
  		• if units of a division are no longer available for investment; or
     
  		• if in our judgment, investment in a division becomes inappropriate considering the purposes of the Separate Account.

    Frequent Trading and Market-Timing (Abusive Trading Practices)

    This Contract is not designed for frequent trading or market timing activity of the investment options. If you intend to trade frequently and/or use market timing investment strategies, you should not purchase this Contract. The Company does not accommodate market timing.

    We consider frequent trading and market timing activities to be abusive trading practices because they:

  		•  Disrupt the management of the underlying mutual funds by;
     
  		• forcing the fund to hold short-term (liquid) assets rather than investing for long term growth, which results in lost investment opportunities for the fund; and
     
  		• causing unplanned portfolio turnover;
  		• Hurt the portfolio performance of the underlying mutual funds; and
  		• Increase expenses of the underlying mutual fund and separate account due to:
     
  		• increased broker-dealer commissions; and
     
  		• increased record keeping and related costs.

    If we are not able to identify such abusive trading practices, the abuses described above will negatively impact the Contract and cause investors to suffer the harms described.

    We have adopted policies and procedures to help us identify and prevent abusive trading practices. In addition, the underlying mutual funds monitor trading activity to identify and take action against abuses. While our policies and procedures are designed to identify and protect against abusive trading practices, there can be no certainty that we will identify and prevent abusive trading in all instances. When we do identify abusive trading, we will apply our policies and procedures in a fair and uniform manner.

    Principal Investment Plus Variable Annuity SM  GENERAL PROVISIONS  79 
    www.principal.com     

    If we, or an underlying mutual fund that is an investment option with the Contract, deem abusive trading practices to be occurring, we will take action that may include, but is not limited to:

    • Rejecting transfer instructions from a Contract owner or other person authorized by the owner to direct transfers;

    • Restricting submission of transfer requests by, for example, allowing transfer requests to be submitted by 1st class U.S. mail only and disallowing requests made via the internet, by facsimile, by overnight courier or by telephone;

    • Limiting the number of unscheduled transfers during a Contract year to no more than 12;

    • Prohibiting you from requesting a transfer among the divisions for a minimum of thirty days where there is evidence of at least one round-trip transaction (exchange or redemption of shares that were purchased within 30 days of the exchange/redemption) by you; and

    • Taking such other action as directed by the underlying mutual fund.

    We support the underlying mutual funds right to accept, reject or restrict, without prior written notice, any transfer requests into a fund.

    In some instances, a transfer may be completed prior to a determination of abusive trading. In those instances, we will reverse the transfer (within two business days of the transfer) and return the Contract to the investment option holdings it had prior to the transfer. We will give you notice in writing in this instance.

    Distribution of the Contract

    The Company has appointed Princor Financial Services Corporation (“Princor”) (Des Moines, Iowa 50392-0200), a broker-dealer registered under the Securities Exchange Act of 1934, a member of the Financial Industry Regulatory Authority and affiliate of the Company, as the distributor and principal underwriter of the Contract. Princor is paid 6.5% of premium payments by the Company for the distribution of the Contract. Princor also may receive 12b-1 fees in connection with purchases and sales of mutual funds underlying the Contracts. The 12b-1 fees for the underlying mutual funds are shown in this Contract prospectus in Summary of Expense Information.

    Applications for the Contracts are solicited by registered representatives of Princor or such other broker-dealers as have entered into selling agreements with Princor. Such registered representatives act as appointed agents of the Company under applicable state insurance law and must be licensed to sell variable insurance products. The Company intends to offer the Contract in all jurisdictions where it is licensed to do business and where the Contract is approved.

    Performance Calculation

    The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the hypothetical performance of its divisions for this Contract as if the Contract had been issued on or after the date the underlying mutual fund in which the division invests was first offered. The hypothetical performance from the date of the inception of the underlying mutual fund in which the division invests is calculated by reducing the actual performance of the underlying mutual fund by the fees and charges of this Contract as if it had been in existence.

    The yield and total return figures described below vary depending upon market conditions, composition of the underlying mutual fund’s portfolios and operating expenses. These factors and possible differences in the methods used in calculating yield and total return should be considered when comparing the Separate Account performance figures to performance figures published for other investment vehicles. The Separate Account may also quote rankings, yields or returns as published by independent statistical services or publishers and information regarding performance of certain market indices. Any performance data quoted for the Separate Account represents only historical performance and is not intended to indicate future performance. For further information on how the Separate Account calculates yield and total return figures, see the SAI.

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    From time to time the Separate Account advertises its Money Market Division’s “yield” and “effective yield” for these Contracts. Both yield figures are based on historical earnings and are not intended to indicate future performance. The “yield” of the division refers to the income generated by an investment in the division over a 7-day period (which period is stated in the advertisement). This income is then “annualized.” That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The “effective yield” is calculated similarly but, when annualized, the income earned by an investment in the division is assumed to be reinvested. The “effective yield” is slightly higher than the “yield” because of the compounding effect of the assumed reinvestment.

    The Separate Account also advertises the average annual total return of its various divisions. The average annual total return for any of the divisions is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable accumulated value.

    FEDERAL TAX MATTERS

    The following description is a general summary of the tax rules, primarily related to federal income taxes, which in our opinion are currently in effect. These rules are based on laws, regulations and interpretations which are subject to change at any time. This summary is not comprehensive and is not intended as tax advice. Federal estate and gift tax considerations, as well as state and local taxes, may also be material. You should consult a qualified tax adviser about the tax implications of taking action under a Contract or related retirement plan.

    Non-Qualified Contracts

    Section 72 of the Internal Revenue Code governs the income taxation of annuities in general.

    • Premium payments made under non-qualified Contracts are not excludable or deductible from your gross income or any other person’s gross income.
    • An increase in the accumulated value of a non-qualified Contract owned by a natural person resulting from the investment performance of the Separate Account or interest credited to the DCA Plus Accounts and the Fixed Account is generally not taxable until paid out as surrender proceeds, death benefit proceeds, or otherwise.
    • Generally, owners who are not natural persons are immediately taxed on any increase in the accumulated value.

    The following discussion applies generally to Contracts owned by natural persons.

  		•  Surrenders or partial surrenders are taxed as ordinary income to the extent of the accumulated income or gain under the Contract.
  		• The value of the Contract pledged or assigned is taxed as ordinary income to the same extent as a partial surrender.
  		• Annuity benefit payments:
     
  		• The “investment in the contract” is generally the total of the premium payments made.
     
  		• The basic rule for taxing annuity benefit payments is that part of each annuity benefit payment is considered a nontaxable return of the investment in the contract and part is considered taxable income. An “exclusion ratio” is applied to each annuity benefit payment to determine how much of the payment is excludable from gross income. The remainder of the annuity benefit payment is includable in gross income for the year received.
     
  		• After the premium payment(s) in the Contract is paid out, the full amount of any annuity benefit payment is taxable.

    For purposes of determining the amount of taxable income resulting from distributions, all Contracts and other annuity contracts issued by us or our affiliates to the same owner within the same calendar year are treated as if they are a single contract.

    Transfer of ownership may have tax consequences to the owner. Please consult with your tax advisor before changing ownership of your Contract.

    Principal Investment Plus Variable Annuity SM  GENERAL PROVISIONS  81 
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    Required Distributions for Non-Qualified Contracts

    In order for a non-qualified Contract to be treated as an annuity contract for federal income tax purposes, the Internal Revenue Code requires:

    • If the person receiving payments dies on or after the annuitization date but prior to the time the entire interest in the Contract has been distributed, the remaining portion of the interest is distributed at least as rapidly as under the method of distribution being used as of the date of that person’s death.

    • If you die prior to the annuitization date, the entire interest in the Contract will be distributed: • within five years after the date of your death; or

    • as annuity benefit payments which begin within one year of your death and which are made over the life of your designated beneficiary or over a period not extending beyond the life expectancy of that beneficiary.

    • If you take a distribution from the Contract before you are 59 ½, you may incur an income tax penalty.

    Generally, unless the beneficiary elects otherwise, the above requirements are satisfied prior to the annuitization date by paying the death benefit in a single payment, subject to proof of your death. The beneficiary may elect, by written request, to receive an annuity benefit payment option instead of a single payment.

    If your designated beneficiary is your surviving spouse, the Contract may be continued with your spouse deemed to be the new owner for purposes of the Internal Revenue Code. Where the owner or other person receiving payments is not a natural person, the required distributions provided for in the Internal Revenue Code apply upon the death of the annuitant.

    TAX-QUALIFIED CONTRACTS: IRA, SEP, and SIMPLE-IRA

    The Contract may be used to fund IRAs, SEPs, and SIMPLE-IRAs.

    • IRA – An Individual Retirement Annuity (IRA) is a retirement savings annuity. Contributions grow tax deferred.

    • SEP-IRA – A SEP is a form of IRA. A SEP allows you, as an employer, to provide retirement benefits for your employees by contributing to their IRAs.

    • SIMPLE-IRA – SIMPLE stands for Savings Incentive Match Plan for Employers. A SIMPLE-IRA allows employees to save for retirement by deferring salary on a pre-tax basis and receiving predetermined company contributions.

    The tax rules applicable to owners, annuitants and other payees vary according to the type of plan and the terms and conditions of the plan itself. In general, premium payments made under a retirement program recognized under the Internal Revenue Code are excluded from the participant’s gross income for tax purposes prior to the annuity benefit payment date (subject to applicable state law). The portion, if any, of any premium payment made that is not excluded from their gross income is their investment in the Contract. Aggregate deferrals under all plans at the employee’s option may be subject to limitations.

    Tax-qualified retirement arrangements, such as IRAs, SEPs, and SIMPLE-IRAs, are tax-deferred. You derive no additional benefit from the tax deferral feature of the annuity. Consequently, an annuity should be used to fund an IRA, or other tax qualified retirement arrangement to benefit from the annuity’s features other than tax deferral. These features may include guaranteed lifetime income, death benefits without surrender charges, guaranteed caps on fees, and the ability to transfer among investment options without sales or withdrawal charges.

    The tax implications of these plans are further discussed in the SAI under the heading Taxation Under Certain Retirement Plans. Check with your tax advisor for the rules which apply to your specific situation.

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    Premature Distributions: There is a 10% penalty under the Internal Revenue Code on the taxable portion of a “premature distribution” from IRAs, IRA rollovers and SIMPLE-IRAs. The tax penalty is increased to 25% in the case of distributions from SIMPLE-IRAs during the first two years of participation. Generally, an amount is a “premature distribution” unless the distribution is:

    • made on or after you reach age 59 ½;
    • made to a beneficiary on or after your death;
    • made upon your disability;
    • part of a series of substantially equal periodic payments for the life or life expectancy of you or you and the beneficiary;
    • made to pay certain medical expenses;
    • for health insurance premiums while employed;
    • for first home purchases (up to $10,000);
    • for qualified higher education expenses;
    • for qualified disaster tax relief distributions (up to $100,000); or
    • for qualified reservist distributions.

    For more information regarding premature distributions, please consult your tax advisor.

    Rollover IRAs

    If you receive a lump-sum distribution from a qualified retirement plan, tax-sheltered annuity or governmental 457(b) plan, you may maintain the tax-deferred status of the distribution by rolling it over into an eligible retirement plan or IRA. You can accomplish this by electing a direct rollover from the plan, or you can receive the distribution and roll it over into an eligible retirement plan or IRA within 60 days. However, if you do not elect a direct rollover from the plan, the plan is required to withhold 20% of the distribution. This amount is sent to the IRS as income tax withholding to be credited against your taxes. Amounts received prior to age 59 ½ and not rolled over may be subject to an additional 10% excise tax. Beginning in 2008, if your adjusted gross income is $100,000 or less for the taxable year (and you are not a married individual filing a separate income tax return), you may roll over amounts from a qualified plan directly to a ROTH IRA. If you roll over a distribution from a qualified plan directly to a Roth IRA, the entire distribution is generally taxable unless it includes after-tax contributions.

    Roth IRAs

    The Contract may be purchased to fund a Roth IRA. Contributions to a Roth IRA are not deductible from taxable income. Subject to certain limitations, a traditional IRA, SIMPLE-IRA or SEP may be converted into a Roth IRA or a distribution from such an arrangement may be rolled over to a Roth IRA. However, a conversion or a rollover to a Roth IRA is not excludable from gross income. If certain conditions are met, qualified distributions from a Roth IRA are tax-free. For more information, please contact your tax advisor.

    Required Minimum Distributions for IRAs

    The Required Minimum Distribution (RMD) regulations dictate when individuals must start taking payments from their IRA. Generally speaking, RMDs for IRAs must begin no later than April 1 following the close of the calendar year in which you turn 70 ½. Thereafter, the RMD is required no later than December 31 of each calendar year.

    The RMD rules apply to traditional IRAs, as well as SEP-IRAs and SIMPLE-IRAs, during the lifetime and after the death of IRA owners. They do not, however, apply to Roth IRAs during the lifetime of the Roth IRA owner. If an individual owns more than one IRA, the RMD amount must be determined for each, but the actual distribution can be satisfied from a combination of one or more of the owner's IRAs NOTE: Contractual limitations exist that may limit the ability to satisfy an individual's multiple RMDs obligations via this annuity. Please see the Required Minimum Distribution (RMD) section of the GMWB (Investment Protector Plus) Riders of this prospectus for details.

    Failure to comply with the RMD rules can result in an excise tax penalty. This penalty equals 50% of the amount of the RMD that exceeds the actual distribution amount (if any) that occurred during the calendar year in question.

    Principal Investment Plus Variable Annuity SM  GENERAL PROVISIONS  83 
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    New legislation provides a temporary waiver of RMD rules for calendar year 2009. The new law indicates that no RMD is required for calendar year 2009.

    NOTE: You must inform us if you wish to exercise the option to not take your RMD for calendar year 2009.

    Withholding

    Annuity benefit payments and other amounts received under the Contract are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld.

    Notwithstanding the recipient’s election, withholding may be required on payments delivered outside the United States. Moreover, special “backup withholding” rules may require us to disregard the recipient’s election if the recipient fails to supply us with a “TIN” or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies us that the TIN provided by the recipient is incorrect.

    MUTUAL FUND DIVERSIFICATION

    The United States Treasury Department has adopted regulations under Section 817(h) of the Internal Revenue Code which establishes standards of diversification for the investments underlying the Contracts. Under this Internal Revenue Code Section, Separate Account investments must be adequately diversified in order for the increase in the value of non-qualified Contracts to receive tax-deferred treatment. In order to be adequately diversified, the portfolio of each underlying mutual fund must, as of the end of each calendar quarter or within 30 days thereafter, have no more than 55% of its assets invested in any one investment, 70% in any two investments, 80% in any three investments and 90% in any four investments. Failure of an underlying mutual fund to meet the diversification requirements could result in tax liability to non-qualified Contract holders.

    The investment opportunities of the underlying mutual funds could conceivably be limited by adhering to the above diversification requirements. This would affect all owners, including owners of Contracts for whom diversification is not a requirement for tax-deferred treatment.

    STATE REGULATION

    The Company is subject to the laws of the State of Iowa governing insurance companies and to regulation by the Insurance Department of the State of Iowa. An annual statement in a prescribed form must be filed by March 1 in each year covering our operations for the preceding year and our financial condition on December 31 of the prior year. Our books and assets are subject to examination by the Commissioner of Insurance of the State of Iowa, or the Commissioner’s representatives, at all times. A full examination of our operations is conducted periodically by the National Association of Insurance Commissioners. Iowa law and regulations also prescribe permissible investments, but this does not involve supervision of the investment management or policy of the Company.

    In addition, we are subject to the insurance laws and regulations of other states and jurisdictions where we are licensed to operate. Generally, the insurance departments of these states and jurisdictions apply the laws of the state of domicile in determining the field of permissible investments.

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    GENERAL INFORMATION

    Reservation of Rights

    The Company reserves the right to:

    • increase the minimum amount for each premium payment to not more than $1,000; and
    • terminate a Contract and send you the accumulated value if no premiums are paid during two consecutive calendar years and the accumulated value (or total premium payments less partial surrenders and applicable surrender charges) is less than $2,000. The Company will first notify you of its intent to exercise this right and give you 60 days to increase the accumulated value to at least $2,000.

    Legal Opinions

    Legal matters applicable to the issue and sale of the Contracts, including our right to issue Contracts under Iowa Insurance Law, have been passed upon by Karen Shaff, General Counsel and Executive Vice President.

    Legal Proceedings

    There are no legal proceedings pending to which Separate Account B is a party or which would materially affect Separate Account B.

    12h-7 Representation

    The Company believes that, consistent with well established industry and SEC practice, the periodic reporting requirements of the Securities Exchange Act of 1934 do not apply to the Company as the depositor of one or more variable insurance product separate accounts. If such requirements are deemed to apply to the Company as such a depositor, the Company intends to rely on the exemption from such requirements provided by Rule 12h-7 under that Act.

    Other Variable Annuity Contracts

    The Company currently offers other variable annuity contracts that participate in Separate Account B. In the future, we may designate additional group or individual variable annuity contracts as participating in Separate Account B.

    Payments to Financial Intermediaries

    The Company pays compensation to broker-dealers, financial institutions, and other parties

    (“Financial Intermediaries”) for the sale of the Contract according to schedules in the sales agreements and other agreements reached between the Company and the Financial Intermediaries. Such compensation generally consists of commissions on premiums paid on the Contract. The Company and/or its affiliates may also pay other amounts (“Additional Payments”) that include, but are not limited to, marketing allowances, expense reimbursements, and educational payments. These Additional Payments are designed to provide incentives for the sale of the Contracts as well as other products sold by the Company and may influence the financial intermediary or its registered representative to recommend the purchase of this Contract over competing annuity contracts or other investment options. You may ask your registered representative about these differing and divergent interests, how your registered representative is personally compensated, and how your registered representative’s broker-dealer is compensated for soliciting applications for the Contract.

    Service Arrangements and Compensation

    The Company has entered into agreements with the distributors, advisers, and/or the affiliates of some of the mutual funds underlying the Contract and receives compensation for providing certain services including, but not limited to, distribution and operational support services, to the underlying mutual fund. Fees for these services are paid periodically (typically, quarterly or monthly) based on the average daily net asset value of shares of each fund held by

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    the Separate Account and purchased at the Contract owners’ instructions. Because the Company receives such fees, it may be subject to competing interests in making these funds available as investment options under the Contract. The Company takes into consideration the anticipated payments from underlying mutual funds when it determines the charges assessed under the Contract. Without these payments, charges under the Contract are expected to be higher.

    Independent Registered Public Accounting Firm

    The financial statements of Principal Life Insurance Company Separate Account B and the consolidated financial statements of Principal Life Insurance Company are included in the SAI. Those statements have been audited by Ernst & Young LLP, independent registered public accounting firm, for the periods indicated in their reports which also appear in the SAI.

    Financial Statements

    The consolidated financial statements of Principal Life Insurance Company which are included in the SAI should be considered only as they relate to our ability to meet our obligations under the Contract. They do not relate to investment performance of the assets held in the Separate Account.

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    TABLE OF SEPARATE ACCOUNT DIVISIONS

    AIM V.I. Basic Value Division 
     
    Invests in:  AIM V.I. Basic Value Fund –Series I Shares 
    Investment Advisor:  Invesco Aim Advisors, Inc. 
    Investment Objective:  seeks long-term growth of capital. 
     
     
     
    AIM V.I. International Growth Division 
     
    Invests in:  AIM V.I. International Growth Fund – Series I Shares 
    Investment Advisor:  Invesco Aim Advisors, Inc. 
    Investment Objective:  Seeks to provide long-term growth of capital by investing in a diversified portfolio of 
      international equity securities whose issuers are considered to have strong earnings 
      momentum. 
     
     
     
    AIM V.I. Small Cap Equity Division 
     
    Invests in:  AIM V.I. Small Cap Equity Fund –Series I Shares 
    Investment Advisor:  Invesco Aim Advisors, Inc. 
    Investment Objective:  seeks long-term growth of capital. 
     
     
     
    AllianceBernstein Small Cap Growth Division 
     
    Invests in:  AllianceBernstein Variable Products Series Fund, Inc. – AllianceBernstein Small Cap 
      Growth Portfolio – Class A 
    Investment Advisor:  AllianceBernstein L.P. 
    Investment Objective:  seeks growth of capital by pursuing aggressive investment policies. 
     
     
     
    American Century VP Inflation Protection Division 
     
    Invests in:  American Century VP Inflation Protection Fund – Class II 
    Investment Advisor:  American Century Investment Management, Inc. 
    Investment Objective:  seeks long-term total return using a strategy that seeks to protect against U.S. inflation. 
     
     
     
    American Century VP Ultra Division 
     
    Invests in:  American Century VP Ultra Fund – Class II 
    Investment Advisor:  American Century Investment Management, Inc. 
    Investment Objective:  seeks long-term capital growth by investing primarily in stocks of U.S. companies. 

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    American Century VP Vista Division 
     
    Invests in:  American Century VP Vista Fund – Class I 
    Investment Advisor:  American Century Investment Management, Inc. 
    Investment Objective:  seeks long term capital growth. 
     
     
     
    Dreyfus Investment Portfolio Technology Growth Division 
     
    Invests in:  Dreyfus Investment Portfolio Technology Growth Portfolio – Service Class 
    Investment Advisor:  The Dreyfus Corporation 
    Investment Objective:  seeks capital appreciation. 
     
     
     
    Fidelity VIP Contrafund® Division 
     
    Invests in:  Fidelity VIP Contrafund® Portfolio – Service Class 2 
    Investment Advisor:  Fidelity Management & Research Company 
    Investment Objective:  seeks long-term capital appreciation. 
     
     
     
    Fidelity VIP Equity-Income Division 
     
    Invests in:  Fidelity VIP Equity-Income Portfolio – Service Class 2 
    Investment Advisor:  Fidelity Management & Research Company 
    Investment Objective:  seeks reasonable income. The fund will also consider the potential for capital appreciation. 
      The fund’s goal is to achieve a yield which exceeds the composite yield on the securities 
    comprising the Standard & Poor’s 500/SM/ Index (S&P 500®).
     
     
     
    Fidelity VIP Growth Division 
     
    Invests in:  Fidelity VIP Growth Portfolio – Service Class 2 
    Investment Advisor:  Fidelity Management & Research Company 
    Investment Objective:  seeks to achieve capital appreciation. 
     
     
     
    Fidelity VIP Mid Cap Division 
     
    Invests in:  Fidelity VIP Mid Cap Portfolio – Service Class 2 
    Investment Advisor:  Fidelity Management & Research Company 
    Investment Objective:  seeks long-term growth of capital. 

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    Fidelity VIP Overseas Division 
     
    Invests in:  Fidelity VIP Overseas Portfolio – Service Class 2 
    Investment Advisor:  Fidelity Management & Research Company 
    Investment Objective:  seeks long-term growth of capital. 
     
     
     
    Goldman Sachs VIT Structured Small Cap Equity Division 
     
    Invests in:  Goldman Sachs VIT – Goldman Sachs Structured Small Cap Equity Fund - Institutional 
      Shares 
    Investment Advisor:  Goldman Sachs Asset Management, L.P. 
    Investment Objective:  seeks long-term growth of capital. 
     
     
     
    Goldman Sachs VIT Mid Cap Value Division 
     
    Invests in:  Goldman Sachs VIT – Goldman Sachs Mid Cap Value Fund – Institutional Shares 
    Investment Advisor:  Goldman Sachs Asset Management, L.P. 
    Investment Objective:  seeks long-term growth of capital. 
     
     
     
    MFS VIT Utilities Division   
     
    Invests in:  MFS VIT Utilities Series - Service Class 
    Investment Advisor:  Massachusetts Financial Services Company 
    Investment Objective:  seek total return. 
     
     
     
    MFS VIT Value Division   
     
    Invests in:  MFS VIT Value Series - Service Class 
    Investment Advisor:  Massachusetts Financial Services Company 
    Investment Objective:  seek capital appreciation. 
     
     
     
    Neuberger Berman AMT Small Cap Growth Portfolio - S Class 
     
    Invests in:  Neuberger Berman AMT Small-Cap Growth Portfolio – S Class 
    Investment Advisor:  Neuberger Berman Management Inc. 
    Investment Objective:  seeks long-term capital growth. 

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    www.principal.com     

    Neuberger Berman AMT Partners Division   
     
      Invests in:  Neuberger Berman AMT Partners Portfolio – I Class 
    Investment Advisor:  Neuberger Berman Management Inc.   
    Investment Objective:  seeks growth of capital.   
     
     
     
    Neuberger Berman AMT Socially Responsive Division   
     
      Invests in:  Neuberger Berman AMT Socially Responsive Portfolio – I Class 
    Investment Advisor:  Neuberger Berman Management Inc.   
    Investment Objective:  seeks long-term growth of capital by investing primarily in securities of companies that 
        meet the fund’s financial criteria and social policy. 
     
     
     
    PIMCO All Asset Division     
     
      Invests in:  PIMCO VIT All Asset Portfolio - Administrative Class 
    Investment Advisor:  Research Affiliates, LLC   
    Investment Objective:  seeks maximum real return consistent with preservation of real capital and prudent 
        investment management.   
     
     
     
    PIMCO Total Return Division   
     
      Invests in:  PIMCO VIT Total Return Portfolio - Administrative Class 
    Investment Advisor:  Pacific Investment Management Company, LLC 
    Investment Objective:  seeks maximum total return, consistent with preservation of capital and prudent investment 
        management.   
     
     
     
    Asset Allocation Division     
     
      Invests in:  Principal Variable Contract Funds Asset Allocation Account – Class 1 
    Investment Advisor:  Morgan Stanley Investment Management, Inc. (doing business as Van Kampen) through a 
    sub-advisory agreement with Principal Management Corporation
    Investment Objective:  to generate a total investment return consistent with the preservation of capital. The 
        Account intends to pursue flexible investment policy in seeking to achieve this investment 
        objective by investing primarily in equity and flexible-income securities. 
     
     
     
    Bond & Mortgage Securities Division   
     
      Invests in:  Principal Variable Contracts Funds Bond & Mortgage Securities Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
        Management Corporation   
    Investment Objective:  to provide as high a level of income as is consistent with preservation of capital and 
        prudent investment risk.   
     
     
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    Diversified International Division 
     
    Invests in:  Principal Variable Contracts Funds Diversified International Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to seek long-term growth of capital by investing in a portfolio of equity securities domiciled 
      in any of the nations of the world. 
     
     
     
    Equity Income Division   
     
    Invests in:  Principal Variable Contracts Funds Equity Income Account – Class 1 
    Investment Advisor:  Edge Asset Management, Inc. through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to seek to provide a relatively high level of current income and long-term growth of income 
      and capital. 
     
     
     
    Government & High Quality Bond Division 
     
    Invests in:  Principal Variable Contracts Funds Government & High Quality Bond Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to seek a high level of current income, liquidity and safety of principal. 
     
     
     
    International Emerging Markets Division 
     
    Invests in:  Principal Variable Contracts Funds International Emerging Markets Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks long-term growth of capital by investing in equity securities of issuers in emerging 
      market countries. 
     
     
     
    International SmallCap Division 
     
    Invests in:  Principal Variable Contracts Funds International SmallCap Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to seek long-term growth of capital. The Account will attempt to achieve its objective by 
      investing primarily in equity securities of non-U.S. companies with comparatively smaller 
      market capitalizations. 

    Principal Investment Plus Variable Annuity SM  TABLE OF SEPARATE ACCOUNT DIVISIONS  91 
    www.principal.com     

    LargeCap Blend II Division 
     
    Invests in:  Principal Variable Contracts Funds LargeCap Blend Account II – Class 1 
    Investment Advisor:  T. Rowe Price Associates through a sub-advisory agreement with Principal Management 
      Corporation 
    Investment Objective:  seeks long-term growth of capital. 
     
     
     
    LargeCap Growth Division 
     
    Invests in:  Principal Variable Contracts Funds LargeCap Growth Account – Class 1 
    Investment Advisor:  Columbus Circle Investors through a sub-advisory agreement with Principal Management 
      Corporation 
    Investment Objective:  to seek growth of capital. The Account seeks to achieve its objective through the purchase 
      primarily of common stocks, but the Account may also invest in other securities. 
     
     
     
    LargeCap Growth I Division 
     
    Invests in:  Principal Variable Contracts Funds LargeCap Growth Account I – Class 1 
    Investment Advisor:  T. Rowe Price Associates through a sub-advisory agreement with Principal Management 
      Corporation 
    Investment Objective:  to provide long-term capital appreciation by investing primarily in growth-oriented common 
      stocks of medium and large capitalization U.S. corporations and, to a limited extent, foreign 
      corporations. 
     
     
     
    LargeCap S&P 500 Index Division 
     
    Invests in:  Principal Variable Contracts Funds LargeCap S&P 500 Index Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to seek long-term growth of capital by investing in stocks of large U.S. companies. The 
      Account attempts to mirror the investment results of the Standard & Poor’s 500 Index. 
     
     
     
    LargeCap Value Division   
     
    Invests in:  Principal Variable Contracts Funds LargeCap Value Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to provide long-term capital appreciation and secondarily growth investment income. The 
      Account seeks to achieve its investment objectives through the purchase primarily of 
    common stocks, but the Account may invest in other securities.

    92  TABLE OF SEPARATE ACCOUNT DIVISIONS  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    LargeCap Value III Division 
     
    Invests in:  Principal Variable Contracts Funds LargeCap Value Account III – Class 1 
    Investment Advisor:  AllianceBernstein, L.P. through a sub-advisory agreement with Principal Management 
      Corporation 
    Investment Objective:  to seek long-term growth of capital 
     
     
     
    MidCap Blend Division   
     
    Invests in:  Principal Variable Contracts Funds MidCap Blend Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to achieve capital appreciation by investing primarily in securities of emerging and other 
      growth-oriented companies. 
     
     
     
    MidCap Growth I Division 
     
    Invests in:  Principal Variable Contracts Funds MidCap Growth Account I – Class1 
    Investment Advisor:  Mellon Equity Associates, LLP through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to seek long-term growth of capital. The Account will attempt to achieve its objective by 
      investing primarily in growth stocks of medium market capitalization companies. 
     
     
     
    MidCap Value II Division   
     
    Invests in:  Principal Variable Contracts Funds MidCap Value Account II – Class 1 
    Investment Advisor:  Jacob Levy Management, Inc. through a sub-advisory agreements with Principal 
      Management Corporation 
    Investment Objective:  seeks long-term growth of capital by investing primarily in equity securities of companies 
    with value characteristics and medium market capitalizations.
     
     
     
    Money Market Division   
     
    Invests in:  Principal Variable Contracts Funds Money Market Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to seek as high a level of current income available from short-term securities as is 
      considered consistent with preservation of principal and maintenance of liquidity by 
      investing all of its assets in a portfolio of money market instruments. 

    Principal Investment Plus Variable Annuity SM  TABLE OF SEPARATE ACCOUNT DIVISIONS  93 
    www.principal.com     

    Mortgage Securities Division   
     
      Invests in:  Principal Variable Contracts Funds Mortgage Securities Account - Class 1 
    Investment Advisor:  Edge Asset Management, Inc. through a sub-advisory agreement with Principal 
        Management Corporation   
    Investment Objective:  seeks to provide a high level of current income consistent with safety and liquidity. 
     
     
     
    LifeTime 2010 Division     
     
      Invests in:  Principal Variable Contracts Funds Principal LifeTime 2010 Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
        Management Corporation   
    Investment Objective:  seeks a total return consisting of long-term growth of capital and current income by 
        investing primarily in shares of other Principal Variable Contracts Funds accounts. 
     
     
     
    LifeTime 2020 Division     
     
      Invests in:  Principal Variable Contracts Funds Principal LifeTime 2020 Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
        Management Corporation   
    Investment Objective:  seeks a total return consisting of long-term growth of capital and current income by 
        investing primarily in shares of other Principal Variable Contracts Funds accounts. 
     
     
     
    Principal LifeTime 2030 Division   
     
      Invests in:  Principal Variable Contracts Funds Principal LifeTime 2030 Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
        Management Corporation   
    Investment Objective:  seeks a total return consisting of long-term growth of capital and current income by 
        investing primarily in shares of other Principal Variable Contracts Funds accounts. 
     
     
     
    Principal LifeTime 2040 Division   
     
      Invests in:  Principal Variable Contracts Funds Principal LifeTime 2040 Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
        Management Corporation   
    Investment Objective:  seeks a total return consisting of long-term growth of capital and current income by 
        investing primarily in shares of other Principal Variable Contracts Funds accounts. 
     
     
     
    Principal LifeTime 2050 Division   
     
      Invests in:  Principal Variable Contracts Funds Principal LifeTime 2050 Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
     
     
    94  TABLE OF SEPARATE ACCOUNT DIVISIONS  Principal Investment Plus Variable Annuity SM 
          1-800-852-4450 

      Management Corporation 
    Investment Objective:  seeks a total return consisting of long-term growth of capital and current income by 
      investing primarily in shares of other Principal Variable Contracts Funds accounts 

    Principal Investment Plus Variable Annuity SM  TABLE OF SEPARATE ACCOUNT DIVISIONS  95 
    www.principal.com     

    Principal LifeTime Strategic Income Division 
     
    Invests in:  Principal Variable Contracts Funds Principal LifeTime Strategic Income Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks high current income by investing primarily in shares of other Principal Variable 
      Contracts Funds accounts 
     
     
     
    Real Estate Securities Division 
     
    Invests in:  Principal Variable Contracts Funds Real Estate Securities Account – Class 1 
    Investment Advisor:  Principal Real Estate Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to seek to generate a high total return. The Account will attempt to achieve its objective by 
      investing primarily in equity securities of companies principally engaged in the real estate 
      industry. 
     
     
     
    Short-Term Bond Division 
     
    Invests in:  Principal Variable Contracts Funds Short-Term Bond Account – Class 1 
    Investment Advisor:  Principal Global Investors, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  to provide current income. 
     
     
     
    Short-Term Income Division 
     
    Invests in:  Principal Variable Contracts Funds Short-Term Income Account - Class 1 
    Investment Advisor:  Edge Asset Management, Inc. through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks to provide as high a level of current income as is consistent with prudent investment 
      management and stability of principal. 
     
     
     
    SmallCap Growth II Division 
     
    Invests in:  Principal Variable Contracts Funds SmallCap Growth Account II – Class 1 
    Investment Advisor:  Emerald Advisors, Inc. through a sub-advisory agreement; Essex Investment Management 
      Company, LLC through a sub-advisory agreement; UBS Global Asset Management 
      (Americas) Inc. through a sub-advisory agreement with Principal Management Corporation 
    Investment Objective:  to seek long-term growth of capital. The Account will attempt to achieve its objective by 
      investing primarily in equity securities of growth companies with comparatively smaller 
      market capitalizations. 

    96  TABLE OF SEPARATE ACCOUNT DIVISIONS  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    SmallCap Value I Division 
     
    Invests in:  Principal Variable Contracts Funds SmallCap Value Account I – Class 1 
    Investment Advisor:  J.P. Morgan Investment Management, Inc., through a sub-advisory agreement and Mellon 
      Equity Associates, LLP through a sub-advisory agreement with Principal Management 
      Corporation 
    Investment Objective:  to seek long-term growth of capital by investing primarily in equity securities of small 
      companies with value characteristics and comparatively smaller market capitalizations. 
     
     
     
    SAM Balanced Division   
     
    Invests in:  Principal Variable Contracts Funds Strategic Asset Management Balanced Portfolio – 
      Class 1 
    Investment Advisor:  Edge Asset Management, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks to provide as high a level of total return (consisting of reinvested income and capital 
      appreciation) as is consistent with reasonable risk 
     
     
     
    SAM Conservative Balanced Division 
     
    Invests in:  Principal Variable Contracts Funds Strategic Asset Management Conservative Balanced 
      Portfolio – Class 1 
    Investment Advisor:  Edge Asset Management, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks to provide a high level of total return (consisting of reinvestment of income and 
      capital appreciation), consistent with a moderate degree of principal risk. 
     
     
     
    SAM Conservative Growth Division 
     
    Invests in:  Principal Variable Contracts Funds Strategic Asset Management Conservative Growth 
      Portfolio – Class 1 
    Investment Advisor:  Edge Asset Management, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks to provide long-term capital appreciation. 
     
     
     
    SAM Flexible Income Division 
     
    Invests in:  Principal Variable Contracts Funds Strategic Asset Management Flexible Income Portfolio 
      – Class 1 
    Investment Advisor:  Edge Asset Management, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks to provide a high level of total return (consisting of reinvestment of income with some 
      capital appreciation). 

    Principal Investment Plus Variable Annuity SM  TABLE OF SEPARATE ACCOUNT DIVISIONS  97 
    www.principal.com     

    SAM Strategic Growth Division 
     
    Invests in:  Principal Variable Contracts Funds Strategic Asset Management Strategic Growth Portfolio 
      – Class 1 
    Investment Advisor:  Edge Asset Management, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks to provide long-term capital appreciation. 
     
     
     
    West Coast Equity Division 
     
    Invests in:  Principal Variable Contracts Funds West Coast Equity Account – Class 1 
    Investment Advisor:  Edge Asset Management, LLC through a sub-advisory agreement with Principal 
      Management Corporation 
    Investment Objective:  seeks long-term growth of capital and willing to accept the risks of investing in common 
      stocks that may have greater risks than stocks of companies with lower potential for 
      earnings growth. 
     
     
     
    T. Rowe Price Blue Chip Growth Division 
     
    Invests in:  T. Rowe Price Blue Chip Growth Portfolio – II 
    Investment Advisor:  T. Rowe Price Associates Inc. 
    Investment Objective:  seeks to provide long-term capital growth. 
     
     
     
    T. Rowe Price Health Sciences Division 
     
    Invests in:  T. Rowe Price Health Sciences Portfolio – II 
    Investment Advisor:  T. Rowe Price Associates Inc. 
    Investment Objective:  seeks long-term capital appreciation. 
     
     
     
    Van Eck World Hard Assets Division 
     
    Invests in:  Van Eck Worldwide Insurance Trust - Worldwide Hard Assets Fund - Class S Shares 
    Investment Advisor:  Van Eck Associates Corporation 
    Investment Objective:  seeks long-term capital appreciation by investing primarily in "hard asset" securities. 
      Income is a secondary consideration. 

    98  TABLE OF SEPARATE ACCOUNT DIVISIONS  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    REGISTRATION STATEMENT

    This prospectus (Part A of the registration statement) omits some information contained in the Statement of Additional Information (Part B of the registration statement) and Part C of the registration statement which the Company has filed with the SEC. The SAI is hereby incorporated by reference into this prospectus. You may request a free copy of the SAI by contacting your registered representative or calling us at 1-800-852-4450.

    Information about the Contract (including the Statement of Additional Information and Part C of the registration statement) can be reviewed and copied at the Securities and Exchange Commission’s Public Reference Room in Washington, D.C. Information on the operation of the public reference room may be obtained by calling the Commission at 202-551-8090. Reports and other information about the Contract are available on the Commission’s internet site at http://www.sec.gov. Copies of this information may be obtained, upon payment of a duplicating fee, by writing the Public Reference Section of the Commission, 100 F Street NE, Washington, D.C. 20549-0102.

    The registration numbers for the Contract are 333-116220 and 811-02091.

    CUSTOMER INQUIRIES

    Your questions should be directed to: Principal Investment Plus Variable Annuity, Principal Financial Group, P.O. Box 9382, Des Moines, Iowa 50306-9382, 1-800-852-4450. You may also contact us through our internet site: www.principal.com.

      TABLE OF CONTENTS OF THE SAI

     General Information and History  3 
     Independent Registered Public Accounting Firm  3 
     Principal Underwriter  3 
     Calculation of Performance Data  3 
     Taxation Under Certain Retirement Plans  10 
     Principal Life Insurance Company Separate Account B   
           Report of Independent Registered Public Accounting Firm  14 
           Financial Statements  16 
     Principal Life Insurance Company   
           Report of Independent Registered Public Accounting Firm  142 
           Consolidated Financial Statements  143 
    To obtain a copy of the Statement of Additional Information, free of charge, write or telephone:   
    Princor Financial Services Corporation   
    a company of   
    the Principal Financial Group   
    Des Moines, IA 50392-2080   
    Telephone: 1-800-852-4450   

    Principal Investment Plus Variable Annuity SM  REGISTRATION STATEMENT  99 
    www.principal.com     

    APPENDIX A - PRINCIPAL VARIABLE ANNUITY EXCHANGE OFFER

    Principal Variable Annuity Exchange Offer (“exchange offer”)

    Commencing July 22, 2009, owners of an eligible Principal Variable Annuity contract may elect to exchange their Principal Variable Annuity contract (“old contract”) for a new Principal Investment Plus Variable Annuity contract ("new contract") subject to the exchange offer terms and conditions. To determine if it is in your best interest to participate in the exchange offer, we recommend that you consult with your tax advisor and financial professional before electing to participate in the exchange offer.

    You are eligible to participate in the exchange offer when:

    • your old contract is not subject to any surrender charges;
    • available in your state; and
    • your old contract has reached the contract anniversary following July 22, 2009.

    Exchange Offer Terms and Conditions

    • You must qualify for and elect an available GMWB rider. To qualify for the GMWB rider, you (or the annuitant if the owner is a non-natural person) must be age 80 or younger (GMWB 1 Rider) or between the ages of 45 and 80 (GMWB 2-SL/JL rider).
    • You must receive a current prospectus for the new contract.
    • You must complete all required exchange offer forms.
    • The Premium Payment Credit Rider is not available on the new contract.
    • If we approve your application to participate in the exchange offer, you are directing that all of your investment options under your old contract be redeemed. The redemption amount will be transferred to your new contract and allocated as you direct. Election of a GMWB rider results in restriction of your Contract investment options to the more limited GMWB investment options (see new contract prospectus for further details).
    • The amount being exchanged to the new contract cannot be allocated to the DCA Plus Accounts.
    • Any new premium payments (excluding the amount transferred under this exchange offer) you make to the new contract are subject to surrender charges.
    • At contract issue the death benefit under your new contract will be the greater of the death benefit under your old contract on the exchange date or the death benefit under the new contract.
    • We reserve the right to require you to return your old contract to us. Upon issuing you a new contract, your old contract will terminate.
    • The exchange offer is not available for partial exchanges.
    • Only one old contract can be exchanged for one new contract.

    Exchange Offer Duration

    The exchange offer is scheduled to commence on July 22, 2009. Currently, there is no closing date for the exchange offer. We reserve the right, however, to modify the exchange offer commencement date and to modify or terminate the exchange offer upon reasonable written notice to you.

      IMPORTANT CONSIDERATIONS

    An exchange may or may not be in your best interest.

    The features and benefits, investment options, and charges and deductions of the new contract differ from those of your old contract. For your convenience, we have provided the following chart with a side-by-side summary comparison of the features and costs of your old contract and the new contract available under the exchange offer. There may be additional differences important for you to consider prior to making an exchange. You should carefully review the prospectus for your old contract and compare it to the new contract prospectus before deciding to make an exchange. To obtain a prospectus, please contact us at 1-800-852-4450.

    100 APPENDIX A - Principal variable annuity exchange offer

    Principal Investment Plus Variable Annuity SM
    1-800-852-4450

    CHART: Summary Comparison* of Principal Variable Annuity and New Contract (Investment Plus Variable Annuity with GMWB Rider)

    To participate in the exchange offer you must elect one of the GMWB riders.

    A. Features  Old Contract   New Contract 
     
    GMWB Riders  Not available   GMWB 1 
         GMWB 2-SL/JL 
     
    --Available** Separate Account  49   61 
    Divisions     
     
    --Fixed Rate Options (including 2  1 year - Fixed Account   1 year - Fixed Account 
    dollar-cost averaging options)  6 month - DCA Plus Account   6 month - DCA Plus Account**** 
      12 month - DCA Plus Account   12 month - DCA Plus Account**** 
     
    Automatic Portfolio Rebalancing  Available   Same 
     
    No. of Free Division Transfers/  12   1 
    Contract Year     
     
     
    B. Annuitization  Old Contract  New Contract 
     
    Annuity Benefit Payments First  Any time  Any time on/after the first contract 
    Available    anniversary 
     
    Annuity Benefit Payments  Fixed annuity benefit payments  Same 
     
    Annuity Mortality Table  1983a Annuity Mortality Table  Annuity 2000 Mortality Table 
     
    Annuity Benefit Payment Options  Fixed period; life income; life  Same 
    income with fixed period; custom
      options   
     
     
    C. Death Benefit  Old Contract  New Contract 
     
    Base Death Benefit  An amount equal to the greatest of  An amount equal to the greatest of 
      (i) total premium payments less  (i) total premium payments less 
      surrenders, or  surrenders, or 
      (ii) contract value, or  (ii) contract value, or 
      (iii) 7 year Step-Up  (iii) 7 year Step-Up 
     
      For partial surrenders from Old  For partial surrenders, the death 
      Contracts prior to November 23,  benefit is reduced proportionately 
      2003, the death benefit is reduced  for each withdrawal. 
      by the amount of each withdrawal.   
     
    For partial surrenders from Old  
      Contracts issued on or after   
      November 23, 2003, the death   
      benefit is reduced proportionately   
      for each withdrawal.   

    Principal Investment Plus Variable Annuity SM  APPENDIX A - Principal variable annuity exchange offer  101 
    www.principal.com     

    Optional Enhanced Death Benefit  Available  Available 
    Rider     
     
    Payable  1st owner or annuitant to die  1st owner to die 

    102 APPENDIX A - Principal variable annuity exchange offer

    Principal Investment Plus Variable Annuity SM
    1-800-852-4450

    D. Fees and Charges  Old Contract  New Contract 
     
    Annual Fee (waived for contracts with  Lesser of $30 or 2% of contract  Same 
    accumulated value of $30,000 or  accumulated value   
    more)     
     
     
    Mortality and Risk Charges***  1.25%  Same 
     
    Administration Charge*** (on an  Maximum: 0.15%  Same 
    annual basis)     
      Current: 0.00%   
     
    Underlying Mutual Funds  Maximum Annual: 1.62%  Maximum Annual: 1.80% 
     
      Minimum Annual: 0.30%  Minimum Annual: 0.30% 
     
     
     
    -AND-
     
    GMWB1 Rider  Old Contract  New Contract 
     
    --Taken as % of average quarterly  Not available  Maximum Annual: 0.85% 
    Investment Back remaining     
    withdrawal benefit base.    Current Annual: 0.80% 
     
    -OR-     
     
    GMWB2 – SL/JL  Old Contract  New Contract 
     
    --Taken as % of average quarterly  Not available  Maximum Annual: 1.00% 
    Investment Back withdrawal benefit     
    base.    Current Annual: 0.95% 
     
    E. Transaction Charges  Old Contract  New Contract 
     
    Surrender Charge Period and % of  7 years (6,6,6,5,4,3,2)  7 years (6,6,6,5,4,3,2) 
    amount surrendered (applies only to     
    new premium payments)  9 years (8,8,8,8,7,6,5,4,3) if you   Premium Payment Credit Rider not 
      elected the Purchase Payment  available 
      Credit Rider   
     
    Unscheduled Partial Surrender  Maximum: lesser of $25 or 2% of  Maximum: lesser of $25 or 2% of 
      each unscheduled partial  each unscheduled partial surrender 
      surrender after the 1st in a contract  after the 12th in a contract year. 
      year.   
     
      Current: $0/0%  Current $0/0% 

    Principal Investment Plus Variable Annuity SM  APPENDIX A - Principal variable annuity exchange offer  103 
    www.principal.com     

    Unscheduled Transfers  Maximum: lesser of $30 or 2% of  Mximum: less of $30 or 2% of each 
      each unscheduled transfer after  unscheduled transfer after the 1st in 
      the 12th in a contract year.  a contract year. 
     
      Current: $0/0%  Current: $0/0% 

    *Does not reflect state variations.

    **Investment Plus Variable Annuity has 61 Separate Account Divisions; choice is limited to 49 due to GMWB Rider. ***Charges taken daily as % of average daily Separate Account Division accumulated value.

    ****Only available for new premium payments. The DCA Plus Accounts are not available for the amount being exchanged.

    Although we believe that an exchange (as described in this Appendix) will not be a taxable event for Federal tax purposes, we recommend that you consult your tax adviser before electing to participate in the exchange offer.

    Charges and Expenses

    The new contract and your old contract have different annual expenses, different transaction charges, and different investment options that may result in different underlying mutual fund expenses. Please see the comparison chart above for details.

    Surrender Charges

    Under the exchange offer, surrender charges will not apply on any amounts transferred from the old contract to the new contract. Surrender charges under the new contract will only apply to new contract premium payments.

    Death Benefit

    The death benefit in the new contract will be calculated as specified in the prospectus for the new contract. At the time of the exchange, the death benefit from the old contract will be transferred to the new contract and will be adjusted for new premium payments made and withdrawals taken under the new contract ("adjusted old contract death benefit").

    Upon your death we will pay the greater of the new contract death benefit or this "adjusted old contract death benefit".

    GMWB Rider

    The new contract offers two GMWB (Investment Protector Plus) riders not available under the old contract. These two riders are GMWB 1 (Investor Protector Plus) and GMWB 2 SL/JL (Investor Protector Plus 2). A GMWB rider allows you to take certain guaranteed annual withdrawals, regardless of your Contract accumulated value. A GMWB rider also allows your beneficiary(ies) to choose a death benefit under the Contract or death benefit available under the rider. You may add only one GMWB rider to your Contract. You must qualify for and elect a GMWB rider when you purchase the new contract.

    The GMWB riders offer a Step-Up feature that is either annual or once every five years, depending on which rider you select. A Step-Up can increase your rider withdrawal benefit payments if your Contract accumulated value increases. The Contract accumulated value increases whenever additional premium payments are made, the division values rise with market growth, or credits (from the Premium Payment Credit Rider) are applied.

    The GWMB riders also offer a GMWB Bonus that differs between the riders. A GMWB Bonus rewards you for not taking a withdrawal in certain early years of the rider. A GMWB Bonus amount will provide a modest increase to your rider withdrawal benefit payments. The GMWB Bonus does not increase your Contract accumulated value.

    104 APPENDIX A - Principal variable annuity exchange offer

    Principal Investment Plus Variable Annuity SM
    1-800-852-4450

    Once elected, a GMWB rider may not be terminated for five contract years.

    Election of a GMWB rider results in restriction of your Contract investment options to the more limited GMWB investment options (see new contract prospectus for further details). The GMWB investment options reflect a balanced investment objective that is intended to support the rider guarantees. If your investment objective is aggressive growth, the rider investment restrictions may not support your investment objective.

    Please review the new contract prospectus for additional information regarding the GMWB riders and whether a GMWB rider is appropriate for your needs.

    Tax Matters

    Although we believe that an exchange as described in this Appendix will not be a taxable event for Federal tax purposes, we recommend that you consult your tax advisor before electing to participate in the exchange offer.

    There may be differences between your old contract, as amended by tax-qualified retirement plan endorsements, and the new contract, as amended by similar qualified plan endorsements. If you are using the old contract in connection with a tax-qualified retirement plan, you should consult a tax advisor before electing to participate in the exchange offer. See also the FEDERAL TAX MATTERS section of this prospectus.

    Principal Investment Plus Variable Annuity SM  APPENDIX A - Principal variable annuity exchange offer  105 
    www.principal.com     

    APPENDIX B — CONDENSED FINANCIAL INFORMATION

    Financial statements are included in the Statement of Additional Information.

    The following table contains the unit values for the Contract without the Premium Payment Credit Rider for the periods ended December 31.

      For Contracts Without the Premium Payment Credit Rider 
      Accumulation Unit Value
              Number of 
              Accumulation Units 
            Percentage  Outstanding 
        Beginning of    Change from  End of Period 
      Division  Period  End of Period  Prior Period  (in thousands) 
     
       AIM V.I. Basic Value         
      2008  $13.154  $6.265  -55.69%  91 
      2007  13.118  13.154  0.28  69 
      2006  11.733  13.118  11.80  49 
      2005(1)  11.307  11.733  3.77  5 
       AIM V.I. International Growth         
      2008(2)  10.000  6.076  -39.24  14 
       AIM V.I. SmallCap Equity         
      2008  14.762  10.014  -32.16  82 
      2007  14.212  14.762  3.87  50 
      2006  12.253  14.212  15.99  25 
      2005(1)  11.498  12.253  6.57  6 
       AllianceBernstein Small Cap Growth         
      2008  15.526  8.349  -46.23  109 
      2007  13.782  15.526  12.65  78 
      2006  12.608  13.782  9.31  53 
      2005(1)  11.857  12.608  6.33  18 
       American Century VP Inflation Protection         
      2008  11.087  10.773  -2.83  4,752 
      2007  10.250  11.087  8.17  5,125 
      2006  10.216  10.250  0.33  3,389 
      2005(1)  10.127  10.216  0.88  1,227 
       American Century VP Ultra         
      2008  12.863  7.412  -42.38  4,883 
      2007  10.779  12.863  19.33  3,530 
      2006  11.297  10.779  –4.59  2,714 
      2005(1)  10.962  11.297  3.06  911 
       American Century VP Vista         
      2008  18.553  9.413  -49.26  125 
      2007  13.441  18.553  38.03  87 
      2006  12.485  13.441  7.66  39 
      2005(1)  11.980  12.485  -4.22  71 
       Dreyfus Technology Growth         
      2008  13.760  7.984  -41.98  60 
      2007  12.176  13.760  13.01  38 
      2006  11.851  12.176  2.75  25 
      2005(1)  10.954  11.851  8.19  10 
       Fidelity VIP Contrafund®         
      2008  16.698  9.450  -43.41  2,410 
     
     
    106                     APPENDIX B — CONDENSED FINANCIAL INFORMATION  Principal Investment Plus Variable Annuity SM 
                             1-800-852-4450 

           2007  14.415  16.698  15.84  2,031   
           2006  13.098  14.415  10.05  1,240   
           2005(1)  11.562  13.098  13.29  427   
       Fidelity VIP Equity-Income           
           2008  13.952  7.879  -43.53  572   
           2007  13.951  13.952  0.01  686   
           2006  11.779  13.951  18.44  347   
           2005(1)  11.373  11.779  3.57  94   
       Fidelity VIP Growth           
           2008  15.069  7.841  -47.97  436   
           2007  12.048  15.069  25.07  376   
           2006  11.447  12.048  5.25  204   
           2005(1)  10.809  11.447  5.90  59   
       Fidelity VIP Mid Cap           
           2008  17.768  10.597  -40.36  357   
           2007  15.600  17.768  13.90  321   
           2006  14.053  15.600  11.01  198   
           2005(1)  12.492  14.053  12.50  36   
       Fidelity VIP Overseas           
           2008  18.498  10.237  -44.66  2,623   
           2007  16.003  18.498  15.59  2,013   
           2006  13.759  16.003  16.31  1,503   
           2005(1)  11.951  13.759  15.13  581   
       Goldman Sachs VIT Mid Cap Value           
           2008  15.148  9.417  -37.83  981   
           2007  14.863  15.148  1.92  925   
           2006  12.956  14.863  14.72  550   
           2005(1)  11.892  12.956  8.95  162   
       Goldman Sachs VIT Structured Small Cap Equity           
           2008  11.118  7.244  -34.84  322   
           2007  13.481  11.118  –17.53  287   
           2006  12.159  13.481  10.87  189   
           2005(1)  11.502  12.159  5.77  63   
       Neuberger Berman AMT Small Cap Growth           
           2008  11.492  6.869  -40.23  179   
           2007  11.578  11.492  –0.74  163   
           2006  11.138  11.578  3.95  104   
           2005(1)  10.677  11.138  4.32  35   
       Neuberger Berman AMT Partners           
           2008  16.356  7.689  -52.99  356   
           2007  15.148  16.356  7.97  327   
           2006  13.666  15.148  10.84  209   
           2005(1)  12.298  13.666  11.12  40   
       Neuberger Berman Socially Responsive           
           2008  14.471  8.654  -40.20  338   
           2007  13.617  14.471  6.27  265   
           2006  12.126  13.617  12.30  144   
           2005(1)  11.467  12.126  5.75  54   
       T. Rowe Price Blue Chip Growth           
           2008  13.879  7.860  -43.37  114   
           2007  12.494  13.879  11.09  87   
           2006  11.571  12.494  7.98  51   
           2005(1)  10.774  11.571  7.40  34   
       T. Rowe Price Health Sciences           
           2008  15.836  11.076  -30.06  262   
     
    Principal Investment Plus Variable Annuity SM  APPENDIX B — CONDENSED FINANCIAL INFORMATION  107 
    www.principal.com           

           2007  13.623  15.836  16.24  181 
           2006  12.722  13.623  7.08  113 
           2005(1)  10.642  12.722  19.55  34 
       Asset Allocation       
           2008  26.647  19.778  -25.78  296 
           2007  24.140  26.647  10.39  254 
           2006  21.674  24.140  11.38  170 
           2005(1)  20.667  21.674  4.87  72 
       Bond & Mortgage Securities       
           2008  19.317  15.821  -18.10  4,452 
           2007  18.916  19.317  2.12  4,627 
           2006  18.302  18.916  3.35  2,822 
           2005(1)  18.080  18.302  1.23  1,000 
       Diversified International       
           2008  31.029  16.480  -46.89  1,267 
           2007  27.066  31.029  14.64  1,077 
           2006  21.417  27.066  26.38  612 
           2005(1)  18.156  21.417  17.96  184 
       Equity Income       
           2008  10.378  6.770  -34.77  12,992 
           2007(3)  10.000  10.378  3.78  11,013 
       Government & High Quality Bond       
           2008  19.074  18.529  -2.86  1,896 
           2007  18.413  19.074  3.59  1,697 
           2006  17.888  18.413  2.93  1,035 
           2005(1)  17.677  17.888  1.19  382 
       International Emerging Markets       
           2008  41.619  18.554  -55.42  756 
           2007  29.657  41.619  40.33  658 
           2006  21.709  29.657  36.61  368 
           2005(1)  17.761  21.709  22.23  131 
       International SmallCap       
           2008  33.257  16.327  -50.91  589 
           2007  30.833  33.257  7.86  571 
           2006  23.945  30.833  28.77  362 
           2005(1)  19.894  23.945  20.36  146 
       LargeCap Blend II (f/k/a LargeCap Blend)       
           2008  13.506  8.482  -37.20  6,947 
           2007  13.010  13.506  3.81  5,847 
           2006  11.374  13.010  14.38  3,901 
           2005(1)  10.969  11.374  3.69  1,448 
       LargeCap Growth       
           2008  22.461  12.607  -43.87  361 
           2007  18.462  22.461  21.66  236 
           2006  17.007  18.462  8.56  125 
           2005(1)  15.349  17.007  10.80  23 
       LargeCap Growth I       
           2008  32.193  18.883  -41.34  232 
           2007  30.042  32.193  7.16  194 
           2006  28.640  30.042  4.90  129 
           2005(1)  25.496  28.640  12.33  40 
       LargeCap S&P 500 Index       
           2008  10.978  6.820  -37.88  1,888 
           2007  10.573  10.978  3.83  1,455 
           2006  9.263  10.573  14.14  891 
     
    108  APPENDIX B — CONDENSED FINANCIAL INFORMATION  Principal Investment Plus Variable Annuity SM 
             1-800-852-4450 

           2005(1)  8.972  9.263  3.24  350   
       LargeCap Value           
           2008  28.988  18.560  -35.97  362   
           2007  29.384  28.988  –1.35  390   
           2006  24.803  29.384  18.47  209   
           2005(1)  24.041  24.803  3.17  84   
       LargeCap Value III           
           2008  13.977  8.173  -41.53  6,150   
           2007  14.699  13.977  -4.91  4,943   
           2006  12.245  14.699  20.04  3,113   
           2005(1)  11.936  12.245  2.59  1,132   
       MidCap Blend           
           2008  41.530  27.098  -34.75  1,393   
           2007  38.425  41.530  8.08  1,220   
           2006  34.060  38.425  12.82  815   
           2005(1)  31.455  34.060  8.28  319   
       MidCap Growth I           
           2008  13.689  7.957  -41.87  391   
           2007  12.513  13.689  9.40  332   
           2006  11.555  12.513  8.29  185   
           2005(1)  10.382  11.555  11.30  67   
       MidCap Value II           
           2008  16.596  9.191  -44.62  2,556   
           2007  16.981  16.596  –2.27  2,027   
           2006  15.179  16.981  11.87  1,276   
           2005(1)  14.153  15.179  7.25  498   
       Money Market           
           2008  14.280  14.466  1.30  2,954   
           2007  13.786  14.280  3.58  894   
           2006  13.342  13.786  3.33  371   
           2005(1)  13.173  13.342  1.28  166   
       Mortgage Securities           
           2008(4)  10.000  10.094  0.94  12   
       Principal LifeTime 2010           
           2008  12.910  8.809  -31.77  2,466   
           2007  12.603  12.910  2.44  2,499   
           2006  11.363  12.603  10.91  1,605   
           2005(1)  10.886  11.363  4.38  904   
       Principal LifeTime 2020           
           2008  13.682  8.896  -34.98  9,751   
           2007  13.212  13.682  3.56  8,959   
           2006  11.616  13.212  13.74  5,303   
           2005(1)  11.020  11.616  5.41  1,657   
       Principal LifeTime 2030           
           2008  13.780  8.652  -37.21  1,333   
           2007  13.168  13.780  4.65  1,138   
           2006  11.612  13.168  13.40  677   
           2005(1)  11.037  11.612  5.21  190   
       Principal LifeTime 2040           
           2008  14.107  8.615  -38.93  591   
           2007  13.409  14.107  5.21  555   
           2006  11.793  13.409  13.70  278   
           2005(1)  11.180  11.793  5.48  93   
       Principal LifeTime 2050           
           2008  14.195  8.544  -39.81  305   
     
    Principal Investment Plus Variable Annuity SM  APPENDIX B — CONDENSED FINANCIAL INFORMATION  109 
    www.principal.com           

       2007  13.482  14.195  5.29  271 
       2006  11.820  13.482  14.06  168 
       2005(1)  11.208  11.820  5.46  27 
    Principal LifeTime Strategic Income         
       2008  12.204  9.173  -24.84  1,026 
       2007  12.101  12.204  0.85  1,246 
       2006  11.113  12.101  8.89  851 
       2005(1)  10.650  11.113  4.35  446 
    Real Estate Securities         
       2008  29.571  19.606  -33.70  417 
       2007  36.380  29.571  –18.72  414 
       2006  26.965  36.380  34.92  286 
       2005(1)  22.385  26.965  20.46  81 
    SAM Balanced         
       2008  10.314  7.519  -27.10  23,851 
       2007(5)    10.314    2,332 
    SAM Conservative Balanced         
       2008  10.286  8.206  -20.22  4,867 
       2007(5)  10.000  10.286  2.86  599 
    SAM Conservative Growth         
       2008  10.314  6.813  -33.94  1,434 
       2007(5)  10.000  10.314  3.14  410 
    SAM Flexible Income         
       2008  10.222  8.706  -14.83  4,008 
       2007(5)  10.000  10.222  2.22  109 
    SAM Strategic Growth         
       2008  10.308  6.370  -38.20  1,229 
       2007(5)  10.000  10.308  3.08  401 
    Short-Term Bond         
       2008  10.517  9.173  -12.78  6,672 
       2007  10.333  10.517  1.78  6,933 
       2006  10.017  10.333  3.15  4,270 
       2005(1)  9.922  10.017  0.96  1,671 
    Short-Term Income         
       2008(4)  10.000  9.986  -0.14  19 
    SmallCap Growth II         
       2008  11.154  6.483  -41.88  498 
       2007  10.758  11.154  3.68  418 
       2006  9.996  10.758  7.62  244 
       2005(1)  9.337  9.996  7.06  65 
    SmallCap Value I         
       2008  23.221  15.635  -32.67  1,766 
       2007  25.988  23.221  –10.65  1,639 
       2006  22.179  25.988  17.17  950 
       2005(1)  20.935  22.179  5.94  362 
    West Coast Equity         
       2008  10.360  6.817  -34.20  203 
       2007  10.000  10.360  3.60  92,800 

    (1)      Commenced Operations on March 1, 2005
    (2)      Commenced Operations on May 16, 2008
    (3)      Commenced Operations on January 12, 2007
    (4)      Commenced Operations on November 21, 2008
    (5)      Commenced Operations on May 1, 2007

    The following table contains the unit values for the Contract with the Premium Payment Credit Rider for the periods ended December 31.

    110 APPENDIX B — CONDENSED FINANCIAL INFORMATION

    Principal Investment Plus Variable Annuity SM
    1-800-852-4450

      For Contracts With the Premium Payment Credit Rider 
      Accumulation Unit Value   
            Number of 
            Accumulation Units 
          Percentage  Outstanding 
      Beginning of  End of  Change from  End of Period 
                                                         Division       Period  Period  Prior Period  (in thousands) 
    AIM V.I. Basic Value         
       2008  $12.891  $6.103  -52.66%  45 
       2007  12.933  12.891  -0.33  45 
       2006  11.638  12.933  11.13  33 
       2005(1)  11.272  11.638  3.25  8 
    AIM V.I. International Growth         
       2008(2)  10.000  6.053  -39.47  4 
    AIM V.I. SmallCap Equity         
       2008  14.467  9.755  -32.57  51 
       2007  14.012  14.467  3.25  51 
       2006  12.154  14.012  15.29  30 
       2005(1)  11.462  12.154  6.04  7 
    AllianceBernstein Small Cap Growth         
       2008  15.216  8.133  -46.55  38 
       2007  13.589  15.216  11.97  41 
       2006  12.506  13.589  8.66  19 
       2005(1)  11.819  12.506  5.81  4 
    American Century VP Inflation Protection         
       2008  10.865  10.494  -3.41  1,573 
       2007  10.106  10.865  7.51  1,864 
       2006  10.133  10.106  –0.27  1,377 
       2005(1)  10.095  10.133  –0.37  560 
    American Century VP Ultra         
       2008  12.606  7.220  -42.73  1,731 
       2007  10.627  12.606  18.62  1,347 
       2006  11.205  10.627  -5.16  1,128 
       2005(1)  10.927  11.205  2.54  468 
    American Century VP Vista         
       2008  18.182  9.169  -49.57  78 
       2007  13.252  18.182  37.20  76 
       2006  12.384  13.252  7.01  13 
       2005(1)  11.942  12.384  3.70  8 
    Dreyfus Technology Growth         
       2008  13.486  7.778  -42.33  30 
       2007  12.005  13.486  12.34  36 
       2006  11.754  12.005  2.14  12 
       2005(1)  10.920  11.754  7.64  3 
    Fidelity VIP Contrafund®         
       2008  16.364  9.206  -43.74  648 
       2007  14.212  16.364  15.14  540 
       2006  12.992  14.212  9.39  380 
       2005(1)  11.525  12.992  12.73  101 
    Fidelity VIP Equity-Income         
       2008  13.489  7.572  -43.87  177 
       2007  13.570  13.489  -0.60  180 
       2006  11.526  13.570  17.73  144 
       2005(1)  11.184  11.526  3.06  56 

       Fidelity VIP Growth     
     
     
    Principal Investment Plus Variable Annuity SM  APPENDIX B — CONDENSED FINANCIAL INFORMATION  111 
    www.principal.com     

           2008  14.768  7.638  -48.28  239 
           2007  11.879  14.768  24.32  230 
           2006  11.354  11.879  4.63  160 
           2005(1)  10.775  11.354  5.37  56 
       Fidelity VIP Mid Cap       
           2008  17.413  10.323  -40.72  134 
           2007  15.381  17.413  13.21  105 
           2006  13.939  15.381  10.35  85 
           2005(1)  12.452  13.939  11.94  35 
       Fidelity VIP Overseas       
           2008  18.129  9.972  -44.99  1,056 
           2007  15.779  18.129  14.89  890 
           2006  13.647  15.779  15.62  694 
           2005(1)  11.913  13.647  14.56  301 
     
       Goldman Sachs VIT Mid Cap Value       
           2008  14.845  9.173  -38.21  403 
           2007  14.655  14.845  1.30  416 
           2006  12.850  14.655  14.05  303 
           2005(1)  11.854  12.850  8.40  91 
       Goldman Sachs VIT Structured Small Cap Equity       
           2008  10.896  7.057  -35.23  139 
           2007  13.292  10.896  -18.03  132 
           2006  12.060  13.292  10.22  110 
           2005(1)  11.466  12.060  5.18  31 
       Neuberger Berman Small Cap Growth       
           2008  11.262  6.691  -40.59  109 
           2007  11.415  11.262  –1.34  109 
           2006  11.047  11.415  3.33  71 
           2005(1)  10.643  11.047  3.80  22 
       Neuberger Berman AMT Partners       
           2008  16.029  7.490  -53.27  123 
           2007  14.936  16.029  7.32  112 
           2006  12.555  14.936  10.19  101 
           2005(1)  12.259  12.555  10.57  25 
       Neuberger Berman Socially Responsive       
           2008  14.182  8.430  -40.56  75 
           2007  13.426  14.182  5.63  60 
           2006  12.028  13.426  11.63  42 
           2005(1)  11.431  12.028  5.22  9 
       T. Rowe Price Blue Chip Growth       
           2008  13.602  7.657  -43.71  50 
           2007  12.319  13.602  10.41  49 
           2006  11.477  12.319  7.33  32 
           2005(1)  10.740  11.477  6.86  22 
       T. Rowe Price Health Sciences       
           2008  15.520  10.790  -30.48  78 
           2007  13.432  15.520  15.54  63 
           2006  12.618  13.432  6.45  49 
           2005(1)  11.608  12.618  8.70  9 
       Asset Allocation       
           2008  25.535  18.839  26.22  155 
           2007  23.273  25.535  9.72  149 
           2006  21.021  23.273  10.71  99 
           2005(1)  20.145  21.021  4.35  25 
       Bond & Mortgage Securities       
     
     
    112  APPENDIX B — CONDENSED FINANCIAL INFORMATION  Principal Investment Plus Variable Annuity SM 
             1-800-852-4450 

           2008  18.511  15.070  -18.59  1,452   
           2007  18.237  18.511  1.50  1,650   
           2006  17.751  18.237  2.74  1,157   
           2005(1)  17.623  17.751  0.73  474   
       Diversified International           
           2008  29.734  15.697  -47.21  384   
           2007  26.094  29.734  13.95  347   
           2006  20.771  26.094  25.63  239   
           2005(1)  17.697  20.771  17.37  64   
       Equity Income           
           2008  10.317  6.690  -35.16  3,927   
           2007(3)  10.000  10.317  3.17  3,617   
       Government & High Quality Bond           
           2008  18.278  17.649  -3.44  597   
           2007  17.751  18.278  2.97  576   
           2006  17.349  17.751  2.32  349   
           2005(1)  17.230  17.349  0.69  133   
       International Emerging Markets           
           2008  39.883  17.672  -55.69  357   
           2007  28.591  39.883  39.49  317   
           2006  21.055  28.591  35.79  214   
           2005(1)  17.311  21.055  21.63  64   
     
       International SmallCap           
           2008  31.869  15.551  -51.20  265   
           2007  29.725  31.869  7.21  244   
           2006  23.223  29.725  28.00  170   
           2005(1)  19.391  23.223  19.76  68   
       LargeCap Blend II           
           2008  13.057  8.151  -37.57  2,452   
           2007  12.654  13.057  3.18  2,224   
           2006  11.129  12.654  13.70  1,642   
           2005(1)  10.787  11.129  3.17  664   
       LargeCap Growth           
           2008  21.523  12.008  -44.21  123   
           2007  17.798  21.523  20.93  113   
           2006  16.494  17.798  7.91  77   
           2005(1)  14.960  16.494  10.25  11   
       LargeCap Growth I           
           2008  30.849  17.986  -41.70  95   
           2007  28.962  30.849  6.52  91   
           2006  27.776  28.962  4.27  65   
           2005(1)  24.851  27.776  11.77  18   
       LargeCap S&P 500 Index           
           2008  10.520  6.496  -38.25  630   
           2007  10.193  10.520  3.21  589   
           2006  8.984  10.193  13.46  446   
           2005(1)  8.745  8.984  2.73  166   
       LargeCap Value           
           2008  27.779  17.679  -36.36  192   
           2007  28.328  27.779  –1.94  201   
           2006  24.056  28.328  17.76  130   
           2005(1)  23.433  24.056  2.66  31   
       LargeCap Value III           
           2008  13.513  7.854  -41.88  2,139   
           2007  14.297  13.513  -5.48  1,842   
     
     
    Principal Investment Plus Variable Annuity SM  APPENDIX B — CONDENSED FINANCIAL INFORMATION  113 
    www.principal.com           

       2006  11.982  14.297  19.32  1,312 
       2005(1)  11.737  11.982  2.09  540 
    MidCap Blend         
       2008  39.797  25.811  -35.14  499 
       2007  37.044  39.797  7.43  468 
       2006  33.034  37.044  12.14  343 
       2005(1)  30.660  33.034  7.74  147 
    MidCap Growth I         
       2008  13.118  7.579  -42.22  172 
       2007  12.063  13.118  8.75  155 
       2006  11.207  12.063  7.64  95 
       2005(1)  10.120  11.207  10.74  18 
    MidCap Value II         
       2008  15.949  8.779  -44.96  874 
       2007  16.419  15.949  –2.86  723 
       2006  14.764  16.419  11.21  524 
       2005(1)  13.835  14.764  6.71  229 
    Money Market         
       2008  13.684  13.779  0.69  1,131 
       2007  13.291  13.684  2.96  593 
       2006  12.940  13.291  2.71  370 
       2005(1)  12.840  12.940  0.78  189 
    Mortgage Securities         
       2008(4)  10.000  10.088  0.88  0 
    Principal LifeTime 2010         
       2008  12.655  8.582  -32.18  478 
       2007  12.428  12.655  1.83  555 
       2006  11.273  12.428  10.25  436 
       2005(1)  10.824  11.273  4.15  222 
    Principal LifeTime 2020         
       2008  13.411  8.667  -35.37  3,188 
       2007  13.028  13.411  2.94  3,302 
       2006  11.524  13.028  13.05  1,978 
       2005(1)  10.987  11.524  4.89  602 
     
    Principal LifeTime 2030         
       2008  13.507  8.429  -37.60  500 
       2007  12.985  13.507  4.02  415 
       2006  11.519  12.985  12.73  234 
       2005(1)  11.004  11.519  4.68  90 
    Principal LifeTime 2040         
       2008  13.827  8.393  -39.30  198 
       2007  13.223  13.827  4.57  197 
       2006  11.699  13.223  13.03  103 
       2005(1)  11.147  11.699  4.95  30 
    Principal LifeTime 2050         
       2008  13.914  8.324  -40.18  123 
       2007  13.294  13.914  4.66  134 
       2006  11.726  13.294  13.37  92 
       2005(1)  11.175  11.726  4.93  39 
    Principal LifeTime Strategic Income         
       2008  11.962  8.937  -25.29  245 
       2007  11.933  11.962  0.24  264 
       2006  11.024  11.933  8.25  184 
       2005(1)  10.618  11.024  3.82  45 

       Real Estate Securities   
     
     
    114  APPENDIX B — CONDENSED FINANCIAL INFORMATION  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

       2008  28.337  18.675  -34.10  172 
       2007  35.074  28.337  -19.21  165 
       2006  26.153  35.074  34.11  135 
       2005(1)  21.819  26.153  19.86  55 
    SAM Balanced         
       2008  10.272  7.443  -27.54  3,960 
       2007(5)  10.000  10.272  2.72  967 
    SAM Conservative Balanced         
       2008  10.244  8.124  -20.70  1,276 
       2007(5)  10.000  10.244  2.44  184 
    SAM Conservative Growth         
       2008  10.273  6.745  -34.34  779 
       2007(5)  10.000  10.273  2.73  175 
    SAM Flexible Income         
       2008  10.181      1,252 
       2007(5)  10.000  10.181  1.81  15 
    SAM Strategic Growth         
       2008  10.267  6.307  -38.57  615 
       2007  10.000  10.267  2.67  207 
    Short-Term Bond         
       2008  10.229  8.868  -13.31  2,196 
       2007  10.110  10.229  1.18  2,463 
       2006  9.861  10.110  2.53  1,751 
       2005(1)  9.816  9.861  0.46  805 
    Short-Term Income         
       2008(4)        3 
    SmallCap Growth II         
       2008  10.688  6.174  -42.23  173 
       2007  10.371  10.688  3.06  157 
       2006  9.694  10.371  6.98  111 
       2005(1)  9.100  9.694  6.53  32 
    SmallCap Value I         
       2008  22.252  14.892  -33.08  563 
       2007  25.054  22.252  -11.18  551 
       2006  21.511  25.054  16.47  373 
       2005(1)  20.405  21.511  5.42  152 
    West Coast Equity         
       2008  10.318  6.749  -34.59  96 
       2007(5)  10.000  10.318  3.18  44 

    (1)      Commenced Operations on March 1, 2005
    (2)      Commenced Operations on May 16, 2008
    (3)      Commenced Operations on January 12, 2007
    (4)      Commenced Operations on November 21, 2008
    (5)      Commenced Operations on May 1, 2007
    Principal Investment Plus Variable Annuity SM  APPENDIX B — CONDENSED FINANCIAL INFORMATION  115 
    www.principal.com     

    APPENDIX C — GMWB 1 EXAMPLES

    These examples have been provided to assist you in understanding the various features of the Investor Protector Plus (“GMWB 1”) Rider and to demonstrate how premium payments received and withdrawals taken from the Contract affect the values and benefits under the GMWB 1 Rider. These examples are based on certain hypothetical assumptions and are for illustrative purposes only. These examples are not intended to serve as projections of future investment returns.

    NOTE: For the purpose of the following examples, a partial annuitization has the same effect as a partial surrender and both are referred to as a withdrawal in the following examples.

    Examples Without Excess Withdrawals 
    The examples without excess withdrawals assume the following: 
    • the client is age 62. 
    • initial premium payment = $100,000. 
    • the withdrawal benefit bases prior to partial surrender = $100,000. 
    • the remaining withdrawal benefit bases prior to partial surrender = $100,000. 
    • Investment Back (7%) withdrawal benefit payment = $7,000. 
    • For Life (5%) withdrawal benefit payment = $5,000. 

    Example 1

    In contract year one, no withdrawals are taken.

    On the first contract anniversary: 
    • a 5% GMWB bonus is credited to the withdrawal benefit bases. The credit is $100,000 x 0.05 = $5,000. 
    • there is no GMWB Step-Up because the client is not eligible until the fifth contract anniversary following the rider 
           effective date. 
    • Investment Back: 
           •  the new Investment Back withdrawal benefit base is $100,000 + $5,000 = $105,000; 
           •  the new Investment Back remaining withdrawal benefit base is $100,000 + $5,000 = $105,000; and 
           •  the new Investment Back withdrawal benefit payment is $105,000 x 0.07 = $7,350. 
    • For Life: 
           •  the new For Life withdrawal benefit base is $100,000 + $5,000 = $105,000; 
           •  the new For Life remaining withdrawal benefit base is base is $100,000 + $5,000 = $105,000; and 
           •  the new For Life withdrawal benefit payment is $105,000 x 0.05 = $5,250. 

    Example 2 
    In contract year one: 
    •  no withdrawals are taken. 
    •  the client makes a premium payment of $50,000. 
     
    On the first contract anniversary: 
    •  a 5% GMWB bonus is credited to the withdrawal benefit bases. The credit is ($100,000 + $50,000) x 0.05 = $7,500. 
    •  there is no GMWB Step-Up because the client is not eligible until the fifth contract anniversary following the rider 
      effective date. 
    •  Investment Back: 
      •  the new Investment Back withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; 
      •  the new Investment Back remaining withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; and 
      •  the new Investment Back withdrawal benefit payment is $157,500 x 0.07 = $11,025. 
    •  For Life: 
      •  the new For Life withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; 
      •  the new For Life remaining withdrawal benefit base is $100,000 + $50,000 + $7,500 = $157,500; and 
      •  the new For Life withdrawal benefit payment is $157,500 x 0.05 = $7,875. 

    116  APPENDIX C — GMWB 1 EXAMPLES  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    Example 3

    In contract year one, the client takes a withdrawal of $5,000.

    On the first contract anniversary:

  		•  Since a withdrawal was taken in contract year one, no GMWB bonus is credited.
  		• there is no GMWB Step-Up because the client is not eligible until the fifth contract anniversary following the rider effective date.
  		• Investment Back:
     
  		• the Investment Back withdrawal benefit base remains the same ($100,000);
     
  		• the new Investment Back remaining withdrawal benefit base is $100,000 - $5,000 = $95,000; and
     
  		• the Investment Back withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.07 = $7,000).
  		• For Life:
     
  		• the For Life withdrawal benefit base remains the same ($100,000);
     
  		• the new For Life remaining withdrawal benefit base is $100,000 - $5,000 = $95,000; and
     
  		• the For Life withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.05 = $5,000).

    Example 4
    In contract year one, no withdrawals are taken.

    On the first contract anniversary:

  		•  a 5% GMWB bonus is credited to the withdrawal benefit bases. The credit is $100,000 x 0.05 = $5,000.
  		• there is no GMWB Step-Up because the client is not eligible until the fifth contract anniversary following the rider effective date.
  		• Investment Back:
     
  		• the new Investment Back withdrawal benefit base is $100,000 + $5,000 = $105,000;
     
  		• the new Investment Back remaining withdrawal benefit base is $100,000 + $5,000 = $105,000; and
     
  		• the new Investment Back withdrawal benefit payment is $105,000 x 0.07 = $7,350.
  		• For Life:
     
  		• the new For Life withdrawal benefit base is $100,000 + $5,000 = $105,000;
     
  		• the new For Life remaining withdrawal benefit base is base is $100,000 + $5,000 = $105,000; and
     
  		• the new For Life withdrawal benefit payment is $105,000 x 0.05 = $5,250.

    In contract year two, the client takes a withdrawal of $5,000.

    On the second contract anniversary:

  		•  Since a withdrawal was taken in contract year two, no GMWB bonus is credited.
  		• there is no GMWB Step-Up because the client is not eligible until the fifth contract anniversary following the rider effective date.
  		• Investment Back:
     
  		• the Investment Back withdrawal benefit base remains the same ($105,000);
     
  		• the new Investment Back remaining withdrawal benefit base is $105,000 - $5,000 = $100,000; and
     
  		• the Investment Back withdrawal benefit payment for the next contract year remains the same ($7,350).
  		• For Life:
     
  		• the For Life withdrawal benefit base remains the same ($105,000);
     
  		• the new For Life remaining withdrawal benefit base is $105,000 - $5,000 = $100,000; and
     
  		• the For Life withdrawal benefit payment for the next contract year remains the same ($5,250).

    In contract year three, no withdrawals are taken.

    On the third contract anniversary:

    • Since a withdrawal was taken in contract year two, no GMWB bonus is credited.
    • there is no GMWB Step-Up because the client is not eligible until the fifth contract anniversary following the rider effective date.
    Principal Investment Plus Variable Annuity SM  APPENDIX C — GMWB 1 EXAMPLES  117 
    www.principal.com     

    • Investment Back: 
           •  the Investment Back withdrawal benefit base remains the same ($105,000); 
           •  the Investment Back remaining withdrawal benefit base remains the same ($100,000); and 
           •  the Investment Back withdrawal benefit payment for the next contract year remains the same ($7,350). 
    • For Life: 
           •  the For Life withdrawal benefit base remains the same ($105,000); 
           •  the For Life remaining withdrawal benefit base remains the same ($100,000); and 
           •  the For Life withdrawal benefit payment for the next contract year remains the same ($5,250). 

    Example 5

    In each of the first five contract years, the client takes a withdrawal of $5,000. No GMWB Bonus is credited since a withdrawal was taken in contract year one. On the fifth contract anniversary, the client will receive GMWB Step-Up if the Contract’s accumulated value is greater than the Investment Back remaining withdrawal benefit base.

    If the accumulated value on the fifth     
    contract anniversary is:  $90,000  $110,000 
    Investment Back     
         Prior to step-up     
               Withdrawal Benefit Base  $100,000  $100,00 
               Withdrawal Benefit Payment  $100,000 x 0.07 = $7,000  $100,000 x 0.07 = $7,000 
               Remaining Withdrawal Benefit Base  $75,000  $75,000 
         After step-up     
               Withdrawal Benefit Base  $90,000  $110,000 
               Withdrawal Benefit Payment  $90,000 x 0.07 = $6,300  $110,000 x 0.07 = $7,700 
               Remaining Withdrawal Benefit Base  $90,000  $110,000 
    For Life     
         Prior to step-up     
               Withdrawal Benefit Base  $100,000  $100,000 
               Withdrawal Benefit Payment  $100,000 x 0.05 = $5,000  $100,000 x 0.05 = $5,000 
               Remaining withdrawal Benefit Base  $75,000  $75,000 
         After step-up     
               Withdrawal Benefit Base  $90,000  $110,000 
               Withdrawal Benefit Payment  $90,000 x 0.05 = $4,500  $110,000 x 0.05 = $5,500 
               Remaining Withdrawal Benefit Base  $90,000  $110,000 

    118  APPENDIX C — GMWB 1 EXAMPLES  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    Examples With Excess Withdrawals
    The excess withdrawal examples assume the following:

  		•  the client is age 62
  		• the initial premium payment is $100,000
  		• the Investment Back and For Life withdrawal benefit bases prior to partial surrender = $100,000
  		• the remaining withdrawal benefit bases prior to withdrawal = $100,000
  		• Investment Back (7%) withdrawal benefit payment = $7,000
  		• For Life (5%) withdrawal benefit payment = $5,000
  		• Withdrawal taken = $8,000
     
  		• excess amount under the Investment Back withdrawal option is $1,000; and
     
  		• excess amount under the For Life withdrawal option is $3,000

    Example 6

    In this example, assume the accumulated value prior to the withdrawal is $90,000.

    Withdrawal Benefit Base Calculation

    On the contract anniversary following the withdrawal, the withdrawal benefit base is adjusted for any excess withdrawals.

    Investment Back

    The amount of the adjustment* is $1,204.82. The new Investment Back withdrawal benefit base is $100,000 -$1,204.82 = $98,795.18.

    *The amount of the adjustment for the excess withdrawal is the greater of a or b where: a = $1,000 (the amount of the excess withdrawal); and b = $1,204.82 (the result of (1 divided by 2) multiplied by 3) where:

    1 = the amount of the withdrawal greater than the Investment Back withdrawal benefit payment available prior to the withdrawal ($1,000);

    2 = the accumulated value after the Investment Back withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $7,000); and

    3 = the Investment Back withdrawal benefit base prior to the adjustment for the excess amount ($100,000).

    For Life

    The amount of the adjustment* is $3,529.41. The new For Life withdrawal benefit base is $100,000 - $3,529.41 = $96,470.59.

    *The amount of the adjustment for the excess withdrawal is the greater of a or b where:

    a = $3,000 (the amount of the excess withdrawal); and b = $3,529.41 (the result of (1 divided by 2) multiplied by 3) where:

    1 = the amount of the withdrawal greater than the For Life withdrawal benefit payment available prior to the withdrawal ($3,000);

    2 = the accumulated value after the For Life withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $5,000); and

    3 = is the For Life withdrawal benefit base prior to the adjustment for the excess amount ($100,000).

    Remaining Withdrawal Benefit Base Calculation

    The remaining withdrawal benefit base is adjusted when withdrawals are taken.

    Principal Investment Plus Variable Annuity SM  APPENDIX C — GMWB 1 EXAMPLES  119 
    www.principal.com     

    Investment Back

    The amount of the adjustment* is $8,120.48 (the amount of the Investment Back withdrawal benefit payment plus the excess withdrawal). The new Investment Back remaining withdrawal benefit base is $100,000 - $8,120.48 = $91,879.52 .

    *The amount of the adjustment is a plus b where:

    a = $7,000 (the actual amount withdrawn that does not exceed the Investment Back withdrawal benefit payment); and b = $1,120.48 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of 1 or 2 where:

    1 = $1,000 (the amount of the excess withdrawal); and

    2 = $1,120.48 (the result of (x divided by y) multiplied by z) where;

    x = the amount of the withdrawal greater than the Investment Back withdrawal benefit payment available prior to the withdrawal ($1,000);

    y = the accumulated value after the Investment Back withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $7,000); and

    z = the Investment Back remaining withdrawal benefit base after the Investment Back withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000).

    For Life

    The amount of the adjustment* is $8,352.94 (the amount of the For Life withdrawal benefit payment plus the excess withdrawal). The new For Life remaining withdrawal benefit base is $100,000 - $8,352.94 = $91,647.06.

    *The amount of the adjustment is (a plus b) where:

    a = $5,000 (the actual amount withdrawn that does not exceed the For Life withdrawal benefit payment); and b = $3,352.94 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of 1 or 2 where:

    1 = $3,000 (the amount of the excess withdrawal); and

    2 = $3,352.94 (the result of (x divided by y) multiplied by z) where;

    x = the amount of the withdrawal greater than the For Life withdrawal benefit payment available prior to the withdrawal ($3,000);

    y = the accumulated value after the For Life withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $5,000); and

    z = the For Life remaining withdrawal benefit base after the For Life withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000).

    Withdrawal Benefit Payment Calculation (for the next contract year)

    The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The For Life withdrawal benefit payment percentage is locked-in at 5%.

    Investment Back

    The new Investment Back withdrawal benefit payment is $98,795.18 x 0.07 = $6,915.66.

    120  APPENDIX C — GMWB 1 EXAMPLES  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    For Life

    The new “Single Life” For Life withdrawal benefit payment is $96,470.59 x 0.05 = $4,823.53.

    Example 7

    In this example, assume the accumulated value prior to the withdrawal is $110,000.

    Withdrawal Benefit Base Calculation

    On the contract anniversary following the withdrawal, the withdrawal benefit bases are adjusted for any excess withdrawals.

    Investment Back

    The amount of the adjustment* is $1,000 (the amount of the excess withdrawal). The new Investment Back withdrawal benefit base is $100,000 - $1,000 = $99,000.

    * The amount of the adjustment for excess withdrawal is the greater of a or b where:

    a = $1,000 (the amount of the excess withdrawal); and

    b = $970.87 (the result of (1 divided by 2) multiplied by 3) where:

    1 = the amount of the withdrawal greater than the Investment Back withdrawal benefit payment available prior to the withdrawal ($1,000);

    2 = the accumulated value after the Investment Back withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($110,000 minus $7,000); and

    3 = the Investment Back withdrawal benefit base prior to the adjustment for the excess amount ($100,000)

    For Life

    The amount of the adjustment* is $3,000 (the amount of the excess withdrawal). The new For Life withdrawal benefit base is $100,000 - $3,000 = $97,000.

    *The amount of the adjustment for excess withdrawal is the greater of a or b where:

    a = $3,000 (the amount of the excess withdrawal); and b = $2,857.14 (the result of (1 divided by 2) multiplied by 3) where:

    1 = the amount of the withdrawal greater than the For Life withdrawal benefit payment available prior to the withdrawal ($3,000);

    2 = the accumulated value after the For Life withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($110,000 minus $5,000); and

    3 = the For Life withdrawal benefit base prior to the adjustment for the excess amount ($100,000).

    Remaining Withdrawal Benefit Base Calculation

    The remaining withdrawal benefit base is adjusted when withdrawals are taken.

    Principal Investment Plus Variable Annuity SM  APPENDIX C — GMWB 1 EXAMPLES  121 
    www.principal.com     

    Investment Back

    The amount of the adjustment* is $8,000 (the amount of the Investment Back withdrawal benefit payment plus the excess withdrawal). The new Investment Back remaining withdrawal benefit base is $100,000 - $8,000 = $92,000.

    *The amount of the adjustment is (a plus b) where:

    a = $7,000 (the actual amount withdrawn that does not exceed the Investment Back withdrawal benefit payment); and

    b = $1,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of 1 or 2 where:

    1 = $1,000 (the amount of the excess withdrawal); and

    2 = $902.91 (the result of (x divided by y) multiplied by z) where:

    x = the amount of the withdrawal greater than the Investment Back withdrawal benefit payment available prior to the withdrawal ($1,000);

    y = the accumulated value after the Investment Back withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($110,000 - $7,000); and

    z = the Investment Back remaining withdrawal benefit base after the Investment Back withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000).

    For Life

    The amount of the adjustment* is $8,000 (the amount of the For Life withdrawal benefit payment plus the excess withdrawal). The new For Life remaining withdrawal benefit base is $100,000 - $8,000 = $92,000.

    *The amount of the adjustment is (a plus b) where:

    a = $5,000 (the actual amount withdrawn that does not exceed the For Life withdrawal benefit payment); and

    b = $3,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of 1 or 2 where:

    1 = $3,000 (the amount of the excess withdrawal); and

    2 = $2,714.28 (the result of (x divided by y) multiplied by z) where:

    x = the amount of the withdrawal greater than the For Life withdrawal benefit payment available prior to the withdrawal ($3,000);

    y = the accumulated value after the For Life withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($110,000 - $5,000); and

    z = the For Life remaining withdrawal benefit base after the For Life withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000).

    Withdrawal Benefit Payment Calculation (for the next contract year)

    The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The For Life withdrawal benefit payment percentage is locked-in at 5%.

    Investment Back

    The new Investment Back withdrawal benefit payment is $99,000 x 0.07 = $6,930.

    122  APPENDIX C — GMWB 1 EXAMPLES  Principal Investment Plus Variable Annuity SM 
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    For Life

    The new For Life withdrawal benefit payment is $97,000 x 0.05 = $4,850.

    Principal Investment Plus Variable Annuity SM  APPENDIX C — GMWB 1 EXAMPLES  123 
    www.principal.com     

    APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES

    These examples have been provided to assist you in understanding the various features of the GMWB 2-SL and the GMWB 2-SL/JL Riders (together, the “GMWB 2 Rider”) and to demonstrate how premium payments received and withdrawals taken from the Contract affect the values and benefits under the GMWB 2 Rider. These examples are based on certain hypothetical assumptions and are for illustrative purposes only. These examples are not intended to serve as projections of future investment returns.

    NOTE: For the purpose of the following examples, a partial annuitization has the same effect as a partial surrender and both are referred to as a withdrawal in the following examples.

    Examples Without Excess Withdrawals

    The examples without excess withdrawals assume the following:

    • the client is age 62 and the client’s spouse is age 60 on the rider effective date.

    • initial premium payment = $100,000.

    • the withdrawal benefit bases prior to partial surrender = $100,000.

    • the remaining withdrawal benefit bases prior to partial surrender = $100,000.

    • Investment Back (7%) withdrawal benefit payment = $7,000.

    • “Single Life” For Life (5%) withdrawal benefit payment = $5,000, if withdrawals start prior to the client attaining age 70.

    • “Joint Life” For Life (4.5%) withdrawal benefit payment = $4,500, if withdrawals start prior to the spouse attaining age 70.

    Example

    In contract year one, no withdrawals are taken and no For Life withdrawal benefit payment election has been designated. Because the client has not made a For Life withdrawal benefit payment election, we automatically calculate the For Life withdrawal benefit payment as “Single Life”.

    On the first contract anniversary:

    • a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is $100,000 x 0.07 = $7,000.

    • there is no GMWB Step-Up because the withdrawal benefit bases after the bonus is credited are larger than the Contract’s accumulated value.

    • Investment Back:

    • the new Investment Back withdrawal benefit base is $100,000 + 7,000 = $107,000;

    • the new Investment Back remaining withdrawal benefit base is $100,000 + 7,000 = $107,000; and • the new Investment Back withdrawal benefit payment is $107,000 x 0.07 = $7,490.

    • For Life:

    • the new For Life withdrawal benefit base is $100,000 + 7,000 = $107,000;

    • the new For Life remaining withdrawal benefit base is base is $100,000 + 7,000 = $107,000; and • the new “Single Life” For Life withdrawal benefit payment is $107,000 x 0.05 = $5,350.

    Example 2

    In contract year one:

    • no withdrawals are taken and no For Life withdrawal benefit payment election has been designated. Because the client has not made a For Life withdrawal benefit payment election, we automatically calculate the For Life withdrawal benefit payment as “Single Life”.

    • the client makes a premium payment of $50,000.

    124  APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES  Principal Investment Plus Variable Annuity SM 
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    On the first contract anniversary:

  		•  a 7% GMWB bonus is credited to the withdrawal benefit base. The credit is ($100,000 + $50,000) x 0.07 = $10,500.
  		• there is no GMWB Step-Up because the withdrawal benefit bases after the bonus is credited are larger than the Contract’s accumulated value.
  		• Investment Back:
     
  		• the new Investment Back withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500;
     
  		• the new Investment Back remaining withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; and
     
  		• the new Investment Back withdrawal benefit payment is $160,500 x 0.07 = $11,235.
  		• For Life:
     
  		• the new For Life withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500;
     
  		• the new For Life remaining withdrawal benefit base is $100,000 + $50,000 + $10,500 = $160,500; and
     
  		• the new “Single Life” For Life withdrawal benefit payment is $160,500 x 0.05 = $8,025.

    Example 3

    In contract year one, the client elects the “Joint Life” For Life withdrawal benefit payment and takes a withdrawal of $4,500. The “Joint Life” For Life withdrawal benefit payment percentage is locked-in at 4.5% .

    On the first contract anniversary:

  		•  Since a withdrawal was taken in contract year one, no GMWB bonus is credited.
  		• there is no GMWB Step-Up because the withdrawal benefit bases after the bonus is credited are larger than the Contract’s accumulated value.
  		• Investment Back:
     
  		• the withdrawal benefit base remains the same ($100,000);
     
  		• the new remaining withdrawal benefit base is $100,000 - $4,500 = $95,500; and
     
  		• the withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.07 = $7,000).
  		• For Life:
     
  		• the For Life withdrawal benefit base remains the same ($100,000);
     
  		• the new For Life remaining withdrawal benefit base is $100,000 - $4,500 = $95,500; and
     
  		• the “Joint Life” For Life withdrawal benefit payment for the next contract year remains the same ($100,000 x 0.045 = $4,500).

    Example 4

    In contract year one, no withdrawals are taken and no For Life withdrawal benefit payment election has been designated. Because the client has not made a For Life withdrawal benefit payment election, we automatically calculate For Life withdrawal benefit payment as “Single Life”.

    On the first contract anniversary:

  		•  a 7% GMWB bonus is credited to the withdrawal benefit bases. The credit is $100,000 x 0.07 = $7,000.
  		• there is no GMWB Step-Up because the withdrawal benefit bases after the bonus is credited are larger than the Contract’s accumulated value.
  		• Investment Back:
     
  		• the new Investment Back withdrawal benefit base is $100,000 + 7,000 = $107,000;
     
  		• the new Investment Back remaining withdrawal benefit base is $100,000 + 7,000 = $107,000; and
     
  		• the new Investment Back withdrawal benefit payment is $107,000 x 0.07 = $7,490.
  		• For Life:
     
  		• the new For Life withdrawal benefit base is $100,000 + 7,000 = $107,000;
     
  		• the new For Life remaining withdrawal benefit base is base is $100,000 + 7,000 = $107,000; and
     
  		• the new “Single Life” For Life withdrawal benefit payment is $107,000 x 0.05 = $5,350.

    In contract year two, the client elects the “Joint Life” For Life withdrawal benefit payment and takes a withdrawal of $4,500. The “Joint Life” For Life withdrawal benefit payment percentage is locked-in at 4.5% .

    Principal Investment Plus Variable Annuity SM  APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES  125 
    www.principal.com     

    On the second contract anniversary: 
    •  Since a withdrawal was taken in contract year two, no GMWB bonus is credited. 
    •  there is no GMWB Step-Up because the withdrawal benefit bases are larger than the Contract’s accumulated 
      value. 
    •  Investment Back: 
      •  the Investment Back withdrawal benefit base remains the same ($107,000); 
      •  the new Investment Back remaining withdrawal benefit base is $107,000 - $4,500 = $102,500; and 
      •  the Investment Back withdrawal benefit payment for the next contract year remains the same ($107,000 x 0.07 
        = $7,490). 
    •  For Life: 
      •  the For Life withdrawal benefit base remains the same ($107,000); 
      •  the new For Life remaining withdrawal benefit base is $107,000 - $4,500 = $102,500; and 
      •  the “Joint Life” For Life withdrawal benefit payment for the next contract year is $107,000 x 0.045 = $4,815. 
     
    In contract year three, no withdrawals are taken. The “Joint Life” For Life withdrawal benefit payment percentage 
    remains locked-in at 4.5%. 
     
    On the third contract anniversary: 
    •  Since a withdrawal was taken in contract year two, no GMWB bonus is credited. 
    •  there is no GMWB Step-Up because the withdrawal benefit bases are larger than the Contract’s accumulated 
      value. 
    •  Investment Back: 
      •  the Investment Back withdrawal benefit base remains the same ($107,000); 
      •  the Investment Back remaining withdrawal benefit base remains the same ($102,500); and 
      •  the Investment Back withdrawal benefit for the next contract year remains the same ($107,000 x 0.07 = $7,490). 
    •  For Life: 
      •  the For Life withdrawal benefit base remains the same ($107,000); 
      •  the For Life remaining withdrawal benefit base remains the same ($102,500); and 
      •  the “Joint Life” For Life withdrawal benefit payment for the next contract year remains the same ($107,000 x 
        0.045 = $4,815). 

    126  APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES  Principal Investment Plus Variable Annuity SM 
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    Example

    The client elects the “Single Life” For Life withdrawal benefit payment, and in each of the first two contract years, takes a withdrawal of $5,000. Assume there is no GMWB Step-Up on the first contract anniversary. On the 2nd contract anniversary, the client will receive GMWB Step-Up if the Contract’s accumulated value is greater than the applicable withdrawal benefit base.

    If the accumulated value on the second     
    contract anniversary is:                   $95,000  $110,000 
    Investment Back     
     Prior to step-up     
       Withdrawal Benefit Base  $100,000  $100,00 
       Withdrawal Benefit Payment  $100,000 x 0.07 = $7,000  $100,000 x 0.07 = $7,000 
       Remaining Withdrawal Benefit Base  $90,000  $90,000 
     After step-up     
       Withdrawal Benefit Base  $100,000  $110,000 
       Withdrawal Benefit Payment  $100,000 x 0.07 = $7,000  $110,000 x 0.07 = $7,700 
       Remaining Withdrawal Benefit Base  $90,000  $110,000 
    For Life (“Single Life”)     
     Prior to step-up     
       Withdrawal Benefit Base  $100,000  $100,000 
       Withdrawal Benefit Payment  $100,000 x 0.05 = $5,000  $100,000 x 0.05 = $5,000 
       Remaining withdrawal Benefit Base  $90,000  $90,000 
     After step-up     
       Withdrawal Benefit Base  $100,000  $110,000 
       Withdrawal Benefit Payment  $100,000 x 0.05 = $5,000  $110,000 x 0.05 = $5,500 
       Remaining Withdrawal Benefit Base  $95,000  $110,000 

    Examples With Excess Withdrawals
    The excess withdrawal examples assume the following:

  		•  the client is age 62 and elected “Single Life” For Life withdrawal benefit payments at the first withdrawal and therefore, locks-in the “Single Life” For Life withdrawal benefit payment percentage at 5%.
  		• the initial premium payment is $100,000
  		• the withdrawal benefit bases prior to partial surrender = $100,000
  		• the remaining withdrawal benefit bases prior to partial surrender = $100,000
  		• Investment Back (7%) withdrawal benefit payment = $7,000
  		• “Single Life” For Life (5%) withdrawal benefit payment = $5,000
  		• Withdrawal taken = $8,000
     
  		• excess amount under the Investment Back withdrawal option is $1,000; and
     
  		• excess amount under the For Life withdrawal option is $3,000
    Principal Investment Plus Variable Annuity SM  APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES  127 
    www.principal.com     

    Example 6

    In this example, assume the accumulated value prior to the withdrawal is $90,000.

    Withdrawal Benefit Base Calculation

    On the contract anniversary following the withdrawal, the withdrawal benefit base is adjusted for any excess withdrawals.

    Investment Back

    The amount of the adjustment* is $1,204.82. The new Investment Back withdrawal benefit base is $100,000 -$1,204.82 = $98,795.18.

    *The amount of the adjustment for the excess withdrawal is the greater of a or b where:

    a = $1,000 (the amount of the excess withdrawal); and

    b = $1,204.82 (the result of (1 divided by 2) multiplied by 3) where:

    1 = the amount of the withdrawal greater than the Investment Back withdrawal benefit payment remaining prior to the withdrawal ($1,000);

    2 = the accumulated value after the Investment Back withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $7,000); and

    3 = the Investment Back withdrawal benefit base prior to the adjustment for the excess amount ($100,000).

    For Life

    The amount of the adjustment* is $3,529.41. The new For Life withdrawal benefit base is $100,000 - $3,529.41 = $96,470.59.

    *The amount of the adjustment for the excess withdrawal is the greater of a or b where:

    a = $3,000 (the amount of the excess withdrawal); and

    b = $3,529.41 (the result of (1 divided by 2) multiplied by 3) where:

    1 = the amount of the withdrawal greater than the “Single Life” For Life withdrawal benefit payment remaining prior to the withdrawal ($3,000);

    2 = the accumulated value after the “Single Life” For Life withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $5,000); and

    3 = is the For Life withdrawal benefit base prior to the adjustment for the excess amount ($100,000).

    Remaining Withdrawal Benefit Base Calculation

    The remaining withdrawal benefit base is adjusted when withdrawals are taken.

    Investment Back

    The amount of the adjustment* is $8,120.48 (the amount of the Investment Back withdrawal benefit plus the excess withdrawal). The new Investment Back remaining withdrawal benefit base is $100,000—$8,120.48 = $91,879.52.

    *The amount of the adjustment is (a plus b) where:

    a = $7,000 (the actual amount withdrawn that does not exceed the Investment Back withdrawal benefit payment); and

    b = $1,120.48 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of 1 or 2 where:

    128  APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES  Principal Investment Plus Variable Annuity SM 
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    1 = $1,000 (the amount of the excess withdrawal); and

    2 = $1,120.48 (the result of (x divided by y) multiplied by z) where:

    x = the amount of the withdrawal greater than the Investment Back withdrawal benefit payment available prior to the withdrawal ($1,000);

    y = the accumulated value after the Investment Back withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $7,000); and

    z = the Investment Back remaining withdrawal benefit base after the Investment Back withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000).

    For Life

    The amount of the adjustment* is $8,352.94 (the amount of the “Single Life” For Life withdrawal benefit payment plus the excess withdrawal). The new For Life remaining withdrawal benefit base is $100,000 - $8,352.94 = $91,647.06.

    *The amount of the adjustment is (a plus b) where:

    a = $5,000 (the actual amount withdrawn that does not exceed the “Single Life” For Life withdrawal benefit payment); and

    b = $3,352.94 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of 1 or 2 where:

    1 = $3,000 (the amount of the excess withdrawal); and

    2 = $3,352.94 (the result of (x divided by y) multiplied by z) where:

    x = the amount of the withdrawal greater than the “Single Life” For Life withdrawal benefit payment remaining prior to the withdrawal ($3,000);

    y = the accumulated value after the “Single Life” For Life withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($90,000 - $5,000); and

    z = the For Life remaining withdrawal benefit base after the “Single Life” For Life withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000).

    Withdrawal Benefit Payment Calculation (for the next contract year)

    The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The “Single Life” For Life withdrawal benefit payment percentage is locked-in at 5%.

    Investment Back

    The new Investment Back withdrawal benefit payment is $98,795.18 x 0.07 = $6,915.66.

    For Life

    The new “Single Life” For Life withdrawal benefit payment is $96,470.59 x 0.05 = $4,823.53.

    Example 7

    In this example, assume the accumulated value prior to the withdrawal is $110,000.

    Withdrawal Benefit Base Calculation

    On the contract anniversary following the withdrawal, the withdrawal benefit base is adjusted for any excess withdrawals.

    Principal Investment Plus Variable Annuity SM  APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES  129 
    www.principal.com     

    Investment Back

    The amount of the adjustment* is $1,000 (the amount of the excess withdrawal). The new Investment Back withdrawal benefit base is $100,000 - $1,000 = $99,000.

    *The amount of the adjustment for excess withdrawal is the greater of a or b where:

    a = $1,000 (the amount of the excess withdrawal); and

    b = $970.87 (the result of (1 divided by 2) multiplied by 3) where:

    1 = the amount of the withdrawal greater than the Investment Back withdrawal benefit payment available prior to the withdrawal ($1,000);

    2 = the accumulated value after the Investment Back withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($110,000 minus $7,000); and

    3 = the Investment Back withdrawal benefit base prior to the adjustment for the excess amount ($100,000)

    For Life

    The amount of the adjustment* is $3,000 (the amount of the excess withdrawal). The new For Life withdrawal benefit base is $100,000 - $3,000 = $97,000.

    *The amount of the adjustment for excess withdrawal is the greater of a or b where:

    a = $3,000 (the amount of the excess withdrawal); and

    b = $2,857.14 (the result of (1 divided by 2) multiplied by 3) where:

    1 = the amount of the withdrawal greater than the “Single Life” For Life withdrawal benefit payment available prior to the withdrawal ($3,000);

    2 = the accumulated value after the “Single Life” For Life withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($110,000 minus $5,000); and

    3 = the For Life withdrawal benefit base prior to the adjustment for the excess amount ($100,000).

    Remaining Withdrawal Benefit Base Calculation

    The remaining withdrawal benefit base is adjusted when withdrawals are taken.

    Investment Back

    The amount of the adjustment* is $8,000 (the amount of the Investment Back withdrawal benefit payment plus the excess withdrawal). The new Investment Back remaining withdrawal benefit base is $100,000 - $8,000 = $92,000.

    *The amount of the adjustment is a plus b where:

    a = $7,000 (the actual amount withdrawn that does not exceed the Investment Back withdrawal benefit payment); and

    b = $1,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of 1 or 2 where:

    1 = $1,000 (the amount of the excess withdrawal); and

    2 = $902.91 (the result of (x divided by y) multiplied by z) where:

    x = the amount of the withdrawal greater than the Investment Back withdrawal benefit payment available prior to the withdrawal ($1,000);

    130  APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES  Principal Investment Plus Variable Annuity SM 
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    y = the accumulated value after the Investment Back withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($110,000 - $7,000); and

    z = the Investment Back remaining withdrawal benefit base after the Investment Back withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $7,000).

    For Life

    The amount of the adjustment* is $8,000 (the amount of the “Single Life” For Life withdrawal benefit payment plus the excess withdrawal). The new For Life remaining withdrawal benefit base is $100,000 - $8,000 = $92,000.

    *The amount of the adjustment is a plus b where:

    a = $5,000 (the actual amount withdrawn that does not exceed the “Single Life” For Life withdrawal benefit payment); and

    b = $3,000 (a proportionate reduction for the excess withdrawal). The amount of the proportionate reduction is the greater of 1 or 2 where:

    1 = $3,000 (the amount of the excess withdrawal); and

    2 = $2,714.28 (the result of (x divided by y) multiplied by z) where:

    x = the amount of the withdrawal greater than the “Single Life” For Life withdrawal benefit payment available prior to the withdrawal ($3,000);

    y = the accumulated value after the “Single Life” For Life withdrawal benefit payment is deducted but prior to the withdrawal of the excess amount ($110,000 - $5,000); and

    z = the For Life remaining withdrawal benefit base after the “Single Life” For Life withdrawal benefit payment is deducted but prior to the adjustment for the excess amount ($100,000 - $5,000).

    Withdrawal Benefit Payment Calculation (for the next contract year)

    The withdrawal benefit payment is the new withdrawal benefit base (calculated on the contract anniversary) multiplied by the associated percentage. The “Single Life” For Life withdrawal benefit payment percentage is locked-in at 5%.

    Investment Back

    The new Investment Back withdrawal benefit payment is $99,000 x 0.07 = $6,930.

    For Life

    The new “Single Life” For Life withdrawal benefit payment is $97,000 x 0.05 = $4,850.

    Principal Investment Plus Variable Annuity SM  APPENDIX D — GMWB 2-SL AND GMWB 2-SL/JL EXAMPLES  131 
    www.principal.com     

    APPENDIX E — GMWB INVESTMENT OPTIONS

    GMWB Investment Options

    While a GMWB rider is in effect, the investment options you may select are restricted. The limited investment options available under a GMWB rider (the “GMWB investment options”) are intended to support the rider’s guarantees with a balanced investment objective. If your investment goal is aggressive growth, a GMWB rider may not be appropriate for you.

    The GMWB investment options are:

    • GMWB Self-Build Model A;
    • GMWB Self-Build Model B;
    • GMWB Self-Build Model C;
    • GMWB Self-Build Model D;
    • Principal LifeTime 2010 Account;
    • Principal LifeTime 2020 Account;
    • Principal LifeTime 2030 Account;*
    • Principal LifeTime Strategic Income Account;
    • Strategic Asset Management Balanced Portfolio;
    • Strategic Asset Management Conservative Balanced Portfolio; or
    • Strategic Asset Management Flexible Income Portfolio.

    *Principal LifeTime 2030 Account is only available as an investment option with the GMWB 2 Rider.

    When you purchase a GMWB rider, you must allocate 100% of your Separate Account division accumulated value and premium payments to any one of the listed GMWB investment options. You may transfer 100% of your Separate Account division accumulated value from your current GMWB investment option to one other GMWB investment option which is available at the time of the transfer. You may make a transfer by providing us notice (we will effect the transfer at the price next determined after we receive your notice in good order). Any future premium payments are allocated to the GMWB investment option your Separate Account division accumulated value is invested in at the time of the new premium payments. While your GMWB rider is in effect, you may make allocations of Contract value and premium payments to, and transfer Contract accumulated value to, the Fixed Account and you may allocate new premium payments to the DCA Plus Accounts. Such allocations and transfers are subject to the provisions of your Contract. See FIXED ACCOUNT AND FIXED DCA PLUS ACCOUNTS - Fixed Account.

    For more information about GMWB Select Models or GMWB Self-Build Models, please see below. For more information about Principal LifeTime Accounts and Strategic Asset Management (SAM) Portfolios, please see the prospectus sections titled THE CONTRACT — The Underlying Mutual Funds, TABLE OF SEPARATE ACCOUNT DIVISIONS and SUMMARY OF EXPENSE INFORMATION — Annual Underlying Mutual Fund Expenses and the underlying fund’s prospectus provided with this prospectus. For more information about the Fixed and DCA Plus Accounts, please see FIXED ACCOUNT AND DCA PLUS ACCOUNTS.

    You should note that all of the GMWB investment options (except the Self-Build Models) are series of Principal Variable Contracts Funds, Inc., which is managed by Principal Management Corporation ("PMC"), an affiliate of ours. In addition, most of the underlying funds available as options under the GMWB Self-Build Models are also managed by PMC. If you wish to invest your Contract accumulated value predominantly in underlying funds that are not managed by an affiliate of ours, a GMWB rider may not appropriate for you. You may wish to consult with your financial advisor in making your decision to select a GMWB rider.

    To the extent that an underlying fund managed by PMC may be included as a GMWB investment option or as an option under a GMWB Self-Build Model, PMC will receive additional compensation from the management fee of the underlying fund. However, we do not take such potential financial benefit into account in selecting the underlying fund to be a GMWB investment option or an option under a Self-Build Model.

    132 APPENDIX E — GMWB INVESTMENT OPTIONS

    Principal Investment Plus Variable Annuity SM
    1-800-852-4450

    For more information about: (1) GMWB Self-Build Models, please see below; (2) Principal LifeTime Accounts and Strategic Asset Management (SAM) Portfolios, please see the prospectus sections titled THE CONTRACT -The Underlying Mutual Funds, TABLE OF SEPARATE ACCOUNT DIVISIONS and SUMMARY EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses and the underlying fund's prospectus provided with this prospectus; (3) the Fixed and DCA Plus Accounts, please see FIXED ACCOUNT AND FIXED DCA PLUS ACCOUNTS and (4) transfers under your Contract, please see THE CONTRACT - The Accumulation Period, Division Transfers and GENERAL PROVISIONS - Frequent Trading and Market Timing (Abusive Trading Practices).

    We reserve the right to modify the list of available GMWB investment options, subject to compliance with applicable regulations.

    If you previously purchased a Contract with a GMWB rider and have your Separate Account division accumulated value invested in a GMWB investment option which is no longer available (a "Discontinued GMWB investment option"), you may continue to maintain that investment and allocate new premium payments to it, provided that the Discountinued GMWB investment optio remains and available Separate Account division under the Contract. You should note that a Discountinued GMWB investment option may still be available as a Separate Account division under the Contract. If the Discontinued GMWB investment option involves more than one Separate Account division, we will continue to rebalance your Separate Account division accumulated value each calendar quarter. You may not transfer your Separate Account division accumulated value to any other Discontinued GMWB investment option. You may transfer your Separate Account division accumulated value to another GMWB investment option that is available at the time of transfer; in this case, the Discontinued GMWB investment option will no longer be available to you.

    GMWB Self-Build Models

    Each of the GMWB Self-Build Models requires you to allocate your Separate Account division accumulated value and premium payments in specified percentages among asset classes and provides you limited ability to select the Separate Account divisions that you wish to use to meet those allocation requirements. The major asset classes on which each model is based and the required allocations among those asset classes are shown in the following table.

    Asset Class  Model A  Model B  Model C  Model D 
    Short-Term Fixed Income  30%  20%  10%  15% 
    Fixed Income  40%  30%  20%  15% 
    Balanced/Asset Allocation  10%  15%  20%  25% 
    Large US Equity  20%  25%  30%  25% 
    Small/Mid US Equity  0%  5%  15%  0% 
    International Equity  0%  5%  5%  20% 

    To "build your model," you select one of the available models and then pick Separate Account divisions from each of the asset classes in the model. The table below identifies the Separate Account divisions that are available within each asset class for purposes of the GMWB Self-Build Models. It also identifies those instances in which there are limitations on the percentage of assets that you may allocate to a sub-class within asset classes. The sum of the percentages that you allocate to the Separate Account divisions in an asset class or sub-class must equal the required aggregate percentage for that asset class or sub-class. The sum of the percentages you invest in all the asset classes must equal 100% of your Separate Account division accumulated value.

    Principal Investment Plus Variable Annuity SM  APPENDIX E — GMWB INVESTMENT OPTIONS  133 
    www.principal.com     

    If you choose a GMWB Self-Build Model, you are directing us to allocate your Separate Account division accumulated value and premium payments according to the allocation percentages you have set. In addition, you are directing us to automatically rebalance your Separate Account division accumulated value each calendar quarter to match the allocation percentages you set in your GMWB Self-Build Model. You may transfer among the divisions within an asset class or sub-class as long as your allocations for that asset class or sub-class equal the percentage established by your chosen GMWB Self-Build Model, and you adhere to the transfer provisions of your Contract (See THE CONTRACT - The Accumulation Period, Division Transfers and GENERAL PROVISIONS - Frequent Trading and

    Market Timing (Abusive Trading Practices)). We currently do not charge a transfer fee. If we start charging a transfer fee in the future, we will not impose such a fee on the quarterly automatic portfolio rebalancing.

    In selecting and building a GMWB Self-Build Model, you should consider your personal objectives, investment time horizons, risk tolerance and other financial circumstances. You should also remember that asset allocation does not insure a profit or protect against loss. You may wish to ask your financial advisor for assistance in selecting a model and choosing among the Separate Account divisions available under that model. You may also wish to contact your financial advisor from time to time to discuss whether your selections remain appropriate for your needs.

    For more information about the Separate Account divisions named in the table for the GMWB Self-Build Models below, please see the prospectus sections titled THE CONTRACT - The Underlying Mutual Funds, TABLE OF SEPARATE ACCOUNT DIVISIONS and SUMMARY OF EXPENSE INFORMATION - Annual Underlying Mutual Fund Expenses and the underlying fund's prospectus provided with this prospectus.

    You may choose one of the GMWB Self-Build Models shown below:

        Investment  GMWB  GMWB  GMWB  GMWB 
        Advisor  Model  Model  Model  Model 
          A  B  C  D 
     Money Market  Principal Global Inves-         
        tors, LLC*         
     Short-Term Bond  Principal Global Inves-         
        tors, LLC*         
     Short-Term Income  Edge Asset Manage-         
        ment, Inc.*         
     Short-Term Fixed Income Options Total  30%  20%  10%  15% 
     
     
     American Century VP Inflation  American Century Invest-         
     Protection  ment Management, Inc.         
     Bond & Mortgage Securities  Principal Global Inves-         
        tors, LLC*         
     Government & High Quality  Principal Global Inves-         
     Bond    tors, LLC*         
     Mortgage Securities  Edge Asset Manage-         
        ment, Inc.*         
     
     
    134  APPENDIX E — GMWB INVESTMENT OPTIONS    Principal Investment Plus Variable Annuity SM 
              1-800-852-4450 

     Fixed Income Subaccounts Total      40%  30%  20%  15% 
     
     Asset Allocation  Morgan Stanley Invest-         
      ment Management, Inc.*         
     LifeTime 2010  Principal Global Inves-         
      tors, LLC*           
     LifeTime 2020  Principal Global Inves-         
      tors, LLC*           
     LifeTime Strategic Income  Principal Global Inves-         
      tors, LLC*           
     Strategic Asset Management  Edge Asset Manage-         
     (“SAM”) Balanced  ment, Inc.*           
     SAM Conservative Balanced  Edge Asset Manage-         
      ment, Inc.*           
     SAM Flexible Income  Edge Asset Manage-         
      ment, Inc.*           
     Balanced/Asset Allocation Subaccounts Total    10%  15%  20%  25% 
     
     AIM V.I. Basic Value  Invesco AIM Advisors,         
      Inc.           
     Equity Income  Edge Asset Manage-         
      ment, Inc.*           
     LargeCap Value III  Alliance Bernstein, L.P.*         
     LargeCap Value II  American Century Invest-         
      ment Management, Inc.*         
     LargeCap Value  Principal Global Inves-         
      tors, LLC*           
     Large Value Total      10%  10%  10%  10% 
     LargeCap Blend II  T. Rowe Price Associ-  N/A       
      ates, Inc.*           
     LargeCap S&P 500 Index  Principal Global Inves-  N/A       
      tors, LLC*           
     Neuberger Berman AMT  Neuberger Berman Man-  N/A       
     Socially Responsible  agement, Inc.           
     Large Blend Total      0%  5%  10%  5% 
     
    Principal Investment Plus Variable Annuity SM  APPENDIX E — GMWB INVESTMENT OPTIONS       135 
    www.principal.com             

    American Century VP Ultra II  American Century Invest-         
      ment Management, Inc.         
    Fidelity VIP II ContraFund  Fidelity Management &         
      Research Company         
    LargeCap Growth  Columbus Circle Inves-         
      tors*         
    T. Rowe Price Blue Chip Growth  T. Rowe Price Associ-         
      ates, Inc.         
    Large Growth Total    10%  10%  10%  10% 
    Large US Equity Subaccounts Total  20%  25%  30%  25% 
     
    MidCap Value II  Neuberger Berman Man-  N/A  N/A    N/A 
      agement, Inc. & Jacob         
      Levy Management, Inc.*         
    Real Estate Securities  Principal Real Estate  N/A  N/A    N/A 
      Investors, LLC*         
    MidCap Value Total    0%  0%  5%  0% 
    American Century VP Vista  American Century Invest-  N/A      N/A 
      ment Management, Inc.         
    MidCap Blend  Principal Global Inves-  N/A      N/A 
      tors, LLC*         
    T. Rowe Price Health Sciences  T. Rowe Price Associ-  N/A      N/A 
      ates, Inc.         
    Mid Cap Blend and Growth Total    0%  5%  5%  0% 
    AIM V.I. SmallCap Equity  Invesco AIM Advisors,  N/A  N/A    N/A 
      Inc.         
    Neuberger Berman AMT Fas-  Neuberger Berman Man-  N/A  N/A    N/A 
    ciano  agement, Inc         
    SmallCap Value I  JP Morgan Investment  N/A  N/A    N/A 
      Management, Inc.*         
    SmallCap Total    0%  0%  5%  0% 
    Small/Mid US Equity Subaccount Total  0%  5%  15%  0% 
     
    Diversified International  Principal Global Inves-  N/A       

                                                                     tors, LLC*   
     
     
    136  APPENDIX E — GMWB INVESTMENT OPTIONS  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    Fidelity VIP Overseas  Fidelity Management &  N/A       
      Research Company         
    AIM V.I. International Growth  Invesco AIM Advisors,  N/A       
      Inc.         
    International Equity Subaccounts Total  0%  5%  5%  20% 
     
    Total    100%  100%  100%  100% 

    Principal Investment Plus Variable Annuity SM  APPENDIX E — GMWB INVESTMENT OPTIONS  137 
    www.principal.com     

    * Pursuant to a sub-advisory agreement with Principal Management Corporation, the investment advisor.

    We from time to time may make available other GMWB Self-Build Models. We also may make changes to or restrict the availability of GMWB Self-Build Models. These changes or restrictions will apply only to new purchasers of the Contract or to you if you transfer out of a GMWB Self-Build Model and wish to transfer back to that model. If we restrict the availability of or change a GMWB Self-Build Model that you have selected, you may continue to maintain your Separate Account division accumulated value and allocate new premium payments in accordance with your selected model. We will continue to rebalance your Separate Account division accumulated value according to that model each calendar quarter. You may transfer your Separate Account division accumulated value to any other GMWB investment option that is available at the time of transfer; in this case, the model from which you transferred will no longer be available to you. Any time you wish to transfer your Separate Account division accumulated value to another GMWB investment option, you may wish to consult with your registered representative about the GMWB investment options available.

    We reserve the right to modify the list of available Separate Account divisions in a GMWB Self-Build Model, subject to compliance with applicable regulations.

    138 APPENDIX E — GMWB INVESTMENT OPTIONS

    Principal Investment Plus Variable Annuity SM
    1-800-852-4450

    APPENDIX F - ENHANCED DEATH BENEFIT RIDER

    ENHANCED DEATH BENEFIT RIDER:

    EXAMPLES OF CALCULATION OF ENHANCED DEATH BENEFIT

    For all examples, assume

    Contract issue date is 01/01/2005
    Original premium payment = $100,000
    Owner's age on issue date is 69 years

    CALCULATION OF THE ENHANCED DEATH BENEFIT ON THE FOURTH CONTRACT ANNIVERSARY (01/01/ 2009) (prior to the lock-in date)

    Assume the following:

    AV = $105,000
    Additional premium payments = $0
    Partial surrenders and partial annuitizations = $0
    Owner age = 73

    The enhanced death benefit is the greatest of a, b, and c below. a. $121,550.63 = [$100,000 x (1.05)4] + $0 - $0 = $121,550.63 + $0 (premium payments made since the rider effective date increased at a 5% effective annual interest rate - $0 (adjustments for all partial surrenders and partial annuitizations taken since the rider effective date increased at a 5% effective annual interest rate)

    b. $105,000 = $105,000 + $0 - $0 = (highest accumulated value on any Contract anniversary since the rider effective date) + (additional premium payments made since that Contract anniversary) - (adjustments for all partial surrenders and partial annuitizations taken since that Contract anniversary)

    c.      Standard death benefit = $105,000 where the standard death benefit is the greater of
      i.      $105,000 = AV
      ii.      $100,000 = $100,000 +$0 - $0 = [(original premium payment) + (premium payments made after the Contract
      issue date)] - (adjustments for all partial surrenders and partial annuitization taken since the Contract issue date)

    The enhanced death benefit is $121,550.63 on the fourth Contract anniversary.

    CALCULATION OF THE ENHANCED DEATH BENEFIT AFTER THE FOURTH CONTRACT ANNIVERSARY WHEN ADDITIONAL PREMIUM PAYMENT IS MADE (and prior to the lock-in date)

    Assume the following:

    AV immediately prior to premium payment = $106,000 Additional premium payment = $50,000 AV after premium payment = $156,000 Partial surrenders and partial annuitizations = $0 Owner age = 73

    The enhanced death benefit after the premium payment is the greatest of a, b, and c below.

    Principal Investment Plus Variable Annuity SM  APPENDIX F - ENHANCED DEATH BENEFIT RIDER  139 
    www.principal.com     

    a.      $171,550.63 = $121,550.63 + $50,000 - $0
    b.      $155,000 = $105,000 + $50,000 - $0
    c.      Standard death benefit = $156,000 where the standard death benefit is the greater of
      i.      $156,000 = AV
      ii.      $150,000 = $100,000 + $50,000 - $0

    The enhanced death benefit is $171,550.63

    CALCULATION OF THE ENHANCED DEATH BENEFIT ON THE FIFTH CONTRACT ANNIVERSARY (01/01/2010) (and prior to the lock-in date)

    Assume the following:

    AV = $159,000

    Additional premium payments since last Contract anniversary = $0 Partial surrenders/annuitizations since last Contract anniversary = $0 Age of Owner = 74

    The enhanced death benefit is the greatest of a, b, and c below.

    a.      $180,128.16 = [$171,550.63 x (1.05)] + $0 - $0 = $180,128.16 + $0 - $0
    b.      $159,000 = $159,000 + $0 - $0
    c.      Standard death benefit = $159,000 where the standard death benefit is the greater of
      i.      $159,000 = AV
      ii.      $150,000 = $150,000 + $0 - $0

    The enhanced death benefit is $180,128.16.

    CALCULATION OF THE ENHANCED DEATH BENEFIT on 06/30/2010 -- AFTER THE FIFTH CONTRACT ANNIVERSARY and DATE WHEN PARTIAL SURRENDER HAS BEEN TAKEN (06/30/2010)(and prior to the lock-in date)

    Assume the following:

    AV prior to partial surrender = $155,000 Partial surrender on 06/30/2010 = $10,000 AV after partial surrender = $145,000 Age of Owner = 74

    The enhanced death benefit after the partial surrender is the greatest of a, b, and c below.

    140 APPENDIX F - ENHANCED DEATH BENEFIT RIDER

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    a. $172,664.93 = $180,128.16 x [1.05 x (180/365)] + $0 - [($10,000/$155,000) x 180,128.16 x (1.05 x {181/365})] = $184,569.67 + $0 - $11,904.74

    b.      $148,744.50 = $159,000 + $0 - [($10,000/$155,000) x $159,000] = $159,000 + $0 - $10,255.50
    c.      Standard death benefit = $145,000 where the standard death benefit is the greater of
      i.      $145,000 = AV
      ii.      $140,325.00 = $150,000 + $0 - [($10,000/$155,000) x $150,000] = $150,000 + $0 - $9,675.00

    The enhanced death benefit is $172,664.93

    CALCULATION OF THE ENHANCED DEATH BENEFIT ON THE SIXTH CONTRACT ANNIVERSARY (01/01/ 2011)(and lock-in date)

    Assume the following:

    AV = $150,000

    Premium payments since last Contract anniversary = $0

    Partial surrenders/annuitizations since last Contract anniversary = $0 Age of Owner = 75

    The enhanced death benefit is the greatest of a, b, and c below.

    a.      $177,040.60 = $172,664.93 x [1.05 x (185/365)] + $0 - $0 = $177,040.60 + $0 - $0
    b.      $150,000 = $150,000 + $0 - $0
    c.      Standard death benefit = $150,000 where the standard death benefit is the greater of
      i.      $150,000 = AV
      iii.      $140,325.00 = $140,325.00 + $0 - $0

    The enhanced death benefit is $177,040.60. The enhanced death benefit is now locked-in and will only increase for any purchase payments received and decrease for any partial surrenders and partial annuitizations taken.
    _____________________________________________________________________________________________

    CALCULATION OF THE ENHANCED DEATH BENEFIT ON 06/30/2011 - AFTER THE SIXTH CONTRACT   
    ANNIVERSARY and DATE WHEN ADDITIONAL PREMIUM PAYMENT IS MADE and AFTER LOCK-IN   
    Assume the following:     
    AV before premium payment made = $150,000     
    06/30/2011 premium payment = $5,000     
    AV after premium payment made = $155,000     
    The enhanced death benefit after the premium payment is the greatest of a, b, and c below.   
    a. $182,040.60 = $177,040.60 + $5000 - $0     
     
    Principal Investment Plus Variable Annuity SM  APPENDIX F - ENHANCED DEATH BENEFIT RIDER  141 
    www.principal.com     

    b.      $155,000 = $150,000 + $5,000 - $0
    c.      Standard death benefit = $155,000 where the standard death benefit is the greater of
      i.      $155,000 = AV (after premium payment made)
      ii.      $145,325 = $140,325 + $5,000 - $0

    The enhanced death benefit is $182,040.60
    _____________________________________________________________________________________________

    CALCULATION OF THE ENHANCED DEATH BENEFIT AFTER THE SEVENTH CONTRACT ANNIVERSARY (01/ 01/2012) and AFTER LOCK-IN

    Assume the following:

    AV = $160,000
    Premium payments since lock-in date = $0
    Partial Surrenders/annuitizations since lock-in date = $0
    Age of Owner = 76

    Although the enhanced death benefit is now past the lock-in date, the standard death benefit may increase to the Contract AV on any Contract anniversary divisible by seven (e.g., 7, 14, 21). The enhanced death benefit is the greatest of a, b, and c below.

    a.      $182,040.60 = $182,040.60 + $0 - $0
    b.      $155,000 = $155,000 + $0 - $0
    c.      Standard death benefit = $160,000 where the standard death benefit is the greatest
      i.      $160,000 = AV on seventh Contract anniversary
      ii.      $145,325 = $145,325 + $0 - $0
      iii.      $160,000 = $160,000 + $0 - $0 = [(seventh Contract anniversary accumulated value) + (additional premium payments made since that Contract anniversary) - (adjustments for all partial surrenders and partial annuitizations since that Contract anniversary)]

    The enhanced death benefit is $182,040.60.
    _____________________________________________________________________________________________

    CALCULATION OF THE ENHANCED DEATH BENEFIT on 06/30/2012 - DATE WHEN PARTIAL SURRENDER TAKEN and AFTER SEVENTH CONTRACT ANNIVERSARY and AFTER LOCK-IN

    Assume the following:

    AV ON 6/30/2012 prior to partial surrender = $190,000 Partial surrender = $5,000 AV after the partial surrender = $185,000

    The enhanced death benefit after the surrender is the greatest of a, b, and c below.

    a. $177,252.93 = $182,040.60 + $0 - [($5,000/$190,000) x $182,040.60] = $182,040.60 + $0 - $4,787.67

    142 APPENDIX F - ENHANCED DEATH BENEFIT RIDER

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    1-800-852-4450

    b.      $150,923.50 = $155,000 + $0 - [($5,000/$190,000) x $155,000] = $155,000 + $0 - $4,076.50
    c.      Standard death benefit = $185,000 where the standard death benefit is the greatest of
      i.      $185,000 = AV
      ii.      $141,502.95 = $145,325 + $0 - [($5,000/$190,000) x $145,325] = $145,325 + $0 - $3,822.05
      iii.      $155,792 = $160,000 + $0 - [($5,000/$190,000) x $160,000] = $160,000 + $0 - $4,208.00

    The enhanced death benefit is $185,000.
    _____________________________________________________________________________________________

    CALCULATION OF THE ENHANCED DEATH BENEFIT on 06/30/2013 - DATE WHEN PARTIAL SURRENDER TAKEN and AFTER LOCK-IN

    Assume the following:

    AV prior to partial surrender = $110,000 Partial surrender - $10,000 AV after partial surrender = $100,000

    The enhanced death benefit after the partial surrender is the greatest of a, b, and c below.

    a.      $161,140.64 = $177,252.93 + $0 - [($10,000/$110,000) x $177,252.93] = $177,252.93 + $0 - $16,112.29
    b.      $137,204.55 = $150,923.50 + $0 - ($10,000/$110,000) x $150,923.50 = $150,923.50 + $0 - $13,718.95
    c.      Standard death benefit = $141,630.51 where the standard death benefit is the greatest of
      i.      $100,000 = accumulated value
      ii.      $128,640.33 = $141,502.95 + $0 - [($10,000/$110,000) x $141,502.95] = $141,502.95 + $0 - $12,862.62
      iii.      $141,630.51 = $155,792 + $0 - [($10,000/$110,000) x $155,792] = $155,792 + $0 - $14,161.49

    The enhanced death benefit is $161,140.64.

    Principal Investment Plus Variable Annuity SM  APPENDIX F - ENHANCED DEATH BENEFIT RIDER  143 
    www.principal.com     

    PART B
    PRINCIPAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT B 
    PRINCIPAL INVESTMENT PLUS VARIABLE ANNUITYSM 
    Statement of Additional Information
    dated May 1, 2009

    This Statement of Additional Information provides information about the Principal Investment Plus Variable Annuity (the “Contract”) in addition to the information that is contained in the Contract’s Prospectus dated May 1, 2009.

    This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning:

    Principal Investment Plus Variable Annuity 
    The Principal Financial Group
    P.O. Box 9382
    Des Moines Iowa 50306-9382
    Telephone: 1-800-852-4450

    TABLE OF CONTENTS   
    GENERAL INFORMATION AND HISTORY  3 
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  3 
    PRINCIPAL UNDERWRITER  3 
    CALCULATION OF PERFORMANCE DATA  3 
    TAXATION UNDER CERTAIN RETIREMENT PLANS  10 
    Principal Life Insurance Company Separate Account B   
       Report of Independent Registered Public Accounting Firm  14 
       Financial Statements  16 
    Principal Life Insurance Company   
       Report of Independent Registered Public Accounting Firm  136 
       Consolidated Financial Statements  137 

    2 Principal Investment Plus Variable Annuity SM 
    1-800-852-4450 

    GENERAL INFORMATION AND HISTORY

    Principal Life Insurance Company (the “Company”) is the issuer of the Principal Investment Plus Variable Annuity (the “Contract”) and serves as custodian of its assets. The Company is a stock life insurance company with authority to transact life and annuity business in all states of the United States and the District of Columbia. The Company’s home office is located at: Principal Financial Group, Des Moines, Iowa 50392. The Company is a wholly owned subsidiary of Principal Financial Services, Inc., which in turn, is a wholly owned direct subsidiary of Principal Financial Group, Inc., a publicly-traded company.

    On June 24,1879, the Company was incorporated under Iowa law as a mutual assessment life insurance company named Bankers Life Association. The Company became a legal reserve life insurance company and changed its name to Bankers Life Company in 1911. In 1986, the Company changed its name to Principal Mutual Life Insurance Company. In 1998, the Company became Principal Life Insurance Company, a subsidiary stock life insurance company of Principal Mutual Holding Company, as part of a reorganization into a mutual insurance holding company structure. In 2001, Principal Mutual Holding Company converted to a stock company through a process called demutualization, resulting in the current organizational structure.

    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

    Ernst & Young LLP, 801 Grand Avenue, Suite 3000, Des Moines, Iowa 50309, serves as the independent registered public accounting firm for Principal Life Insurance Company Separate Account B and the Principal Life Insurance Company.

    PRINCIPAL UNDERWRITER

    The principal underwriter of the Contract is Princor Financial Services Corporation (“Princor”) which is a wholly owned subsidiary of Principal Financial Services, Inc. and an affiliate of the Company. The address of Princor is the Principal Financial Group, 680 8th Street, Des Moines, Iowa 50392-0200. Princor was incorporated in Iowa in 1968 and is a securities broker-dealer registered with the Securities Exchange Commission as well as a member of the FINRA. The Contracts may also be sold through other broker-dealers authorized by Princor and applicable law to do so. Registered representatives of such broker-dealers may be paid on a different basis than described below.

    The Contract’s offering to the public is continuous. As the principal underwriter, Princor is paid for the distribution of the Contract. For the last three fiscal years Princor has received and retained the following commissions:

    2008  2007  2006 
    received/retained  received/retained  received/retained 
    $20,823,068/$0  $24,201,879/$0  $22,386,910/$0 

    CALCULATION OF PERFORMANCE DATA

    The Separate Account may publish advertisements containing information (including graphs, charts, tables and examples) about the performance of one or more of its divisions. Separate performance figures will be shown for the Contract without the premium payment credit rider and for the Contract with the premium payment credit rider.

    The Contract was not offered prior to March 1, 2005. However, the certain divisions invest in underlying mutual funds which were offered prior to the date the Contract was available. Thus, the Separate Account may publish advertisements containing information about the hypothetical performance of one or more of its divisions for this Contract as the Contract was issued on or after the date the underlying mutual fund was first offered. The hypothetical performance from the date of inception of the underlying mutual fund in which the division invests is derived by reducing the actual performance of the underlying mutual fund by the highest level of fees and charges of the Contract as if it had been in existence.

    Principal Investment Plus Variable Annuity SM  GENERAL INFORMATION AND HISTORY  3 
    www.principal.com     

    In addition, as certain of the underlying mutual funds have added classes since the inception of the fund, performance may be shown for periods prior to the inception date of the new class which represents the historical results of initial class shares adjusted to reflect the fees and expenses of the new class.

    The yield and total return figures described below will vary depending upon market conditions, the composition of the underlying mutual fund’s portfolios and operating expenses. These factors and possible differences in the methods used in calculating yield and total return should be considered when comparing the Separate Account performance figures to performance figures published for other investment vehicles.

    The Separate Account may also quote rankings, yields or returns as published by independent statistical services or publishers and information regarding performance of certain market indices. Any performance data quoted for the Separate Account represents only historical performance and is not intended to indicate future performance.

    From time to time the Separate Account advertises its Money Market Division’s “yield” and “effective yield” for the Contract. Both yield figures are based on historical earnings and are not intended to indicate future performance. The “yield” of the division refers to the income generated by an investment under the Contract in the division over a 7-day period (which period will be stated in the advertisement). This income is then “annualized.” That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The “effective yield” is calculated similarly but, when annualized, the income earned by an investment in the division is assumed to be reinvested. The “effective yield” will be slightly higher than the “yield” because of the compounding effect of this assumed reinvestment. Neither yield quotation reflects a sales load deducted from purchase payments which, if included, would reduce the “yield” and “effective yield.”

                         Yield For the Period Ended December 31, 2008 
                                              For Contracts:  7-Day Annualized Yield  7-Day Effective Yield 
    without a surrender charge or a Purchase Payment Credit Rider  0.14%  0.14% 
    with a surrender charge but without a Purchase Payment Credit Rider  -5.86%  -5.86% 
    without a surrender charge but with a Purchase Payment Credit Rider  -0.45%  -0.45% 
    with a surrender charge or a Purchase Payment Credit Rider  -6.45  6.45 

    Also, from time to time, the Separate Account will advertise the average annual total return of its various divisions. The average annual total return for any of the divisions is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable Contract value. In this calculation for the Contract without the Premium Payment Credit Rider, the ending value is reduced by a surrender charge that decreases from 6% to 0% over a period of 7 years. For the calculations relating to the Contract with the Premium Payment Credit Rider, the ending value is reduced by a surrender charge that decreases from 8% to 0% over a period of 9 years. The Separate Account may also advertise total return figures for its divisions for a specified period that does not take into account the surrender charge in order to illustrate the change in the division’s unit value over time. See “Charges and Deductions” in the Prospectus for a discussion of surrender charges.

    4 CALCULATION OF PERFORMANCE DATA  Principal Investment Plus Variable Annuity SM 
      1-800-852-4450 

    Following are the hypothetical average annual total returns for the period ending December 31, 2008 assuming the Contract had been offered as of the effective dates of the underlying mutual funds in which the divisions invest:

                       For Contracts without the Premium Payment   
                         Credit Rider and with Surrender Charge   
              Since 
     Division  Date Effective  One Year Five Years Ten Years 

    Inception

    AIM V.I. Basic Value  September 10, 2001   -58.40  -10.53    -6.25 
    AIM V.I. International Growth  May 5, 1993  -47.15  3.23  0.65  4.59 
    AIM V.I. SmallCap Equity  August 29, 2003  -38.20  -1.86    0.86 
    AllianceBernstein Small Cap Growth  August 15, 1996  -52.25  -5.68  -3.41  -1.53 
    American Century VP Inflation Protection  December 31, 2002  -8.86  1.30    1.95 
    American Century VP Ultra  May 1, 2001  -48.41  -7.16    -5.73 
    American Century VP Vista  October 5, 2001  -55.29  -2.37    0.43 
    Asset Allocation  June 1, 1994  -31.81  -0.23  1.64  4.74 
    Bond & Mortgage Securities  December 18, 1987  -24.13  -2.64  0.97  4.65 
    Diversified International  May 2, 1994  -52.92  1.78  0.17  3.41 
    Dreyfus Technology Growth  August 31, 1999  -48.01  -8.45    -8.43 
    Equity Income  April 28, 1998  -40.79  -0.51  3.33  3.31 
    Fidelity VIP Contrafund®  January 3, 1995   -49.44  -1.80  0.34  7.34 
    Fidelity VIP Equity-Income  November 3, 1986  -49.56  -5.99  -1.68  5.97 
    Fidelity VIP Growth  October 31, 1986  -54.00  -7.02  -4.57  6.08 
    Fidelity VIP Mid Cap  December 28, 1998  -46.39  0.97  9.21  9.54 
    Fidelity VIP Overseas  January 28, 1987  -50.69  -1.14  -0.63  3.56 
    Goldman Sachs Mid Cap Value  May 1, 1998  -43.87  -0.51  5.29  3.43 
    Goldman Sachs Structured Small Cap Equity  February 13, 1998  -40.88  -7.29  0.38  -0.67 
    Government & High Quality Bond  April 9, 1987  -8.89  0.68  2.81  5.25 
    International Emerging Markets  October 24, 2000  -61.45  6.43    7.03 
    International SmallCap  May 1, 1998  -56.94  1.66  6.11  4.55 
    LargeCap Blend II  May 1, 2002  -43.23  -4.16    -2.27 
    LargeCap Growth  May 2, 1994  -49.90  -3.10  -5.37  1.54 
    LargeCap Growth I  June 1, 1994  -47.37  -6.25  -3.89  4.42 
    LargeCap S&P 500 Index  May 3, 1999  -43.91  -4.46    -4.11 
    LargeCap Value  May 13, 1970  -42.00  -3.34  -2.27  8.66 
    LargeCap Value II  August 30, 2004  -44.30      -5.68 
    LargeCap Value III  May 1, 2002  -47.55  -5.74    -2.73 
    MFS VIT Utilities  January 3, 1995  -38.98  7.42  3.68  8.90 
    MFS VIT Value  January 2, 2002  -39.61  -0.63    0.64 
    MidCap Blend  December 18, 1987  -40.78  -0.70  3.49  9.56 
    MidCap Growth I  May 1, 1998  -47.90  -3.85  -1.97  -2.24 
    MidCap Value II  May 3, 1999  -50.65  -5.12    2.76 
    Money Market  March 18, 1983  -4.73  1.22  1.89  1.90 
    Mortgage Securities  May 6, 1993  -2.66  2.45  3.66  4.02 
    Neuberger Berman AMT Partners  March 22, 1994  -59.02  -5.87  -2.53  3.76 
    Neuberger Berman AMT Small Cap Growth  July 12, 2002  -46.26  -7.96    -2.65 
    Neuberger Berman AMT Socially Responsive  February 18, 1999  -46.23  -4.12    -0.12 
    PIMCO VIT All Asset  April 30, 2003  -22.92  0.57    2.38 
    PIMCO VIT Total Return  December 31, 1997  -2.53  3.04  4.26  4.52 
    Principal LifeTime 2010  August 30, 2004  -37.80      -3.70 
    Principal LifeTime 2020  August 30, 2004  -41.01      -3.47 
    Principal LifeTime 2030  August 30, 2004  -43.25      -4.11 
    Principal LifeTime 2040  August 30, 2004  -44.96      -4.21 
    Principal LifeTime 2050  August 30, 2004  -45.84      -4.40 
    Principal LifeTime Strategic Income  August 30, 2004  -30.87      -2.77 
    Real Estate Securities  May 1, 1998  -39.73  1.42  7.72  6.45 
     
     
    Principal Investment Plus Variable Annuity SM           CALCULATION OF PERFORMANCE DATA                 5 
    www.principal.com           

    SAM Balanced  June 3, 1997  -33.13  -1.22  2.71  3.98 
    SAM Conservative Balanced  April 23, 1998  -26.25  -0.56  1.64  1.84 
    SAM Conservative Growth  June 3, 1997  -39.98  -2.31  2.07  3.64 
    SAM Flexible Income  September 9, 1997  -20.86  -0.44  2.78  3.51 
    SAM Strategic Growth  June 3, 1997  -44.23  -3.13  1.56  3.84 
    Short-Term Bond  May 1, 2003  -18.81  -2.34    -1.89 
    Short-Term Income  January 12, 1994  -7.84  0.54  2.92  2.99 
    SmallCap Growth II  May 1, 1998  -47.91  -6.40  -4.49  -4.03 
    SmallCap Value I  May 1, 1998  -38.70  -2.82  6.31  4.20 
    T. Rowe Price Blue Chip Growth  December 29, 2000  -49.40  -6.20    -5.99 
    T. Rowe Price Health Sciences  December 29, 2000  -36.09  1.48    -0.72 
    Van Eck Worldwide Hard Assets  May 1, 2006  -53.02      -12.27 
    West Coast Equity  April 28, 1998  -40.23  -2.02  4.47  4.98 
     
     
                       For Contracts without the Premium Payment   
                         Credit Rider and without Surrender Charge   
              Since
     Division  Date Effective  One Year Five Years Ten Years

    Inception

    AIM V.I. Basic Value  September 10, 2001  -52.40  -9.61    -6.25 
    AIM V.I. International Growth  May 5, 1993  -41.15  3.75  0.65  4.59 
    AIM V.I. SmallCap Equity Fund  August 29, 2003  -32.20  -1.22    1.22 
    AllianceBernstein Small Cap Growth  August 15, 1996  -46.25  -4.93  -3.41  -1.53 
    American Century VP Inflation Protection  December 31, 2002  -2.86  1.86    2.25 
    American Century VP Ultra  May 1, 2001  -42.41  -6.37    -5.73 
    American Century VP Vista  October 5, 2001  -49.29  -1.72    0.43 
    Asset Allocation  June 1, 1994  -25.81  0.37  1.64  4.74 
    Bond & Mortgage Securities  December 18, 1987  -18.13  -1.99  0.97  4.65 
    Diversified International  May 2, 1994  -46.92  2.33  0.17  3.41 
    Dreyfus Technology Growth  August 31, 1999  -42.01  -7.61    -8.43 
    Equity Income  April 28, 1998  -34.79  0.10  3.33  3.31 
    Fidelity VIP Contrafund  January 3, 1995  -43.44  -1.17  0.34  7.34 
    Fidelity VIP Equity-Income  November 3, 1986  -43.56  -5.24  -1.68  5.97 
    Fidelity VIP Growth  October 31, 1986  -48.00  -6.23  -4.57  6.08 
    Fidelity VIP MidCap  December 28, 1998  -40.39  1.54  9.21  9.54 
    Fidelity VIP Overseas  January 28, 1987  -44.69  -0.52  -0.63  3.56 
    Goldman Sachs Mid Cap Value  May 1, 1998  -37.87  0.09  5.29  3.43 
    Goldman Sachs Structured Small Cap Equity  February 13, 1998  -34.88  -6.49  0.38  -0.67 
    Government & High Quality Bond  April 9, 1987  -2.89  1.25  2.81  5.25 
    International Emerging Markets  October 24, 2000  -55.45  6.89    7.03 
    International SmallCap  May 1, 1998  -50.94  2.22  6.11  4.55 
    LargeCap Blend II  May 1, 2002  -37.23  -3.46    -2.27 
    LargeCap Growth  May 2, 1994  -43.90  -2.43  -5.37  1.54 
    LargeCap Growth I  June 1, 1994  -41.37  -5.49  -3.89  4.42 
    LargeCap S&P 500 Index  May 3, 1999  -37.91  -3.75    -4.11 
    LargeCap Value  May 13, 1970  -36.00  -2.67  -2.27  8.66 
    LargeCap Value II  August 30, 2004  -38.30      -4.85 
    LargeCap Value III  May 1, 2002  -41.55  -4.99    -2.73 
    MFS VIT Utilities  January 3, 1995  -38.61  8.07  4.31  9.56 
    MFS VIT Value  January 2, 2002  -33.61  -0.02    0.64 
    MidCap Blend  December 18, 1987  -34.78  -0.09  3.49  9.56 
    MidCap Growth I  May 1, 1998  -41.90  -3.16  -1.97  -2.24 
    MidCap Value II  May 3, 1999  -44.65  -4.39    2.76 
    Money Market  March 18, 1983  1.27  1.78  1.89  1.90 
    Mortgage Securities  May 6, 1993  3.34  2.99  3.66  4.02 

    6 CALCULATION OF PERFORMANCE DATA  Principal Investment Plus Variable Annuity SM 
      1-800-852-4450 

    Neuberger Berman AMT Partners  March 22, 1994  -53.02  -5.12  -2.53  3.76 
    Neuberger Berman AMT Small Cap Growth  July 12, 2002  -40.26  -7.14    -2.65 
    Neuberger Berman AMT Socially Responsive  February 18, 1999  -40.23  -3.42    -0.12 
    PIMCO VIT All Asset  April 30, 2003  -16.92  1.15    2.70 
    PIMCO VIT Total Return  December 31, 1997  3.47  3.57  4.26  4.52 
    Principal LifeTime 2010  August 30, 2004  -31.80      -2.93 
    Principal LifeTime 2020  August 30, 2004  -35.01      -2.71 
    Principal LifeTime 2030  August 30, 2004  -37.25      -3.33 
    Principal LifeTime 2040  August 30, 2004  -38.96      -3.42 
    Principal LifeTime 2050  August 30, 2004  -39.84      -3.61 
    Principal LifeTime Strategic Income  August 30, 2004  -24.87      -2.02 
    Real Estate Securities  May 1, 1998  -33.73  1.98  7.72  6.45 
    SAM Balanced  June 3, 1997  -27.13  -0.60  2.71  3.98 
    SAM Conservative Balanced  April 23, 1998  -20.25  0.05  1.64  1.84 
    SAM Conservative Growth  June 3, 1997  -33.98  -1.66  2.07  3.64 
    SAM Flexible Income  September 9, 1997  -14.86  0.17  2.78  3.51 
    SAM Strategic Growth  June 3, 1997  -38.23  -2.45  1.56  3.84 
    Short-Term Bond  May 1, 2003  -12.81  -1.69    -1.51 
    Short-Term Income  January 12, 1994  -1.84  1.13  2.92  2.99 
    SmallCap Growth II  May 1, 1998  -41.91  -5.63  -4.49  -4.03 
    SmallCap Value I  May 1, 1998  -32.70  -2.16  6.31  4.20 
    T. Rowe Price Blue Chip Growth  December 29, 2000  -43.40  -5.43    -5.99 
    T.Rowe Price Health Sciences  December 29, 2000  -30.09  2.04    -0.72 
    Van Eck Worldwide Hard Assets  May 1, 2006  -47.02      -9.99 
    West Coast Equity  April 28, 1998  -34.23  -1.37  4.47  4.98 
     
                           For Contracts with the Premium Payment   
                                      Credit Rider and with Surrender Charge   
              Since 
     Division  Date Effective   One Year Five Ten Years Inception
    AIM V.I. Basic Value  September 10, 2001   -60.69  -11.41    -7.03 
    AIM V.I. International Growth  May 5, 1993  -49.51  2.41  0.04  3.97 
    AIM V.I. SmallCap Equity  August 29, 2003  -40.61  -2.69    0.06 
    AllianceBernstein Small Cap Growth  August 15, 1996  -54.58  -6.53  -3.99  -2.12 
    American Century VP Inflation Protection  December 31, 2002  -11.44  0.48    1.17 
    American Century VP Ultra  May 1, 2001  -50.75  -8.02    -6.49 
    American Century VP Vista  October 5, 2001  -57.60  -3.20    -0.32 
    Asset Allocation  June 1, 1994  -34.25  -1.05  1.03  4.11 
    Bond & Mortgage Securities  December 18, 1987  -26.62  -3.48  0.37  4.02 
    Diversified International  May 2, 1994  -55.24  0.96  -0.43  2.79 
    Dreyfus Technology Growth  August 31, 1999  -50.36  -9.32    -8.98 
    Equity Income  April 28, 1998  -43.19  -1.34  2.71  2.69 
    Fidelity VIP Contrafund®  January 3, 1995  -51.78  -2.63  -0.26  6.69 
    Fidelity VIP Equity-Income  November 3, 1986  -51.90  -6.85  -2.27  5.34 
    Fidelity VIP Growth  October 31, 1986  -56.31  -7.88  -5.15  5.44 
    Fidelity VIP Mid Cap  December 28, 1998  -48.75  0.14  8.56  8.88 
    Fidelity VIP Overseas  January 28, 1987  -53.02  -1.96  -1.23  2.93 
    Goldman Sachs Mid Cap Value  May 1, 1998  -46.24  -1.34  4.66  2.81 
    Goldman Sachs Structured Small Cap Equity  February 13, 1998  -43.27  -8.15  -0.22  -1.26 
    Government & High Quality Bond  April 9, 1987  -11.47  -0.15  2.19  4.61 
    International Emerging Markets  October 24, 2000  -63.72  5.61    6.39 
    International SmallCap  May 1, 1998  -59.23  0.84  5.48  3.92 
    LargeCap Blend II  May 1, 2002  -45.61  -5.00    -3.22 
     
     
    Principal Investment Plus Variable Annuity SM           CALCULATION OF PERFORMANCE DATA                 7 
    www.principal.com           

    LargeCap Growth  May 2, 1994  -52.24  -3.94  -5.93  0.93 
    LargeCap Growth I  June 1, 1994  -49.73  -7.10  -4.47  3.79 
    LargeCap S&P 500 Index  May 3, 1999  -46.29  -5.31    -4.68 
    LargeCap Value  May 13, 1970  -44.39  -4.18  -2.86  8.01 
    LargeCap Value II  August 30, 2004  -46.67      -6.56 
    LargeCap Value III  May 1, 2002  -49.90  -6.59    -3.68 
    MFS VIT Utilities  January 3, 1995  -46.98  6.82  3.68  8.90 
    MFS VIT Value  January 2, 2002  -42.01  -1.45    -0.25 
    MidCap Blend  December 18, 1987  -43.17  -1.53  2.86  8.91 
    MidCap Growth I  May 1, 1998  -50.25  -4.69  -2.55  -2.83 
    MidCap Value II  May 3, 1999  -52.98  -5.97    2.14 
    Money Market  March 18, 1983  -7.34  0.40  1.28  1.29 
    Mortgage Securities  May 6, 1993  -55.34  -11.71  -3.62  -0.92 
    Neuberger Berman AMT Partners  March 22, 1994  -61.30  -6.72  -3.12  3.13 
    Neuberger Berman AMT Small Cap Growth  July 12, 2002  -48.62  -8.82    -3.61 
    Neuberger Berman AMT Socially Responsive  February 18, 1999  -48.59  -4.96    -0.72 
    PIMCO VIT All Asset Portfolio  April 30, 2003  -25.42  -0.25    1.60 
    PIMCO VIT Total Return  December 31, 1997  -5.15  2.23  3.63  3.90 
    Principal LifeTime 2010  August 30, 2004  -40.21      -4.57 
    Principal LifeTime 2020  August 30, 2004  -43.40      -4.34 
    Principal LifeTime 2030  August 30, 2004  -45.63      -4.98 
    Principal LifeTime 2040  August 30, 2004  -47.33      -5.08 
    Principal LifeTime 2050  August 30, 2004  -48.20      -5.27 
    Principal LifeTime Strategic Income  August 30, 2004  -33.32      -3.63 
    Real Estate Securities  May 1, 1998  -42.13  0.60  7.07  5.81 
    SAM Balanced Portfolio  June 3, 1997  -35.57  -2.05  2.10  3.36 
    SAM Conservative Balanced Portfolio  April 23, 1998  -28.73  -1.38  1.03  1.23 
    SAM Conservative Growth Portfolio  June 3, 1997  -42.38  -3.15  1.45  3.02 
    SAM Fixed Income Portfolio  September 9, 1997  -23.37  -1.26  2.16  2.89 
    SAM Strategic Growth  June 3, 1997  -46.61  -3.95  0.96  3.22 
    Short-Term Bond  May 1, 2003  -21.34  -3.17    -2.69 
    Short-Term Income  January 12, 1994  -58.00  -13.44  -4.31  -2.10 
    SmallCap Growth II  May 1, 1998  -50.26  -7.25  -5.06  -4.61 
    SmallCap Value I  May 1, 1998  -41.10  -3.66  5.67  3.58 
    T. Rowe Price Blue Chip Growth  December 29, 2000  -51.74  -7.05    -6.55 
    T. Rowe Price Health Sciences  December 29, 2000  -38.51  0.66    -1.31 
    Van Eck Worldwide Hard Assets  May 1, 2006  -55.34      -13.31 
    West Coast Equity  April 28, 1998  -42.62  -2.85  3.84  4.35 
     
                           For Contracts with the Premium Payment   
                           Credit Rider and without Surrender Charge   
              Since 
     Division  Date Effective One Year Five Years Ten Years  Inception
    AIM V.I. Basic Value  September 10, 2001  -52.69  -10.15    -6.81 
    AIM V.I. International Growth  May 5, 1993  -41.51  3.13  0.04  3.97 
    AIM V.I. Small Cap Equity  August 29, 2003  -32.61  -1.81    0.61 
    AllianceBernstein Small Cap Growth  August 15, 1996  -46.58  -5.50  -3.99  -2.12 
    American Century VP Inflation Protection  December 31, 2002  -3.44  1.25    1.64 
    American Century VP Ultra  May 1, 2001  -42.75  -6.93    -6.29 
    American Century VP Vista  October 5, 2001  -49.60  -2.31    -0.18 
    Asset Allocation  June 1, 1994  -26.25  -0.23  1.03  4.11 
    Bond & Mortgage Securities  December 18, 1987  -18.62  -2.57  0.37  4.02 
    Diversified International  May 2, 1994  -47.24  1.72  -0.43  2.79 

    8 CALCULATION OF PERFORMANCE DATA  Principal Investment Plus Variable Annuity SM 
      1-800-852-4450 

    Dreyfus Technology Growth  August 31, 1999  -42.36  -8.16    -8.98 
    Equity Income  April 28, 1998  -35.19  -0.51  2.71  2.69 
    Fidelity VIP Contrafund  January 3, 1995  -43.78  -1.76  -0.26  6.69 
    Fidelity VIP Equity-Income  November 3, 1986  -43.90  -5.81  -2.27  5.34 
    Fidelity VIP Growth  October 31, 1986  -48.31  -6.80  -5.15  5.44 
    Fidelity VIP Mid Cap  December 28, 1998  -40.75  0.93  8.56  8.88 
    Fidelity VIP Overseas  January 28, 1987  -45.02  -1.11  -1.23  2.93 
    Goldman Sachs Mid Cap Value  May 1, 1998  -38.24  -0.51  4.66  2.81 
    Goldman Sachs Structured Small Cap Equity  February 13, 1998  -35.27  -7.05  -0.22  -1.26 
    Government & High Quality Bond  April 9, 1987  -3.47  0.65  2.19  4.61 
    International Emerging Markets  October 24, 2000  -55.72  6.25    6.39 
    International SmallCap  May 1, 1998  -51.23  1.60  5.48  3.92 
    LargeCap Blend II  May 1, 2002  -37.61  -4.04    -2.86 
    LargeCap Growth  May 2, 1994  -44.24  -3.02  -5.93  0.93 
    LargeCap Growth I  June 1, 1994  -41.73  -6.05  -4.47  3.79 
    LargeCap S&P 500 Index  May 3, 1999  -38.29  -4.33    -4.68 
    LargeCap Value  May 13, 1970  -36.39  -3.25  -2.86  8.01 
    LargeCap Value II  August 30, 2004  -38.67      -5.42 
    LargeCap Value III  May 1, 2002  -41.90  -5.56    -3.31 
    MFS VIT Utilities  January 3, 1195  -38.98  7.42  3.68  8.90 
    MFS VIT Value  January 2, 2002  -34.01  -0.62    0.04 
    MidCap Blend  December 18, 1987  -35.17  -0.69  2.86  8.91 
    MidCap Growth I  May 1, 1998  -42.25  -3.74  -2.55  -2.83 
    MidCap Value II  May 3, 1999  -44.98  -4.96    2.14 
    Money Market  March 18, 1983  0.66  1.17  1.28  1.29 
    Mortgage Securities  May 6, 1993  -47.34  -10.43  -3.62  -0.92 
    Neuberger Berman AMT Partners  March 22, 1994  -53.30  -5.69  -3.12  3.13 
    Neuberger Berman AMT Small Cap Growth  July 12, 2002  -40.62  -7.70    -3.23 
    Neuberger Berman AMT Socially Responsive  February 18, 1999  -40.59  -4.00    -0.72 
    PIMCO VIT All Asset  April 30, 2003  -17.42  0.54    2.08 
    PIMCO VIT Total Return  December 31, 1997  2.85  2.95  3.63  3.90 
    Principal LifeTime 2010  August 30, 2004  -32.21      -3.51 
    Principal LifeTime 2020  August 30, 2004  -35.40      -3.29 
    Principal LifeTime 2030  August 30, 2004  -37.63      -3.91 
    Principal LifeTime 2040  August 30, 2004  -39.33      -4.00 
    Principal LifeTime 2050  August 30, 2004  -40.20      -4.18 
    Principal LifeTime Strategic Income  August 30, 2004  -25.32      -2.60 
    Real Estate Securities  May 1, 1998  -34.13  1.37  7.07  5.81 
    SAM Balanced Portfolio  June 3, 1997  -27.57  -1.20  2.10  3.36 
    SAM Conservative Balanced Portfolio  April 23, 1998  -20.73  -0.55  1.03  1.23 
    SAM Conservative Growth Portfolio  June 3, 1997  -34.38  -2.25  1.45  3.02 
    SAM Flexible Income Portfolio  September 9, 1997  -15.37  -0.43  2.16  2.89 
    SAM Strategic Growth Portfolio  June 3, 1997  -38.61  -3.03  0.96  3.22 
    Short-Term Bond  May 1, 2003  -13.34  -2.28    -2.10 
    Short-Term Income  January 12, 1994  -50.00  -12.06  -4.31  -2.10 
    SmallCap Growth II  May 1, 1998  -42.26  -6.19  -5.06  -4.61 
    SmallCap Value I  May 1, 1998  -33.10  -2.74  5.67  3.58 
    T. Rowe Price Blue Chip Growth  December 29, 2000  -43.74  -6.00    -6.55 
    T. Rowe Price Health Sciences  December 29, 2000  -30.51  1.42    -1.31 
    Van Eck Worldwide Hard Assets  May 1, 2006  -47.34      -10.53 
    West Coast Equity  April 28, 1998  -34.62  -1.97  3.84  4.35 

    Principal Investment Plus Variable Annuity SM  CALCULATION OF PERFORMANCE DATA  9 
    www.principal.com     

    TAXATION UNDER CERTAIN RETIREMENT PLANS

    INDIVIDUAL RETIREMENT ANNUITIES

    Contributions. Individuals may make contributions for individual retirement annuity (IRA) contracts. Individuals may make deductible contributions (for any year) up to the lesser of the amount shown in the chart or 100% of compensation.

    Individuals age 50 or over are also permitted to make additional “catch-up” contributions. The additional contribution is $1,000 in 2008 and 2009.

    Such individuals may establish a traditional IRA for a non-working spouse. The annual contribution for both spouses’ contracts cannot exceed the lesser of the amount shown in the chart or 100% of the working spouse’s compensation. No more than the individual IRA limit may be contributed to either spouse’s IRA for any year.

      IRA - Maximum Annual Contribution   
    Year  Individual IRA  Individual IRA + Spousal IRA 
    2008  $5,000  $10,000 
    2009  $5,000  $10,000 

    Starting in 2009, limits are indexed to inflation.

    Contributions may be tax deductible. If an individual and his/her spouse do not participate in a qualified retirement plan, the contributions to an IRA are fully tax deductible regardless of income. If an individual is an active participant in a qualified retirement plan, his/her ability to deduct the contributions depends upon his/her income level.

    For individuals who are not active participants but whose spouses are, deductibility of traditional IRA contributions is phased out if the couple files a joint return and the Adjusted Gross Income is between $166,000 and $176,000 in 2009.


    An individual may make non-deductible IRA contributions to the extent of the excess of: 
         (1) The lesser of maximum annual contribution or 100% of compensation, over 
         (2) The IRA deductible contributions made with respect to the individual. 

    An individual may not make any contribution to his/her own IRA for the year in which he/she reaches age 70 ½ or for any year thereafter.

    Taxation of Distributions. Distributions from IRA Contracts are taxed as ordinary income to the recipient, although special rules exist for the tax-free return of non-deductible contributions. In addition, taxable distributions received under an IRA Contract prior to age 59 ½ are subject to a 10% penalty tax in addition to regular income tax. Certain distributions are exempted from this penalty tax, including distributions following the owner’s death or disability if the distribution is paid as part of a series of substantially equal periodic payments made for the life (or life expectancy) of the Owner or the joint lives (or joint life expectancies) of Owner and the Owner’s designated Beneficiary; distributions to pay medical expenses; distributions for certain unemployment expenses; distributions for first home purchases (up to $10,000) and distributions for higher education expenses and distributions for certain natural disaster victims.

    10  TAXATION UNDER CERTAIN RETIREMENT PLANS  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    Required Distributions. Generally, distributions from IRA Contracts must commence not later than April 1 of the calendar year following the calendar year in which the owner attains age 70 ½, and such distributions must be made over a period that does not exceed the uniform life distribution period established by the IRS. A penalty tax of 50% may be imposed on any amount by which the minimum required distribution in any year exceeded the amount actually distributed in that year. In addition, in the event that the owner dies before his or her entire interest in the Contract has been distributed, the owner’s entire interest must be distributed in accordance with rules similar to those applicable upon the death of the Contract Owner in the case of a non-qualified Contract, as described in the Prospectus.

    Tax-Free Rollovers. The Internal Revenue Code (the “Code”) permits the taxable portion of funds to be transferred in a tax-free rollover from a qualified retirement plan, tax-deferred annuity plan or governmental 457(b) plan to an IRA Contract if certain conditions are met, and if the rollover of assets is completed within 60 days after the distribution from the qualified plan is received. A direct rollover of funds may avoid a 20% federal tax withholding generally applicable to qualified plans, tax-deferred annuity plan, or governmental 457(b) plan distributions. In addition, not more frequently than once every twelve months, amounts may be rolled over tax-free from one IRA to another, subject to the 60-day limitation and other requirements. The once-per-year limitation on rollovers does not apply to direct transfers of funds between IRA custodians or trustees.

    SIMPLIFIED EMPLOYEE PENSION PLANS AND SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLANS

    Contributions. Under Section 408(k) of the Code, employers may establish a type of IRA plan referred to as a simplified employee pension plan (SEP). Employer contributions to a SEP cannot exceed the lesser of 100% of compensation or $49,000 for 2009.

    Employees of certain small employers may have contributions made to the salary reduction simplified employee pension plan (SAR/SEP) on their behalf on a salary reduction basis. The amount that an employee chooses to defer and contribute to the SAR/SEP is referred to as an elective deferral.

    These elective deferrals are subject to the same cap as elective deferrals to IRC Section 401(k) plans, see table below. In addition to the elective deferrals, SAR/SEP may permit additional elective deferrals by individuals age 50 or over, referred to as “catch-up contributions”.

    No new SAR/SEP are permitted after 1996 for any employer, but those in effect prior to 1997 may continue to operate, receive contributions, and add new employees.

    Employees of tax-exempt organizations and state and local government agencies are not eligible for SAR/SEPs.

                         Salary Reduction Simplified Employee Pension Plan (SAR-SEP) 
    Year  Elective Deferral  Catch-up Contribution 
    2008  $15,500  $5,000 
    2009  $16,500  $5,500 

    Taxation of Distributions. Generally, distribution payments from SEPs and SAR/SEPs are subject to the same distribution rules described above for IRAs.

    Required Distributions. SEPs and SAR/SEPs are subject to the same minimum required distribution rules described above for IRAs.

    Tax-Free Rollovers. Generally, rollovers and direct transfers may be made to and from SEPs and SAR/SEPs in the same manner as described above for IRAs, subject to the same conditions and limitations.

    Principal Investment Plus Variable Annuity SM  TAXATION UNDER CERTAIN RETIREMENT PLANS  11 
    www.principal.com     

    SAVINGS INCENTIVE MATCH PLANS FOR EMPLOYEES (SIMPLE IRA)

    Contributions. Under Section 408(p) of the Code, employers may establish a type of IRA plan known as a SIMPLE IRA. Employees may have contributions made to the SIMPLE IRA on a salary reduction basis. The amount that an employee chooses to defer and contribute to the SIMPLE IRA is referred to as an elective deferral.

    These elective deferrals cannot exceed the amounts shown in the chart. In addition to the elective deferrals, SIMPLE IRA may permit additional elective deferrals by individuals age 50 or over, referred to as “catch-up contributions”.

    Elective contribution amounts made under the salary reduction portions (i.e., those subject to the $11,500 limit in 2009) of a SIMPLE IRA plan are counted in the overall limit on elective deferrals by any individual. For example, an individual under age 50 who defers the maximum of $11,500 to a SIMPLE IRA of (i.e., $16,500 for 2009) one employer and participates in a 401(k) plan of another employer would be limited to an elective deferral of $5,000 in 2009 ($16,500 – $11,500) to the 401(k) plan.

    The employer generally must match either 100% of the employee’s elective deferral, up to 3% of the employee’s compensation or fixed nonelective contributions of 2% of compensation.


    Taxation of Distributions. Generally, distribution payments from SIMPLE IRAs are subject to the same distribution rules described above for IRAs, except that distributions made within two years of the date of an employee’s first participation in a SIMPLE IRA of an employer are subject to a 25% penalty tax instead of the 10% penalty tax discussed previously.

    Required Distributions. SIMPLE IRAs are subject to the same minimum required distribution rules described above for IRAs.

    Tax-Free Rollovers. Direct transfers may be made among SIMPLE IRAs in the same manner as described above for IRAs, subject to the same conditions and limitations. Rollovers from SIMPLE IRAs are permitted after two years have elapsed from the date of an employee’s first participation in a SIMPLE IRA of the employer. Rollovers to SIMPLE IRAs from other plans are not permitted.

    ROTH INDIVIDUAL RETIREMENT ANNUITIES (ROTH IRA)

    Contribution. Under Section 408A of the Code, individuals may contribute to a Roth IRA on his/her own behalf up to the lesser of maximum annual contribution limit as shown in the chart or 100% of compensation. In addition, the contribution must be reduced by the amount of any contributions made to other IRAs for the benefit of the same individual.

    Individuals age 50 or over are also permitted to make additional “catch-up” contributions. The additional contribution is $1,000 for 2008 and 2009.


    Starting in 2009, individual Roth IRA limits are indexed for cost-of-living.

    12  TAXATION UNDER CERTAIN RETIREMENT PLANS  Principal Investment Plus Variable Annuity SM 
        1-800-852-4450 

    The maximum contribution is phased out for single taxpayers with adjusted gross income between $105,000 and $120,000 and for joint filers with adjusted gross income between $166,000 and $176,000 (see chart below).

    If taxable income is recognized on the traditional IRA, and IRA owner (with adjusted gross income of less than $100,000) may convert a traditional IRA into a Roth IRA. All IRA income will need to be recognized in the year of conversion. No IRS 10% tax penalty will apply to the conversion.

                               Modified Adjusted Gross Income Limits - 2009   
    Single  Married Filing Joint  ROTH IRA Contribution 
    $105,000 or less  $166,000 or less  Full Contribution 
    $105,000 – $120,000  $166,000 – $176,000  Partial Contribution* 
    $120,000 & over  $176,000 & over  No Contribution 

    * Those entitled to only a partial contribution should check with a tax advisor to determine the allowable contribution.

    A person whose filing status is “married, filing separately” may not make a full Roth IRA contribution, unless the couple are separated and have been living apart for the entire year. Only a partial contribution is allowed if the Modified Adjusted Gross Income is less than $10,000.

    Taxation of Distribution. Qualified distributions are received income-tax free by the Roth IRA owner, or beneficiary in case of the Roth IRA owner’s death. A qualified distribution is any distribution made after five years if the IRA owner is over age 591/2, dies, becomes disabled, or uses the funds for first-time home buyer expenses at the time of distribution. The five-year period for converted amounts begins from the year of the conversion.

    Principal Investment Plus Variable Annuity SM  TAXATION UNDER CERTAIN RETIREMENT PLANS  13 
    www.principal.com     

    Report of Independent Registered Public Accounting Firm

    The Board of Directors and Participants
    Principal Life Insurance Company

    We have audited the accompanying statements of assets and liabilities of each of the divisions of Principal Life Insurance Company Separate Account B (“Separate Account”) comprised of the divisions described in Note 1, as of December 31, 2008, and the related statements of operations for the year then ended and changes in net assets for each of the two years in the period then ended, or for those divisions operating for portions of such periods as disclosed in the financial statements. These financial statements are the responsibility of the management of the Separate Account. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Separate Account’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Separate Account’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2008 by correspondence with the fund companies or their transfer agents, as applicable. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the respective divisions of Principal Life Insurance Company Separate Account B at December 31, 2008, and the results of their operations and the changes in their net assets for the periods described above, in conformity with U.S. generally accepted accounting principles.

      /s/ Ernst & Young LLP

    Des Moines, Iowa

    April 24, 2009

    Principal Life Insurance Company
     
    Separate Account B
     
     
    Statements of Assets and Liabilities
     
     
    December 31, 2008
     
     
     
          AIM V.I. 
      AIM V.I.  Capital 
      Basic Value  Appreciation 
      Series I  Series I 
      Division  Division 
     
    Assets       
    Investments in shares of mutual funds, at market  $ 842,020  $ 6,141,147 
    Liabilities    –  – 
     
    Net assets  $ 842,020  $ 6,141,147 
     
     
    Net assets       
    Applicable to accumulation units:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    –  5,186,928 
       The Principal Variable Annuity with Purchase Payment Credit Rider    –  954,219 
       Principal Investment Plus Variable Annuity    568,301  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    273,719  – 
    Applicable to contracts in annuitization period:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    Total net assets  $ 842,020  $ 6,141,147 
     
     
    Investments in shares of mutual funds, at cost  $ 1,854,284  $ 9,532,917 
    Shares of mutual fund owned    205,371  363,597 
    Accumulation units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    –  836,070 
       The Principal Variable Annuity With Purchase Payment Credit Rider    –  156,307 
       Principal Investment Plus Variable Annuity    90,709  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    44,851  – 
    Accumulation unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    –  6.20 
       The Principal Variable Annuity With Purchase Payment Credit Rider    –  6.10 
       Principal Investment Plus Variable Annuity    6.27  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    6.10  – 
    Annuitized units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
    Annuitized unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    See accompanying notes.       

    2

        AIM V.I.  AIM V.I.  AIM V.I.   
    AIM V.I.  AIM V.I.  Global  International  Small Cap  AIM V.I. 
    Core Equity  Dynamics  Health Care  Growth  Equity  Technology 
    Series I  Series I  Series I  Series I  Series I  Series I 
    Division  Division  Division  Division  Division  Division 
     
    $ 30,084,589  $ 1,799,818  $ 8,405,382  $ 111,635  $ 4,072,254  $ 2,797,959 
    –  –  –  –  –  – 
    $ 30,084,589  $ 1,799,818  $ 8,405,382  $ 111,635  $ 4,072,254  $ 2,797,959 
     
     
     
    $ –  $ –  $ –  $ –  $ –  $ – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    23,199,473  909,140  5,082,339  –  1,815,088  1,695,127 
    6,885,116  890,678  3,323,043  –  942,107  1,102,832 
    –  –  –  87,460  818,935  – 
    –  –  –  24,175  496,124  – 
     
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    $ 30,084,589  $ 1,799,818  $ 8,405,382  $ 111,635  $ 4,072,254  $ 2,797,959 
     
    $ 38,873,081  $ 2,770,773  $ 10,757,108  $ 123,987  $ 5,882,110  $ 3,948,964 
    1,523,270  180,162  674,048  5,728  383,451  333,885 
     
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    3,063,142  155,978  594,723  –  181,258  479,996 
    954,418  159,972  407,071  –  96,579  326,921 
    –  –  –  14,395  81,784  – 
    –  –  –  3,994  50,862  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    7.57  5.83  8.55  –  10.01  3.53 
    7.21  5.57  8.16  –  9.75  3.37 
    –  –  –  6.08  10.01  – 
    –  –  –  6.05  9.75  – 
     
    –  –  –  –  –  – 
    –  –  –  –  –  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
    –  –  –  –  –  – 

     

    3

    Principal Life Insurance Company
     
    Separate Account B
     
     
    Statements of Assets and Liabilities (continued)
     
     
    December 31, 2008
     
     
      Alliance   
      Bernstein VP  American 
      Series Small  Century VP 
      Cap Growth  Income & 
      Class A  Growth 
      Division  Division 
     
    Assets       
    Investments in shares of mutual funds, at market  $ 1,216,674  $ 17,875,914 
    Liabilities    –  – 
     
    Net assets  $ 1,216,674  $ 17,875,914 
     
     
    Net assets       
    Applicable to accumulation units:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  3,175,254 
       Principal Freedom 2 Variable Annuity    –  97,349 
       The Principal Variable Annuity    –  8,988,079 
       The Principal Variable Annuity With Purchase Payment Credit Rider    –  5,615,232 
       Principal Investment Plus Variable Annuity    909,653  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    307,021  – 
    Applicable to contracts in annuitization period:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    Total net assets  $ 1,216,674  $ 17,875,914 
     
     
    Investments in shares of mutual funds, at cost  $ 1,948,794  $ 23,966,416 
    Shares of mutual fund owned    144,327  3,708,696 
    Accumulation units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  399,102 
       Principal Freedom 2 Variable Annuity    –  13,489 
       The Principal Variable Annuity    –  1,159,528 
       The Principal Variable Annuity With Purchase Payment Credit Rider    –  758,341 
       Principal Investment Plus Variable Annuity    108,953  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    37,750  – 
    Accumulation unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  7.96 
       Principal Freedom 2 Variable Annuity    –  7.22 
       The Principal Variable Annuity    –  7.75 
       The Principal Variable Annuity With Purchase Payment Credit Rider    –  7.40 
       Principal Investment Plus Variable Annuity    8.35  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    8.13  – 
    Annuitized units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
    Annuitized unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA    –  – 
    See accompanying notes.       

    4

        American       
    American  American  Century VP II  American  American   
    Century VP I  Century VP I  Inflation  Century VP II  Century VP II  Asset 
    Ultra  Vista  Protection  Ultra  Value  Allocation 
    Division  Division  Division  Division  Division  Division 
     
    $ 4,393,475  $ 1,891,753  $ 67,684,111  $ 48,691,721  $ 25,960,083  $ 50,513,490 
    –  –  –  –  –  – 
    $ 4,393,475  $ 1,891,753  $ 67,684,111  $ 48,691,721  $ 25,960,083  $ 50,513,490 
     
     
     
    $ –  $ –  $ –  $ –  $ –  $ – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  144,815 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    2,804,132  –  –  –  17,161,247  35,094,576 
    1,589,343  –  –  –  8,798,836  6,498,483 
    –  1,180,734  51,181,106  36,191,453  –  5,860,384 
    –  711,019  16,503,005  12,500,268  –  2,915,232 
     
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    $ 4,393,475  $ 1,891,753  $ 67,684,111  $ 48,691,721  $ 25,960,083  $ 50,513,490 
     
    $ 6,554,092  $ 3,156,042  $ 70,074,223  $ 75,951,270  $ 41,197,918  $ 61,912,204 
    724,996  175,650  6,836,779  8,128,835  5,547,026  5,026,218 
     
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  130,040 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    448,916  –  –  –  1,737,549  1,774,390 
    266,361  –  –  –  927,030  344,944 
    –  125,442  4,751,867  4,882,841  –  296,396 
    –  77,546  1,572,880  1,731,296  –  154,791 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    –  –  –  –  –  1.11 
    –  –  –  –  –  – 
    –  –  –  –  –  – 
    6.25  –  –  –  9.88  19.78 
    5.97  –  –  –  9.49  18.84 
    –  9.41  10.77  7.41  –  19.78 
    –  9.17  10.49  7.22  –  18.84 
     
    –  –  –  –  –  – 
    –  –  –  –  –  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
    –  –  –  –  –  – 

     

    5

    Principal Life Insurance Company
     
    Separate Account B
     
     
    Statements of Assets and Liabilities (continued)
     
     
    December 31, 2008
     
     
          Bond & 
          Mortgage 
      Balanced  Securities 
      Division  Division 
     
    Assets       
    Investments in shares of mutual funds, at market  $ 44,974,598  $ 238,616,478 
    Liabilities    –  – 
     
    Net assets  $ 44,974,598  $ 238,616,478 
     
     
    Net assets       
    Applicable to accumulation units:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    589,933  225,608 
       Premier Variable    2,033,668  2,637,279 
       Principal Freedom Variable Annuity    –  7,944,308 
       Principal Freedom 2 Variable Annuity    –  514,449 
       The Principal Variable Annuity    34,231,782  97,208,073 
       The Principal Variable Annuity With Purchase Payment Credit Rider    8,119,215  37,765,435 
       Principal Investment Plus Variable Annuity    –  70,434,930 
       Principal Investment Plus Variable Annuity With Purchase Rider    –  21,886,396 
    Applicable to contracts in annuitization period:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    Total net assets  $ 44,974,598  $ 238,616,478 
     
     
    Investments in shares of mutual funds, at cost  $ 61,557,744  $ 299,591,645 
    Shares of mutual fund owned    4,199,309  25,520,479 
    Accumulation units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    378,668  129,962 
       Premier Variable    1,265,112  1,472,497 
       Principal Freedom Variable Annuity    –  684,473 
       Principal Freedom 2 Variable Annuity    –  59,045 
       The Principal Variable Annuity    2,343,357  6,144,205 
       The Principal Variable Annuity With Purchase Payment Credit Rider    583,516  2,505,996 
       Principal Investment Plus Variable Annuity    –  4,452,121 
       Principal Investment Plus Variable Annuity With Purchase Rider    –  1,452,365 
    Accumulation unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    1.56  1.74 
       Premier Variable    1.61  1.79 
       Principal Freedom Variable Annuity    –  11.61 
       Principal Freedom 2 Variable Annuity    –  8.71 
       The Principal Variable Annuity    14.61  15.82 
       The Principal Variable Annuity With Purchase Payment Credit Rider    13.91  15.07 
       Principal Investment Plus Variable Annuity    –  15.82 
       Principal Investment Plus Variable Annuity With Purchase Rider    –  15.07 
    Annuitized units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
    Annuitized unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA    –  – 
    See accompanying notes.       

    6

            Fidelity VIP  Fidelity VIP  Fidelity VIP 
        Dreyfus IP    Equity-Income  Growth  Growth 
    Diversified  Technology Growth  Equity  Service  Service  Service 
    International  Service Shares  Income  Class 2  Class  Class 2 
    Division Division  Division  Division  Division  Division 
     
    $ 151,538,724  $ 709,523  $ 142,948,606  $ 38,384,493  $ 16,640,452  $ 5,241,959 
      –  –  –  –  –  – 
    $ 151,538,724  $ 709,523  $ 142,948,606  $ 38,384,493  $ 16,640,452  $ 5,241,959 
     
     
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
    473,628  –  –  –  –  – 
    3,578,355  –  36,791  –  –  – 
    3,815,790  –  –  –  –  – 
    644,501  –  –  –  –  – 
    88,763,889  –  21,582,468  21,314,150  12,517,283  – 
    27,364,028  –  7,115,853  11,219,122  4,123,169  – 
    20,873,056  479,770  87,948,085  4,508,521  –  3,415,935 
    6,025,477  229,753  26,265,409  1,342,700  –  1,826,024 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
    $ 151,538,724  $ 709,523  $ 142,948,606  $ 38,384,493  $ 16,640,452  $ 5,241,959 
     
    $ 243,663,774  $ 1,059,095  $ 226,844,045  $ 66,662,924  $ 29,549,219  $ 8,130,488 
    16,382,565  113,706  12,323,156  2,952,653  709,009  224,880 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
    263,706  –  –  –  –  – 
    1,931,359  –  43,422  –  –  – 
    382,153  –  –  –  –  – 
    87,424  –  –  –  –  – 
    5,385,908  –  3,187,461  2,704,902  2,188,216  – 
    1,743,153  –  1,063,575  1,481,583  756,750  – 
    1,266,563  60,091  12,991,527  572,211  –  435,638 
    383,853  29,541  3,926,587  177,331  –  239,061 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      1.80  –  –  –  –  – 
      1.85  –  0.85  –  –  – 
      9.98  –  –  –  –  – 
      7.37  –  –  –  –  – 
      16.48  –  6.77  7.88  5.72  – 
      15.70  –  6.69  7.57  5.45  – 
      16.48  7.98  6.77  7.88  –  7.84 
      15.70  7.78  6.69  7.57  –  7.64 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 

     

    7

    Principal Life Insurance Company
     
    Separate Account B
     
     
    Statements of Assets and Liabilities (continued)
     
     
    December 31, 2008
     
     
     
      Fidelity VIP  Fidelity VIP II 
      Overseas  Contrafund 
      Service  Service 
      Class 2  Class 
      Division  Division 
     
    Assets       
    Investments in shares of mutual funds, at market  $ 37,380,417  $ 57,669,223 
    Liabilities    –  – 
     
    Net assets  $ 37,380,417  $ 57,669,223 
     
     
    Net assets       
    Applicable to accumulation units:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    –  44,209,873 
       The Principal Variable Annuity With Purchase Payment Credit Rider    –  13,459,350 
       Principal Investment Plus Variable Annuity    26,852,131  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    10,528,286  – 
    Applicable to contracts in annuitization period:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    Total net assets  $ 37,380,417  $ 57,669,223 
     
     
    Investments in shares of mutual funds, at cost  $ 61,519,601  $ 96,055,962 
    Shares of mutual fund owned    3,096,969  3,761,854 
    Accumulation units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    –  4,545,092 
       The Principal Variable Annuity With Purchase Payment Credit Rider    –  1,452,711 
       Principal Investment Plus Variable Annuity    2,623,397  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    1,055,908  – 
    Accumulation unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    –  9.73 
       The Principal Variable Annuity With Purchase Payment Credit Rider    –  9.26 
       Principal Investment Plus Variable Annuity    10.24  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    9.97  – 
    Annuitized units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
    Annuitized unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA    –  – 
    See accompanying notes.       

    8

          Goldman Sachs       
    Fidelity VIP II  Fidelity VIP III  Structured  Goldman Sachs  Government   
    Contrafund  Mid Cap  Small Cap  VIT Mid Cap  & High  International 
    Service Service  Equity Service  Value Service  Quality  Emerging 
    Class 2 Class 2  Class I  Class I  Bond  Markets 
    Division Division  Division  Division  Division  Division 
     
    $ 28,737,378  $ 5,160,787  $ 3,309,548  $ 12,939,322  $ 237,196,678  $ 62,434,726 
      –  –  –  –  –  – 
    $ 28,737,378  $ 5,160,787  $ 3,309,548  $ 12,939,322  $ 237,196,678  $ 62,434,726 
     
     
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  149,686  – 
      –  –  –  –  27,698  – 
      –  –  –  –  264,112  – 
      –  –  –  –  3,260,608  353,114 
      –  –  –  –  4,546,466  – 
      –  –  –  –  309,452  – 
      –  –  –  –  136,233,588  28,316,802 
      –  –  –  –  46,737,451  13,420,639 
    22,775,083  3,780,813  2,330,038  9,240,610  35,127,454  14,031,494 
    5,962,295  1,379,974  979,510  3,698,712  10,540,163  6,312,677 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
    $ 28,737,378  $ 5,160,787  $ 3,309,548  $ 12,939,322  $ 237,196,678  $ 62,434,726 
     
    $ 53,377,887  $ 8,760,426  $ 6,166,209  $ 23,142,717  $ 250,908,675  $ 121,870,762 
    1,898,110  284,812  474,147  1,494,148  22,292,921  6,975,947 
     
      –  –  –  –  –  – 
      –  –  –  –  53,129  – 
      –  –  –  –  8,823  – 
      –  –  –  –  122,970  – 
      –  –  –  –  1,464,211  174,961 
      –  –  –  –  420,132  – 
      –  –  –  –  29,598  – 
      –  –  –  –  7,352,430  1,526,169 
      –  –  –  –  2,648,088  759,383 
    2,410,042  356,788  321,643  981,310  1,895,852  756,267 
    647,681  133,684  138,806  403,217  597,208  357,202 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  2.82  – 
      –  –  –  –  3.14  – 
      –  –  –  –  2.15  – 
      –  –  –  –  2.23  2.02 
      –  –  –  –  10.82  – 
      –  –  –  –  10.46  – 
      –  –  –  –  18.53  18.55 
      –  –  –  –  17.65  17.67 
      9.45  10.60  7.24  9.42  18.53  18.55 
      9.21  10.32  7.06  9.17  17.65  17.67 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 

     

    9

    Principal Life Insurance Company
     
    Separate Account B
     
     
    Statements of Assets and Liabilities (continued)
     
     
    December 31, 2008
     
     
     
          Janus Aspen 
          Mid Cap 
      International  Growth 
      SmallCap  Service Shares 
      Division  Division 
     
    Assets       
    Investments in shares of mutual funds, at market  $ 54,644,546  $ 9,983,596 
    Liabilities    –  – 
     
    Net assets  $ 54,644,546  $ 9,983,596 
     
     
    Net assets       
    Applicable to accumulation units:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    63,619  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    29,730,862  6,562,245 
       The Principal Variable Annuity With Purchase Payment Credit Rider    11,116,207  3,421,351 
       Principal Investment Plus Variable Annuity    9,617,495  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    4,116,363  – 
    Applicable to contracts in annuitization period:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    Total net assets  $ 54,644,546  $ 9,983,596 
     
     
    Investments in shares of mutual funds, at cost  $ 106,338,718  $ 12,569,829 
    Shares of mutual fund owned    5,985,164  482,299 
    Accumulation units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    47,665  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    1,820,887  1,271,172 
       The Principal Variable Annuity With Purchase Payment Credit Rider    714,767  695,818 
       Principal Investment Plus Variable Annuity    589,052  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    264,690  – 
    Accumulation unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    1.33  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  – 
       The Principal Variable Annuity    16.33  5.16 
       The Principal Variable Annuity With Purchase Payment Credit Rider    15.55  4.92 
       Principal Investment Plus Variable Annuity    16.33  – 
       Principal Investment Plus Variable Annuity With Purchase Rider    15.55  – 
    Annuitized units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
    Annuitized unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA    –  – 
    See accompanying notes.       

    10

    LargeCap    LargeCap  LargeCap  LargeCap  LargeCap  LargeCap 
    Blend II    Growth  Growth I  S&P 500 Index  Value  Value II 
    Division    Division  Division  Division  Division  Division 
     
    $ 138,622,834  $ 49,772,328  $ 89,909,691  $ 82,147,796  $ 97,288,236  $ 4,021,919 
      –  –  –  –  –  – 
    $ 138,622,834  $ 49,772,328  $ 89,909,691  $ 82,147,796  $ 97,288,236  $ 4,021,919 
     
     
     
    $ –  $ –  $ –  $ –  $ 1,234,733  $ – 
      –  –  –  –  1,480,396  – 
      –  –  –  –  103,267  – 
      –  696,889  –  –  741,723  – 
      –  3,426,129  28,119  625,147  6,425,458  – 
      –  –  1,176,852  8,624,384  3,027,834  – 
      –  –  66,256  538,020  434,575  – 
    40,131,198  35,581,233  68,879,177  39,402,424  62,336,947  – 
    19,587,238  4,040,779  13,673,776  15,994,279  11,243,782  – 
    58,922,544  4,551,750  4,381,370  12,873,615  6,726,423  2,818,175 
    19,981,854  1,475,548  1,704,141  4,089,927  3,394,295  1,203,744 
     
      –  –  –  –  1,331  – 
      –  –  –  –  137,472  – 
    $ 138,622,834  $ 49,772,328  $ 89,909,691  $ 82,147,796  $ 97,288,236  $ 4,021,919 
     
    $ 264,341,681  $ 75,675,841  $ 136,044,798  $ 111,935,213  $ 156,810,997  $ 6,510,075 
    28,406,318  4,908,513  7,671,475  12,599,355  5,043,454  594,080 
     
      –  –  –  –  45,397  – 
      –  –  –  –  322,070  – 
      –  –  –  –  44,960  – 
      –  529,775  –  –  328,281  – 
      –  2,524,487  41,534  779,429  2,743,145  – 
      –  –  196,644  1,216,584  388,212  – 
      –  –  11,101  74,789  60,530  – 
    4,731,380  2,822,226  3,647,237  5,777,678  3,358,488  – 
    2,403,045  336,493  760,159  2,462,230  635,977  – 
    6,947,059  361,053  232,028  1,887,753  362,410  348,956 
    2,451,536  122,881  94,749  629,642  191,998  152,985 
     
    $ –  $ –  $ –  $ –  $ 27.23  $ – 
      –  –  –  –  4.60  – 
      –  –  –  –  5.35  – 
      –  1.32  –  –  2.26  – 
      –  1.36  0.68  0.80  2.34  – 
      –  –  5.98  7.09  7.80  – 
      –  –  5.97  7.19  7.18  – 
      8.48  12.61  18.88  6.82  18.56  – 
      8.15  12.01  17.99  6.50  17.68  – 
      8.48  12.61  18.88  6.82  18.56  8.08 
      8.15  12.01  17.99  6.50  17.68  7.87 
     
      –  –  –  –  49  – 
      –  –  –  –  25,674  – 
     
    $ –  $ –  $ –  $ –  $ 27.23  $ – 
      –  –  –  –  5.35  – 

     

    11

    Principal Life Insurance Company
     
    Separate Account B
     
     
    Statements of Assets and Liabilities (continued)
     
     
    December 31, 2008
     
     
     
     
          LifeTime 
      LargeCap  Strategic 
      Value III  Income 
      Division  Division 
     
    Assets       
    Investments in shares of mutual funds, at market  $ 113,000,951  $ 16,445,515 
    Liabilities    –  – 
     
    Net assets  $ 113,000,951  $ 16,445,515 
     
     
    Net assets       
    Applicable to accumulation units:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  886,659 
       The Principal Variable Annuity    32,139,226  1,129,445 
       The Principal Variable Annuity With Purchase Payment Credit Rider    13,791,210  77,383 
       Principal Investment Plus Variable Annuity    50,269,495  12,166,604 
       Principal Investment Plus Variable Annuity With Purchase Rider    16,801,020  2,185,424 
    Applicable to contracts in annuitization period:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    Total net assets  $ 113,000,951  $ 16,445,515 
     
     
    Investments in shares of mutual funds, at cost  $ 179,436,039  $ 21,727,064 
    Shares of mutual fund owned    15,086,909  1,903,416 
    Accumulation units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  108,546 
       The Principal Variable Annuity    3,932,058  123,132 
       The Principal Variable Annuity With Purchase Payment Credit Rider    1,755,776  8,659 
       Principal Investment Plus Variable Annuity    6,150,421  1,326,402 
       Principal Investment Plus Variable Annuity With Purchase Rider    2,139,037  244,541 
    Accumulation unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    –  8.17 
       The Principal Variable Annuity    8.17  9.17 
       The Principal Variable Annuity With Purchase Payment Credit Rider    7.85  8.94 
       Principal Investment Plus Variable Annuity    8.17  9.17 
       Principal Investment Plus Variable Annuity With Purchase Rider    7.85  8.94 
    Annuitized units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
    Annuitized unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA    –  – 
    See accompanying notes.       

    12

    LifeTime    LifeTime  LifeTime  LifeTime  LifeTime  MidCap 
    2010    2020  2030  2040  2050  Blend 
    Division    Division  Division  Division  Division  Division 
     
    $ 30,145,370  $ 119,535,510  $ 18,995,171  $ 7,121,773  $ 3,856,422  $ 211,731,427 
      –  –  –  –  –  – 
    $ 30,145,370  $ 119,535,510  $ 18,995,171  $ 7,121,773  $ 3,856,422  $ 211,731,427 
     
     
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  922,039 
      –  –  –  –  –  4,506,432 
      –  –  –  –  –  2,922,630 
    3,082,986  4,248,397  2,774,857  288,865  135,652  285,319 
    997,952  620,371  431,189  50,430  92,613  125,032,475 
    234,366  294,436  41,790  28,736  –  27,430,728 
    21,723,343  86,737,891  11,530,066  5,092,659  2,605,091  37,752,083 
    4,106,723  27,634,415  4,217,269  1,661,083  1,023,066  12,879,721 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
    $ 30,145,370  $ 119,535,510  $ 18,995,171  $ 7,121,773  $ 3,856,422  $ 211,731,427 
     
    $ 44,635,667  $ 185,221,918  $ 28,413,812  $ 11,731,262  $ 6,365,063  $ 303,510,101 
    3,735,486  14,739,274  2,416,688  896,949  494,413  8,493,038 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  318,487 
      –  –  –  –  –  1,508,586 
      –  –  –  –  –  202,960 
    403,928  568,188  381,361  40,586  19,303  36,334 
    113,268  69,739  49,838  5,854  10,840  4,613,888 
    27,303  33,972  4,958  3,424  –  1,062,699 
    2,465,855  9,750,546  1,332,633  591,056  304,782  1,393,155 
    478,462  3,188,462  500,291  197,874  122,852  498,992 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  2.90 
      –  –  –  –  –  2.99 
      –  –  –  –  –  14.40 
      7.63  7.48  7.28  7.12  7.03  7.85 
      8.81  8.90  8.65  8.61  8.54  27.10 
      8.58  8.67  8.43  8.39  8.32  25.81 
      8.81  8.90  8.65  8.61  8.54  27.10 
      8.58  8.67  8.43  8.39  8.32  25.81 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 

     

    13

    Principal Life Insurance Company
    Separate Account B
    Statements of Assets and Liabilities (continued) 
    December 31, 2008

      MidCap  MidCap 
      Growth I  Value II 
      Division  Division 
     
    Assets     
    Investments in shares of mutual funds, at market  $ 29,095,695  $ 66,669,765 
    Liabilities  –  – 
     
    Net assets  $ 29,095,695  $ 66,669,765 
     
     
    Net assets     
    Applicable to accumulation units:     
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus  –  – 
       Pension Builder Plus – Rollover IRA  –  – 
       Personal Variable  –  – 
       Premier Variable  4,789  113,783 
       Principal Freedom Variable Annuity  769,488  3,740,743 
       Principal Freedom 2 Variable Annuity  87,371  223,165 
       The Principal Variable Annuity  16,886,784  20,688,369 
       The Principal Variable Annuity With Purchase Payment Credit Rider  6,932,395  10,739,209 
       Principal Investment Plus Variable Annuity  3,109,267  23,493,244 
       Principal Investment Plus Variable Annuity With Purchase Rider  1,305,601  7,671,252 
    Applicable to contracts in annuitization period:     
       Bankers Flexible Annuity  –  – 
       Pension Builder Plus – Rollover IRA  –  – 
     
    Total net assets  $ 29,095,695  $ 66,669,765 
     
     
    Investments in shares of mutual funds, at cost  $ 47,068,375  $ 120,103,505 
    Shares of mutual fund owned  4,841,214  8,460,630 
    Accumulation units outstanding:     
       Bankers Flexible Annuity  –  – 
       Pension Builder Plus  –  – 
       Pension Builder Plus – Rollover IRA  –  – 
       Personal Variable  –  – 
       Premier Variable  5,653  113,267 
       Principal Freedom Variable Annuity  86,977  269,594 
       Principal Freedom 2 Variable Annuity  13,298  37,553 
       The Principal Variable Annuity  2,122,180  2,250,901 
       The Principal Variable Annuity With Purchase Payment Credit Rider  914,660  1,223,166 
       Principal Investment Plus Variable Annuity  390,760  2,556,175 
       Principal Investment Plus Variable Annuity With Purchase Rider  172,268  873,769 
    Accumulation unit value:     
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus  –  – 
       Pension Builder Plus – Rollover IRA  –  – 
       Personal Variable  –  – 
       Premier Variable  0.85  1.00 
       Principal Freedom Variable Annuity  8.85  13.88 
       Principal Freedom 2 Variable Annuity  6.57  5.94 
       The Principal Variable Annuity  7.96  9.19 
       The Principal Variable Annuity With Purchase Payment Credit Rider  7.58  8.78 
       Principal Investment Plus Variable Annuity  7.96  9.19 
       Principal Investment Plus Variable Annuity With Purchase Rider  7.58  8.78 
    Annuitized units outstanding:     
       Bankers Flexible Annuity  –  – 
       Pension Builder Plus – Rollover IRA  –  – 
    Annuitized unit value:     
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA  –  – 
    See accompanying notes.     

    14

              Neuberger   
          Neuberger  Neuberger  Berman AMT   
          Berman AMT  Berman AMT  Socially   
    Money    Mortgage  Partners  Small Cap Growth  Responsive  Real Estate 
    Market    Securities  I Class  S Class  I Class  Securities 
    Division    Division  Divison  Divison  Divison  Division 
     
    $ 244,387,527  $ 258,918  $ 3,659,649  $ 1,961,402  $ 3,554,792  $ 64,056,602 
      –  –  –  –  –  – 
    $ 244,387,527  $ 258,918  $ 3,659,649  $ 1,961,402  $ 3,554,792  $ 64,056,602 
     
     
     
    $ –  $ –  $ –  $ –  $ –  $ – 
    163,964  –  –  –  –  – 
      7,715  –  –  –  –  – 
    564,114  –  –  –  –  – 
    6,198,026  –  –  –  –  107,144 
    7,062,357  –  –  –  –  – 
    1,518,543  –  –  –  –  176,833 
    127,602,669  136,092  –  –  –  34,819,601 
    42,985,302  –  –  –  –  17,553,456 
    42,713,938  122,210  2,737,366  1,230,003  2,923,423  8,180,424 
    15,570,899  616  922,283  731,399  631,369  3,219,144 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
    $ 244,387,527  $ 258,918  $ 3,659,649  $ 1,961,402  $ 3,554,792  $ 64,056,602 
     
    $ 244,387,526  $ 259,649  $ 8,420,096  $ 3,264,326  $ 5,586,206  $ 115,051,598 
    244,387,527  25,187  514,719  234,898  378,572  7,320,754 
     
      –  –  –  –  –  – 
      70,555  –  –  –  –  – 
      3,019  –  –  –  –  – 
    341,906  –  –  –  –  – 
    3,620,330  –  –  –  –  61,461 
    565,214  –  –  –  –  – 
    139,462  –  –  –  –  26,254 
    8,822,119  13,483  –  –  –  1,775,836 
    3,120,010  –  –  –  –  939,877 
    2,954,293  12,108  355,995  179,067  337,819  417,228 
    1,130,630  119  123,130  109,308  74,897  172,372 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      2.33  –  –  –  –  – 
      2.56  –  –  –  –  – 
      1.65  –  –  –  –  – 
      1.71  –  –  –  –  1.74 
      12.49  10.10  –  –  –  – 
      10.90  10.10  –  –  –  6.74 
      14.47  10.09  –  –  –  19.61 
      13.78  5.17  –  –  –  18.68 
      14.47  10.09  7.69  6.87  8.65  19.61 
      13.78  5.17  7.49  6.69  8.43  18.68 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 

     

    15

    Principal Life Insurance Company
     
    Separate Account B
     
     
    Statements of Assets and Liabilities (continued)
     
     
    December 31, 2008
     
     
     
          SAM 
      SAM  Conservative 
      Balanced  Balanced 
      Portfolio  Portfolio 
      Division  Division 
     
    Assets       
    Investments in shares of mutual funds, at market  $ 229,326,889  $ 60,144,292 
    Liabilities    –  – 
     
    Net assets  $ 229,326,889  $ 60,144,292 
     
     
    Net assets       
    Applicable to accumulation units:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    1,062,232  357,805 
       The Principal Variable Annuity    12,571,109  6,477,826 
       The Principal Variable Annuity With Purchase Payment Credit Rider    6,901,530  3,003,732 
       Principal Investment Plus Variable Annuity    179,320,947  39,937,634 
       Principal Investment Plus Variable Annuity With Purchase Rider    29,471,071  10,367,295 
    Applicable to contracts in annuitization period:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    Total net assets  $ 229,326,889  $ 60,144,292 
     
     
    Investments in shares of mutual funds, at cost  $ 297,079,360  $ 70,623,067 
    Shares of mutual fund owned    19,190,535  6,337,649 
    Accumulation units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    140,576  43,385 
       The Principal Variable Annuity    1,672,006  789,366 
       The Principal Variable Annuity With Purchase Payment Credit Rider    927,206  369,722 
       Principal Investment Plus Variable Annuity    23,851,252  4,866,983 
       Principal Investment Plus Variable Annuity With Purchase Rider    3,959,520  1,276,169 
    Accumulation unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    –  – 
       Principal Freedom Variable Annuity    –  – 
       Principal Freedom 2 Variable Annuity    7.56  8.25 
       The Principal Variable Annuity    7.52  8.21 
       The Principal Variable Annuity With Purchase Payment Credit Rider    7.44  8.12 
       Principal Investment Plus Variable Annuity    7.52  8.21 
       Principal Investment Plus Variable Annuity With Purchase Rider    7.44  8.12 
    Annuitized units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
    Annuitized unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA    –  – 
    See accompanying notes.       

    16

    SAM SAM  SAM       
    Conservative  Flexible  Strategic       
    Growth Income  Growth  Short Term  Short-Term  SmallCap 
    Portfolio Portfolio  Portfolio  Bond  Income  Blend 
    Division Division  Division  Division  Division  Division 
     
    $ 22,493,595  $ 66,369,891  $ 16,338,612  $ 114,329,097  $ 261,319  $ 32,501,151 
      –  –  –  –  –  – 
    $ 22,493,595  $ 66,369,891  $ 16,338,612  $ 114,329,097  $ 261,319  $ 32,501,151 
     
     
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  76,148 
      –  –  –  2,691,521  –  2,742,537 
    652,779  –  180,968  64,520  –  87,086 
    4,193,496  14,097,799  3,640,106  22,794,055  55,193  21,746,511 
    2,628,545  6,586,542  815,844  8,103,968  –  7,848,869 
    9,766,143  34,896,174  7,826,038  61,202,176  190,927  – 
    5,252,632  10,789,376  3,875,656  19,472,857  15,199  – 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
    $ 22,493,595  $ 66,369,891  $ 16,338,612  $ 114,329,097  $ 261,319  $ 32,501,151 
     
    $ 32,432,114  $ 74,928,683  $ 25,024,191  $ 132,779,262  $ 261,476  $ 50,486,468 
    1,822,820  6,273,147  1,330,506  13,263,236  108,431  5,866,634 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  90,919 
      –  –  –  286,889  –  256,608 
    95,338  –  28,266  6,993  –  13,194 
    615,541  1,619,332  571,426  2,484,953  5,527  2,587,275 
    389,730  764,198  129,367  913,846  –  980,392 
    1,433,539  4,008,463  1,228,553  6,671,571  19,143  – 
    778,810  1,251,873  614,563  2,195,682  2,974  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  – 
      –  –  –  –  –  0.84 
      –  –  –  9.38  9.99  10.69 
      6.85  8.75  6.40  9.23  9.99  6.60 
      6.81  8.71  6.37  9.17  9.99  8.40 
      6.74  8.62  6.31  8.87  5.12  8.01 
      6.81  8.71  6.37  9.17  9.99  – 
      6.74  8.62  6.31  8.87  5.12  – 
     
      –  –  –  –  –  – 
      –  –  –  –  –  – 
     
    $ –  $ –  $ –  $ –  $ –  $ – 
      –  –  –  –  –  – 

     

    17

    Principal Life Insurance Company
     
    Separate Account B
     
     
    Statements of Assets and Liabilities (continued)
     
     
    December 31, 2008
     
     
     
     
      SmallCap  SmallCap 
      Growth II  Value I 
      Division  Division 
     
    Assets       
    Investments in shares of mutual funds, at market  $ 24,054,630  $ 74,626,359 
    Liabilities    –  – 
     
    Net assets  $ 24,054,630  $ 74,626,359 
     
     
    Net assets       
    Applicable to accumulation units:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    16,035  121,638 
       Principal Freedom Variable Annuity    682,844  – 
       Principal Freedom 2 Variable Annuity    84,674  248,375 
       The Principal Variable Annuity    14,723,549  26,787,721 
       The Principal Variable Annuity With Purchase Payment Credit Rider    4,255,412  11,479,995 
       Principal Investment Plus Variable Annuity    3,225,315  27,605,065 
       Principal Investment Plus Variable Annuity With Purchase Rider    1,066,801  8,383,565 
    Applicable to contracts in annuitization period:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
     
    Total net assets  $ 24,054,630  $ 74,626,359 
     
     
    Investments in shares of mutual funds, at cost  $ 43,555,834  $ 117,356,275 
    Shares of mutual fund owned    3,600,992  7,847,146 
    Accumulation units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    32,849  98,906 
       Principal Freedom Variable Annuity    116,346  – 
       Principal Freedom 2 Variable Annuity    14,030  37,871 
       The Principal Variable Annuity    2,271,181  1,713,288 
       The Principal Variable Annuity With Purchase Payment Credit Rider    689,177  770,844 
       Principal Investment Plus Variable Annuity    497,543  1,765,624 
       Principal Investment Plus Variable Annuity With Purchase Rider    172,779  562,948 
    Accumulation unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
       Personal Variable    –  – 
       Premier Variable    0.49  1.23 
       Principal Freedom Variable Annuity    5.87  – 
       Principal Freedom 2 Variable Annuity    6.04  6.56 
       The Principal Variable Annuity    6.48  15.63 
       The Principal Variable Annuity With Purchase Payment Credit Rider    6.17  14.89 
       Principal Investment Plus Variable Annuity    6.48  15.63 
       Principal Investment Plus Variable Annuity With Purchase Rider    6.17  14.89 
    Annuitized units outstanding:       
       Bankers Flexible Annuity    –  – 
       Pension Builder Plus – Rollover IRA    –  – 
    Annuitized unit value:       
       Bankers Flexible Annuity  $ –  $ – 
       Pension Builder Plus – Rollover IRA    –  – 
    See accompanying notes.       

    18

    T. Rowe Price  T. Rowe Price  Templeton   
    Blue Chip  Health  Growth Securities  West Coast 
    Growth II  Sciences II  Class 2  Equity 
    Division  Division  Division  Division 
     
    $ 1,277,586  $ 3,736,468  $ 1,158,190  $ 2,080,302 
    –  –  –  – 
    $ 1,277,586  $ 3,736,468  $ 1,158,190  $ 2,080,302 
     
     
     
    $ –  $ –  $ –  $ – 
    –  –  –  – 
    –  –  –  – 
    –  –  –  – 
    –  –  –  – 
    –  –  1,158,190  – 
    –  –  –  46,950 
    –  –  –  – 
    –  –  –  – 
    898,423  2,899,654  –  1,382,129 
    379,163  836,814  –  651,223 
     
    –  –  –  – 
    –  –  –  – 
    $ 1,277,586  $ 3,736,468  $ 1,158,190  $ 2,080,302 
     
    $ 1,896,681  $ 4,798,018  $ 1,797,191  $ 3,014,039 
    190,685  389,215  141,243  138,226 
     
    –  –  –  – 
    –  –  –  – 
    –  –  –  – 
    –  –  –  – 
    –  –  –  – 
    –  –  105,234  – 
    –  –  –  6,853 
    –  –  –  – 
    –  –  –  – 
    114,303  261,796  –  202,755 
    49,521  77,559  –  96,499 
     
    $ –  $ –  $ –  $ – 
    –  –  –  – 
    –  –  –  – 
    –  –  –  – 
    –  –  –  – 
    –  –  11.01  – 
    –  –  –  6.85 
    –  –  –  – 
    –  –  –  – 
    7.86  11.08  –  6.82 
    7.66  10.79  –  6.75 
     
    –  –  –  – 
    –  –  –  – 
     
    $ –  $ –  $ –  $ – 
    –  –  –  – 

     

    19

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations
     
     
    Year Ended December 31, 2008
     
     
     
          AIM V.I. 
        AIM V.I.  Capital 
        Basic Value  Appreciation 
        Series I  Series I 
        Division  Division 
    Investment income (loss)       
    Income:       
       Dividends  $ 11,626  $ – 
     
    Expenses:       
         Mortality and expense risks    14,103  123,987 
         Separate account rider charges    2,387  9,717 
     
    Net investment income (loss)    (4,864)  (133,704) 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (87,834)  (308,915) 
    Capital gains distributions    251,505  – 
     
    Total realized gains (losses) on investments    163,671  (308,915) 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (944,942)  (4,885,610) 
     
    Net increase (decrease) in net assets resulting from operations  $ (786,135)  $ (5,328,229) 
     
     
     
    (1) Commenced operations May 19, 2008.       
     
    See accompanying notes.       

    20

        AIM V.I.  AIM V.I.  AIM V.I.   
    AIM V.I.  AIM V.I.  Global  International  Small Cap  AIM V.I. 
    Core Equity  Dynamics  Health Care  Growth  Equity  Technology 
    Series I  Series I  Series I  Series I  Series I  Series I 
    Division  Division  Division  Division (1)  Division  Division 
     
     
    $ 865,758  $ –  $ –  $ 691  $ –  $ – 
     
     
    557,783  38,669  145,266  432  65,040  56,760 
    64,931  8,453  27,533  51  11,372  10,646 
    243,044  (47,122)  (172,799)  208  (76,412)  (67,406) 
     
     
    (82,697)  (42,749)  263,764  (12,201)  (214,145)  (112,801) 
    –  –  2,236,265  1,672  17,418  – 
    (82,697)  (42,749)  2,500,029  (10,529)  (196,727)  (112,801) 
     
     
    (15,384,815)  (1,836,688)  (6,274,461)  (12,352)  (1,675,944)  (2,460,977) 
    $ (15,224,468)  $ (1,926,559)  $ (3,947,231)  $ (22,673)  $ (1,949,083)  $ (2,641,184) 

     

    21

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations (continued)
     
     
    Year Ended December 31, 2008
     
        Alliance   
        Bernstein VP  American 
        Series Small  Century VP 
        Cap Growth  Income & 
        Class A  Growth 
        Division  Division 
     
    Investment income (loss)       
    Income:       
       Dividends  $ –  $ 546,655 
     
    Expenses:       
         Mortality and expense risks    21,248  307,714 
         Separate account rider charges    2,764  47,534 
     
    Net investment income (loss)    (24,012)  191,407 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (41,887)  (229,282) 
    Capital gains distributions    –  3,274,939 
     
    Total realized gains (losses) on investments    (41,887)  3,045,657 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (925,472)  (14,275,056) 
     
    Net increase (decrease) in net assets resulting from operations  $ (991,371)  $ (11,037,992) 
     
     
     
    See accompanying notes.       

    22

        American       
    American  American  Century VP II  American  American   
    Century VP I  Century VP I  Inflation  Century VP II  Century VP II  Asset 
    Ultra  Vista  Protection  Ultra  Value  Allocation 
    Division  Division  Division  Division  Division  Division 
     
     
    $ –  $ –  $ 3,771,644  $ –  $ 842,560  $ 2,060,277 
     
     
    90,028  33,174  985,514  705,677  447,461  863,931 
    15,845  6,543  122,153  90,372  72,947  80,681 
    (105,873)  (39,717)  2,663,977  (796,049)  322,152  1,115,665 
     
     
    (276,221)  (60,999)  (38,340)  (1,132,024)  (2,720,090)  (66,775) 
    1,222,701  115,070  –  8,293,293  4,779,986  5,612,751 
    946,480  54,071  (38,340)  7,161,269  2,059,896  5,545,976 
     
     
    (4,576,606)  (1,743,999)  (4,973,159)  (36,896,658)  (13,783,171)  (26,722,216) 
    $ (3,735,999)  $ (1,729,645)  $ (2,347,522)  $ (30,531,438)  $ (11,401,123)  $ (20,060,575) 

     

    23

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations (continued)
     
     
    Year Ended December 31, 2008
     
     
     
     
          Bond & 
          Mortgage 
        Balanced  Securities 
        Division  Division (1) 
     
    Investment income (loss)       
    Income:       
       Dividends  $ 2,381,240  $ 19,196,837 
     
    Expenses:       
         Mortality and expense risks    796,324  3,870,693 
         Separate account rider charges    69,687  481,467 
     
    Net investment income (loss)    1,515,229  14,844,677 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (1,016,269)  (10,378,357) 
    Capital gains distributions    2,795,030  – 
     
    Total realized gains (losses) on investments    1,778,761  (10,378,357) 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (27,010,040)  (65,321,558) 
     
    Net increase (decrease) in net assets resulting from operations  $ (23,716,050)  $ (60,855,238) 
     

    (1)      Represented the operations of Bond Division until May 19, 2008 name change.
    (2)      Represented the operations of Equity Income I Division until May 19, 2008 name change.

    See accompanying notes.

    24

          Fidelity VIP  Fidelity VIP  Fidelity VIP 
      Dreyfus IP    Equity-Income  Growth  Growth 
    Diversified  Technology Growth  Equity  Service  Service  Service 
    International  Service Shares  Income  Class 2  Class  Class 2 
    Division  Division  Division (2)  Division  Division  Division 
     
     
    $ 4,310,379  $ –  $ 4,592,872  $ 1,295,320  $ 186,943  $ 46,592 
     
     
    2,960,999  12,337  2,251,468  762,132  350,677  95,439 
    317,431  2,221  262,375  118,860  40,423  16,519 
    1,031,949  (14,558)  2,079,029  414,328  (204,157)  (65,366) 
     
     
    (378,109)  (69,725)  (8,805,752)  (3,393,364)  (1,097,052)  (99,848) 
    56,873,063  –  13,729,216  66,310  –  – 
    56,494,954  (69,725)  4,923,464  (3,327,054)  (1,097,052)  (99,848) 
     
     
    (200,607,999)  (450,798)  (82,471,273)  (29,685,097)  (15,328,472)  (4,515,123) 
    $ (143,081,096)  $ (535,081)  $ (75,468,780)  $ (32,597,823)  $ (16,629,681)  $ (4,680,337) 

     

    25

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations (continued)
     
     
    Year Ended December 31, 2008
     
     
     
        Fidelity VIP  Fidelity VIP II 
        Overseas  Contrafund 
        Service  Service 
        Class 2  Class 
        Division  Division 
     
    Investment income (loss)       
    Income:       
       Dividends  $ 1,276,909  $ 755,941 
     
    Expenses:       
         Mortality and expense risks    578,106  1,164,787 
         Separate account rider charges    82,709  130,523 
     
    Net investment income (loss)    616,094  (539,369) 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (989,776)  (4,294,282) 
    Capital gains distributions    5,266,440  2,872,136 
     
    Total realized gains (losses) on investments    4,276,664  (1,422,146) 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (31,632,732)  (47,719,745) 
     
    Net increase (decrease) in net assets resulting from operations  $ (26,739,974)  $ (49,681,260) 
     
     
    See accompanying notes.       

    26

        Goldman Sachs       
    Fidelity VIP II  Fidelity VIP III  Structured  Goldman Sachs  Government   
    Contrafund  Mid Cap  Small Cap  VIT Mid Cap  & High  International 
    Service  Service  Equity Service  Value Service  Quality  Emerging 
    Class 2  Class 2  Class I  Class I  Bond  Markets 
    Division  Division  Division  Division  Division  Division 
     
     
    $ 321,541  $ 16,347  $ 30,023  $ 191,700  $ 13,258,262  $ 1,307,671 
     
     
    474,671  85,988  52,866  224,029  3,320,944  1,462,860 
    47,326  10,415  7,649  31,819  405,610  217,307 
    (200,456)  (80,056)  (30,492)  (64,148)  9,531,708  (372,496) 
     
     
    (2,480,832)  (324,871)  (274,257)  (975,145)  (2,283,709)  (3,221,858) 
    1,025,763  1,055,750  7,576  34,326  –  40,499,234 
    (1,455,069)  730,879  (266,681)  (940,819)  (2,283,709)  37,277,376 
     
     
    (19,365,539)  (4,048,458)  (1,452,822)  (7,016,663)  (15,720,378)  (121,845,736) 
    $ (21,021,064)  $ (3,397,635)  $ (1,749,995)  $ (8,021,630)  $ (8,472,379)  $ (84,940,856) 

     

    27

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations (continued)
     
     
    Year Ended December 31, 2008
     
     
     
          Janus Aspen 
          Mid Cap 
        International  Growth 
        SmallCap  Service Shares 
        Division  Division 
     
    Investment income (loss)       
    Income:       
       Dividends  $ 1,958,371  $ 9,955 
     
    Expenses:       
         Mortality and expense risks    1,187,570  214,242 
         Separate account rider charges    154,875  34,486 
     
    Net investment income (loss)    615,926  (238,773) 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (3,463,994)  764,102 
    Capital gains distributions    19,366,109  1,006,907 
     
    Total realized gains (losses) on investments    15,902,115  1,771,009 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (78,701,482)  (10,470,032) 
     
    Net increase (decrease) in net assets resulting from operations  $ (62,183,441)  $ (8,937,796) 
     

    (1)      Represented the operations of LargeCap Blend Division until May 19, 2008 name change.
    (2)      Represented the operations of Growth Division until May 19, 2008 name change.
    (3)      Represented the operations of Equity Growth Division until May 19, 2008 name change.
    (4)      Represented the operations of LargeCap Stock Index Division until May 19, 2008 name change.
    (5)      Represented the operations of Capital Value Division until May 19, 2008 name change.
    (6)      Represented the operations of Equity Value Division until May 19, 2008 name change.

    See accompanying notes.

    28

    LargeCap  LargeCap  LargeCap  LargeCap  LargeCap  LargeCap 
    Blend II  Growth  Growth I  S&P 500 Index  Value  Value II 
    Division (1)  Division (2)  Division (3)  Division (4)  Division (5)  Division (6) 
     
     
    $ 2,615,331  $ 408,099  $ 238,712  $ 2,844,299  $ 3,424,874  $ 1,329 
     
     
    2,346,507  944,892  1,742,143  1,424,003  1,719,023  61,192 
    332,050  56,354  142,636  175,549  130,900  8,966 
    (63,226)  (593,147)  (1,646,067)  1,244,747  1,574,951  (68,829) 
     
     
    (8,382,339)  (1,777,113)  (2,635,400)  (37,095)  (7,880,719)  (272,256) 
    81,335,911  –  –  2,955,013  20,229,744  234,709 
    72,953,572  (1,777,113)  (2,635,400)  2,917,918  12,349,025  (37,547) 
     
     
    (156,185,338)  (40,078,823)  (64,763,074)  (58,021,735)  (75,472,610)  (2,184,956) 
    $ (83,294,992)  $ (42,449,083)  $ (69,044,541)  $ (53,859,070)  $ (61,548,634)  $ (2,291,332) 

     

    29

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations (continued)
     
     
    Year Ended December 31, 2008
     
     
     
     
          LifeTime 
        LargeCap  Strategic 
        Value III  Income 
        Division (1)  Division 
     
    Investment income (loss)       
    Income:       
       Dividends  $ 3,572,545  $ 810,003 
     
    Expenses:       
         Mortality and expense risks    1,909,692  254,341 
         Separate account rider charges    254,821  17,952 
     
    Net investment income (loss)    1,408,032  537,710 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (3,374,348)  (830,752) 
    Capital gains distributions    6,885,703  646,990 
     
    Total realized gains (losses) on investments    3,511,355  (183,762) 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (85,454,359)  (6,107,588) 
     
    Net increase (decrease) in net assets resulting from operations  $ (80,534,972)  $ (5,753,640) 
     

    (1)      Represented the operations of LargeCap Value Division until May 19, 2008 name change.
    (2)      Represented the operations of MidCap Division until May 19, 2008 name change.

    See accompanying notes.

    30

    LifeTime  LifeTime  LifeTime  LifeTime  LifeTime  MidCap 
    2010  2020  2030  2040  2050  Blend 
    Division  Division  Division  Division  Division  Division (2) 
     
     
    $ 1,754,703  $ 6,793,880  $ 882,089  $ 381,171  $ 214,794  $ 1,940,435 
     
     
    500,145  1,946,609  259,056  120,070  66,025  3,792,429 
    36,515  232,338  29,124  13,666  9,047  352,225 
    1,218,043  4,614,933  593,909  247,435  139,722  (2,204,219) 
     
     
    (1,834,526)  (4,750,694)  (828,281)  (375,263)  (275,179)  (1,735,289) 
    2,839,538  13,248,536  1,886,464  857,319  507,043  35,728,565 
    1,005,012  8,497,842  1,058,183  482,056  231,864  33,993,276 
     
     
    (16,944,125)  (78,452,695)  (11,164,961)  (5,355,646)  (2,949,512)  (151,699,449) 
    $ (14,721,070)  $ (65,339,920)  $ (9,512,869)  $ (4,626,155)  $ (2,577,926)  $ (119,910,392) 

     

    31

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations (continued)
     
     
    Year Ended December 31, 2008
     
     
     
     
        MidCap  MidCap 
        Growth I  Value II 
        Division (1)  Division (2) 
     
    Investment income (loss)       
    Income:       
       Dividends  $ 38,679  $ 868,695 
     
    Expenses:       
         Mortality and expense risks    569,768  1,198,362 
         Separate account rider charges    80,154  165,408 
     
    Net investment income (loss)    (611,243)  (495,075) 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (1,300,515)  (4,487,211) 
    Capital gains distributions    6,643,640  8,334,932 
     
    Total realized gains (losses) on investments    5,343,125  3,847,721 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (27,761,953)  (56,328,898) 
     
    Net increase (decrease) in net assets resulting from operations  $ (23,030,071)  $ (52,976,252) 
     

    (1)      Represented the operations of MidCap Growth Division until May 19, 2008 name change.
    (2)      Represented the operations of MidCap Value Division until May 19, 2008 name change.
    (3)      Commenced operations November 24, 2008.
    (4)      Represented the operations of Neuberger Berman AMT Fasciano S Class Division until November 24, 2008 name change.

    See accompanying notes.

    32

            Neuberger   
        Neuberger  Neuberger  Berman AMT   
        Berman AMT  Berman AMT  Socially   
    Money  Mortgage  Partners  Small Cap Growth  Responsive  Real Estate 
    Market  Securities  I Class  S Class  I Class  Securities 
    Division  Division (3)  Divison  Divison (4)  Divison  Division 
     
     
    $ 4,544,437  $ –  $ 31,473  $ –   $99,350  $ 2,309,627 
     
     
    2,208,192  168  72,913  34,960  53,408  1,213,844 
    272,222  656  8,678  6,403  4,713  188,597 
    2,064,023  (824)  (50,118)  (41,363)  41,229  907,186 
     
     
    –  9  (292,324)  (98,214)  (50,160)  (3,895,274) 
    –  –  993,095  97,751  339,688  33,646,444 
    –  9  700,771  (463)  289,528  29,751,170 
     
     
    –  (731)  (4,538,126)  (1,283,991)  (2,407,338)  (65,216,125) 
    $ 2,064,023  $ (1,546)  $ (3,887,473)  $ (1,325,817)   $(2,076,581)  $ (34,557,769) 

     

    33

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations (continued)
     
     
    Year Ended December 31, 2008
     
     
     
          SAM 
        SAM  Conservative 
        Balanced  Balanced 
        Portfolio  Portfolio 
        Division  Division 
     
    Investment income (loss)       
    Income:       
       Dividends  $ 5,216,496  $ 1,134,864 
     
    Expenses:       
         Mortality and expense risks    1,706,759  419,697 
         Separate account rider charges    155,069  44,877 
     
    Net investment income (loss)    3,354,668  670,290 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (1,660,310)  (1,228,196) 
    Capital gains distributions    16,207,161  2,028,510 
     
    Total realized gains (losses) on investments    14,546,851  800,314 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (67,929,605)  (10,578,080) 
     
    Net increase (decrease) in net assets resulting from operations  $ (50,028,086)  $ (9,107,476) 
     

    (1)      Commenced operations November 24, 2008.
    (2)      Represented the operations of SmallCap Division until May 19, 2008 name change.

    See accompanying notes.

    34

    SAM  SAM  SAM       
    Conservative  Flexible  Strategic       
    Growth  Income  Growth  Short Term  Short-Term  SmallCap 
    Portfolio  Portfolio  Portfolio  Bond  Income  Blend 
    Division  Division  Division  Division  Division (1)  Division (2) 
     
     
    $ 727,387  $ 1,734,338  $ 528,578  $ 6,867,105  $ –  $ 217,563 
     
     
    225,989  407,004  173,827  1,777,722  172  598,057 
    39,036  49,621  23,265  213,637  8,744  70,329 
    462,362  1,277,713  331,486  4,875,746  (8,916)  (450,823) 
     
     
    (782,897)  (782,941)  (1,000,841)  (3,548,152)  7  (1,539,998) 
    1,933,853  2,309,739  2,298,996  –  –  5,931,588 
    1,150,956  1,526,798  1,298,155  (3,548,152)  7  4,391,590 
     
     
    (9,970,888)  (8,573,985)  (8,719,757)  (20,527,201)  (157)  (25,781,767) 
    $ (8,357,570)  $ (5,769,474)  $ (7,090,116)  $ (19,199,607)  $ (9,066)  $ (21,841,000) 

     

    35

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Operations
     
     
    Year Ended December 31, 2008
     
     
     
     
        SmallCap  SmallCap 
        Growth II  Value I 
        Division (1)  Division (2) 
    Investment income (loss)       
    Income:       
       Dividends  $ –  $ 984,734 
     
    Expenses:       
         Mortality and expense risks    452,398  1,263,357 
         Separate account rider charges    47,729  162,944 
     
    Net investment income (loss)    (500,127)  (441,567) 
     
     
    Realized gains (losses) on investments       
    Realized gains (losses) on sale of fund shares    (2,752,055)  (4,367,422) 
    Capital gains distributions    –  11,883,307 
     
    Total realized gains (losses) on investments    (2,752,055)  7,515,885 
     
    Change in net unrealized appreciation or depreciation of       
         investments    (15,384,937)  (44,840,466) 
     
    Net increase (decrease) in net assets resulting from operations  $ (18,637,119)  $ (37,766,148) 
     

    (1)      Represented the operations of SmallCap Growth Division until May 19, 2008 name change.
    (2)      Represented the operations of SmallCap Value Division until May 19, 2008 name change.

    See accompanying notes.

    36

    T. Rowe Price  T. Rowe Price  Templeton   
    Blue Chip  Health  Growth Securities  West Coast 
    Growth II  Sciences II  Class 2  Equity 
    Division  Division  Division  Division 
     
     
    $ 1,872  $ –  $ 33,781  $ 22,032 
     
     
    21,433  49,165  16,229  24,385 
    3,423  5,633  –  3,747 
    (22,984)  (54,798)  17,552  (6,100) 
     
     
    (79,654)  (48,870)  (56,639)  (104,741) 
    –  46,234  133,119  201,253 
    (79,654)  (2,636)  76,480  96,512 
     
     
    (852,802)  (1,302,312)  (1,102,357)  (936,758) 
    $ (955,440)  $ (1,359,746)  $ (1,008,325)  $ (846,346) 

     

    37

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
        AIM V.I.   
        Basic Value   
        Series I   
        Division   
     
        2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ (4,864)  $ (14,688) 
       Total realized gains (losses) on investments    163,671    115,703 
       Change in net unrealized appreciation or depreciation of investments    (944,942)    (99,322) 
     
    Net increase (decrease) in net assets resulting from operations    (786,135)    1,693 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
             and applicable premium taxes    588,611    1,291,953 
       Administration charges    (23)    (4) 
       Contingent sales charges    (1,785)    (2,450) 
       Contract terminations    (40,442)    (67,829) 
       Death benefit payments    –    – 
       Flexible withdrawal option payments    (13,011)    (5,282) 
       Transfer payments to other contracts    (383,996)    (812,080) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    149,354    404,308 
     
    Total increase (decrease)    (636,781)    406,001 
     
    Net assets at beginning of period    1,478,801    1,072,800 
     
    Net assets at end of period  $ 842,020  $ 1,478,801 
     
     
    See accompanying notes.         

    38 0707-0846563

    AIM V.I.     
    Capital  AIM V.I.  AIM V.I. 
    Appreciation  Core Equity  Dynamics 
    Series I  Series I  Series I 
    Division  Division  Division 

               2008             2007  2008             2007             2008 

    2007 

     
     
    $ (133,704)  $ (202,656)  $ 243,044  $ (209,020)  $ (47,122)  $ (59,974) 
    (308,915)  226,433  (82,697)               1,172,864  (42,749)  279,603 
    (4,885,610)  1,505,901  (15,384,815)               3,021,327  (1,836,688)  87,946 
    (5,328,229)  1,529,678  (15,224,468)               3,985,171  (1,926,559)  307,575 

    895,684  816,837  1,978,598  2,938,682  487,791  2,730,901 
    (2,580)  (4,239)  (16,899)  (18,949)  (356)  (762) 
    (21,677)  (19,996)  (77,402)  (69,263)  (2,972)  (3,924) 
    (1,512,703)  (1,830,974)  (5,401,288)  (6,342,151)  (207,421)  (359,277) 
    (12,399)  (124,976)  (187,574)  (265,184)  (14,831)  (6,566) 
    (186,382)  (215,382)  (807,458)  (919,479)  (47,216)  (50,755) 
    (1,816,790)  (1,606,543)  (6,509,763)  (4,805,844)  (904,286)  (1,269,505) 
    –  –  –  –  –  – 
    (2,656,847)  (2,985,273)  (11,021,786)  (9,482,188)  (689,291)  1,040,112 
    (7,985,076)  (1,455,595)  (26,246,254)  (5,497,017)  (2,615,850)  1,347,687 
     
    14,126,223  15,581,818  56,330,843  61,827,860  4,415,668  3,067,981 
    $ 6,141,147  $ 14,126,223  $ 30,084,589  $ 56,330,843  $ 1,799,818  $ 4,415,668 

    39

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
        AIM V.I.
        Global
        Health Care 
        Series I
        Division
     
        2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ (172,799)  $ (209,627) 
       Total realized gains (losses) on investments    2,500,029    536,422 
       Change in net unrealized appreciation or depreciation of investments    (6,274,461)    1,023,437 
     
    Net increase (decrease) in net assets resulting from operations    (3,947,231)    1,350,232 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    1,592,273    1,465,691 
       Administration charges    (3,370)    (4,020) 
       Contingent sales charges    (15,050)    (9,952) 
       Contract terminations    (1,050,260)    (911,294) 
       Death benefit payments    (54,479)    (14,796) 
       Flexible withdrawal option payments    (142,431)    (140,658) 
       Transfer payments to other contracts    (1,930,945)    (1,635,349) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    (1,604,262)    (1,250,378) 
     
    Total increase (decrease)    (5,551,493)    99,854 
     
    Net assets at beginning of period    13,956,875    13,857,021 
     
    Net assets at end of period  $ 8,405,382  $ 13,956,875 
     
     
     
    (1) Commenced operations May 19, 2008.         
     
     
    See accompanying notes.         

    40

    AIM V.I.  AIM V.I.   
    International  Small Cap  AIM V.I. 
    Growth  Equity  Technology 
    Series I  Series I  Series I 
    Division (1)  Division  Division 

    2008             2008             2007               2008  2007 
     
     
    $ 208  $ (76,412)  $ (64,482)  $ (67,406)  $ (94,547) 
    (10,529)  (196,727)  183,394  (112,801)  236,183 
    (12,352)  (1,675,944)  (156,803)  (2,460,977)  224,475 
    (22,673)  (1,949,083)  (37,891)  (2,641,184)  366,111 
     
     
     
    171,992  1,428,513  6,314,875  966,164  1,524,700 
    (32)  (1,268)  (868)  (557)  (881) 
    –  (6,429)  (3,581)  (5,500)  (3,393) 
    –  (394,723)  (270,790)  (383,777)  (310,724) 
    –  (10,969)  (8,279)  (9,335)  – 
    (346)  (48,037)  (20,725)  (76,069)  (90,068) 
    (37,306)  (994,880)  (698,436)  (1,612,440)  (1,073,021) 
    –  –  –  –  – 
    134,308  (27,793)  5,312,196  (1,121,514)  46,613 
    111,635  (1,976,876)  5,274,305  (3,762,698)  412,724 
     
    –  6,049,130  774,825  6,560,657  6,147,933 
    $ 111,635  $ 4,072,254  $ 6,049,130  $ 2,797,959  $ 6,560,657 

      41

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
        Alliance
        Bernstein VP 
        Series Small
        Cap Growth
        Class A
        Division
     
        2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ (24,012)  $ (18,567) 
       Total realized gains (losses) on investments    (41,887)    22,733 
       Change in net unrealized appreciation or depreciation of investments    (925,472)    121,216 
     
    Net increase (decrease) in net assets resulting from operations    (991,371)    125,382 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
            and applicable premium taxes    741,297    937,217 
       Administration charges    (709)    (67) 
       Contingent sales charges    (1,543)    (1,828) 
       Contract terminations    (34,961)    (50,604) 
       Death benefit payments    (4,731)    – 
       Flexible withdrawal option payments    (8,386)    (7,306) 
       Transfer payments to other contracts    (325,926)    (153,826) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    365,041    723,586 
     
    Total increase (decrease)    (626,330)    848,968 
     
    Net assets at beginning of period    1,843,004    994,036 
     
    Net assets at end of period  $ 1,216,674  $ 1,843,004 
     
     
    See accompanying notes.         

    42

    American     
    Century VP  American  American 
    Income &  Century VP I  Century VP I 
    Growth  Ultra  Vista 
    Division  Division  Division 

               2008             2007             2008             2007             2008             2007 
     
     
    $ 191,407  $ 191,227  $ (105,873)  $ (134,442)  $ (39,717)  $ (23,419) 
    3,045,657  1,336,790  946,480  304,911  54,071  44,568 
    (14,275,056)  (1,954,567)  (4,576,606)  1,426,049  (1,743,999)  429,027 
    (11,037,992)  (426,550)  (3,735,999)  1,596,518  (1,729,645)  450,176 
     
     
     
    1,673,098  2,726,990  1,273,012  1,100,781  1,272,811  2,235,369 
    (3,038)  (5,182)  (1,533)  (1,927)  (323)  (68) 
    (24,798)  (24,549)  (7,917)  (6,626)  (3,034)  (4,919) 
    (2,269,439)  (2,751,384)  (552,465)  (606,678)  (68,715)  (136,191) 
    (79,065)  (180,180)  (8,408)  (64,742)  (1,397)  – 
    (431,511)  (518,812)  (114,924)  (105,664)  (14,870)  (6,364) 
    (4,098,638)  (3,013,936)  (2,112,475)  (1,703,616)  (558,995)  (235,968) 
    –  –  –  –  –  – 
    (5,233,391)  (3,767,053)  (1,524,710)  (1,388,472)  625,477  1,851,859 
    (16,271,383)  (4,193,603)  (5,260,709)  208,046  (1,104,168)  2,302,035 
     
    34,147,297  38,340,900  9,654,184  9,446,138  2,995,921  693,886 
    $ 17,875,914  $ 34,147,297  $ 4,393,475  $ 9,654,184  $ 1,891,753  $ 2,995,921 

      43

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
        American
        Century VP II 
        Inflation
        Protection 
        Division
     
         2008     2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ 2,663,977  $ 1,952,792 
       Total realized gains (losses) on investments    (38,340)    127,965 
       Change in net unrealized appreciation or depreciation of investments    (4,973,159)    3,279,333 
     
    Net increase (decrease) in net assets resulting from operations    (2,347,522)    5,360,090 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    31,436,649    36,032,785 
       Administration charges    (440,824)    (363,624) 
       Contingent sales charges    (94,742)    (51,368) 
       Contract terminations    (2,146,023)    (1,422,130) 
       Death benefit payments    (218,658)    (326,003) 
       Flexible withdrawal option payments    (1,162,278)    (773,981) 
       Transfer payments to other contracts    (34,403,685)    (10,055,940) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    (7,029,561)    23,039,739 
     
    Total increase (decrease)    (9,377,083)    28,399,829 
     
    Net assets at beginning of period    77,061,194    48,661,365 
     
    Net assets at end of period  $ 67,684,111  $ 77,061,194 
     
     
    See accompanying notes.         

    44

    American  American   
    Century VP II  Century VP II  Asset 
    Ultra  Value 

    Allocation 

    Division  Division  Division 

                2008              2007              2008              2007              2008 

                2007 

     
     
    $ (796,049)  $ (756,193)  $ 322,152  $ (6,712)  $ 1,115,665  $ 19,168 
    7,161,269  1,043,567  2,059,896  4,428,534  5,545,976  6,193,393 
    (36,896,658)  9,418,363  (13,783,171)  (7,540,424)  (26,722,216)  2,070,338 
    (30,531,438)  9,705,737  (11,401,123)  (3,118,602)  (20,060,575)  8,282,899 
     
     
     
    29,056,644  24,849,593  3,386,467  6,145,896  8,945,708  11,905,867 
    (382,862)  (337,790)  (8,333)  (11,352)  (65,967)  (55,393) 
    (73,852)  (41,883)  (36,041)  (32,190)  (120,045)  (104,478) 
    (1,672,856)  (1,159,525)  (2,515,067)  (2,947,527)  (7,695,514)  (9,197,293) 
    (99,348)  (296,989)  (99,144)  (226,134)  (555,322)  (459,264) 
    (847,116)  (612,502)  (399,073)  (473,536)  (1,733,913)  (1,755,399) 
    (9,146,358)  (10,960,316)  (7,351,537)  (5,517,684)  (13,257,863)  (7,781,206) 
    –  –  –  –  –  – 
    16,834,252  11,440,588  (7,022,728)  (3,062,527)  (14,482,916)  (7,447,166) 
    (13,697,186)  21,146,325  (18,423,851)  (6,181,129)  (34,543,491)  835,733 
     
    62,388,907  41,242,582  44,383,934  50,565,063  85,056,981  84,221,248 
    $ 48,691,721  $ 62,388,907  $ 25,960,083  $ 44,383,934  $ 50,513,490  $ 85,056,981 

      45

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
        Balanced
        Division
     
         2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ 1,515,229  $ 1,158,888 
       Total realized gains (losses) on investments    1,778,761    1,688,290 
       Change in net unrealized appreciation or depreciation of investments    (27,010,040)    780,339 
     
    Net increase (decrease) in net assets resulting from operations    (23,716,050)    3,627,517 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    3,240,476    8,509,576 
       Administration charges    (28,703)    (32,194) 
       Contingent sales charges    (118,717)    (98,008) 
       Contract terminations    (9,741,919)    (9,835,167) 
       Death benefit payments    (789,860)    (1,092,383) 
       Flexible withdrawal option payments    (1,549,753)    (1,870,753) 
       Transfer payments to other contracts    (8,277,684)    (5,572,117) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    (17,266,160)    (9,991,046) 
     
    Total increase (decrease)    (40,982,210)    (6,363,529) 
     
    Net assets at beginning of period    85,956,808    92,320,337 
     
    Net assets at end of period  $ 44,974,598  $ 85,956,808 
     
     
     
    (1) Represented the operations of Bond Division until May 19, 2008 name change.     
     
     
    See accompanying notes.         

    46

    Bond &    Dreyfus IP 
    Mortgage  Diversified  Technology Growth 
    Securities  International  Service Shares 
    Division (1)  Division  Division 

               2008             2007             2008             2007  2008  2007 
     
     
    $ 14,844,677  $ 9,828,710  $ 1,031,949  $ (1,355,914)  $ (14,558)  $ (9,857) 
    (10,378,357)  325,412  56,494,954  41,083,197  (69,725)  5,389 
    (65,321,558)  (3,419,562)  (200,607,999)  2,160,512  (450,798)  81,730 
    (60,855,238)  6,734,560  (143,081,096)  41,887,795  (535,081)  77,262 
     
     
     
    56,435,336  94,180,424  40,686,774  61,350,625  558,140  596,194 
    (607,377)  (520,854)  (138,567)  (152,360)  (102)  (38) 
    (438,051)  (280,068)  (322,721)  (281,431)  (1,924)  (511) 
    (26,067,288)  (22,228,581)  (22,311,832)  (26,602,667)  (43,580)  (14,157) 
    (1,927,338)  (1,326,465)  (1,046,118)  (910,903)  –  – 
    (6,537,538)  (6,506,053)  (2,867,820)  (2,852,527)  (8,187)  – 
    (80,071,614)  (31,160,779)  (45,077,767)  (37,471,969)  (277,832)  (92,383) 
    –  –  –  –  –  – 
    (59,213,870)  32,157,624  (31,078,051)  (6,921,232)  226,515  489,105 
    (120,069,108)  38,892,184  (174,159,147)  34,966,563  (308,566)  566,367 
     
    358,685,586  319,793,402  325,697,871  290,731,308  1,018,089  451,722 
    $ 238,616,478  $ 358,685,586  $ 151,538,724  $ 325,697,871  $ 709,523  $ 1,018,089 

      47

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
      Equity
      Income
      Division (1) 
     
                 2008       2007 
     
    Increase (decrease) in net assets from       
    Operations:       
       Net investment income (loss)  $ 2,079,028  $ (805,782) 
       Total realized gains (losses) on investments  4,923,465    8,313,178 
       Change in net unrealized appreciation or depreciation of investments  (82,471,273)    (1,424,166) 
     
    Net increase (decrease) in net assets resulting from operations  (75,468,780)    6,083,230 
     
    Changes from principal transactions:       
       Purchase payments, less sales charges, per payment fees       
    and applicable premium taxes  61,022,256    234,633,226 
       Administration charges  (883,089)    (648,089) 
       Contingent sales charges  (258,290)    (162,291) 
       Contract terminations  (8,930,508)    (8,659,683) 
       Death benefit payments  (522,676)    (850,396) 
       Flexible withdrawal option payments  (3,043,025)    (2,550,132) 
       Transfer payments to other contracts  (38,443,998)    (18,369,149) 
       Annuity payments  –    – 
     
    Increase (decrease) in net assets from principal transactions  8,940,670    203,393,486 
     
    Total increase (decrease)  (66,528,110)    209,476,716 
     
    Net assets at beginning of period  209,476,716    – 
     
    Net assets at end of period  $ 142,948,606  $ 209,476,716 
     

    (1)      Commenced operations January 5, 2007. Represented the operations of Equity Income I Division until May 19, 2008 name change.

    See accompanying notes.

    48

    Fidelity VIP  Fidelity VIP  Fidelity VIP 
    Equity-Income  Growth  Growth 
    Service  Service  Service 
    Class 2  Class  Class 2 
    Division  Division  Division 

                2008              2007              2008              2007              2008              2007 
     
     
    $ 414,328  $ 139,095  $ (204,157)  $ (271,771)  $ (65,366)  $ (78,070) 
    (3,327,054)  7,791,991  (1,097,052)               (435,485)  (99,848)  101,890 
    (29,685,097)  (8,223,571)  (15,328,472)             8,565,958  (4,515,123)  1,394,319 
    (32,597,823)  (292,485)  (16,629,681)             7,858,702  (4,680,337)  1,418,139 

    8,354,230  16,740,652  3,646,198  5,460,859  2,652,240  4,586,608 
    (11,959)  (18,666)  (9,946)  (10,911)  (1,027)  (913) 
    (84,742)  (59,372)  (42,105)  (40,870)  (10,142)  (8,319) 
    (4,715,453)  (4,913,793)  (2,938,177)  (3,742,336)  (229,740)  (230,298) 
    (138,892)  (495,845)  (225,190)  (207,561)  (16,770)  (1,392) 
    (721,551)  (774,247)  (316,741)  (339,888)  (18,895)  (16,920) 
    (11,676,408)  (7,383,477)  (5,142,748)  (4,468,309)  (1,523,972)  (1,040,964) 
    –  –  –  –  –  – 
    (8,994,775)  3,095,252  (5,028,709)  (3,349,016)  851,694  3,287,802 
    (41,592,598)  2,802,767  (21,658,390)  4,509,686  (3,828,643)  4,705,941 
     
    79,977,091  77,174,324  38,298,842  33,789,156  9,070,602  4,364,661 
    $ 38,384,493  $ 79,977,091  $ 16,640,452  $ 38,298,842  $ 5,241,959  $ 9,070,602 

    49

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
        Fidelity VIP 
        Overseas
        Service
        Class 2
        Division
     
         2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ 616,094  $ 686,846 
       Total realized gains (losses) on investments    4,276,664    2,980,497 
       Change in net unrealized appreciation or depreciation of investments    (31,632,732)    2,377,483 
     
    Net increase (decrease) in net assets resulting from operations    (26,739,974)    6,044,826 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    20,490,181    21,422,953 
       Administration charges    (197,710)    (178,233) 
       Contingent sales charges    (63,906)    (38,934) 
       Contract terminations    (1,447,555)    (1,077,892) 
       Death benefit payments    (87,893)    (180,041) 
       Flexible withdrawal option payments    (583,536)    (432,217) 
       Transfer payments to other contracts    (7,347,509)    (7,202,311) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    10,762,072    12,313,325 
     
    Total increase (decrease)    (15,977,902)    18,358,151 
     
    Net assets at beginning of period    53,358,319    35,000,168 
     
    Net assets at end of period  $ 37,380,417  $ 53,358,319 
     
     
    See accompanying notes.         

    50

    Fidelity VIP II  Fidelity VIP II  Fidelity VIP III 
    Contrafund  Contrafund  Mid Cap 
    Service  Service  Service 
    Class  Class 2  Class 2 
    Division  Division  Division 

               2008             2007             2008             2007             2008             2007 
     
     
    $ (539,369)  $ (696,211)  $ (200,456)  $ (146,480)  $ (80,056)  $ (53,615) 
    (1,422,146)  34,147,279  (1,455,069)  10,198,598  730,879  453,329 
    (47,719,745)  (15,403,916)  (19,365,539)  (5,496,196)  (4,048,458)  278,037 
    (49,681,260)  18,047,152  (21,021,064)  4,555,922  (3,397,635)  677,751 
     
     
     
    12,121,187  17,185,239  18,471,732  22,360,186  2,836,284  3,330,933 
    (28,969)  (31,865)  (105,448)  (82,962)  (871)  (826) 
    (136,894)  (127,082)  (55,997)  (21,436)  (11,622)  (3,402) 
    (9,552,807)  (11,636,456)  (1,268,410)  (593,464)  (263,243)  (94,198) 
    (203,363)  (414,578)  (188,212)  (79,001)  (1,143)  – 
    (1,407,643)  (1,542,951)  (542,500)  (319,302)  (79,142)  (48,555) 
    (19,783,201)  (13,615,013)  (9,303,596)  (6,350,099)  (1,461,252)  (715,346) 
    –  –  –  –  –  – 
    (18,991,690)  (10,182,706)  7,007,569  14,913,922  1,019,011  2,468,606 
    (68,672,950)  7,864,446  (14,013,495)  19,469,844  (2,378,624)  3,146,357 
     
    126,342,173  118,477,727  42,750,873  23,281,029  7,539,411  4,393,054 
    $ 57,669,223  $ 126,342,173  $ 28,737,378  $ 42,750,873  $ 5,160,787  $ 7,539,411 

     

    51

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
        Goldman Sachs 
        Structured
        Small Cap
        Equity Service 
        Class I
        Division
     
        2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ (30,492)  $ (47,127) 
       Total realized gains (losses) on investments    (266,681)    468,331 
       Change in net unrealized appreciation or depreciation of investments    (1,452,822)    (1,329,970) 
     
    Net increase (decrease) in net assets resulting from operations    (1,749,995)    (908,766) 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    1,184,594    2,218,893 
       Administration charges    (162)    (397) 
       Contingent sales charges    (6,936)    (5,263) 
       Contract terminations    (157,120)    (145,717) 
       Death benefit payments    (5,869)    (4,380) 
       Flexible withdrawal option payments    (40,487)    (36,296) 
       Transfer payments to other contracts    (540,408)    (492,775) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    433,612    1,534,065 
     
    Total increase (decrease)    (1,316,383)    625,299 
     
    Net assets at beginning of period    4,625,931    4,000,632 
     
    Net assets at end of period  $ 3,309,548  $ 4,625,931 
     
     
    See accompanying notes.         

    52

    Goldman Sachs  Government   
    VIT Mid Cap  & High  International 
    Value Service  Quality  Emerging 
    Class I  Bond  Markets 
    Division  Division  Division 

               2008             2007             2008             2007  2008  2007 
     
     
    $ (64,148)  $ (84,880)  $ 9,531,707  $ 8,931,036  $ (372,495)  $ (672,041) 
    (940,819)  2,952,270  (2,283,708)  (45,887)  37,277,375  15,685,719 
    (7,016,663)  (2,895,642)  (15,720,378)  556,134  (121,845,736)  29,138,150 
    (8,021,630)  (28,252)  (8,472,379)  9,441,283  (84,940,856)  44,151,828 
     
     
     
    4,577,107  9,557,030  79,089,815  52,595,854  31,734,390  57,313,240 
    (1,847)  (1,534)  (229,848)  (197,217)  (36,086)  (36,986) 
    (36,967)  (18,887)  (427,591)  (251,766)  (158,999)  (105,679) 
    (837,345)  (522,888)  (28,347,401)  (22,921,947)  (8,406,299)  (8,572,600) 
    (105,265)  (52,409)  (1,750,298)  (1,915,110)  (335,750)  (234,366) 
    (164,601)  (108,775)  (7,129,878)  (7,200,822)  (971,879)  (905,130) 
    (2,663,267)  (1,252,474)  (72,927,998)  (28,756,321)  (38,127,192)  (32,280,061) 
    –  –  –  –  –  – 
    767,815  7,600,063  (31,723,199)  (8,647,329)  (16,301,815)  15,178,418 
    (7,253,815)  7,571,811  (40,195,578)  793,954  (101,242,671)  59,330,246 
     
    20,193,137  12,621,326  277,392,256  276,598,302  163,677,397  104,347,151 
    $ 12,939,322  $ 20,193,137  $ 237,196,678  $ 277,392,256  $ 62,434,726  $ 163,677,397 

      53

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
      International 
      SmallCap 
      Division
     
                 2008       2007 
     
    Increase (decrease) in net assets from       
    Operations:       
       Net investment income (loss)  $ 615,925  $ 96,258 
       Total realized gains (losses) on investments  15,902,116    29,626,721 
       Change in net unrealized appreciation or depreciation of investments  (78,701,482)    (19,945,496) 
     
    Net increase (decrease) in net assets resulting from operations  (62,183,441)    9,777,483 
     
    Changes from principal transactions:       
       Purchase payments, less sales charges, per payment fees       
    and applicable premium taxes  14,016,317    32,557,186 
       Administration charges  (29,611)    (44,542) 
       Contingent sales charges  (138,546)    (134,328) 
       Contract terminations  (8,145,534)    (11,316,043) 
       Death benefit payments  (408,857)    (412,907) 
       Flexible withdrawal option payments  (964,948)    (1,006,898) 
       Transfer payments to other contracts  (21,093,388)    (23,377,974) 
       Annuity payments  –    – 
     
    Increase (decrease) in net assets from principal transactions  (16,764,567)    (3,735,506) 
     
    Total increase (decrease)  (78,948,008)    6,041,977 
     
    Net assets at beginning of period  133,592,554    127,550,577 
     
    Net assets at end of period  $ 54,644,546  $ 133,592,554 
     

    (1)      Represented the operations of LargeCap Blend Division until May 19, 2008 name change.
    (2)      Represented the operations of Growth Division until May 19, 2008 name change.

    See accompanying notes.

    54

    Janus Aspen     
    Mid Cap     
    Growth  LargeCap  LargeCap 
    Service Shares  Blend II  Growth 
    Division  Division (1)  Division (2) 

               2008             2007             2008             2007             2008             2007 
     
     
    $ (238,773)  $ (295,034)  $ (63,226)  $ (1,620,667)  $ (593,147)  $ (1,077,668) 
    1,771,009  1,252,560  72,953,572  9,827,640  (1,777,113)  482,673 
    (10,470,032)  2,816,020  (156,185,338)  (1,358,796)  (40,078,823)  20,008,519 
    (8,937,796)  3,773,546  (83,294,992)  6,848,177  (42,449,083)  19,413,524 
     
     
     
    2,308,745  4,840,315  41,924,239  58,960,470  12,349,924  10,396,440 
    (7,100)  (7,819)  (468,016)  (413,189)  (27,239)  (27,906) 
    (25,647)  (18,485)  (235,408)  (154,992)  (141,832)  (117,010) 
    (1,789,711)  (1,692,621)  (9,869,226)  (9,417,847)  (11,686,832)  (11,836,434) 
    (41,151)  (144,826)  (554,073)  (815,704)  (487,543)  (583,681) 
    (193,769)  (165,218)  (2,557,424)  (2,314,962)  (1,389,229)  (1,440,656) 
    (3,849,010)  (3,388,444)  (32,366,363)  (18,754,301)  (10,596,351)  (7,689,073) 
    –  –  –  –  –  – 
    (3,597,643)  (577,098)  (4,126,271)  27,089,475  (11,979,102)  (11,298,320) 
    (12,535,439)  3,196,448  (87,421,263)  33,937,652  (54,428,185)  8,115,204 
     
    22,519,035  19,322,587  226,044,097  192,106,445  104,200,513  96,085,309 
    $ 9,983,596  $ 22,519,035  $ 138,622,834  $ 226,044,097  $ 49,772,328  $ 104,200,513 

      55

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
      LargeCap 
      Growth I
      Division (1) 
     
                 2008       2007 
     
    Increase (decrease) in net assets from       
    Operations:       
       Net investment income (loss)  $ (1,646,067)  $ (1,553,762) 
       Total realized gains (losses) on investments  (2,635,400)    2,923,216 
       Change in net unrealized appreciation or depreciation of investments  (64,763,074)    11,443,127 
     
    Net increase (decrease) in net assets resulting from operations  (69,044,541)    12,812,581 
     
    Changes from principal transactions:       
       Purchase payments, less sales charges, per payment fees       
    and applicable premium taxes  9,779,265    31,951,753 
       Administration charges  (46,551)    (58,316) 
       Contingent sales charges  (236,325)    (234,532) 
       Contract terminations  (16,127,674)    (21,245,633) 
       Death benefit payments  (781,435)    (799,204) 
       Flexible withdrawal option payments  (2,019,662)    (2,106,430) 
       Transfer payments to other contracts  (16,630,080)    (15,053,442) 
       Annuity payments  –    – 
     
    Increase (decrease) in net assets from principal transactions  (26,062,462)    (7,545,804) 
     
    Total increase (decrease)  (95,107,003)    5,266,777 
     
    Net assets at beginning of period  185,016,694    179,749,917 
     
    Net assets at end of period  $ 89,909,691  $ 185,016,694 
     

    (1)      Represented the operations of Equity Growth Division until May 19, 2008 name change.
    (2)      Represented the operations of LargeCap Stock Index Division until May 19, 2008 name change.
    (3)      Represented the operations of Capital Value Division until May 19, 2008 name change.
    (4)      Represented the operations of Equity Value Division until May 19, 2008 name change.

    See accompanying notes.

    56

    LargeCap  LargeCap  LargeCap 
    S&P 500 Index  Value  Value II 
    Division (2)  Division (3)  Division (4) 

               2008             2007  2008             2007             2008             2007 
     
     
    $ 1,244,747  $ 55,989  $ 1,574,951  $ 721,531  $ (68,829)  $ 37,773 
    2,917,918  4,337,636  12,349,025  16,525,636  (37,547)  495,190 
    (58,021,735)  1,288,344  (75,472,610)  (19,654,871)  (2,184,956)  (699,988) 
    (53,859,070)  5,681,969  (61,548,634)  (2,407,704)  (2,291,332)  (167,025) 
     
     
     
    19,935,434  28,947,541  12,575,035  23,308,698  1,949,669  2,484,414 
    (65,769)  (60,366)  (88,427)  (109,840)  (23,770)  (20,354) 
    (161,617)  (137,148)  (229,260)  (196,128)  (7,573)  (4,529) 
    (11,991,244)  (13,174,505)  (20,571,144)  (20,797,498)  (171,533)  (125,396) 
    (483,690)  (542,567)  (994,192)  (872,908)  (38,983)  – 
    (1,867,387)  (1,888,599)  (2,493,490)  (2,956,918)  (63,037)  (41,430) 
    (23,436,342)  (17,398,878)  (23,120,543)  (15,803,050)  (854,092)  (530,517) 
    –  –  (24,168)  (31,978)  –  – 
    (18,070,615)  (4,254,522)  (34,946,189)  (17,459,622)  790,681  1,762,188 
    (71,929,685)  1,427,447  (96,494,823)  (19,867,326)  (1,500,651)  1,595,163 
     
    154,077,481  152,650,034  193,783,059  213,650,385  5,522,570  3,927,407 
    $ 82,147,796  $ 154,077,481  $ 97,288,236  $ 193,783,059  $ 4,021,919  $ 5,522,570 

      57

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
      LargeCap 
      Value III
      Division (1) 
     
                 2008       2007 
     
    Increase (decrease) in net assets from       
    Operations:       
       Net investment income (loss)  $ 1,408,032  $ (295,001) 
       Total realized gains (losses) on investments  3,511,355    9,861,437 
       Change in net unrealized appreciation or depreciation of investments  (85,454,359)    (19,916,705) 
     
    Net increase (decrease) in net assets resulting from operations  (80,534,972)    (10,350,269) 
     
    Changes from principal transactions:       
       Purchase payments, less sales charges, per payment fees       
    and applicable premium taxes  41,916,328    60,637,909 
       Administration charges  (399,607)    (358,127) 
       Contingent sales charges  (187,556)    (138,777) 
       Contract terminations  (7,805,174)    (8,662,098) 
       Death benefit payments  (500,918)    (658,835) 
       Flexible withdrawal option payments  (2,144,166)    (2,026,258) 
       Transfer payments to other contracts  (28,036,940)    (21,432,258) 
       Annuity payments  –    – 
     
    Increase (decrease) in net assets from principal transactions  2,841,967    27,361,556 
     
    Total increase (decrease)  (77,693,005)    17,011,287 
     
    Net assets at beginning of period  190,693,956    173,682,669 
     
    Net assets at end of period  $ 113,000,951  $ 190,693,956 
     

    (1) Represented the operations of LargeCap Value Division until May 19, 2008 name change.

    See accompanying notes.

    58

    LifeTime     
    Strategic  LifeTime  LifeTime 
    Income  2010  2020 
    Division  Division  Division 

               2008             2007             2008  2007             2008             2007 
     
     
    $ 537,710  $ (4,421)  $ 1,218,043  $ (66,787)  $ 4,614,933  $ (1,232,783) 
    (183,762)  250,887  1,005,012  718,307  8,497,842  1,159,469 
    (6,107,588)  (222,644)  (16,944,125)  (131,502)  (78,452,695)  3,221,698 
    (5,753,640)  23,822  (14,721,070)  520,018  (65,339,920)  3,148,384 
     
     
     
    7,623,247  10,389,388  12,129,287  22,656,550  41,444,400  83,412,984 
    (58,670)  (49,530)  (179,795)  (169,772)  (903,503)  (746,192) 
    (29,695)  (19,247)  (95,191)  (28,469)  (168,733)  (84,448) 
    (813,091)  (559,155)  (2,458,641)  (839,247)  (4,360,563)  (2,402,527) 
    (114,089)  (122,313)  (282,462)  (148,243)  (822,838)  (5,144) 
    (635,407)  (443,109)  (697,099)  (449,937)  (1,761,631)  (1,349,579) 
    (4,555,812)  (928,569)  (6,838,217)  (4,418,408)  (21,843,432)  (4,626,403) 
    –  –  –  –  –  – 
    1,416,483  8,267,465  1,577,882  16,602,474  11,583,700  74,198,691 
    (4,337,157)  8,291,287  (13,143,188)  17,122,492  (53,756,220)  77,347,075 
     
    20,782,672  12,491,385  43,288,558  26,166,066  173,291,730  95,944,655 
    $ 16,445,515  $ 20,782,672  $ 30,145,370  $ 43,288,558  $ 119,535,510  $ 173,291,730 

      59

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
        LifeTime
        2030
        Division
     
         2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ 593,909  $ (187,482) 
       Total realized gains (losses) on investments    1,058,183    240,370 
       Change in net unrealized appreciation or depreciation of investments    (11,164,961)    572,827 
     
    Net increase (decrease) in net assets resulting from operations    (9,512,869)    625,715 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
              and applicable premium taxes    10,001,609    13,956,921 
       Administration charges    (13,575)    (5,180) 
       Contingent sales charges    (47,233)    (38,877) 
       Contract terminations    (1,320,744)    (1,083,510) 
       Death benefit payments    (506,580)    – 
       Flexible withdrawal option payments    (121,952)    (84,241) 
       Transfer payments to other contracts    (3,825,710)    (1,010,190) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    4,165,815    11,734,923 
     
    Total increase (decrease)    (5,347,054)    12,360,638 
     
    Net assets at beginning of period    24,342,225    11,981,587 
     
    Net assets at end of period  $ 18,995,171  $ 24,342,225 
     

    (1) Represented the operations of MidCap Division until May 19, 2008 name change.

    See accompanying notes.

    60

    LifeTime  LifeTime  MidCap 
    2040  2050  Blend 
    Division  Division  Division (1) 

                2008              2007              2008              2007              2008              2007 
     
     
    $ 247,435  $ (84,388)  $ 139,722  $ (61,152)  $ (2,204,219)  $ (2,818,271) 
    482,056  87,956  231,864  96,479  33,993,276  44,568,045 
    (5,355,646)  235,751  (2,949,512)  170,452  (151,699,449)  (12,610,018) 
    (4,626,155)  239,319  (2,577,926)  205,779  (119,910,392)  29,139,756 
     
     
     
    2,507,872  6,480,111  1,532,331  3,148,114  39,754,579  56,364,878 
    (5,052)  (2,616)  (3,264)  (1,602)  (362,939)  (330,735) 
    (21,493)  (9,456)  (12,484)  (2,589)  (472,723)  (375,397) 
    (581,892)  (262,408)  (283,055)  (71,683)  (30,601,185)  (34,013,940) 
    (1,324)  –  –  –  (1,660,461)  (1,605,003) 
    (46,780)  (30,474)  (16,744)  (13,127)  (4,461,809)  (4,535,732) 
    (1,210,091)  (499,141)  (742,245)  (790,257)  (50,717,607)  (31,640,876) 
    –  –  –  –  –  – 
    641,240  5,676,016  474,539  2,268,856  (48,522,145)  (16,136,805) 
    (3,984,915)  5,915,335  (2,103,387)  2,474,635  (168,432,537)  13,002,951 
     
    11,106,688  5,191,353  5,959,809  3,485,174  380,163,964  367,161,013 
    $ 7,121,773  $ 11,106,688  $ 3,856,422  $ 5,959,809  $ 211,731,427  $ 380,163,964 

      61

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
        MidCap
        Growth I
        Division (1)
     
         2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ (611,243)  $ (784,591) 
       Total realized gains (losses) on investments    5,343,125    9,560,836 
       Change in net unrealized appreciation or depreciation of investments    (27,761,953)    (3,576,354) 
     
    Net increase (decrease) in net assets resulting from operations    (23,030,071)    5,199,891 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    5,413,498    9,889,151 
       Administration charges    (9,569)    (13,240) 
       Contingent sales charges    (63,925)    (54,986) 
       Contract terminations    (4,008,344)    (4,815,316) 
       Death benefit payments    (111,438)    (416,857) 
       Flexible withdrawal option payments    (550,898)    (570,512) 
       Transfer payments to other contracts    (8,527,427)    (7,021,735) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    (7,858,103)    (3,003,495) 
     
    Total increase (decrease)    (30,888,174)    2,196,396 
     
    Net assets at beginning of period    59,983,869    57,787,473 
     
    Net assets at end of period  $ 29,095,695  $ 59,983,869 
     

    (1)      Represented the operations of MidCap Growth Division until May 19, 2008 name change.
    (2)      Represented the operations of MidCap Value Division until May 19, 2008 name change.
    (3)      Commenced operations November 24, 2008.

    See accompanying notes.

    62

    MidCap  Money  Mortgage 
    Value II  Market  Securities 
    Division (2)  Division  Division (3) 

     
               2008             2007             2008             2007  2008 
     
     
    $ (495,075)  $ (957,281)  $ 2,064,023  $ 3,913,697  $ (824) 
    3,847,721  12,276,643  –  –  9 
    (56,328,898)  (14,908,849)  –  –  (731) 
    (52,976,252)  (3,589,487)  2,064,023  3,913,697  (1,546) 
     
     
     
    23,795,371  36,909,215  276,562,170  167,045,728  261,967 
    (215,911)  (193,825)  (115,347)  (83,158)  (39) 
    (122,965)  (104,814)  (902,943)  (438,625)  – 
    (6,841,705)  (8,897,540)  (58,633,656)  (40,741,716)  – 
    (294,491)  (505,543)  (1,122,430)  (347,568)  – 
    (1,365,327)  (1,448,584)  (4,665,357)  (2,919,136)  – 
    (20,517,614)  (16,339,225)  (100,477,626)  (89,256,908)  (1,464) 
    –  –  –  –  – 
    (5,562,642)  9,419,684  110,644,811  33,258,617  260,464 
    (58,538,894)  5,830,197  112,708,834  37,172,314  258,918 
     
    125,208,659  119,378,462  131,678,693  94,506,379  – 
    $ 66,669,765  $ 125,208,659  $ 244,387,527  $ 131,678,693  $ 258,918 

      63

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
      Neuberger
      Berman AMT 
      Partners
      I Class
      Divison
     
                 2008    2007 
     
    Increase (decrease) in net assets from       
    Operations:       
       Net investment income (loss)  $ (50,118)  $ (41,789) 
       Total realized gains (losses) on investments  700,771    671,286 
       Change in net unrealized appreciation or depreciation of investments  (4,538,126)    (200,086) 
     
    Net increase (decrease) in net assets resulting from operations  (3,887,473)    429,411 
     
    Changes from principal transactions:       
       Purchase payments, less sales charges, per payment fees       
              and applicable premium taxes  1,553,847    2,720,666 
       Administration charges  (2,921)    (1,488) 
       Contingent sales charges  (7,281)    (4,155) 
       Contract terminations  (164,914)    (115,037) 
       Death benefit payments  (6,659)    – 
       Flexible withdrawal option payments  (98,604)    (54,387) 
       Transfer payments to other contracts  (879,941)    (493,158) 
       Annuity payments  –    – 
     
    Increase (decrease) in net assets from principal transactions  393,527    2,052,441 
     
    Total increase (decrease)  (3,493,946)    2,481,852 
     
    Net assets at beginning of period  7,153,595    4,671,743 
     
    Net assets at end of period  $ 3,659,649  $ 7,153,595 
     

    (1) Represented the operations of Neuberger Berman AMT Fasciano S Class Division until November 24, 2008 name change.

    See accompanying notes.

    64

      Neuberger   
    Neuberger  Berman AMT   
    Berman AMT  Socially   
    Small Cap Growth  Responsive  Real Estate 
    S Class  I Class  Securities 
    Divison (1)  Divison  Division 

               2008             2007             2008             2007             2008  2007 
     
     
    $ (41,363)  $ (39,493)  $ 41,229  $ (44,201)  $ 907,186  $ (981,981) 
    (463)  29,015  289,528  70,897  29,751,170  31,807,670 
    (1,283,991)  (50,780)  (2,407,338)  133,693  (65,216,125)  (61,203,593) 
    (1,325,817)  (61,258)  (2,076,581)  160,389  (34,557,769)  (30,377,904) 
     
     
     
    722,988  1,427,777  1,689,764  2,790,419  16,896,419  35,009,323 
    (238)  (280)  (16,466)  (13,032)  (29,928)  (42,965) 
    (4,447)  (3,420)  (5,904)  (2,913)  (141,678)  (133,155) 
    (100,733)  (94,690)  (133,744)  (80,653)  (8,396,734)  (11,933,764) 
    (1,755)  (711)  (48,913)  –  (293,005)  (493,361) 
    (10,108)  (3,995)  (82,161)  (51,351)  (1,277,565)  (1,684,000) 
    (429,076)  (160,869)  (460,078)  (633,091)  (25,058,425)  (55,073,957) 
    –  –  –  –  –  – 
    176,631  1,163,812  942,498  2,009,379  (18,300,916)  (34,351,879) 
    (1,149,186)  1,102,554  (1,134,083)  2,169,768  (52,858,685)  (64,729,783) 
     
    3,110,588  2,008,034  4,688,875  2,519,107  116,915,287  181,645,070 
    $ 1,961,402  $ 3,110,588  $ 3,554,792  $ 4,688,875  $ 64,056,602  $ 116,915,287 

      65

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
      SAM
      Balanced
      Portfolio
      Division (1)
     
                   2008    2007 
     
    Increase (decrease) in net assets from       
    Operations:       
       Net investment income (loss)  $ 3,354,668  $ (86,893) 
       Total realized gains (losses) on investments  14,546,851    (3,105) 
       Change in net unrealized appreciation or depreciation of investments  (67,929,605)    177,134 
     
    Net increase (decrease) in net assets resulting from operations  (50,028,086)    87,136 
     
    Changes from principal transactions:       
       Purchase payments, less sales charges, per payment fees       
    and applicable premium taxes  265,171,493    36,412,324 
       Administration charges  (899,960)    (39,538) 
       Contingent sales charges  (66,255)    (1,329) 
       Contract terminations  (2,159,017)    (52,326) 
       Death benefit payments  (440,131)    – 
       Flexible withdrawal option payments  (1,682,240)    (69,223) 
       Transfer payments to other contracts  (15,883,543)    (1,022,416) 
       Annuity payments  –    – 
     
    Increase (decrease) in net assets from principal transactions  244,040,347    35,227,492 
     
    Total increase (decrease)  194,012,261    35,314,628 
     
    Net assets at beginning of period  35,314,628    – 
     
    Net assets at end of period  $ 229,326,889  $ 35,314,628 
     
     
     
    (1) Commenced operations May 1, 2007.       
     
     
    See accompanying notes.       

    66

    SAM  SAM  SAM 
    Conservative  Conservative  Flexible 
    Balanced  Growth  Income 
    Portfolio  Portfolio  Portfolio 
    Division (1)  Division (1)  Division (1) 

    2008 2007 2008 2007 2008 2007
     
     
    $ 670,290  $ (18,979)  $ 462,362  $ (13,057)  $ 1,277,713  $ (1,230) 
    800,314  3,859  1,150,956  (1,188)  1,526,798  896 
    (10,578,080)  99,305  (9,970,888)  32,369  (8,573,985)  15,193 
    (9,107,476)  84,185  (8,357,570)  18,124  (5,769,474)  14,859 
     
     
     
    73,655,354  9,160,622  27,494,346  6,979,356  86,506,079  1,663,232 
    (151,726)  (7,012)  (5,644)  (971)  (113,308)  (613) 
    (44,887)  (1,565)  (21,181)  (644)  (69,110)  (330) 
    (1,279,391)  (117,518)  (684,818)  (17,834)  (2,500,034)  (9,143) 
    (40,961)  –  –  –  (89,213)  – 
    (687,709)  (30,758)  (149,819)  (24,076)  (868,517)  (4,436) 
    (10,859,658)  (427,208)  (2,683,492)  (52,182)  (12,245,490)  (144,611) 
    –  –  –  –  –  – 
    60,591,022  8,576,561  23,949,392  6,883,649  70,620,407  1,504,099 
    51,483,546  8,660,746  15,591,822  6,901,773  64,850,933  1,518,958 
     
    8,660,746  –  6,901,773  –  1,518,958  – 
    $ 60,144,292  $ 8,660,746  $ 22,493,595  $ 6,901,773  $ 66,369,891  $ 1,518,958 

      67

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
        SAM
        Strategic
        Growth
        Portfolio
        Division (1)
     
        2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ 331,486  $ (24,495) 
       Total realized gains (losses) on investments    1,298,155    291 
       Change in net unrealized appreciation or depreciation of investments    (8,719,757)    34,178 
     
    Net increase (decrease) in net assets resulting from operations    (7,090,116)    9,974 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    20,627,592    6,874,783 
       Administration charges    (4,508)    (796) 
       Contingent sales charges    (16,923)    (557) 
       Contract terminations    (655,741)    (15,411) 
       Death benefit payments    (2,817)    – 
       Flexible withdrawal option payments    (97,306)    (2,915) 
       Transfer payments to other contracts    (3,207,792)    (78,855) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    16,642,505    6,776,249 
     
    Total increase (decrease)    9,552,389    6,786,223 
     
    Net assets at beginning of period    6,786,223    – 
     
    Net assets at end of period  $ 16,338,612  $ 6,786,223 
     

    (1)      Commenced operations May 1, 2007.
    (2)      Commenced operations November 24, 2008.
    (3)      Represented the operations of SmallCap Division until May 19, 2008 name change.

    See accompanying notes.

    68

    Short Term  Short-Term  SmallCap 
    Bond  Income  Blend 
    Division  Division (2)  Division (3) 

               2008             2007  2008             2008             2007 
     
     
    $ 4,875,746  $ 2,638,632  $ (8,916)  $ (450,823)  $ (752,591) 
    (3,548,152)  199,277  7  4,391,590  9,613,894 
    (20,527,201)  (775,739)  (157)  (25,781,767)  (8,429,214) 
    (19,199,607)  2,062,170  (9,066)  (21,841,000)  432,089 
     
     
     
    44,820,832  60,878,423  274,679  3,979,820  7,643,052 
    (581,830)  (495,682)  (83)  (8,472)  (11,463) 
    (173,227)  (107,012)  –  (67,080)  (60,023) 
    (6,752,698)  (5,969,537)  –  (5,187,036)  (6,220,318) 
    (740,100)  (549,362)  –  (135,513)  (244,449) 
    (3,513,885)  (3,227,039)  –  (860,728)  (990,475) 
    (52,508,378)  (17,208,162)  (4,211)  (8,590,660)  (7,088,354) 
    –  –  –  –  – 
    (19,449,286)  33,321,629  270,385  (10,869,669)  (6,972,030) 
    (38,648,893)  35,383,799  261,319  (32,710,669)  (6,539,941) 
     
    152,977,990  117,594,191  –  65,211,820  71,751,761 
    $ 114,329,097  $ 152,977,990  $ 261,319  $ 32,501,151  $ 65,211,820 

      69

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
        SmallCap   
        Growth II   
        Division (1)   
     
        2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ (500,127)  $ (683,380) 
       Total realized gains (losses) on investments    (2,752,055)    (819,858) 
       Change in net unrealized appreciation or depreciation of investments    (15,384,937)    3,245,872 
     
    Net increase (decrease) in net assets resulting from operations    (18,637,119)    1,742,634 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    4,835,027    9,802,660 
       Administration charges    (5,181)    (7,735) 
       Contingent sales charges    (56,468)    (56,973) 
       Contract terminations    (3,443,038)    (5,134,107) 
       Death benefit payments    (79,952)    (139,307) 
       Flexible withdrawal option payments    (364,143)    (385,519) 
       Transfer payments to other contracts    (6,050,797)    (6,738,576) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    (5,164,552)    (2,659,557) 
     
    Total increase (decrease)    (23,801,671)    (916,923) 
     
    Net assets at beginning of period    47,856,301    48,773,224 
     
    Net assets at end of period  $ 24,054,630  $ 47,856,301 
     

    (1)      Represented the operations of SmallCap Growth Division until May 19, 2008 name change.
    (2)      Represented the operations of SmallCap Value Division until May 19, 2008 name change.

    See accompanying notes.

    70

      T. Rowe Price  T. Rowe Price 
    SmallCap  Blue Chip  Health 
    Value I  Growth II  Sciences II 
    Division (2)  Division  Division 

               2008             2007  2008  2007             2008             2007 
     
     
    $ (441,567)  $ (1,387,585)  $ (22,984)  $ (18,061)  $ (54,798)  $ (40,170) 
    7,515,885  12,256,293  (79,654)  10,147  (2,636)  381,677 
    (44,840,466)  (25,656,037)  (852,802)  132,923  (1,302,312)  70,965 
    (37,766,148)  (14,787,329)  (955,440)  125,009  (1,359,746)  412,472 
     
     
     
    22,046,166  40,756,743  838,742  817,202  2,491,467  2,150,730 
    (219,829)  (192,162)  (105)  (78)  (10,936)  (7,774) 
    (143,628)  (121,030)  (3,801)  (1,529)  (6,238)  (3,712) 
    (6,695,459)  (8,939,686)  (86,090)  (42,333)  (141,297)  (102,778) 
    (286,298)  (488,097)  –  –  (19,809)  (3,240) 
    (1,227,159)  (1,210,449)  (9,109)  (6,259)  (48,125)  (21,040) 
    (24,391,324)  (17,767,563)  (378,209)  (48,549)  (1,026,645)  (763,621) 
    –  –  –  –  –  – 
    (10,917,531)  12,037,756  361,428  718,454  1,238,417  1,248,565 
    (48,683,679)  (2,749,573)  (594,012)  843,463  (121,329)  1,661,037 
     
    123,310,038  126,059,611  1,871,598  1,028,135  3,857,797  2,196,760 
    $ 74,626,359  $ 123,310,038  $ 1,277,586  $ 1,871,598  $ 3,736,468  $ 3,857,797 

      71

    Principal Life Insurance Company
    Separate Account B
     
     
    Statements of Changes in Net Assets (continued)
     
    Years Ended December 31, 2008 and 2007, Except as Noted
     
     
     
     
        Templeton
        Growth Securities
        Class 2
        Division
     
        2008    2007 
     
    Increase (decrease) in net assets from         
    Operations:         
       Net investment income (loss)  $ 17,552  $ 13,722 
       Total realized gains (losses) on investments    76,480    228,341 
       Change in net unrealized appreciation or depreciation of investments    (1,102,357)    (194,563) 
     
    Net increase (decrease) in net assets resulting from operations    (1,008,325)    47,500 
     
    Changes from principal transactions:         
       Purchase payments, less sales charges, per payment fees         
    and applicable premium taxes    150,654    215,921 
       Administration charges    –    – 
       Contingent sales charges    (1,072)    (1,051) 
       Contract terminations    (307,458)    (357,202) 
       Death benefit payments    (20,805)    (7,897) 
       Flexible withdrawal option payments    (30,822)    (34,321) 
       Transfer payments to other contracts    (287,074)    (228,583) 
       Annuity payments    –    – 
     
    Increase (decrease) in net assets from principal transactions    (496,577)    (413,133) 
     
    Total increase (decrease)    (1,504,902)    (365,633) 
     
    Net assets at beginning of period    2,663,092    3,028,725 
     
    Net assets at end of period  $ 1,158,190  $ 2,663,092 
     
     
     
    (1) Commenced operations May 1, 2007.         
     
     
    See accompanying notes.         

    72

    West Coast
    Equity
    Division (1)
    2008  2007 
     
     
    $ (6,100)  $ (4,274) 
    96,512  464 
    (936,758)  3,021 
    (846,346)  (789) 
     
     
     
    1,942,160  1,500,527 
    (254)  (20) 
    (740)  (34) 
    (16,751)  (930) 
    –  – 
    (34,219)  (915) 
    (396,687)  (64,700) 
    –  – 
    1,493,509  1,433,928 
    647,163  1,433,139 
     
    1,433,139  – 
    $ 2,080,302  $ 1,433,139 

      73

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements 

    1. Nature of Operations and Significant Accounting Policies

    Principal Life Insurance Company Separate Account B (Separate Account B) is a segregated investment account of Principal Life Insurance Company (Principal Life) and is registered under the Investment Company Act of 1940 as a unit investment trust, with no stated limitations on the number of authorized units. As directed by eligible contractholders, each division of Separate Account B invests exclusively in shares representing interests in a corresponding investment option. As of December 31, 2008, contractholder investment options include the following open-end management investment companies:

    Principal Variable Contracts Fund, Inc. (1) 
       Asset Allocation Account 
       Balanced Account 
       Bond & Mortgage Securities Account (8) 
       Diversified International Account 
       Equity Income Account (4, 9) 
       Government & High Quality Bond Account 
       International Emerging Markets Account 
       International SmallCap Account 
       LargeCap Blend II Account (10) 
       LargeCap Growth Account (11) 
       LargeCap Growth I Account (12) 
       LargeCap S&P 500 Index Account (13) 
       LargeCap Value Account (14) 
       LargeCap Value II Account (15) 
       LargeCap Value III Account (16) 
       LifeTime Strategic Income Account (2) 
       LifeTime 2010 Account (2) 
       LifeTime 2020 Account (2) 
       LifeTime 2030 Account (2) 
       LifeTime 2040 Account (2) 
       LifeTime 2050 Account (2) 
       MidCap Blend Account (17) 
       MidCap Growth I Account (18) 
       MidCap Value II Account (19) 
       Money Market Account 
       Mortgage Securities Account (7) 
       Real Estate Securities Account 
       Short Term Bond Account 
       Short-Term Income Account (7) 
       SmallCap Blend Account (20) 
       SmallCap Growth II Account (21) 
       SmallCap Value I Account (22) 
       Strategic Asset Management Portfolio – Balanced Portfolio Accounts (5) 
       Strategic Asset Management Portfolio – Conservative Balanced Portfolio Account (5) 
       Strategic Asset Management Portfolio – Conservative Growth Portfolio Account (5) 
       Strategic Asset Management Portfolio – Flexible Income Portfolio Account (5) 
       Strategic Asset Management Portfolio – Strategic Growth Portfolio Account (5) 
       West Coast Equity Account (5) 

    74

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    1. Nature of Operations and Significant Accounting Policies (continued) 
     
             AIM V.I. Basic Value Fund – Series I (2) 
             AIM V.I. Capital Appreciation Fund – Series I (3) 
             AIM V.I. Core Equity Fund – Series I 
             AIM V.I. Dynamics Fund – Series I 
             AIM V.I. Global Health Care Fund – Series I 
             AIM V.I. International Growth Fund – Series I (6) 
             AIM V.I. Small Cap Equity Fund – Series I (2) 
             AIM V.I. Technology Fund – Series I 
             Alliance Bernstein VP Series Fund, Inc: 
                 Small Cap Growth Portfolio – Class A (2) 
             American Century Variable Portfolios, Inc: 
                 VP Income & Growth Fund – I 
                 VP Inflation Protection Fund – II (2) 
                 VP Ultra Fund – I 
                 VP Ultra Fund – II (2) 
                 VP Value Fund – II 
                 VP Vista Fund – I (2) 
             Dreyfus Investment Portfolios: 
                 Technology Growth Portfolio – Service Shares (2) 
             Fidelity Variable Insurance Products Fund: 
                 Equity-Income Portfolio – SC2 
                 Growth Portfolio – SC 
                 Growth Portfolio – SC2 (2) 
                 Overseas Portfolio – SC2 (2) 
             Fidelity Variable Insurance Products Fund II: 
                 Contrafund Portfolio – SC 
                 Contrafund Portfolio – SC2 (2) 
             Fidelity Variable Insurance Products Fund III: 
                 Mid Cap Portfolio – SC2 (2) 
             Franklin Templeton VIP Trust: 
                 Templeton Growth Securities Fund – Class 2 
             Goldman Sachs Variable Insurance Trust: 
                 Mid Cap Value Fund – SC I (2) 
                 Structured Small Cap Equity Fund – SC I (2) 
             Janus Aspen Series Mid Cap Growth Portfolio – Service Shares 
             Neuberger Berman AMT Partners Portfolio – I Class (2) 
             Neuberger Berman AMT Small Cap Growth Portfolio – S Class (2, 23) 
             Neuberger Berman AMT Socially Responsive Portfolio – I Class (2) 
             T. Rowe Price Blue Chip Growth Portfolio – II (2) 
             T. Rowe Price Health Sciences Portfolio – II (2) 
     
             (1)  Organized by Principal Life Insurance Company 
             (2)  Commenced operations January 4, 2005 
             (3)  Commenced operations April 28, 2006 
             (4)  Commenced operations January 5, 2007. 
             (5)  Commenced operations May 1, 2007. 
             (6)  Commenced operations May 19, 2008. 
             (7)  Commenced operations November 24, 2008. 
             (8)  Represented the operations of Bond Division until May 19, 2008 name change. 
             (9)  Represented the operations of Equity Income I Division until May 19, 2008 name change. 
             (10) Represented the operations of LargeCap Blend Division until May 19, 2008 name change. 

    75

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    1. Nature of Operations and Significant Accounting Policies (continued) 
     
             (11) Represented the operations of Growth Division until May 19, 2008 name change. 
             (12) Represented the operations of Equity Growth Division until May 19, 2008 name change. 
             (13) Represented the operations of LargeCap Stock Index Division until May 19, 2008 name change. 
             (14) Represented the operations of Capital Value Division until May 19, 2008 name change. 
             (15) Represented the operations of Equity Value Division until May 19, 2008 name change. 
             (16) Represented the operations of LargeCap Value Division until May 19, 2008 name change. 
             (17) Represented the operations of MidCap Division until May 19, 2008 name change. 
             (18) Represented the operations of MidCap Growth Division until May 19, 2008 name change. 
             (19) Represented the operations of MidCap Value Division until May 19, 2008 name change. 
             (20) Represented the operations of SmallCap Division until May 19, 2008 name change. 
             (21) Represented the operations of SmallCap Growth Division until May 19, 2008 name change. 
             (22) Represented the operations of Small Cap Value Division until May 19, 2008 name change. 
             (23) Represented the operations of Neuberger Berman AMT Fasciano S Class Division until November 24, 2008 name change.

    Commencement of operations date is the date that the division became available to contractholders.

    The assets of Separate Account B are owned by Principal Life. The assets of Separate Account B support the following variable annuity contracts of Principal Life and may not be used to satisfy the liabilities arising from any other business of Principal Life: Bankers Flexible Annuity; Pension Builder Plus; Pension Builder Plus – Rollover IRA; Personal Variable; Premier Variable; Principal Freedom Variable Annuity; Principal Freedom 2 Variable Annuity; The Principal Variable Annuity; The Principal Variable Annuity with Purchase Payment Credit Rider; Principal Investment Plus Variable Annuity, and Principal Investment Plus Variable Annuity with Purchase Rider. Principal Life no longer accepts contributions for Bankers Flexible Annuity Contracts, Pension Builder Plus Contracts and Pension Builder Plus-Rollover IRA Contracts. Contractholders are being given the option of withdrawing their funds or transferring to another contract. Contributions to the Personal Variable contracts are no longer accepted from new customers, only from existing customers beginning January 1998.

    Use of Estimates in the Preparation of Financial Statements

    The preparation of financial statements and accompanying notes of Separate Account B in accordance with U.S. generally accepted accounting principals requires management to make estimates and assumptions that affect the amounts reported and disclosed. These estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in the financial statements and accompanying notes.

    76

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    1. Nature of Operations and Significant Accounting Policies (continued)

    Investments

    Investments are stated at the closing net asset values per share on December 31, 2008. The average cost method is used to determine realized gains and losses on investments. Dividends are taken into income on an accrual basis as of the ex-dividend date. Investment transactions are accounted for on a trade date basis.

    Fair Value Measurements

    Effective January 1, 2008, Separate Account B adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). For disclosures, SFAS 157 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels:

    • Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
    • Level 2 – Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.
    • Level 3 – Unobservable inputs for the asset or liability reflecting internal assumptions.

    The investments of the open-end management investment companies listed above represent investments in mutual funds for which a daily net asset value (“NAV”) is calculated and published. Therefore, the investments fall into Level 1 of the fair value hierarchy. The adoption of SFAS 157 had no effect on the recorded investment amounts in Separate Account B.

    2. Expenses and Related Party Transactions

    Principal Life is compensated for the following expenses:

    Bankers Flexible Annuity Contracts – Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.48% of the asset value of each contract. An annual administration charge of $7 for each participant’s account is deducted as compensation for administrative expenses.

    Pension Builder Plus and Pension Builder Plus – Rollover IRA Contracts – Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a

    77

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    2. Expenses and Related Party Transactions (continued)

    reduction of the unit value equivalent to an annual rate of 1.50% (1% for a Rollover Individual Retirement Annuity) of the asset value of each contract. A contingent sales charge of up to 7% may be deducted from withdrawals made during the first ten years of a contract, except for withdrawals related to death or permanent disability. An annual administration charge will be deducted ranging from a minimum of $25 to a maximum of $275 depending upon a participant’s investment account values and the number of participants under the retirement plan and their participant investment account value.

    Personal Variable Contracts – Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.64% of the asset value of each contract. A contingent sales charge of up to 5% may be deducted from withdrawals from an investment account during the first seven years from the date the first contribution which relates to such participant is accepted by Principal Life. This charge does not apply to withdrawals made from investment accounts which correlate to a plan participant as a result of the plan participant’s death or permanent disability. An annual administration charge of $34 for each participant’s account plus 0.35% of the annual average balance of investment account values which correlate to a plan participant will be deducted on a quarterly basis.

    Premier Variable Contracts – Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.42% of the asset value of each contract. The Contractholder must also pay contract administration charges. The annual charge ranges from a minimum charge of $2,150 to $7,725 plus 0.03% of account values greater than $30,000,000. The amount varies by Plan document and account balance of contract. Recordkeeping charges are also paid by the Contractholder. The annual charge ranges from $2,250 to $25,316 plus $10 per participant. The amount varies by total plan participants. There were no contingent sales charges provided for in these contracts.

    Principal Freedom Variable Annuity – Mortality and expenses risk assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.85% of the asset value of each contract. A contingent sales charge up to 6% may be deducted from the withdrawals made during the first six years of a contract, except for withdrawals related to death, annuitization, permanent disability, confinement in a health facility, or terminal illness. Principal Life reserves the right to charge an additional administrative fee of up to 0.15% of the asset value of each Division.

    78

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    2. Expenses and Related Party Transactions (continued)

    Principal Freedom 2 Variable Annuity – Mortality and expenses risk assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 0.95% of the asset value of each contract. A surrender charge up to 3% may be deducted from the withdrawals made during the first three years of a contract, except for death, annuitization, permanent disability, confinement in a health facility, or terminal illness. Principal Life reserves the right to charge an additional administrative fee of up to 0.15% of the asset value of each Division.

    The Principal Variable Annuity – Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 1.25% of the asset value of each contract. A surrender charge of up to 6% may be deducted from the withdrawals made during the first six years of a contract, except for death, annuitization, permanent disability, confinement in a health care facility, or terminal illness. An annual administration charge of the lesser of 2% of the accumulated value or $30 is deducted at the end of the contract year. Principal Life reserves the right to charge an additional administrative fee of up to 0.15% of the asset value of each Division. This fee is currently being waived. Effective November 27, 2000, Principal Life added a purchase payment credit rider to the contract, at an annual rate of 0.6% . For electing participants, the rider is deducted from the daily unit value.

    The Principal Investment Plus Variable Annuity - Mortality and expense risks assumed by Principal Life are compensated for by a daily charge resulting in a reduction of the unit value equivalent to an annual rate of 1.25% of the asset value of each contract. A contingent sales charge of up to 6% may be deducted from the withdrawals made during the first six years of a contract, except for death, annuitization, permanent disability, confinement in a health care facility, or terminal illness. An annual administration charge of the lesser of 2% of the accumulated value or $30 is deducted at the end of the contract year. Principal Life reserves the right to charge an additional administrative fee of up to 0.15% of the asset value of each Division. This fee is currently being waived. The product also contains an optional premium payment credit rider, which charges an annual rate of 0.6% . For electing participants, the rider is deducted from the daily unit value.

    During the year ended December 31, 2008, management fees were paid indirectly to Principal Management Corporation (wholly owned by Principal Financial Services, Inc.), an affiliate of

    79

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    2. Expenses and Related Party Transactions (continued)

    Principal Life, in its capacity as advisor to Principal Variable Contracts Fund, Inc. Investment advisory and management fees are computed on an annual rate of 0.25% of the average daily net assets of the LargeCap S&P 500 Index Account and 0.1225% of the average daily net assets of the Principal LifeTime Accounts. The annual rate paid by the SAM Portfolios is based upon the aggregate average daily net assets (“aggregate net assets”) of the SAM Portfolios. The investment advisory and management fee schedule for the SAM Portfolios is 0.25% of aggregate net assets up to the first $1 billion and 0.20% of aggregate net assets over $1 billion.

    The annual rates used in this calculation for each of the other Accounts are as shown in the following tables.

        Net Assets of Accounts (in millions)   
              Over 
      First $100  Next $100  Next $100  Next $100  $400 
    Asset Allocation Account       0.80%      0.75%    0.70%    0.65% 0.60%
    Balanced Account       0.60      0.55      0.50      0.45 0.40
    Bond & Mortgage Securities Account       0.50      0.45      0.40      0.35 0.30
    Equity Income Account       0.60      0.55      0.50      0.45 0.40
    Government & High Quality Bond Account       0.50      0.45      0.40      0.35 0.30
    International SmallCap Account       1.20      1.15      1.10      1.05 1.00
    LargeCap Growth Account I       0.80      0.75      0.70      0.65 0.60
    MidCap Blend Account       0.65      0.60 0.55      0.50 0.45
    MidCap Growth Account I       0.90      0.85 0.80      0.75 0.70
    Money Market Account       0.50      0.45      0.40      0.35 0.30
    Real Estate Securities Account       0.90      0.85      0.80      0.75 0.70
    Short-Term Bond Account       0.50      0.45 0.40      0.35 0.30
    SmallCap Blend Account       0.85      0.80      0.75      0.70 0.65
    SmallCap Growth Account II       1.00      0.95 0.90      0.85 0.80
    SmallCap Value Account I       1.10      1.05      1.00      0.95 0.90

    80

    Principal Life Insurance Company
    Separate Account B
     
     
    Notes to Financial Statements (continued)
     
     
     
     
    2. Expenses and Related Party Transactions (continued)       
     
        Net Assets of Accounts (in millions)   
              Over 
      First $250  Next $250  Next $250  Next $250  $1000 
    Diversified International Account                 0.85%      0.80%    0.75%    0.70% 0.65%
    International Emerging Markets Account                   1.25      1.20      1.15      1.10 1.05
    LargeCap Blend Account II                 0.75      0.70 0.65      0.60 0.55
    LargeCap Value Account                   0.60      0.55      0.50      0.45 0.40
    LargeCap Value Account II                   0.85      0.80      0.75      0.70 0.65
    LargeCap Value Account III                   0.75      0.70      0.65      0.60 0.55
    MidCap Value Account II                 1.05      1.00 0.95      0.90 0.85

      Net Assets of Accounts
      First $1  Next $1  Next $1  Over $3 
      billion     billion  billion   billion 
    MidCap Stock Account  0.75%     0.70%  0.65%  0.60% 

         Net Assets of Accounts (in millions) 
      First $200  Next $300  Over $500 
    Short-Term Income Account     0.50%  0.45%  0.40% 

      Net Assets of Accounts 
      (in millions) 
      First $500  Over $500 
    West Coast Equity Account   0.625%  0.50% 

      Net Assets of Accounts (in millions)
      Next $1  Next $1  Over $3 
      First $500  Next $500  billion  billion  billion 
    LargeCap Growth Account  0.68%  0.63%  0.61%  0.56%  0.51% 

      Net Assets of Accounts 
      (in billions) 
      First $2  Over $2 
    Mortgage Securities Account   0.50  0.45 

    3. Federal Income Taxes

    The operations of Separate Account B are a part of the operations of Principal Life. Under current practice, no federal income taxes are allocated by Principal Life to the operations of Separate Account B.

    81

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments

    The aggregate cost of purchases and proceeds from sales of investments were as follows for the period ended December 31, 2008:

    Division  Purchases             Sales 
     
    AIM V.I. Basic Value Series I Division:  851,742  455,747 
         Principal Investment Plus Variable Annuity  $ 649,638  $ 292,180 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  202,104  163,567 
     
    AIM V.I. Capital Appreciation Series I Division:  895,684  3,686,235 
         The Principal Variable Annuity  663,678  3,066,051 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  232,006  620,184 
     
    AIM V.I. Core Equity Series I Division:  2,844,356  13,623,098 
         The Principal Variable Annuity  2,225,664  9,818,336 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  618,692  3,804,762 
     
    AIM V.I. Dynamics Series I Division:  487,791  1,224,204 
         The Principal Variable Annuity  323,429  939,044 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  164,362  285,160 
     
    AIM V.I. Global Health Care Series I Division:  3,828,538  3,369,334 
         The Principal Variable Annuity  2,954,480  2,189,224 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  874,058  1,180,110 
     
    AIM V.I. International Growth Series I Division:  174,355  38,167 
         Principal Investment Plus Variable Annuity  136,400  29,805 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  37,955  8,362 

    82

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    AIM V.I. Small Cap Equity Series I Division:  1,445,931  1,532,718 
         The Principal Variable Annuity  $ 533,072  $ 830,711 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  128,074  316,509 
         Principal Investment Plus Variable Annuity  662,319  259,037 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  122,466  126,461 
     
    AIM V.I. Technology Series I Division:  966,164  2,155,084 
         The Principal Variable Annuity  788,439  1,556,516 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  177,725  598,568 
     
    AllianceBernstein VP Small Cap Growth Class A Division:  741,297  400,268 
         Principal Investment Plus Variable Annuity  670,109  281,374 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  71,188  118,894 
     
    American Century VP Income & Growth Division:  5,494,692  7,261,737 
         Principal Freedom Variable Annuity  993,453  1,475,715 
         Principal Freedom 2 Variable Annuity  37,329  25,612 
         The Principal Variable Annuity  3,101,406  4,147,101 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  1,362,504  1,613,309 
     
    American Century VP I Ultra Division:  2,495,713  2,903,595 
         The Principal Variable Annuity  1,786,542  1,869,202 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  709,171  1,034,393 
     
    American Century VP I Vista Division:  1,387,881  687,051 
         Principal Investment Plus Variable Annuity  958,139  309,294 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  429,742  377,757 

    83

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    American Century VP II Inflation Protection Division:  35,208,293  39,573,877 
         Principal Investment Plus Variable Annuity  $ 27,818,061  $ 29,549,999 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  7,390,232  10,023,878 
     
    American Century VP II Ultra Division:  37,349,937  13,018,441 
         Principal Investment Plus Variable Annuity  28,129,093  9,334,247 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  9,220,844  3,684,194 
     
    American Century VP II Value Division:  9,009,013  10,929,603 
         The Principal Variable Annuity  5,431,947  7,133,007 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  3,577,066  3,796,596 
     
    Asset Allocation Division:  16,618,736  24,373,236 
         Premier Variable  152,679  42,426 
         The Principal Variable Annuity  7,737,030  16,228,475 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  2,947,428  4,666,993 
         Principal Investment Plus Variable Annuity  4,468,200  2,533,855 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  1,313,399  901,487 
     
    Balanced Division:  8,416,746  21,372,647 
         Personal Variable  168,825  355,977 
         Premier Variable  606,109  1,123,604 
         The Principal Variable Annuity  5,320,677  16,570,919 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  2,321,135  3,322,147 

    84

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:       Purchases             Sales 
     
    Bond & Mortgage Securities Division:  75,632,173  120,001,366 
         Personal Variable  $ 67,815  $ 137,404 
         Premier Variable  1,459,577  1,494,349 
         Principal Freedom Variable Annuity  1,384,293  4,300,375 
         Principal Freedom 2 Variable Annuity  411,149  205,646 
         The Principal Variable Annuity  18,277,451  50,307,067 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  12,760,235  22,379,830 
         Principal Investment Plus Variable Annuity  33,356,811  31,014,706 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  7,914,842  10,161,989 
     
    Diversified International Division:  101,870,216  75,043,255 
         Personal Variable  333,531  339,922 
         Premier Variable  2,260,855  1,931,993 
         Principal Freedom Variable Annuity  2,410,307  2,380,921 
         Principal Freedom 2 Variable Annuity  627,967  525,832 
         The Principal Variable Annuity  45,975,798  44,256,654 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  23,282,589  13,613,739 
         Principal Investment Plus Variable Annuity  21,595,373  9,401,630 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  5,383,796  2,592,564 
     
    Dreyfus IP Technology Growth Service Shares Division:  558,140  346,183 
         Principal Investment Plus Variable Annuity  470,225  199,018 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  87,915  147,165 

    85

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    Equity Income Division:  79,344,344  54,595,429 
         Premier Variable  $ 12,853  $ 31,243 
         The Principal Variable Annuity  6,694,057  12,614,147 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  2,866,300  4,640,542 
         Principal Investment Plus Variable Annuity  56,019,087  28,712,893 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  13,752,047  8,596,604 
     
    Fidelity VIP Equity-Income Service Class 2 Division:  9,715,860  18,229,997 
         The Principal Variable Annuity  4,591,803  9,588,131 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  2,592,572  5,134,051 
         Principal Investment Plus Variable Annuity  1,931,685  2,949,962 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  599,800  557,853 
     
    Fidelity VIP Growth Service Class Division:  3,833,141  9,066,007 
         The Principal Variable Annuity  2,509,635  6,956,038 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  1,323,506  2,109,969 
     
    Fidelity VIP Growth Service Class 2 Division:  2,698,832  1,912,504 
         Principal Investment Plus Variable Annuity  2,045,072  1,354,207 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  653,760  558,297 
     
    Fidelity VIP Overseas Service Class 2 Division:  27,033,530  10,388,924 
         Principal Investment Plus Variable Annuity  20,172,686  7,285,653 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  6,860,844  3,103,271 

    86

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    Fidelity VIP II Contrafund Service Class Division:  15,749,264  32,408,187 
         The Principal Variable Annuity  $ 10,741,117  $ 23,885,575 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  5,008,147  8,522,612 
     
    Fidelity VIP II Contrafund Service Class 2 Division:  19,819,036  11,986,160 
         Principal Investment Plus Variable Annuity  16,480,652  10,300,943 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  3,338,384  1,685,217 
     
    Fidelity VIP III Mid Cap Service Class 2 Division:  3,908,381  1,913,676 
         Principal Investment Plus Variable Annuity  2,573,178  1,356,085 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  1,335,203  557,591 
     
    Goldman Sachs Structured Small Cap Equity Service Class I     
               Division:  1,222,193  811,497 
         Principal Investment Plus Variable Annuity  927,865  582,389 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  294,328  229,108 
     
    Goldman Sachs VIT Mid Cap Value Service Class I Division:  4,803,133  4,065,140 
         Principal Investment Plus Variable Annuity  3,593,136  2,731,534 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  1,209,997  1,333,606 

    87

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    Government & High Quality Bond Division:  92,348,077  114,539,568 
         Pension Builder Plus  $ 14,259  $ 3,016 
         Pension Builder Plus – Rollover IRA  1,271  19,967 
         Personal Variable  163,210  267,705 
         Premier Variable  1,368,017  1,371,141 
         Principal Freedom Variable Annuity  1,322,816  3,090,358 
         Principal Freedom 2 Variable Annuity  251,597  132,692 
         The Principal Variable Annuity  38,700,625  59,211,913 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  18,315,556  24,170,890 
         Principal Investment Plus Variable Annuity  24,644,672  19,518,611 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  7,566,054  6,753,275 
     
    International Emerging Markets Division:  73,541,295  49,716,372 
         Premier Variable  417,124  193,135 
         The Principal Variable Annuity  31,501,182  27,480,491 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  14,621,547  10,671,088 
         Principal Investment Plus Variable Annuity  18,944,164  7,937,314 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  8,057,278  3,434,344 
     
    International SmallCap Division:  35,340,797  32,123,329 
         Premier Variable  39,068  81,900 
         The Principal Variable Annuity  17,011,942  20,348,895 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  6,959,200  6,004,420 
         Principal Investment Plus Variable Annuity  8,159,611  4,341,952 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  3,170,976  1,346,162 

    88

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:       Purchases             Sales 
     
    Janus Aspen Mid Cap Growth Service Shares Division:  3,325,607  6,155,116 
         The Principal Variable Annuity  $ 2,697,092  $ 4,546,394 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  628,515  1,608,722 
     
    LargeCap Blend II Division:  125,875,481  48,729,067 
         The Principal Variable Annuity  28,871,075  17,499,192 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  17,771,445  8,644,829 
         Principal Investment Plus Variable Annuity  61,428,742  16,690,054 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  17,804,219  5,894,992 
     
    LargeCap Growth Division:  12,758,023  25,330,272 
         Personal Variable  578,354  746,619 
         Premier Variable  820,202  1,883,714 
         The Principal Variable Annuity  4,268,150  16,803,293 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  2,314,097  3,583,735 
         Principal Investment Plus Variable Annuity  3,619,664  1,339,998 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  1,157,556  972,913 
     
    LargeCap Growth I Division:  10,017,977  37,726,506 
         Premier Variable  27,173  27,722 
         Principal Freedom Variable Annuity  136,817  671,211 
         Principal Freedom 2 Variable Annuity  53,912  24,955 
         The Principal Variable Annuity  4,630,269  28,568,465 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  2,355,655  6,631,210 
         Principal Investment Plus Variable Annuity  2,210,745  1,279,807 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  603,406  523,136 

    89

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    LargeCap S&P 500 Index Division:  25,734,746  39,605,601 
         Premier Variable  $ 825,123  $ 687,525 
         Principal Freedom Variable Annuity  1,222,098  4,279,145 
         Principal Freedom 2 Variable Annuity  575,157  406,292 
         The Principal Variable Annuity  8,987,329  20,187,802 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  3,930,802  8,699,948 
         Principal Investment Plus Variable Annuity  8,640,594  4,248,946 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  1,553,643  1,095,943 
     
    LargeCap Value Division:  36,229,653  49,371,147 
         Bankers Flexible Annuity  282,147  144,317 
         Pension Builder Plus  372,326  438,017 
         Pension Builder Plus – Rollover IRA  190,641  204,020 
         Personal Variable  409,481  550,240 
         Premier Variable  2,604,655  3,945,116 
         Principal Freedom Variable Annuity  1,083,415  1,929,100 
         Principal Freedom 2 Variable Annuity  233,589  57,803 
         The Principal Variable Annuity  16,882,964  29,232,896 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  6,269,915  6,062,842 
         Principal Investment Plus Variable Annuity  6,413,710  5,467,559 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  1,486,810  1,339,237 
     
    LargeCap Value II Division:  2,185,707  1,229,146 
         Principal Investment Plus Variable Annuity  1,698,255  985,088 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  487,452  244,058 

    90

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    LargeCap Value III Division:  52,374,576  41,238,874 
         The Principal Variable Annuity  $ 8,527,845  $ 16,264,543 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  4,884,233  7,285,646 
         Principal Investment Plus Variable Annuity  30,130,540  13,176,423 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  8,831,958  4,512,262 
     
    LifeTime Strategic Income Division:  9,080,240  6,479,057 
         Principal Freedom 2 Variable Annuity  205,625  502,647 
         The Principal Variable Annuity  1,545,850  699,485 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  369,722  230,197 
         Principal Investment Plus Variable Annuity  6,236,147  4,233,072 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  722,896  813,656 
     
    LifeTime 2010 Division:  16,723,528  11,088,065 
         Principal Freedom 2 Variable Annuity  1,919,428  662,485 
         The Principal Variable Annuity  1,705,061  433,409 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  617,671  269,514 
         Principal Investment Plus Variable Annuity  11,786,670  8,371,529 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  694,698  1,351,128 
     
    LifeTime 2020 Division:  61,486,816  32,039,647 
         Principal Freedom 2 Variable Annuity  2,749,104  1,496,263 
         The Principal Variable Annuity  1,141,247  328,982 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  655,100  252,352 
         Principal Investment Plus Variable Annuity  46,288,503  21,436,560 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  10,652,862  8,525,490 

    91

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    LifeTime 2030 Division:  12,770,162  6,123,974 
         Principal Freedom 2 Variable Annuity  $ 2,288,891  $ 559,425 
         The Principal Variable Annuity  600,955  60,745 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  50,347  4,970 
         Principal Investment Plus Variable Annuity  7,038,517  4,010,589 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  2,791,452  1,488,245 
     
    LifeTime 2040 Division:  3,746,362  2,000,368 
         Principal Freedom 2 Variable Annuity  238,421  218,846 
         The Principal Variable Annuity  56,961  21,033 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  39,643  2,568 
         Principal Investment Plus Variable Annuity  2,711,616  1,311,318 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  699,721  446,603 
     
    LifeTime 2050 Division:  2,254,168  1,132,864 
         Principal Freedom 2 Variable Annuity  25,018  1,778 
         The Principal Variable Annuity  118,879  13,759 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  39,557  30,575 
         Principal Investment Plus Variable Annuity  1,551,847  622,444 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  518,867  464,308 

    92

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    MidCap Blend Division:  77,423,579  92,421,378 
         Personal Variable  $ 417,087  $ 616,620 
         Premier Variable  1,610,957  1,979,054 
         Principal Freedom Variable Annuity  853,398  1,606,130 
         Principal Freedom 2 Variable Annuity  209,436  77,454 
         The Principal Variable Annuity  29,022,637  55,344,496 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  13,333,977  14,354,015 
         Principal Investment Plus Variable Annuity  25,192,495  14,063,674 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  6,783,592  4,379,935 
     
    MidCap Growth I Division:  12,095,817  13,921,523 
         Premier Variable  5,478  20,093 
         Principal Freedom Variable Annuity  289,384  423,180 
         Principal Freedom 2 Variable Annuity  56,905  30,118 
         The Principal Variable Annuity  5,939,899  8,336,958 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  2,419,909  3,470,233 
         Principal Investment Plus Variable Annuity  2,473,069  1,163,162 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  911,173  477,779 
     
    MidCap Value II Division:  32,998,998  30,721,783 
         Premier Variable  32,016  29,839 
         Principal Freedom Variable Annuity  972,698  2,132,731 
         Principal Freedom 2 Variable Annuity  259,243  224,315 
         The Principal Variable Annuity  6,237,046  11,622,562 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  3,785,110  5,723,931 
         Principal Investment Plus Variable Annuity  16,843,803  8,505,721 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  4,869,082  2,482,684 

    93

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:       Purchases             Sales 
     
    Money Market Division:  281,106,607  168,397,773 
         Pension Builder Plus  $ 5,647  $ 9,718 
         Pension Builder Plus – Rollover IRA  203  119 
         Personal Variable  748,063  679,255 
         Premier Variable  4,049,344  3,476,875 
         Principal Freedom Variable Annuity  5,253,726  4,062,639 
         Principal Freedom 2 Variable Annuity  1,833,054  625,883 
         The Principal Variable Annuity  133,481,879  78,151,409 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  42,646,317  25,715,925 
         Principal Investment Plus Variable Annuity  71,488,754  41,818,113 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  21,599,620  13,857,837 
     
    Mortgage Securities Division:  261,967  2,327 
         The Principal Variable Annuity  136,386  96 
         Principal Investment Plus Variable Annuity  122,408  45 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  3,173  2,186 
     
    Neuberger Berman AMT Partners I Class Division:  2,578,415  1,241,911 
         Principal Investment Plus Variable Annuity  1,875,602  903,478 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  702,813  338,433 
     
    Neuberger Berman AMT Small Cap Growth S Class Division:  820,739  587,720 
         Principal Investment Plus Variable Annuity  570,184  355,290 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  250,555  232,430 
     
    Neuberger Berman AMT Socially Responsive I Class Division:  2,128,802  805,387 
         Principal Investment Plus Variable Annuity  1,820,509  713,451 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  308,293  91,936 

    94

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:       Purchases             Sales 
     
    Real Estate Securities Division:  52,852,490  36,599,776 
         Premier Variable  $ 150,954  $ 107,974 
         Principal Freedom 2 Variable Annuity  192,169  84,863 
         The Principal Variable Annuity  26,367,676  20,302,636 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  14,487,216  10,039,060 
         Principal Investment Plus Variable Annuity  7,398,374  3,952,989 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  4,256,101  2,112,254 
     
    SAM Balanced Portfolio Division:  286,595,150  22,992,974 
         Principal Freedom 2 Variable Annuity  1,475,386  100,203 
         The Principal Variable Annuity  20,609,961  3,879,276 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  11,461,539  1,919,840 
         Principal Investment Plus Variable Annuity  220,417,417  13,310,979 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  32,630,847  3,782,676 
     
    SAM Conservative Balanced Portfolio Division:  76,818,728  13,528,906 
         Principal Freedom 2 Variable Annuity  477,126  28,314 
         The Principal Variable Annuity  10,955,572  3,252,507 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  5,195,944  1,772,926 
         Principal Investment Plus Variable Annuity  48,819,773  7,605,554 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  11,370,313  869,605 

    95

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
    SAM Conservative Growth Portfolio Division:  30,155,586  3,809,979 
         Principal Freedom 2 Variable Annuity  $ 773,771  $ 58,087 
         The Principal Variable Annuity  6,268,882  606,498 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  4,076,469  386,870 
         Principal Investment Plus Variable Annuity  12,352,413  2,067,119 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  6,684,051  691,405 
     
    SAM Flexible Income Portfolio Division:  90,550,156  16,342,297 
         The Principal Variable Annuity  22,530,538  5,911,372 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  10,684,358  2,995,994 
         Principal Investment Plus Variable Annuity  43,962,377  6,071,930 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  13,372,883  1,363,001 
     
    SAM Strategic Growth Portfolio Division:  23,455,166  4,182,179 
         Principal Freedom 2 Variable Annuity  309,686  16,262 
         The Principal Variable Annuity  6,001,160  924,570 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  1,309,541  134,939 
         Principal Investment Plus Variable Annuity  11,386,072  2,709,671 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  4,448,707  396,737 
     
    Short Term Bond Division:  51,687,937  66,261,477 
         Principal Freedom Variable Annuity  499,113  1,836,747 
         Principal Freedom 2 Variable Annuity  19,568  19,374 
         The Principal Variable Annuity  7,521,799  15,573,688 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  3,292,632  7,425,291 
         Principal Investment Plus Variable Annuity  32,341,296  31,552,158 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  8,013,529  9,854,219 

    96

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
     
    Short-Term Income Division:  274,679  13,210 
         The Principal Variable Annuity  $ 59,216  $ 4,040 
         Principal Investment Plus Variable Annuity  186,520  8,864 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  28,943  306 
     
    SmallCap Blend Division:  10,128,971  15,517,875 
         Premier Variable  103,271  56,715 
         Principal Freedom Variable Annuity  766,509  1,435,244 
         Principal Freedom 2 Variable Annuity  78,842  64,840 
         The Principal Variable Annuity  6,078,398  10,365,066 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  3,101,951  3,596,010 
     
    SmallCap Growth II Division:  4,835,027  10,499,706 
         Premier Variable  1,861  4,865 
         Principal Freedom Variable Annuity  44,906  229,332 
         Principal Freedom 2 Variable Annuity  58,131  75,211 
         The Principal Variable Annuity  1,722,811  7,038,550 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  763,170  1,747,489 
         Principal Investment Plus Variable Annuity  1,771,537  1,065,945 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  472,611  338,314 
     
    SmallCap Value I Division:  34,914,207  34,389,998 
         Premier Variable  79,489  44,702 
         Principal Freedom 2 Variable Annuity  124,704  82,106 
         The Principal Variable Annuity  8,201,074  13,928,563 
         The Principal Variable Annuity With Purchase Payment     
               Credit Rider  4,153,464  5,529,711 
         Principal Investment Plus Variable Annuity  17,585,861  11,271,820 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  4,769,615  3,533,096 

    97

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued) 

    4. Purchases and Sales of Investments (continued)     
     
    Division:  Purchases             Sales 
     
     
    T. Rowe Price Blue Chip Growth II Division:  840,614  502,170 
         Principal Investment Plus Variable Annuity  $ 703,475  $ 375,686 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  137,139  126,484 
     
    T. Rowe Price Health Sciences II Division:  2,537,701  1,307,848 
         Principal Investment Plus Variable Annuity  2,113,187  1,066,627 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  424,514  241,221 
     
    Templeton Growth Securities Class 2 Division:  317,554  663,460 
         Principal Freedom Variable Annuity  317,554  663,460 
     
    West Coast Equity Division:  2,165,445  476,783 
         Principal Freedom 2 Variable Annuity  74,998  31,236 
         Principal Investment Plus Variable Annuity  1,329,420  229,831 
         Principal Investment Plus Variable Annuity With Purchase     
               Rider  761,027  215,716 

    98

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding

    Transactions in units were as follows for each of the periods ended December 31:


    2008 2007
    Division:  Purchased   Redeemed 

    Purchased 

    		                  Redeemed   
     
    AIM V.I. Basic Value Series I Division:         
       Principal Investment Plus Variable Annuity  47,666  25,805  72,017  52,526 
       Principal Investment Plus Variable Annuity With         
           Purchase Rider  14,829  14,446  22,966  11,389 
     
    AIM V.I. Capital Appreciation Series I Division:         
       The Principal Variable Annuity  78,498  339,899  63,498  305,130 
       The Principal Variable Annuity With Purchase         
           Payment Credit Rider  27,441  68,753  13,887  55,874 
     
    AIM V.I. Core Equity Series I Division:         
       The Principal Variable Annuity  165,835  994,243  206,666  964,295 
       The Principal Variable Annuity With Purchase         
           Payment Credit Rider  46,099  385,285  69,390  190,437 
     
    AIM V.I. Dynamics Series I Division:         
       The Principal Variable Annuity  38,045  104,788  159,915  107,558 
       The Principal Variable Annuity With Purchase         
           Payment Credit Rider  19,334  31,821  85,280  45,875 
     
    AIM V.I. Global Health Care Series I Division:         
       The Principal Variable Annuity  115,332  206,495  75,788  159,510 
       The Principal Variable Annuity With Purchase         
           Payment Credit Rider  34,120  111,312  52,747  78,363 
     
    AIM V.I. International Growth Series I Division:         
       Principal Investment Plus Variable Annuity  19,471  5,076  –  – 
       Principal Investment Plus Variable Annuity With         
           Purchase Rider  5,418  1,424  –  – 
     
    AIM V.I. Small Cap Equity Series I Division:         
       The Principal Variable Annuity  41,722  62,673  246,997  44,848 
       The Principal Variable Annuity With Purchase         
           Payment Credit Rider  10,024  23,879  123,977  13,543 
       Principal Investment Plus Variable Annuity  51,940  19,656  30,139  5,701 
       Principal Investment Plus Variable Annuity With         
           Purchase Rider  9,604  9,596  23,430  2,456 

      99

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased   Redeemed  Purchased   Redeemed 
     
       AIM V.I. Technology Series I Division:         
           The Principal Variable Annuity  169,550  314,151  154,636  155,384 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  38,219  120,809  87,261  80,517 
     
       Alliance Bernstein VP Series Small Cap Growth Class         
                 A Division:         
           Principal Investment Plus Variable Annuity  52,705  21,891  37,879  12,818 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  5,599  9,250  23,391  1,311 
     
       American Century VP II Inflation Protection Division:         
           Principal Investment Plus Variable Annuity  2,241,768  2,615,115  2,650,485  914,769 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  595,555  887,093  791,067  304,069 
     
       American Century VP II Ultra Division:         
           Principal Investment Plus Variable Annuity  2,239,417  886,780  1,640,622  824,694 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  734,091  350,009  512,148  292,822 
     
       American Century VP II Value Division:         
           The Principal Variable Annuity  171,028  590,577  289,522  398,786 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  112,626  314,339  132,275  231,271 
     
       American Century VP Income & Growth Division:         
           Principal Freedom Variable Annuity  26,293  144,628  18,884  80,603 
           Principal Freedom 2 Variable Annuity  2,225  2,442  13,988  282 
           The Principal Variable Annuity  95,020  400,991  140,073  360,625 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  41,744  155,994  46,204  81,211 
     
       American Century VP I Ultra Division:         
           The Principal Variable Annuity  107,207  219,609  62,700  173,668 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  42,556  121,529  50,701  90,255 

    100

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased Redeemed Purchased Redeemed 
        
     
       American Century VP I Vista Division:         
           Principal Investment Plus Variable Annuity  59,224  20,623  66,262  18,104 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  26,563  25,188  67,785  4,741 
     
       Asset Allocation Division:         
           Premier Variable  104,078  34,870  82,109  23,285 
           The Principal Variable Annuity  128,531  675,630  210,065  594,601 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  48,964  194,298  40,357  85,792 
           Principal Investment Plus Variable Annuity  154,237  112,059  128,381  44,573 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  45,337  39,868  87,249  37,333 
     
       Balanced Division:         
           Personal Variable  49,179  180,818  63,687  27,601 
           Premier Variable  186,636  528,453  279,403  347,742 
           The Principal Variable Annuity  107,730  868,149  277,672  699,434 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  46,997  174,047  89,199  135,396 
     
       Bond & Mortgage Securities Division:         
           Personal Variable  24,342  68,309  16,376  13,734 
           Premier Variable  607,083  724,008  455,656  317,212 
           Principal Freedom Variable Annuity  50,341  323,353  62,389  204,036 
           Principal Freedom 2 Variable Annuity  36,784  20,275  55,248  17,860 
           The Principal Variable Annuity  630,453  2,767,094  1,218,545  1,615,184 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  440,145  1,230,982  572,911  707,695 
           Principal Investment Plus Variable Annuity  1,548,537  1,723,891  2,334,772  528,923 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  367,434  564,834  727,879  235,245 

    101

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased Redeemed  Purchased Redeemed
       
     
       Diversified International Division:         
           Personal Variable  41,916  127,577  43,977  32,651 
           Premier Variable  317,042  658,647  585,978  503,339 
           Principal Freedom Variable Annuity  49,713  162,138  66,138  146,538 
           Principal Freedom 2 Variable Annuity  33,468  52,947  128,299  27,460 
           The Principal Variable Annuity  621,481  1,788,934  813,693  1,494,198 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  314,724  550,292  297,396  432,576 
           Principal Investment Plus Variable Annuity  590,586  401,009  636,425  171,409 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  147,235  110,581  186,048  78,284 
     
       Dreyfus IP Technology Growth Service Shares Division:         
           Principal Investment Plus Variable Annuity  41,281  19,594  16,872  3,762 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  7,718  14,489  28,805  4,467 
     
       Equity Income Division:         
           Premier Variable  4,174  31,367  157,893  87,278 
           The Principal Variable Annuity  428,662  1,415,153  5,223,371  1,049,419 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  183,547  520,612  1,717,711  317,071 
           Principal Investment Plus Variable Annuity  5,244,203  3,265,725  12,228,773  1,215,724 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  1,287,392  977,754  4,031,284  414,335 
     
       Fidelity VIP Equity – Income Service Class 2 Division:         
           The Principal Variable Annuity  356,539  847,264  474,665  577,967 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  201,305  453,675  210,391  270,617 
           Principal Investment Plus Variable Annuity  155,311  269,210  397,849  59,020 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  48,225  50,909  79,335  43,617 
     
       Fidelity VIP Growth Service Class Division:         
           The Principal Variable Annuity  275,835  767,582  408,275  709,122 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  145,467  232,830  133,895  197,952 

    102

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
     
    Division:  Purchased                Redeemed  Purchased              Redeemed 
     
       Fidelity VIP Growth Service Class 2 Division:         
           Principal Investment Plus Variable Annuity  168,868  109,533  220,485  48,572 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  53,983  45,157  114,683  44,583 
     
       Fidelity VIP Overseas Service Class 2 Division:         
           Principal Investment Plus Variable Annuity  1,098,741  488,101  882,470  372,984 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  373,688  207,903  351,132  154,546 
     
       Fidelity VIP II Contrafund Service Class Division:         
           The Principal Variable Annuity  600,005  1,707,976  742,835  1,319,389 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  279,758  609,423  352,611  417,082 
     
       Fidelity VIP II Contrafund Service Class 2 Division:         
           Principal Investment Plus Variable Annuity  1,184,175  805,595  1,126,676  335,646 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  239,871  131,794  298,927  139,294 
     
       Fidelity VIP III Mid Cap Service Class 2 Division:         
           Principal Investment Plus Variable Annuity  127,009  91,328  152,507  29,282 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  65,904  37,552  41,833  21,415 
     
       Goldman Sachs Structured Small Cap Equity Service         
                 Class I Division:         
           Principal Investment Plus Variable Annuity  94,149  59,040  128,704  30,854 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  29,865  23,226  46,394  23,836 
     
       Goldman Sachs VIT Mid Cap Value Service Class I         
                 Division:         
           Principal Investment Plus Variable Annuity  263,805  207,963  454,214  79,122 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  88,837  101,533  160,334  47,456 

    103

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased              Redeemed  Purchased  Redeemed 
     
       Government & High Quality Bond Division:         
           Pension Builder Plus  2,543  284  11  3,273 
           Pension Builder Plus – Rollover IRA  –  6,106  –  2,218 
           Personal Variable  66,387  122,194  14,986  11,743 
           Premier Variable  529,981  598,945  444,988  304,729 
           Principal Freedom Variable Annuity  94,029  276,892  37,413  143,832 
           Principal Freedom 2 Variable Annuity  22,703  12,256  25,328  6,517 
           The Principal Variable Annuity  1,680,452  3,070,222  1,001,211  2,009,660 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  795,295  1,253,295  479,307  788,308 
           Principal Investment Plus Variable Annuity  1,221,199  1,022,389  898,005  236,227 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  374,915  353,738  384,525  157,607 
     
       International Emerging Markets Division:         
           Premier Variable  80,132  57,968  217,281  144,859 
           The Principal Variable Annuity  366,560  896,473  713,049  671,561 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  170,142  348,114  281,905  299,617 
           Principal Investment Plus Variable Annuity  359,748  261,392  420,840  131,168 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  153,007  113,100  188,803  85,495 
     
       International SmallCap Division:         
           Premier Variable  5,564  38,497  93,174  67,210 
           The Principal Variable Annuity  228,700  792,826  388,677  722,129 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  93,556  233,942  142,979  208,636 
           Principal Investment Plus Variable Annuity  189,888  172,596  314,748  105,110 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  73,794  53,511  113,325  39,205 
     
       Janus Aspen Mid Cap Growth Service Shares Division:         
           The Principal Variable Annuity  253,040  590,093  419,220  370,216 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  58,967  208,802  141,449  266,378 

    104

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
     
    Division:  Purchased                Redeemed  Purchased              Redeemed 
     
       LargeCap Blend II Division:         
           The Principal Variable Annuity  353,620  1,521,804  647,300  960,949 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  217,669  751,791  280,576  484,486 
           Principal Investment Plus Variable Annuity  2,544,338  1,444,602  2,632,407  685,967 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  737,439  510,239  835,909  253,664 
     
       LargeCap Growth Division:         
           Personal Variable  317,302  415,241  135,547  116,677 
           Premier Variable  401,193  908,028  528,100  594,353 
           The Principal Variable Annuity  226,302  917,826  162,598  827,511 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  122,696  195,750  100,292  142,726 
           Principal Investment Plus Variable Annuity  199,630  74,475  133,593  23,155 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  63,841  54,073  53,358  16,938 
     
       LargeCap Growth I Division:         
           Premier Variable  26,518  27,178  45,167  5,065 
           Principal Freedom Variable Annuity  16,902  81,269  290,099  29,088 
           Principal Freedom 2 Variable Annuity  6,161  2,778  8,543  825 
           The Principal Variable Annuity  183,974  1,044,842  542,196  1,063,043 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  93,597  242,525  269,194  151,581 
           Principal Investment Plus Variable Annuity  86,282  48,302  81,393  16,294 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  23,550  19,744  34,863  8,957 
     
       LargeCap S&P 500 Index Division:         
           Premier Variable  700,191  581,212  294,356  266,293 
           Principal Freedom Variable Annuity  59,972  446,840  84,337  324,811 
           Principal Freedom 2 Variable Annuity  55,792  41,924  91,323  38,420 
           The Principal Variable Annuity  679,443  2,151,942  853,612  1,651,643 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  297,169  927,381  541,956  649,791 
           Principal Investment Plus Variable Annuity  908,689  476,279  778,913  214,717 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  163,389  122,848  271,092  128,050 

    105

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
     
    Division:  Purchased                      Redeemed  Purchased  Redeemed 
     
       LargeCap Value Division:         
           Bankers Flexible Annuity  –  4,723  –  7,480 
           Pension Builder Plus  179  66,669  318  33,804 
           Pension Builder Plus – Rollover IRA  25,914  34,699  795  9,904 
           Personal Variable  74,620  192,255  43,341  43,192 
           Premier Variable  336,982  1,206,870  382,621  512,683 
           Principal Freedom Variable Annuity  28,536  186,040  43,469  149,379 
           Principal Freedom 2 Variable Annuity  17,745  5,288  49,790  3,726 
           The Principal Variable Annuity  154,978  1,172,225  248,423  959,978 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  57,555  243,117  102,978  165,605 
           Principal Investment Plus Variable Annuity  194,692  222,979  243,430  62,182 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  45,133  54,617  90,868  18,973 
     
       LargeCap Value II Division:         
           Principal Investment Plus Variable Annuity  150,123  93,024  124,943  26,984 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  43,090  23,047  59,419  26,512 
     
       LargeCap Value III Division:         
           The Principal Variable Annuity  495,405  1,437,263  696,886  1,104,557 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  283,738  643,817  298,129  387,453 
           Principal Investment Plus Variable Annuity  2,360,718  1,153,580  2,374,089  543,667 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  691,981  395,043  749,327  219,556 
     
       LifeTime Strategic Income Division:         
           Principal Freedom 2 Variable Annuity  9,734  53,557  160,385  8,016 
           The Principal Variable Annuity  124,292  64,018  62,858  – 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  29,727  21,068  –  – 
           Principal Investment Plus Variable Annuity  462,214  381,626  502,098  107,064 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  53,580  73,354  140,351  60,058 

    106

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
     
    Division:  Purchased                Redeemed  Purchased                Redeemed 
     
       LifeTime 2010 Division:         
           Principal Freedom 2 Variable Annuity  150,152  71,885  315,702  37,265 
           The Principal Variable Annuity  132,207  41,983  23,052  8 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  47,893  26,107  5,521  4 
           Principal Investment Plus Variable Annuity  695,190  728,316  1,266,310  372,687 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  40,974  117,547  184,379  65,626 
     
       LifeTime 2020 Division:         
           Principal Freedom 2 Variable Annuity  189,997  156,752  562,317  37,280 
           The Principal Variable Annuity  86,678  30,979  14,073  33 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  49,755  23,763  7,983  3 
           Principal Investment Plus Variable Annuity  2,559,662  1,767,709  4,113,856  458,344 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  589,082  703,032  1,515,244  191,141 
     
       LifeTime 2030 Division:         
           Principal Freedom 2 Variable Annuity  182,170  55,776  254,406  2,545 
           The Principal Variable Annuity  48,509  5,378  6,707  – 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  4,064  440  1,334  – 
           Principal Investment Plus Variable Annuity  529,697  335,260  569,889  108,348 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  210,076  124,408  231,638  50,892 
     
       LifeTime 2040 Division:         
           Principal Freedom 2 Variable Annuity  17,230  20,982  35,447  146 
           The Principal Variable Annuity  5,223  1,728  2,359  – 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  3,635  211  –  – 
           Principal Investment Plus Variable Annuity  143,397  107,286  317,564  40,668 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  37,003  36,539  111,571  17,284 

    107

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased                     Redeemed  Purchased                  Redeemed 
     
       LifeTime 2050 Division:         
           Principal Freedom 2 Variable Annuity  –  –  21,072  1,769 
           The Principal Variable Annuity  10,278  1,539  2,101  – 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  3,420  3,420  –  – 
           Principal Investment Plus Variable Annuity  87,805  53,901  154,429  51,246 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  29,358  40,207  50,829  9,225 
     
    MidCap Blend Division:         
           Personal Variable  60,836  170,800  31,008  49,436 
           Premier Variable  202,969  482,249  272,229  402,139 
           Principal Freedom Variable Annuity  14,364  81,956  18,271  69,477 
           Principal Freedom 2 Variable Annuity  16,710  7,769  28,516  2,196 
           The Principal Variable Annuity  277,903  1,491,038  386,976  1,180,854 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  127,678  386,712  171,618  263,767 
           Principal Investment Plus Variable Annuity  549,704  376,318  579,852  175,337 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  148,019  117,199  188,607  63,924 
     
       MidCap Growth I Division:         
           Premier Variable  3,722  15,250  146,369  143,001 
           Principal Freedom Variable Annuity  6,960  36,258  5,981  30,161 
           Principal Freedom 2 Variable Annuity  4,008  3,529  13,072  1,291 
           The Principal Variable Annuity  192,995  736,469  313,022  586,240 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  78,626  306,553  115,208  263,946 
           Principal Investment Plus Variable Annuity  163,311  104,251  191,557  45,073 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  60,170  42,822  84,563  24,939 

    108

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased                     Redeemed  Purchased  Redeemed 
     
       MidCap Value II Division:         
           Premier Variable  9,806  19,246  181,618  159,760 
           Principal Freedom Variable Annuity  19,377  103,822  18,934  84,916 
           Principal Freedom 2 Variable Annuity  26,764  24,866  49,682  16,022 
           The Principal Variable Annuity  260,635  842,118  472,939  740,221 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  158,173  414,730  213,823  291,919 
           Principal Investment Plus Variable Annuity  1,139,956  610,996  1,050,181  299,041 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  329,530  178,340  299,852  101,511 
     
       Money Market Division:         
           Pension Builder Plus  551  3,128  8,969  13,711 
           Pension Builder Plus – Rollover IRA  –  16  –  17 
           Personal Variable  448,478  412,778  467,205  402,427 
           Premier Variable  2,297,761  2,036,913  1,807,602  1,345,916 
           Principal Freedom Variable Annuity  410,122  323,114  143,294  190,834 
           Principal Freedom 2 Variable Annuity  167,287  56,895  100,751  71,681 
           The Principal Variable Annuity  9,195,993  5,389,053  6,107,024  5,181,658 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  2,938,041  1,773,282  1,957,138  1,263,021 
           Principal Investment Plus Variable Annuity  4,968,099  2,908,092  2,229,046  1,705,591 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  1,501,062  963,694  1,273,102  1,049,775 
     
       Mortgage Securities Division         
           The Principal Variable Annuity  13,483  –  –  – 
           Principal Investment Plus Variable Annuity  12,112  4  –  – 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  314  195  –  – 
     
       Neuberger Berman AMT Partners I Class Division:         
           Principal Investment Plus Variable Annuity  97,584  68,857  142,142  23,592 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  36,566  25,793  30,250  18,994 
     
       Neuberger Berman AMT Small Cap Growth S Class Division:       
           Principal Investment Plus Variable Annuity  51,312  35,280  72,915  13,552 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  22,548  23,080  47,614  8,537 

      109

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased                Redeemed  Purchased                Redeemed 
     
       Neuberger Berman AMT Socially Responsive I Class         
                 Division:         
           Principal Investment Plus Variable Annuity  128,230  55,331  167,800  46,512 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  21,715  7,130  26,075  7,716 
     
       Real Estate Securities Division:         
           Premier Variable  37,057  42,336  102,146  237,306 
           Principal Freedom 2 Variable Annuity  11,899  8,342  28,338  6,513 
           The Principal Variable Annuity  262,781  741,241  390,427  1,273,840 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  144,380  366,522  229,375  541,709 
           Principal Investment Plus Variable Annuity  146,177  143,200  261,288  133,203 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  84,092  76,518  111,069  80,787 
     
       SAM Balanced Portfolio Division:         
           Principal Freedom 2 Variable Annuity  147,608  9,676  6,715  4,071 
           The Principal Variable Annuity  2,027,435  456,241  100,814  2 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  1,127,490  225,792  26,138  630 
           Principal Investment Plus Variable Annuity  22,941,122  1,421,680  2,433,639  101,829 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  3,396,230  404,009  976,988  9,689 
     
       SAM Conservative Balanced Portfolio Division:         
           Principal Freedom 2 Variable Annuity  46,079  2,694     
           The Principal Variable Annuity  1,125,674  362,311  36,535  10,532 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  533,878  197,494  33,371  33 
           Principal Investment Plus Variable Annuity  5,094,901  827,327  635,245  35,836 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  1,186,622  94,595  195,615  11,473 

    110

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased                   Redeemed  Purchased                  Redeemed 
     
       SAM Conservative Growth Portfolio Division:         
           Principal Freedom 2 Variable Annuity  94,394  5,951  7,012  117 
           The Principal Variable Annuity  627,625  66,607  54,523  – 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  408,126  42,487  24,091  – 
           Principal Investment Plus Variable Annuity  1,264,941  240,913  413,989  4,478 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  684,476  80,580  179,643  4,729 
     
       SAM Flexible Income Portfolio Division:         
           The Principal Variable Annuity  2,249,073  635,097  5,356  – 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  1,066,548  321,879  19,529  – 
           Principal Investment Plus Variable Annuity  4,536,153  636,603  124,778  15,865 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  1,379,849  142,902  15,099  173 
     
       SAM Strategic Growth Portfolio Division:         
           Principal Freedom 2 Variable Annuity  29,274  1,879  887  16 
           The Principal Variable Annuity  642,221  115,397  44,602  – 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  140,142  16,842  6,067  – 
           Principal Investment Plus Variable Annuity  1,174,204  346,747  403,213  2,117 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  458,779  50,769  213,975  7,422 
     
       Short Term Bond Division:         
           Principal Freedom Variable Annuity  30,264  178,245  20,377  76,914 
           Principal Freedom 2 Variable Annuity  1,630  1,798  8,064  903 
           The Principal Variable Annuity  605,528  1,541,653  683,459  807,391 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  265,067  735,036  492,188  491,429 
           Principal Investment Plus Variable Annuity  2,873,201  3,134,346  3,497,744  835,226 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  711,922  978,904  1,153,906  442,603 

    111

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
    Division:  Purchased                Redeemed  Purchased  Redeemed 
     
       Short-Term Income Division         
           The Principal Variable Annuity  5,929  402  –  – 
           Principal Investment Plus Variable Annuity  19,172  29  –  – 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  2,975  1  –  – 
     
       SmallCap Blend Division:         
           Premier Variable  80,443  44,855  10,536  2,330 
           Principal Freedom Variable Annuity  15,874  100,286  30,557  91,454 
           Principal Freedom 2 Variable Annuity  7,472  7,188  18,091  5,181 
           The Principal Variable Annuity  221,285  902,692  363,553  695,675 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  112,927  313,176  133,330  240,409 
     
       SmallCap Growth II Division:         
           Premier Variable  2,579  6,422  129,287  119,085 
           Principal Freedom Variable Annuity  5,152  29,184  4,628  24,281 
           Principal Freedom 2 Variable Annuity  6,258  11,614  19,883  1,572 
           The Principal Variable Annuity  200,569  750,598  452,179  872,030 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  88,848  186,354  107,101  145,022 
           Principal Investment Plus Variable Annuity  196,094  116,052  206,599  33,490 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  52,314  36,833  65,618  19,091 
     
       SmallCap Value I Division:         
           Premier Variable  45,544  28,339  64,512  86,492 
           Principal Freedom 2 Variable Annuity  10,024  11,484  39,168  1,640 
           The Principal Variable Annuity  178,269  678,392  305,208  621,718 
           The Principal Variable Annuity With Purchase         
               Payment Credit Rider  90,285  269,325  138,104  227,792 
           Principal Investment Plus Variable Annuity  676,808  547,123  888,588  202,859 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  183,563  171,493  251,870  74,037 
     
       T. Rowe Price Blue Chip Growth II Division:         
           Principal Investment Plus Variable Annuity  62,910  35,304  41,413  5,259 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  12,264  11,886  19,138  2,198 

    112

    Principal Financial Group
    Separate Account B
     
    Notes to Financial Statements (continued) 

    5. Changes in Units Outstanding (continued)         
     
      2008 2007
     
    Division:  Purchased  Redeemed  Purchased  Redeemed 
     
       T. Rowe Price Health Sciences II Division:         
           Principal Investment Plus Variable Annuity  159,930  79,583  110,929  42,649 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  32,128  17,998  32,470  17,806 
     
       Templeton Growth Securities Class 2 Division:         
           Principal Freedom Variable Annuity  9,259  42,403  11,325  32,647 
     
       West Coast Equity Division:  223,940  56,347  –  – 
           Principal Freedom 2 Variable Annuity  7,978  3,257  2,213  81 
           Principal Investment Plus Variable Annuity  137,341  27,386  99,260  6,460 
           Principal Investment Plus Variable Annuity With         
               Purchase Rider  78,621  25,704  43,661  79 

    113

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights

    Principal Life sells a number of variable annuity products, which have unique combinations of features and fees that are charged against the contract owner’s account balance. Differences in the fee structures result in a variety of unit values, expense ratios, and total returns.

    Separate Account B has presented the following disclosures for 2008, 2007, 2006, 2005 and 2004 in accordance with AICPA Audit and Accounting Guide for Investment Companies. Information for years prior to 2004 is not required to be presented. The following table was developed by determining which products issued by Principal Life have the lowest and highest total return. Only product designs within each division that had units outstanding during the respective periods were considered when determining the lowest and highest total return. The summary may not reflect the minimum and maximum contract charges offered by Principal Life as contract owners may not have selected all available and applicable contract options as discussed in Note 2.

        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
    AIM V.I. Basic Value             
       Series I Division:             
             2008  136  $6.27 to $6.10  $842  1.04%  1.25% to 1.85%                       (52.32)% to (52.68)% 
             2007  113  13.15 to 12.89  1,479  0.55  1.25 to 1.85  0.28 to (0.33) 
             2006  82  13.12 to 12.93  1,073  0.64  1.25 to 1.85  11.80 to 11.13 
             2005 (4)  13  11.73 to 11.64  154  0.19  1.25 to 1.85  3.76 to 3.25 
     
    AIM V.I. Capital             
       Appreciation Series I             
       Division:             
             2008  992  6.20 to 6.10  6,141  -     1.25 to 1.85  (43.22) to (43.62) 
             2007  1,295  10.92 to 10.82  14,126  -  1.25 to 1.85  10.61 to 9.95 
             2006 (5)  1,579  9.88 to 9.84  15,582  0.07  1.25 to 1.85  (1.12) to (1.52) 
     
    AIM V.I. Core Equity             
       Series I Division:             
             2008  4,018  7.57 to 7.21  30,085  1.97  1.25 to 1.85  (31.06) to (31.46) 
             2007  5,185  10.98 to 10.52  56,331  1.05  1.25 to 1.85  6.77 to 6.12 
             2006  6,064  10.28 to 9.91  61,828  0.61  1.25 to 1.85  15.26 to 14.57 
             2005  3,755  8.92 to 8.65  33,287  1.45  1.25 to 1.85  3.96 to 3.35 
             2004  4,303  8.58 to 8.37  36,736  0.95  1.25 to 1.85  7.65 to 7.03 

    114

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
             AIM V.I. Dynamics             
                 Series I Division:             
                       2008  316  $5.83 to $5.57  $1,800                 -                   % 1.25% to 1.85%           (48.72)% to (48.99)% 
                       2007  395  11.37 to 10.92  4,416  -  1.25 to 1.85  10.79 to 10.12 
                       2006  303  10.26 to 9.92  3,068  -  1.25 to 1.85  14.68 to 13.99 
                       2005  289  8.95 to 8.70  2,558  -  1.25 to 1.85  9.41 to 8.61 
                       2004  313  8.18 to 8.01  2,536  –  1.25 to 1.85  11.90 to 11.25 
     
             AIM V.I. Global Health             
                 Care Series I             
                 Division:             
                       2008  1,002  8.55 to 8.16  8,405  -  1.25 to 1.85  (29.46) to (29.96) 
                       2007  1,170  12.12 to 11.65  13,957  –  1.25 to 1.85  10.46 to 9.79 
                       2006  1,279  10.98 to 10.61  13,857  –  1.25 to 1.85  3.93 to 3.31 
                       2005  1,366  10.56 to 10.27  14,276  -  1.25 to 1.85  6.77 to 6.20 
                       2004  1,474  9.89 to 9.67  14,456  –  1.25 to 1.85  6.23 to 5.57 
     
             AIM V.I. International             
                 Growth Series I             
                 Division:             
                       2008 (8)  18  6.08 to 6.05  112  1.65  1.25 to 1.85  (39.14) to (39.44) 
     
             AIM V.I. Small Cap             
                 Equity Series I             
                 Division:             
                       2008  410  10.01 to 9.75  4,072  -  1.25 to 1.85  (32.18) to (32.62) 
                       2007  413  14.76 to 14.47  6,049  0.05  1.25 to 1.85  (1.03) to 3.25 
                       2006  55  14.21 to 14.01  775  –  1.25 to 1.85  15.98 to 15.29 
                       2005 (4)  13  12.25 to 12.15  160  -  1.25 to 1.85  6.61 to 6.04 
     
             AIM V.I. Technology             
                 Series I Division:             
                       2008  807  3.53 to 3.37  2,798  -  1.25 to 1.85  (45.19) to (45.56) 
                       2007  1,034  6.44 to 6.19  6,561  –  1.25 to 1.85  6.36 to 5.72 
                       2006  1,028  6.06 to 5.86  6,148  –  1.25 to 1.85  9.11 to 8.46 
                       2005  1,137  5.55 to 5.40  6,245  -  1.25 to 1.85  0.91 to 0.37 
                       2004  1,233  5.50 to 5.38  6,738  –  1.25 to 1.85  3.19 to 2.67 

    115

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)   Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
             Alliance Bernstein VP             
                 Series Small Cap             
                 Growth Class A             
                 Division:             
                       2008  147  $8.35 to $8.13  $1,217  -%  1.25% to 1.85%  (46.23)% to (46.58)% 
                       2007  120  15.53 to 15.22  1,843  –  1.25 to 1.85  12.65 to 11.97 
                       2006  72  13.78 to 13.59  994  –  1.25 to 1.85  9.31 to 8.66 
                       2005 (4)  22  12.61 to 12.51  271  –  1.25 to 1.85  6.34 to 5.81 
     
             American Century VP             
                 Income & Growth             
                 Division:             
                       2008  2,330  7.96 to 7.40  17,876  2.11  0.85 to 1.85  (35.13) to (35.82) 
                       2007  2,869  12.27 to 11.53  34,147  1.87  0.85 to 1.85  (0.92) to (1.91) 
                       2006  3,173  12.38 to 11.76  38,341  1.80  0.85 to 1.85  16.10 to 14.95 
                       2005  3,373  10.66 to 10.23  35,269  1.94  0.85 to 1.85  3.70 to 2.71 
                       2004  3,343  10.28 to 9.96  33,859  1.29  0.85 to 1.85  12.10 to 10.91 
     
             American Century VP I             
                 Ultra Division:             
                       2008  715  6.25 to 5.97  4,393  -  1.25 to 1.85  (42.18) to (42.54) 
                       2007  907  10.81 to 10.39  9,654  -  1.25 to 1.85  19.51 to 18.79 
                       2006  1,057  9.04 to 8.74  9,446  –  1.25 to 1.85  (4.47) to (5.04) 
                       2005  1,132  9.47 to 9.21  10,612  -  1.25 to 1.85  0.96 to 0.33 
                       2004  1,148  9.38 to 9.18  10,692  –  1.25 to 1.85  9.20 to 8.64 
     
             American Century VP I             
                 Vista Division:             
                       2008  203  9.41 to 9.17  1,892  -  1.25 to 1.85  (49.27) to (49.56) 
                       2007  163  18.55 to 18.18  2,996  -  1.25 to 1.85  38.03 to 37.20 
                       2006  52  13.44 to 13.25  694  –  1.25 to 1.85  7.66 to 7.01 
                       2005 (4)  25  12.48 to 12.38  313  -  1.25 to 1.85  4.22 to 3.70 
     
             American Century VP II             
                 Inflation Protection             
                 Division:             
                       2008  6,325  10.77 to 10.49  67,684  4.86  1.25 to 1.85  (2.89) to (3.50) 
                       2007  6,990  11.09 to 10.87  77,061  4.39  1.25 to 1.85  8.17 to 7.52 
                       2006  4,767  10.25 to 10.11  48,661  3.17  1.25 to 1.85  0.33 to (0.27) 
                       2005 (4)  1,787  10.22 to 10.13  18,214  4.75  1.25 to 1.85  0.88 to 0.37 

    116

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value        Total Return (3) 
        Corresponding to  Net  Investment  Expense  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Ratio (2)  Lowest to Highest 
    Division  (000’s)  Expense Ratio  (000’s)   Ratio (1)  Lowest to Highest  Expense Ratio 
     
             American Century VP II             
                 Ultra Division:             
                       2008  6,614  $7.41 to $7.22  $48,692  -%  1.25% to 1.85%  (42.38)% to (42.74)% 
                       2007  4,877  12.86 to 12.61  62,389  –     1.25 to 1.85  19.33 to 18.62 
                       2006  3,842  10.78 to 10.63  41,243  –     1.25 to 1.85  (4.59) to (5.16) 
                       2005 (4)  1,379  11.30 to 11.20  15,536  –     1.25 to 1.85  3.06 to 2.54 
     
             American Century VP II             
                 Value Division:             
                       2008  2,665  9.88 to 9.49  25,960  2.38     1.25 to 1.85  (27.67) to (28.16) 
                       2007  3,286  13.66 to 13.21  44,384  1.46     1.25 to 1.85  (6.49) to (7.05) 
                       2006  3,494  14.61 to 14.21  50,565  1.17     1.25 to 1.85  17.00 to 16.30 
                       2005  3,366  12.49 to 12.22  41,722  0.65     1.25 to 1.85  3.57 to 2.95 
                       2004  2,631  12.06 to 11.87  31,569  0.60     1.25 to 1.85  12.71 to 12.09 
     
             Asset Allocation             
                 Division:             
                       2008  2,701  1.11 to 18.84  50,513  3.02     0.51 to 1.85  (25.15) to (26.20) 
                       2007  3,276  1.49 to 25.53  85,057  1.39     0.42 to 1.85  11.31 to 9.72 
                       2006  3,514  1.34 to 23.27  84,221  0.77     0.42 to 1.85  12.29 to 10.71 
                       2005  4,008  1.19 to 21.02  84,245  1.65     0.42 to 1.85  5.31 to 3.85 
                       2004  4,337  1.13 to 20.24  87,504  3.26     0.42 to 1.85  7.62 to 6.47 
     
             Balanced Division:             
                       2008  4,571  1.61 to 13.91  44,975  3.67     0.41 to 1.85  (31.21) to (32.21) 
                       2007  5,932  2.34 to 20.52  85,957  2.60     0.42 to 1.85  4.93 to 3.43 
                       2006  6,432  2.17 to 19.84  92,320  2.49     0.42 to 1.85  10.73 to 9.40 
                       2005  7,824  2.01 to 18.13  98,501  2.59     0.42 to 1.85  6.35 to 4.80 
                       2004  11,449  1.84 to 17.30  109,503  2.12     0.42 to 1.85  8.88 to 8.06 
     
             Bond & Mortgage             
                 Securities Division:             
                       2008 (10)  16,901  1.79 to 15.07  238,616  6.18     0.44 to 1.85  (17.41) to (18.58) 
                       2007  20,618  2.17 to 18.51  358,686  4.24     0.42 to 1.85  2.97 to 1.50 
                       2006  18,814  2.11 to 18.24  319,793  3.87     0.42 to 1.85  4.21 to 2.73 
                       2005  17,587  2.02 to 17.75  280,484  4.32     0.42 to 1.85  2.02 to 0.63 
                       2004  18,219  1.92 to 17.64  252,489  4.56     0.42 to 1.85  1.59 to 3.04 
     
             Diversified International             
                 Division:             
                       2008  11,444  1.85 to 15.70  151,539  1.79     0.41 to 1.85  (46.44) to (47.19) 
                       2007  13,180  3.46 to 29.73  325,698  0.91     0.42 to 1.85  15.60 to 13.95 
                       2006  13,309  2.99 to 26.09  290,731  1.18     0.42 to 1.85  27.43 to 25.63 
                       2005  13,536  2.35 to 20.77  228,177  1.03     0.42 to 1.85  23.04 to 21.53 
                       2004  15,016  1.91 to 17.09  184,002  0.94     0.42 to 1.85  20.89 to 18.76 

    117

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
             Dreyfus IP Technology             
                 Growth Service             
                 Shares Division:             
                       2008  90     $7.98 to $7.78  $710  -%  1.25% to 1.85%                (42.01)% to (42.33)% 
                       2007  75  13.76 to 13.49  1,018  -  1.25 to 1.85  13.01 to 12.33 
                       2006  37  12.18 to 12.00  452  –  1.25 to 1.85  2.75 to 2.13 
                       2005 (4)  13  11.85 to 11.75  159  -  1.25 to 1.85  8.18 to 7.64 
     
             Equity Income Division:             
                       2008 (11)  21,213  0.85 to 6.69  142,949  2.55  0.48 to 1.85  (34.22) to (35.17) 
                       2007 (6)  20,275  1.29 to 10.32  209,477  0.94  0.42 to 1.85  5.73 to 3.46 
     
             Fidelity VIP Equity-             
                 Income Service Class             
                 2 Division:             
                       2008  4,936  7.88 to 7.57  38,384  2.15  1.25 to 1.85  (43.51) to (43.88) 
                       2007  5,796  13.95 to 13.49  79,977  1.62  1.25 to 1.85  0.01 to (0.59) 
                       2006  5,585  13.95 to 13.57  77,174  2.96  1.25 to 1.85  18.44 to 17.74 
                       2005  5,125  11.78 to 11.53  59,908  1.31  1.25 to 1.85  3.57 to 3.64 
                       2004  4,327  11.30 to 11.12  48,616  1.05  1.25 to 1.85  9.92 to 9.23 
     
             Fidelity VIP Growth             
                 Service Class             
                 Division:             
                       2008  2,945  5.72 to 5.45  16,640  0.68  1.25 to 1.85  (47.91) to (48.19) 
                       2007  3,524  10.98 to 10.52  38,299  0.62  1.25 to 1.85  25.29 to 24.53 
                       2006  3,889  8.76 to 8.45  33,789  0.30  1.25 to 1.85  5.41 to 4.78 
                       2005  4,630  8.31 to 8.06  38,238  0.40  1.25 to 1.85  4.40 to 3.73 
                       2004  5,219  7.96 to 7.77  41,373  0.16  1.25 to 1.85  1.92 to 1.30 
     
             Fidelity VIP Growth             
                 Service Class 2             
                 Division:             
                       2008  675  7.84 to 7.64  5,242  0.61  1.25 to 1.85  (47.98) to (48.27) 
                       2007  607  15.07 to 14.77  9,071  0.30  1.25 to 1.85  25.08 to 24.33 
                       2006  364  12.05 to 11.88  4,365  0.09  1.25 to 1.85  5.25 to 4.62 
                       2005 (4)  115  11.45 to 11.35  1,309  -  1.25 to 1.85  5.90 to 5.37 
     
             Fidelity VIP Overseas             
                 Service Class 2             
                 Division:             
                       2008  3,679  10.24 to 9.97  37,380  2.74  1.25 to 1.85  (44.65) to (45.01) 
                       2007  2,903  18.50 to 18.13  53,358  2.91  1.25 to 1.85  15.59 to 14.90 
                       2006  2,197  16.00 to 15.78  35,000  0.42  1.25 to 1.85  16.31 to 15.62 
                       2005 (4)  882  13.76 to 13.65  12,096  -  1.25 to 1.85  15.13 to 14.56 

    118

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
    Fidelity VIP II             
                 Contrafund Service             
                 Class Division:             
    2008  5,998  $9.73 to$9.26  $57,669  0.83%  1.25% to 1.85%              (43.30)% to (43.71)% 
    2007  7,435  17.16 to 16.45  126,342  0.83  1.25 to 1.85  16.04 to 15.34 
    2006  8,076  14.79 to 14.26  118,478  1.10  1.25 to 1.85  10.21 to 9.55 
    2005  7,983  13.42 to 13.02  106,462  0.19  1.25 to 1.85  15.39 to 14.71 
    2004  7,170  11.63 to 11.35  82,971  0.23  1.25 to 1.85  13.91 to 13.27 
     
    Fidelity VIP II             
                 Contrafund Service             
                 Class 2 Division:             
    2008  3,058  9.45 to 9.21  28,737  0.84  1.25 to 1.85  (43.41) to (43.70) 
    2007  2,571  16.70 to 16.36  42,751  0.90  1.25 to 1.85  15.84 to 15.14 
    2006  1,620  14.41 to 14.21  23,281  1.10  1.25 to 1.85  10.05 to 9.39 
                       2005 (4)  528  13.10 to 12.99  6,902  -  1.25 to 1.85  13.29 to 12.72 
     
    Fidelity VIP III Mid             
                 Cap Service Class 2             
    Division:             
    2008  490     10.60 to 10.32  5,161  0.24  1.25 to 1.85  (40.35) to (40.72) 
    2007  426  17.77 to 17.41  7,539  0.49  1.25 to 1.85  13.90 to 13.21 
    2006  283  15.60 to 15.38  4,393  0.09  1.25 to 1.85  11.01 to 10.35 
                       2005 (4)  71  14.05 to 13.94  997  -  1.25 to 1.85  12.50 to 11.94 
     
    Goldman Sachs             
                 Structured Small Cap             
                 Equity Service Class I             
    Division:             
    2008  460  7.24 to 7.06  3,310  0.71  1.25 to 1.85  (34.89) to (35.23) 
    2007  419  11.12 to 10.90  4,626  0.42  1.25 to 1.85  (17.53) to (18.02) 
    2006  298  13.48 to 13.29  4,001  0.94  1.25 to 1.85  10.88 to 10.22 
                       2005 (4)  94  12.16 to 12.06  1,146  0.60  1.25 to 1.85  5.70 to 5.18 
     
    Goldman Sachs VIT             
                 Mid Cap Value             
                 Service Class I             
    Division:             
    2008  1,385  9.42 to 9.17  12,939  1.07  1.25 to 1.85  (37.82) to (38.25) 
    2007  1,341  15.15 to 14.85  20,193  0.93  1.25 to 1.85  1.91 to 1.30 
    2006  853  14.86 to 14.65  12,621  1.43  1.25 to 1.85  14.72 to 14.04 
                       2005 (4)  253  12.96 to 12.85  3,272  1.31  1.25 to 1.85  8.95 to 8.41 

    119

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
             Government & High             
                 Quality Bond             
    Division:             
    2008  14,592  $2.23 to $17.65  $237,197         4.95%  0.42% to 1.85%  (2.05)% to (3.45)% 
    2007  16,521  2.27 to 18.28  277,392  4.61  0.42 to 1.85  4.46 to 2.97 
    2006  16,900  2.18 to 17.75  276,598  4.15  0.42 to 1.85  3.79 to 2.32 
    2005  18,392  2.10 to 17.35  286,799  4.41  0.42 to 1.85  1.45 to 0.15 
    2004  22,005  2.07 to 17.32  306,512  4.73  0.42 to 1.85  3.50 to 1.64 
     
             International Emerging             
                 Markets Division:             
    2008  3,574  2.02 to 17.67  62,435  1.14  0.43 to 1.85  (55.05) to (55.69) 
    2007  4,121  4.49 to 39.88  163,677  0.91  0.42 to 1.85  41.51 to 39.49 
    2006  3,632  3.17 to 28.59  104,347  -  0.42 to 1.85  37.74 to 35.79 
    2005  3,018  2.30 to 21.06  62,694  1.34  0.42 to 1.85  33.72 to 21.62 
    2004  2,096  1.72 to 15.97  32,241  0.79  0.42 to 1.85  24.46 to 22.56 
     
             International SmallCap             
    Division:             
    2008  3,437  1.33 to 15.55  54,645  2.09  0.40 to 1.85  (50.49) to (51.21) 
    2007  4,137  2.70 to 31.87  133,593  1.47  0.42 to 1.85  8.75 to 7.21 
    2006  4,226  2.48 to 29.72  127,551  0.52  0.42 to 1.85  29.83 to 28.00 
    2005  4,454  1.91 to 23.22  102,214  0.53  0.42 to 1.85  28.19 to 19.76 
    2004  4,109  1.49 to 18.32  74,478  0.76  0.42 to 1.85  29.57 to 27.84 
     
             Janus Aspen Mid Cap             
                 Growth Service             
                 Shares Division:             
    2008  1,967  5.16 to 4.92  9,984  0.06  1.25 to 1.85  (44.58) to (44.84) 
    2007  2,454  9.31 to 8.92  22,519  0.07  1.25 to 1.85  20.22 to 19.50 
    2006  2,530  7.74 to 7.47  19,323  -  1.25 to 1.85  11.90 to 11.23 
    2005  2,681  6.92 to 6.71  18,346  -  1.25 to 1.85  10.54 to 10.00 
    2004  2,849  6.26 to 6.10  17,665  -  1.25 to 1.85  19.01 to 18.22 
     
             LargeCap Blend II             
    Division:             
                       2008 (12)  16,533  8.48 to 8.15  138,623  1.40  1.25 to 1.85  (37.23) to (37.60) 
    2007  16,908  13.51 to 13.06  226,044  0.67  1.25 to 1.85  3.81 to 3.19 
    2006  14,897  13.01 to 12.65  192,106  0.62  1.25 to 1.85  14.38 to 13.70 
    2005  11,345  11.37 to 11.13  128,134  0.01  1.25 to 1.85  3.44 to 3.17 
    2004  7,891  11.00 to 10.82  86,333  1.18  1.25 to 1.85  9.02 to 8.31 

    120

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value        Total Return (3) 
        Corresponding to    Investment  Expense  Corresponding to 
    Units Lowest to Highest Net Assets  Income  Ratio (2)  Lowest to Highest 
       Division  (000’s)  Expense Ratio  (000’s)  Ratio (1) Lowest to Highest  Expense Ratio 
             LargeCap Growth             
                 Division:             
                       2008 (13)  6,697  $1.36 to $12.01  $49,772           0.52%  0.41% to 1.85%  (43.40)% to (44.19)% 
                       2007  7,931  2.40 to 21.52  104,201  0.17  0.42 to 1.85  22.68 to 20.93 
                       2006  8,539  1.95 to 17.80  96,085  0.27  0.42 to 1.85  9.46 to 7.91 
                       2005  10,265  1.79 to 16.49  101,200  0.73  0.42 to 1.85  11.88 to 10.05 
                       2004  16,647  1.60 to 14.99  114,994  0.33  0.42 to 1.85  8.84 to 7.38 
     
             LargeCap Growth I             
                 Division:             
                       2008 (14)  4,983  0.68 to 17.99  89,910  0.17  0.49 to 1.85  (40.85) to (41.69) 
                       2007  6,013  1.14 to 30.85  185,017  0.53  0.42 to 1.85  8.14 to 6.52 
                       2006  6,016  1.06 to 28.96  179,750  –  0.42 to 1.85  5.71 to 4.27 
                       2005  6,904  1.00 to 27.78  195,218  –  0.42 to 1.85  7.53 to 5.59 
                       2004  7,862  0.93 to 26.31  207,318  0.53  0.42 to 1.85  8.14 to 7.34 
     
             LargeCap S& P 500             
                 Index Division:             
                       2008 (15)  12,828  0.80 to 6.50  82,148  2.42  0.43 to 1.85  (37.36) to (38.21) 
                       2007  14,712  1.28 to 10.52  154,077  1.39  0.42 to 1.85  4.70 to 3.21 
                       2006  15,070  1.22 to 10.19  152,650  1.33  0.42 to 1.85  15.09 to 13.46 
                       2005  15,133  1.06 to 8.98  134,689  0.03  0.42 to 1.85  3.92 to 2.56 
                       2004  14,735  1.02 to 8.76  127,190  1.60  0.42 to 1.85  9.68 to 8.42 
     
             LargeCap Value             
                 Division:             
                       2008 (16)  8,481  2.34 to 17.68  97,288  2.36  0.41 to 1.85  (35.44) to (36.36) 
                       2007  10,935  3.63 to 27.78  193,783  1.66  0.42 to 1.85  (0.52) to (1.94) 
                       2006  11,695  3.65 to 28.33  213,650  1.57  0.42 to 1.85  19.45 to 17.76 
                       2005  13,018  3.05 to 24.06  198,490  0.01  0.42 to 1.85  6.27 to 4.85 
                       2004  17,135  2.87 to 22.94  214,377  1.43  0.42 to 1.85  11.67 to 10.29 
     
             LargeCap Value II             
                 Division:             
                       2008 (17)  502  8.08 to 7.87  4,022  0.03  1.25 to 1.85  (38.23) to (38.61) 
                       2007  425  13.08 to 12.82  5,523  2.22  1.25 to 1.85  (2.56) to (3.14) 
                       2006  294  13.42 to 13.24  3,927  1.70  1.25 to 1.85  18.08 to 17.37 
                       2005 (4)  133  11.37 to 11.28  1,511  2.48  1.25 to 1.85  1.49 to 0.99 
     
             LargeCap Value III             
                 Division:             
                       2008 (18)  13,977  8.17 to7.85  113,001  2.34  1.25 to 1.85  (41.56) to (41.89) 
                       2007  13,775  13.98 to 13.51  190,694  1.26  1.25 to 1.85  (4.92) to (5.49) 
                       2006  11,912  14.70 to 14.30  173,683  0.94  1.25 to 1.85  20.04 to 19.33 
                       2005  9,023  12.24 to 11.98  109,779  0.01  1.25 to 1.85  2.59 to 3.51 
                       2004  6,391  11.76 to 11.58  74,817  1.59  1.25 to 1.85  11.68 to 11.03 

      121

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to    Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Net Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)   Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
         LifeTime Strategic             
               Income Division:             
                    2008  1,811   $8.17 to $8.94  $16,446  3.91% 0.95% to 1.85%   (24.63)% to (25.25)% 
                     2007  1,725  10.84 to 11.97  20,783  1.19  0.95 to 1.85  1.15 to (0.06) 
                     2006  1,035  10.71 to 11.93  12,491  0.13  0.95 to 1.85  1.69 to 8.24 
                     2005 (4)  490  11.11 to 11.02  5,446  -  1.25 to 1.85  4.35 to 3.83 
     
         LifeTime 2010 Division:             
                     2008  3,489  7.63 to 8.58  30,145  4.31  0.95 to 1.85  (31.57) to (32.17) 
                     2007  3,408  11.15 to 12.66  43,289  1.12  0.95 to 1.85  2.75 to 0.95 
                     2006  2,089  10.85 to 12.43  26,166  0.04  0.95 to 1.85  2.75 to 10.24 
                     2005 (4)  1,126  11.36 to 11.27  12,780  -  1.25 to 1.85  4.67 to 4.15 
     
         LifeTime 2020 Division:             
                     2008  13,611  7.48 to 8.67  119,536  4.33  0.95 to 1.85  (34.79) to (35.35) 
                     2007  12,818  11.47 to 13.42  173,292  0.49  0.95 to 1.85  3.87 to 1.54 
                     2006  7,291  11.04 to 13.03  95,945  -  0.95 to 1.85  3.41 to 13.06 
                     2005 (4)  2,259  11.62 to 11.52  26,189  -  1.25 to 1.85  5.41 to 4.89 
     
         LifeTime 2030 Division:             
                     2008  2,269  7.28 to 8.43  18,995  4.09  0.95 to 1.85  (36.97) to (37.60) 
                     2007  1,816  11.55 to 13.52  24,342  0.35  0.95 to 1.85  4.96 to 1.97 
                     2006  914  11.01 to 12.99  11,982  0.01  0.95 to 1.85  3.90 to 12.73 
                     2005 (4)  280  11.61 to 11.52  3,241  -  1.25 to 1.85  5.21 to 4.68 
     
         LifeTime 2040 Division:             
                     2008  839  7.12 to 8.39  7,122  3.94  0.95 to 1.85  (38.73) to (39.33) 
                     2007  799  11.62 to 13.84  11,107  0.29  0.95 to 1.85  5.52 to 2.13 
                     2006  390  11.01 to 13.22  5,191  0.02  0.95 to 1.85  4.22 to 13.03 
                     2005 (4)  123  11.79 to 11.70  1,449  -  1.25 to 1.85  5.48 to 4.95 
     
         LifeTime 2050 Division:             
                     2008  458  7.03 to 8.32  3,856  4.05  0.95 to 1.85  (39.60) to (40.19) 
                     2007  426  11.64 to 13.92  5,960  0.21  0.95 to 1.85  5.61 to 2.26 
                     2006  260  11.02 to 13.29  3,485  0.01  1.25 to 1.85  4.59 to 13.38 
                     2005 (4)  66  11.82 to 11.73  774  -  1.25 to 1.85  5.46 to 4.94 
     
         MidCap Blend Division:             
                     2008 (19)  9,635  2.99 to 25.81  211,731  0.63  0.44 to 1.85  (34.20) to (35.15) 
                     2007  11,351  4.54 to 39.80  380,164  0.61  0.42 to 1.85  8.99 to 7.43 
                     2006  11,881  4.17 to 37.04  367,161  1.03  0.42 to 1.85  13.75 to 12.14 
                     2005  13,033  3.66 to 33.03  339,324  0.09  0.42 to 1.85  8.61 to 7.21 
                     2004  15,701  3.37 to 30.81  322,650  1.18  0.42 to 1.85  17.42 to 15.57 

    122

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to    Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Net Assets  Income  Lowest to  Lowest to Highest 
                           Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
             MidCap Growth I             
                 Division:             
    2008 (20)  3,706  $0.85 to $7.58  $29,096     0.09% 0.27% to 1.85% (41.39)% to (42.23)% 
                       2007  4,441  1.45 to 13.12  59,984  0.11  0.42 to 1.85  10.31 to 8.74 
                       2006  4,666  1.31 to 12.06  57,787  -  0.42 to 1.85  9.20 to 7.64 
                       2005  4,764  1.20 to 11.21  53,923  -  0.42 to 1.85  13.21 to 10.74 
                       2004  4,811  1.06 to 10.04  48,681  –  0.42 to 1.85  11.58 to 9.73 
     
             MidCap Value II             
                 Division:             
                       2008 (21)  7,324  1.00 to 8.78  66,670  0.89  0.66 to 1.85  (44.15) to (44.95) 
                       2007  7,574  1.80 to 15.95  125,209  0.64  0.42 to 1.85  (1.45) to (2.86) 
                       2006  6,981  1.83 to 16.42  119,378  0.24  0.42 to 1.85  12.80 to 11.20 
                       2005  6,389  1.62 to 14.76  94,905  -  0.42 to 1.85  10.20 to 6.72 
                       2004  4,931  1.47 to 13.60  66,587  0.10  0.42 to 1.85  22.50 to 20.35 
     
             Money Market             
                 Division:             
                       2008  20,768  1.71 to 13.78  244,388  2.44  0.40 to 1.85  2.15 to 0.73 
                       2007  12,707  1.68 to 13.68  131,679  4.73  0.42 to 1.85  4.55 to 2.96 
                       2006  9,838  1.60 to 13.29  94,506  4.53  0.42 to 1.85  4.32 to 2.71 
                       2005  9,888  1.54 to 12.94  82,162  2.64  0.42 to 1.85  2.67 to 0.78 
                       2004  12,349  1.50 to 2.13  89,606  0.88  0.42 to 2.16  0.00 to (0.93) 
     
             Mortgage Securities             
                 Division:             
                       2008 (9)  26  10.10 to 5.17  259  -  0.85 to 1.85  1.20 to (48.20) 
     
             Neuberger Berman             
                 AMT Partners I             
                 Class Division:             
                       2008  479  7.69 to 7.49  3,660  0.54  1.25 to 1.85  (53.00) to (53.28) 
                       2007  440  16.36 to 16.03  7,154  0.70  1.25 to 1.85  7.97 to 7.32 
                       2006  310  15.15 to 14.94  4,672  0.96  1.25 to 1.85  10.85 to 10.19 
                       2005 (4)  65  13.67 to 13.55  884  1.51  1.25 to 1.85  11.12 to 10.57 
     
             Neuberger Berman             
                 AMT Small Cap             
                 Growth S Class             
                 Division:             
                       2008 (25)  288  6.87 to 6.69  1,961  0.00  1.25 to 1.85  (40.21) to (40.59) 
                       2007  273  11.49 to 11.26  3,111  -  1.25 to 1.85  (0.74) to (1.34) 
                       2006  174  11.58 to 11.42  2,008  -  1.25 to 1.85  3.95 to 3.33 
                       2005 (4)  58  11.14 to 11.05  640  -  1.25 to 1.85  4.32 to 3.80 

    123

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
             Neuberger Berman             
                 AMT Socially             
                 Responsive I Class             
                 Division:             
                       2008  413  $8.65 to $8.43  $3,555         2.30%  1.25% to 1.85%  (40.22)% to (40.55)% 
                       2007  325  14.47 to 14.18  4,689         0.10  1.25 to 1.85  6.27 to 5.63 
                       2006  186  13.62 to 13.43  2,519         0.14  1.25 to 1.85  12.29 to 11.62 
                       2005 (4)  64  12.13 to 12.03  773  -  1.25 to 1.85  5.57 to 5.22 
     
             Real Estate Securities             
                 Division:             
                       2008  3,393  1.74 to 18.68  64,057         2.39  0.47 to 1.85  (33.14) to (34.09) 
                       2007  4,085  2.61 to 28.34  116,915         0.83  0.42 to 1.85  (18.04) to (19.21) 
                       2006  5,236  3.18 to 35.07  181,645         1.59  0.42 to 1.85  35.90 to 34.11 
                       2005  5,253  2.34 to 26.15  133,793         0.02  0.42 to 1.85  15.27 to 13.74 
                       2004  5,230  2.03 to 22.99  115,811         2.28  0.42 to 1.85  34.44 to 32.05 
     
             SAM Balanced Portfolio             
    Division:             
                       2008  30,551  7.56 to 7.44  229,327         3.52  0.95 to 1.85  (26.82) to (27.56) 
                       2007 (7)  3,428  10.33 to 10.28  35,315         0.06  0.95 to 1.85  3.35 to 2.20 
     
             SAM Conservative             
                 Balanced Portfolio             
                 Division:             
                       2008  7,346  8.25 to 8.12  60,144         3.11  0.95 to 1.85  (19.98) to (20.70) 
                       2007 (7)  843  10.31 to 10.25  8,661         0.29  0.95 to 1.85  3.07 to 1.64 
     
             SAM Conservative             
                 Growth Portfolio             
                 Division:             
                       2008  3,313  6.85 to 6.74  22,494         3.79  0.95 to 1.85  (33.75) to (34.37) 
                       2007 (7)  670  10.34 to 10.28  6,902         0.54  0.95 to 1.85  3.30 to 2.62 
     
             SAM Flexible Income             
                 Portfolio Division:             
                       2008  7,644  8.75 to 8.62  66,370         4.86  0.95 to 1.85  (14.55) to (15.32) 
                       2007 (7)  149  10.24 to 10.19  1,519         0.49  0.95 to 1.85  2.43 to 1.12 
     
             SAM Strategic Growth             
                 Portfolio Division:             
                       2008  2,572  6.40 to 6.31  16,339         3.61  0.95 to 1.85  (38.04) to (38.56) 
                       2007 (7)  659  10.33 to 10.27  6,786         0.18  0.95 to 1.85  3.16 to 2.87 

    124

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
                           Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
         Short Term Bond             
               Division:             
                     2008  12,560  $9.38 to $8.87  $114,329         4.85%  0.85% to 1.85%  (12.42)% to (13.29)% 
                     2007  14,642  10.71 to 10.23  152,978  3.29  0.85 to 1.85  2.19 to 1.17 
                     2006  11,441  10.48 to 10.11  117,594  2.22  0.85 to 1.85  3.56 to 2.53 
                     2005  8,171  10.12 to 9.86  81,529  1.51  0.85 to 1.85  0.94 to 0.46 
                     2004  5,485  10.03 to 9.87  54,515  –  0.85 to 1.85  0.50 to (0.50) 
     
         Short-Term Income             
               Division:             
                     2008 (9)  28  9.99 to 5.12  261  -     0.85 to 1.85  0.30 to (48.59) 
     
         SmallCap Blend             
               Division:             
                     2008 (22)  3,928  0.84 to 8.01  32,501  0.45  0.43 to 1.85  (37.00) to (37.86) 
                     2007  4,859  1.33 to 12.89  65,212  0.31  0.42 to 1.85  1.22 to (0.23) 
                     2006  5,338  1.31 to 12.92  71,752  0.16  0.42 to 1.85  12.23 to 10.64 
                     2005  5,934  1.17 to 11.68  70,854  0.02  0.42 to 1.85  6.36 to 5.13 
                     2004  5,891  1.10 to 11.11  66,830  –  0.42 to 1.85  19.57 to 17.57 
     
         SmallCap Growth II             
               Division:             
                     2008 (23)  3,794  0.49 to 6.17  24,055  -     0.43 to 1.85  (41.39) to (42.28) 
                     2007  4,379  0.83 to 10.69  47,856  -  0.42 to 1.85  4.48 to 3.06 
                     2006  4,608  0.80 to 10.37  48,773  -  0.42 to 1.85  8.52 to 6.98 
                     2005  4,861  0.73 to 9.69  46,695  -  0.42 to 1.85  5.80 to 4.72 
                     2004  5,065  0.69 to 9.26  46,544  –  0.42 to 1.85  11.29 to 9.20 
     
         SmallCap Value I             
               Division:             
                     2008 (24)  4,949  1.23 to 14.89  74,626  0.98  0.41 to 1.85  (32.10) to (33.08) 
                     2007  5,471  1.81 to 22.25  123,310  0.36  0.42 to 1.85  (9.90) to (11.18) 
                     2006  4,998  2.01 to 25.05  126,060  0.29  0.42 to 1.85  18.24 to 16.47 
                     2005  4,563  1.70 to 21.51  95,378  0.04  0.42 to 1.85  5.59 to 4.28 
                     2004  3,973  1.61 to 20.63  78,298  0.17  0.42 to 1.85  22.90 to 20.86 
     
         T. Rowe Price Blue             
               Chip Growth II             
               Division:             
                     2008  164  7.86 to 7.66  1,278  0.11  1.25 to 1.85  (43.37) to (43.68) 
                     2007  136  13.88 to 13.60  1,872  0.11  1.25 to 1.85  11.08 to 10.42 
                     2006  83  12.49 to 12.32  1,028  0.24  1.25 to 1.85  7.97 to 7.33 
                     2005 (4)  56  11.57 to 11.48  644  0.28  1.25 to 1.85  7.40 to 6.86 

    125

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6. Financial Highlights (continued)         
     
        Unit Fair Value      Expense  Total Return (3) 
        Corresponding to  Net  Investment  Ratio (2)  Corresponding to 
      Units  Lowest to Highest  Assets  Income  Lowest to  Lowest to Highest 
    Division  (000’s)  Expense Ratio  (000’s)  Ratio (1)  Highest  Expense Ratio 
     
         T. Rowe Price Health             
               Sciences II Division:             
                     2008  339  $11.08 to $10.79  $3,736           0.00%   1.25% to 1.85%  (30.05)% to (30.48)% 
                     2007  245  15.84 to 15.52  3,858  –  1.25 to 1.85  16.24 to 15.54 
                     2006  162  13.62 to 13.43  2,197  –  1.25 to 1.85  7.09 to 6.45 
                     2005 (4)  43  12.72 to 12.62  551  –  1.25 to 1.85  19.54 to 18.94 
     
         Templeton Growth             
               Securities Class 2             
               Division:             
                     2008  105  11.01  1,158  1.81  0.85  (42.81) 
                     2007  138  19.25  2,663  1.33  0.85  1.48 
                     2006  160  18.97  3,029  1.28  0.85  20.78 
                     2005  146  15.70  2,287  1.07  0.85  7.90 
                     2004  127  14.55  1,852  1.11  0.85  15.11 
     
         West Coast Equity             
               Division:             
                     2008  306  6.85 to 6.75  2,080  1.08  0.95 to 1.85  (34.01) to (34.59) 
                     2007 (7)  139  10.38 to 10.32  1,433  0.08  0.95 to 1.85  3.48 to 2.86 

    (1)      These amounts represent the dividends, excluding distributions of capital gains, received by the division from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets.
      These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the subaccount is affected by the timing of the declaration of dividends by the underlying fund in which the subaccounts invest.
    (2)      These ratios represent the annualized contract expenses of Separate Account B, consisting primarily of mortality and expense charges, for each period indicated. The ratios include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund are excluded.
    (3)      These amounts represent the total return for the periods indicated, including changes in the value of the underlying fund, and reflect deductions for all items included in the expense ratio. The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate the effective date of that investment option in the variable account. The total return is calculated for the period indicated or from the effective date through the end of the reporting period. These percentages represent the range of total returns available as of the report date and correspond with the expense ratio lowest to highest.
    (4)      Commencement of operations, January 4, 2005.
    (5)      Commencement of operations, April 28, 2006.
    (6)      Commencement of operations, January 5, 2007.
    (7)      Commencement of operations, May 1, 2007.
    (8)      Commenced operations May 19, 2008.
    (9)      Commenced operations November 24, 2008.
    (10)      Represented the operations of Bond Division until May 19, 2008 name change.

    126

    Principal Life Insurance Company 
    Separate Account B
     
    Notes to Financial Statements (continued) 

    6.      Financial Highlights (continued)
      (11)      Represented the operations of Equity Income I Division until May 19, 2008 name change.
      (12)      Represented the operations of LargeCap Blend Division until May 19, 2008 name change.
      (13)      Represented the operations of Growth Division until May 19, 2008 name change.
      (14)      Represented the operations of Equity Growth Division until May 19, 2008 name change.
      (15)      Represented the operations of LargeCap Stock Index Division until May 19, 2008 name change.
      (16)      Represented the operations of Capital Value Division until May 19, 2008 name change.
      (17)      Represented the operations of Equity Value Division until May 19, 2008 name change.
      (18)      Represented the operations of LargeCap Value Division until May 19, 2008 name change.
      (19)      Represented the operations of MidCap Division until May 19, 2008 name change.
      (20)      Represented the operations of MidCap Growth Division until May 19, 2008 name change.
      (21)      Represented the operations of MidCap Value Division until May 19, 2008 name change.
      (22)      Represented the operations of SmallCap Division until May 19, 2008 name change.
      (23)      Represented the operations of SmallCap Growth Division until May 19, 2008 name change.
      (24)      Represented the operations of Small Cap Value Division until May 19, 2008 name change.
      (25)      Represented the operations of Neuberger Berman AMT Fasciano S Class Division until November 24, 2008 name change. 

    There are divisions that have total return outside of the ranges indicated above. The following is a list of the divisions and corresponding lowest total return and highest total return.

        2008 Total 
                                                             Division  2008 Unit Value  Return 
     
    American Century VP Income & Growth Division  $7.22             –% 
    Asset Allocation Division  19.78  – 
    Balanced Division  1.56 and 14.61  – 
    Bond & Mortgage Securities Division  1.74 and 15.82  – 
    Diversified International Division  1.80 and 16.48  – 
    Equity Income Division  6.77  – 
    Government & High Quality Bond Division  2.15 and 18.53  – 
    International Emerging Markets Division  18.55  – 
    International SmallCap Division  16.33  – 
    LargeCap Growth Division  1.32 and 12.61  – 
    LargeCap Growth I Division  18.88  – 
      6.82, 7.09 and   
    LargeCap S&P 500 Index Division  7.19  – 
      2.26, 18.56 and   
    LargeCap Value Division  27.22  – 
    LifeTime Strategic Income Division  9.17  (25.31) 
    LifeTime 2010 Division  8.81  (32.23) 

    127

    Principal Life Insurance Company   
    Separate Account B   
     
                                                             Notes to Financial Statements (continued)   
     
     
     
     
    6. Financial Highlights (continued)     
     
        2008 Total 
                                                             Division  2008 Unit Value  Return 
     
     LifeTime 2020 Division  $8.90  (35.39)% 
     LifeTime 2030 Division  8.65  (37.65) 
     LifeTime 2040 Division  8.61  (39.38) 
     LifeTime 2050 Division  8.54  (40.23) 
     MidCap Blend Division  2.90 and 27.10  – 
     MidCap Growth I Division  7.96 and 8.85  – 
     MidCap Value II Division  9.19 and 13.88  – 
     Money Market Division  1.65 and 14.47  – 
     Real Estate Securities Division  19.61  – 
     SAM Balanced Portfolio Division  –  (27.63) 
     SAM Conservative Balanced Portfolio Division  –  (20.78) 
     SAM Conservative Growth Portfolio Division  –  (34.44) 
     SAM Flexible Income Portfolio Division  –  (15.41) 
     SmallCap Blend Division  8.40 and 10.69  – 
     SmallCap Growth II Division  6.48  – 
     SmallCap Value I Division  15.63  – 
     
     
      2007  2007 Total 
                                                             Division  Unit Value  Return 
     
        (1.43)% and 
    AIM V.I. SmallCap Equity Series I Division  $ –  3.87% 
    American Century VP Income and Growth    – 
    Division  11.14   
    Asset Allocation Division  26.65  – 
    Balanced Division  2.27 and 21.41  – 
    Bond Division  2.11 and 19.32  – 
    Capital Value Division  3.51, 28.99 and 42.27  – 
    Diversified International Division  3.36 and 31.03  – 
    Equity Growth Division  32.19  2.66 and 2.73 
    Equity Income I Division  10.38  – 
    Government and High Quality Bond Division  2.20 and 19.07  – 

    128

    Principal Life Insurance Company   
    Separate Account B   
     
    Notes to Financial Statements (continued)   
     
     
     
     
    6. Financial Highlights (continued)     
     
      2007  2007 Total 
                                                             Division  Unit Value  Return 
     
    Growth Division  $2.33 and $22.46                 –% 
    International Emerging Markets Division  41.62                 – 
    International SmallCap Division  33.26                 – 
      10.98, 11.37 and                 – 
    LargeCap Stock Index Division  11.55   
    LifeTime Strategic Income Division  12.20                 – 
    LifeTime 2010 Division  12.91                 – 
    LifeTime 2020 Division  13.68                 – 
    LifeTime 2030 Division  13.78                 – 
    LifeTime 2040 Division  14.11                 – 
    LifeTime 2050 Division  14.20                 – 
    MidCap Division  4.41 and 41.53                 – 
    MidCap Growth Division  13.69 and 15.16                 – 
    MidCap Value Division  16.60 and 24.95                 – 
    Money Market Division  1.62 and 14.28                 – 
    Real Estate Securities Division  29.57                 – 
    SAM Balanced Portfolio Division  10.27                 – 
    SAM Conservative Balanced Portfolio Division  10.24                 – 
    SAM Conservative Growth Portfolio Division  10.27                 – 
    SAM Flexible Income Portfolio Division  10.18                 – 
    SAM Strategic Growth Portfolio Division  –  2.54 
    SmallCap Division  13.45 and 17.04                 – 
    SmallCap Growth Division  11.15                 – 
    SmallCap Value Division  23.22                 – 

      129

    Principal Life Insurance Company
    Separate Account B
     
    Notes to Financial Statements (continued)
     
     
     
     
    6. Financial Highlights (continued)     
     
     
      2006  2006 Total 
    Division  Unit Value  Return 
     
             American Century VP Income & Growth Division  $11.25  4.83% 
             Asset Allocation Division  24.14  – 
             Balanced Division  2.17 and 20.58  – 
             Bond Division  2.05 and 18.92  0.35 
             Capital Value Division  3.53, 29.38 and 42.51  4.47 
             Diversified International Division  2.91 and 27.07  6.56 
             Equity Growth Division  30.04  – 
             Government & High Quality Bond Division  2.11 and 18.41  0.29 
             Growth Division  1.90 and 18.46  – 
             International Emerging Markets Division  29.66  – 
             International SmallCap Division  30.83  – 
             LargeCap Stock Index Division  10.57, 10.90 and 11.09  3.93 
             LifeTime Strategic Income Division  12.10  8.89 
             LifeTime 2010 Division  12.60  10.91 
             LifeTime 2020 Division  13.21  13.73 
             LifeTime 2030 Division  13.17  13.40 
             LifeTime 2040 Division  13.41  13.70 
             LifeTime 2050 Division  13.48  14.06 
             MidCap Division  4.05 and 38.42  4.32 
             MidCap Growth Division  12.51 and 13.80  3.76 
             MidCap Value Division  16.98 and 25.43  4.92 
             Money Market Division  1.55 and 13.79  0.60 
             Real Estate Securities Division  36.38  3.71 
             Short Term Bond Division  –  0.44 
             SmallCap Division  13.40 and 16.90  4.60 
             SmallCap Growth Division  10.76  3.49 
             SmallCap Value Division  25.99  4.97 

     

    130

    Principal Life Insurance Company   
    Separate Account B   
     
    Notes to Financial Statements (continued)   
     
     
     
     
    6. Financial Highlights (continued)     
     
     
      2005  2005 Total 
                                                                       Division  Unit Value  Return 
     
             Asset Allocation Division  $21.67                       –% 
             Balanced Division  1.96 and 18.70  – 
             Bond Division  1.97 and 18.30  2.60 
             Capital Value Division  2.96, 24.80 and 35.61  3.17 and 2.66 
             Diversified International Division  2.29 and 21.42  17.96 and 17.37 
             Equity Growth Division  28.64  11.77 and 12.33 
             Fidelity VIP Equity – Income Service Class 2     
                 Division  –  4.26 to 3.06 
             Government & High Quality Bond Division  2.04 and 17.89  1.49 
             Growth Division  1.74 and 17.01  – 
             International Emerging Markets Division  21.71  – 
             International SmallCap Division  23.95  – 
             LargeCap Blend Division  –  3.69 and 2.82 
             LargeCap Stock Index Division  9.26 and 9.51  – 
             LargeCap Value Division  –  2.08 and 4.13 
             MidCap Division  3.57 and 34.06  8.84 
             MidCap Growth Division  11.56 and 12.69  – 
             MidCap Value Division  15.18 and 22.64  – 
             Money Market Division  1.49 and 13.34  – 
             Real Estate Securities Division  26.97  19.86 and 20.46 
             Short Term Bond Division  –  (0.06) and 0.96 
             SmallCap Division  12.04 and 15.13  – 
             SmallCap Growth Division  10.00  6.53 and 7.06 
             SmallCap Value Division  22.18  5.94 

     

    131

    Principal Life Insurance Company   
    Separate Account B   
     
    Notes to Financial Statements (continued)   
     
     
     
     
    6. Financial Highlights (continued)     
     
      2004  2004 Total 
                                                                 Division  Unit Value  Return 
     
             Asset Allocation Division  $20.75                 –% 
             Balanced Division  1.85 and 17.73                 – 
             Bond Division  1.94 and 18.08                 – 
      2.79, 23.51 and                 – 
             Capital Value Division  33.50   
             Diversified International Division  1.86 and 17.52                 – 
             Equity Growth Division  26.96                 – 
             Government & High Quality Bond Division  2.01 and 17.76                 – 
             Growth Division  1.56 and 15.36                 – 
             International Emerging Markets Division  16.37                 – 
             International SmallCap Division  18.78                 – 
             LargeCap Stock Index Division  8.98 and 9.18                 – 
             MidCap Division  3.29 and 31.58                 – 
             MidCap Growth Division  10.29 and 11.26                 – 
             MidCap Value Division  13.90 and 20.66                 – 
             Money Market Division  1.46 and 13.16                 – 
             Real Estate Securities Division  23.57                 – 
             SmallCap Division  11.39 and 14.25                 – 
             SmallCap Growth Division  9.49                 – 
             SmallCap Value Division  21.14                 – 

     

    132

      Report of Independent Registered Public Accounting Firm

    The Board of Directors and Stockholder
    Principal Life Insurance Company

         We have audited the accompanying consolidated statements of financial position of Principal Life Insurance Company (“the Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

         We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Principal Life Insurance Company at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

         As discussed in Note 1 to the consolidated financial statements, in response to new accounting standards, the Company changed its methods of accounting for its pension and other post-retirement benefits effective December 31, 2006 and January 1, 2008, and for the treatment of modifications or exchanges of insurance contracts and income tax contingencies effective January 1, 2007.

      /s/ Ernst & Young LLP

    Des Moines, Iowa
    March 13, 2009

     

     

     

     

     

     

     

     

     

     

    3

    Principal Life Insurance Company
    Consolidated Statements of Financial Position
     
      December 31, 
               2008           2007 
                           (in millions) 
    Assets     
    Fixed maturities, available-for-sale  $ 38,064.0  $ 44,236.7 
    Fixed maturities, trading  752.1  302.1 
    Equity securities, available-for-sale  234.2  309.7 
    Equity securities, trading  125.7  223.9 
    Mortgage loans  12,633.8  12,101.0 
    Real estate  915.2  859.6 
    Policy loans  881.4  853.7 
    Other investments  2,081.8  1,335.1 
       Total investments  55,688.2  60,221.8 
    Cash and cash equivalents  2,536.7  1,447.3 
    Accrued investment income  744.0  766.3 
    Premiums due and other receivables  938.2  866.0 
    Deferred policy acquisition costs  3,970.1  2,626.7 
    Property and equipment  494.0  435.4 
    Goodwill  258.2  244.0 
    Other intangibles  187.7  190.0 
    Separate account assets  51,069.2  75,743.3 
    Other assets  3,237.3  1,610.0 
       Total assets  $ 119,123.6  $ 144,150.8 
     
    Liabilities     
    Contractholder funds  $ 43,046.4  $ 40,267.5 
    Future policy benefits and claims  15,974.2  15,622.9 
    Other policyholder funds  518.5  526.6 
    Short-term debt  291.1  344.5 
    Long-term debt  121.2  186.9 
    Income taxes currently payable  4.1  5.6 
    Deferred income taxes  4.2  386.3 
    Separate account liabilities  51,069.2  75,743.3 
    Other liabilities  6,044.7  4,590.5 
       Total liabilities  117,073.6  137,674.1 
    Stockholder’s equity     
    Common stock, par value $1 per share — 5.0 million shares authorized, 2.5 million shares     
       issued and outstanding (wholly owned indirectly by Principal Financial Group, Inc.)  2.5  2.5 
    Additional paid-in capital  5,626.6  5,595.9 
    Retained earnings  1,158.5  760.8 
    Accumulated other comprehensive income (loss)  (4,737.6)  117.5 
       Total stockholder’s equity  2,050.0  6,476.7 
       Total liabilities and stockholder’s equity  $ 119,123.6  $ 144,150.8 
     
    See accompanying notes.     

    4

    Principal Life Insurance Company
    Consolidated Statements of Operations
     
               For the year ended December 31, 
             2008         2007         2006 
        (in millions)   
    Revenues       
    Premiums and other considerations  $ 4,005.1  $ 4,387.7  $ 4,066.2 
    Fees and other revenues  1,849.5  1,996.8  1,634.3 
    Net investment income  3,472.0  3,552.5  3,352.8 
    Net realized capital gains (losses)  (622.6)  (348.4)  30.4 
       Total revenues  8,704.0  9,588.6  9,083.7 
    Expenses       
    Benefits, claims and settlement expenses  5,634.0  5,908.6  5,293.3 
    Dividends to policyholders  267.3  293.8  290.7 
    Operating expenses  2,355.3  2,464.1  2,231.0 
       Total expenses  8,256.6  8,666.5  7,815.0 
    Income from continuing operations before income taxes  447.4  922.1  1,268.7 
    Income taxes  44.3  201.2  320.0 
    Income from continuing operations, net of related income taxes  403.1  720.9  948.7 
    Income from discontinued operations, net of related income taxes        — 20.2  28.9 
    Net income  $ 403.1  $ 741.1  $ 977.6 
     
    See accompanying notes.       

     

     

     

     

     

     

     

     

     

     


     

    5

    Principal Life Insurance Company      
    Consolidated Statements of Stockholder’s Equity       
     
            Accumulated   
        Additional    other  Total 
      Common  paid-in  Retained  comprehensive  stockholder’s 
      stock  capital  earnings  income (loss)  equity 
                   (in millions)     
    Balances at January 1, 2006  $ 2.5  $ 5,354.8  $ 870.4  $ 854.9  $ 7,082.6
    Capital contributions  —       93.8  —   —  93.8
    Capital transactions of equity method investee, net of related             
       income taxes  —  1.7 —   — 1.7
    Stock-based compensation and additional related tax benefits  —  65.0 (0.9)   — 64.1
    Dividends to parent  —  — (1,176.2)   — (1,176.2)
    Transition adjustment related to post-retirement benefit             
       obligations, net of related income taxes  —  — —   23.3 23.3
    Comprehensive income:             
       Net income  —  — 977.6    — 977.6
       Net unrealized losses, net  —   — —   (269.9) (269.9)
       Foreign currency translation adjustment, net of related             
           income taxes  —  — —   1.6 1.6
       Minimum pension liability, net of related income taxes  —  — —   2.7 2.7
    Comprehensive income            712.0
    Balances at December 31, 2006             2.5  5,515.3 670.9   612.6 6,801.3
    Capital contributions  —  13.9 —   — 13.9
    Capital transactions of equity method investee, net of related             
       income taxes  —  1.1 —   — 1.1
    Stock-based compensation and additional related tax benefits  —  65.6 (1.2)   — 64.4
    Dividends to parent  —  — (650.0)   — (650.0)
    Comprehensive income:             
       Net income  —  — 741.1   — 741.1
       Net unrealized losses, net  —  — —   (550.8) (550.8)
       Foreign currency translation adjustment, net of related             
           income taxes  —  — —   3.0 3.0
       Unrecognized post-retirement benefit obligation, net of             
           related income taxes  —  — —   52.7 52.7
    Comprehensive income            246.0
    Balances at December 31, 2007  2.5  5,595.9 760.8   117.5 6,476.7
    Return of capital to parent  —  (5.2) —   — (5.2)
    Capital transactions of equity method investee, net of related             
       income taxes  —                0.6 —   — 0.6
    Stock-based compensation and additional related tax benefits  —     35.3 (0.8)   — 34.5
    Dividends to parent  —  — (5.5)   — (5.5)
    Effects of changing post-retirement benefit plan             
       measurement date, net of related income taxes  —  — 0.9   (2.0) (1.1)
    Comprehensive loss:             
       Net income  —  — 403.1   — 403.1
       Net unrealized losses, net  —  — —   (4,205.1) (4,205.1)
       Foreign currency translation adjustment, net of related             
           income taxes  —  — —   (15.5) (15.5)
       Unrecognized post-retirement benefit obligation, net of             
           related income taxes  —  — —   (632.5) (632.5)
    Comprehensive loss            (4,450.0)
    Balances at December 31, 2008  $ 2.5  $ 5,626.6 $ 1,158.5  $ (4,737.6) $ 2,050.0

    See accompanying notes.

    6

    Principal Life Insurance Company
    Consolidated Statements of Cash Flows
     
                 For the year ended December 31, 
        2008  2007             2006 
          (in millions)   
    Operating activities         
    Net income  $ 403.1  $ 741.1  $ 977.6 
    Adjustments to reconcile net income to net cash provided by operating         
       activities:         
       Income from discontinued operations, net of related income taxes           —  (20.2)  (28.9) 
       Amortization of deferred policy acquisition costs    375.1  351.4  236.8 
       Additions to deferred policy acquisition costs    (637.8)  (568.7)  (445.8) 
       Accrued investment income    22.3  (52.6)  (46.4) 
       Net cash flows for trading securities    (457.9)  (180.7)  (93.0) 
       Premiums due and other receivables    (74.9)  (136.6)  (98.7) 
       Contractholder and policyholder liabilities and dividends    2,010.4  1,912.4  1,692.9 
       Current and deferred income taxes    (194.3)  (105.8)  125.0 
       Net realized capital (gains) losses    622.6  348.4  (30.4) 
       Depreciation and amortization expense    91.4  88.8  79.3 
       Mortgage loans held for sale, acquired or originated    (36.8)  (27.2)  (382.6) 
       Mortgage loans held for sale, sold or repaid, net of gain    18.1  104.2  719.7 
       Real estate acquired through operating activities    (77.5)  (48.2)  (82.3) 
       Real estate sold through operating activities    24.5  43.7  91.4 
       Stock-based compensation    23.2  59.7  63.8 
       Other    (67.5)  (86.0)  (272.6) 
    Net adjustments    1,640.9  1,682.6  1,528.2 
    Net cash provided by operating activities    2,044.0  2,423.7  2,505.8 
    Investing activities         
    Available-for-sale securities:         
       Purchases    (6,179.9)  (10,223.8)  (7,399.7) 
       Sales    1,087.1  2,858.5  1,094.0 
       Maturities    3,039.4  4,278.2  3,453.5 
    Mortgage loans acquired or originated    (3,395.7)  (3,043.8)  (2,501.0) 
    Mortgage loans sold or repaid    2,791.1  1,996.5  2,002.0 
    Real estate acquired    (33.3)  (115.2)  (26.6) 
    Real estate sold    68.7  50.8  211.1 
    Net purchases of property and equipment    (104.1)  (74.5)  (39.5) 
    Sales (purchases) of interest in subsidiaries, net of cash acquired    18.0  (7.0)  (37.2) 
    Net change in other investments    (31.5)  16.3  99.2 
    Net cash used in investing activities  $ (2,740.2)  $ (4,264.0)  $ (3,144.2) 

     

     

     

     

     

    7

    Principal Life Insurance Company
    Consolidated Statements of Cash Flows — (continued)
     
               For the year ended December 31, 
        2008  2007  2006 
        (in millions)
    Financing activities         
    Proceeds from financing element derivatives  $ 142.2  $ 128.7  $ 132.1 
    Payments for financing element derivatives    (114.6)  (137.2)  (141.0) 
    Excess tax benefits from share-based payment arrangements    2.7  9.6  8.4 
    Dividends to parent    (5.5)  (650.0)  (1,176.2) 
    Capital contribution (return of capital) from (to) parent    (5.2)  13.9  (5.8) 
    Issuance of long-term debt    0.1  0.2  1.0 
    Principal repayments of long-term debt    (65.8)  (69.4)  (15.4) 
    Net repayments of short-term borrowings    (71.3)  (67.7)  (306.9) 
    Investment contract deposits    11,349.0  9,958.9  8,925.7 
    Investment contract withdrawals    (9,813.7)  (8,209.9)  (6,859.4) 
    Net increase in banking operation deposits    373.1  417.1  258.9 
    Other    (5.4)  (5.3)  — 
    Net cash provided by financing activities    1,785.6  1,388.9  821.4 
    Discontinued operations         
    Net cash provided by operating activities    —  2.5  6.9 
    Net cash used in investing activities    —  (1.3)  (8.4) 
    Net cash used in financing activities    —  (0.5)  (0.6) 
    Net cash provided by (used in) discontinued operations    —  0.7  (2.1) 
    Net increase (decrease) in cash and cash equivalents    1,089.4  (450.7)  180.9 
    Cash and cash equivalents at beginning of year    1,447.3  1,898.0  1,717.1 
    Cash and cash equivalents at end of year  $ 2,536.7  $ 1,447.3  $ 1,898.0 
     
    Cash and cash equivalents of discontinued operations included above         
    At beginning of year  $ —  $ (0.7)  $ 1.4 
    At end of year  $ —  $ —  $ (0.7) 
     
    Supplemental Information:         
    Cash paid for interest  $ 15.2  $ 20.7  $ 28.3 
    Cash paid for income taxes  $ 227.5  $ 246.4  $ 177.3 
     
    See accompanying notes.         

     

     

     

     

     

     

     

     

     

    8

    Principal Life Insurance Company 
    Notes to Consolidated Financial Statements 
    December 31, 2008

    1. Nature of Operations and Significant Accounting Policies

    Description of Business

         Principal Life Insurance Company along with its consolidated subsidiaries is a diversified financial services organization engaged in promoting retirement savings and investment and insurance products and services in the U.S. We are a direct wholly owned subsidiary of Principal Financial Services, Inc. (“PFSI”), which in turn is a direct wholly owned subsidiary of Principal Financial Group, Inc. (“PFG”).

    Basis of Presentation

         The accompanying consolidated financial statements, which include our majority-owned subsidiaries and consolidated variable interest entities (“VIEs”), have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Less than majority-owned entities in which we have at least a 20% interest and limited liability companies (“LLCs”), partnerships and real estate joint ventures in which we have at least a 5% interest, are reported on the equity basis in the consolidated statements of financial position as other investments. Investments in LLCs, partnerships and real estate joint ventures in which we have an ownership percentage of 3% to 5% are accounted for under the equity or cost method depending upon the specific facts and circumstances of our ownership and involvement. All significant intercompany accounts and transactions have been eliminated. Information included in the notes to the financial statements excludes information applicable to less than majority-owned entities reported on the equity and cost methods, unless otherwise noted.

    Closed Block

         We operate a closed block (“Closed Block”) for the benefit of individual participating dividend-paying policies in force at the time of the 1998 mutual insurance holding company (“MIHC”) formation. See Note 9, Closed Block, for further details.

    Recent Accounting Pronouncements

         On January 12, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (“FSP EITF 99-20-1”). This FSP amends EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, by eliminating the requirement that a holder’s best estimate of cash flows be based upon those that a market participant would use. Instead, FSP EITF 99-20-1 eliminates the use of market participant assumptions and requires the use of management’s judgment in the determination of whether it is probable there has been an adverse change in estimated cash flow. This FSP was effective for reporting periods ending after December 15, 2008, and did not have a material impact on our consolidated financial statements.

         On December 11, 2008, the FASB issued FSP FAS 140-4 and FASB Interpretation (“FIN”) 46(R)-8, Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities (“FSP FAS 140-4 and FIN 46(R)-8”). This FSP requires additional disclosures by public entities with continuing involvement in transfers of financial assets to special purpose entities and with variable interests in VIEs. FSP FAS 140-4 and FIN 46(R)-8 was effective for reporting periods ending after December 15, 2008. We have included the required disclosures in our consolidated financial statements for the year ended December 31, 2008. See Note 5, Variable Interest Entities, and Note 7, Securitization Transactions, for further details.

         On September 12, 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 (1) amends Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument; (2) amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee and (3) clarifies the FASB’s intent about the effective date of SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No.

    133 (“SFAS 161”). FSP FAS 133-1 and FIN 45-4 is effective for reporting periods ending after November 15, 2008. We have included the required disclosures in our consolidated financial statements for the year ended December 31, 2008. See Note 8, Derivative Financial Instruments, for further details relating to our credit derivatives.

    9

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

         On March 19, 2008, the FASB issued SFAS 161. This statement requires (1) qualitative disclosures about objectives and strategies for using derivatives, (2) quantitative disclosures about fair value amounts of gains and losses on derivative instruments and related hedged items and (3) disclosures about credit-risk-related contingent features in derivative instruments. The disclosures are intended to provide users of financial statements with an enhanced understanding of how and why derivative instruments are used, how they are accounted for and the financial statement impacts. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We plan to make the required disclosures in our consolidated financial statements beginning in first quarter 2009.

         On December 4, 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). Among the changes, the standard requires that the acquiring entity in a business combination establish the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including any noncontrolling interests, and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. In addition, SFAS 141(R) requires direct acquisition costs to be expensed. This statement is effective for the first annual reporting period beginning on or after December 15, 2008. All requirements of SFAS 141(R) should be applied prospectively.

         Also on December 4, 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an Amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). Under this statement, noncontrolling interests are to be treated as a separate component of equity, rather than as a liability or other items outside of equity. In addition, SFAS 160 changes the way the consolidated income statement is presented. Net income will include the total income of all consolidated subsidiaries, with separate disclosures on the face of the income statement of the income attributable to controlling and noncontrolling interests. Previously, net income attributable to the noncontrolling interest was reported as an operating expense in arriving at consolidated net income. Finally, SFAS 160 revises the accounting requirements for changes in a parent’s ownership interest while the parent retains control and for changes in a parent’s ownership interest that results in deconsolidation. This statement is effective for the first annual reporting period beginning on or after December 15, 2008. Presentation and disclosure requirements should be applied retrospectively for all periods presented. All other requirements of SFAS 160 should be applied prospectively. Certain separate account arrangements involve ownership of mutual funds to support the investment objective of the separate account. It is possible that, through a separate account arrangement, greater than 50% of the mutual fund shares could be owned. The accounting guidance for this circumstance is not well defined, but we, like many other insurers, do not consolidate the mutual fund as we believe the arrangement qualifies for the exemption afforded investment companies. In January, the FASB asked the EITF to consider a topic entitled “Consideration of an Insurer's Accounting for Majority Owned Investments When the Ownership is through a Separate Account.” It is anticipated that the EITF will consider the issue in 2009. It is not possible to predict the outcome of the deliberations with any certainty; however, one outcome could be the recognition of the portion of the mutual fund not held via the separate account arrangement as a non-controlling interest in equity. The value of non-controlling interest is dependent on the daily changes to mutual fund share ownership levels. Therefore, we are still evaluating the impact this guidance will have on our consolidated financial statements.

         On June 11, 2007, the American Institute of Certified Public Accountants (the “AICPA”) issued Statement of Position (“SOP”) 07-1, Clarification of the Scope of the Audit and Accounting Guide “Investment Companies” and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (“SOP 07-1”). This SOP provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide for Investment Companies (the “Guide”). This SOP also addresses whether the specialized industry accounting principles of the Guide should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company and applies the equity method of accounting to its investment in the entity. In addition, this SOP includes certain disclosure requirements for parent companies and equity method investors in investment companies that retain investment company accounting in the parent company’s consolidated financial statements or the financial statements of an equity method investor. The provisions of this SOP were effective for fiscal years beginning on or after December 15, 2007. However, on February 14, 2008, the FASB issued FSP SOP 07-1-1, Effective Date of AICPA Statement of Position 07-1, to indefinitely defer the effective date of SOP 07-1.

    10

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

         On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be reported at fair value. Unrealized gains and losses on items for which the fair value option is elected shall be reported in net income. The decision about whether to elect the fair value option (1) is applied instrument by instrument, with certain exceptions (2) is irrevocable and (3) is applied to an entire instrument and not only to specified risks, specific cash flows, or portions of that instrument. SFAS 159 also requires additional disclosures that are intended to facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities and between assets and liabilities in the financial statements of an entity that selects different measurement attributes for similar assets and liabilities. At the effective date, the fair value option may be elected for eligible items that exist at that date and the effect of the first remeasurement to fair value for those items should be reported as a cumulative effect adjustment to retained earnings. We adopted SFAS 159 on January 1, 2008, and which no impact on our consolidated financial statements. Election of this option upon acquisition or assumption of eligible items could introduce period to period volatility in net income.

         On September 29, 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R (“SFAS 158”). The requirement to recognize the funded status of a defined benefit postretirement plan and the disclosure requirements were effective for fiscal years ending after December 15, 2006, and did not have a material impact on our consolidated financial statements. Effective for fiscal years ending after December 15, 2008, SFAS 158 also eliminates the ability to choose a measurement date by requiring that plan assets and benefit obligations be measured as of the annual balance sheet date. For 2007, we used a measurement date of October 1 for the measurement of plan assets and benefit obligations. Two transition methods were available when implementing the change in measurement date for 2008. We chose the alternative that allowed us to use the October 1, 2007, measurement date as a basis for determining the 2008 expense and transition adjustment. The effect of changing the measurement date resulted in a $0.9 million increase to retained earnings and a $2.0 million decrease to accumulated other comprehensive income in the first quarter of 2008.

         On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). This standard, which provides guidance for using fair value to measure assets and liabilities, applies whenever other standards require or permit assets or liabilities to be measured at fair value, but does not expand the use of fair value measurement. SFAS 157 establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, and requires fair value measurements to be separately disclosed by level within the hierarchy. On February 12, 2008, the FASB issued FSP FAS 157-2, Effective Date of Statement No. 157 (“FSP FAS 157-2”) to defer the effective date of the standard for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis. On February 14, 2008, the FASB issued FSP FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13, which amends SFAS 157 to exclude instruments covered by SFAS No. 13, Accounting for Leases, and its related interpretive guidance from the scope of SFAS 157. On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not Active (“FSP FAS 157-3”), which clarifies the application of SFAS 157 in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive. Our adoption of SFAS 157 on January 1, 2008, for assets and liabilities measured at fair value on a recurring basis and financial assets and liabilities measured at fair value on a nonrecurring basis did not have a material impact on our consolidated financial statements. We are deferring the adoption of SFAS 157 for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis until January 1, 2009, in accordance with FSP FAS 157-2. We do not anticipate this guidance will have a material impact on our consolidated financial statements. FSP FAS 157-3 was effective upon issuance and did not have a material impact on our consolidated financial statements. See Note 17, Fair Value of Financial Instruments, for further details.

    11

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

         The staff of the United States Securities and Exchange Commission (“SEC”) published Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), on September 13, 2006. SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. Under SAB 108, registrants are required to quantify the effects on the current year financial statements of correcting all misstatements, including both the carryover and reversing effects of uncorrected prior year misstatements. After considering all relevant quantitative and qualitative factors, if a misstatement is material, a registrant's prior year financial statements must be restated. SAB 108 was effective for fiscal years ending after November 15, 2006, and did not have a material impact on our consolidated financial statements.

         On July 13, 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48, which is an interpretation of SFAS No. 109, Accounting for Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 requires the affirmative evaluation that it is more likely than not, based on the technical merits of a tax position, that an enterprise is entitled to economic benefits resulting from positions taken in income tax returns. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. FIN 48 also requires companies to disclose additional quantitative and qualitative information in their financial statements about uncertain tax positions. We adopted FIN 48 on January 1, 2007, which did not have a material impact on our consolidated financial statements. See Note 13, Income Taxes, for further details.

         On March 17, 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (“SFAS 156”), which amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

    (“SFAS 140”). This statement (1) requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in specified situations, (2) requires all separately recognized servicing assets and liabilities to be initially measured at fair value, (3) for subsequent measurement of each class of separately recognized servicing assets and liabilities, an entity can elect either the amortization or fair value measurement method, (4) permits a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, without calling into question the treatment of other available-for-sale securities, provided the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value, and (5) requires separate presentation of servicing assets and liabilities measured at fair value in the statement of financial position and also requires additional disclosures. The initial measurement requirements of this statement should be applied prospectively to all transactions entered into after the fiscal year beginning after September 15, 2006. The election related to the subsequent measurement of servicing assets and liabilities was also effective the first fiscal year beginning after September 15, 2006. We adopted SFAS 156 effective January 1, 2007, and did not elect to subsequently measure any of our servicing rights at fair value or reclassify any available-for-sale securities to trading.

         On February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (“SFAS 155”), which amends SFAS 133 and SFAS 140. SFAS 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement was effective for all financial instruments acquired or issued after the beginning of an entity's fiscal year that begins after September 15, 2006. At adoption, the fair value election could also be applied to hybrid financial instruments that had been bifurcated under SFAS 133 prior to adoption of this statement. We adopted SFAS 155 on January 1, 2007, and did not apply the fair value election to any existing hybrid financial instruments that had been bifurcated under SFAS 133 prior to adoption of SFAS 155.

    12

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

         On September 19, 2005, the AICPA issued SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts ("SOP 05-1"). AICPA defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. An internal replacement that is determined to result in a replacement contract that is substantially unchanged from the replaced contract should be accounted for as a continuation of the replaced contract. Contract modifications resulting in a replacement contract that is substantially changed from the replaced contract should be accounted for as an extinguishment of the replaced contract and any unamortized deferred policy acquisition costs (“DPAC”), unearned revenue liabilities, and deferred sales inducement costs from the replaced contract should be written off and acquisition costs on the new contracts deferred as appropriate. This SOP was effective for internal replacements occurring in fiscal years beginning after December 15, 2006. As of January 1, 2007, we adopted SOP 05-1, which did not have a material impact on our consolidated financial statements.

         On May 30, 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of Accounting Principles Board Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"), which changes the requirements for the accounting and reporting of a change in accounting principle. Under SFAS 154, a change in accounting principle should be retrospectively applied to all prior periods, unless it is impracticable to do so. This retrospective application replaces the requirement of Accounting Principles Board ("APB") Opinion No. 20, Accounting Changes ("APB 20"), to recognize changes in accounting principle by including the cumulative effect of the change in net income during the current period. SFAS 154 applies to all voluntary changes in accounting principles where we are changing to a more preferable accounting method, as well as to changes required by an accounting pronouncement that does not contain specific transition provisions. SFAS 154 carries forward without change the guidance contained in APB 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 was effective for accounting changes on or after January 1, 2006.

         On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R requires all share-based payments to employees to be recognized at fair value in the financial statements. SFAS 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure — an Amendment of FASB Statement No. 123, and amends SFAS No. 95, Statement of Cash Flows. On April 14, 2005, the SEC approved a new rule delaying the effective date of SFAS 123R to annual periods that begin after June 15, 2005. Accordingly, PFG adopted SFAS 123R effective January 1, 2006, using the modified-prospective method.

         The provisions of our stock awards allow approved retirees to retain all or a portion of their awards if they retire prior to the end of the required service period. SFAS 123R considers this to be a nonsubstantive service condition. Accordingly, it is appropriate to recognize compensation cost either immediately for stock awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if retirement eligibility is expected to occur during the nominal vesting period. Prior to PFG adopting SFAS 123R, our approach was to follow the widespread practice of recognizing compensation cost over the explicit service period (up to the date of actual retirement). For any awards that are granted after PFG’s adoption of SFAS 123R on January 1, 2006, we recognize compensation cost through the period that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. If we had applied the nonsubstantive vesting provisions of SFAS 123R to awards granted prior to January 1, 2006, our consolidated financial statements would not have been materially impacted.

         SFAS 123R requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow. This requirement reduces net operating cash flows and increases net financing cash flows in periods after the effective date.

         Under the modified-prospective method, any excess income tax deduction realized for awards accounted for under SFAS 123R (regardless of the type of award or the jurisdiction in which the tax benefit is generated) is eligible to absorb write-offs of deferred income tax assets for any awards accounted for under SFAS 123R. SFAS 123R does not require separate pools of excess income tax benefits for separate types of awards, rather the excess income tax benefits of employee and nonemployee awards may be combined in a single pool of excess tax benefits. Our policy is to pool the employee and nonemployee awards together in this manner. Deferred income tax asset write-offs resulting from deficient deductions on employee awards may be offset against previous excess income tax benefits arising from nonemployee awards, and vice versa.

    13

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

         This Statement did not have a material impact on our consolidated financial statements as we began expensing our pro-rata share of PFG’s stock options using a fair-value based method effective for the year beginning January 1, 2002. In addition, any stock options granted prior to January 1, 2002, were fully vested at the time of adoption of SFAS 123R. We use the Black-Scholes formula to estimate the value of stock options granted to employees. We applied the prospective method of transition as prescribed by SFAS 123 when PFG elected to begin expensing stock-based compensation in 2002. The cumulative effect of the change in accounting principle as a result of adopting SFAS 123R was immaterial. Therefore, the pre-tax cumulative effect of the change in accounting principle is reflected in operating expenses. See Note 20, Stock-Based Compensation Plans, for further details.

    Use of Estimates in the Preparation of Financial Statements

         The preparation of our consolidated financial statements and accompanying notes requires management to make estimates and assumptions that affect the amounts reported and disclosed. These estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed in the consolidated financial statements and accompanying notes. The most critical estimates include those used in determining:

    • the fair value of investments in the absence of quoted market values;
    • investment impairments;
    • the fair value of and accounting for derivatives;
    • the liability for contractholder funds and future policy benefits and claims;
    • the capitalization and amortization of DPAC;
    • the value of our pension and other postretirement benefit obligations;
    • accounting for income taxes and the valuation of deferred tax assets; and
    • the measurement of goodwill, indefinite lived intangible assets, finite lived intangible assets and related impairments, if any.

         A description of such critical estimates is incorporated within the discussion of the related accounting policies which follow. In applying these policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries; others are specific to our businesses and operations. Actual results could differ from these estimates.

    Cash and Cash Equivalents

         Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity date of three months or less when purchased.

    Investments

         Fixed maturity securities include bonds, mortgage-backed securities, redeemable preferred stock and certain nonredeemable preferred stock. Equity securities include mutual funds, common stock and nonredeemable preferred stock. We classify fixed maturity securities and equity securities as either available-for-sale or trading at the time of the purchase and, accordingly, carry them at fair value. See Note 17, Fair Value of Financial Instruments, for policies related to the determination of fair value. Unrealized gains and losses related to available-for-sale securities, excluding those in fair value hedging relationships, are reflected in stockholder’s equity, net of adjustments related to DPAC, sales inducements, unearned revenue reserves, derivatives in cash flow hedge relationships and applicable income taxes. Unrealized gains and losses related to trading securities and available-for-sale securities in fair value hedging relationships are reflected in net income as net realized capital gains (losses).

         The cost of fixed maturity securities is adjusted for amortization of premiums and accrual of discounts, both computed using the interest method. The cost of fixed maturity securities and equity securities is adjusted for declines in value that are other than temporary. Impairments in value deemed to be other than temporary are reported in net income as a component of net realized capital gains (losses). For loan-backed and structured securities, we recognize income using a constant effective yield based on currently anticipated prepayments using a tool that models the prepayment behavior of the underlying collateral based on the current interest rate environment.

    14

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

         Real estate investments are reported at cost less accumulated depreciation. The initial cost bases of properties acquired through loan foreclosures are the lower of the fair market values of the properties at the time of foreclosure or the outstanding loan balance. Buildings and land improvements are generally depreciated on the straight-line method over the estimated useful life of improvements, and tenant improvement costs are depreciated on the straight-line method over the term of the related lease. We recognize impairment losses for properties when indicators of impairment are present and a property's expected undiscounted cash flows are not sufficient to recover the property's carrying value. In such cases, the cost bases of the properties are reduced to fair value. Real estate expected to be disposed is carried at the lower of cost or fair value, less cost to sell, with valuation allowances established accordingly and depreciation no longer recognized. The carrying amount of real estate held for sale was $135.4 million and $82.4 million as of December 31, 2008 and 2007, respectively. Any impairment losses and any changes in valuation allowances are reported in net income.

         Commercial and residential mortgage loans are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method, net of valuation allowances, and direct write-downs for impairment. Any changes in the valuation allowances are reported in net income as net realized capital gains (losses). We measure impairment based upon the present value of expected cash flows discounted at the loan's effective interest rate or the loan's observable market price. If foreclosure is probable, the measurement of any valuation allowance is based upon the fair value of the collateral. We have commercial mortgage loans held for sale in the amount of $16.7 million and $2.9 million at December 31, 2008 and 2007, respectively, which are carried at lower of cost or fair value, less cost to sell, and reported as mortgage loans in the consolidated statements of financial position.

         Net realized capital gains and losses on sales of investments are determined on the basis of specific identification. In general, in addition to realized capital gains and losses on investment sales and periodic settlements on derivatives not designated as hedges, gains and losses related to other than temporary impairments, trading securities, certain seed money investments, fair value hedge ineffectiveness, mark-to-market adjustments on derivatives not designated as hedges, changes in the mortgage loan valuation allowance and impairments of real estate held for investment are reported as net realized capital gains (losses). Investment gains and losses on sales of certain real estate held for sale, which do not meet the criteria for classification as a discontinued operation, are reported as net investment income and are excluded from net realized capital gains (losses).

    Policy loans and other investments, excluding investments in unconsolidated entities, are primarily reported at cost.

    Securitizations

         Previously, we, along with other contributors, sold commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as qualifying special purpose entities (“QSPEs”), we recognize the gain on the sale of the loans to the trust and the trusts are not required to be consolidated. There is significant judgment used to determine whether a trust is a QSPE. To maintain QSPE status, the trust must continue to meet the QSPE criteria both initially and in subsequent periods. We analyze the governing pooling and servicing agreements for each of our securitizations and believe that the terms are industry standard and are consistent with the QSPE criteria. If at any time we determine a trust no longer qualifies as a QSPE, each trust would need to be reviewed to determine if there is a need to recognize the commercial mortgage loan asset in the consolidated statements of financial position along with the offsetting liability. See Note 7, Securitization Transactions, for further details.

    Derivatives

         Overview. Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices or the values of securities. Derivatives generally used by us include interest rate swaps, swaptions, futures, currency swaps, currency forwards, credit default swaps, commodity swaps and options. Derivatives may be exchange traded or contracted in the over-the-counter market. Derivative positions are either assets or liabilities in the consolidated statements of financial position and are measured at fair value, generally by obtaining quoted market prices or through the use of pricing models. Fair values can be affected by changes in interest rates, foreign exchange rates, financial indices, values of securities, credit spreads, and market volatility and liquidity.

    15

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

    Accounting and Financial Statement Presentation. We designate derivatives as either:

    (a)      a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, including those denominated in a foreign currency (“fair value hedge”);
    (b)      a hedge of a forecasted transaction or the exposure to variability of cash flows to be received or paid related to a recognized asset or liability, including those denominated in a foreign currency (“cash flow hedge”); or
    (c)      a derivative not designated as a hedging instrument.

         Our accounting for the ongoing changes in fair value of a derivative depends on the intended use of the derivative and the designation, as described above, and is determined when the derivative contract is entered into or at the time of redesignation under SFAS 133. Hedge accounting is used for derivatives that are specifically designated in advance as hedges and that reduce our exposure to an indicated risk by having a high correlation between changes in the value of the derivatives and the items being hedged at both the inception of the hedge and throughout the hedge period.

         Fair Value Hedges. When a derivative is designated as a fair value hedge and is determined to be highly effective, changes in its fair value, along with changes in the fair value of the hedged asset, liability or firm commitment attributable to the hedged risk, are reported in net realized capital gains (losses). Any difference between the net change in fair value of the derivative and the hedged item represents hedge ineffectiveness.

         Cash Flow Hedges. When a derivative is designated as a cash flow hedge and is determined to be highly effective, changes in its fair value are recorded as a component of other comprehensive income. Any hedge ineffectiveness is recorded immediately in net income. At the time the variability of cash flows being hedged impacts net income, the related portion of deferred gains or losses on the derivative instrument is reclassified and reported in net income.

         Non-Hedge Derivatives. If a derivative does not qualify or is not designated for hedge accounting, all changes in fair value are reported in net income without considering the changes in the fair value of the economically associated assets or liabilities.

         Hedge Documentation and Effectiveness Testing. At inception, we formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. This process includes associating all derivatives designated as fair value or cash flow hedges with specific assets or liabilities on the statement of financial position or with specific firm commitments or forecasted transactions. Effectiveness of the hedge is formally assessed at inception and throughout the life of the hedging relationship. Even if a derivative is highly effective and qualifies for hedge accounting treatment, the hedge might have some ineffectiveness.

         We use qualitative and quantitative methods to assess hedge effectiveness. Qualitative methods may include monitoring changes to terms and conditions and counterparty credit ratings. Quantitative methods may include statistical tests including regression analysis and minimum variance and dollar offset techniques.

         Termination of Hedge Accounting. We prospectively discontinue hedge accounting when (1) the criteria to qualify for hedge accounting is no longer met, e.g., a derivative is determined to no longer be highly effective in offsetting the change in fair value or cash flows of a hedged item; (2) the derivative expires, is sold, terminated or exercised; or (3) we remove the designation of the derivative being the hedging instrument for a fair value or cash flow hedge.

         If it is determined that a derivative no longer qualifies as an effective hedge, the derivative will continue to be carried on the consolidated statements of financial position at its fair value, with changes in fair value recognized prospectively in net realized capital gains (losses). The asset or liability under a fair value hedge will no longer be adjusted for changes in fair value pursuant to hedging rules and the existing basis adjustment is amortized to the consolidated statements of operations line associated with the asset or liability. The component of other comprehensive income related to discontinued cash flow hedges that are no longer highly effective is amortized to the consolidated statements of operations consistent with the net income impacts of the original hedged cash flows. If a cash flow hedge is discontinued because a hedged forecasted transaction is no longer probable, the deferred gain or loss is immediately reclassified from other comprehensive income into net income.

    16

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

         Embedded Derivatives. We purchase and issue certain financial instruments and products that contain a derivative that is embedded in the financial instrument or product. We assess whether this embedded derivative is clearly and closely related to the asset or liability that serves as its host contract. If we deem that the embedded derivative's terms are not clearly and closely related to the host contract, and a separate instrument with the same terms would qualify as a derivative instrument, the derivative is bifurcated from that contract and held at fair value on the consolidated statements of financial position, with changes in fair value reported in net income.

    Contractholder and Policyholder Liabilities

         Contractholder and policyholder liabilities (contractholder funds, future policy benefits and claims and other policyholder funds) include reserves for investment contracts and reserves for universal life, term life insurance, participating traditional individual life insurance, group life insurance, accident and health insurance and disability income policies, as well as a provision for dividends on participating policies.

         Investment contracts are contractholders' funds on deposit with us and generally include reserves for pension and annuity contracts. Reserves on investment contracts are equal to the cumulative deposits less any applicable charges and withdrawals plus credited interest. Reserves for universal life insurance contracts are equal to cumulative deposits less charges plus credited interest, which represents the account balances that accrue to the benefit of the policyholders.

         We hold additional reserves on certain long duration contracts where benefit features result in gains in early years followed by losses in later years, universal life/variable universal life contracts that contain no lapse guarantee features, or annuities with guaranteed minimum death benefits.

         Reserves for nonparticipating term life insurance and disability income contracts are computed on a basis of assumed investment yield, mortality, morbidity and expenses, including a provision for adverse deviation, which generally varies by plan, year of issue and policy duration. Investment yield is based on our experience. Mortality, morbidity and withdrawal rate assumptions are based on our experience and are periodically reviewed against both industry standards and experience.

         Reserves for participating life insurance contracts are based on the net level premium reserve for death and endowment policy benefits. This net level premium reserve is calculated based on dividend fund interest rates and mortality rates guaranteed in calculating the cash surrender values described in the contract.

         Participating business represented approximately 17%, 18% and 20% of our life insurance in force and 57%, 59% and 61% of the number of life insurance policies in force at December 31, 2008, 2007 and 2006, respectively. Participating business represented approximately 68%, 68% and 71% of life insurance premiums for the years ended December 31, 2008, 2007 and 2006, respectively. The amount of dividends to policyholders is declared annually by our Board of Directors. The amount of dividends to be paid to policyholders is determined after consideration of several factors including interest, mortality, morbidity and other expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by us. At the end of the reporting period, we establish a dividend liability for the pro rata portion of the dividends expected to be paid on or before the next policy anniversary date.

         Some of our policies and contracts require payment of fees in advance for services that will be rendered over the estimated lives of the policies and contracts. These payments are established as unearned revenue reserves upon receipt and included in other policyholder funds in the consolidated statements of financial position. These unearned revenue reserves are amortized to operations over the estimated lives of these policies and contracts in relation to the emergence of estimated gross profit margins.

         The liability for unpaid accident and health claims is an estimate of the ultimate net cost of reported and unreported losses not yet settled. This liability is estimated using actuarial analyses and case basis evaluations. Although considerable variability is inherent in such estimates, we believe that the liability for unpaid claims is adequate. These estimates are continually reviewed and, as adjustments to this liability become necessary, such adjustments are reflected in net income.

    17

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued)

    Recognition of Premiums and Other Considerations, Fees and Other Revenues and Benefits

         Traditional individual life insurance products include those products with fixed and guaranteed premiums and benefits and consist principally of whole life and term life insurance policies. Premiums from these products are recognized as premium revenue when due. Related policy benefits and expenses for individual life products are associated with earned premiums and result in the recognition of profits over the expected term of the policies and contracts.

         Immediate annuities with life contingencies include products with fixed and guaranteed annuity considerations and benefits and consist principally of group and individual single premium annuities with life contingencies. Annuity considerations from these products are recognized as revenue. However, the collection of these annuity considerations does not represent the completion of the earnings process, as we establish annuity reserves, using estimates for mortality and investment assumptions, which include provision for adverse deviation as required by U.S. GAAP. We anticipate profits to emerge over the life of the annuity products as we earn investment income, pay benefits and release reserves.

         Group life and health insurance premiums are generally recorded as premium revenue over the term of the coverage. Certain group contracts contain experience premium refund provisions based on a pre-defined formula that reflects their claim experience. Experience premium refunds are recognized as revenue over the term of the coverage and adjusted to reflect current experience. Fees for contracts providing claim processing or other administrative services are recorded as revenue over the period the service is provided. Related policy benefits and expenses for group life and health insurance products are associated with earned premiums and result in the recognition of profits over the term of the policies and contracts.

         Universal life-type policies are insurance contracts with terms that are not fixed. Amounts received as payments for such contracts are not reported as premium revenues. Revenues for universal life-type insurance contracts consist of policy charges for the cost of insurance, policy initiation and administration, surrender charges and other fees that have been assessed against policy account values and investment income. Policy benefits and claims that are charged to expense include interest credited to contracts and benefit claims incurred in the period in excess of related policy account balances.

         Investment contracts do not subject us to significant risks arising from policyholder mortality or morbidity and consist primarily of Guaranteed Investment Contracts (“GICs”), funding agreements and certain deferred annuities. Amounts received as payments for investment contracts are established as investment contract liability balances and are not reported as premium revenues. Revenues for investment contracts consist of investment income and policy administration charges. Investment contract benefits that are charged to expense include benefit claims incurred in the period in excess of related investment contract liability balances and interest credited to investment contract liability balances.

         Fees and other revenues are earned for asset management services provided to retail and institutional clients based largely upon contractual rates applied to the market value of the client's portfolio. Additionally, fees and other revenues are earned for administrative services performed including recordkeeping and reporting services for retirement savings plans. Fees and other revenues received for performance of asset management and administrative services are recognized as revenue when earned, typically when the service is performed.

    Deferred Policy Acquisition Costs

         Commissions and other costs (underwriting, issuance and field expenses) that vary with and are primarily related to the acquisition of new and renewal insurance policies and investment contract business are capitalized to the extent recoverable. Maintenance costs and acquisition costs that are not deferrable are charged to operations as incurred.

         DPAC for universal life-type insurance contracts, participating life insurance policies and certain investment contracts are being amortized over the lives of the policies and contracts in relation to the emergence of estimated gross profit margins. This amortization is adjusted in the current period when estimates of estimated gross profit are revised. For individual variable life insurance, individual variable annuities and group annuities which have separate account equity investment options, we utilize a mean reversion method (reversion to the mean assumption), a common industry practice, to determine the future domestic equity market growth assumption used for the amortization of DPAC. The DPAC of nonparticipating term life insurance and individual disability policies are being amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policyholder liabilities.

         DPAC are subject to recoverability testing at the time of policy issue and loss recognition testing on an annual basis, or when an event occurs that may warrant loss recognition. If loss recognition is necessary, DPAC would be written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related losses and expenses.

    18

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued) Deferred Policy Acquisition Costs on Internal Replacements

         SOP 05-1 applies to all modifications and replacements made to contracts defined by SFAS No. 60, Accounting and Reporting by Insurance Enterprises and SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. The SOP lists criteria that assist in defining an internal replacement transaction as involving a substantially changed or substantially unchanged contract. We review all modifications and replacements that meet the definition of an internal replacement. If an internal replacement results in a substantially changed contract, the acquisition costs, sales inducements and unearned revenue associated with the new contract are deferred and amortized over the lifetime of the new contract. In addition, the existing DPAC, sales inducement, and unearned revenue balances associated with the replaced contract are written off.

         If an internal replacement results in a substantially unchanged contract, the acquisition costs, sales inducements and unearned revenue associated with the new contract are not deferred. All acquisition costs, sales inducements and unearned revenue associated with the new contract are immediately recognized in the period incurred. In addition, the existing DPAC, sales inducement, or unearned revenue balance associated with the replaced contract is not written off, but instead is carried over to the new contract.

    Long-Term Debt

         Long-term debt includes notes payable, nonrecourse mortgages and other debt with a maturity date greater than one year at the date of issuance. Current maturities of long-term debt are classified as long-term debt in our consolidated statement of financial position.

    Reinsurance

         We enter into reinsurance agreements with other companies in the normal course of business. We may assume reinsurance from or cede reinsurance to other companies. Assets and liabilities related to reinsurance ceded are reported on a gross basis. Premiums and expenses are reported net of reinsurance ceded. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. We are contingently liable with respect to reinsurance ceded to other companies in the event the reinsurer is unable to meet the obligations it has assumed. At December 31, 2008 and 2007, our largest exposures to a single third-party reinsurer were $18.5 billion and $19.9 billion of life insurance in force, respectively, representing 11% of total net life insurance in force. To minimize the possibility of losses, we regularly evaluate the financial condition of our reinsurers and monitor concentrations of credit risk.

    The effects of reinsurance on premiums and other considerations and policy and contract benefits were as follows:

      For the year ended December 31, 
      2008  2007  2006 
        (in millions)   
    Premiums and other considerations:       
       Direct  $ 4,290.5  $ 4,504.4  $ 4,229.3 
       Assumed  9.7  160.0  117.3 
       Ceded  (295.1)  (276.7)  (280.4) 
    Net premiums and other considerations  $ 4,005.1  $ 4,387.7  $ 4,066.2 
    Benefits, claims and settlement expenses:       
       Direct  $ 5,853.7  $ 5,963.0  $ 5,472.2 
       Assumed  43.5  190.4  141.8 
       Ceded  (263.2)  (244.8)  (320.7) 
    Net benefits, claims and settlement expenses  $ 5,634.0  $ 5,908.6  $ 5,293.3 

    19

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    1. Nature of Operations and Significant Accounting Policies — (continued) Separate Accounts

         The separate account assets presented in the consolidated financial statements represent the fair market value of funds that are separately administered by us for contracts with equity, real estate and fixed income investments. The separate account contract owner, rather than us, bears the investment risk of these funds. The separate account assets are legally segregated and are not subject to claims that arise out of any of our other business. We receive fees for mortality, withdrawal, and expense risks, as well as administrative, maintenance and investment advisory services, that are included in the consolidated statements of operations. Net deposits, net investment income and realized and unrealized capital gains and losses on the separate accounts are not reflected in the consolidated statements of operations.

         At December 31, 2008 and 2007, the separate accounts include a separate account valued at $207.4 million and $748.8 million, respectively, which primarily includes shares of PFG’s stock that were allocated and issued to eligible participants of qualified employee benefit plans administered by us as part of the policy credits issued under Principal Mutual Holding Company’s 2001 demutualization. The separate account shares are recorded at fair value and are reported as separate account assets with a corresponding separate account liability to eligible participants of the qualified plan. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.

    Income Taxes

         Our ultimate parent, PFG, files a U.S. consolidated income tax return that includes all of our qualifying subsidiaries. PFG allocates income tax expenses and benefits to companies in the group generally based upon pro rata contribution of taxable income or operating losses. We are taxed at U.S. corporate rates on taxable income based on existing tax laws. Current income taxes are charged or credited to net income based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income taxes are provided for the tax effect of temporary differences in the financial reporting and income tax bases of assets and liabilities and net operating losses using enacted income tax rates and laws. The effect on deferred income tax assets and deferred income tax liabilities of a change in tax rates is recognized in operations in the period in which the change is enacted.

    Goodwill and Other Intangibles

         Goodwill and other intangibles include the cost of acquired subsidiaries in excess of the fair value of the net tangible assets recorded in connection with acquisitions. Goodwill and indefinite-lived intangible assets are not amortized. Rather, they are tested for impairment during the fourth quarter each year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing for indefinite-lived intangible assets consists of a comparison of the fair value of the intangible asset with its carrying value.

         Intangible assets with a finite useful life are amortized as related benefits emerge and are reviewed periodically for indicators of impairment in value. If facts and circumstances suggest possible impairment, the sum of the estimated undiscounted future cash flows expected to result from the use of the asset is compared to the current carrying value of the asset. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized for the excess of the carrying amount of assets over their fair value.

    Reclassifications

         Reclassifications have been made to the 2007 and 2006 notes to consolidated financial statements to conform to the 2008 presentation.

     

     

     

     

     

     

    20

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    2. Related Party Transaction

         We have entered into various related party transactions with our ultimate parent and its other affiliates. During the years ended December 31, 2008, 2007 and 2006, we received $199.2 million, $187.1 million and $116.0 million, respectively, of expense reimbursements from affiliated entities.

         We and our direct parent, PFSI, are parties to a cash advance agreement, which allows us, collectively, to pool our available cash in order to more efficiently and effectively invest our cash. The cash advance agreement allows (i) us to advance cash to PFSI in aggregate principal amounts not to exceed $1.0 billion, with such advanced amounts earning interest at the daily 30-day LIBOR rate (the “Internal Crediting Rate”); and (ii) PFSI to advance cash to us in aggregate principal amounts not to exceed $1.0 billion, with such advance amounts paying interest at the Internal Crediting Rate plus 10 basis points to reimburse PFSI for the costs incurred in maintaining short-term investing and borrowing programs. Under this cash advance agreement, we had a receivable from PFSI of $325.4 million and $267.6 million at December 31, 2008 and 2007, respectively, and earned interest of $10.9 million, $28.2 million and $13.5 million during 2008, 2007 and 2006, respectively.

         Pursuant to certain regulatory requirements or otherwise in the ordinary course of business, we guarantee certain payments of our subsidiaries and have agreements with affiliates to provide and/or receive management, administrative and other services, all of which, individually and in the aggregate, are immaterial to our business, financial condition and net income.

    3. Discontinued Operations Real Estate Investments

         In 2007 and 2006, we sold certain real estate properties previously held for investment purposes. These properties qualify for discontinued operations treatment. Therefore, the income from discontinued operations has been removed from our results of continuing operations for all periods presented. The gains on disposal, which are reported in our Corporate segment, are excluded from segment operating earnings for all periods presented. All assets, including cash, and liabilities of the discontinued operations have been reclassified to separate discontinued asset and liability line items on the consolidated statements of financial position. We have separately disclosed the operating, investing and financing portions of the cash flows attributable to our discontinued operations in our consolidated statements of cash flows. Additionally, the information included in the notes to the financial statements excludes information applicable to these properties, unless otherwise noted.

         The properties were sold to take advantage of positive real estate market conditions in specific geographic locations and to further diversify our real estate portfolio.

    Selected financial information for the discontinued operations is as follows:

      For the year ended December 31,
      2008  2007  2006 
        (in millions)   
    Total revenues  $ —  $ 0.3  $ (3.1) 
    Income from discontinued operations:       
       Income (loss) before income taxes  $ —  $ 0.3  $ (3.1) 
       Income taxes (benefits)  —  0.1  (1.1) 
       Gain on disposal of discontinued operations  —  32.8     47.5 
       Income taxes on disposal  —  12.8     16.6 
    Net income  $ —  $ 20.2  $ 28.9 

     

     

     

    21

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    4. Goodwill and Other Intangible Assets

    Goodwill

    The changes in the carrying amount of goodwill reported in our segments for 2007 and 2008 were as follows:

    U.S. Asset Accumulation  Global Asset Management  Life and Health Insurance Consolidated
                  (in millions)  
    Balances at January 1, 2007  $ 19.6  $ 140.4  $ 69.5  $ 229.5 
    Goodwill disposed  (3.0)                             —  —  (3.0) 
    Other  —                             —  17.5  17.5 
    Balances at December 31, 2007  16.6  140.4  87.0  244.0 
    Goodwill from acquisitions  2.1                             12.1  —  14.2 
    Balances at December 31, 2008  $ 18.7  $ 152.5  $ 87.0  $ 258.2 

    Finite Lived Intangibles

         Amortized intangible assets that continue to be subject to amortization over a weighted average remaining expected life of 15 years were as follows:

          December 31,     
        2008      2007   
      Gross
    carrying
    amount    		 Accumulated
    amortization    		 Net
    carrying
    amount    		 Gross
    carrying
    amount    		 Accumulated
    amortization    		 Net
    carrying
    amount
     
     
      (in millions)
    Finite lived intangibles  $ 133.0  $ 39.8  $ 93.2  $ 127.0  $ 31.5  $ 95.5 

         We recorded no significant impairments in 2008, 2007 and 2006. The amortization expense for intangible assets with finite useful lives was $8.3 million, $9.9 million and $7.6 million for 2008, 2007 and 2006, respectively. At December 31, 2008, the estimated amortization expense for the next five years is as follows (in millions):

    Year ending December 31:   
           2009        $ 4.5 
           2010         4.1 
           2011         4.1 
           2012         3.8 
           2013         3.4 

    Indefinite Lived Intangible Assets

         The net carrying amount of unamortized indefinite-lived assets was $94.5 million as of both December 31, 2008 and 2007. This represents our share of the purchase price from our parent’s December 31, 2006, acquisition of WM Advisors, Inc. related to investment management contracts that are not subject to amortization. We were allocated $99.9 million of the purchase price based on the fact that we will benefit from our parent’s acquisition, which also included $3.2 million related to goodwill and $2.2 million related to other amortizable intangible assets that was subject to a three-year amortization period.

     

     

    22

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    5. Variable Interest Entities

         We have relationships with various types of special purpose entities and other entities where we have a variable interest. The following serves as a discussion of investments in entities that meet the definition of a VIE.

    Consolidated Variable Interest Entities

         Synthetic Collateralized Debt Obligation. On May 26, 2005, we invested $130.0 million in a secured credit-linked note issued by a grantor trust. The trust entered into a credit default swap providing credit protection on the first 45% of loss of seven mezzanine tranches totaling $288.9 million of seven synthetic reference portfolios. Subordination for the seven mezzanine tranches ranges from 1.29% to 4.79% . Therefore, defaults in an underlying reference portfolio will only affect the credit-linked note if cumulative losses exceed the subordination of a synthetic reference portfolio.

         We have determined that this grantor trust is a VIE and that we are the primary beneficiary of the trust as we are the sole investor in the trust and the manager of the synthetic reference portfolios. Upon consolidation of the trust, as of December 31, 2008 and 2007, our consolidated statements of financial position include $93.5 million and $127.2 million, respectively, of available-for-sale fixed maturity securities, which represent the collateral held by the trust. The assets of the trust are held by a trustee and can only be liquidated to settle obligations of the trust. These obligations include losses on the synthetic reference portfolio and the return of investments due to maturity or termination of the trust. As of December 31, 2008 and 2007, our consolidated statements of financial position include $53.4 million and $0.2 million, respectively, of other liabilities representing derivative market values of the trust. As of December 31, 2007, we also reported $1.1 million of other investments in our consolidated statements of financial position relating to derivative market values of the trust.

         As of December 31, 2008 and 2007, the credit default swap entered into by the trust had an outstanding notional amount of $130.0 million. During the years ended December 31, 2008, 2007 and 2006, the credit default swaps had a change in fair value that resulted in a $54.5 million pre-tax loss, $3.2 million pre-tax loss and $4.4 million pre-tax gain, respectively. The credit default swap counterparties of the grantor trusts have no recourse to our assets.

         Grantor Trusts. We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying $425.9 million par value notes by issuing an interest-only certificate and a residual certificate related to each note contributed. Each interest-only certificate entitles the holder to interest on the stated note for a specified term while the residual certificate entitles the holder to interest payments subsequent to the term of the interest-only certificate and to all principal payments. We retained the interest-only certificate and the residual certificates were subsequently sold to a third party.

         We have determined that these grantor trusts are VIEs as our interest-only certificates are exposed to the majority of the risk of loss due to interest rate risk. The restricted interest periods end between 2016 and 2020 and, at that time, the residual certificate holders’ certificates are redeemed by the trust in return for the notes. We have determined that it will be necessary for us to consolidate these entities until the expiration of the interest-only period. As of December 31, 2008 and 2007, our consolidated statements of financial position include $212.2 million and $332.1 million, respectively, of undated subordinated floating rate notes of the grantor trusts, which are classified as available-for-sale fixed maturity securities and represent the collateral held by the trust. The obligation to deliver the underlying securities to the residual certificate holders of $103.8 million and $155.6 million as of December 31, 2008 and 2007, respectively, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. The creditors of the grantor trusts have no recourse to our assets.

         Other. In addition to the entities above, we have a number of relationships with a disparate group of entities, which meet the criteria for VIEs. Due to the nature of our direct investment in the equity and/or debt of these VIEs, we are the primary beneficiary of such entities, which requires us to consolidate them. These entities include seven private investment vehicles and several hedge funds. The consolidation of these VIEs did not have a material effect on either our consolidated statements of financial position as of December 31, 2008 or 2007, or results of operations for the years ended December 31, 2008, 2007 and 2006. For these entities, the creditors have no recourse to our assets.

    23

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    5. Variable Interest Entities (continued)

         The carrying amount and classification of other consolidated VIE assets that are pledged as collateral that the VIEs have designated for their other obligations and the debt of the VIEs are as follows:

      December 31,
      2008 2007 
      in millions)
    Fixed maturity securities, available-for-sale  $ 103.8  $ 116.2 
    Fixed maturity securities, trading  17.2  34.7 
    Equity securities, trading  30.7  90.1 
    Cash and other assets  140.8  93.8 
    Total assets pledged as collateral  $ 292.5  $ 334.8 
    Long-term debt and other obligations  $ 334.2  $ 327.2 

         As of December 31, 2008 and 2007, $292.5 million and $334.8 million, respectively, of assets were pledged as collateral for the VIE entities' other obligations and debt. The assets of the trusts are held by a trustee and can only be liquidated to settle obligations of the trusts. These obligations primarily include unrealized losses on derivatives, the synthetic reference portfolios or financial guarantees and the return of investments due to maturity or termination of the trusts. As of December 31, 2008 and 2007, these entities had long-term debt of $142.6 million and $175.6 million, respectively, all of which was issued to our affiliates and, therefore, eliminated upon consolidation.

    Significant Unconsolidated Variable Interest Entities

         We hold a significant variable interest in a number of VIEs where we are not the primary beneficiary. These entities include private investment vehicles that have issued trust certificates that are recorded as available-for-sale fixed maturity securities in the consolidated statements of financial position.

         On September 21, 2001, we entered into a transaction where a third party transferred funds to a trust. The trust purchased shares of a specific money market fund and then separated the cash flows of the money market shares into share receipts and dividend receipts. The dividend receipts entitle the holder to dividends paid for a specified term while the share receipts, purchased at a discount, entitle the holder to dividend payments subsequent to the term of the dividend receipts and the rights to the underlying shares. We purchased $150.0 million par value of the share receipts at a significant discount. After the restricted dividend period ends on December 21, 2021, we, as the share receipt holder, have the right to terminate the trust agreement and will receive the underlying money market fund shares. We determined the primary beneficiary is the dividend receipt holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our investment in the share receipts as measured by amortized cost and indicated in the following table.

         On June 20, 1997, we entered into a transaction in which we purchased a residual trust certificate with a par value of $100.0 million. The trust separated the cash flows of an underlying security into an interest-only certificate that entitles the third party certificate holder to the stated interest on the underlying security through May 15, 2017, and a residual certificate entitling the holder to interest payments subsequent to the term of the interest-only certificates and any principal payments. Subsequent to the restricted interest period, we, as the residual certificate holder, have the right to terminate the trust agreement and will receive the underlying security. We determined the primary beneficiary is the interest-only certificate holder, which has the majority of the risk of loss. Our maximum exposure to loss as a result of our involvement with this entity is our investment in the residual trust certificate as measured by amortized cost and indicated in the following table. The only assets of the trust are corporate bonds which are guaranteed by a foreign government.

    24

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    5. Variable Interest Entities (continued)

         The classification of the asset, carrying value and maximum loss exposure for our significant unconsolidated VIEs as of December 31, 2008, are as follows (in millions):

      Classification of asset    Asset carrying value  Maximum exposure to loss
      Fixed maturities-     
    $150.0 million Trust Share Receipts  available-for-sale  $ 61.2  $ 73.7 
      Fixed maturities-     
    $100.0 million Residual Trust Certificate  available-for-sale  $ 101.9  $ 61.3 

         The classification of the asset, carrying value and maximum loss exposure for our significant unconsolidated VIEs as of December 31, 2007, are as follows (in millions):

    Classification of asset Asset carrying value Maximum exposure
    to loss
      Fixed maturities-     
     $150.0 million Trust Share Receipts  available-for-sale  $ 66.1  $ 69.6 
      Fixed maturities-     
     $100.0 million Residual Trust Certificate  available-for-sale  $ 83.4  $ 56.8 
     
    6. Investments       
     
    Fixed Maturities and Equity Securities       

         The cost, gross unrealized gains and losses and fair value of fixed maturities and equity securities available-for-sale as of December 31, 2008 and 2007, are summarized as follows:

    Cost Gross
    unrealized
    gains    		 Gross
    unrealized
    losses    		 Fair value
                                                                                                                                       (in millions)
    December 31, 2008         
    Fixed maturities, available-for-sale:         
       U.S. government and agencies  $ 538.6  $ 46.4  $ 0.1  $ 584.9 
       Non-U.S. governments  462.1  31.5  15.1  478.5 
       States and political subdivisions  2,113.8  32.6  120.9  2,025.5 
       Corporate — public  20,044.2  144.5  2,963.8  17,224.9 
       Corporate — private  12,315.9  153.8  2,104.3  10,365.4 
       Mortgage-backed and other asset-backed securities  10,318.6  77.6  3,011.4  7,384.8 
    Total fixed maturities, available-for-sale  $ 45,793.2  $ 486.4  $ 8,215.6  $ 38,064.0 
    Total equity securities, available-for-sale  $ 300.3  $ 28.0  $ 94.1  $ 234.2 
    December 31, 2007         
    Fixed maturities, available-for-sale:         
       U.S. government and agencies  $ 618.9  $ 28.8  $ 0.1  $ 647.6 
       Non-U.S. governments  419.4  35.7  1.2  453.9 
       States and political subdivisions  1,867.6  39.1  10.2  1,896.5 
       Corporate — public  19,328.3  594.2  434.7  19,487.8 
       Corporate — private  12,023.4  368.3  221.3  12,170.4 
       Mortgage-backed and other asset-backed securities  9,926.2  155.0  500.7  9,580.5 
    Total fixed maturities, available-for-sale  $ 44,183.8  $ 1,221.1  $ 1,168.2  $ 44,236.7 
    Total equity securities, available-for-sale  $ 314.6  $ 10.3  $ 15.2  $ 309.7 

    25

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    6. Investments — (continued)

         The cost and fair value of fixed maturities available-for-sale at December 31, 2008, by expected maturity, were as follows:

             Cost  Fair value 
                      (in millions)
    Due in one year or less  $ 1,831.3  $ 1,791.2 
    Due after one year through five years  12,764.6  11,667.5 
    Due after five years through ten years  10,488.4  8,730.0 
    Due after ten years  10,390.3  8,490.5 
      35,474.6  30,679.2 
    Mortgage-backed and other asset-backed securities  10,318.6  7,384.8 
    Total  $ 45,793.2  $ 38,064.0 

         The above summarized activity is based on expected maturities. Actual maturities may differ because borrowers may have the right to call or prepay obligations.

    Our portfolio is diversified by industry, issuer and asset class. Credit concentrations are managed to established limits.

    Net Investment Income

    Major categories of net investment income are summarized as follows:

      For the year ended December 31,
      2008 2007  2006
        (in millions)   
    Fixed maturities, available-for-sale  $ 2,748.3  $ 2,603.0  $ 2,463.8 
    Fixed maturities, trading  30.5  15.1  10.6 
    Equity securities, available-for-sale  16.2  23.5  54.6 
    Equity securities, trading  0.4  0.6  0.4 
    Mortgage loans  743.2  755.6  708.5 
    Real estate  54.0  74.5  63.4 
    Policy loans  54.1  52.6  50.9 
    Cash and cash equivalents  63.0  111.2  60.1 
    Derivatives  (56.8)  36.0  38.6 
    Other  (31.0)  43.7  51.9 
    Total  3,621.9  3,715.8  3,502.8 
    Less investment expenses  (149.9)  (163.3)  (150.0) 
    Net investment income  $ 3,472.0  $ 3,552.5  $ 3,352.8 

     

     

     

     

    26

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    6. Investments — (continued) Net Realized Capital Gains and Losses

    The major components of net realized capital gains (losses) on investments are summarized as follows:

              For the year ended December 31,
      2008 2007 2006
        (in millions)   
    Fixed maturities, available-for-sale:       
       Gross gains  $ 39.3 $ 32.4 $ 31.8
       Gross losses  (436.2)  (280.2) (62.9)
       Hedging (net)  496.3 151.8 (14.6)
    Fixed maturities, trading  (41.1) (4.2) (4.6)
    Equity securities, available-for-sale:       
       Gross gains  12.0 6.4 1.4
       Gross losses  (56.6) (53.9) (0.1)
    Equity securities, trading  (62.7) 23.5 20.1
    Mortgage loans  (44.3) (7.2) 3.2
    Derivatives  (595.7) (236.0) 91.2
    Other  66.4 19.0 (35.1)
    Net realized capital gains (losses)  $ (622.6) $ (348.4) $ 30.4

         Proceeds from sales of investments (excluding call and maturity proceeds) in fixed maturities, available-for-sale were $1.1 billion, $2.3 billion and $1.3 billion in 2008, 2007 and 2006, respectively.

         We recognize impairment losses for fixed maturities and equity securities when declines in value are other than temporary. Gross realized losses related to other than temporary impairments of fixed maturity securities were $420.1 million, $215.7 million and $14.6 million in 2008, 2007 and 2006, respectively. Certain fixed maturity securities moved into a loss position during the second quarter of 2007, and we determined that we did not have the ability and intent to hold these securities. As a result, we also recognized impairment losses on these securities of $24.5 million, net of recoveries on the subsequent sale, primarily due to a change in interest rates. As a result of the need to fund our parent’s acquisition of WM Advisors, Inc., we also recognized $17.2 million of write-downs in 2006 that resulted from our determination that we no longer had the ability and intent to hold certain fixed maturity securities until they recovered in value. We also recognized gross realized losses as the result of credit triggered sales of $13.7 million, $32.3 million and $22.2 million in 2008, 2007 and 2006, respectively. Gross realized losses related to other than temporary impairments of equity securities were $55.3 million and $52.6 million in 2008 and 2007, respectively. We did not recognize any impairment losses on equity securities in 2006.

     

     

     

    27

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    6. Investments — (continued)

    Gross Unrealized Losses for Fixed Maturities and Equity Securities

         For fixed maturities and equity securities available-for-sale with unrealized losses as of December 31, 2008 and 2007, the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as follows:


         As of December 31, 2008, we held $28,923.7 million in available-for-sale fixed maturity securities with unrealized losses of $8,215.6 million. Our consolidated portfolio consists of fixed maturity securities where 94% are investment grade (rated AAA through BBB-) with an average price of 78 (carrying value/amortized cost) at December 31, 2008. Due to the credit disruption that began in the last half of 2007 and continued into 2008 which reduced liquidity and led to wider credit spreads, we saw an increase in unrealized losses in our securities portfolio. The unrealized losses were more pronounced in the Corporate-public and Corporate-private finance sectors and in structured products, such as collateralized debt obligations, asset-backed securities and commercial mortgage-backed securities.

         For those securities that have been in a loss position for less than twelve months, our consolidated portfolio holds 2,105 securities with a carrying value of $18,488.0 million and unrealized losses of $3,037.6 million reflecting an average price of 86 at December 31, 2008. Of this portfolio, 95% was investment grade (rated AAA through BBB-) at December 31, 2008, with associated unrealized losses of $2,701.9 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

         For those securities that have been in a continuous loss position greater than or equal to twelve months, our consolidated portfolio holds 1,526 securities with a carrying value of $10,435.7 million and unrealized losses of $5,178.0 million. The average rating of this portfolio is A- with an average price of 67 at December 31, 2008. Of the $5,178.0 million in unrealized losses, the Corporate-public and Corporate-private sectors account for $2,943.8 million in unrealized losses with an average price of 73 and an average credit rating of BBB+. The remaining unrealized losses consist primarily of $2,192.3 million in unrealized losses within the mortgage-backed and other asset-backed securities sector at December 31, 2008. The average price of the mortgage-backed and other asset-backed securities sector is 52 and the average credit rating is AA-. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

         Because we have the ability and intent to hold the available-for-sale securities with unrealized losses until a recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at December 31, 2008.

     

     

     

     

    28

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued)
     
    6. Investments — (continued)             
          December 31, 2007    
      Less than Greater than or    
      twelve months equal to twelve months Total
        Gross   Gross   Gross
      Carrying unrealized Carrying unrealized Carrying unrealized
      value losses value losses value losses
          (in millions)     
    Fixed maturities, available-for-sale:             
       U.S. government and agencies  $ 4.2 $ 0.1 $ 19.3 $ — $ 23.5 $ 0.1
       Non-U.S. governments  55.2 1.1 11.8 0.1 67.0 1.2
       States and political subdivisions  375.2 7.1 205.7 3.1 580.9 10.2
       Corporate — public  4,804.7 238.6 3,460.2 196.1 8,264.9 434.7
       Corporate — private  3,386.5 133.6 1,802.0 87.7 5,188.5 221.3
       Mortgage-backed and other asset-backed             
           securities  3,272.0 405.0 2,177.7 95.7 5,449.7 500.7
    Total fixed maturities, available-for-sale  $11,897.8 $ 785.5 $ 7,676.7 $ 382.7 $ 19,574.5 $ 1,168.2
    Total equity securities, available-for-sale  $ 106.8 $ 12.0 $ 26.5 $ 3.2 $ 133.3 $ 15.2

         As of December 31, 2007, we held $19,574.5 million in available-for-sale fixed maturity securities with unrealized losses of $1,168.2 million. Our consolidated portfolio consisted of fixed maturity securities where 95% were investment grade (rated AAA through BBB-) with an average price of 94 (carrying value/amortized cost) at December 31, 2007. Due to the credit disruption in the last half of 2007 that led to reduced liquidity and wider credit spreads, we saw an increase in unrealized losses in our securities portfolio. The unrealized losses were more pronounced in structured products such as collateralized debt obligations and asset-backed securities.

         For those securities that had been in a loss position for less than twelve months, our consolidated portfolio held 1,268 securities with a carrying value of $11,897.8 million and unrealized losses of $785.5 million reflecting an average price of 94 at December 31, 2007. Of this portfolio, 93% was investment grade (rated AAA through BBB-) at December 31, 2007, with associated unrealized losses of $738.0 million. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

         For those securities that had been in a continuous loss position greater than or equal to twelve months, our consolidated portfolio held 945 securities with a carrying value of $7,676.7 million and unrealized losses of $382.7 million. The average rating of this portfolio was A with an average price of 95 at December 31, 2007. Of the $382.7 million in unrealized losses, the Corporate-public and Corporate-private sectors accounted for $283.8 million in unrealized losses with an average price of 95 and an average credit rating of BBB+. The remaining unrealized losses consisted primarily of $95.6 million in unrealized losses within the mortgage-backed and other asset-backed securities sector at December 31, 2007. The average price of the mortgage-backed and other asset-backed securities sector was 96 and the average credit rating was AA+. The losses on these securities can primarily be attributed to changes in market interest rates and changes in credit spreads since the securities were acquired.

         Because we had the ability and intent to hold the available-for-sale securities with unrealized losses until a recovery of fair value, which may be maturity, we did not consider these investments to be other-than-temporarily impaired at December 31, 2007.

    Net Unrealized Gains and Losses on Available-for-Sale Securities and Derivative Instruments

         The net unrealized gains and losses on investments in fixed maturities available-for-sale, equity securities available-for-sale and derivative instruments are reported as a separate component of stockholder’s equity. The cumulative amount of net unrealized gains and losses on available-for-sale securities and derivative instruments net of adjustments related to DPAC, sales inducements, unearned revenue reserves, changes in policyholder benefits and claims and applicable income taxes was as follows:

     

     

     

     

    29

    Principal Life Insurance Company      
    Notes to Consolidated Financial Statements — (continued)    
     
    6. Investments — (continued)       
     
      December 31,
      2008 2007 
      (in millions)
                       Net unrealized gains (losses) on fixed maturities, available-for-sale(1)  $ (7,729.3) $ 52.8
                       Net unrealized losses on equity securities, available-for-sale  (66.0) (4.9)
                       Adjustments for assumed changes in amortization patterns  1,175.2 2.2
                       Net unrealized gains on derivative instruments  156.8 32.3
                       Net unrealized gains (losses) on equity method subsidiaries and minority interest       
                           adjustments  73.6 (2.6)
                       Provision for deferred income taxes  2,237.4 (27.0)
                       Net unrealized gains (losses) on available-for-sale securities and derivative 
                           instruments  $ (4,152.3) $ 52.8

    (1)      Excludes net unrealized gains (losses) on fixed maturities, available-for-sale included in fair value hedging relationships.

    Commercial Mortgage Loans

         Commercial mortgage loans represent a primary area of credit risk exposure. At December 31, 2008 and 2007, the commercial mortgage portfolio is diversified by geographic region and specific collateral property type as follows:

    December 31,
     

    2008


    Carrying Amount

     

     

    Percent of total

    2007


    Carrying Amount

     

     

    Percent of total

     
                                                                                                                         (in millions)
    Geographic distribution         
    New England  $ 459.4  4.1% $  481.2  4.5% 
    Middle Atlantic  1,794.8  15.9  1,815.5  16.9 
    East North Central  974.9  8.6  960.2  8.9 
    West North Central  550.0  4.9  513.2  4.8 
    South Atlantic  2,849.9  25.2  2,876.2  26.7 
    East South Central  323.2  2.9  339.0  3.1 
    West South Central  775.9  6.9  692.9  6.4 
    Mountain  900.3  8.0  794.7  7.4 
    Pacific  2,707.9  24.0  2,333.4  21.7 
    Valuation allowance  (57.0)  (0.5)  (42.8)  (0.4) 
    Total  $ 11,279.3  100.0% $  10,763.5  100.0% 
    Property type distribution         
    Office  $ 2,894.7  25.7% $  2,647.8  24.6% 
    Retail  3,004.5  26.7  2,915.5  27.1 
    Industrial  2,688.1  23.8  2,756.0  25.6 
    Apartments  1,832.6  16.2  1,698.3  15.8 
    Hotel  507.0  4.5  273.3  2.5 
    Mixed use/other  409.4  3.6  515.4  4.8 
    Valuation allowance  (57.0)  (0.5)  (42.8)  (0.4) 
    Total  $ 11,279.3  100.0% $  10,763.5  100.0% 

    30

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    6. Investments — (continued)

    Commercial Mortgage Loan Valuation Allowance

         Mortgage loans on real estate are considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to contractual terms of the loan agreement. When we determine that a loan is impaired, a valuation allowance is established equal to the difference between the carrying amount of the mortgage loan and the estimated value. Estimated value is based on either the present value of the expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or fair value of the collateral. The change in the valuation allowance is included in net realized capital gains (losses) on our consolidated statements of operations.

         The valuation allowance is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management's periodic evaluation and assessment of the adequacy of the valuation allowance and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect a borrower's ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience and other relevant factors. The evaluation of our impaired loan component is subjective, as it requires the estimation and timing of future cash flows expected to be received on impaired loans. Impaired mortgage loans, along with the related loan specific allowance for losses, were as follows:

     
      December 31,
      2008 2007
      (in millions)
    Impaired loans  $ 175.7 $ 45.8
    Allowance for losses  26.2  10.0
    Net impaired loans  $ 149.5 $ 35.8

         The average recorded investment in impaired mortgage loans and the interest income recognized on impaired mortgage loans were as follows:

      For the year ended December 31,
      2008 2007 2006
      (in millions)
    Average recorded investment in impaired loans  $ 68.3  $ 11.5 $ 4.3
    Interest income recognized on impaired loans  17.4 3.4   0.5

         When it is determined that a loan is impaired, interest accruals are stopped and all interest income is recognized on the cash basis.

    A summary of the changes in the commercial mortgage loan valuation allowance is as follows:

      For the year ended December 31,
      2008 2007 2006
      (in millions)
    Balance at beginning of year  $ 42.8 $ 32.2 $ 33.2
    Provision  42.9 10.7 1.3
    Releases  (28.7) (0.1) (2.3)
    Balance at end of year  $ 57.0 $ 42.8 $ 32.2

    Real Estate

         Depreciation expense on invested real estate was $32.0 million, $30.1 million and $30.2 million in 2008, 2007 and 2006, respectively. Accumulated depreciation was $248.1 million and $226.3 million as of December 31, 2008 and 2007, respectively.

     

     

     

     

    31

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    6. Investments — (continued) Other Investments

         Other investments include minority interests in unconsolidated entities, joint ventures and partnerships and properties owned jointly with venture partners and operated by the partners. Such investments are generally accounted for using the equity method. In applying the equity method, we record our share of income or loss reported by the equity investees. Changes in the value of our investment in equity investees attributable to capital transactions of the investee, such as an additional offering of stock, are recorded directly to stockholder’s equity. Total assets of the unconsolidated entities were $7,560.8 million and $7,198.0 million at December 31, 2008 and 2007, respectively. Total revenues of the unconsolidated entities were $2,199.2 million, $2,103.6 million and $1,245.0 million in 2008, 2007 and 2006, respectively. During 2008, 2007 and 2006, we included $(41.9) million, $33.2 million and $43.5 million, respectively, in net investment income representing our share of current year net income of the unconsolidated entities. In 2008, we experienced losses compared to gains in 2007 associated with certain equity method investments resulting from adverse market conditions. At December 31, 2008 and 2007, our net investment in unconsolidated entities was $61.9 million and $104.8 million, respectively.

         In the ordinary course of our business and as part of our investment operations, we have also entered into long-term contracts to make and purchase investments aggregating $121.7 million and $402.2 million at December 31, 2008 and 2007, respectively.

         Derivative assets are carried at fair value and reported as a component of other investments. Certain seed money investments are carried at fair value with changes in fair value included in net realized capital gains (losses) on our consolidated statements of operations.

    Securities Lending

         During the third quarter of 2008, we decided to temporarily unwind the securities lending program due to a downturn in current economic conditions. Prior to that time, we participated in a securities lending program whereby certain fixed maturity securities from the investment portfolio were loaned to other institutions for a short period of time. We maintained ownership of the loaned securities. Securities loaned under such transactions could be sold or repledged by the transferee. Both we and the borrower could request or return the loaned securities at any time. We required initial cash collateral, which we could not repledge, equal to 102 percent of the market value of the loaned securities. The collateral was invested by the lending agent in accordance with our guidelines. Net returns on the investments, after payment of a rebate to the borrower, were shared between the agent and us and reported in net investment income on the consolidated statements of operations. The transaction was accounted for as a secured borrowing and the collateral was included in other assets on our statements of financial position, with a corresponding liability reflecting our obligation to return the collateral upon the return of the loaned securities recorded in other liabilities.

         As of December 31, 2008, we held no cash collateral on securities lending. As of December 31, 2007, we had received $622.7 million of cash collateral on securities lending. As of December 31, 2008, we had loaned no securities. As of December 31, 2007, we had loaned securities with a fair value of $608.9 million.

    Securities Posted as Collateral

         We posted $869.4 million in fixed maturities, available-for-sale securities at December 31, 2008, to satisfy collateral requirements primarily associated with our derivative credit support annex (collateral) agreements and a reinsurance arrangement. In addition, we posted $1,498.5 million in commercial mortgage loans as of December 31, 2008, to satisfy collateral requirements associated with our obligation under funding agreements with the Federal Home Loan Bank of Des Moines. Since we did not relinquish ownership rights on these securities, they are reported as fixed maturities, available-for-sale and commercial mortgage loans, respectively, on our consolidated statements of financial position.

     

     

     

     

     

    32

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    7. Securitization Transactions

         Previously, we, along with other contributors, sold commercial mortgage loans in securitization transactions to trusts. As these trusts are classified as QSPEs, they are not subject to the VIE consolidation rules. We purchased primary servicing responsibilities and have retained other immaterial interests. The investors and the securitization entities have no recourse to our other assets for failure of debtors to pay when due. The value of our retained interests is subject primarily to credit risk. In 2006, we began transitioning our securitization platform to a new joint venture company that we report using the equity method of accounting. The transition was complete by the end of 2007 such that all of our commercial mortgage loan securitization transactions after that point were conducted through the joint venture. During the third quarter of 2008, we made a decision to terminate our commercial mortgage securities issuance operation.

         In 2008, no gains from securitizations were recognized as we had no new securitizations. In 2007 and 2006, we recognized gains of $2.2 million and $13.6 million, respectively, on the securitization of commercial mortgage loans.

         Key economic assumptions used in measuring the other retained interests at the date of securitization resulting from transactions completed included a cumulative foreclosure rate between 1% and 7% during 2007 and 2% and 10% during 2006. The assumed range of the loss severity, as a percentage of defaulted loans, was between 1% and 27% during 2007 and 2% and 31% during 2006. The low end of the loss severity range relates to a portfolio of seasoned loans. The high end of the loss severity range relates to a portfolio of newly issued loans.

         At December 31, 2008 and 2007, the fair values of other retained interests related to the securitizations of commercial mortgage loans were $133.2 million and $315.8 million, respectively. Our interests are primarily classified as fixed maturities, available-for-sale on our consolidated statements of financial position and are carried at fair value. Cash flows are continuously monitored for adverse deviations from original expectations and impairments are recorded when necessary.

                       The table below summarizes cash flows for securitization transactions:       
      For the year ended December 31,
      2008 2007 2006
        (in millions)   
                       Proceeds from new securitizations  $ — $ 105.2 $ 698.6
                       Servicing fees received  2.0 1.9 1.3
                       Other cash flows received on retained interests  39.3 35.7 37.4
     
    8. Derivative Financial Instruments       

         Derivatives are generally used to hedge or reduce exposure to market risks associated with assets held or expected to be purchased or sold and liabilities incurred or expected to be incurred. Derivatives are used to change the characteristics of our asset/liability mix consistent with our risk management activities. Additionally, derivatives are also used in asset replication strategies. We do not buy, sell or hold these investments for trading purposes.

    Types of Derivative Instruments

         Interest rate swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts based upon designated market rates or rate indices and an agreed upon notional principal amount. Generally, no cash is exchanged at the outset of the contract and no principal payments are made by either party. Cash is paid or received based on the terms of the swap. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty at each due date. We use interest rate swaps primarily to more closely match the interest rate characteristics of assets and liabilities arising from timing mismatches between assets and liabilities (including duration mismatches). We also use interest rate swaps to hedge against changes in the value of assets we anticipate acquiring and other anticipated transactions and commitments. Interest rate swaps are used to hedge against changes in the value of the guaranteed minimum withdrawal benefit (“GMWB”) liability. The GMWB rider on our variable annuity products provides for guaranteed minimum withdrawal benefits regardless of the actual performance of various equity and/or fixed income funds available with the product.

     

     

     

     

    33

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    8. Derivative Financial Instruments — (continued)

         In exchange-traded futures transactions, we agree to purchase or sell a specified number of contracts, the values of which are determined by the values of designated classes of securities, and to post variation margin on a daily basis in an amount equal to the difference in the daily market values of those contracts. We enter into exchange-traded futures with regulated futures commissions merchants who are members of a trading exchange. We have used exchange-traded futures to reduce market risks from changes in interest rates, to alter mismatches between the assets in a portfolio and the liabilities supported by those assets, and to hedge against changes in the value of securities we own or anticipate acquiring or selling. We use exchange-traded futures to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity product, as previously explained.

         A swaption is an option to enter into an interest rate swap at a future date. We write these options and receive a premium in order to transform our callable liabilities into fixed term liabilities. Swaptions provide us the benefit of the agreed-upon strike rate if the market rates for liabilities are higher, with the flexibility to enter into the current market rate swap if the market rates for liabilities are lower. Swaptions not only hedge against the downside risk, but also allow us to take advantage of any upside benefits. In addition, we may sell an investment-type contract with attributes tied to market indices (an embedded derivative as noted below), in which case we write an equity call option to convert the overall contract into a fixed-rate liability, essentially eliminating the equity component altogether. We purchase equity call spreads to hedge the equity participation rates promised to contractholders in conjunction with our fixed deferred annuity products that credit interest based on changes in an external equity index. Equity put options are used to hedge against changes in the value of the GMWB liability related to the GMWB rider on our variable annuity products, as previously explained.

         Currency forwards are contracts in which we agree with other parties to deliver a specified amount of an identified currency at a specified future date. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at the specified future date. Currency swaps are contracts in which we agree with other parties to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate as calculated by reference to an agreed principal amount. Generally, the principal amount of each currency is exchanged at the beginning and termination of the currency swap by each party. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made by one counterparty for payments made in the same currency at each due date. We use currency forwards and currency swaps to reduce market risks from changes in currency exchange rates with respect to investments or liabilities denominated in foreign currencies that we either hold or intend to acquire or sell.

         We use credit default swaps to enhance the return on our investment portfolio by providing comparable exposure to fixed income securities that might not be available in the primary market. They are also occasionally used to hedge credit exposures in our investment portfolio. Credit derivatives are used to sell or buy credit protection on an identified name or names on an unfunded or synthetic basis in return for receiving or paying a quarterly premium. At the same time we enter into these synthetic transactions, we buy a quality cash bond to match against the credit default swap. The premium generally corresponds to a referenced name's credit spread at the time the agreement is executed. When selling protection, if there is an event of default by the referenced name, as defined by the agreement, we are obligated to pay the counterparty the referenced amount of the contract and receive in return the referenced security in an amount equal to the notional value of the credit default swap.

         Commodity swaps are used to sell or buy protection on commodity prices in return for receiving or paying a quarterly premium. We purchased AAA rated secured limited recourse notes from VIEs that are consolidated in our financial results. These VIEs use a commodity swap to enhance the return on an investment portfolio by selling protection on a static portfolio of commodity trigger swaps, each referencing a base or precious metal. The portfolio of commodity trigger swaps is a portfolio of deep out-of-the-money European puts on various base or precious metals. The VIEs provide mezzanine protection that the average spot rate will not fall below a certain trigger price on each commodity trigger swap in the portfolio and receives guaranteed quarterly premiums in return until maturity. At the same time the VIEs enter into this synthetic transaction, they buy a quality cash bond to match against the commodity swaps.

     

     

     

     

    34

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    8. Derivative Financial Instruments — (continued) Exposure

         Our risk of loss is typically limited to the fair value of our derivative instruments and not to the notional or contractual amounts of these derivatives. Risk arises from changes in the fair value of the underlying instruments. We are also exposed to credit losses in the event of nonperformance of the counterparties. Our current credit exposure is limited to the value of derivatives that have become favorable to us. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings and by establishing and monitoring exposure limits. We also utilize various credit enhancements, including collateral and credit triggers to reduce the credit exposure to our derivative instruments.

         Our derivative transactions are generally documented under International Swaps and Derivatives Association, Inc. Master Agreements. Management believes that such agreements provide for legally enforceable set-off and close-out netting of exposures to specific counterparties. Under such agreements, in connection with an early termination of a transaction, we are permitted to set off our receivable from a counterparty against our payables to the same counterparty arising out of all included transactions. We do not offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparties under master netting agreements.

         We posted $300.7 million and $126.8 million in cash and securities under collateral arrangements as of December 31, 2008 and 2007, respectively, to satisfy collateral requirements associated with our derivative credit support agreements.

         As of December 31, 2008 and 2007, we had received $257.2 million and $314.8 million, respectively of cash collateral associated with our derivative credit support annex agreements.

    The notional amounts and credit exposure of our derivative financial instruments by type were as follows:

                                       December 31,  
      2008   2007
                                        (in millions)   
    Notional amounts of derivative instruments       
    Interest rate swaps  $ 23,799.8 $ 18,162.3
    Foreign currency swaps  6,274.6   6,325.1
    Embedded derivative financial instruments  2,459.8   1,701.5
    Credit default swaps  1,948.9   1,134.8
    Options  797.5   572.0
    Futures  161.0   57.7
    Swaptions  94.8   488.8
    Commodity swaps  40.0   40.0
    Currency forwards  —   227.8
    Total notional amounts at end of year  $ 35,576.4 $ 28,710.0
     
    Credit exposure of derivative instruments       
    Interest rate swaps  $ 1,105.1  $ 286.0 
    Foreign currency swaps  558.1    800.5 
    Options  222.1    64.4 
    Credit default swaps  70.7    5.6 
    Currency forwards  —    2.5 
    Commodity swaps  —    0.3 
    Total credit exposure at end of year  1,956.0    1,159.3 
    Less: Collateral received  278.5    326.5 
    Net credit exposure at end of year  $ 1,677.5  $ 832.8 

     

     

     

     

    35

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    8. Derivative Financial Instruments — (continued)

         The fair value of our derivative instruments classified as assets at December 31, 2008 and 2007, was $1,873.2 million and $1,067.3 million, respectively, and was reported with other investments on the consolidated statements of financial position. The fair value of derivative instruments classified as liabilities at December 31, 2008 and 2007, was $2,034.5 million and $588.6 million, respectively, and was reported with other liabilities on the consolidated statements of financial position. The fair value of embedded derivative liabilities reported with contractholder funds on the consolidated statements of financial position at December 31, 2008 and 2007, was $39.9 million and $49.3 million, respectively. The fair value of embedded derivative liabilities reported with other liabilities on the consolidated statements of financial position at December 31, 2008 and 2007, was $109.3 million and $166.2 million, respectively.

    Credit Derivatives Sold

         When we sell credit protection, we are exposed to the underlying credit risk similar to purchasing a fixed maturity security instrument. The majority of our credit derivative contracts sold reference a single name or reference security (referred to as “single name credit default swaps”). The remainder of our credit derivatives reference either a basket or index of securities. These instruments are either referenced in an over-the-counter credit derivative transaction, or embedded within an investment structure that has been fully consolidated into our financial statements.

         These credit derivative transactions are subject to events of default defined within the terms of the contract, which normally consist of bankruptcy, failure to pay, or modified restructuring of the reference entity and/or issue. If a default event occurs for a reference name or security, we are obligated to pay the counterparty an amount equal to the notional amount of the credit derivative transaction. As a result, our maximum future payment is equal to the notional amount of the credit derivative. In certain cases, we also have purchased credit protection with identical underlyings to certain of our sold protection transactions. The effect of this purchased protection would reduce our total maximum future payments by $60.8 million and $10.0 million and these credit derivative transactions have a net fair value of $21.2 million and $0.2 million at December 31, 2008 and 2007, respectively. Our potential loss could also be reduced by any amount recovered in the default proceedings of the underlying credit name.

         We purchased certain investment structures with embedded credit features that are fully consolidated into our financial statements. This consolidation results in recognition of the underlying credit derivatives and collateral within the structure, typically high quality fixed maturity securities that are owned by a special purpose vehicle. These credit derivatives reference a single name or several names in a basket structure. In the event of default, the collateral within the structure would typically be liquidated to pay the claims of the credit derivative counterparty.

     

     

     

     

     

     

     

     

     

     

    36

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    8. Derivative Financial Instruments — (continued)

         The following tables show our credit default swap protection sold by types of contract, types of referenced/underlying asset class and external agency rating for the underlying reference security as of December 31, 2008 and 2007. The maximum future payments are undiscounted and have not been reduced by the effect of any offsetting transactions, collateral or recourse features described above.


     

     

     

     

    37

    Principal Life Insurance Company 
    Notes to Consolidated Financial Statements — (continued) 
     
    8. Derivative Financial Instruments — (continued) 


         We also have invested in available-for-sale fixed maturity securities that contain credit default swaps that do not require bifurcation. These securities are subject to the credit risk of the issuer, normally a special purpose vehicle, which consists of the underlying credit default swaps and high quality fixed maturity securities that serve as collateral. A default event occurs if the cumulative losses exceed a specified attachment point, which is typically not the first loss of the portfolio. If a default event occurs that exceeds the specified attachment point, our investment may not be fully returned. We would have no future potential payments under these investments. The following tables show by the types of referenced/underlying asset class and external rating of the available-for-sale fixed maturity security our fixed maturity securities with nonbifurcatable embedded credit derivatives as of December 31, 2008 and 2007.

     

     

     

     

    38

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued)
     
    8. Derivative Financial Instruments — (continued)       
     
      December 31, 2008
          Weighted
          average
      Amortized Carrying expected life
      cost value (in years)
      (in millions)
    Corporate debt       
             AAA  $ 55.0   $25.9  4.5 
             AA  5.0  4.0  1.3 
             A  35.0  19.0  3.1 
             BB  44.9  16.5  5.9 
             B  1.4  1.4  8.7 
             C  8.8  5.7  8.0 
    Structured finance       
             AAA  32.0  17.1  5.5 
             AA  47.4  18.4  5.6 
             A  66.0  15.1  5.5 
             BBB  34.4  14.4  6.5 
             BB  54.8  7.0  8.2 
             CCC  0.4  0.4  3.0 
    Total fixed maturity securities with credit derivatives  $ 385.1   $144.9  5.8 
     
      December 31, 2007
          Weighted
          average
      Amortized Carrying expected life
      cost value (in years)
      (in millions)
    Corporate debt       
             AAA  $ 68.3  $ 68.0  1.4 
             AA  216.8  181.3  7.3 
             A  90.3  75.7  6.4 
    Structured finance       
             AAA  67.4  58.2  7.9 
             AA  42.5  23.7  5.6 
             A  89.0  62.4  5.4 
             BBB  94.6  62.2  8.7 
    Total fixed maturity securities with credit derivatives  $ 668.9  $531.5  6.5 
     
    Fair Value Hedges       

         We use fixed-to-floating rate interest rate swaps to more closely align the interest rate characteristics of certain assets and liabilities. In general, these swaps are used in asset and liability management to modify duration, which is a measure of sensitivity to interest rate changes.

         We enter into currency exchange swap agreements to convert certain foreign denominated assets and liabilities into U.S. dollar floating-rate denominated instruments to eliminate the exposure to future currency volatility on those items.

         We also sell callable investment-type agreements and use cancellable interest rate swaps and written interest rate swaptions to hedge the changes in fair value of the callable feature.

         The net interest effect of interest rate swap and currency swap transactions for derivatives in fair value hedges is recorded as an adjustment to income or expense of the underlying hedged item in our consolidated statements of operations.

     

     

     

    39

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    8. Derivative Financial Instruments — (continued)

         We recognized a pre-tax net gain (loss) of $(12.5) million, $(7.9) million and $4.7 million in 2008, 2007, and 2006, respectively, relating to the ineffective portion of our fair value hedges, which was reported with net realized capital gains (losses) in our consolidated statements of operations. All gains or losses on derivatives were included in the assessment of hedge effectiveness.

    Cash Flow Hedges

         We utilize floating-to-fixed rate interest rate swaps to eliminate the variability in cash flows of recognized financial assets and liabilities and forecasted transactions.

         We enter into currency exchange swap agreements to convert both principal and interest payments of certain foreign denominated assets and liabilities into U.S. dollar denominated fixed-rate instruments to eliminate the exposure to future currency volatility on those items.

         The net interest effect of interest rate swap and currency swap transactions for derivatives in cash flow hedges is recorded as an adjustment to income or expense of the underlying hedged item in our consolidated statements of operations.

         In 2008, 2007 and 2006, we recognized a pre-tax increase (decrease) in fair value of $124.4 million, $(7.5) million and $0.3 million, respectively, related to cash flow hedges in accumulated other comprehensive income. During this time period, none of our cash flow hedges have been discontinued because it was probable that the original forecasted transaction would not occur by the end of the originally specified time period. We reclassified pre-tax net losses of $3.3 million, $3.9 million, and $0.7 million from accumulated comprehensive income into net income during 2008, 2007 and 2006, respectively, which are the portion of deferred losses related to the variability in hedged cash flows that impacted net income in those periods. We expect to reclassify net gains of $21.3 million in the next 12 months.

         For the years ended December 31, 2008, 2007 and 2006, we recognized a pre-tax gain of $0.4 million, $2.0 million, and $2.5 million in net income due to cash flow hedge ineffectiveness, respectively. All gains or losses on derivatives were included in the assessment of hedge effectiveness.

         The maximum length of time that we are hedging our exposure to the variability in future cash flows for forecasted transactions, excluding those related to the payments of variable interest on existing financial assets and liabilities, is 11.5 years. At December 31, 2008, we had $162.3 million of gross unrealized gains and $42.6 million of gross unrealized losses reported in accumulated other comprehensive income on the consolidated statements of financial position related to hedges of forecasted transactions.

    Derivatives Not Designated as Hedging Instruments

         Our use of futures, certain swaptions and swaps, options and currency forwards are effective from an economic standpoint, but they have not been designated as hedges for financial reporting purposes. As such, periodic changes in the market value of these instruments, which includes unrealized gains and losses as well as periodic and final settlements, flow directly into net realized capital gains (losses). For the years ended December 31, 2008, 2007 and 2006, pre-tax gains (losses) of $(104.4) million, $(77.9) million and $10.0 million, respectively, were recognized in net income from market value changes of derivatives not receiving hedge accounting treatment, including market value changes of embedded derivatives that have been bifurcated from the host contract.

    Embedded Derivatives

         We purchase or issue certain financial instruments or products that contain a derivative instrument that is embedded in the financial instrument or product. When it is determined that the embedded derivative possesses economic characteristics that are not clearly or closely related to the economic characteristics of the host contract and a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the consolidated statements of financial position, is carried at fair value with changes in fair value reported in net income.

     

     

    40

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    8. Derivative Financial Instruments — (continued)

         We sell investment-type liability contracts in which the return is tied to an external equity index, a leveraged inflation index or leveraged reference swap. These returns are embedded options that are bifurcated from the host investment-type contract and accounted for separately. We economically hedge the embedded equity derivative by writing equity call options with identical features to convert the overall contract into a fixed-rate liability, effectively eliminating the equity component altogether. For the years ended December 31, 2008, 2007 and 2006, respectively, we recognized a pre-tax gain (loss) of $(8.1) million, $0.1 million and $3.1 million on the purchased equity call options and a pre-tax gain (loss) of $8.1 million, $(0.1) million and $(3.1) million on the change in fair value of the embedded derivatives in net realized capital gains (losses). We economically hedge the leveraged embedded derivatives with interest rate swaps and currency swaps to convert them to a fixed-rate liability or floating rate U.S. dollar liability. For the years ended December 31, 2008, 2007 and 2006, respectively, we recognized a pre-tax gain (loss) of $2.7 million, $4.6 million and $(2.6) million on the swaps and a pre-tax gain (loss) of $(6.3) million, $(4.6) million and $6.0 million on the change in fair value of the embedded derivatives in net realized capital gains (losses).

         We have group benefit plan contracts that have guaranteed separate accounts as an investment option. These contracts contain an embedded option, or guarantee, that has been bifurcated and accounted for separately. For the year ended December 31, 2008, we recognized a $7.6 million pre-tax loss on the change in fair value of the embedded derivative in net realized capital gains (losses). There was no pre-tax gain or loss recognized for the years ended December 31, 2007 and 2006.

         We contributed undated subordinated floating rate notes to three grantor trusts. The trusts separated the cash flows of the underlying notes by issuing an interest-only certificate and a residual certificate related to each note contributed. We retained the interest-only certificates and the residual certificates were subsequently sold to a third party. We have determined these grantor trusts are VIEs and it is necessary for us to consolidate these entities. The obligation to deliver the underlying securities to residual certificate holders of $103.8 million and $155.6 million as of December 31, 2008 and 2007, respectively is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying securities. For the years ended December 31, 2008, 2007 and 2006, respectively, we recognized a pre-tax gain of $70.0 million, $19.6 million and $7.2 million on the change in fair value of the obligation, which is reflected in accumulated other comprehensive income on the consolidated statements of financial position.

         During 2005, we purchased existing Class A units of a trust that represent interest payments on the underlying security within the trust. The trust also issued Class B units representing the residual interests in the underlying security. We have determined that this trust is a VIE and it is necessary for us to consolidate this entity. The obligation to deliver the underlying security to the Class B unit holder of $5.5 million and $10.6 million as of December 31, 2008 and 2007, respectively, is classified as an other liability and contains an embedded derivative of the forecasted transaction to deliver the underlying security. For the years ended December 31, 2008, 2007 and 2006, respectively, we recognized a pre-tax gain (loss) of $6.1 million, $2.3 million and $(0.5) million on the change in fair value of the obligation, which is reflected in accumulated other comprehensive income on the consolidated statements of financial position.

         We offer a fixed deferred annuity product that credits interest based on changes in an external equity index. It contains an embedded derivative that has been bifurcated and accounted for separately, with changes in fair value reported in net realized capital gains (losses). We economically hedge the fixed deferred annuity product by purchasing options that match the product's profile. For the years ended December 31, 2008, 2007 and 2006, respectively, we recognized a pre-tax gain (loss) of $(12.6) million, $1.2 million and $5.3 million on the call spread options purchased and a pre-tax gain (loss) of $13.1 million, $(2.7) million and $(6.1) million on the change in fair value of the embedded derivatives.

     

     

     

     

     

     

    41

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    8. Derivative Financial Instruments — (continued)

         We offer certain variable annuity products with a GMWB rider. The GMWB provides that the contractholder will receive at least their principal deposit back through withdrawals of up to a specified annual amount, even if the account value is reduced to zero. The GMWB represents an embedded derivative in the variable annuity contract that is required to be reported separately from the host variable annuity contract. Declines in the equity market may increase our exposure to benefits under contracts with the GMWB. We economically hedge the GMWB exposure using futures, options and interest rate swaps. For the years ended December 31, 2008, 2007 and 2006, respectively, we recognized in net income a pre-tax gain (loss) of $171.5 million, $8.9 million and $(4.2) million on the hedging instruments and a pre-tax gain (loss) of $(37.4) million, $(19.7) million and $2.8 million on the change in fair value of the embedded derivatives, respectively. The adoption of SFAS 157 during 2008 resulted in the incorporation of our own non-performance risk and additional risk margins in the valuation of the GMWB. In 2008, the difference in the gain on the hedging instruments and the loss on the GMWB is largely attributable to the inclusion of our own non-performance risk in the valuation of the GMWB, which is a risk we do not attempt to hedge.

    9. Closed Block

         In connection with the 1998 MIHC formation, we formed a Closed Block to provide reasonable assurance to policyholders included therein that, after the formation of the MIHC, assets would be available to maintain dividends in aggregate in accordance with the 1997 policy dividend scales, if the experience underlying such scales continued. Certain of our assets were allocated to the Closed Block in an amount that produces cash flows which, together with anticipated revenue from policies and contracts included in the Closed Block, were expected to be sufficient to support the Closed Block policies, including, but not limited to, provisions for payment of claims, certain expenses, charges and taxes, and to provide for continuation of policy and contract dividends in aggregate in accordance with the 1997 dividend scales, if the experience underlying such scales continues, and to allow for appropriate adjustments in such scales, if such experience changes. Due to adjustable life policies being included in the Closed Block, the Closed Block is charged with amounts necessary to properly fund for certain adjustments, such as face amount and premium increases, that are made to these policies after the Closed Block inception date. These amounts are referred to as Funding Adjustment Charges and are treated as capital transfers from the Closed Block.

         Assets allocated to the Closed Block inure solely to the benefit of the holders of policies included in the Closed Block. Closed Block assets and liabilities are carried on the same basis as other similar assets and liabilities. We will continue to pay guaranteed benefits under all policies, including the policies within the Closed Block, in accordance with their terms. If the assets allocated to the Closed Block, the investment cash flows from those assets and the revenues from the policies included in the Closed Block, including investment income thereon, prove to be insufficient to pay the benefits guaranteed under the policies included in the Closed Block, we will be required to make such payments from their general funds. No additional policies were added to the Closed Block, nor was the Closed Block affected in any other way, as a result of the demutualization.

         A policyholder dividend obligation (“PDO”) is required to be established for earnings in the Closed Block that are not available to PFG stockholders. A model of the Closed Block was established to produce the pattern of expected earnings in the Closed Block (adjusted to eliminate the impact of related amounts in accumulated other comprehensive income).

         If actual cumulative earnings of the Closed Block are greater than the expected cumulative earnings of the Closed Block, only the expected cumulative earnings will be recognized in income with the excess recorded as a PDO. This PDO represents undistributed accumulated earnings that will be paid to Closed Block policyholders as additional policyholder dividends unless offset by future performance of the Closed Block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in income. At December 31, 2008 and 2007, cumulative actual earnings have been less than cumulative expected earnings. Additionally, cumulative net unrealized gains (losses) did not exceed the cumulative expected earnings. Therefore, there was no PDO liability as of December 31, 2008 and 2007.

     

     

     

     

     

     

    42

    Principal Life Insurance Company     
    Notes to Consolidated Financial Statements — (continued)     
    9. Closed Block — (continued)     
     
                       Closed Block liabilities and assets designated to the Closed Block were as follows:     
                   December 31, 
             2008       2007 
                     (in millions) 
                       Closed Block liabilities     
                       Future policy benefits and claims  $ 5,309.9  $ 5,362.1 
                       Other policyholder funds  25.9  26.7 
                       Policyholder dividends payable  328.9  351.1 
                       Other liabilities  47.1  71.1 
                           Total Closed Block liabilities  5,711.8  5,811.0 
                       Assets designated to the Closed Block     
                       Fixed maturities, available-for-sale  2,429.5  3,032.4 
                       Fixed maturities, trading  32.8  10.2 
                       Equity securities, available-for-sale  15.9  22.2 
                       Mortgage loans  618.1  638.1 
                       Policy loans  758.2  753.4 
                       Other investments  183.8  122.8 
                           Total investments  4,038.3  4,579.1 
                       Cash and cash equivalents  39.4            — 
                       Accrued investment income  70.1  73.3 
                       Deferred income tax asset  270.4  94.8 
                       Premiums due and other receivables  18.2  20.1 
                       Other assets                      —  39.2 
                           Total assets designated to the Closed Block  4,436.4  4,806.5 
                       Excess of Closed Block liabilities over assets designated to the Closed Block  1,275.4  1,004.5 
                       Amounts included in accumulated other comprehensive income (loss)  (307.7)  10.9 
                       Maximum future earnings to be recognized from Closed Block assets and liabilities  $ 967.7  $ 1,015.4 

     

     

     

     

     

     

     

     

    43

    Principal Life Insurance Company             
    Notes to Consolidated Financial Statements — (continued)         
     
    9. Closed Block — (continued)             
     
                       Closed Block revenues and expenses were as follows:             
     
        For the year ended December 31, 
                   2008  2007         2006 
        (in millions)
                       Revenues             
                       Premiums and other considerations    $ 550.4  $ 576.6    $ 596.7 
                       Net investment income    280.9  288.3    293.2 
                       Net realized capital losses               (12.7)  (12.9)    (0.9) 
                           Total revenues    818.6  852.0    889.0 
                       Expenses             
                       Benefits, claims and settlement expenses    467.6  485.8    497.0 
                       Dividends to policyholders    261.8  286.4    287.0 
                       Operating expenses      7.4  12.1    5.5 
                           Total expenses    736.8  784.3    789.5 
                       Closed Block revenue, net of Closed Block expenses, before income taxes    81.8  67.7    99.5 
                       Income taxes    25.6  20.7    32.2 
                       Closed Block revenue, net of Closed Block expenses and income taxes    56.2  47.0    67.3 
                       Funding adjustment charges    (8.5)  (9.4)    (7.7) 
                       Closed Block revenue, net of Closed Block expenses, income taxes and funding           
                           adjustment charges    $ 47.7  $ 37.6    $ 59.6 
     
                       The change in maximum future earnings of the Closed Block was as follows:             
     
         For the year ended December 31, 
        2008    2007    2006 
        (in millions)
                       Beginning of year  $ 1,015.4  $ 1,053.0  $ 1,112.6 
                       End of year       967.7    1,015.4    1,053.0 
                       Change in maximum future earnings  $ (47.7)  $ (37.6)  $ (59.6) 

         We charge the Closed Block with federal income taxes, payroll taxes, state and local premium taxes and other state or local taxes, licenses and fees as provided in the plan of reorganization.

    10. Deferred Policy Acquisition Costs       
     
                       Policy acquisition costs deferred and amortized in 2008, 2007 and 2006 were as follows:   
     
      For the year ended December 31, 
      2008  2007           2006 
        (in millions)   
                       Balance at beginning of year  $ 2,626.7  $ 2,265.9  $ 2,069.9 
                       Cost deferred during the year  637.8  568.7  445.8 
                       Amortized to expense during the year  (375.1)  (351.4)  (236.8) 
                       Adjustment related to unrealized (gains) losses on available-for-sale       
                           securities and derivative instruments  1,080.7  143.5  (13.0) 
                       Balance at end of year  $ 3,970.1  $ 2,626.7  $ 2,265.9 

     

     

     

     

    44

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    11. Insurance Liabilities Contractholder Funds

         Major components of contractholder funds in the consolidated statements of financial position are summarized as follows:

      December 31,
                                                2008    2007 
      (in millions)
    Liabilities for investment-type contracts:       
       GICs  $ 11,857.4  $ 11,698.8 
       Funding agreements  15,757.3    16,193.4 
       Other investment-type contracts  987.1    1,236.8 
    Total liabilities for investment-type contracts  28,601.8    29,129.0 
    Liabilities for individual annuities  11,128.6    8,259.7 
    Universal life and other reserves  3,316.0    2,878.8 
    Total contractholder funds  $ 43,046.4  $ 40,267.5 

         Our GICs and funding agreements contain provisions limiting early surrenders, which typically include penalties for early surrenders, minimum notice requirements or, in the case of funding agreements with survivor options, minimum pre-death holding periods and specific maximum amounts.

         Funding agreements include those issued directly to nonqualified institutional investors, as well as to four separate programs where the funding agreements have been issued directly or indirectly to unconsolidated special purpose entities. Claims for principal and interest under funding agreements are afforded equal priority to claims of life insurance and annuity policyholders under insolvency provisions of Iowa Insurance Laws.

         We are authorized to issue up to $4.0 billion of funding agreements under a program established in 1998 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. As of December 31, 2008 and 2007, $3,159.1 million and $3,935.3 million, respectively, of liabilities are outstanding with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program as we are authorized to issue up to Euro 4.0 billion (approximately USD$5.3 billion) of funding agreements under a program established in 2006 to support the prospective issuance of medium term notes by an unaffiliated entity in non-U.S. markets. The unaffiliated entity is an unconsolidated special purpose vehicle. As of December 31, 2008 and 2007, $1,415.2 million and $1,469.8 million, respectively, of liabilities are outstanding with respect to the issuance outstanding under this new program.

         In addition, we were authorized to issue up to $7.0 billion of funding agreements under a program established in 2001 to support the prospective issuance of medium term notes by an unaffiliated entity in both domestic and international markets. The unaffiliated entity is an unconsolidated qualifying special purpose entity. As of December 31, 2008 and 2007, $2,468.7 million and $3,109.9 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. We do not anticipate any new issuance activity under this program, given our December 2005 termination of the dealership agreement for this program and the availability of the SEC-registered program described in the following paragraph.

         We were authorized to issue up to $4.0 billion of funding agreements under a program established in March 2004 to support the prospective issuance of medium term notes by unaffiliated entities in both domestic and international markets. In February 2006, this program was amended to authorize issuance of up to an additional $5.0 billion in recognition of the use of nearly all $4.0 billion of initial issuance authorization. In recognition of the use of nearly all $9.0 billion, this program was amended in November 2007 to authorize issuance of up to an additional $5.0 billion. Under this program, both the notes and the supporting funding agreements are registered with the SEC. As of December 31, 2008 and 2007, $7,655.5 million and $6,748.5 million, respectively, of liabilities are being held with respect to the issuance outstanding under this program. In contrast with direct funding agreements, GIC issuances and the other three funding agreement-backed medium term note programs described above, our payment obligations on each funding agreement issued under this SEC-registered program are guaranteed by PFG.

         Due to a downturn in the credit market, we reduced the amount of medium term note issuances in 2008. As economic conditions change, we will reassess the use of our medium term note programs.

     

     

     

    45

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    11. Insurance Liabilities — (continued) Future Policy Benefits and Claims

    Activity associated with unpaid accident and health claims is summarized as follows:

                 For the year ended December 31, 
                                                      2008         2007         2006 
      (in millions)
    Balance at beginning of year  $ 964.3  $ 877.2  $ 814.8 
    Incurred:       
       Current year  1,994.5  2,160.6  2,047.5 
       Prior years  (56.7)  (12.8)  (37.5) 
    Total incurred  1,937.8  2,147.8  2,010.0 
    Payments:       
       Current year  1,588.6  1,738.5  1,666.9 
       Prior years  321.7  322.2  280.7 
    Total payments  1,910.3  2,060.7  1,947.6 
    Balance at end of year:       
       Current year  405.9  422.1  380.6 
       Prior years  585.9  542.2  496.6 
    Total balance at end of year  $ 991.8  $ 964.3  $ 877.2 

         The activity summary in the liability for unpaid accident and health claims shows a decrease of $56.7 million, $12.8 million and $37.5 million for the years ended December 31, 2008, 2007 and 2006, respectively, relating to prior years. Such liability adjustments, which affected current operations during 2008, 2007 and 2006, respectively, resulted in part from developed claims for prior years being different than were anticipated when the liabilities for unpaid accident and health claims were originally estimated. These trends have been considered in establishing the current year liability for unpaid accident and health claims. We also had claim adjustment expense liabilities of $39.1 million, $37.0 million and $33.4 million, and related reinsurance recoverables of $4.3 million, $4.2 million and $4.9 million in 2008, 2007 and 2006, respectively, which are not included in the rollforward above.

    12. Debt Short-Term Debt

         As of December 31, 2008, we had credit facilities with various financial institutions in an aggregate amount of $450.0 million. As of December 31, 2008 and 2007, we had $291.1 million and $344.5 million of outstanding borrowings related to our credit facilities, which consisted of a payable to PFSI, and had no assets pledged as support. Interest paid on intercompany debt was $8.3 million, $19.6 million and $23.8 million during 2008, 2007 and 2006, respectively.

         The weighted-average interest rates on short-term borrowings as of December 31, 2008 and 2007, were 0.5% and 4.7% respectively.

    Long-Term Debt

    The components of long-term debt as of December 31, 2008 and 2007, were as follows:

         December 31, 
                 2008 2007 
         (in millions) 
    8% surplus notes payable, due 2044  $ 99.2  $ 99.2 
    Non-recourse mortgages and notes payable                   —  63.2 
    Other mortgages and notes payable                   22.0  24.5 
    Total long-term debt  $ 121.2  $ 186.9 

         The amounts included above are net of the discount and premium associated with issuing these notes, which are being amortized to expense over their respective terms using the interest method.

     

     

    46

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    12. Debt — (continued)

         On March 10, 1994, we issued $100.0 million of surplus notes due March 1, 2044, at an 8% annual interest rate. None of our affiliates hold any portion of the notes. Each payment of interest and principal on the notes, however, may be made only with the prior approval of the Commissioner of Insurance of the State of Iowa (the “Commissioner”) and only to the extent that we have sufficient surplus earnings to make such payments. Interest of $8.0 million for each of the years ended December 31, 2008, 2007 and 2006 was approved by the Commissioner, and charged to expense.

         Subject to Commissioner approval, the notes due March 1, 2044, may be redeemed at our election on or after March 1, 2014, in whole or in part at a redemption price of approximately 102.3% of par. The approximate 2.3% premium is scheduled to gradually diminish over the following ten years. These notes may be redeemed on or after March 1, 2024, at a redemption price of 100% of the principal amount plus interest accrued to the date of redemption.

         The non-recourse mortgages, other mortgages and notes payable are primarily financings for real estate developments. Outstanding principal balances as of December 31, 2008, ranged from $6.0 million to $9.3 million per development with interest rates generally ranging from 5.5% to 5.8% . Outstanding principal balances as of December 31, 2007, ranged from $3.0 million to $41.2 million per development with interest rates generally ranging from 5.5% to 8.1% . Outstanding debt is secured by the underlying real estate properties, which were reported as real estate on our consolidated statements of financial position with a carrying value of $30.4 million and $141.1 million as of December 31, 2008 and 2007, respectively.

    At December 31, 2008, future annual maturities of the long-term debt were as follows (in millions):

                       Year ending December 31:       
                               2009    $ 0.5 
                               2010      0.4 
                               2011      0.4 
                               2012      0.4 
                               2013      8.8 
                               Thereafter      110.7 
                               Total future maturities of the long-term debt    $ 121.2 
     
    13. Income Taxes       
     
                       Our income tax expense from continuing operations was as follows:       
     
      For the year ended December 31, 
                      2008  2007     2006 
      (in millions)
                       Current income taxes:       
                           U.S. federal  $ 116.0  $ 288.7  $ 233.9 
                           State and foreign  34.7  25.3  49.0 
                       Total current income taxes  150.7  314.0  282.9 
                       Deferred income taxes  (106.4)  (112.8)  37.1 
                       Total income taxes  $ 44.3  $ 201.2  $ 320.0 

         Our provision for income taxes may not have the customary relationship of taxes to income. A reconciliation between the U.S. corporate income tax rate and the effective tax rate from continuing operations is as follows:

      For the year ended
      December 31,
      2008 2007  2006 
    U.S. corporate income tax rate  35%  35%  35% 
    Dividends received deduction  (19)  (12)  (8) 
    Interest exclusion from taxable income   (6)  (2)  (1) 
    Other  —  1  (1) 
    Effective income tax rate  10%  22%  25% 

     

     

    47

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    13. Income Taxes — (continued)

         We adopted the provisions of FIN 48 on January 1, 2007. The application of FIN 48 did not have a material impact on our consolidated financial statements. As of December 31, 2008, the total unrecognized benefits were $62.9 million. Of this amount, $24.4 million, if recognized, would reduce the 2008 effective tax rate. We recognize interest and penalties related to uncertain tax positions in operating expenses. As of December 31, 2008 and 2007, we had recognized $21.3 million and $17.8 million of accumulated pre-tax interest and penalties related to unrecognized tax benefits, respectively, of which $3.5 million was included in net income during 2008.

           A summary of the changes in unrecognized tax benefits follows.       
     
      For the year ended December 31,
           2008   2007 
      (in millions)
    Balance at beginning of year  $ 59.5  $ 60.0 
       Additions based on tax positions related to the current year                               1.7    0.1 
       Additions for tax positions of prior years                               4.1    — 
       Reductions for tax positions related to the current year                           (2.1)    — 
       Reductions for tax positions of prior years                           (0.3)    (0.6) 
    Balance at end of year  $ 62.9  $ 59.5 
     
           Significant components of our net deferred income taxes were as follows:       
                     December 31, 
                         2008    2007 
                  (in millions)  
    Deferred income tax assets:       
       Net unrealized losses on available-for-sale securities            $ 2,237.6            $ — 
       Insurance liabilities  400.3  377.9 
       Net operating loss carryforwards  187.2  104.6 
       Post-retirement benefits  479.2  54.0 
       Stock-based compensation  48.3  46.2 
       Other deferred income tax assets  58.9  41.9 
           Gross deferred income tax assets  3,411.5  624.6 
           Valuation allowance  (5.3)  (4.8) 
           Total deferred income tax assets  3,406.2  619.8 
    Deferred income tax liabilities:       
       Deferred policy acquisition costs  (810.2)  (733.8) 
       Real estate  (150.5)  (170.5) 
       Net unrealized gains on available-for-sale securities                   —   (26.9) 
       Intangible assets  (25.7)  (33.8) 
       Other deferred income tax liabilities  (87.3)  (41.1) 
           Total deferred income tax liabilities  (1,073.7)  (1,006.1) 
    Total net deferred income tax assets (liabilities)  $ 2,332.5 $  (386.3) 
     
           Net deferred tax income taxes by jurisdiction are as follows:       
     
      December 31,  
                      2008   2007 
      (in millions)   
    Deferred income tax assets:       
       U.S.  $ 2,336.7  $ — 
    Deferred income tax liabilities:       
       U.S.                         —    (364.5) 
       State  (4.2)    (21.8) 
           Net deferred income tax liabilities  (4.2)    (386.3) 
    Total net deferred income tax assets (liabilities)  $ 2,332.5  $ (386.3) 

     

     

    48

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    13. Income Taxes — (continued)

         In management’s judgment, the total deferred income tax asset is more likely than not to be realized. Included in the deferred income tax asset is the expected income tax benefit attributable to net unrealized losses on available-for-sale securities. There is no valuation allowance provided for the deferred tax asset attributable to unrealized losses on available-for-sale securities. Management expects to recover the unrealized losses by holding the securities until maturity or recovery in value; therefore, the related deferred tax asset is expected to reverse over time.

         The total deferred income tax asset also includes capital and net operating loss carryforwards for tax purposes available to offset future capital gains and taxable income, respectively. The capital loss carryforward was $110.0 million as of December 31, 2008 and will expire if unused by 2013. Domestic state net operating loss carryforwards were $1.0 million as of December 31, 2008, and will expire between 2009 and 2025. A valuation allowance has been recorded on income tax benefits associated with state net operating loss carryforwards. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of the deferred income tax asset that is more likely than not to be realized.

         Accumulated net operating losses of $376.6 million and $263.8 million at December 31, 2008 and 2007, respectively, are attributed to captive reinsurance companies that are temporarily excluded from the consolidated U.S. federal income tax return. These net operating losses will expire between 2021 and 2023. One of the captive reinsurance companies will be able to join the consolidated U.S. federal income tax return in 2012 with the other in 2013. All accumulated net operating losses are anticipated to be utilized before expiration. Therefore, no valuation allowance has been provided for the deferred income tax assets attributable to these net operating losses.

         The Internal Revenue Service (“IRS”) has completed examination of the consolidated U.S. federal income tax returns for years prior to 2004. The examination of tax returns for the years 2002 and 2003 resulted in a refund of $176.7 million (including interest) in December 2006, which was consistent with the receivable that we had established for these tax years. We are contesting other issues and have filed suit in the Court of Federal Claims, requesting refunds for the years 1995-2003. At December 31, 2008 and 2007, respectively, our accrual for current tax receivable included $230.8 million and $214.3 million associated with the requested refunds, as it is management’s assessment the refunds will more likely than not be realized. These current tax receivables are included in other assets in the consolidated statements of financial position. We do not expect the litigation to be resolved within the next twelve months.

         The IRS commenced examination of the U.S. consolidated federal income tax returns for 2004-2005 in March 2007. The fieldwork is substantially complete and the final report is expected to be received sometime in the third or fourth quarter 2009. The statute of limitations for the 2004-2005 tax years expires on September 15, 2009. The IRS will begin examination of the U.S. consolidated federal income tax returns for 2006-2007 in the first quarter 2009.

         We believe it is reasonably possible that the amount of our unrecognized tax benefits could increase by $0.0 million to $11.0 million within the next twelve months. The uncertainty is associated with our affiliate’s investment in a transaction that gave rise to foreign tax credits. We expect the IRS to disallow some or all of these foreign tax credits. We believe that we have adequate defenses against, or sufficient provisions for, the contested issues, but final resolution of the contested issues could take several years while legal remedies are pursued. Consequently, we do not expect the ultimate resolution of issues from tax years 1995 - 2003 to have a material impact on our net income. Similarly, we believe there are adequate defenses against, or sufficient provisions for, any challenges that might arise in tax years subsequent to 2003.

     

     

     

     

     

     

    49

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    14. Employee and Agent Benefits

         We have post-retirement benefit plans covering substantially all of our employees and certain agents, including employees of other companies affiliated with our ultimate parent, PFG ("affiliated companies"). Actuarial information regarding the status of the post-retirement benefit plans is calculated for the total plan only. The affiliated company portion of the actuarial present value of the accumulated or projected benefit obligations, or net assets available for benefits, is not separately determined. However, we are reimbursed for employee benefits related to the affiliated companies. The reimbursement is not reflected in our employee and agent benefits disclosures.

         We have defined benefit pension plans covering substantially all of our employees and certain agents. Some of these plans provide supplemental pension benefits to employees with salaries and/or pension benefits in excess of the qualified plan limits imposed by federal tax law. The employees and agents are generally first eligible for the pension plans when they reach age 21. For plan participants employed prior to January 1, 2002, the pension benefits are based on the greater of a final average pay benefit or a cash balance benefit. The final average pay benefit is based on the years of service and generally the employee's or agent's average annual compensation during the last five years of employment. Partial benefit accrual of final average pay benefits is recognized from first eligibility until retirement based on attained service divided by potential service to age 65 with a minimum of 35 years of potential service. The cash balance portion of the plan started on January 1, 2002. An employee's account is credited with an amount based on the employee's salary, age and service. These credits accrue with interest. For plan participants hired on and after January 1, 2002, only the cash balance plan applies. Our policy is to fund the cost of providing pension benefits in the years that the employees and agents are providing service to us. Our funding policy for the qualified defined benefit plan is to contribute an amount annually at least equal to the minimum annual contribution required under the Employee Retirement Income Security Act (“ERISA”), and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. Our funding policy for the non-qualified benefit plan is to fund the plan in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the plans are fully funded on a U.S. GAAP basis, no deposit is made. While we designate assets to cover the computed liability of the non-qualified plan, the assets are not included as part of the asset balances presented in this footnote as they do not qualify as plan assets in accordance with U.S. GAAP.

         We also provide certain health care, life insurance and long-term care benefits for retired employees. Subsidized retiree health benefits are provided for employees hired prior to January 1, 2002. Employees hired after December 31, 2001, have access to retiree health benefits but it is intended that they pay for the full cost of the coverage. The health care plans are contributory with participants' contributions adjusted annually. The contributions are based on the number of years of service and age at retirement for those hired prior to January 1, 2002. As part of the substantive plan, the retiree health contributions are assumed to be adjusted in the future as claim levels change. The life insurance plans are contributory for a small group of previously grandfathered participants that have elected supplemental coverage and dependent coverage.

         Covered employees are first eligible for the health and life postretirement benefits when they reach age 57 and have completed ten years of service with us. Retiree long-term care benefits are provided for employees whose retirement was effective prior to July 1, 2000. Partial benefit accrual of these health, life and long-term care benefits is recognized from the employee's date of hire until retirement based on attained service divided by potential service to age 65 with a minimum of 35 years of potential service. Our policy is to fund the cost of providing retiree benefits in the years that the employees are providing service to us using a methodology similar to the calculation of the net periodic benefit cost under U.S. GAAP, but using long-term assumptions. However, if the plans are fully funded on a U.S. GAAP basis, no deposit is made.

         For 2007, we used a measurement date of October 1 for the pension and other postretirement benefit plans. For 2008, we used a December 31 measurement date as required by SFAS 158.

     

     

     

     

     

     

    50

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    14. Employee and Agent Benefits — (continued) Obligations and Funded Status

         The plans' combined funded status, reconciled to amounts recognized in the consolidated statements of financial position and consolidated statements of operations, was as follows:


         The accumulated benefit obligation for all defined benefit pension plans was $1,535.8 million and $1,363.1 million at December 31, 2008 and 2007, respectively.

         Employer contributions to the pension plans include contributions made directly to the qualified pension plan assets and contributions from corporate assets to pay nonqualified pension benefits. Benefits paid from the pension plans include both qualified and nonqualified plan benefits. Nonqualified pension plan assets are not included as part of the asset balances presented in this footnote. The nonqualified pension plan assets are held in a Rabbi trust for the benefit of all nonqualified plan participants. The assets held in a Rabbi trust are available to satisfy the claims of general creditors only in the event of bankruptcy. Therefore, these assets are fully consolidated in our consolidated statements of financial position and are not reflected in our funded status as they do not qualify as plan assets under U.S. GAAP. The market value of assets held in these trusts was $269.8 million and $237.2 million as of December 31, 2008 and 2007, respectively.

     

     

     

     

     

    51

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    14. Employee and Agent Benefits — (continued) Pension Plan Changes and Plan Gains/Losses

         On January 1, 2008, the vesting schedule for the qualified pension plan and corresponding nonqualified plans changed to a three-year cliff schedule as required by the Pension Protection Act of 2006. This change was recognized as a prior service cost and resulted in an increase in liabilities of $4.3 million at December 31, 2007.

         For the year ended December 31, 2008, the pension plans had an actuarial loss of $8.1 million, primarily due to a decrease in the discount rate offset by a change in certain actuarial assumptions and methods. For the year ended December 31, 2007, the pension plans had an actuarial loss of $33.3 million, primarily due to salary increases greater than assumed, which was partially offset by the increase in the discount rate.

    Other Post Retirement Plan Changes and Plan Gains/Losses

         On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”) was signed into law. The Medicare Modernization Act introduced a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree medical benefit plans. During 2008, 2007 and 2006, the Medicare subsidies we received and accrued for were $0.8 million, $0.8 million and $0.9 million, respectively, and are included in service cost.

         An actuarial loss of $44.0 million occurred during 2008 for the other postretirement benefit plans. This was due to a decrease in the discount rate and a less than expected increase in retiree contributions, which was partially offset by a decrease in the trend assumption and a less than expected increase in health care claim costs. An actuarial gain of $1.2 million occurred during 2007 for the other postretirement benefit plans. This was due to a less than assumed increase in health care claim costs, as well as an increase in the discount rate. The gain was partially offset by an increase of the trend assumption.

    Information for pension plans with an accumulated benefit obligation in excess of plan assets:

         For 2008, both the qualified and nonqualified plans had accumulated benefit obligations in excess of plan assets. For 2007, the obligations below relate only to the nonqualified pension plan liabilities. As noted previously, the nonqualified plans have assets that are deposited in trusts that fail to meet the U.S. GAAP requirements to be included in plan assets; however, these assets are included in our consolidated statements of financial position.

                                               December 31,
                 2008 2007 
                                           (in millions)
    Projected benefit obligation  $ 1,712.1 $ 310.6 
    Accumulated benefit obligation         1,535.8  239.1 
    Fair value of plan assets         1,010.5  1,597.6 

    Information for other postretirement benefit plans with an accumulated postretirement benefit obligation in excess of plan assets:

                        December 31,
      2008 2007 
                        (in millions)
    Accumulated postretirement benefit obligation  $ 87.9 $ 2.0
    Fair value of plan assets    71.6    1.9

     

     

     

     

    52

    Principal Life Insurance Company 
    Notes to Consolidated Financial Statements — (continued) 
    14. Employee and Agent Benefits — (continued) 
    Components of net periodic benefit cost: 


         For 2007, we used a measurement date of October 1 for the pension and other postretirement plans. For 2008, we used a December 31 measurement date as required by SFAS 158. Net periodic benefit cost shown above for 2008 covers the period of 15 months from October 1, 2007, through December 31, 2008. Net periodic benefit cost for the period from October 1, 2007, to December 31, 2007, was recognized as a direct adjustment to retained earnings during 2008 as required by SFAS 158. The breakdown of 2008 net periodic benefit cost between the two periods was as follows:

        Pension benefits     Other postretirement benefits 
      10/01/07-  1/1/08-    10/01/07- 1/1/08-   
      12/31/07  12/31/08  Total  12/31/07 12/31/08  Total 
          (in millions)   
    Net periodic benefit cost (income)  $ 3.1     $ 12.3 $     15.4 $ (4.5) $ (18.1)  $ (22.6) 

         The pension plans' actuarial gains and losses are amortized using a straight-line amortization method over the average remaining service period of plan participants. For the qualified pension plan, gains and losses are amortized without use of the 10% allowable corridor. For the nonqualified pension plans and other postretirement benefit plans, the corridors allowed are used.


         As of and subsequent to December 31, 2006, net actuarial (gain) loss and net prior service cost benefit have been recognized in accumulated other comprehensive income due to the application of SFAS 158.

         The estimated net actuarial (gain) loss and prior service cost (benefit) that will be amortized from accumulated other comprehensive income into net periodic benefit cost for the pension benefits during the 2009 fiscal year are $92.6 million and $(7.7) million, respectively. The estimated net actuarial (gain) loss and prior service cost (benefit) for the postretirement benefits that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the 2009 fiscal year are $9.2 million and $(2.1) million, respectively.

     

     

    53

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    14. Employee and Agent Benefits — (continued) Assumptions:

    Weighted-average assumptions used to determine benefit obligations as disclosed under the Obligations and Funded Status section

    Pension benefits Other
    postretirement
    benefits
         
         
         
                 For the year ended December 31,   
             2008  2007  2008  2007   
    Discount rate           6.00%  6.30%   6.00%  6.30%   
    Rate of compensation increase           5.00%  5.00%   5.00%  5.00%   
     
    Weighted-average assumptions used to determine net periodic benefit cost         
        Pension benefits     Other postretirement benefits 
          For the year ended December 31,     
      2008         2007             2006    2008     2007  2006 
    Discount rate  6.30%           6.15%               5.75%   6.30%     6.15%  5.75% 
    Expected long-term return on plan assets  8.25%           8.25%               8.25%   7.30%     7.30%  7.30% 
    Rate of compensation increase  5.00%           5.00%               5.00%   5.00%     5.00%  5.00% 

         For other postretirement benefits, the 7.30% expected long-term return on plan assets for 2008 is based on the weighted average expected long-term asset returns for the medical, life and long-term care plans. The expected long-term rates for the health, life and long-term care plans are 7.25%, 7.75% and 5.85%, respectively.

         The expected return on plan assets is the long-term rate we expect to be earned based on the plans' investment strategy. Historical and expected future returns of multiple asset classes were analyzed to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free real rate of return and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plans. Based on a review in 2008, the long-term expected return on plan assets will be lowered to 8.00% for the 2009 expense calculation.

    Assumed health care cost trend rates     
      December 31, 
       2008   2007 
                       Health care cost trend rate assumed for next year under age 65  10.5%  12.0% 
                       Health care cost trend rate assumed for next year age 65 and over  10.0%  11.0% 
                       Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)  5.0%  5.0% 
                       Year that the rate reaches the ultimate trend rate  2020  2019 

         Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

      1-percentage-  1-percentage- 
      point increase  point decrease 
                                       (in millions) 
    Effect on total of service cost and interest cost components  $ 4.8 $                         (3.8) 
    Effect on accumulated postretirement benefit obligation                                 (46.4)                         37.2 

    54

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    14. Employee and Agent Benefits — (continued) Pension Plan Assets

         The qualified pension plan's weighted-average asset allocations by asset category as of the two most recent measurement dates are as follows:

      December 31,  October 1, 
    Asset category  2008  2007 
    Domestic equity securities  50% 53% 
    International equity securities  17 18
    Domestic debt securities  23 21
    Real estate  10 8
       Total  100% 100%
     
    Our investment strategy is to achieve the following:     

    • Obtain a reasonable long-term return consistent with the level of risk assumed and at a cost of operation within prudent levels. Performance benchmarks are monitored.
    • Ensure sufficient liquidity to meet the emerging benefit liabilities for the plan.
    • Provide for diversification of assets in an effort to avoid the risk of large losses and maximize the investment return to the pension plan consistent with market and economic risk.

         In administering the qualified pension plan's asset allocation strategy, we consider the projected liability stream of benefit payments, the relationship between current and projected assets of the plan and the projected actuarial liabilities streams, the historical performance of capital markets adjusted for the perception of future short- and long-term capital market performance and the perception of future economic conditions.

    The overall target asset allocation for the qualified plan assets is:

    Asset category  Target allocation 
    Domestic equity securities  40% - 60% 
    International equity securities  5% - 20% 
    Domestic debt securities  20% - 30% 
    International debt securities  0% - 7% 
    Real estate  3% - 10% 

         Other 0% - 7% Other Postretirement Benefit Plan Assets

         The other postretirement benefit plans' weighted-average asset allocations by asset category as of the two most recent measurement dates are as follows:

      December 31,  October 1, 
    Asset category  2008     2007 
    Equity securities  53%  63% 
    Debt securities  47  37 
       Total  100%  100% 
    The weighted average target asset allocation for the other postretirement benefit plans is:   
     
    Asset category  Target allocation 
    Equity securities    50 - 70% 

         Debt securities 30 - 50% The investment strategies and policies for the other postretirement benefit plans are similar to those employed by the qualified pension plan.

     

     

    55

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    14. Employee and Agent Benefits — (continued) Contributions

         Our funding policy for the qualified pension plan is to fund the plan annually in an amount at least equal to the minimum annual contribution required under ERISA and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. We do not anticipate contributions will be needed to satisfy the minimum funding requirements of ERISA for our qualified plan. At this time, it is too early to estimate the amount that may be contributed, but it is possible that we may fund the plans in 2009 in the range of $20-$50 million. This includes funding for both our qualified and nonqualified pension plans. We may contribute to our other postretirement benefit plans in 2009 pending future analysis.

    Estimated Future Benefit Payments

         The estimated future benefit payments, which reflect expected future service, and the expected amount of tax-free subsidy receipts under Medicare Part D are:

        Other postretirement benefits   
        (gross benefit payments,   
        including prescription drug  Amount of Medicare Part D 
      Pension benefits  benefits)  subsidy receipts 
        (in millions)   
    Year ending December 31:       
       2009  $ 65.4  $ 21.6  $ 1.1 
       2010  70.2  23.6  1.2 
       2011  75.1  25.8  1.4 
       2012  81.0  28.2  1.7 
       2013  87.5  30.9  1.8 
       2014-2018  533.5  201.1  13.2 

         The above table reflects the total estimated future benefits to be paid from the plan, including both our share of the benefit cost and the participants' share of the cost, which is funded by their contributions to the plan.

         The assumptions used in calculating the estimated future benefit payments are the same as those used to measure the benefit obligation for the year ended December 31, 2008.

     

     

     

     

     

     

     

     

    56

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    14. Employee and Agent Benefits — (continued)

         The information that follows shows supplemental information for our defined benefit pension plans. Certain key summary data is shown separately for qualified and non-qualified plans.


         In addition, we have defined contribution plans that are generally available to all employees and agents. Eligible participants could not contribute more than $15,500 of their compensation to the plans in 2008. Effective January 1, 2006, we made several changes to the retirement programs. In general, the pension and supplemental executive retirement plan benefit formulas were reduced, and the 401(k) matching contribution was increased. Employees who were ages 47 or older with at least ten years of service on December 31, 2005, could elect to retain the prior benefit provisions and forgo receipt of the additional matching contributions. The employees who elected to retain the prior benefit provisions are referred to as “Grandfathered Choice Participants”. In 2006, we matched the Grandfathered Choice Participant's contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. For all other participants, we matched the participant's contributions at a 75% contribution rate up to a maximum of 6% of the participant's compensation. The defined contribution plans allow employees to choose among various investment options, including PFG common stock. We contributed $41.2 million, $40.0 million and $36.4 million in 2008, 2007 and 2006, respectively, to our qualified defined contribution plans.

         We also have a nonqualified defined contribution plan available to select employees and agents which allows them to contribute amounts in excess of limits imposed by federal tax law. In 2008 and 2007, we matched the Grandfathered Choice Participant's Contribution at a 50% contribution rate up to a maximum contribution of 3% of the participant's compensation. For all other participants, we matched the participant's contributions at a 75% contribution rate up to a maximum contribution of 6% of the participant's compensation. We contributed $7.3 million, $7.5 million and $8.0 million in 2008, 2007 and 2006, respectively, to our nonqualified defined contribution plans.

     

     

     

    57

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    15. Contingencies, Guarantees and Indemnifications

    Litigation and Regulatory Contingencies

         We are regularly involved in litigation, both as a defendant and as a plaintiff, but primarily as a defendant. Litigation naming us as a defendant ordinarily arises out of our business operations as a provider of asset management and accumulation products and services, life, health and disability insurance. Some of the lawsuits are class actions, or purport to be, and some include claims for punitive damages. In addition, regulatory bodies, such as state insurance departments, the SEC, the Financial Industry Regulatory Authority, the Department of Labor and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws, ERISA and laws governing the activities of broker-dealers. We receive requests from regulators and other governmental authorities relating to other industry issues and may receive additional requests, including subpoenas and interrogatories, in the future.

         On November 8, 2006, a trustee of Fairmount Park Inc. Retirement Savings Plan filed a putative class action lawsuit in the United States District Court for the Southern District of Illinois against us. Our Motion to Transfer Venue was granted and the case is now pending in the Southern District of Iowa. The complaint alleged, among other things, that we breached our alleged fiduciary duties while performing services to 401(k) plans by failing to disclose, or adequately disclose, to employers or plan participants the fact that we receive “revenue sharing fees from mutual funds that are included in its pre-packaged 401(k) plans” and allegedly failed to use the revenue to defray the expenses of the services provided to the plans. Plaintiff further alleged that these acts constitute prohibited transactions under ERISA. Plaintiff sought to certify a class of all retirement plans to which we were a service provider and for which we received and retained “revenue sharing” fees from mutual funds. On August 27, 2008, the Plaintiff's Motion for Class Certification was denied. The Plaintiff filed a petition seeking permission to appeal that ruling. The petition was denied on October 28, 2008.

         On August 28, 2007, two plaintiffs, “Walsh and Young”, filed a putative class action lawsuit in the United States District Court for the Southern District of Iowa against us and Princor Financial Services Corporation (the “Principal Defendants”). The lawsuit alleges that the Principal Defendants breached alleged fiduciary duties to participants in employer-sponsored 401(k) plans who were retiring or leaving their respective plans, including providing misleading information and failing to act solely in the interests of the participants, resulting in alleged violations of ERISA. The Principal Defendants are aggressively defending the lawsuit.

         While the outcome of any pending or future litigation or regulatory matter cannot be predicted, management does not believe that any pending litigation or regulatory matter will have a material adverse effect on our business or financial position. The outcome of such matters is always uncertain, and unforeseen results can occur. It is possible that such outcomes could materially affect net income in a particular quarter or annual period.

    Guarantees and Indemnifications

         In the normal course of business, we have provided guarantees to third parties primarily related to a former subsidiary, joint ventures and industrial revenue bonds. These agreements generally expire through 2019. The maximum exposure under these agreements as of December 31, 2008, was approximately $222.0 million. At inception, the fair value of such guarantees was insignificant. In addition, we believe the likelihood is remote that material payments will be required. Therefore, any liability accrued within our consolidated statements of financial position is insignificant. Should we be required to perform under these guarantees, we generally could recover a portion of the loss from third parties through recourse provisions included in agreements with such parties, the sale of assets held as collateral that can be liquidated in the event that performance is required under the guarantees or other recourse generally available to us; therefore, such guarantees would not result in a material adverse effect on our business or financial position. While the likelihood is remote, such outcomes could materially affect net income in a particular quarter or annual period.

         We are also subject to various other indemnification obligations issued in conjunction with certain transactions, primarily the sale of Principal Residential Mortgage, Inc. and other divestitures, acquisitions and financing transactions whose terms range in duration and often are not explicitly defined. Certain portions of these indemnifications may be capped, while other portions are not subject to such limitations; therefore, the overall maximum amount of the obligation under the indemnifications cannot be reasonably estimated. At inception, the fair value of such indemnifications was insignificant. In addition, we believe the likelihood is remote that material payments will be required. Therefore, any liability accrued within our consolidated statements of financial position is insignificant. While we are unable to estimate with certainty the ultimate legal and financial liability with respect to these indemnifications, we believe that performance under these indemnifications would not result in a material adverse effect on our business or financial position. While the likelihood is remote, performance under these indemnifications could materially affect net income in a particular quarter or annual period.

    58

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    15. Contingencies, Guarantees and Indemnifications — (continued) Guaranty Funds

         Under state insurance guaranty fund laws, insurers doing business in a state can be assessed, up to prescribed limits, for certain obligations of insolvent insurance companies to policyholders and claimants. A state’s fund assesses its members based on their pro rata market share of written premiums in the state for the classes of insurance for which the insolvent insurer was engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. We accrue liabilities for guaranty fund assessments when an assessment is probable, can be reasonably estimated and when the event obligating us to pay has occurred. While we cannot predict the amount and timing of any future assessments, we have established reserves we believe are adequate for assessments relating to insurance companies that are currently subject to insolvency proceedings. As of December 31, 2008 and 2007, the liability balance for guaranty fund assessments, which is not discounted, was $16.2 million and $9.8 million, respectively, and was reported within other liabilities in the consolidated statements of financial position. As of December 31, 2008 and 2007, $8.1 million and $2.4 million, respectively, related to premium tax offsets were included in premiums due and other receivables in the consolidated statements of financial position.

    Operating Leases

         As a lessee, we lease office space, data processing equipment, office furniture and office equipment under various operating leases. Rental expense for the years ended December 31, 2008, 2007 and 2006, respectively, was $49.3 million, $50.7 million and $52.8 million.

         At December 31, 2008, the future minimum lease payments are $178.9 million. The following represents payments due by period for operating lease obligations as of December 31, 2008 (in millions):

    Year ending December 31:   
       2009  $ 47.9 
       2010  39.6 
       2011  27.3 
       2012  18.7 
       2013  14.3 
       2014 and thereafter  35.2 
      183.0 
       Less: Future sublease rental income on noncancelable leases  4.1 
       Total future minimum lease payments  $ 178.9 

    Capital Leases

         Beginning in 2007, we leased hardware storage equipment under capital leases. As of December 31, 2008 and 2007, these leases had a gross asset balance of $21.0 million and $15.2 million and accumulation depreciation of $10.5 million and $5.0 million, respectively. Depreciation expense for the years ended December 31, 2008 and 2007, was $6.2 million and $5.0 million, respectively.

         As of December 31, 2008, we no longer leased an aircraft under a capital lease. As of December 31, 2007, we leased an aircraft which had a gross asset balance of $14.4 million and accumulated depreciation of $1.7 million. Depreciation expense for each of the years ended December 31, 2008, 2007 and 2006 was zero, $0.6 million and $0.6 million, respectively.

     

     

     

     

     

     

     

     

    59

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    15. Contingencies, Guarantees and Indemnifications — (continued)

         The following represents future minimum lease payments due by period for capital lease obligations as of December 31, 2008 (in millions).

    Year ending December 31:   
       2009  $ 5.7 
       2010  3.6 
       2011  2.0 
       2012  0.2 
       2013  — 
       2014 and thereafter  — 
           Total  11.5 
           Less: Amounts representing interest  0.7 
           Net present value of minimum lease payments  $ 10.8 

    Letters of Credit

         We have entered into agreements with third parties who issue standby letters of credit on behalf of a wholly-owned captive reinsurance subsidiary. The letters of credit are used to support the statutory reserves assumed by our captive reinsurance company. The letters of credit, which we guarantee, also allow us to take credit for ceded reserves on our statutory balance sheet. As of December 31, 2008 and 2007, there was a total of $429.0 million and $365.0 million in outstanding letters of credit, respectively.

     

     

     

     

     

     

     

     

     

     

     

     

    60

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    16. Stockholder’s Equity

    Accumulated Other Comprehensive Income (Loss)

         Comprehensive income includes all changes in stockholder’s equity during a period except those resulting from investments by stockholders and distributions to stockholders.

    The components of accumulated other comprehensive income (loss) were as follows:


     

     

     

     

     

     

    61


     

     

     

     

     

     

     

     

     

     

    62

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    16. Stockholder’s Equity — (continued)

      Net unrealized  Net unrealized  Foreign  Unrecognized  Accumulated 
      gains (losses) on  gains on  currency  post-retirement  other 
      available-for-sale  derivative  translation  benefit  comprehensive 
      securities  instruments  adjustment  obligations  income (loss) 
          (in millions)     
    Balances at January 1, 2008  $ 31.2 $ 21.6 $ (2.5) $ 67.2 $ 117.5
    Net change in unrealized gains on fixed           
       maturities, available-for-sale  (7,782.1) — — — (7,782.1)
    Net change in unrealized gains on equity           
       securities, available-for-sale  (61.1) — — — (61.1)
    Net change in unrealized gains on equity           
       method subsidiaries and minority interest              
        adjustments  76.2 — — — 76.2
    Adjustments for assumed changes in           
       amortization pattern  1,173.0  — — — 1,173.0
    Net change in unrealized gains on           
       derivative instruments  — 124.5 — — 124.5
    Change in net foreign currency translation           
       adjustment  — — (23.8) — (23.8)
    Effects of changing post-retirement benefit         
       plan measurement date  — — — (3.1) (3.1)
    Change in unrecognized post-retirement           
       benefit obligations  — — — (973.1) (973.1)
    Net change in provision for deferred           
       income tax benefit (expense)  2,307.9 (43.5) 8.3 341.7 2,614.4
    Balances at December 31, 2008  $ (4,254.9) $ 102.6 $ (18.0) $ (567.3) $ (4,737.6)

         The following table sets forth the adjustments necessary to avoid duplication of items that are included as part of net income for a year that had been part of other comprehensive income in prior years:

           For the year ended December 31, 
      2008  2007  2006 
        (in millions)   
    Unrealized losses on available-for-sale securities and derivative instruments       
       arising during the year  $ (4,205.1)  $ (550.8)  $(269.9) 
    Adjustment for realized gains (losses) on available-for-sale securities and       
       derivative instruments included in net income  (15.1)                 80.9  25.1 
    Unrealized losses on available-for-sale securities and derivative instruments,       
       as reported  $ (4,220.2)  $ (469.9)  $(244.8) 

         The above table includes unrealized gains (losses) on available-for-sale securities and derivatives in cash flow hedge relationships net of adjustments related to DPAC, sales inducements, unearned revenue reserves, changes in policyholder benefits and claims and applicable income taxes.

    Dividend Limitations

         Under Iowa law, we may pay stockholder dividends only from the earned surplus arising from our business and must receive the prior approval of the Commissioner to pay a stockholder dividend if such a stockholder dividend would exceed certain statutory limitations. The current statutory limitation is the greater of 10% of our policyholder surplus as of the preceding year-end or the net gain from operations from the previous calendar year. Based on this limitation and 2008 statutory results, we could pay approximately $651.3 million in stockholder dividends in 2009 without exceeding the statutory limitation.

     

     

     

     

    63

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    17. Fair Value of Financial Instruments

         We use fair value measurements to record fair value of certain assets and liabilities and to estimate fair value of financial instruments not recorded at fair value but required to be disclosed at fair value under SFAS No. 107, Disclosure About Fair Value of Financial Instruments (“SFAS 107”). We follow SFAS 157 to determine SFAS 107 fair value disclosure amounts. Certain financial instruments, particularly policyholder liabilities other than investment-type contracts, are excluded from these fair value disclosure requirements.

    Valuation hierarchy

         SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). For SFAS 157 disclosures, SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels.

    • Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities. Our Level 1 assets and liabilities primarily include exchange traded equity securities, mutual funds and U.S. Treasury bonds.
    • Level 2 – Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. Our Level 2 assets and liabilities primarily include fixed maturity securities (including public and private bonds), equity securities, over-the-counter derivatives and other investments for which public quotations are not available but that are priced by third-party pricing services or internal models using observable inputs.
    • Level 3 – Significant unobservable inputs for the asset or liability. Our Level 3 assets and liabilities include certain fixed maturity securities, private equity securities, complex derivatives and embedded derivatives that must be priced using broker quotes or other valuation methods that utilize significant unobservable inputs.

    Determination of fair value

         The following discussion describes the valuation methodologies used for assets and liabilities measured or disclosed at fair value. The techniques utilized in estimating the fair values of financial instruments are reliant on the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

         Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument.

    Fixed Maturities and Equity Securities

         Fair values of equity securities are determined using public quotations, when available. Fair values of public bonds and those private securities that are actively traded in the secondary market have been determined through the use of third-party pricing services using market observable inputs. Private placement securities and other corporate fixed maturities where we do not receive a public quotation are valued by discounting the expected cash flows. Market rates used are applicable to the yield, credit quality and average maturity of each security. Private equity securities may also utilize internal valuation methodologies appropriate for the specific asset. Fair values might also be determined using broker quotes or through the use of internal models or analysis.

    Derivatives

         Fair values of derivative instruments are determined using either pricing valuation models that utilize market observable inputs or broker quotes. The valuation models consider projected discounted cash flows, relevant swap curves and appropriate implied volatilities.

    Mortgage Loans

         Fair values of commercial and residential mortgage loans are determined by discounting the expected cash flows using market rates that are applicable to the yield, credit quality and maturity of each loan.

     

     

    64

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    17. Fair Value of Financial Instruments (continued)

    Policy Loans

         Fair values of policy loans are estimated by discounting expected cash flows using a risk-free rate based on the U.S. Treasury curve.

    Other Investments

         Other investments reported at fair value primarily include seed money investments, for which the fair value is determined using the net asset value of the fund. The carrying amounts of other assets classified as other investments in the accompanying consolidated statements of financial position approximate their fair values.

    Cash and Cash Equivalents

         Because of the nature of these assets, carrying amounts approximate fair values. Fair values of cash equivalents may be determined using public quotations, when available.

    Securities Lending Collateral and Securities Lending Payable

         The carrying amounts of our securities lending cash collateral and securities lending payable approximate their fair value. During the third quarter of 2008, we decided to temporarily unwind the securities lending program due to a downturn in current economic conditions.

    Separate Account Assets

         Separate account assets include public equity, public and private debt securities and derivative instruments, for which fair values are determined as previously described. Separate account assets also include commercial mortgage loans, for which the fair value is estimated by discounting the expected total cash flows using market rates that are applicable to the yield, credit quality and maturity of the loans. Finally, separate account assets include real estate, for which the fair value is estimated using discounted cash flow valuation models that utilize public real estate market data inputs such as transaction prices, market rents, vacancy levels, leasing absorption, market cap rates and discount rates. In addition, each property is appraised annually by an independent appraiser.

    Investment-Type Insurance Contracts

         The fair values of our reserves and liabilities for investment-type insurance contracts are estimated using discounted cash flow analyses based on current interest rates being offered for similar contracts with maturities consistent with those remaining for the investment-type contracts being valued. Investment-type insurance contracts include insurance, annuity and other policy contracts that do not involve significant mortality or morbidity risk and that are only a portion of the policyholder liabilities appearing in the consolidated statements of financial position. Insurance contracts include insurance, annuity and other policy contracts that do involve significant mortality or morbidity risk. The fair values for our insurance contracts, other than investment-type contracts, are not required to be disclosed. We do consider, however, the various insurance and investment risks in choosing investments for both insurance and investment-type contracts. Certain annuity contracts and other investment-type insurance contracts include embedded derivatives that have been bifurcated from the host contract. The fair value of embedded derivatives is calculated based on actuarial and capital market assumptions, including non-performance risk, reflecting the projected cash flows over the life of the contract, incorporating expected policyholder behavior.

    Short-Term Debt

         The carrying amount of short-term debt approximates its fair value because of the relatively short time between origination of the debt instrument and its maturity.

    Long-Term Debt

         Fair values for debt issues are estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements.

     

     

     

     

    65

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    17. Fair Value of Financial Instruments (continued)

    Separate Account Liabilities

         Fair values of separate account liabilities, excluding insurance-related elements, are estimated based on market assumptions around what a potential acquirer would pay for the associated block of business, including both the separate account assets and liabilities. As the applicable separate account assets are already reflected at fair value, any adjustment to the fair value of the block is an assumed adjustment to the separate account liabilities. To compute fair value, the separate account liabilities are originally set to equal separate account assets because these are pass-through contracts. The separate account liabilities are reduced by the amount of future fees expected to be collected that are intended to offset upfront acquisition costs already incurred that a potential acquirer would not have to pay. The estimated future fees are adjusted by an adverse deviation discount and the amount is then discounted at a risk-free rate as measured by the yield on U.S. Treasury securities at maturities aligned with the estimated timing of fee collection.

    Other Liabilities

         Certain obligations reported in other liabilities include embedded derivatives to deliver underlying securities of structured investments to third parties. The fair value of the embedded derivatives is calculated based the value of the underlying securities utilizing the yield, credit quality and average maturity of each security.

    Assets and liabilities measured at fair value on a recurring basis

    Assets and liabilities measured at fair value on a recurring basis are summarized below.

        As of December 31, 2008  
      Assets /        
      (liabilities) Fair value hierarchy level  
      measured at fair        
      value Level 1   Level 2 Level 3
             (in millions)    
    Assets           
    Fixed maturities, available-for-sale  $ 38,064.0  $ 96.8  $ 36,831.2  $ 1,136.0 
    Fixed maturities, trading  752.1  —    691.4  60.7 
    Equity securities, available-for-sale  234.2  169.8    8.2  56.2 
    Equity securities, trading  125.7  31.1    94.6  — 
    Net derivative assets and liabilities (1)  (161.3)  —    4.9  (166.2) 
    Other investments (2)  66.0  3.3    62.7  — 
    Cash equivalents (3)  1,601.1  649.4    951.7  — 
     Sub-total excluding separate account assets  40,681.8  950.4    38,644.7  1,086.7 
     
    Separate account assets  51,069.2  30,609.3    14,567.3  5,892.6 
    Total assets  $ 91,751.0  $ 31,559.7  $ 53,212.0  $ 6,979.3 
     
    Liabilities           
    Investment-type insurance contracts (4)  $ (39.9)  $ —  $ —  $ (39.9) 
    Other liabilities (4)  (109.3)  —    (5.5)  (103.8) 
    Total liabilities  $ (149.2)  $ —  $ (5.5)  $ (143.7) 

    (1)      The fair value of our derivative instruments classified as assets and liabilities at December 31, 2008, was $1,873.2 million and $2,034.5 million, respectively. Within the consolidated statements of financial position, derivative assets are reported with other investments and derivative liabilities are reported with other liabilities.
    (2)      Primarily includes seed money investments reported at fair value.
    (3)      Includes short-term investments with a maturity date of three months or less when purchased.
    (4)      Includes bifurcated embedded derivatives that are reported at fair value within the same line item in the consolidated statements of financial position in which the host contract is reported.

     

     

     

    66

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    17. Fair Value of Financial Instruments (continued) Changes in Level 3 fair value measurements

         The reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2008, is as follows:

                         For the year ended December 31, 2008      Changes in 
        Total realized/unrealized gains      Ending  unrealized 
      Beginning  (losses)      asset /  gains (losses) 
      asset /      Purchases,    (liability)  included in 
      (liability)    Included in  sales,    balance  net income 
      balance as  Included in  other  issuances  Transfers  as of  relating to 
      of January  net income  comprehensive  and  in (out) of  December  positions still 
      1, 2008         (1)  income  settlements  Level 3  31, 2008  held (1) 
            (in millions)       
    Assets               
    Fixed maturities, available-for-sale  $ 2,153.6  $ (148.5)  $ (508.7)  $ (567.8)  $ 207.4  $ 1,136.0  $ (116.7) 
    Fixed maturities, trading  92.3  (19.1)  —  (11.4)           (1.1)  60.7  (19.1) 
    Equity securities, available-for-sale  51.1  (41.5)  (12.1)  20.7         38.0  56.2  (35.3) 
    Net derivative assets and liabilities  (8.0)  (125.3)  (23.9)  (9.0)         —  (166.2)  (130.5) 
    Separate account assets  7,122.2  (958.4)  —  (166.9)  (104.3)  5,892.6  (944.1) 
     
    Liabilities               
    Investment-type insurance               
       contracts  (49.3)  (38.2)  —  47.6         —  (39.9)  (50.3) 
    Other liabilities (2)  (155.6)             —  70.0  (18.2)         —  (103.8)             — 

    (1)      Both realized gains (losses) and mark-to-market unrealized gains (losses) for the year ended December 31, 2008, are generally reported in net realized capital gains (losses) within the consolidated statements of operations. Gains and losses for separate account assets do not impact net income as the change in value of separate account assets is offset by a change in value of separate account liabilities.
    (2)      Certain embedded derivatives reported in other liabilities are part of a cash flow hedge, with the effective portion of the unrealized gains (losses) recorded in accumulated other comprehensive income.

    Assets and liabilities measured at fair value on a nonrecurring basis

         Certain assets are measured at fair value on a nonrecurring basis. During 2008, mortgage servicing rights with an aggregate cost of $13.8 million had been written down to fair value of $12.3 million, resulting in a charge of $1.5 million that was recorded in operating expenses. These mortgage servicing rights are a Level 3 fair value measurement, as fair value is determined by calculating the present value of the future servicing cash flows from the underlying mortgage loans.

    Transition

         In connection with our adoption of SFAS 157 on January 1, 2008, we recorded a $13.0 million pre-tax gain in net realized capital gains (losses) resulting from the incorporation of our own creditworthiness and additional risk margins in the valuation of certain embedded derivatives recorded at fair value.

     

     

     

     

     

     

    67

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    17. Fair Value of Financial Instruments — (continued) SFAS 107 disclosures

    The carrying amounts and estimated fair values of our financial instruments were as follows:

                           December 31,   
        2008    2007   
      Carrying amount  Fair value  Carrying amount  Fair value 
          (in millions)   
                       Assets (liabilities)           
                       Fixed maturities, available-for-sale  $ 38,064.0 $  38,064.0 $  44,236.7 $  44,236.7 
                       Fixed maturities, trading    752.1  752.1  302.1  302.1 
                       Equity securities, available-for-sale    234.2  234.2  309.7  309.7 
                       Equity securities, trading    125.7  125.7  223.9  223.9 
                       Net derivative assets and liabilities    (161.3)  (161.3)  478.7  478.7 
                       Mortgage loans    12,633.8  12,863.8  12,101.0  12,809.3 
                       Policy loans    881.4  1,119.4  853.7  940.3 
                       Other investments    146.7  146.7  163.0  163.0 
                       Cash and cash equivalents    2,536.7  2,536.7  1,447.3  1,447.3 
                       Securities lending collateral    —  —  622.7  622.7 
                       Separate account assets    51,069.2  51,069.2  75,743.3  75,743.3 
                       Investment-type insurance contracts    (39,730.4)  (36,277.3)  (37,388.7)  (36,627.9) 
                       Short-term debt    (291.1)  (291.2)  (344.5)  (344.5) 
                       Long-term debt    (121.2)  (109.4)  (186.9)  (201.4) 
                       Separate account liabilities    (46,549.6)  (45,609.3)  (69,299.2)  (68,169.6) 
                       Other liabilities    (109.3)  (109.3)  (166.2)  (166.2) 
                       Securities lending payable    —  —  (622.7)  (622.7) 
     
    18. Statutory Insurance Financial Information         

         We prepare statutory financial statements in accordance with the accounting practices prescribed or permitted by the Insurance Division of the Department of Commerce of the State of Iowa (the “State of Iowa”). The State of Iowa recognizes only statutory accounting practices prescribed or permitted by the State of Iowa for determining and reporting the financial condition and results of operations of an insurance company to determine its solvency under the Iowa Insurance Law. The National Association of Insurance Commissioners' (“NAIC”) Accounting Practices and Procedures Manual has been adopted as a component of prescribed practices by the State of Iowa. The Commissioner has the right to permit other specific practices that deviate from prescribed practices. Our use of prescribed and permitted statutory accounting practices has resulted in higher statutory surplus of $387.4 million relative to the accounting practices and procedures of the NAIC primarily due to a state prescribed practice associated with reinsurance of our universal life “secondary” or “no lapse” guarantee provisions. Statutory accounting practices differ from U.S. GAAP primarily due to charging policy acquisition costs to expense as incurred, establishing reserves using different actuarial assumptions, valuing investments on a different basis and not admitting certain assets, including certain net deferred income tax assets.

         Life and health insurance companies are subject to certain risk-based capital (“RBC”) requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus maintained by a life and health insurance company is to be determined based on the various risk factors related to it. At December 31, 2008, we meet the minimum RBC requirements.

      Statutory net income and statutory surplus were as follows:

      As of or for the year ended December 31, 
      2008  2007  2006 
        (in millions)   
    Statutory net income  $ 83.3 $ 540.2   $684.9 
    Statutory surplus  4,807.7 3,695.0 3,596.1 

     

     

     

    68

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    19. Segment Information

         We provide financial products and services through the following segments: U.S. Asset Accumulation, Global Asset Management and Life and Health Insurance. In addition, there is a Corporate segment. The segments are managed and reported separately because they provide different products and services, have different strategies or have different markets and distribution channels.

         The U.S. Asset Accumulation segment provides retirement and related financial products and services primarily to businesses, their employees and other individuals.

         The Global Asset Management segment provides asset management services to our asset accumulation business, our life and health insurance operations, the Corporate segment and third-party clients.

         The Life and Health insurance segment provides individual life insurance, group health insurance and specialty benefits, which consists of group dental and vision insurance, individual and group disability insurance and group life insurance, throughout the United States.

         The Corporate segment manages the assets representing capital that has not been allocated to any other segment. Financial results of the Corporate segment primarily reflect our financing activities (including interest expense), income on capital not allocated to other segments, inter-segment eliminations, income tax risks and certain income, expenses and other after-tax adjustments not allocated to the segments based on the nature of such items.

         Management uses segment operating earnings in goal setting, as a basis for determining employee compensation and in evaluating performance on a basis comparable to that used by securities analysts. We determine segment operating earnings by adjusting U.S. GAAP net income for net realized capital gains (losses), as adjusted, and other after-tax adjustments which management believes are not indicative of overall operating trends. Net realized capital gains (losses), as adjusted, are net of income taxes, related changes in the amortization pattern of DPAC and sales inducements, recognition of deferred front-end fee revenues for sales charges on retirement products and services, net realized capital gains and losses distributed, minority interest capital gains and losses and certain market value adjustments to fee revenues. Net realized capital gains (losses), as adjusted, exclude periodic settlements and accruals on non-hedge derivative instruments and exclude certain market value adjustments of embedded derivatives. Segment operating revenues exclude net realized capital gains (losses) (except periodic settlements and accruals on non-hedge derivatives), including their impact on recognition of front-end fee revenues and certain market value adjustments to fee revenues and revenue from our terminated commercial mortgage securities issuance operation. Segment operating revenues include operating revenues from real estate properties that qualify for discontinued operations. While these items may be significant components in understanding and assessing the consolidated financial performance, management believes the presentation of segment operating earnings enhances the understanding of our results of operations by highlighting earnings attributable to the normal, ongoing operations of the business.

         The accounting policies of the segments are consistent with the accounting policies for the consolidated financial statements, with the exception of income tax allocation. The Corporate segment functions to absorb the risk inherent in interpreting and applying tax law. The segments are allocated tax adjustments consistent with the positions we took on tax returns. The Corporate segment results reflect any differences between the tax returns and the estimated resolution of any disputes.

     

     

     

     

     

     

    69

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    19. Segment Information — (continued)

         The following tables summarize selected financial information by segment and reconcile segment totals to those reported in the consolidated financial statements:

                   December 31, 
         2008    2007 
                   (in millions) 
    Assets:         
    U.S. Asset Accumulation  $ 99,774.7  $ 125,369.3 
    Global Asset Management    1,123.3    1,226.2 
    Life and Health Insurance    14,497.9    14,783.8 
    Corporate    3,727.7    2,771.5 
       Total consolidated assets  $ 119,123.6  $ 144,150.8 
      For the year ended December 31, 
      2008  2007       2006 
        (in millions)     
    Operating revenues by segment:         
    U.S. Asset Accumulation  $ 4,331.3  $ 4,617.1  $ 3,924.9 
    Global Asset Management  545.8  529.0    424.8 
    Life and Health Insurance  4,660.0  4,840.4    4,722.6 
    Corporate  (115.5)  (65.2)  (82.2) 
       Total segment operating revenues  9,421.6  9,921.3    8,990.1 
    Add:         
       Net realized capital gains (losses) (except periodic settlements and         
           accruals on non-hedge derivatives), including recognition of         
           front-end fee revenues and certain market value adjustments to fee         
           revenues  (685.5)  (362.5)  29.9 
       Terminated commercial mortgage securities issuance operation  (32.1)  30.1    60.6 
    Subtract:         
       Operating revenues from discontinued real estate investments  — 0.3    (3.1) 
       Total revenues per consolidated statements of operations  $ 8,704.0  $ 9,588.6  $ 9,083.7 
    Operating earnings by segment, net of related income taxes:         
    U.S. Asset Accumulation  $ 499.6  $ 605.5  $ 516.7 
    Global Asset Management  86.6  98.0    71.4 
    Life and Health Insurance  272.2  223.3    285.3 
    Corporate  18.5  45.1    26.6 
       Total segment operating earnings, net of related income taxes  876.9  971.9    900.0 
    Net realized capital gains (losses), as adjusted (1)  (453.4)  (245.4)  7.7 
    Other after-tax adjustments (2)  (20.4)  14.6    69.9 
       Net income per consolidated statements of operations  $ 403.1  $ 741.1  $ 977.6 

     

     

     

     

     

     

     

     

    70

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    19. Segment Information — (continued)

    (1) Net realized capital gains (losses), as adjusted, is derived as follows:

           2008         2007  2006 
        (in millions)   
    Net realized capital gains (losses):       
    Net realized capital gains (losses)  $ (622.6)  $ (348.4)  $ 30.4 
    Periodic settlements and accruals on non-hedge derivatives (3)  (59.0)  (18.8)         — 
    Certain market value adjustments to fee revenues  (3.9)  (4.0)         (1.3) 
    Recognition of front-end fee revenues  — 8.7  0.8 
       Net realized capital gains (losses), net of related revenue adjustments  (685.5)  (362.5)         29.9 
    Amortization of deferred policy acquisition and sales inducement costs related to       
    net realized capital gains (losses)  (47.2)  10.4  5.4 
    Capital (gains) losses distributed  49.6  (10.9)  (11.8) 
    Certain market value adjustments of embedded derivatives  (9.5)           —         — 
    Minority interest capital (gains) losses  0.9  (11.4)         (7.5) 
    Income tax effect  238.3  129.0         (8.3) 
       Net realized capital gains (losses), as adjusted  $ (453.4)  $ (245.4)  $ 7.7 

    (2)      In 2008, other after-tax adjustments of $(20.4) million included (1) the negative effect of losses associated with our terminated commercial mortgage securities issuance operation that has been exited but does not qualify for discontinued operations accounting treatment under U.S. GAAP ($28.0 million) and (2) the positive effect of a change in an estimated loss related to a prior year legal contingency ($7.6 million).
      In 2007, other after-tax adjustments of $14.6 million included (1) the positive effect of: (a) a gain on sale of a real estate property that qualifies for discontinued operations treatment ($20.0 million) and (b) gains associated with our terminated commercial mortgage securities issuance operation that has been exited but does not qualify for discontinued operation accounting treatment under U.S. GAAP ($5.7 million) and (2) the negative effect of tax refinements related to prior years ($11.1 million).
      In 2006, other after-tax adjustments of $69.9 million included (1) the positive effect of: (a) gain on sales of real estate properties that qualify for discontinued operations treatment ($30.9 million); (b) gains associated with our terminated commercial mortgage securities issuance operation that has been exited but does not qualify for discontinued operations accounting treatment under U.S. GAAP ($28.7 million) and (c) a favorable court ruling on a contested IRS issue for 1991 and later years ($18.8 million) and (2) the negative effect from a contribution to the Principal Financial Group, Inc. Foundation ($8.5 million).
    (3)      The amounts in periods prior to 2007 were not material.

     

     

     

     

     

     

     

     

    71

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    19. Segment Information — (continued)

         The following is a summary of income tax expense (benefit) allocated to our segments for purposes of determining operating earnings. Segment income taxes are reconciled to income taxes reported on our consolidated statements of operations.

      For the year ended December 31, 
         2008  2007     2006 
      (in millions)
    Income tax expense (benefit) by segment:       
    U.S. Asset Accumulation  $ 116.3  $ 137.7  $ 115.2 
    Global Asset Management  46.4  52.9  38.8 
    Life and Health Insurance  133.8  107.6  144.1 
    Corporate  (2.7)  20.3  10.9 
       Total segment income taxes from operating earnings  293.8  318.5  309.0 
    Add:       
     Tax expense (benefit) related to net realized capital gains (losses), as adjusted  (238.3)  (129.0)  8.3 
       Tax expense (benefit) related to other after-tax adjustments  4.1  8.8  (13.9) 
       Tax expense (benefit) related to terminated commercial mortgage securities       
    issuance operation  (15.3)  3.0  15.5 
    Subtract:       
       Income tax expense (benefit) from discontinued real estate  — 0.1  (1.1) 
       Total income tax expense per consolidated statements of operations  $ 44.3  $ 201.2  $ 320.0 

     

     

     

     

     

     

     

     

     

     

     

     

    72

    Principal Life Insurance Company       
    Notes to Consolidated Financial Statements — (continued)     
    19. Segment Information — (continued)       
     
                       The following table summarizes operating revenues for our products and services:     
     
               For the year ended December 31, 
               2008  2007  2006 
      (in millions)
                       U.S. Asset Accumulation:       
                           Full-service accumulation  $ 1,397.3  $ 1,591.4  $ 1,382.7 
                           Individual annuities  1,017.1  799.8  582.8 
                           Bank and trust services  74.4  66.8  53.0 
                           Eliminations  (7.4)  (6.6)  (5.1) 
                               Total Accumulation  2,481.4  2,451.4  2,013.4 
                           Investment only  1,138.0  1,179.2  1,080.7 
                           Full-service payout  711.9  986.5  830.8 
                               Total Guaranteed  1,849.9  2,165.7  1,911.5 
                           Total U.S. Asset Accumulation  4,331.3  4,617.1  3,924.9 
                       Global Asset Management (1)  545.8  529.0  424.8 
                       Life and Health Insurance:       
                           Individual life insurance  1,393.4  1,370.1  1,344.7 
                           Health insurance  1,770.2  2,001.7  2,063.8 
                           Specialty benefits insurance  1,498.2  1,470.7  1,316.0 
                           Eliminations  (1.8)  (2.1)  (1.9) 
                               Total Life and Health Insurance  4,660.0  4,840.4  4,722.6 
                       Corporate  (115.5)  (65.2)  (82.2) 
                       Total operating revenues  $ 9,421.6  $ 9,921.3  $ 8,990.1 
                       Total operating revenues  $ 9,421.6  $ 9,921.3  $ 8,990.1 
                       Add:       
                             Net realized capital gains (losses) (except periodic settlements and       
                                 accruals on non-hedge derivatives), including recognition of front-end       
                                 fee revenues and certain market value adjustments to fee revenues  (685.5)  (362.5)  29.9 
                             Terminated commercial mortgage securities issuance operation  (32.1)  30.1  60.6 
                       Subtract:       
                             Operating revenues from discontinued real estate investments  —  0.3  (3.1) 
                       Total revenues per consolidated statements of operations  $ 8,704.0  $ 9,588.6  $ 9,083.7 

    (1)      Reflects inter-segment revenues of $215.6 million, $171.4 million and $152.3 million in 2008, 2007 and 2006, respectively. These revenues are eliminated within the Corporate segment.

     

     

     

     

     

     

     

     

    73

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    20. Stock-Based Compensation Plans

         The Stock-Based Compensation Plans footnote represents all share based compensation data related to us and our subsidiaries’ employees. As of December 31, 2008, our ultimate parent, PFG has the 2005 Stock Incentive Plan, the Employee Stock Purchase Plan, the Stock Incentive Plan and the Long-Term Performance Plan (“Stock-Based Compensation Plans”). As of May 17, 2005, no new grants will be made under the Stock Incentive Plan or the Long-Term Performance Plan. Under the terms of the 2005 Stock Incentive Plan, grants may be nonqualified stock options, incentive stock options qualifying under Section 422 of the Internal Revenue Code, restricted stock, restricted stock units, stock appreciation rights, performance shares, performance units or other stock based awards. To date, PFG has not granted any incentive stock options, restricted stock or performance units.

         For awards with graded vesting, we use an accelerated expense attribution method. The compensation cost that was charged against income for the Stock-Based Compensation Plans is as follows:

                 For the year ended December 31, 
      2008           2007  2006 
      (in millions)
                       Compensation cost  $ 26.1  $ 53.0 $  58.0 
                       Related income tax benefit    8.3                 17.6  19.0 
                       Capitalized as part of an asset    4.7                   4.0  3.4 
     
    Nonqualified Stock Options         

         Nonqualified stock options were granted to certain employees under the 2005 Stock Incentive Plan and the Stock Incentive Plan. Options outstanding under the 2005 Stock Incentive Plan and the Stock Incentive Plan were granted at an exercise price equal to the fair market value of PFG’s common stock on the date of grant, and expire ten years after the grant date. These options have graded or cliff vesting over a three-year period, except in the case of approved retirement.

         The total intrinsic value of stock options exercised was $3.4 million, $35.5 million and $31.7 million during 2008, 2007 and 2006, respectively.

         The weighted-average remaining contractual lives for stock options exercisable is approximately 6 years as of December 31, 2008.

         The fair value of stock options is estimated using the Black-Scholes option pricing model. The following is a summary of the assumptions used in this model for the stock options granted during the period:

               For the year ended December 31, 
    Options         2008  2007  2006 
    Expected volatility       25.4%  23.6%  16.2% 
    Expected term (in years)  6  6  6 
    Risk-free interest rate  3.1%  4.6%  4.6% 
    Dividend yield         1.51%  1.28%  1.32% 
    Weighted average estimated fair value  $ 15.41  $ 17.98  $ 11.41 

         We previously determined expected volatility for stock options granted based on, among other factors, historical volatility using monthly price observations. Beginning with stock options granted in 2007, we determine expected volatility based on, among other factors, historical volatility of PFG’s common stock using daily price observations. We believe that daily price observations provide a better estimate of expected fluctuations in PFG’s common stock price over the expected term of stock options granted. The expected term represents the period of time that options granted are expected to be outstanding. We previously determined expected term based on the simplified method as described by the SEC. Beginning with stock options granted in 2008, we determine expected term using historical exercise and employee termination data as we believe we now have sufficient data to provide a reasonable basis on which to estimate expected term. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury risk-free interest rate in effect at the time of grant. The dividend yield is based on historical dividend distributions compared to the closing price of PFG’s common shares on the grant date.

     

     

     

     

    74

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    20. Stock-Based Compensation Plans — (continued)

         As of December 31, 2008, there were $10.4 million of total unrecognized compensations costs related to nonvested stock options. The cost is expected to be recognized over a weighted-average service period of approximately 1.7 years.

    Performance Share Awards

         Beginning in 2006, performance share awards were granted to certain employees under the 2005 Stock Incentive Plan. The performance share awards are treated as an equity award and are paid in shares. Whether the performance shares are earned depends upon the participant's continued employment through the performance period (except in the case of an approved retirement) and PFG’s performance against three-year goals set at the beginning of the performance period. A return on equity objective and an earnings per share objective must be achieved for any of the performance shares to be earned. If the performance requirements are not met, the performance shares will be forfeited, no compensation cost is recognized and any previously recognized compensation cost is reversed. There is no maximum contractual term on these awards.

         The fair value of performance share awards is determined based on the closing stock price of PFG common shares on the grant date. The weighted-average grant-date fair value of performance share awards granted during 2008, 2007 and 2006 were $56.92, $62.73 and $49.40, respectively.

         As of December 31, 2008, there were no unrecognized compensation costs related to nonvested performance share awards granted.

         Because no performance share awards vested or were paid out, the intrinsic value of performance share awards vested was $0.0 million in 2008, 2007 and 2006.

    Restricted Stock Units

         Restricted stock units are issued under the 2005 Stock Incentive Plan and Stock Incentive Plan. Restricted stock units are treated as an equity award. There is no maximum contractual term on these awards.

         Restricted stock units were issued to certain employees and agents pursuant to the Stock Incentive Plan and 2005 Stock Incentive Plan. Under these plans, awards have graded or cliff vesting over a three-year service period. When service for PFG ceases (except in the case of an approved retirement), all vesting stops and unvested units are forfeited.

         The total intrinsic value of restricted stock units vested was $23.8 million, $21.7 million and $15.0 million during 2008, 2007 and 2006, respectively.

         The fair value of restricted stock units is determined based on the closing stock price of PFG’s common shares on the grant date. The weighted-average grant-date fair value of restricted stock units granted during 2008, 2007 and 2006 was $57.96, $61.28 and $50.08, respectively.

         As of December 31, 2008, there were $26.5 million of total unrecognized compensation costs related to nonvested restricted stock unit awards granted under these plans. The cost is expected to be recognized over a weighted-average period of approximately 2.0 years.

    Employee Stock Purchase Plan

         Under our Employee Stock Purchase Plan, participating employees had the opportunity to purchase shares of PFG common stock on a quarterly basis through 2008. Beginning in 2009, participating employees have the opportunity to purchase shares of PFG common stock on a semi-annual basis. Employees may purchase up to $25,000 worth of PFG common stock each year. Employees may purchase shares of PFG’s common stock at a price equal to 85% of the shares' fair market value as of the beginning or end of the purchase period, whichever is lower.

         We recognize compensation expense for the fair value of the discount granted to employees participating in the employee stock purchase plan in the period of grant. Shares of the Employee Stock Purchase Plan are treated as an equity award. The weighted-average fair value of the discount on the stock purchased was $6.54, $10.47 and $10.34 during 2008, 2007 and 2006, respectively. The total intrinsic value of the Employee Stock Purchase Plan shares settled was $4.8 million, $5.9 million and $6.2 million during 2008, 2007 and 2006, respectively.

     

     

    75

    Principal Life Insurance Company
    Notes to Consolidated Financial Statements — (continued) 

    20. Stock-Based Compensation Plans — (continued) Long-Term Performance Plan

         PFG also maintains the Long-Term Performance Plan, which provides the opportunity for eligible executives to receive additional awards if specified minimum corporate performance objectives are achieved over a three-year period. This plan utilizes stock as an option for payment and is treated as a liability award during vesting and a liability award or equity award subsequent to vesting, based on the participant payment election. Effective with PFG stockholder approval of the 2005 Stock Incentive Plan, no further grants will be made under the Long-Term Performance Plan, and any future awards paid under the Long-Term Performance Plan will be issued under the 2005 Stock Incentive Plan. As of December 31, 2005, all awards under this plan were fully vested and no awards were granted under this plan in 2008, 2007 and 2006. There is no maximum contractual term on these awards.

         The fair value of Long-Term Performance Plan liability units is determined as of each reporting period based on the Black-Scholes option pricing model that uses the assumptions noted in the following table:

    Long-Term Performance Plan  For the year ended December 31,    
      2008  2007      2006
    Expected volatility  104.1%  25.0%    11.2% 
    Expected term (in years)  1  2    2 
    Risk-free interest rate  0.5%  3.2%    4.8% 
    Dividend yield  —%  —%    —% 

         The amount of cash used to settle Long-Term Performance Plan units granted was $2.6 million, $2.9 million and $10.2 million for 2008, 2007 and 2006, respectively. The total intrinsic value of Long-Term Performance Plan units settled was $4.2 million, $3.0 million and $10.4 million during 2008, 2007 and 2006, respectively.

    21. Quarterly Results of Operations (Unaudited)           
     
                       The following is a summary of unaudited quarterly results of operations for 2008 and 2007:     
     
      For the three months ended,
      December 31  September 30    June 30  March 31 
      (in millions)
    2008           
       Total revenues  $ 2,072.6  $ 2,139.4  $ 2,313.4  $ 2,178.6 
       Total expenses  2,102.6  2,057.4    2,088.6  2,008.0 
       Income from continuing operations, net of related income taxes  13.3  72.9    175.2  141.7 
       Net income  13.3  72.9    175.2  141.7 
    2007           
       Total revenues  $ 2,165.6  $ 2,494.8  $ 2,528.1  $ 2,400.1 
       Total expenses  2,229.8  2,215.8    2,140.4  2,080.5 
       Income (loss) from continuing operations, net of related income           
           taxes  (0.4)  193.9    286.0  241.4 
       Income (loss) from discontinued operations, net of related income           
           taxes  20.6  (0.2)    (0.2)  — 
       Net income  20.2  193.7    285.8  241.4 

     

     

     

     

     

     

     

     

     

     

    76

    PART C
    OTHER INFORMATION
     
    Item 24.  Financial Statements and Exhibits 
     
                       (a)  Financial Statements included in the Registration Statement 
      (1)  Part A: 
        Condensed Financial Information for the 4 years ended 
        December 31, 2008 and the period ended December 31, 2004. 
     
      (2)  Part B: 
        Principal Life Insurance Company Separate Account B: 
        Report of Independent Registered Public Accounting Firm 
        Statements of Assets and Liabilities, December 31, 2008 
        Statements of Operations for the year ended December 31, 2008 
        Statements of Changes in Net Assets for the years ended December 31, 2008 and 2007.
        Notes to Financial Statements. 
     
        Principal Life Insurance Company: 
        Report of Independent Registered Public Accounting Firm  
        Consolidated Statements of Financial Position at December 31, 2008 and 2007. 
        Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006. 
        Consolidated Statements of Stockholder's Equity for the years ended December 31, 2008, 2007 
        and 2006. 
        Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006. 
        Notes to Consolidated Financial Statements. 
     
      (3)  Part C 
        Principal Life Insurance Company 
        Report of Independent Registered Public Accounting Firm on Schedules* 
        Schedule I - Summary of Investments - Other Than Investments in Related Parties As December 
        31, 2008* 
        Schedule III - Supplementary Insurance Information as of December 31, 2008, 2007 and 2006 and 
        for each of the years then ended* 
        Schedule IV – Reinsurance as of December 31, 2008, 2007 and 2006 and for each of the years 
        then ended* 
     
    All other schedules for which provision is made in the applicable accounting regulation of the Securities and 
    Exchange Commission are not required under the related instructions or are inapplicable and therefore have been 
    omitted.     
     
                       (b)  Exhibits 
      (1)           Resolution of Board of Directors of the Depositor – filed with the Commission on filed on 
                 06/07/2004) 
      (3a)           Distribution Agreement (filed 01/04/2005) 
      (3b)           Selling Agreement (filed 06/07/2004) 
      (4a)           Form of Variable Annuity Contract (filed 06/7/2004) 
      (4b)           Amendment to Enhanced Death Benefit Rider (filed 04/27/2006) 
      (4c)           Amendment to Fixed Account Endorsement (filed 04/27/2006) 
      (4d)           Amendment to Fixed DCA Account Endorsement (filed 04/27/2006) 
      (4e)           Amendment to GMWB Rider (filed 04/27/2006) 
      (4f)           Amendment to Contract Data Page (filed 04/27/2006) 
      (4g)           Amendment to Partial Annuitization Endorsement (filed 04/27/2006) 
      (4h)           Amendment to Premium Payment Credit Rider (filed 04/27/2006) 
      (4i)           Form of Specimen Guaranteed Minimum Withdrawal Benefit 2 – Joint Life Rider (filed with the 
                 Commission on 05/01/2008) 
      (4i)           Form of Specimen Guaranteed Minimum Withdrawal Benefit 2 – Single Life Rider (filed with 
                 the Commission on 05/01/2008) 
      (5)           Form of Variable Annuity Application (filed 06/07/2004) 
      (6a)           Articles of Incorporation of the Depositor (filed with the Commission on 06/07/2004) 
      (6b)           Bylaws of Depositor (filed with the Commissioner 06/07/2004) 

    (8a1)  Participation Agreement with AIM Variable Insurance Funds, as amended (filed with the 
      Commission on 05/01/2008) 
    (8a2)  Distribution Agreement with AIM Variable Insurance Funds, (filed with the Commission on May 
      1, 2008) 
    (8a3)  Rule 22c-2 Agreement with AIM Variable Insurance Funds, (filed with the Commission on May 
      1, 2008) 
    (8a4)  Administrative Services Agreement with AIM Variable Insurance Funds, (filed with the 
      Commission on May 1, 2008) 
    (8b1)  Participation Agreement with AllianceBernstein Variable Products Series Fund, as amended 
      (filed with the Commission on 05/01/2008) 
    (8b2)  Administrative Service Agreement with AllianceBernstein Variable Products Series Fund, (filed 
      with the Commission on 05/01/2008) 
    (8b3)  Rule 22c-2 Agreement with AllianceBernstein Variable Products Series Fund, (filed with the 
      Commission on 05/01/2008) 
    (8c1)  Shareholder Services Agreement with American Century Investment Management Inc., as 
      amended (as filed with the Commission on May 1, 2008) 
    (8c2)  Rule 22c-2 Agreement with American Century Investment Management Inc., ( as filed on May 
      1, 2008) 
    (8d1)  Participation Agreement with Dreyfus Investment Portfolios, as amended (filed with the 
      Commission on May 1, 2008) 
    (8d2)  Administrative Services Agreement with Dreyfus Investment Portfolios, as amended (filed with 
      the Commission on May 1, 2008) 
    (8d3)  Rule 12b-1 Agreement with Dreyfus Investment Portfolios, as amended (filed with the 
      Commission on May 1, 2008) 
    (8e1)  Amended & Restated Participation Agreement with Fidelity Insurance Products Fund (as filed 
      on May 1, 2008) 
    (8e2)  Distribution Agreement with Fidelity Variable Insurance Products Fund (as filed on May 1, 
      2008) 
    (8e3)  Service Agreement dated 8/02/1999 with Fidelity Variable Insurance Products Fund (as filed 
      on May 1, 2008) 
    (8e4)  Service Agreement dated 2/29/2000 with Fidelity Variable Insurance Products Fund (as filed 
      on May 1, 2008) 
    (8e5)  Service Agreement dated 3/26/2002 with Fidelity Variable Insurance Products Fund (as filed 
      on May 1, 2008) 
    (8e6)  Rule 22c-2 Agreement with Fidelity Insurance Products Fund (as filed on May 1, 2008) 
    (8f1)  Participation Agreement with Goldman Sachs Variable Insurance Trust, (filed with the 
      Commission on May 1, 2008) 
    (8f2)  Administrative Services Agreement with Goldman Sachs Variable Insurance Trust (filed on 
      May 1, 2008) 
    (8f3)  Rule 22c-C Agreement with Goldman Sachs Variable Insurance Trust (filed with the 
      Commission on May 1, 2008) 
    (8g1)  Participation Agreement with Neuberger Berman Advisers Management Trust, as amended 
      (filed with the Commission on May 1, 2008) 
    (8g2)  Distribution & Administrative Services Agreement with Neuberger Berman Advisers 
      Management Trust (filed on May 1, 2008) 
    (8g3)  Rule 22c-C Agreement with Neuberger Berman Advisers Management Trust (filed with the 
      Commission on May 1, 2008) 
    (8h1)  Form of Participation Agreement with Principal Variable Contracts Funds (as filed on May 1, 
      2008) 
    (8h2)  Form of Rule 22c-2 Agreement with Principal Variable Contracts Funds (as filed on May 1, 
      2008) 
    (8i1)  Participation Agreement with T Rowe Equity Series Inc, as amended (filed with the 
      Commission on May 1, 2008) 
    (8i2)  Rule 12b-1 Agreement with T Rowe Equity Series Inc (filed with the Commission on May 1, 
      2008) 
    (8i3)  Rule 22c-C Agreement with T Rowe Equity Series Inc (filed with the Commission on May 1, 
      2008) 
    (8i4)  Participation Agreement with T Rowe Equity Series Inc, as amended (filed with the 
      Commission on May 1, 2008) 
    (8j1) Participation Agreement with MFS Variable Insurance Trust**
    (8k1) Participation Agreement with Pimco Variable Insurance Trust**
    (8l1) Participation Agreement with Van Eck Worldwide Insurance Trust**
    (9)  Opinion of Counsel (filed 01/04/2005) 
    (10a)  Consent of Independent Registered Public Accounting Firm* 
    (10b)  Powers of Attorney (filed with the Commission on 02/29/2008) 

    (10c)  Consent of Counsel* 
    (11)  Financial Statement Schedules* 
     
    * Filed herein   
    ** To be filed by Amendment. 

    Item 25. Officers and Directors of the Depositor

    Principal Life Insurance Company is managed by a Board of Directors which is elected by its policyowners. The directors and executive officers of the Company, their positions with the Company, including Board Committee memberships, and their principal business address, are as follows:

    DIRECTORS:   
     
    Name and Principal Business Address  Positions and Offices 
    BETSY J. BERNARD  Director 
    40 Shalebrook Drive  Chair, Nominating and Governance Committee 
    Morristown, NJ 07960  Member, Executive Committee 
    JOCELYN CARTER-MILLER  Director 
    Tech Edventures  Member, Nominating and Governance Committee 
    3020 NW 33rd Avenue   
    Lauderdale Lakes, FL 33311   
    GARY E. COSTLEY  Director 
    C & G Capital and Management, LLC  Member, Audit Committee 
    257 Barefoot Beach Boulevard, Suite 404   
    Bonita Springs, FL 34134   
    MICHAEL T. DAN  Director 
    The Brink's Company  Member, Human Resources Committee 
    1801 Bayberry Court   
    Richmond, VA 23226   
    C. DANIEL GELATT, JR.  Director 
    NMT Corporation  Member, Audit Committee 
    2004 Kramer Street   
    La Crosse, WI 54603   
    J. BARRY GRISWELL  Director 
    The Principal Financial Group  Chairman of the Board and Chair, Executive Committee 
    Des Moines, IA 50392   
    SANDRA L. HELTON  Director 
    1040 North Lake Shore Drive #26A  Member, Audit Committee 
    Chicago, IL 60611   
    WILLIAM T. KERR  Director 
    Meredith Corporation  Member, Executive Committee and Chair, Human 
    1716 Locust St.  Resources Committee 
    Des Moines, IA 50309-3023   
    RICHARD L. KEYSER  Director 
    W.W. Grainger, Inc.  Member, Nominating and Governance Committee 
    100 Grainger Parkway   
    Lake Forest, IL 60045-5201   
    ARJUN K. MATHRANI  Director 
    176 East 71st Street, Apt. 9-F  Chair, Audit Committee 
    New York, NY 10021  Member, Executive Committee 
    ELIZABETH E. TALLETT  Director 
    Hunter Partners, LLC  Member, Executive Committee and Human Resources 
    12 Windswept Circle  Committee 
    Thornton, NH 03285-6883   
    LARRY D. ZIMPLEMAN  Director 
    The Principal Financial Group  Principal Life: President and Chief Executive Officer 
    Des Moines, IA 50392  Member, Executive Committee 

    EXECUTIVE OFFICERS (OTHER THAN DIRECTORS)

    Name and Principal Business Address  Positions and Offices 
    JOHN EDWARD ASCHENBRENNER  President, Insurance and Financial Services 
    CRAIG LAWRENCE BASSETT  Vice President and Treasurer 
    GREGORY J. BURROWS  Senior Vice President Retirement and Investor Services 
    RONALD L. DANILSON  Senior Vice President Retirement and Investor Services 
    GREGORY BERNARD ELMING  Senior Vice President and Controller 
    RALPH CRAIG EUCHER  Senior Vice President Human Resources, Corporate Services 
      and Retirement and Investor Services 
    NORA MARY EVERETT  Senior Vice President Retirement and Investor Services 
    THOMAS JOHN GRAF  Senior Vice President Investor Relations 
    JOYCE NIXSON HOFFMAN  Senior Vice President and Corporate Secretary 
    DANIEL JOSEPH HOUSTON  President Retirement and Investor Services 
    G. DAVID SHAFER  Senior Vice President Health 
    ELLEN ZISLIN LAMALE  Senior Vice President and Chief Risk Officer 
    JULIA MARIE LAWLER  Senior Vice President and Chief Investment Officer 
    TERRANCE JOSEPH LILLIS  Senior Vice President and Chief Financial Officer 
    JAMES PATRICK MCCAUGHAN  President, Global Asset Management 
    TIMOTHY JON MINARD  Senior Vice President Retirement Distribution 
    MARY AGNES O'KEEFE  Senior Vice President and Chief Marketing Officer 
    GARY PAUL SCHOLTEN  Senior Vice President and Chief Information Officer 
    KAREN ELIZABETH SHAFF  Executive Vice President and General Counsel 
    NORMAN RAUL SORENSEN  Executive Vice President International Asset Accumulation 
    DEANNA DAWNETTE STRABLE  Senior Vice President Individual Life and Specialty Benefits 

    Item 26. Persons Controlled by or Under Common Control with the Depositor or the Registrant

    The Registrant is a separate account of Principal Life Insurance Company (the "Depositor") and is operated as a unit investment trust. Registrant supports benefits payable under Depositor's variable life contracts by investing assets allocated to various investment options in shares of Principal Variable Contracts Funds, Inc. and other mutual funds registered under the Investment Company Act of 1940 as open-end management investment companies of the "series" type. No person is directly or indirectly controlled by the Registrant.

    The Depositor is wholly-owned by Principal Financial Services, Inc. Principal Financial Services, Inc. (an Iowa corporation) an intermediate holding company organized pursuant to Section 512A.14 of the Iowa Code. In turn, Principal Financial Services, Inc. is a wholly-owned subsidiary of Principal Financial Group, Inc., a publicly traded company that filed consolidated financial statements with the SEC. A list of persons directly or indirectly controlled by or under common control with Depositor as of December 31, 2008 appears below:

    None of the companies listed in such organization chart is a subsidiary of the Registrant; therefore, only the separate financial statements of Registrant and the consolidated financial statements of Depositor are being filed with this Registration Statement.




    Item 27. Number of Contractowners – As of March 31, 2009   
     
    (1)  (2)  (3) 
      Number of Plan  Number of 
    Title of Class  Participants  Contractowners 
    BFA Variable Annuity Contracts  37  6 
    Pension Builder Contracts  192  132 
    Personal Variable Contracts  25  338 
    Premier Variable Contracts  53  1,532 
    Flexible Variable Annuity Contract  41,779  41,779 
    Freedom Variable Annuity Contract  1,619  1,619 
    Freedom 2 Variable Annuity Contract  358  358 
    Investment Plus Variable Annuity Contract  22,919  22,919 
     
    Item 28. Indemnification     

    Sections 490.851 through 490.859 of the Iowa Business Corporation Act permit corporations to indemnify directors and officers where (A) all of the following apply: the director or officer (i) acted in good faith; (ii) reasonably believed that (a) in the case of conduct in the individual's official capacity, that the individual's conduct was in the best interests of the corporation or (b) in all other cases, that the individual's conduct was at least not opposed to the best interests of the corporation; and (iii) in the case of any criminal proceeding, the individual had no reasonable cause to believe the individual's conduct was unlawful; and (B) the individual engaged in conduct for which broader indemnification has been made permissible or obligatory under a provision of the corporation's articles of incorporation.

    Unless ordered by a court pursuant to the Iowa Business Corporation Act, a corporation shall not indemnify a director or officer in either of the following circumstances: (A) in connection with a proceeding by or in the right of the corporation, except for reasonable expenses incurred in connection with the proceeding if it is determined that the director has met the relevant standard of conduct (above) or (B) in connection with any proceeding with respect to conduct for which the director was adjudged liable on the basis that the director receive a financial benefit to which he or she was not entitled, whether or not involving action in the director's official capacity.

    Registrant's By-Laws provide that it shall indemnify directors and officers against damages, awards, settlements and costs reasonably incurred or imposed in connection with any suit or proceeding to which such person is or may be made a party by reason of being a director or officer of the Registrant. Such rights of indemnification are in addition to any rights to indemnity to which the person may be entitled under Iowa law and are subject to any limitations imposed by the Board of Directors. The Board has provided that certain procedures must be followed for indemnification of officers, and that there is no indemnity of officers when there is a final adjudication of liability based upon acts which constitute gross negligence or willful misconduct.

    Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

    Item 29. Principal Underwriters

    (a) Other Activity

    Princor Financial Services Corporation acts as principal underwriter for variable annuity contracts issued by Principal Life Insurance Company Separate Account B, a registered unit investment trust, and for variable life contracts issued by Principal Life Insurance Company Variable Life Separate Account, a registered unit investment trust. Princor Financial Services Corporation and Principal Funds Distributor act as principal underwriters for Class J shares, Institutional Class shares, R-1, R-2, R-3, R-4 and R-5 Class shares of Principal Funds, Inc.

    (b)           Management   
     
      (b1)  (b2) 
        Positions and offices 
               Name and principal  with principal 
             business address  underwriter 
      Michael C. Anagnost  Vice President – Chief Technology 
      The Principal  Officer 
      Financial Group(1)   
     
      John E. Aschenbrenner  Director 
      The Principal   
      Financial Group(1)   
     
      Patricia A. Barry  Assistant Corporate Secretary 
      The Principal   
      Financial Group(1)   
     
      Craig L. Bassett  Treasurer 
      The Principal   
      Financial Group(1)   
     
      Michael J. Beer  President and Director 
      The Principal   
      Financial Group(1)   
     
      Tracy W. Bollin  Financial Controller 
      The Principal   
      Financial Group(1)   
     
      David J. Brown  Senior Vice President 
      The Principal   
      Financial Group(1)   
     
      Jill R. Brown  Senior Vice President and Chief Financial Officer 
      The Principal   
      Financial Group(1)   
     
      David P. Desing  Assistant Treasurer 
      The Principal   
      Financial Group(1)   
     
      Ralph C. Eucher  Chairman of the Board 
      The Principal   
      Financial Group(1)   
     
      Nora M. Everett  Director 
      The Principal   
      Financial Group (1)   
     
      James W. Fennessey  Vice President 
      The Principal   
      Financial Group(1)   
     
      Michael P. Finnegan  Senior Vice President/Investment Services 
      The Principal   
      Financial Group(1)   

    Louis E. Fiori  Vice President – Capital Markets 
    The Principal   
    Financial Group(1)   
     
    Stephen G. Gallaher  Assistant General Counsel 
    The Principal   
    Financial Group(1)   
     
    Eric W. Hays  Senior Vice President/Chief Information Officer 
    The Principal   
    Financial Group(1)   
     
    Joyce N. Hoffman  Senior Vice President and Corporate Secretary 
    The Principal   
    Financial Group(1)   
     
    Patrick A. Kirchner  Assistant General Counsel 
    The Principal   
    Financial Group(1)   
     
    Deanna L. Mankle  Assistant Treasurer 
    The Principal   
    Financial Group(1)   
     
    Sarah J. Pitts  Counsel 
    The Principal   
    Financial Group(1)   
     
    Layne A. Rasmussen  Vice President/Controller – Principal Funds 
    The Principal   
    Financial Group(1)   
     
    David L. Reichart  Senior Vice President 
    The Principal   
    Financial Group(1)   
     
    Michael D. Roughton  Senior Vice President and Senior Securities Counsel 
    The Principal   
    Financial Group(1)   
     
    Adam U. Shaikh  Counsel 
    The Principal   
    Financial Group(1)   
     
    Mark A. Stark  Vice President – Investment Services 
    The Principal   
    Financial Group(1)   
     
    Randy L. Welch  Vice President – Investment Services 
    The Principal   
    Financial Group(1)   
     
    Traci L. Weldon  Chief Compliance Officer 
    The Principal   
    Financial Group(1)   
     
    Dan L. Westholm  Director - Treasury 
    The Principal   
    Financial Group(1)   
     
    Beth C. Wilson  Vice President 
    The Principal   
    Financial Group(1)   

    (1)      711 High Street Des Moines, IA 50309
    (c)  Compensation from the Registrant       
     
     
          (3)     
        (2)  Compensation on Events     
        Net Underwriting  Occasioning the  (4)   
      (1)  Discounts &  Deduction of a Deferred  Brokerage  (5) 
    Name of Principal Underwriter  Commissions  Sales Load  Commissions  Compensation 
     
      Princor Financial Services  $26,629,731.79  0  0  0 
      Corporation         
     
    Item 30. Location of Accounts and Records       

    All accounts, books or other documents of the Registrant are located at the offices of the Depositor, The Principal Financial Group, Des Moines, Iowa 50392.

    Item 31. Management Services

    N/A

    Item 32. .Undertakings

    The Registrant undertakes that in restricting cash withdrawals from Tax Sheltered Annuities to prohibit cash withdrawals before the Participant attains age 59 1/2, separates from service, dies, or becomes disabled or in the case of hardship, Registrant acts in reliance of SEC No Action Letter addressed to American Counsel of Life Insurance (available November 28, 1988). Registrant further undertakes that:

    1.      Registrant has included appropriate disclosure regarding the redemption restrictions imposed by Section 403(b)(11) in its registration statement, including the prospectus, used in connection with the offer of the contract;
    2.      Registrant will include appropriate disclosure regarding the redemption restrictions imposed by Section 403(b)(11) in any sales literature used in connection with the offer of the contract;
    3.      Registrant will instruct sales representatives who solicit Plan Participants to purchase the contract specifically to bring the redemption restrictions imposed by Section 403(b)(11) to the attention of the potential Plan Participants; and
    4.      Registrant will obtain from each Plan Participant who purchases a Section 403(b) annuity contract, prior to or at the time of such purchase, a signed statement acknowledging the Plan Participant's understanding of (a) the restrictions on redemption imposed by Section 403(b)(11), and (b) the investment alternatives available under the employer's Section 403(b) arrangement, to which the Plan Participant may elect to transfer his contract value.

    Fee Representation

    Principal Life Insurance Company represents the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company.

      SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant, Principal Life Insurance Company Separate Account B, has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned thereto duly authorized, and its seal to be hereunto affixed and attested, in the City of Des Moines and State of Iowa, on the 30th day of April, 2009.

    PRINCIPAL LIFE INSURANCE COMPANY 
    SEPARATE ACCOUNT B 
      (Registrant) 
     
     
    By :  /s/ L. D. Zimpleman 
      L. D. Zimpleman 
      Director, President and Chief Executive Officer 
     
     
     
    PRINCIPAL LIFE INSURANCE COMPANY 
      (Depositor) 
     
    By :  /s/ L. D. Zimpleman 
      L. D. Zimpleman 
      Director, President and Chief Executive Officer 

    Attest: 
    /s/ Joyce N. Hoffman 
    Joyce N. Hoffman 
    Senior Vice President and Corporate Secretary 

    Pursuant to the requirements of the Securities Act, this amendment to the registration statement has been signed by the following persons in the capacities and on the date indicated.

    Signature   Title  Date 
     
     
    /s/ L. D. Zimpleman     
    L. D. Zimpleman   Director, President  April 30, 2009 
       and Chief Executive Officer   
     
    /s/ G. B. Elming     
       Senior Vice President and  April 30, 2009 
    G. B. Elming   Controller   
       (Principal Accounting Officer)   
     
    /s/ T. J. Lillis     
       Executive Vice President  April 30, 2009 
    T. J. Lillis   and Chief Financial Officers   
       (Principal Financial Officer)   
     
     (B. J. Bernard)*   Director  April 30, 2009 
    B. J. Bernard     
     
     (J. Carter-Miller)*   Director  April 30, 2009 
    J. Carter-Miller     
     
     (G. E. Costley)*   Director  April 30, 2009 
    G. E. Costley     
     
     (M.T. Dan)*   Director  April 30, 2009 
    M. T. Dan     
     
     (D. J. Drury)*   Director  April 30, 2009 
    D. J. Drury     
     
     (C. D. Gelatt, Jr.)*   Director  April 30, 2009 
    C. D. Gelatt, Jr.     
     
     (J. B. Griswell*   Director and Chairman   
    J. B. Griswell   of the Board  April 30, 2009 
     
     
     (S. L. Helton)*   Director  April 30, 2009 
    S. L. Helton     
     
     (W. T. Kerr)*   Director  April 30, 2009 
    W. T. Kerr     
     
     (R. L. Keyser)*   Director  April 30, 2009 
    R. L. Keyser     
     
     (A. K. Mathrani)*   Director  April 30, 2009 
    A. K. Mathrani     
     
     (E. E. Tallett)*   Director  April 30, 2009 
    E. E. Tallett     
    *By                    /s/ L. D. Zimpleman
                     L. D. Zimpleman   
                     Director, President and Chief Executive Officer 
                     Pursuant to Powers of Attorney 
                     Previously Filed or Included Herein