Registration No. 811-09529
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
Initial Registration Statement
SEPARATE ACCOUNT IMO
OF ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(Exact Name of Registrant)
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Office)
Mary Eldridge, Esq.
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
-----
on (date) pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a) (1)
-----
this post-effective amendment designates a new effective date
----- for a previously filed post-effective amendment
FLEXIBLE PREMIUM VARIABLE LIFE
Pursuant to Reg. Section 270.24f-2 of the Investment Company Act of 1940 ("1940
Act"), Registrant hereby declares that an indefinite amount of its securities is
being registered under the Securities Act of 1933 ("1933 Act").
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registrations Statement
shall become effective in accordance with Section 8(a) of the Securities Act
of 1933 or until this Registration Statement shall become effective on such
date or dates as the Commission, acting pursuant to said Section 8(a) may
determine.
Registrant is making this filing in order to register a new flexible
premium variable life policy, under Securities Act of 1933.
RECONCILIATION AND TIE BETWEEN ITEMS
IN FORM N-8B-2 AND THE PROSPECTUS
ITEM NO. OF
FORM N-8B-2 CAPTION IN PROSPECTUS
- ------------ ---------------------
1. . . . . . . . . . . Cover Page
2. . . . . . . . . . . Cover Page
3. . . . . . . . . . . Not Applicable
4. . . . . . . . . . . Distribution
5. . . . . . . . . . . The Company, The Separate Account and the
Underlying Funds
6. . . . . . . . . . . The Separate Account
7. . . . . . . . . . . Not Applicable
8. . . . . . . . . . . Not Applicable
9. . . . . . . . . . . Legal Proceedings
10 . . . . . . . . . . Summary; Description of the Company, The Separate
Account and the Underlying Funds; The Policy; Policy
Termination and Reinstatement; Other Policy Provisions
11 . . . . . . . . . . Summary; Allmerica Investment Trust; Variable Insurance
Products Fund; T. Rowe Price International Series, Inc.;
Investment Objectives and Policy
12 . . . . . . . . . . Summary; Allmerica Investment Trust; Variable Insurance
Products Fund; T. Rowe Price International Series, Inc.;
13 . . . . . . . . . . Summary; Allmerica Investment Trust; Variable Insurance
Products Fund; T. Rowe Price International Series, Inc.;
Investment Advisory Services to the Trust; Investment
Advisory Services to Variable Insurance Products Fund;
Investment Advisory Services to T. Rowe Price
International Series, Inc.; Charges and Deductions
14 . . . . . . . . . . Summary; Applying for a Policy
15 . . . . . . . . . . Summary; Applying for a Policy; Payments;
Allocation of Net Premiums
16 . . . . . . . . . . The Separate Account; Allmerica Investment Trust;
Variable Insurance Products Fund; T. Rowe Price
International Series, Inc.; Payments;
Allocation of Net Premiums
17 . . . . . . . . . . Summary; Surrender; Partial Withdrawal; Charges
and Deductions; Policy Termination and Reinstatement
18 . . . . . . . . . . The Separate Account; Allmerica Investment Trust;
Variable Insurance Products Fund; T. Rowe Price
International Series, Inc.; Payments
19 . . . . . . . . . . Reports; Voting Rights
20 . . . . . . . . . . Not Applicable
21 . . . . . . . . . . Summary; Policy Loans; Other Policy Provisions
22 . . . . . . . . . . Other Policy Provisions
23 . . . . . . . . . . Not Required
24 . . . . . . . . . . Other Policy Provisions
25 . . . . . . . . . . The Company
26 . . . . . . . . . . Not Applicable
27 . . . . . . . . . . The Company
28 . . . . . . . . . . Directors and Principal Officers of the Company
29 . . . . . . . . . . The Company
30 . . . . . . . . . . Not Applicable
31 . . . . . . . . . . Not Applicable
32 . . . . . . . . . . Not Applicable
33 . . . . . . . . . . Not Applicable
34 . . . . . . . . . . Not Applicable
35 . . . . . . . . . . Distribution
36 . . . . . . . . . . Not Applicable
37 . . . . . . . . . . Not Applicable
38 . . . . . . . . . . Summary; Distribution
39 . . . . . . . . . . Summary; Distribution
40 . . . . . . . . . . Not Applicable
41 . . . . . . . . . . The Company, Distribution
42 . . . . . . . . . . Not Applicable
43 . . . . . . . . . . Not Applicable
44 . . . . . . . . . . Payments; Policy Value and Cash Surrender Value
45 . . . . . . . . . . Not Applicable
46 . . . . . . . . . . Policy Value and Cash Surrender Value; Federal Tax
Considerations
47 . . . . . . . . . . The Company
48 . . . . . . . . . . Not Applicable
49 . . . . . . . . . . Not Applicable
50 . . . . . . . . . . The Separate Account
51 . . . . . . . . . . Cover Page; Summary; Charges and Deductions; The
Policy; Policy Termination and Reinstatement; Other
Policy Provisions
52 . . . . . . . . . . Addition, Deletion or Substitution of Investments
53 . . . . . . . . . . Federal Tax Considerations
54 . . . . . . . . . . Not Applicable
55 . . . . . . . . . . Not Applicable
56 . . . . . . . . . . Not Applicable
57 . . . . . . . . . . Not Applicable
58 . . . . . . . . . . Not Applicable
59 . . . . . . . . . . Not Applicable
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
WORCESTER, MASSACHUSETTS
INDIVIDUAL SURVIVORSHIP FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICIES
PLEASE READ THIS This Prospectus provides important information about an
PROSPECTUS CAREFULLY individual survivorship flexible premium variable life
BEFORE INVESTING AND insurance Policy issued by Allmerica Financial Life
KEEP IT FOR FUTURE Insurance and Annuity Company. The policies are funded
REFERENCE. through the Separate Account IMO, a separate investment
VARIABLE LIFE POLICIES account of the Company that is referred to as the Variable
INVOLVE RISKS INCLUDING Account. Life insurance coverage is provided for two
POSSIBLE LOSS OF Insureds, with Death Proceeds payable at death of the
PRINCIPAL. surviving Insured. Both Insureds must be age 85 or under on
the Date of Issue.
The Separate Account is subdivided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of one of the
following Funds of Allmerica Investment Trust, Variable
Insurance Products Fund, and T. Rowe Price International
Series, Inc.
ALLMERICA INVESTMENT TRUST VARIABLE INSURANCE PRODUCTS FUND
-------------------------- --------------------------------
THIS PROSPECTUS MUST BE Select Aggressive Growth Fund Fidelity VIP Equity-Income Portfolio
ACCOMPANIED BY Select Capital Appreciation Fund Fidelity VIP Growth Portfolio
PROSPECTUSES OF THE Select Value Opportunity Fund Fidelity VIP High Income Portfolio
FUNDS. Select Emerging Markets Fund T. ROWE PRICE INTERNATIONAL SERIES, INC.
Select International Equity Fund T. Rowe Price International Stock Portfolio
Select Growth Fund
Select Strategic Growth Fund
Equity Index Fund
Select Growth and Income Fund
Investment Grade Income Fund
Money Market Fund
THIS LIFE POLICY IS Policy Owners may, within limits, choose the amount of
NOT: initial payment and vary the frequency and amount of future
- - A BANK DEPOSIT OR payments. The Policy allows partial withdrawals and full
OBLIGATION; surrender of the Policy 's surrender value, within limits.
- - FEDERALLY INSURED; The Policies are not suitable for short-term investment
- - ENDORSED BY ANY because of the substantial nature of the surrender charge.
BANK OR This Prospectus can also be obtained from the Securities and
GOVERNMENTAL Exchange Commission's website (http://www.sec.gov).
AGENCY. IT MAY NOT BE ADVANTAGEOUS TO REPLACE EXISTING INSURANCE
WITH THE POLICY.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED THAT THE
INFORMATION IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
CORRESPONDENCE MAY BE MAILED TO DATED , 1999
ALLMERICA LIFE WORCESTER, MASSACHUSETTS 01653
P.O. BOX 8179 (508) 855-1000
BOSTON, MA 02266-8179
TABLE OF CONTENTS
SPECIAL TERMS............................................... 4
SUMMARY OF FEES AND EXPENSES................................ 7
SUMMARY OF POLICY FEATURES.................................. 10
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT, AND THE
UNDERLYING FUNDS........................................... 16
INVESTMENT OBJECTIVES AND POLICIES.......................... 17
INVESTMENT ADVISORY SERVICES................................ 19
THE POLICY.................................................. 22
Applying for a Policy..................................... 22
Free-Look Period.......................................... 22
Conversion Privilege...................................... 23
Payments.................................................. 23
Allocation of Net Payments................................ 24
Transfer Privilege........................................ 24
Death Benefit............................................. 25
Election of Death Benefit Options......................... 26
Changing Between Death Benefit Option 1 and Option 2...... 29
Guaranteed Death Benefit Rider............................ 30
Change in Face Amount..................................... 31
Policy Value.............................................. 31
Payment Options........................................... 33
Optional Insurance Benefits............................... 33
Surrender................................................. 33
Partial Withdrawal........................................ 33
CHARGES AND DEDUCTIONS...................................... 34
Deductions from Payments.................................. 34
Monthly Charges (The Monthly Deduction)................... 34
Computing Insurance Protection Charges.................... 35
Fund Expenses............................................. 38
Surrender Charge.......................................... 38
Partial Withdrawal Costs.................................. 38
Transfer Charges.......................................... 39
Other Administrative Charges.............................. 39
POLICY LOANS................................................ 39
Preferred Loan Option..................................... 40
Repayment of Outstanding Loan............................. 40
Effect of Policy Loans.................................... 40
POLICY TERMINATION AND REINSTATEMENT........................ 41
Termination............................................... 41
Reinstatement............................................. 41
OTHER POLICY PROVISIONS..................................... 42
Policy Owner.............................................. 42
Beneficiary............................................... 42
Assignment................................................ 42
Limit on Right to Challenge Policy........................ 42
Suicide................................................... 43
Notice of First Insured to Die............................ 43
Misstatement of Age or Sex................................ 43
Delay of Payments......................................... 43
FEDERAL TAX CONSIDERATIONS.................................. 43
The Company and the Variable Account...................... 44
Taxation of the Policies.................................. 44
2
Policy Loans.............................................. 44
Modified Endowment Policies............................... 45
Estate and Generation-Skipping Taxes...................... 45
VOTING RIGHTS............................................... 46
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY............. 47
DISTRIBUTION................................................ 48
REPORTS..................................................... 48
LEGAL PROCEEDINGS........................................... 49
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS........... 49
FURTHER INFORMATION......................................... 50
MORE INFORMATION ABOUT THE FIXED ACCOUNT.................... 50
General Description....................................... 50
Fixed Account Interest.................................... 50
Transfers, Surrenders, Partial Withdrawals and Policy
Loans................................................... 50
INDEPENDENT ACCOUNTANTS..................................... 51
YEAR 2000 DISCLOSURE........................................ 51
FINANCIAL STATEMENTS........................................ 52
APPENDIX A -- GUIDELINE MINIMUM DEATH BENEFIT FACTORS
TABLE...................................................... A-1
APPENDIX B -- OPTIONAL INSURANCE BENEFITS................... B-1
APPENDIX C -- CALCULATION OF MAXIMUM SURRENDER CHARGES...... C-1
APPENDIX D -- MONTHLY EXPENSE CHARGES....................... D-1
APPENDIX E -- ILLUSTRATIONS................................. E-1
APPENDIX F -- PERFORMANCE INFORMATION....................... F-1
FINANCIAL STATEMENTS........................................ FIN-1
3
SPECIAL TERMS
AGE: how old each Insured is on the birthday closest to a Policy anniversary.
BENEFICIARY: the person or persons you name to receive the Net Death Benefit
when the Insured dies.
COMPANY: Allmerica Financial Life Insurance and Annuity Company. "We," "our,"
"us," and "the Company" refer to Allmerica Financial Life Insurance and Annuity
Company in this Prospectus.
DATE OF ISSUE: the date the Policy was issued, used to measure the monthly
processing date, Policy months, Policy years and Policy anniversaries.
DEATH BENEFIT: the amount payable upon the death of the surviving Insured before
the Final Payment Date, prior to deductions for any outstanding loan and partial
withdrawals, partial withdrawal costs, and due and unpaid monthly deductions.
EVIDENCE OF INSURABILITY: information, including medical information, used to
decide the Insureds' Underwriting Class.
FACE AMOUNT: the amount of insurance coverage applied for. The initial Face
Amount is shown in your Policy.
FINAL PAYMENT DATE: the Policy anniversary nearest the younger Insured's 100th
birthday. After this date, no payments may be made. See NET DEATH BENEFIT.
FIXED ACCOUNT: a guaranteed account of the general account that guarantees
principal and a fixed interest rate.
FUNDS (UNDERLYING FUNDS): investment portfolios of Allmerica Investment Trust
("Trust"), Variable Insurance Products Fund ("Fidelity VIP"), and T. Rowe Price
International Series, Inc. ("T. Rowe Price").
GENERAL ACCOUNT: all our assets other than those held in a separate investment
account.
GUIDELINE MINIMUM DEATH BENEFIT: the minimum death benefit required to qualify
the Policy as "life insurance" under federal tax laws. The Guideline Minimum
Death Benefit is the PRODUCT of:
- The Policy Value TIMES
- A percentage factor.
The percentage factor is a percentage that, when multiplied by the Policy Value,
determines the minimum death benefit required under federal tax laws. If Death
Benefit Option 3 is in effect, the percentage factor is based on both Insured's
attained age, sex, and Underwriting Class, as set forth in the Policy. If Death
Benefit Option 1 or Death Benefit Option 2 is in effect, the percentage factor
is based on the younger Insured's attained age, as set forth in APPENDIX A,
Guideline Minimum Death Benefit Factors Table.
INSURANCE PROTECTION AMOUNT: the death benefit less the Policy Value.
INSUREDS: The two persons covered under the Policy.
LOAN VALUE: the maximum amount you may borrow under the Policy.
4
MINIMUM MONTHLY PAYMENT: a monthly amount shown in your Policy. If you pay this
amount, we guarantee that your Policy will not lapse before the 49th monthly
processing date from the Date of Issue or increase in Face Amount, within
limits.
MONTHLY PROCESSING DATE: the date, shown in your Policy, when Monthly Insurance
Protection charges are deducted.
NET DEATH BENEFIT: Upon the death of the surviving Insured, the Net Death
Benefit is:
- The death benefit under either Death Benefit Option 1, Death Benefit
Option 2, or Death Benefit Option 3, MINUS
- Any outstanding loan on the date of the surviving Insured's death, partial
withdrawals, partial withdrawal costs, and due and unpaid monthly
deductions.
Where permitted by state law, we will compute the Net Death Benefit on the date
we receive due proof of the surviving Insured's death under Death Benefit Option
2 and on the date of death for Death Benefit Options 1 and 3. If required by
state law, we will compute the Net Death Benefit on the date of death for Death
Benefit Option 2.
NET PAYMENT: your payment less a payment expense charge.
OUTSTANDING LOAN: all unpaid Policy loans plus loan interest due or accrued.
POLICY CHANGE: any change in the Face Amount, the addition or deletion of a
Rider, underwriting reclassifications, or a change in death benefit option
(Option 1 or Option 2).
POLICY OWNER: the person who may exercise all rights under the Policy, with the
consent of any irrevocable beneficiary. "You" and "your" refer to the Policy
owner in this Prospectus.
POLICY VALUE: the total value of your Policy. It is the sum of the:
- Value of the units of the sub-accounts credited to your Policy plus
- Accumulation in the Fixed Account credited to the Policy
PREMIUM: a payment you must make to us to keep the Policy in force.
PRINCIPAL OFFICE: our office at 440 Lincoln Street, Worcester, Massachusetts
01653.
PRO-RATA ALLOCATION: an allocation among the Fixed Account and the Sub-Accounts
in the same proportion that, on the date of allocation, the unloaned Policy
Value in the Fixed Account and the Policy Value in each sub-account bear to the
total unloaned Policy Value.
SUB-ACCOUNT: a subdivision of the Variable Account investing exclusively in the
shares of a fund.
SURRENDER VALUE: the amount payable on a full surrender. It is the Policy Value
less any outstanding loan and surrender charges.
UNDERWRITING CLASS: the insurance risk classification that we assign each
Insured based on the information in the application and other evidence of
insurability we consider. Each Insured's Underwriting Class will affect the
monthly charges and the payment required to keep the Policy in force.
5
UNIT: a measure of your interest in a Sub-Account.
VALUATION DATE: any day on which the net asset value of the shares of any funds
and unit values of any sub-accounts are computed. Valuation Dates currently
occur on:
- Each day the New York Stock Exchange is open for trading
- Other days (other than a day during which no payment, partial withdrawal
or surrender of a Policy was received) when there is a sufficient degree
of trading in a fund's portfolio securities so that the current net asset
value of the sub-accounts may be materially affected
VALUATION PERIOD: the interval between two consecutive Valuation Dates.
VARIABLE ACCOUNT: Separate Account IMO, one of our separate investment accounts.
WRITTEN REQUEST: your request in writing, satisfactory to us, received at our
Principal Office.
6
SUMMARY OF FEES AND EXPENSES
WHAT CHARGES WILL I INCUR UNDER MY POLICY?
The following charges will apply to your Policy under the circumstances
described. Some of these charges apply throughout the Policy's duration. Other
charges apply only if you choose options under the Policy.
- From each payment, we will deduct a Payment Expense Charge of 8.35%, which
is composed of the following:
PREMIUM TAX CHARGE -- A current premium tax deduction of 2.35% of
payments represents our average expenses for state and local premium
taxes,
DEFERRED ACQUISITION COSTS ("DAC TAX") CHARGE -- A current DAC tax
deduction of 1.00% of payments helps reimburse us for federal taxes
imposed on our deferred acquisition costs of the Policies.
FRONT-END SALES LOAD -- From each payment, we will deduct a charge of
5.0% of the payment to partially compensate us for Policy sales expenses.
- We deduct the following monthly charges (the "Monthly Deduction") from
Policy Value:
MONTHLY INSURANCE PROTECTION CHARGE -- The Monthly Insurance Protection
Charge will be charged on each monthly processing date until the Final
Payment Date. This charge compensates us for providing life insurance
coverage for the Insureds. The charge is equal to a specified amount that
varies with the sexes (unisex rates required by state law), Ages and
Underwriting Classes of the Insureds and Death Benefit Option selected,
for each $1,000 of the Policy's Face Amount.
MONTHLY EXPENSE CHARGE -- The Monthly Expense Charge will be charged on
the monthly processing date for the first ten years after issue or an
increase in Face Amount. This charge reimburses the Company for
underwriting and acquisition costs. The charge is equal to a specified
amount that varies with the ages and sexes of the Insureds, for each
$1,000 of the Policy's Face Amount.
MONTHLY MAINTENANCE FEE -- A deduction of $16 for Years 1-5 and $6.00 in
Years 6 and over will be taken from the Policy Value on each monthly
processing date up to the Final Payment Date to reimburse the Company for
expenses related to issuance and maintenance of the Contract.
MONTHLY MORTALITY AND EXPENSE RISK CHARGE -- This charge is currently
equal to an annual rate of 0.30% of the Policy Value in each sub-account
for the first 20 Policy years and an annual rate of 0.10% for Policy Year
21 and later. The charge is calculated based on the Policy Value in the
sub-accounts of the Variable Account (but not the Fixed Account) as of
the prior Monthly Processing Date. The Company may increase this charge,
subject to state and federal law, to an annual rate of 0.55% of the
Policy Value in each sub-account for the first 20 Policy years and an
annual rate of 0.35% for Policy Year 21 and later. This charge
compensates us for assuming mortality and expense risks for variable
interests in the Policies. This charge will continue to be assessed after
the Final Payment Date.
MONTHLY RIDER CHARGES -- These charges will vary based on the Riders
selected and by the sexes, Ages, and Underwriting Classifications of the
Insureds.
- The charges below apply only if you surrender your Policy or make partial
withdrawals:
SURRENDER CHARGE -- A surrender charge will apply to a full surrender or
decrease in Face Amount for up to 10 years from Date of Issue of the
Policy or from the date of increase in Face Amount. This charge applies
only on a full surrender or decrease in Face Amount within ten years of
the Date of Issue or of an increase in Face Amount. The maximum Surrender
Charge is equal to a specified
7
amount that varies with the age, sex, and Underwriting Class of both
Insureds for each $1,000 of the Policy's Face Amount. The amount of the
Surrender Charges decreases annually to 0% by the 10th Contract year.
- If there are increases in the Face Amount, each increase will have a
corresponding surrender charge. These charges will be specified in a
supplemental schedule of benefits at the time of the increase.
- For more information, see CHARGES AND DEDUCTIONS-"Surrender Charge" and
APPENDIX C -- SURRENDER CHARGES.
PARTIAL WITHDRAWAL CHARGES -- For each partial withdrawal, we deduct the
following charges from Policy Value:
- A transaction fee of 2% of the amount withdrawn, not to exceed $25 for
each partial withdrawal (including a Free 10% Withdrawal)
- A partial withdrawal charge of 5.0% (but not to exceed the amount of
the outstanding surrender charge) of a withdrawal exceeding the "Free
10% Withdrawal," described below
The partial withdrawal charge does not that apply to:
- That part of a withdrawal equal to 10% of the Policy Value in a Policy
year, less prior free withdrawals made in the same Policy year ("Free
10% Withdrawal")
- Withdrawals when no surrender charge applies.
We reduce the Policy's outstanding surrender charge, if any, by partial
withdrawal charges that are deducted.
The charges below are designed to reimburse us for Policy administrative costs,
and apply under the following circumstances:
CHARGE FOR OPTIONAL GUARANTEED DEATH BENEFIT RIDER -- A one time
administrative charge of $25 will be deducted from Policy Value when the
Rider is elected.
TRANSFER CHARGE -- Currently, the first 12 transfers of Policy Value in a
Policy year are free. A current transfer charge of $10, never to exceed $25,
applies for each additional transfer in the same Policy year. This charge is
for the costs of processing the transfer.
- We reserve the right to charge for other administrative costs we incur.
While there are no current charges for these costs, we may impose a charge
for
- Changing net payment allocation instructions
- Changing the allocation of the Monthly Deduction among the various
sub-accounts
- Providing a projection of values
WHAT ARE THE EXPENSES AND FEES OF THE FUNDS?
In addition to the charges described above, certain fees and expenses are
deducted from the assets of the Underlying Funds. The levels of fees and
expenses vary among the Underlying Funds. The following table shows the expenses
of the Underlying Funds for 1998.
8
TOTAL FUND
MANAGEMENT FEE OTHER EXPENSES EXPENSES
(AFTER ANY (AFTER ANY (AFTER ANY WAIVERS/
UNDERLYING FUND VOLUNTARY WAIVERS) REIMBURSEMENTS) REIMBURSEMENTS)
- --------------- ------------------ --------------- -------------------
Select Emerging Markets Fund(@)............... 1.00%* 1.19% 2.19%(1)(2)*
Select International Equity Fund.............. 0.90% 0.12% 1.02%(1)(2)
T. Rowe Price International Stock Portfolio... 1.05% 0.00% 1.05%
Select Aggressive Growth Fund................. 0.82%*** 0.07% 0.89%(1)(2)***
Select Capital Appreciation Fund.............. 0.94%*** 0.10% 1.04%(1)(2)***
Select Value Opportunity Fund................. 0.90%(1)* 0.08% 0.98%(1)(2)*
Select Growth Fund............................ 0.81%** 0.05% 0.86%(1)(2)**
Select Strategic Growth Fund(@)............... 0.39%* 0.81% 1.20%(1)(2)*
Equity Index Fund............................. 0.29% 0.07% 0.36%(1)
Fidelity VIP Growth Portfolio................. 0.59% 0.09% 0.68%(3)
Select Growth and Income Fund................. 0.68% 0.05% 0.73%(1)(2)*
Investment Grade Income Fund.................. 0.43% 0.09% 0.52%(1)*
Fidelity VIP Equity-Income Portfolio.......... 0.49% 0.09% 0.58%(3)
Fidelity VIP High Income Portfolio............ 0.58% 0.12% 0.70%
Money Market Fund............................. 0.26% 0.06% 0.32%(1)
(@) Select Emerging Markets Fund and Select Strategic Growth Fund commenced
operations on February 20, 1998. Expenses shown are annualized.
* Amount has been adjusted to reflect a voluntary expense limitation currently
in effect for Select Emerging Markets Fund, Select Value Opportunity Fund,
and Select Strategic Growth Fund. Without these adjustments, the Management
Fees and Total Fund Expenses would have been 1.35% and 2.54%, respectively
for Select Emerging Markets Fund, 0.91% and 0.99%, respectively, for Select
Value Opportunity Fund, and 0.85% and 1.66%, respectively for the Select
Strategic Growth Fund.
** Effective June 1, 1998, the management fee for the Select Growth Fund was
revised. The Management Fee and Total Fund Expense ratios shown in the table
above have been adjusted to assume that the revised rates took effect
January 1, 1998.
*** Effective September 1, 1999, the management fee rates for the Select
Aggressive Growth Fund and Select Capital Appreciation Fund were revised.
The Management Fee and Total Fund Expenses shown in the table above have
been adjusted to assume that the revised rates took effect on January 1,
1998.
(1) Until further notice, Allmerica Financial Investment Management
Services, Inc. ("AFIMS") has declared a voluntary expense limitation of
1.35% of average net assets for Select Aggressive Growth Fund and Select
Capital Appreciation Fund, 1.25% for Select Value Opportunity Fund, 1.50%
for Select International Equity Fund, 1.20% for Select Growth Fund, 1.10%
for Select Growth and Income Fund, 1.00% for Investment Grade Income Fund,
and 0.60% for Money Market Fund and Equity Index Fund. The total operating
expenses of these Funds of the Trust were less than their respective expense
limitations throughout 1998.
Until further notice, AFIMS has declared a voluntary expense limitation of
1.20% of average daily net assets for the Select Strategic Growth Fund. In
addition, AFIMS has agreed to voluntarily waive its management fee to the
extent that expenses of the Select Emerging Markets Fund exceed 2.00% of the
Fund's average daily net assets, except that such waiver shall not exceed
the net amount of management fees earned by AFIMS from the Fund after
subtracting fees paid by AFIMS to a sub-adviser.
Until further notice, the Select Value Opportunity Fund's management fee
rate has been voluntarily limited to an annual rate of 0.90% of average
daily net assets, and total expenses are limited to 1.25% of average daily
net assets.
9
The declaration of a voluntary management fee or expense limitation in any
year does not bind AFIMS to declare future expense limitations with respect
to these Funds. These limitations may be terminated at any time.
(2) These funds have entered into agreements with brokers whereby brokers
rebate a portion of commissions. These amounts have been treated as
reductions of expenses. After application of the rebate, the total annual
fund operating expense ratios were 2.19% for Select Emerging Market Fund,
0.86% for Select Aggressive Growth Fund, 1.02% for Select Capital
Appreciation Fund, 0.94% for Select Value Opportunity Fund, 1.01% for Select
International Equity Fund, 0.85% for Select Growth Fund, 1.13% for Select
Strategic Growth Fund, and 0.70% for Select Growth and Income Fund.
(3) A portion of the brokerage commissions that certain funds paid were used to
reduce Fund expenses. In addition, certain funds, or Fidelity
Management & Research Company on behalf of certain funds, have entered into
arrangements with their custodian whereby credits realized as a result of
uninvested cash balances were used to reduce custodian expenses. Including
these reductions, the total operating expenses presented in the table would
have been 0.57% for Fidelity VIP Equity-Income Portfolio, and 0.66% for
Fidelity VIP Growth Portfolio.
The Underlying Fund information above was provided by the Underlying Funds
and was not independently verified by the Company.
SUMMARY OF POLICY FEATURES
This Summary is intended to provide only a very brief overview of the more
significant aspects of the Policy. If you are considering the purchase of this
product, you should read the remainder of this Prospectus carefully before
making a decision. It offers a more complete presentation of the topics
presented here, and will help you better understand the product. However, the
Policy, together with its attached application, constitutes the entire agreement
between you and the Company.
There is no guaranteed minimum Policy Value. The value of a Policy will vary up
or down to reflect the investment experience of allocations to the Sub-Accounts
and the fixed rates of interest earned by allocations to the General Account.
The Policy Value will also be adjusted for other factors, including the amount
of charges imposed. The Policy will terminate if Policy Value is insufficient to
cover certain monthly charges plus loan interest accrued or if Outstanding Loans
exceed the Policy Value. The Policy Value may decrease to the point where the
Policy will lapse and provide no further death benefit without additional
premium payments, unless the optional Guaranteed Death Benefit Rider is in
effect. This Rider may not be available in all states.
WHAT IS THE POLICY'S OBJECTIVE?
The objective of the Policy is to give permanent life insurance protection and
help you build assets tax-deferred. Features available through the Policy
include:
- A Net Death Benefit that can protect your family
- Death Benefit Payment options that can guarantee an income for life
- A personalized investment portfolio
- Experienced professional investment advisers
- Tax deferral on earnings.
10
While the Policy is in force, it will provide:
- Life insurance coverage on the Insureds
- Policy Value
- Surrender rights and partial withdrawal rights
- Loan privileges
- Optional insurance benefits available by Rider.
The Policy combines features and benefits of traditional life insurance with the
advantages of professional money management. However, unlike the fixed benefits
of ordinary life insurance, the Policy Value and the Death Benefit will increase
or decrease depending on investment results. Unlike traditional insurance
policies, the Policy has no fixed schedule for payments. Within limits, you may
make payments of any amount and frequency. While you may establish a schedule of
payments ("planned payments"), the Policy will not necessarily lapse if you fail
to make planned payments. Also, making planned payments will not guarantee that
the Policy will remain in force.
WHO ARE THE KEY PERSONS UNDER THE POLICY?
The Policy is a contract between you and us. Each Policy has a Policy Owner
(you), two Insureds, and a beneficiary. The Insureds are the persons covered
under the Policy. The beneficiary is the person who receives the Net Death
Benefit when the surviving Insured dies. As Policy Owner, you make payments,
choose investment allocations, and select the Insureds and beneficiary.
WHAT HAPPENS WHEN THE SURVIVING INSURED DIES?
We will pay the Net Death Benefit to the beneficiary upon the death of the
surviving Insured while the Policy is in effect. There are no Death Proceeds
payable on the death of the first Insured to die. You may choose between three
death benefit options. Under Death Benefit Option 1 and Death Benefit Option 3,
the death benefit is the greater of (1) the Face Amount (the amount of insurance
applied for) or (2) the Guideline Minimum Death Benefit (the Guideline Minimum
Death Benefit federal tax law requires). Under Death Benefit Option 2, the death
benefit is the greater of (1) the sum of the Face Amount and Policy Value or (2)
the Guideline Minimum Death Benefit. The Guideline Minimum Death Benefit under
Death Benefit Options 1 and 2 is equivalent to a percentage (determined each
month based on the younger Insured's Age) of the Policy Value. The Guideline
Minimum Death Benefit for Death Benefit Option 3 is equivalent to a percentage
(determined each month based on both Insured's attained age, sex, and
Underwriting Class) of the Policy Value. For more information, see "Election of
Death Benefit Option" under THE POLICY.
The Net Death Benefit is the death benefit less any outstanding loan, partial
withdrawals, partial withdrawal costs, and due and unpaid monthly deductions.
The beneficiary may receive the Net Death Benefit in a lump sum or under one of
the Company's payment options.
An optional Guaranteed Death Benefit Rider is available ONLY AT ISSUE OF THE
POLICY. (The Guaranteed Death Benefit Rider may not be available in all states).
If this Rider is in effect, the Company:
- guarantees that your Policy will not lapse regardless of the investment
performance of the Variable Account; and
- provides a guaranteed Net Death Benefit.
11
In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each Policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in Face Amount, as
described below. In addition, a one-time administrative charge of $25 will be
deducted from Policy Value when the Rider is elected. Certain transactions,
including Policy loans, partial withdrawals, underwriting reclassifications,
change in face amount, and changes in Death Benefit Options, can result in the
termination of the Rider. IF THIS RIDER IS TERMINATED, IT CANNOT BE REINSTATED.
FOR MORE INFORMATION, SEE "Guaranteed Death Benefit Rider."
CAN I EXAMINE THE POLICY?
Yes. You have the right to examine and cancel your Policy by returning it to us
or to one of our representatives on or before the 10 days after you receive the
Policy or longer when state law so requires. There may be a longer period in
certain jurisdictions; see the "Right to Examine" provision in your Contract.
If your Policy provides for a full refund of payments under its "Right to
Examine Policy" provision, the Company will mail a refund to you within seven
days. We may delay a refund of any payment made by check until the check has
cleared the bank.
Where required by state law, your refund will be the GREATER of:
- Your entire payment OR
- The Policy Value PLUS deductions under the Policy or by the funds for
taxes, charges or fees.
If your Policy does not provide for a full refund, you will receive:
- Amounts allocated to the Fixed Account PLUS
- The Policy Value in the Variable Account PLUS
- All fees, charges and taxes, which have been imposed.
After an increase in Face Amount, a right to cancel the increase also applies.
WHAT ARE MY INVESTMENT CHOICES?
Each Sub-Account invests exclusively in a corresponding Underlying Fund of the
Allmerica Investment Trust ("Trust") managed by Allmerica Financial Investment
Management Services, Inc., the Fidelity Variable Insurance Products Fund
("Fidelity VIP") managed by Fidelity Management & Research Company ("FMR"), and
T. Rowe Price International Series, Inc. ("T. Rowe Price") managed by Rowe
Price-Fleming International, Inc. ("Price-Fleming") with respect to the T. Rowe
Price International Stock Portfolio. In some states, insurance regulations may
restrict the availability of particular Underlying Funds. The Policy also offers
a Fixed Account that is part of the general account of the Company. The Fixed
Account is a guaranteed account offering a minimum interest rate. This range of
investment choices allows you to allocate you money among the Sub-Accounts and
the Fixed Account to meet your investment needs.
If your Policy provides for a full refund under its "Right to Examine Policy "
provision as required in your state, we will allocate all sub-account
investments to the Money Market Fund until the fourth day after the expiration
of the "Right to Examine" provision of your Policy. After this, we will allocate
all amounts as you have chosen.
12
You may allocate and transfer money among the following investment options:
ALLMERICA INVESTMENT TRUST VARIABLE INSURANCE PRODUCTS FUND
- -------------------------- --------------------------------
Select Aggressive Growth Fund Fidelity VIP Overseas Portfolio
Select Capital Appreciation Fund Fidelity VIP Equity-Income Portfolio
Select Value Opportunity Fund Fidelity VIP Growth Portfolio
Select Emerging Markets Fund Fidelity VIP High Income Portfolio
Select International Equity Fund T. ROWE PRICE INTERNATIONAL SERIES,
Select Growth Fund INC.
Select Strategic Growth Fund T. Rowe Price International Stock
Equity Index Fund Portfolio
Select Growth and Income Fund
Investment Grade Income Fund
Money Market Fund
The value of each Sub-Account will vary daily depending upon the performance of
the Underlying Fund in which it invests. Each Sub-Account reinvests dividends or
capital gains distributions received from an Underlying Fund in additional
shares of that Underlying Fund. There can be no assurance that the investment
objectives of the Underlying Funds can be achieved. For more information, see
DESCRIPTION OF THE COMPANY, SEPARATE ACCOUNT IMO, AND THE UNDERLYING FUNDS.
CAN I MAKE TRANSFERS AMONG THE FUNDS AND THE FIXED ACCOUNT?
Yes. The Policy permits you to transfer Policy Value among the available
Sub-Accounts and between the Sub-Accounts and the General Account of the
Company, subject to certain limitations described under THE POLICY - "Transfer
Privilege." You will incur no current taxes on transfers while your money is in
the Policy.
HOW MUCH CAN I INVEST AND HOW OFTEN?
The Policy does not limit payments as to frequency and number. However, no
payment may be less than $250 without our consent. You may choose an automatic
payment method of making payments. Under this method, each month we will deduct
monthly payments from your checking account and apply them to your Policy. The
minimum automatic payment allowed is $100. Payments must be sufficient to
provide a positive Policy Value less outstanding loan at the end of each Policy
month or the Policy may lapse. See POLICY TERMINATION AND REINSTATEMENT.
WHAT IF I NEED MY MONEY?
You may borrow up to the loan value of your Policy. You may also make partial
withdrawals and surrender the Policy for its surrender value. There are two
types of loans that may be available to you:
- A non-preferred loan option is always available to you. The maximum total
loan amount is 90% of the difference between Policy Value and surrender
charges. The Company will charge interest on the amount of the loan at a
current annual rate of 4.8%. This current rate of interest may change, but
is guaranteed not to exceed 6%. However, the Company will also credit
interest on the Policy Value securing the loan. The annual interest rate
credited to the Policy Value securing a non-preferred loan is 4.0%.
- A preferred loan option is automatically available to you unless you
request otherwise. The preferred loan option is available on that part of
an outstanding loan that is attributable to Policy earnings. The term
"Policy earnings" means that portion of the Policy Value that exceeds the
sum of the payments made less all partial withdrawals and partial
withdrawals charges. The Company will charge interest on the amount of the
loan at a current annual rate of 4.00%. This current rate of interest may
change,
13
but is guaranteed not to exceed 4.50%. The annual interest rate credited
to the Policy earnings securing a preferred loan is 4.0%.
We will allocate Policy loans among the sub-accounts and the Fixed Account
according to your instructions. If you do not make an allocation, we will make a
pro-rata allocation. We will transfer the Policy Value in each sub-account equal
to the Policy loan to the Fixed Account.
You may surrender your Policy and receive its surrender value. After the first
Policy year, you may make partial withdrawals of $500 or more from Policy Value,
subject to possible partial withdrawal charges. Under Death Benefit Option 1 and
Death Benefit Option 3, the Face Amount is reduced by each partial withdrawal.
We will not allow a partial withdrawal if it would reduce the Face Amount below
$240,000. A surrender or partial withdrawal may have tax consequences. See
"Taxation of the Policies."
A request for a preferred loan, a partial withdrawal after the Final Payment
Date, or the foreclosure of an outstanding loan will terminate a Guaranteed
Death Benefit Rider. See "Guaranteed Death Benefit Rider." Policy loans may have
tax consequences. There is some uncertainty as to the tax treatment of preferred
loans. See FEDERAL TAX CONSIDERATIONS, "Policy Loans."
CAN I MAKE FUTURE CHANGES UNDER MY POLICY?
Yes. There are several changes you can make after receiving your Policy, within
limits. You may:
- Cancel your Policy under its right-to-examine provision
- Transfer your ownership to someone else
- Change the beneficiary
- Change the allocation of payments, with no tax consequences under current
law
- Make transfers of Policy Value among the funds
- Adjust the death benefit by increasing or decreasing the Face Amount
- Change your choice of death benefit option between Death Benefit Option 1
and Death Benefit Option 2
- Add or remove optional insurance benefits provided by Rider
CAN I CONVERT MY POLICY INTO A FIXED POLICY?
Yes. You can convert your Policy without charge during the first 24 months after
the Date of Issue or after an increase in Face Amount. On conversion, we will
transfer the Policy Value in the Variable Account to the Fixed Account. We will
allocate all future payments to the Fixed Account, unless you instruct us
otherwise.
WHAT ARE THE LAPSE AND REINSTATEMENT PROVISIONS OF MY POLICY?
The Policy will not lapse if you fail to make payments unless:
- The Policy Value is insufficient to cover the next monthly deduction and
loan interest accrued; OR
- Outstanding loans exceeds Policy Value
14
There is a 62-day grace period in either situation.
If you make payments at least equal to minimum monthly payments, we guarantee
that your Policy will not lapse before the 49th monthly processing date from
Date of Issue or increase in Face Amount, within limits and excluding loan
foreclosure. If the Guaranteed Death Benefit Rider is in effect, the Policy will
not lapse regardless of the investment performance of the Variable Account
(excluding loan foreclosure). For more information, see "Guaranteed Death
Benefit Rider."
If the Insureds have not died, you may reinstate your Policy within three years
after the grace period. The Insureds must provide evidence of insurability
subject to our then current underwriting standards. In addition, you must either
repay or reinstate any outstanding loans and make payments sufficient to keep
the Policy in force for three months. See POLICY TERMINATION AND REINSTATEMENT.
HOW IS MY POLICY TAXED?
The Policy is given federal income tax treatment similar to a conventional fixed
benefit life insurance Policy. On a withdrawal of Policy Value, Policy owners
currently are taxed only on the amount of the withdrawal that exceeds total
payments. Withdrawals greater than payments made are treated as ordinary income.
During the first 15 Policy years, however, an "interest first" rule applies to
distributions of cash required under Section 7702 of the Internal Revenue Code
("Code") because of a reduction in benefits under the Policy.
The Net Death Benefit under the Policy is excludable from the gross income of
the beneficiary. However, in some circumstances federal estate tax may apply to
the Net Death Benefit or the Policy Value.
A Policy may be considered a "modified endowment contract." This may occur if
total payments during the first seven Policy years (or within seven years of a
material change in the Policy ) exceed the total net level payments payable, if
the Policy had provided paid-up future benefits after seven level payments. If
the Policy is considered a modified endowment contract, all distributions
(including Policy loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis. Also, a 10% penalty tax may be imposed on
that part of a distribution that is includable in income.
------------------------
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
AS A REPLACEMENT FOR YOUR CURRENT LIFE INSURANCE, OR IF YOU ALREADY OWN A
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY.
THE PURPOSE OF THE POLICY IS TO PROVIDE INSURANCE PROTECTION FOR THE
BENEFICIARY. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO A SYSTEMATIC INVESTMENT PLAN OF A MUTUAL FUND. THE POLICY,
TOGETHER WITH ITS ATTACHED APPLICATION, CONSTITUTES THE ENTIRE AGREEMENT BETWEEN
YOU AND THE COMPANY.
15
DESCRIPTION OF THE COMPANY, THE VARIABLE ACCOUNT,
AND THE UNDERLYING FUNDS
THE COMPANY
The Company is a life insurance company organized under the laws of Delaware in
1974. As of December 31, 1998, the Company had over $14 billion in assets and
over $26 billion of life insurance in force. We are a wholly owned subsidiary of
First Allmerica Financial Life Insurance Company ("First Allmerica," formerly
named State Mutual Life Assurance Company of America), which in turn is a wholly
owned subsidiary of Allmerica Financial Corporation. First Allmerica was
organized under the laws of Massachusetts in 1844 and is the fifth oldest life
insurance company in America. Our Principal Office is 440 Lincoln Street,
Worcester, Massachusetts 01653, Telephone 1-800-628-6267. We are subject to the
laws of the state of Delaware, to regulation by the Commissioner of Insurance of
Delaware, and to other laws and regulations where we are licensed to operate.
The Company is a charter member of the Insurance Marketplace Standards
Association ("IMSA"). Companies that belong to IMSA subscribe to a rigorous set
of standards that cover the various aspects of sales and service for
individually sold life insurance and annuities. IMSA members have adopted
policies and procedures that demonstrate a commitment to honesty, fairness, and
integrity in all customer contacts involving sales and service of individual
life insurance and annuity products.
THE VARIABLE ACCOUNT
The Variable Account is a separate investment account with fifteen sub-accounts.
Each sub-account invests in a fund of the Trust, Fidelity VIP, or T. Rowe Price.
The assets used to fund the variable part of the Policies are set aside in
sub-accounts and are separate from our general assets. We administer and account
for each sub-account as part of our general business. However, income, capital
gains and capital losses are allocated to each sub-account without regard to any
of our other income, capital gains or capital losses. Under Delaware law, the
assets of the Variable Account may not be charged with any liabilities arising
out of any other business of ours.
Our Board of Directors authorized the establishment of the Variable Account by
vote on June 13, 1996. The Variable Account meets the definition of "separate
account" under federal securities laws. It is registered with the Securities and
Exchange Commission ("SEC") as a unit investment trust under the Investment
Company Act of 1940 ("1940 Act"). This registration does not involve SEC
supervision of the management or investment practices or policies of the
Variable Account or of the Company. We reserve the right, subject to law, to
change the names of the Variable Account and the sub-accounts.
THE TRUST
The Trust is an open-end, diversified management investment company registered
with the SEC under the 1940 Act. This registration does not involve SEC
supervision of the investments or investment Policy of the Trust or its separate
investment portfolios.
First Allmerica established the Trust as a Massachusetts business trust on
October 11, 1984. The Trust is a vehicle for the investment of assets of various
separate accounts established by the Company, or other insurance companies.
Shares of the Trust are not offered to the public but solely to the separate
accounts. Ten different investment portfolios of the Trust are available under
the Policies, each issuing a series of shares: the Select Emerging Markets Fund,
Select International Equity Fund, Select Aggressive Growth Fund, Select Capital
Appreciation Fund, Select Value Opportunity Fund, Select Growth Fund, Select
Strategic Growth Fund, Select Growth and Income Fund, Select Income Fund and
Money Market Fund. The assets of each fund are held separate from the assets of
the other funds. Each fund operates as a separate investment vehicle. The income
or losses of one fund have no effect on the investment performance of another
fund. The sub-accounts
16
reinvest dividends and/or capital gains distributions received from a fund in
more shares of that fund as retained assets.
AFIMS serves as investment manager of the Trust. AFIMS has entered into
agreements with other investment managers ("Sub-Advisers"), who manage the
investments of the funds. See "Investment Advisory Services to the Trust."
FIDELITY VIP
Fidelity VIP, managed by Fidelity Management & Research Company ("FMR"), is an
open-end, diversified, management investment company organized as a
Massachusetts business trust on November 13, 1981 and registered with the SEC
under the 1940 Act. Three of its investment portfolios are available under the
Policies: Fidelity VIP Growth Portfolio, Fidelity VIP Equity-Income Portfolio
and Fidelity VIP High Income Portfolio.
T. ROWE PRICE
T. Rowe Price, managed by Rowe Price-Fleming International, Inc.
("Price-Fleming"), is an open-end, diversified, management investment company
organized as a Maryland corporation in 1994 and registered with the SEC under
the 1940 Act. One of its investment portfolios is available under the Policies:
the T. Rowe Price International Stock Portfolio. T. Rowe Price
Associates, Inc., an affiliate of Price-Fleming, serves as sub-adviser to the
Select Capital Appreciation Fund of the Trust.
INVESTMENT OBJECTIVES AND POLICIES
A summary of investment objectives of the funds is set forth below. BEFORE
INVESTING, READ CAREFULLY THE PROSPECTUSES OF THE TRUST, FIDELITY VIP, AND T.
ROWE PRICE THAT ACCOMPANY THIS PROSPECTUS. THEY CONTAIN MORE DETAILED
INFORMATION ON THE FUNDS' INVESTMENT OBJECTIVES, RESTRICTIONS, RISKS AND
EXPENSES. Statements of Additional Information for the funds are available on
request. The investment objectives of the funds may not be achieved. Policy
Value may be less than the aggregate payments made under the Policy.
SELECT EMERGING MARKETS FUND -- seeks long-term growth of capital by investing
in the world's emerging markets. The Sub-Adviser for the Select Emerging Markets
Fund is Schroder Investment Management North America Inc.
SELECT INTERNATIONAL EQUITY FUND -- seeks maximum long-term total return
(capital appreciation and income) primarily by investing in common stocks of
established non-U.S. companies. The Sub-Adviser for the Select International
Equity Fund is Bank of Ireland Asset Management (U.S.) Limited.
T. ROWE PRICE INTERNATIONAL STOCK PORTFOLIO -- seeks long-term growth of capital
through investments primarily in common stocks of established, non-U.S.
companies. The Manager of the Portfolio is Rowe Price-Fleming
International, Inc.
SELECT AGGRESSIVE GROWTH FUND -- seeks above-average capital appreciation by
investing primarily in common stocks of companies that are believed to have
significant potential for capital appreciation. The Sub-Adviser for the Select
Aggressive Growth Fund is Nicholas-Applegate Capital Management, L.P.
SELECT CAPITAL APPRECIATION FUND -- seeks long-term growth of capital.
Realization of income is not a significant investment consideration and any
income realized on the Fund's investments will be incidental to its primary
objective. The Fund will invest primarily in common stock of industries and
companies which are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Sub-Adviser for the Select Capital Appreciation Fund is
T. Rowe Price Associates, Inc.
17
SELECT VALUE OPPORTUNITY FUND -- seeks long-term growth of capital by investing
primarily in a diversified portfolio of common stocks of small and mid-size
companies, whose securities at the time of purchase are considered by the
Sub-Adviser to be undervalued. The Sub-Adviser for the Select Value Opportunity
Fund is Cramer Rosenthal McGlynn, LLC.
SELECT GROWTH FUND -- seeks to achieve growth of capital by investing in a
diversified portfolio consisting primarily of common stocks selected for their
long-term growth potential. The Sub-Adviser for the Select Growth Fund is Putnam
Investment Management, Inc.
SELECT STRATEGIC GROWTH FUND -- seeks long-term growth of capital by investing
primarily in common stocks of established companies. The Sub-Adviser for the
Select Strategic Growth Fund is Cambiar Investors, Inc.
EQUITY INDEX FUND -- seeks to provide investment results that correspond to the
aggregate price and yield performance of a representative selection of United
States publicly traded common stocks. The Equity Index Fund seeks to achieve its
objective by attempting to replicate the aggregate price and yield performance
of the Standard & Poor's Composite Index of 500 Stocks.
FIDELITY VIP GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
SELECT GROWTH AND INCOME FUND -- seeks a combination of long-term growth of
capital and current income. The fund will invest primarily in dividend-paying
common stocks and securities convertible into common stocks. The Sub-Adviser for
the Select Growth and Income Fund is J. P. Morgan Investment Management Inc.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the Portfolio will also consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield that exceeds the composite yield on the
securities comprising S&P 500.
FIDELITY VIP HIGH INCOME PORTFOLIO -- seeks to obtain a high level of current
income by investing primarily in high-yielding, lower-rated fixed-income
securities (commonly referred to as "junk bonds"), while also considering growth
of capital. These securities are often considered to be speculative and involve
greater risk of default or price changes than securities assigned a high quality
rating. For more information about these lower-rated securities, see the
Fidelity VIP prospectus.
SELECT INCOME FUND -- seeks a high level of current income. The fund will invest
primarily in investment grade, fixed-income securities. The Sub-Adviser for the
Select Income Fund is Standish, Ayer & Wood, Inc.
INVESTMENT GRADE INCOME FUND -- seeks to invest in a diversified portfolio of
fixed income securities with the objective of seeking as high a level of total
return (including both income and realized and unrealized capital gains) as is
consistent with prudent investment management.
MONEY MARKET FUND -- seeks to obtain maximum current income consistent with the
preservation of capital and liquidity. Allmerica Asset Management, Inc. is the
Sub-Adviser of the Money Market Fund.
If there is a material change in the investment Policy of a fund, we will notify
you of the change. If you have Policy Value allocated to that fund, you may
without charge reallocate the Policy Value to another fund or to the Fixed
Account. We must receive your written request within 60 days of the LATEST of
the:
- Effective date of the change in the investment Policy OR
- Receipt of the notice of your right to transfer.
18
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISORY SERVICES TO THE TRUST
The Trustees have responsibility for the supervision of the affairs of the
Trust. The Trustees have entered into a management agreement with AFIMS , an
indirectly wholly owned subsidiary of First Allmerica. AFIMS, subject to Trustee
review, is responsible for the daily affairs of the Trust and the general
management of the funds. AFIMS performs administrative and management services
for the Trust, furnishes to the Trust all necessary office space, facilities and
equipment, and pays the compensation, if any, of officers and Trustees who are
affiliated with AFIMS.
The Trust bears all expenses incurred in its operation, other than the expenses
AFIMS assumes under the management agreement. Trust expenses include:
- Costs to register and qualify the Trust's shares under the Securities Act
of 1933 ("1933 Act")
- Other fees payable to the SEC
- Independent public accountant, legal and custodian fees
- Association membership dues, taxes, interest, insurance payments and
brokerage commissions
- Fees and expenses of the Trustees who are not affiliated with AFIMS
- Expenses for proxies, prospectuses, reports to shareholders and other
expenses
Under the management agreement with the Trust, AFIMS has entered into agreements
with investment advisers ("Sub-Advisers") selected by AFIMS and Trustees in
consultation with BARRA RogersCasey, Inc. ("BARRA RogersCasey"), a pension
consulting firm. The cost of such consultation services is borne by AFIMS. As a
consultant, BARRA RogersCasey has no decision-making authority with respect to
the Funds, and is not responsible for any advice provided by AFIMS or the
Sub-Advisers. The Sub-Advisers (other than Allmerica Asset Management, Inc.) are
not affiliated with the Company or the Trust.
19
For providing its services under the management agreement, AFIMS receives a fee,
computed daily at an annual rate based on the average daily net asset value of
each fund as follows:
Select Emerging Markets Fund * 1.35%
Select International Equity Fund First $100 million 1.00%
Next $150 million 0.90%
Over $250 million 0.85%
Select Aggressive Growth Fund First $100 million 1.00%
Next $150 million 0.90%
Next $250 million 0.80%
Next $500 million 0.70%
Over $1 billion 0.65%
Select Capital Appreciation Fund First $100 million 1.00%
Next $150 million 0.90%
Next $250 million 0.80%
Next $500 million 0.70%
Over $1 billion 0.65%
Select Value Opportunity Fund First $100 million 1.00%
Next $150 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Growth Fund First $250 million 0.85%
Next $250 million 0.80%
Next $250 million 0.75%
Over $750 million 0.70%
Select Strategic Growth Fund * 0.85%
Equity Index Fund First $50 million 0.35%
Next $200 million 0.30%
Over $250 million 0.25%
Investment Grade Income Fund First $50 million 0.50%
Next $50 million 0.45%
Over $100 million 0.40%
Select Income Fund First $50 million 0.60%
Next $50 million 0.55%
Over $100 million 0.45%
Money Market Fund First $50 million 0.35%
Next $200 million 0.25%
Over $250 million 0.20%
* For the Select Emerging Markets Fund and the Select Strategic Growth Fund, the
investment management fee does not vary according to the level of assets in the
Fund.
Pursuant to the Management Agreement with the Trust, AFIMS has entered into
agreements ("Sub-Adviser Agreements") with other investment advisers
("Sub-Advisers") under which each Sub-Adviser manages the investments of one or
more of the Funds. Under the Sub-Adviser Agreements, the Sub-Advisers are
authorized to engage in portfolio transactions on behalf of the applicable Fund,
subject to such general or specific instructions as may be given by the
Trustees. AFIMS is solely responsible for the payment of all fees for
20
investment management services to the Sub-Advisers. Sub-Adviser fees, described
in the Trust's prospectus, in no way increase the costs that the funds, Variable
Account and Policy owners bear.
INVESTMENT ADVISORY SERVICES TO FIDELITY VIP
For managing investments and business affairs, each Portfolio pays a monthly
management fee to FMR. The prospectus of VIP contains additional information
concerning the Portfolios, including information concerning additional expenses
paid by the Portfolios, and should be read in conjunction with this Prospectus.
The fee for each fund is calculated by adding a group fee rate to an individual
fund fee rate, multiplying the result by the fund's monthly average net assets,
and dividing by twelve.
The Fidelity VIP High Income Portfolio's annual fee rate is made up of the sum
of two components:
1. A group fee rate based on the average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.37%, and
drops as total assets under management increase.
2. An individual fund fee rate of 0.45% for the Fidelity VIP High Income
Portfolio.
The Fidelity VIP Growth and the Fidelity VIP Equity-Income Portfolios' annual
fee rates are each made up of two components:
1. A group fee rate based on the average net assets of all the mutual funds
advised by FMR. On an annual basis, this rate cannot rise above 0.52%, and
drops as total assets under management increase.
2. An individual fund fee rate 0.30% for the Fidelity VIP Growth Portfolio and
0.20% for the Fidelity VIP Equity-Income Portfolio.
Thus, the Fidelity VIP High Income Portfolio may have a fee as high as 0.82%.
The Fidelity VIP Growth Portfolio may have a fee of as high as 0.82% of its
average net assets. The Fidelity VIP Equity-Income Portfolio may have a fee as
high as 0.72% of its average net assets.
INVESTMENT ADVISORY SERVICES TO T. ROWE PRICE
To cover investment management and operating expenses, the T. Rowe Price
International Stock Portfolio pays Price-Fleming a single, all-inclusive fee of
1.05% of its average daily net assets.
21
THE POLICY
APPLYING FOR A POLICY
After receiving a completed application from a prospective Policy owner, we will
begin underwriting to decide the insurability of the proposed Insureds. We may
require medical examinations and other information before deciding insurability.
We issue a Policy only after underwriting has been completed. We may reject an
application that does not meet our underwriting guidelines.
If a prospective Policy owner makes an initial payment of at least one minimum
monthly payment, we will provide fixed conditional insurance during
underwriting. The fixed conditional insurance will be the insurance applied for,
up to a maximum of $500,000, pending underwriting approval. This coverage will
continue for a maximum of 90 days from the date of the application or, if
required, the completed medical exam. In no event will any insurance proceeds be
paid under the Conditional Insurance Agreement if death is by suicide.
If no fixed conditional insurance was in effect, on Policy delivery we will
require a sufficient payment to place the insurance in force. If you made
payments before the date of issue, we will allocate the payments to the Fixed
Account. IF THE POLICY IS NOT ISSUED AND ACCEPTED, THE PAYMENTS WILL BE RETURNED
TO YOU WITHOUT INTEREST.
If the Policy is issued, we will allocate your Policy Value on date of issue
according to your instructions. However, if your Policy provides for a full
refund of payments under its "Right to Examine Policy " provision as required in
your state (see THE POLICY - "Free-Look Period"), we will initially allocate
your sub-account investments to the Money Market Fund. This allocation to the
Money Market Fund will be until the fourth day after the expiration of the
"Right to Examine" provision of your Policy.
After this, we will allocate all amounts according to your investment choices.
FREE-LOOK PERIOD
The Policy provides for a free look period. You have the right to examine and
cancel your Policy by returning it to us or to one of our representatives on or
before the 10 days after you receive the Policy or longer when state law so
requires. There may be a longer period in certain jurisdictions; see the "Right
to Examine" provision in your Contract.
If your Policy provides for a full refund under its "Right to Examine Policy "
provision, the Company will mail a refund to you within seven days. We may delay
a refund of any payment made by check until the check has cleared your bank.
Where required by state law, however, your refund will be the GREATER of
- Your entire payment OR
- The Policy Value PLUS deductions under the Policy for taxes, charges or
fees
If your Policy does not provide for a full refund, you will receive
- Amounts allocated to the Fixed Account PLUS
- The Policy Value in the Variable Account PLUS
- All fees, charges and taxes which have been imposed
After an increase in Face Amount, we will mail or deliver a notice of a free
look for the increase. You will have the right to cancel the increase before the
10 days after you receive the Policy or longer when state law so
22
requires. There may be a longer period in certain jurisdictions; see the "Right
to Examine" provision in your Contract.
On canceling the increase, you will receive a credit to your Policy Value of the
charges deducted for the increase. Upon request, we will refund the amount of
the credit to you. We will waive any surrender charge computed for the increase.
CONVERSION PRIVILEGE
Within 24 months of the Date of Issue or an increase in Face Amount, you can
convert your Policy into a Fixed Policy by transferring all Policy Value in the
sub-accounts to the Fixed Account. The conversion will take effect at the end of
the valuation period in which we receive, at our Principal Office, notice of the
conversion satisfactory to us. There is no charge for this conversion. We will
allocate all future payments to the Fixed Account, unless you instruct us
otherwise.
PAYMENTS
Payments are payable to the Company. Payments may be made by mail to our
Principal Office or through our authorized representative. All payments after
the initial payment are credited to the Variable Account or Fixed Account on the
date of receipt at the Principal Office.
You may establish a schedule of planned payments. If you do, we will bill you at
regular intervals. Making planned payments will not guarantee that the Policy
will remain in force. The Policy will not necessarily lapse if you fail to make
planned payments. You may make unscheduled payments before the Final Payment
Date or skip planned payments. If the Guaranteed Death Benefit Rider is in
effect, there are certain minimum payment requirements.
The Policy does not limit payments as to frequency and number. However, no
payment may be less than $250 without our consent. You may choose a automatic
payment method of making payments. Under this method, each month we will deduct
monthly payments from your checking account and apply them to your Policy. The
minimum automatic payment allowed is $100. Payments must be sufficient to
provide a positive Policy Value (less Outstanding Loans) at the end of each
Policy month or the Policy may lapse. See POLICY TERMINATION AND REINSTATEMENT.
During the first 48 Policy months following the Date of Issue or an increase in
Face Amount, a guarantee may apply to prevent the Policy from lapsing. The
guarantee will apply during this period if you make payments that, when reduced
by Policy loans, partial withdrawals and partial withdrawal costs, equal or
exceed the required minimum monthly payments. The required minimum monthly
payments are based on the number of months the Policy, increase in Face Amount
or Policy change that causes a change in the minimum monthly payment has been in
force. MAKING MONTHLY PAYMENTS EQUAL TO THE MINIMUM MONTHLY PAYMENTS DOES NOT
GUARANTEE THAT THE POLICY WILL REMAIN IN FORCE, EXCEPT AS STATED IN THIS
PARAGRAPH.
Under Death Benefit Option 1 and Death Benefit Option 2, total payments may not
exceed the current maximum payment limits under federal tax law. These limits
will change with a change in Face Amount, underwriting reclassifications, the
addition or deletion of a Rider, or a change between Death Benefit Option 1 and
Death Benefit Option 2. Where total payments would exceed the current maximum
payment limits, the excess first will be applied to repay any outstanding loans.
If there are remaining excess payments, any such excess payments will be
returned to you. However, we will accept a payment needed to prevent Policy
lapse during a Policy year. See POLICY TERMINATION AND REINSTATEMENT.
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ALLOCATION OF NET PAYMENTS
The net payment equals the payment made less the payment expense charge. In the
application for your Policy, you decide the initial allocation of the net
payment among the Fixed Account and the sub-accounts. You may allocate payments
to one or more of the sub-accounts. The minimum amount that you may allocate to
a sub-account is 1.00% of the net payment. Allocation percentages must be in
whole numbers (for example, 33 1/3% may not be chosen) and must total 100%.
You may change the allocation of future net payments by written request or
telephone request. You have the privilege to make telephone requests, unless you
elected not to have the privilege on the application. The Policy of the Company
and its representatives and affiliates is that they will not be responsible for
losses resulting from acting on telephone requests reasonably believed to be
genuine. The Company will employ reasonable methods to confirm that instructions
communicated by telephone are genuine; otherwise, the Company may be liable for
any losses from unauthorized or fraudulent instructions. Such procedures may
include, among others, requiring some form of personal identification prior to
acting upon instructions received by telephone. All telephone requests are
tape-recorded.
An allocation change will take effect on the date of receipt of the notice at
the Principal Office. No charge is currently imposed for changing payment
allocation instructions. We reserve the right to impose a charge in the future,
but guarantee that the charge will not exceed $25.
The Policy Value in the sub-accounts will vary with investment experience. You
bear this investment risk. Investment performance may also affect the death
benefit. Please review your allocations of payments and Policy Value as market
conditions and your financial planning needs change.
TRANSFER PRIVILEGE
Subject to our then current rules, you may transfer amounts among the
sub-accounts or between a sub-account and the Fixed Account. (You may not
transfer that portion of the Policy Value held in the Fixed Account that secures
a Policy loan.) We will make transfers at your written request or telephone
request, as described in THE POLICY -"Allocation of Net Payments." Transfers are
effected at the value next computed after receipt of the transfer order.
Currently, the first 12 transfers in a Policy year are free. After that, we will
deduct a $10 transfer charge from amounts transferred in that Policy year. We
reserve the right to increase the charge, but we guarantee the charge will never
exceed $25. Any transfers made for a conversion privilege, Policy loan or
material change in investment Policy or under an automatic transfer option will
not count toward the 12 free transfers.
The transfer privilege is subject to our consent. We reserve the right to impose
limits on transfers including, but not limited to, the:
- Minimum amount that may be transferred
- Minimum amount that may remain in a sub-account following a transfer from
that sub-account
- Minimum period between transfers involving the Fixed Account
- Maximum amounts that may be transferred from the Fixed Account
Transfers to and from the Fixed Account are currently permitted only if:
- The amount transferred from the Fixed Account in each transfer may not
exceed the lesser of $100,000 or 25% of the Policy Value in the Fixed
Account.
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- You may make only one transfer involving the Fixed Account in each Policy
quarter
These rules are subject to change by the Company.
DOLLAR-COST AVERAGING OPTION AND AUTOMATIC REBALANCING OPTION
You may have automatic transfers of at least $100 a month made on a periodic
basis:
- from the Sub-Accounts which invest in the Money Market Fund of the Trust
and the Fixed Account, respectively, to one or more of the other
Sub-Accounts ("Dollar-Cost Averaging Option"), or
- to reallocate Policy Value among the Sub-Accounts ("Automatic Rebalancing
Option").
Automatic transfers may be made on a monthly, quarterly, semi-annual or annual
schedule. You may request the day of the month on which automatic transfers will
occur (the "transfer date). If you do not choose a transfer date, the transfer
date will be the 15th of the scheduled month. However, if the transfer date is
not a business day, the automatic transfer will be processed on the next
business day. Each automatic transfer is free, and will not reduce the remaining
number of transfers that are free in a Policy year.
DEATH BENEFIT
GUIDELINE MINIMUM DEATH BENEFIT. In order to qualify as "life insurance" under
the Federal tax laws, this Policy must provide a Guideline Minimum Death
Benefit. The Guideline Minimum Death Benefit will be determined as of the date
of death of the surviving Insured. If Death Benefit Option 1 or Death Benefit
Option 2 is in effect, the Guideline Minimum Death Benefit is obtained by
multiplying the Policy Value by a percentage factor for the youngest Insured's
attained age, as shown in the table below. If Death Benefit Option 3 is in
effect, the Guideline Minimum Death Benefit is obtained by multiplying the
Policy Value by a percentage based on both Insureds' attained age, sex, and
Underwriting Class, as set forth in the Policy.
The Guideline Minimum Death Benefit Factors Table in Appendix A is used when
Death Benefit Option 1 or Death Benefit Option 2 is in effect. The Guideline
Minimum Death Benefit Table reflects the requirements of the "guideline
premium/guideline death benefit" test set forth in the Federal tax laws.
Guideline Minimum Death Benefit factors are set forth in the Policy when Death
Benefit Option 3 is in effect. These factors reflect the requirements of the
"cash value accumulation" test set forth in the Federal tax laws. The Guideline
Minimum Death Benefit factors will be adjusted to conform to any changes in the
tax laws. For more information, see ELECTION OF DEATH BENEFIT OPTIONS, below.
NET DEATH BENEFIT. If the Policy is in force on the surviving Insured's death,
we will, with due proof of death, pay the Net Death Benefit to the named
beneficiary. We will normally pay the Net Death Benefit within seven days of
receiving due proof of the surviving Insured's death, but we may delay payment
of Net Death Benefits. See OTHER POLICY PROVISIONS - "Delay of Payments." The
beneficiary may receive the Net Death Benefit in a lump sum or under a payment
option. See PAYMENT OPTIONS.
The Net Death Benefit depends on the current Face Amount and the Death Benefit
Option that is in effect on the date of death. The Net Death Benefit is:
- The death benefit provided under Death Benefit Option 1, Death Benefit
Option 2, or Death Benefit Option 3, whichever is elected and in effect on
the date of death, PLUS
- Any other insurance on the surviving Insured's life that is provided by
Rider, MINUS
- Any outstanding loan, any partial withdrawals, partial withdrawal costs,
and due and unpaid monthly charges through the Policy month in which the
surviving Insured dies.
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Where permitted by state law, we will compute the Net Death Benefit on
- The date we receive due proof of the surviving Insured's death under Death
Benefit Option 2 OR
- The date of death of the surviving Insured for Death Benefit Options 1 and
3.
If required by state law, we will compute the Net Death Benefit on the date of
death of the surviving Insured for Death Benefit Option 2 as well as for Death
Benefit Options 1 and 3.
ELECTION OF DEATH BENEFIT OPTIONS
Federal tax law requires a Guideline Minimum Death Benefit in relation to Policy
Value for a Contract to qualify as life insurance. Under current Federal tax
law, either the Guideline Premium Test or the Cash Value Accumulation Test can
be used to determine if the Contract complies with the definition of "life
insurance" under the Code. At the time of application, you may elect either of
the tests. If you elect the Guideline Premium Test, you will have the choice of
electing Death Benefit Option 1 or Death Benefit Option 2. If you elect the Cash
Value Accumulation Test, Death Benefit Option 3 will apply.
GUIDELINE PREMIUM TEST AND CASH VALUE ACCUMULATION TEST -- There are two main
differences between the Guideline Premium Test and the Cash Value Accumulation
Test. First, the Guideline Premium Test limits the amount of premium that may be
paid into a Contract, while no such limits apply under the Cash Value
Accumulation Test. Second, the factors that determine the Guideline Minimum
Death Benefit relative to the Policy Value are different. APPLICANTS FOR A
POLICY SHOULD CONSULT A QUALIFIED TAX ADVISER IN CHOOSING BETWEEN THE GUIDELINE
PREMIUM TEST AND THE CASH VALUE ACCUMULATION TEST AND IN CHOOSING A DEATH
BENEFIT OPTION.
The Guideline Premium Test limits the amount of premiums payable under a
Contract to a certain amount based on the particular ages, sexes, and
Underwriting Classes of both Insureds. Under the Guideline Premium Test, you may
choose between Death Benefit Option 1 or Death Benefit Option 2, as described
below. After issuance of the Contract, you may change the selection from Death
Benefit Option 1 to Death Benefit Option 2, or vice versa.
The Cash Value Accumulation Test requires that the Death Benefit must be
sufficient so that the cash Surrender Value does not at any time exceed the net
single premium required to fund the future benefits under the Contract. Under
the Cash Value Accumulation Test, required increases in the Guideline Minimum
Death Benefit (due to growth in Policy Value) will generally be greater than
under the Guideline Premium Test. If you choose the Cash Value Accumulation
Test, ONLY Death Benefit Option 3 is available. You may NOT switch between Death
Benefit Option 3 to Death Benefit Option 1 or to Death Benefit Option 2, or vice
versa.
DEATH BENEFIT OPTION 1 -- LEVEL DEATH BENEFIT WITH GUIDELINE PREMIUM TEST. Under
Option 1, the Death Benefit is equal to the greater of the Face Amount or the
Guideline Minimum Death Benefit, as set forth in Appendix A - Guideline Minimum
Death Benefit Factors Table. The Death Benefit will remain level unless the
Guideline Minimum Death Benefit is greater than the Face Amount. If the
Guideline Minimum Death Benefit is greater than the Face Amount, the Death
Benefit will vary as the Policy Value varies.
Death Benefit Option 1 will offer the best opportunity for the Policy Value to
increase without increasing the Death Benefit as quickly as it might under the
other options. The Death Benefit will never go below the Face Amount.
DEATH BENEFIT OPTION 2 -- ADJUSTABLE DEATH BENEFIT WITH GUIDELINE PREMIUM
TEST.Under Option 2, the Death Benefit is equal to the greater of (1) the Face
Amount plus the Policy Value or (2) the Guideline Minimum Death Benefit. The
Death Benefit will vary as the Policy Value changes, but will never be less than
the Face Amount.
26
Death Benefit Option 2 will offer the best opportunity to have an increasing
Death Benefit as early as possible. The Death Benefit will increase whenever
there is an increase in the Policy Value, and will decrease whenever there is a
decrease in the Policy Value. The Death Benefit will never go below the Face
Amount.
DEATH BENEFIT OPTION 3 -- LEVEL DEATH BENEFIT WITH CASH VALUE ACCUMULATION
TEST.Under Option 3, the Death Benefit will equal the greater of (1) the Face
Amount or (2) the Policy Value multiplied by the applicable factor as set forth
in the Policy. The applicable factor depends upon the Underwriting Class, sex
(unisex if required by law), and then-attained age of both Insureds. The factors
decrease slightly from year to year as the attained age of the Insured
increases.
Death Benefit Option 3 will offer the best opportunity for an increasing death
benefit in later Policy years and/ or to fund the Policy at the "seven-pay"
limit for the full seven years. When the Policy Value multiplied by the
applicable death benefit factor exceeds the Face Amount, the Death Benefit will
increase whenever there is an increase in the Policy Value, and will decrease
whenever there is a decrease in the Policy Value. However, the Death Benefit
will never go below the Face Amount.
ALL DEATH BENEFIT OPTIONS MAY NOT BE AVAILABLE IN ALL STATES.
ILLUSTRATIONS
For the purposes of the following illustrations, assume that both Insureds are
below the age of 40 and that there is no outstanding loan.
ILLUSTRATION OF DEATH BENEFIT OPTION 1 -- Under Option 1, a Policy with a
$100,000 Face Amount will have a death benefit of $100,000. However, because the
death benefit must be equal to or greater than 250% of Policy Value (from
Appendix A -- Guideline Minimum Death Benefit Factors Table), if the Policy
Value exceeds $40,000 the death benefit will exceed the $100,000 Face Amount. In
this example, each dollar of Policy Value above $40,000 will increase the death
benefit by $2.50.
For example, a Policy with a Policy Value of
- $50,000 will have a Guideline Minimum Death Benefit of $125,000 (e.g.,
$50,000 X 2.50);
- $60,000 will produce a Guideline Minimum Death Benefit of $150,000 (e.g.,
$60,000 X 2.50)
- $75,000 will produce a Guideline Minimum Death Benefit of $187,500 (e.g.,
$75,000 X 2.50).
Similarly, if Policy Value exceeds $40,000, each dollar taken out of Policy
Value will reduce the death benefit by $2.50. If, for example, the Policy Value
is reduced from $60,000 to $50,000 because of partial withdrawals, charges or
negative investment performance, the death benefit will be reduced from $150,000
to $125,000. However, the death benefit will never be less than the Face Amount
of the Policy.
The Guideline Minimum Death Benefit Factor becomes lower as the Insureds' ages
increase. If the youngest Insured's age in the above example were both 50 years
old, for example, (rather than between zero and 40), the applicable percentage
would be 185%. The death benefit would be greater than $100,000 Face Amount when
the Policy Value exceeds $54,054 (rather than $40,000), and each dollar then
added to or taken from Policy Value would change the death benefit by $1.85.
ILLUSTRATION OF DEATH BENEFIT OPTION 2 -- Under Option 2, assume that both
Insureds are under the age of 40 and that there is no outstanding loan. The Face
Amount of the Policy is $100,000.
Under Death Benefit Option 2, a Policy with a Face Amount of $100,000 will
produce a death benefit of $100,000 plus Policy Value. For example, a Policy
with Policy Value of
27
- $10,000 will produce a death benefit of $110,000 (e.g., $100,000 +
$10,000);
- $25,000 will produce a death benefit of $125,000 (e.g., $100,000
+$25,000);
- $50,000 will produce a death benefit of $150,000 (e.g., $100,000 +
$50,000).
However, the Guideline Minimum Death Benefit must be at least 250% of the Policy
Value. Therefore, if the Policy Value is greater than $66,667, 250% of the
Policy Value will be Guideline Minimum Death Benefit. The Guideline Minimum
Death Benefit will be greater than the Face Amount plus Policy Value. In this
example, each dollar of Policy Value above $66,667 will increase the death
benefit by $2.50. For example, if the Policy Value is
- $70,000, the Guideline Minimum Death Benefit will be $175,000 (e.g.,
$70,000 X 2.50);
- $80,000, the Guideline Minimum Death Benefit will be $200,000 (e.g.,
$80,000 X 2.50);
- $90,000, the Guideline Minimum Death Benefit will be $225,000 (e.g.,
$90,000 X 2.50).
Similarly, if Policy Value exceeds $66,667, each dollar taken out of Policy
Value will reduce the death benefit by $2.50. If, for example, the Policy Value
is reduced from $80,000 to $70,000 because of partial withdrawals, charges or
negative investment performance, the death benefit will be reduced from $200,000
to $175,000. If, however, the Policy Value times
- The Guideline Minimum Death Benefit factor is LESS THAN
- The Face Amount PLUS Policy Value, THEN
- The death benefit will be the Face Amount PLUS Policy Value.
The Guideline Minimum Death Benefit factor becomes lower as the Insureds' ages
increase. If the Insureds in the above example were both age 50, the death
benefit must be at least 185% of the Policy Value. The death benefit would be
the sum of the Policy Value plus $100,000 unless the Policy Value exceeded
$117,647 (rather than $66,667). Each dollar added to or subtracted from the
Policy would change the death benefit by $1.85.
ILLUSTRATION OF DEATH BENEFIT OPTION 3 -- In this illustration, assume that the
Insureds are a male preferred non-smoker and a female preferred non-smoker, both
age 35, and that there is no Outstanding Loan.
Under Death Benefit Option 3, a Policy with a Face Amount of $100,000 will have
a death benefit of $100,000. However, because the death benefit must be equal to
or greater than 643% of Policy Value (in Policy year 1), if the Policy Value
exceeds $10,235 the death benefit will exceed the $100,000 face amount. In this
example, each dollar of Policy Value above $15,552 will increase the death
benefit by $6.43.
For example, a Policy with a Policy Value of:
- $50,000 will have a Death Benefit of $321,500 ($50,000 x 6.43);
- $60,000 will produce a Death Benefit of $385,800 ($60,000 x 6.43);
- $75,000 will produce a Death Benefit of $482,250 ($75,000 x 6.43).
Similarly, if Policy Value exceeds $15,552, each dollar taken out of Policy
Value will reduce the death benefit by $9.77. If, for example, the Policy Value
is reduced from $60,000 to $50,000 because of partial withdrawals, charges, or
negative investment performance, the death benefit will be reduced from $385,800
to $321,500. If,
28
however, the product of the Policy Value times the applicable percentage is less
than the face amount, the death benefit will equal the face amount.
The applicable percentage becomes lower as the Insureds' ages increase. If both
Insureds' ages in the above example were age 55, for example, (rather than 35),
the applicable percentage would be 307% (in Policy year 1). The death benefit
would not exceed the $100,000 face amount unless the Policy Value exceeded
$32,573 (rather than $15,552), and each dollar then added to or taken from
Policy Value would change the death benefit by $3.07.
CHANGING BETWEEN THE DEATH BENEFIT OPTION 1 AND DEATH BENEFIT 2
You may change between Death Benefit Option 1 and Death Benefit Option 2 once
each Policy year by written request. (YOU MAY NOT CHANGE FROM DEATH BENEFIT
OPTION 3 TO DEATH BENEFIT OPTION 1 OR DEATH BENEFIT OPTION 2, OR VICE VERSA).
Changing options may require evidence of insurability. The change takes effect
on the monthly processing date on or following the date of underwriting
approval. We will impose no charge for changes in death benefit options.
CHANGE FROM DEATH BENEFIT OPTION 1 TO DEATH BENEFIT OPTION 2. If you change from
Death Benefit Option 1 to Death Benefit Option 2, we will decrease the Face
Amount to equal:
- The death benefit MINUS
- The Policy Value on the date of the change
The change may not be made if the Face Amount would fall below $250,000. After
the change from Death Benefit Option 1 to Death Benefit Option 2, future Monthly
Insurance Protection charges may be higher or lower than if no change in option
had been made. However, the insurance protection amount will always equal the
Face Amount, unless the Guideline Minimum Death Benefit applies.
CHANGE FROM DEATH BENEFIT OPTION 2 TO DEATH BENEFIT OPTION 1. If you change
Death Benefit Option 2 to Death Benefit Option 1, we will increase the Face
Amount by the Policy Value on the date of the change. The death benefit will be
the GREATER of:
- The new Face Amount or
- The Guideline Minimum Death Benefit under Death Benefit Option 1
After the change from Death Benefit Option 2 to Death Benefit Option 1, an
increase in Policy Value will reduce the insurance protection amount and the
Monthly Insurance Protection charge. A decrease in Policy Value will increase
the insurance protection amount and the Monthly Insurance Protection charge.
A change in death benefit option may result in total payments exceeding the then
current maximum payment limitation under federal tax law. Where total payments
would exceed the current maximum payment limits, the excess first will be
applied to repay any outstanding loans. If there are remaining excess payments,
any such excess payments will be returned to you. However, we will accept a
payment needed to prevent Policy lapse during a Policy year.
A change from Death Benefit Option 2 to Death Benefit Option 1 within five
Policy years of the Final Payment Date will terminate a Guaranteed Death Benefit
Rider.
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GUARANTEED DEATH BENEFIT RIDER (NOT AVAILABLE IN ALL STATES)
An optional Guaranteed Death Benefit Rider is available only at issue of the
Policy. If this Rider is in effect, the Company:
- guarantees that your Policy will not lapse regardless of the investment
performance of the Variable Account and
- provides a guaranteed Net Death Benefit.
In order to maintain the Guaranteed Death Benefit Rider, certain minimum premium
payment tests must be met on each Policy anniversary and within 48 months
following the Date of Issue and/or the date of any increase in Face Amount, as
described below. In addition, a one-time administrative charge of $25 will be
deducted from Policy Value when the Rider is elected. Certain transactions,
including Policy loans, partial withdrawals, underwriting reclassification of
either Insured, change in face amount, and change in Death Benefit Option, can
result in the termination of the Rider. If this Rider is terminated, it cannot
be reinstated.
GUARANTEED DEATH BENEFIT TESTS.
While the Guaranteed Death Benefit Rider is in effect, the Policy will not lapse
if the following two tests are met:
1. Within 48 months following the Date of Issue of the Policy or of any
increase in the Face Amount, the sum of the premiums paid, less any
Outstanding Loans, partial withdrawals and withdrawal charges, must be
greater than the minimum monthly payment multiplied by the number of months
which have elapsed since the relevant Date of Issue; and
2. On each Policy anniversary, (a) must exceed (b), where, since the Date of
Issue:
(a) is the sum of your premiums, less any withdrawals, partial withdrawal
charges and Outstanding Loans which is classified as a preferred loan;
and
(b) is the sum of the Guaranteed Death Benefit premiums, as shown on the
specifications page of the Policy.
TERMINATION OF THE GUARANTEED DEATH BENEFIT RIDER.
The Guaranteed Death Benefit Rider will end and may not be reinstated on the
first to occur of the following:
- foreclosure of an outstanding loan; or
- the date on which the sum of your payments less withdrawals and loans does
not meet or exceed the applicable Guaranteed Death Benefit test (above);
or
- any Policy change that results in a negative guideline level premium; or
- the effective date of a change from Death Benefit Option 2 to Death
Benefit Option 1, if such changes occur within 5 Policy years of the Final
Payment Date; or
- a request for a partial withdrawal or preferred loan is made after the
Final Premium Payment Date.
It is possible that the Policy Value will not be sufficient to keep the Policy
in force on the first Monthly Payment Date following the date the Rider
terminates.
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CHANGE IN FACE AMOUNT
You may increase or decrease the Face Amount by written request. An increase or
decrease in the Face Amount takes effect on the LATER of the:
- The monthly processing date on or next following date of receipt of your
written request or
- The date of approval of your written request, if evidence of insurability
is required
INCREASES -- You must submit with your written request for an increase
satisfactory evidence of insurability. The consent of both Insured is also
required whenever the Face Amount is increased. An increase in Face Amount may
not be less than $10,000. You may not increase the Face Amount after either
Insured reaches age 85. A written request for an increase must include a payment
if the Policy Value less debt is less than the sum of three minimum monthly
payments
We will also compute a new surrender charge based on the amount of the increase.
An increase in the Face Amount will increase the insurance protection amount
and, therefore, the Monthly Insurance Protection charges.
After increasing the Face Amount, you will have the right, during a free-look
period, to have the increase canceled. See THE POLICY - "Free-Look Period." If
you exercise this right, we will credit to your Policy the charges deducted for
the increase, unless you request a refund of these charges.
DECREASES -- You may decrease the Face Amount by written request. The minimum
amount for a decrease in Face Amount is $10,000. The minimum Face Amount
required after a decrease is $250,000. If
(a) you have chosen the Guideline Premium Test and the Policy would not comply
with the maximum payment limitations under federal tax law, and
(b) you have previously made payments in excess of the amount allowed for the
lower Face Amount, then the excess payments will first be used to repay
outstanding loans, if any. If there are any remaining excess payments, we
will pay any such excess to you . A return of Policy Value may result in tax
liability to you.
A decrease in the Face Amount will lower the insurance protection amount and,
therefore, the Monthly Insurance Protection charge. In computing the the Monthly
Insurance Protection charge, a decrease in the Face Amount will reduce the Face
Amount in the following order:
- the Face Amount provided by the most recent increase;
- the next most recent increases successively; and
- the initial Face Amount
On a decrease in the Face Amount, we will deduct from the Policy Value, if
applicable, any surrender charge. You may allocate the deduction to one
sub-account. If you make no allocation, we will make a pro-rata allocation. We
will reduce the surrender charge by the amount of any surrender charge deducted.
POLICY VALUE
The Policy Value is the total value of your Policy. It is the sum of your
accumulation in the Fixed Account plus the value of your units in the
sub-accounts. There is no guaranteed minimum Policy Value. Policy Value on any
date depends on variables that cannot be predetermined.
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- Your Policy Value is affected by the:
- Frequency and amount of your net payments
- Interest credited in the Fixed Account
- Investment performance of your sub-accounts
- Partial withdrawals
- Loans, loan repayments and loan interest paid or credited
- Charges and deductions under the Policy
- The death benefit option
COMPUTING POLICY VALUE -- We compute the Policy Value on the Date of Issue and
on each Valuation Date. On the Date of Issue, the Policy Value is:
- Accumulations in the Fixed Account, MINUS
- The Monthly Deductions due
On each Valuation Date after the Date of Issue, the Policy Value is the SUM of:
- Accumulations in the Fixed Account PLUS
- The PRODUCT of:
- The number of units in each sub-account TIMES
- The value of a unit in each sub-account on the Valuation Date.
THE UNIT -- We allocate each net payment to the sub-accounts you selected. We
credit allocations to the sub-accounts as units. Units are credited separately
for each sub-account.
The number of units of each sub-account credited to the Policy is the QUOTIENT
of
- That part of the net payment allocated to the sub-account DIVIDED BY
- The dollar value of a unit on the Valuation Date the payment is received
at our Principal Office.
The number of units will remain fixed unless changed by a split of unit value,
transfer, partial withdrawal or surrender. Also, each deduction of charges from
a sub-account will result in cancellation of units equal in value to the amount
deducted.
The dollar value of a unit of a sub-account varies from Valuation Date to
Valuation Date based on the investment experience of that sub-account. This
investment experience reflects the investment performance, expenses and charges
of the fund in which the sub-account invests. The value of each unit was set at
$1.00 on the first Valuation Date of each sub-account. The value of a unit on
any Valuation Date is the PRODUCT of:
- The dollar value of the unit on the preceding Valuation Date TIMES
- The net investment factor
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NET INVESTMENT FACTOR -- The net investment factor measures the investment
performance of a sub-account during the valuation period just ended. The net
investment factor for each sub-account is 1.0000 PLUS the QUOTIENT of:
- The investment income of that sub-account for the valuation period,
adjusted for realized and unrealized capital gains and losses and for
taxes during the valuation period, DIVIDED BY
- The value of that sub-account's assets at the beginning of the valuation
period
The net investment factor may be greater or less than one.
PAYMENT OPTIONS
The Net Death Benefit payable may be paid in a single sum or under one or more
of the payment options then offered by the Company. These payment options also
are available at the Final Payment Date or if the Policy is surrendered. If you
do not make a selection, we will pay the benefits in a single sum. A certificate
will be provided to the payee describing the payment option selected.
OPTIONAL INSURANCE BENEFITS
You may add optional insurance benefits to the Policy by Rider, as described in
APPENDIX B -- OPTIONAL INSURANCE BENEFITS. The cost of certain optional
insurance benefits becomes part of the Monthly Deduction.
SURRENDER
You may surrender the Policy and receive its surrender value. The surrender
value is:
- The Policy Value MINUS
- Any Outstanding Loan and surrender charges
We will compute the surrender value on the Valuation Date on which we receive
the Policy with a written request for surrender. We will deduct a surrender
charge if you surrender the Policy within 10 full Policy years of the Date of
Issue or increase in Face Amount. See CHARGES AND DEDUCTIONS - "Surrender
Charge."
The surrender value may be paid in a lump sum or under a payment option then
offered by us. See PAYMENT OPTIONS. We will normally pay the surrender value
within seven days following our receipt of written request. We may delay benefit
payments under the circumstances described in OTHER POLICY PROVISIONS - "Delay
of Payments."
For important tax consequences of surrender, see FEDERAL TAX CONSIDERATIONS.
PARTIAL WITHDRAWAL
After the first Policy year, you may withdraw part of the surrender value of
your Policy on written request. Your written request must state the dollar
amount you wish to receive. You may allocate the amount withdrawn among the
sub-accounts and the Fixed Account. If you do not provide allocation
instructions, we will make a pro-rata allocation. Each partial withdrawal must
be at least $500. Under both Level Death Benefit Options, the Face Amount is
reduced by the partial withdrawal. We will not allow a partial withdrawal if it
would reduce Death Benefit Option 1 and 3 Face Amount below $240,000.
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On a partial withdrawal from a sub-account, we will cancel the number of units
equal in value to the amount withdrawn. The amount withdrawn will be the amount
you requested plus the partial withdrawal costs. See CHARGES AND DEDUCTIONS
- -"Partial Withdrawal Costs." We will normally pay the partial withdrawal within
seven days following our receipt of written request. We may delay payment as
described in OTHER POLICY PROVISIONS - "Delay of Payments."
For important tax consequences of partial withdrawals, see FEDERAL TAX
CONSIDERATIONS.
CHARGES AND DEDUCTIONS
The following charges will apply to your Policy under the circumstances
described. Some of these charges apply throughout the Policy 's duration. Other
charges apply only if you choose certain options under the Policy.
No surrender charges, partial withdrawal charges or front-end sales loads are
imposed, and no commissions are paid where the Policy owner as of the date of
application is within the following class of individuals:
All employees of First Allmerica and its affiliates and subsidiaries located at
First Allmerica's home office (or at off-site locations if such employees are on
First Allmerica's home office payroll); directors of First Allmerica and its
affiliates and subsidiaries; all employees and registered representatives of any
broker-dealer that has entered into a sales agreement with us or Allmerica
Investments, Inc. to sell the Policies and any spouses of the above persons or
any children of the above persons.
DEDUCTIONS FROM PAYMENTS.
From each payment, we will deduct a Payment Expense Charge of 8.35%, which is
composed of the following:
- Premium tax charge of 2.35% currently
- Deferred Acquisition Costs ("DAC tax") charge of 1.0%
- Front-End Sales Load charge of 5.0%
The 2.35% premium tax charge approximates our average expenses for state and
local premium taxes. Premium taxes vary, ranging from zero to more than 4.00%.
The premium tax deduction is made whether or not any premium tax applies. The
deduction may be higher or lower than the premium tax imposed. However, we do
not expect to make a profit from this deduction. The 1.00% DAC tax deduction
helps reimburse us for approximate expenses incurred from federal taxes for
deferred acquisition costs ("DAC taxes") of the Policies. We deduct the 5.00 %
Front-End Sales Load charge from each payment to partially compensate us for
Policy sales expenses.
We reserve the right to increase or decrease the premium tax deduction or DAC
tax deduction to reflect changes in our expenses for premium taxes or DAC taxes.
The 5.0% Front-End Sales Load charge will not change, even if sales expenses
change.
MONTHLY CHARGES (THE MONTHLY DEDUCTION)
On each monthly processing date, we will deduct certain following monthly
charges (the "Monthly Deduction") from Policy Value. You may allocate the
Monthly Deduction to any number of sub-accounts and to the Fixed Account. If you
make no allocation, we will make a pro-rata allocation. If the sub-accounts you
chose do not have sufficient funds to cover the Monthly Deduction, we will make
a pro-rata allocation.
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The following charges comprise the Monthly Deduction:
- MONTHLY INSURANCE PROTECTION CHARGES. Before the Final Payment Date, we
will deduct a Monthly Insurance Protection charge from your Policy Value.
This charge is the cost for insurance protection under the Policy.
We deduct the Monthly Insurance Protection charge on each monthly processing
date starting with the Date of Issue. We will deduct no Monthly Insurance
Protection charges on or after the Final Payment Date.
- MONTHLY EXPENSE CHARGE -- The Monthly Expense Charge will be charged on
the monthly processing date for the first ten years after issue or an
increase in Face Amount. This charge reimburses the Company for
underwriting and acquisition costs. The charge is equal to a specified
amount that varies with the age, and sex of the Insureds for each $1,000
of the Policy 's Face Amount.
- MONTHLY ADMINISTRATION FEE -- A deduction of $16 for Years 1-5 and $6.00
in Years 6 and over will be taken from the Policy Value on each monthly
processing date up to the Final Payment Date to reimburse the Company for
expenses related to issuance and maintenance of the Contract.
- MONTHLY MORTALITY AND EXPENSE RISK CHARGE -- This charge is currently
equal to an annual rate of 0.30% of the Policy Value in each sub-account
for the first 20 Policy years and an annual rate of 0.10% for Policy Year
21 and later. The charge is based on the Policy Value in the sub-accounts
as of the prior Monthly Processing Date. The Company may increase this
charge, subject to state and federal law, to an annual rate of 0.55% of
the Policy Value in each sub-account for the first 20 Policy years and an
annual rate of 0.35% for Policy Year 21 and later. The charge will
continue to be assessed after the Final Payment Date.
This charge compensates us for assuming mortality and expense risks for variable
interests in the Policies. The mortality risk we assume is that Insureds may
live for a shorter time than anticipated. If this happens, we will pay more Net
Death Benefits than anticipated. The expense risk we assume is that the expenses
incurred in issuing and administering the Policies will exceed those compensated
by the administrative charges in the Policies. If the charge for mortality and
expense risks is not sufficient to cover mortality experience and expenses, we
will absorb the losses. If the charge turns out to be higher than mortality and
expense risk expenses, the difference will be a profit to us. If the charge
provides us with a profit, the profit will be available for our use to pay
distribution, sales and other expenses.
- MONTHLY RIDER CHARGES -- RIDER CHARGES WILL VARY DEPENDING UPON THE RIDERS
SELECTED, AND BY THE UNDERWRITING CLASSIFICATIONS OF THE INSUREDS.
COMPUTING INSURANCE PROTECTION CHARGES
We designed the Monthly Insurance Protection charge to compensate us for the
anticipated cost of paying Net Death Benefits under the Policies. The charge is
computed monthly. Monthly Insurance Protection charges can vary depending upon
the Death Benefit Option you select. Monthly Insurance Protection Charges will
also be different for the initial Face Amount, any increases in Face Amount, and
for that part of the death benefit subject to the Guideline Minimum Death
Benefit.
DEATH BENEFIT OPTION 1 AND DEATH BENEFIT OPTION 3
INITIAL FACE AMOUNT. -- For the initial Face Amount under Death Benefit Option 1
and Death Benefit Option 3, the Monthly Insurance Protection charge is the
PRODUCT of:
- The insurance protection rate TIMES
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- The DIFFERENCE between
- The initial Face Amount AND
- The Policy Value (MINUS any Rider charges) at the beginning of the
Policy month
Under Death Benefit Option 1 and Death Benefit Option 3, the Monthly Insurance
Protection charge decreases as the Policy Value increases (if the Guideline
Minimum Death Benefit is not in effect).
INCREASES IN FACE AMOUNT. -- For each increase in Face Amount under Death
Benefit Option 1 or Death Benefit Option 3, the Monthly Insurance Protection
charge is the PRODUCT of:
- The insurance protection rate for the increase TIMES
- The DIFFERENCE between
- The increase in Face Amount AND
- Any Policy Value (MINUS any Rider charges) IN EXCESS OF than the
initial Face Amount at the beginning of the Policy month and not
allocated to a prior increase
GUIDELINE MINIMUM DEATH BENEFIT. -- If the Guideline Minimum Death Benefit is in
effect, we will compute a Monthly Insurance Protection charge for that part of
the death benefit subject to the Guideline Minimum Death Benefit that exceeds
the current death benefit not subject to the Guideline Minimum Death Benefit.
Under Death Benefit Option 1 or Death Benefit Option 3, this Monthly Insurance
Protection charge is the PRODUCT of:
- The insurance protection rate for the initial Face Amount TIMES
- The DIFFERENCE between
- The Guideline Minimum Death Benefit AND
- The GREATER of the Face Amount OR the Policy Value.
We will adjust the Monthly Insurance Protection charge for any decreases in Face
Amount. See THE POLICY - "CHANGE IN FACE AMOUNT: DECREASES."
DEATH BENEFIT OPTION 2
INITIAL FACE AMOUNT. -- For the initial Face Amount under Death Benefit Option
2, the Monthly Insurance Protection charge is the PRODUCT of:
- The insurance protection rate TIMES
- The initial Face Amount
INCREASES IN FACE AMOUNT. -- For each increase in Face Amount under Death
Benefit Option 2, the Monthly Insurance Protection charge is the PRODUCT of:
- The insurance protection rate for the increase TIMES
- The increase in Face Amount
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GUIDELINE MINIMUM DEATH BENEFIT. -- If the Guideline Minimum Death Benefit is in
effect, we will compute a Monthly Insurance Protection charge for that part of
the death benefit subject to the Guideline Minimum Death Benefit that exceeds
the current death benefit not subject to the Guideline Minimum Death Benefit.
Under Death Benefit Option 2, this Monthly Insurance Protection charge is the
PRODUCT of:
- The insurance protection rate for the initial Face Amount TIMES
- The DIFFERENCE between
- The Guideline Minimum Death Benefit AND
- The Face Amount PLUS the Policy Value
We will adjust the Monthly Insurance Protection charge for any decreases in Face
Amount. See THE POLICY - "CHANGE IN FACE AMOUNT: DECREASES."
INSURANCE PROTECTION CHARGES -- Cost of insurance rates are blended based on sex
distinct rate tables, the Ages and the Underwriting Classes of the Insureds at
the Date of Issue or the effective date of an increase.
The cost of insurance rates are determined at the beginning of each Policy year
for the initial Face Amount. The cost of insurance rates for an increase in Face
Amount or rider are determined annually on the anniversary of the effective date
of each increase. The cost of insurance rates generally increase as the
Insureds' Ages increase. The actual monthly cost of insurance rates will be
based on the Company's expectations as to future mortality experience. They will
not, however, be greater than the guaranteed cost of insurance rates set forth
in the Policy. These guaranteed rates will never exceed the 1980 Commissioners
Standard Ordinary sex distinct rate table, Smoker or Non-Smoker, and the
Insureds' Ages. The Tables used for this purpose set forth different mortality
estimates for smokers and non-smokers. Any change in the cost of insurance rates
will apply to all persons of the same insuring Age and Underwriting Class whose
Policies have been in force for the same length of time.
The Underwriting Class of each Insured will affect the cost of insurance rates.
The Company currently places Insureds into Preferred Underwriting Classes,
Standard Underwriting Classes, and Substandard Underwriting Classes. In
otherwise identical Policies, Insureds in the Preferred Underwriting Class will
have a lower cost of insurance than Insureds in a Standard Underwriting Class,
who in turn will have a lower cost of insurance than Insureds in a Substandard
Underwriting Class. The Underwriting Classes are also divided into two
categories: smokers and non-smokers. Non-smoking Insureds will incur lower cost
of insurance rates than Insureds who are classified as smokers but who are
otherwise in the same Underwriting Class. Any Insured with an Age at issuance
under 18 will be classified initially as regular or substandard. The Insured
then will be classified as a smoker at Age 18 unless the Insured provides
satisfactory evidence that the Insured is a non-smoker. The Company will provide
notice of the opportunity for an Insured to be classified as a non-smoker when
the Insured reaches Age 18.
The cost of insurance rate is determined separately for the initial Face Amount
and for the amount of any increase in the Face Amount. For each increase in the
Face Amount that you request, at a time when either Insureds are in a less
favorable Underwriting Class than previously, a correspondingly higher cost of
insurance rate will apply only to that portion of the Insurance Amount at Risk
for the increase. For the initial Face Amount and any prior increases, the
Company will use the Underwriting Class previously applicable. On the other
hand, if either Insured's Underwriting Class improves on an increase, the lower
cost of insurance rate generally will apply to the entire Insurance Amount at
Risk.
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FUND EXPENSES
The value of the units of the sub-accounts will reflect the investment advisory
fee and other expenses of the funds whose shares the sub-accounts purchase. The
prospectuses and statements of additional information of the Trust, Fidelity
VIP, and T. Rowe Price contain more information concerning the fees and
expenses.
No charges are currently made against the sub-accounts for federal or state
income taxes. Should income taxes be imposed, we may make deductions from the
sub-accounts to pay the taxes. See FEDERAL TAX CONSIDERATIONS.
SURRENDER CHARGE
A surrender charge may apply only on a full surrender or decrease in Face Amount
of the Policy within ten years of the Date of Issue or of an increase in Face
Amount. We compute the surrender charge on Date of Issue and on any increase in
Face Amount. The maximum surrender charge is equal to a specified amount that is
based on the age, sex, and underwriting class of each Insured, for each $1,000
of the Policy 's Face Amount or increase in Face Amount. SEE APPENDIX E --
CALCULATION OF MAXIMUM SURRENDER CHARGES.
During the first year after issue or an increase in Face Amount, 100% of the
surrender charge will apply to a full surrender or decrease in Face Amount. The
amount of the Surrender Charges decreases by one-ninth (11.11%) annually to 0%
by the 10th Contract year.
If more than one surrender charge is in effect because of one or more increases
in Face Amount, we will apply the surrender charges in inverse order. This means
that we will apply surrender and partial withdrawal charges (described below) in
this order:
- First, the most recent increase
- Second, the next most recent increases, and so on
- Third, the initial Face Amount.
A surrender charge may be deducted on a decrease in the Face Amount. On a
decrease, the surrender charge deducted is a fraction of the charge that would
apply to a full surrender. The fraction is the PRODUCT of:
- The decrease DIVIDED by the current Face Amount TIMES
- the surrender charge
Where a decrease causes a partial reduction in an increase or in the initial
Face Amount, we will deduct a proportionate share of the surrender charge for
that increase or for the initial Face Amount.
See APPENDIX C - SURRENDER CHARGES for examples of how we compute the maximum
surrender charge.
The surrender charge is designed to partially reimburse us for the
administrative costs of product research and development, underwriting, Policy
administration, and for distribution expenses, including commissions to our
representatives, advertising, and the printing of prospectuses and sales
literature.
PARTIAL WITHDRAWAL COSTS
For each partial withdrawal, we deduct a transaction fee of 2% of the amount
withdrawn, not to exceed $25. This fee is intended to reimburse us for the cost
of processing the withdrawal. The transaction fee applies to all partial
withdrawals, including a Withdrawal without a surrender charge (described
below).
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A partial withdrawal charge may also be deducted from Policy Value. However, in
any Policy year, you may withdraw, without a partial withdrawal charge, up to:
- 10% of the Policy Value MINUS
- The total of any prior free withdrawals in the same Policy year ("Free 10%
Withdrawal")
The right to make the Free 10% Withdrawal is not cumulative from Policy year to
Policy year. For example, if only 8% of Policy Value were withdrawn in the
second Policy year, the amount you could withdraw in future Policy years would
not be increased by the amount you did not withdraw in the second Policy year.
We impose the partial withdrawal charge on any withdrawal greater than the Free
10% Withdrawal. The charge is 5.0% of the excess withdrawal, up to the amount of
the outstanding surrender charge. We will reduce the Policy 's outstanding
surrender charge by the amount of the partial withdrawal charge. The partial
withdrawal charge deducted will decrease existing surrender charges in inverse
order, as described above under "Surrender Charge." If no surrender charge
applies to the Policy at the time of the withdrawal, no partial withdrawal
charge will apply.
TRANSFER CHARGES
Currently, the first 12 transfers in a Policy year are free. We reserve the
right to limit the number of free transfers in a Policy year to six. After that,
we will deduct a $10 transfer charge from amounts transferred in that Policy
year. We reserve the right to increase the charge, but it will never exceed $25.
This charge reimburses us for the administrative costs of processing the
transfer.
Each of the following transfers of Policy Value from the sub-accounts to the
Fixed Account is free and does not count as one of the 12 free transfers in a
Policy year:
- A conversion within the first 24 months from Date of Issue or increase
- A transfer to the Fixed Account to secure a loan
- A reallocation of Policy Value within 20 days of the Date of Issue
- Dollar-Cost Averaging Option and Automatic Rebalancing Option
OTHER ADMINISTRATIVE CHARGES
We reserve the right to charge for other administrative costs we incur. While
there are no current charges for these costs, we may impose a charge for:
- Changing net payment allocation instructions
- Changing the allocation of Monthly Insurance Protection charges among the
various sub-accounts and the Fixed Account
- Providing a projection of values
We do not currently charge for these costs. Any future charge is guaranteed not
to exceed $25 per transaction.
POLICY LOANS
You may borrow money secured by your Policy Value at any time. There is no
minimum loan amount. The total amount you may borrow, including any outstanding
loan, is the loan value. The loan value is 90% of:
- the Policy Value MINUS
39
- any surrender charges
We will usually pay the loan within seven days after we receive the written
request. We may delay the payment of loans as stated in OTHER POLICY PROVISIONS
- -"Delay of Payments."
We will allocate the loan among the sub-accounts and the Fixed Account according
to your instructions. If you do not make an allocation, we will make a pro-rata
allocation. We will transfer Policy Value in each sub-account equal to the
Policy loan to the Fixed Account. We will not count this transfer as a transfer
subject to the transfer charge.
Policy Value equal to the outstanding loan will earn monthly interest in the
Fixed Account at an annual rate of 4.0%. NO OTHER INTEREST WILL BE CREDITED. The
loan interest rate charged by the Company accrues daily. The current annual
interest rate charged by the Company is 4.80%. The current annual rate of
interest charged on loans may change, but is guaranteed not to exceed 6.00%.
PREFERRED LOAN OPTION
The preferred loan option is automatically available to you, unless you request
otherwise. You may change a preferred loan to a non-preferred loan at any time
upon written request. A request for a preferred loan after the Final Payment
Date will terminate the optional Guaranteed Death Benefit Rider. Any part of the
outstanding loan that represents earnings under the Policy may be treated as a
preferred loan. There is some uncertainty as to the tax treatment of preferred
loans. Consult a qualified tax adviser (and see FEDERAL TAX CONSIDERATIONS).
Policy Value equal to the outstanding loan will earn monthly interest in the
Fixed Account at an annual rate of at least 4.0%. NO OTHER INTEREST WILL BE
CREDITED. The loan interest rate charged by the Company accrues daily. The
current annual loan interest rate charged by the Company for Preferred Loans is
4.00%. The current annual rate of interest charged on preferred loans may
change, but is guaranteed not to exceed 4.50%.
REPAYMENT OF OUTSTANDING LOAN
You may pay any loans before Policy lapse. We will allocate that part of the
Policy Value in the Fixed Account that secured a repaid loan to the sub-accounts
and Fixed Account according to your instructions. If you do not make a repayment
allocation, we will allocate Policy Value according to your most recent payment
allocation instructions. However, loan repayments allocated to the Variable
Account cannot exceed Policy Value previously transferred from the Variable
Account to secure the outstanding loan.
If the outstanding loan exceeds the amount needed to pay the Policy Value less
the next monthly deductions, the Policy will terminate. We will mail a notice of
termination to the last known address of you and any assignee. If you do not
make sufficient payment within 62 days after this notice is mailed, the Policy
will terminate with no value. See POLICY TERMINATION AND REINSTATEMENT. The
foreclosure of an outstanding loan will terminate the optional Guaranteed Death
Benefit Rider.
EFFECT OF POLICY LOANS
Policy loans will permanently affect the Policy Value and surrender value, and
may permanently affect the death benefit. The effect could be favorable or
unfavorable, depending on whether the investment performance of the sub-accounts
is less than or greater than the interest credited to the Policy Value in the
Fixed Account that secures the loan.
We will deduct any outstanding loan from the proceeds payable when the surviving
Insured dies or from a surrender.
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POLICY TERMINATION AND REINSTATEMENT
TERMINATION
Unless the Guaranteed Death Benefit Rider is in effect, the Policy will
terminate if:
- Policy Value is insufficient to cover the next Monthly Deduction plus loan
interest accrued OR
- Outstanding loans exceed the Policy Value
If one of these situations occurs, the Policy will be in default. You will then
have a grace period of 62 days, measured from the date of default, to pay a
premium sufficient to prevent termination. On the date of default, we will send
a notice to you and to any assignee of record. The notice will state the premium
due and the date by which it must be paid.
Failure to pay a sufficient premium within the grace period will result in
Policy termination. If the surviving Insured dies during the grace period, we
will deduct from the Net Death Benefit any monthly charges due and unpaid
through the Policy month in which the surviving Insured dies and any other
overdue charge.
During the first 48 Policy months following the Date of Issue or an increase in
the Face Amount, a guarantee may apply to prevent the Policy from terminating
because of insufficient Policy Value. This guarantee applies if, during this
period, you pay premiums that, when reduced by partial withdrawals and partial
withdrawal costs, equal or exceed specified minimum monthly payments. The
specified minimum monthly payments are based on the number of months the Policy,
increase in Face Amount or Policy change that causes a change in the minimum
monthly payment has been in force. A Policy change that causes a change in the
minimum monthly payment is a change in the Face Amount, underwriting
reclassifications of either Insured, or the addition or deletion of a Rider.
Except for the first 48 months after the Date of Issue or the effective date of
an increase, payments equal to the minimum monthly payment do not guarantee that
the Policy will remain in force.
If the optional Guaranteed Death Benefit Rider is in effect, the Policy will not
lapse regardless of the investment performance of the Variable Account. See
"Guaranteed Death Benefit Rider."
REINSTATEMENT
A terminated Policy may be reinstated within three years of the date of default
and before the Final Payment Date. The reinstatement takes effect on the monthly
processing date following the date you submit to us:
- Written application for reinstatement
- Evidence of insurability showing that the Insureds are insurable according
to our underwriting rules and
- A payment that, after the deduction of the payment expense charge, is
large enough to cover the minimum amount payable
Policies which have been surrendered may not be reinstated.
MINIMUM AMOUNT PAYABLE -- If reinstatement is requested when less than 48
Monthly Deductions have been paid since the Date of Issue or increase in the
Face Amount, you must pay for the lesser of three minimum monthly premiums and
three Monthly Deductions.
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If you request reinstatement more than 48 Monthly Processing Dates from the Date
of Issue or increase in the Face Amount, you must pay 3 monthly deductions.
SURRENDER CHARGE -- The surrender charge on the date of reinstatement is the
surrender charge that was in effect on the date of termination.
POLICY VALUE ON REINSTATEMENT -- The Policy Value on the date of reinstatement
is:
- The net payment made to reinstate the Policy and interest earned from the
date the payment was received at our Principal Office PLUS
- The Policy Value less any outstanding loan on the date of default (not to
exceed the surrender charge on the date of reinstatement) MINUS
- The Monthly Deductions due on the date of reinstatement
You may reinstate any outstanding loan.
OTHER POLICY PROVISIONS
POLICY OWNER
The Policy Owner is an Insured unless another Policy owner has been named in the
application. As Policy owner, you are entitled to exercise all rights under your
Policy while the Insured is alive, with the consent of any irrevocable
beneficiary. The consent of the Insureds is required whenever the Face Amount is
increased.
BENEFICIARY
The beneficiary is the person or persons to whom the Net Death Benefit is
payable on the surviving Insured's death. Unless otherwise stated in the Policy,
the beneficiary has no rights in the Policy before the surviving Insured dies.
While either Insured is alive, you may change the beneficiary, unless you have
declared the beneficiary to be irrevocable. If no beneficiary is alive when the
surviving Insured dies, the Policy owner (or the Policy owner's estate) will be
the beneficiary. If more than one beneficiary is alive when the surviving
Insured dies, we will pay each beneficiary in equal shares, unless you have
chosen otherwise. Where there is more than one beneficiary, the interest of a
beneficiary who dies before the surviving Insured will pass to surviving
beneficiaries proportionally.
ASSIGNMENT
You may assign a Policy as collateral or make an absolute assignment. All Policy
rights will be transferred as to the assignee's interest. The consent of the
assignee may be required to make changes in payment allocations, make transfers
or to exercise other rights under the Policy. We are not bound by an assignment
or release thereof, unless it is in writing and recorded at our Principal
Office. When recorded, the assignment will take effect on the date the written
request was signed. Any rights the assignment creates will be subject to any
payments we made or actions we took before the assignment is recorded. We are
not responsible for determining the validity of any assignment or release.
THE FOLLOWING POLICY PROVISIONS MAY VARY BY STATE.
LIMIT ON RIGHT TO CHALLENGE POLICY
We cannot challenge the validity of your Policy if both Insureds were alive
after the Policy had been in force for two years from the Date of Issue. Also,
we cannot challenge the validity of any increase in the Face
42
Amount if both Insureds were alive after the increase was in force for two years
from the effective date of the increase.
SUICIDE
The Net Death Benefit will not be paid if either Insured commits suicide, while
sane or insane, within two years from the Date of Issue. Instead, we will pay
the beneficiary all payments made for the Policy, without interest, less any
Outstanding Loan and partial withdrawals. If either Insured commits suicide,
while sane or insane, within two years from any increase in Face Amount, we will
not recognize the increase. We will pay to the beneficiary the Monthly Insurance
Protection charges plus monthly expense charges paid for the increase.
NOTICE OF FIRST INSURED TO DIE
Within 90 days of the death of the first Insured to die, or as soon thereafter
as is reasonably possible, you must mail due proof of such death to the
Principal Office.
MISSTATEMENT OF AGE OR SEX
If (a) the Age or sex of either Insured is not correctly stated in the Policy
application and (b) death of the surviving Insured occurs prior to the Final
Premium Payment Date, we will adjust benefits under the Policy to reflect the
correct age and sex. The adjusted benefit will be the benefit that the most
recent Monthly Insurance Protection charge would have purchased for the correct
age and sex. We will not reduce the death benefit to less than the Guideline
Minimum Death Benefit. For a unisex Policy, there is no adjusted benefit for
misstatement of sex.
DELAY OF PAYMENTS
Amounts payable from the Variable Account for surrender, partial withdrawals, or
death of the surviving Insured, as well as Net Death Benefit, Policy loans and
transfers may be postponed whenever:
- The New York Stock Exchange is closed other than customary weekend and
holiday closings
- The SEC restricts trading on the New York Stock Exchange
- The SEC determines an emergency exists, so that disposal of securities is
not reasonably practicable or it is not reasonably practicable to compute
the value of the Variable Account's net assets
We may delay paying any amounts derived from payments you made by check until
the check has cleared your bank. We reserve the right to defer amounts payable
from the Fixed Account. This delay may not exceed six months.
FEDERAL TAX CONSIDERATIONS
The following summary of federal tax considerations is based on our
understanding of the present federal income tax laws as they are currently
interpreted. Legislation may be proposed which, if passed, could adversely and
possibly retroactively affect the taxation of the Policies. This summary is not
exhaustive, does not purport to cover all situations, and is not intended as tax
advice. We do not address tax provisions that may apply if the Policy owner is a
corporation or the trustee of an employee benefit plan. You should consult a
qualified tax adviser to apply the law to your circumstances.
43
THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code.
We file a consolidated tax return with our parent and affiliates. We do not
currently charge for any income tax on the earnings or realized capital gains in
the Variable Account. We do not currently charge for federal income taxes
respecting the Variable Account. A charge may apply in the future for any
federal income taxes we incur. The charge may become necessary, for example, if
there is a change in our tax status. Any charge would be designed to cover the
federal income taxes on the investment results of the Variable Account.
Under current laws, the Company may incur state and local taxes besides premium
taxes. These taxes are not currently significant. If there is a material change
in these taxes affecting the Variable Account, we may charge for taxes paid or
for tax reserves.
TAXATION OF THE POLICIES
We believe that the Policies described in this Prospectus are life insurance
contracts under Section 7702 of the Code. Section 7702 affects the taxation of
life insurance contracts and places limits on the relationship of the Policy
Value to the death benefit. As life insurance contracts, the Net Death Benefits
of the Policies are excludable from the gross income of the beneficiaries. Also,
any increase in Policy Value is not taxable until received by you or your
designee (but see "Modified Endowment Policies").
Federal tax law requires that the investment of each sub-account funding the
Policies is adequately diversified according to Treasury regulations. Although
we do not have control over the investments of the funds, we believe that the
funds currently meet the Treasury's diversification requirements. We will
monitor continued compliance with these requirements.
The Treasury Department has announced that previous regulations on
diversification do not provide guidance concerning the extent to which Policy
owners may direct their investments to divisions of a separate investment
account. Regulations may provide guidance in the future. The Policies or our
administrative rules may be modified as necessary to prevent a Policy owner from
being considered the owner of the assets of the Variable Account.
A surrender, partial withdrawal, change in the death benefit option, change in
the Face Amount, lapse with Policy loan outstanding, or assignment of the Policy
may have tax consequences. Within the first fifteen Policy years, a distribution
of cash required under Section 7702 of the Code because of a reduction of
benefits under the Policy will be taxed to the Policy owner as ordinary income
respecting any investment earnings. Federal, state and local income, estate,
inheritance and other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Insured, Policy owner or
beneficiary.
POLICY LOANS
We believe that non-preferred loans received under the Policy will be treated as
an indebtedness of the Policy Owner for federal income tax purposes. Under
current law, these loans will not constitute income for the Policy Owner while
the Policy is in force (but see "Modified Endowment Policies"). There is a risk,
however, that a preferred loan may be characterized by the Internal Revenue
Service ("IRS") as a withdrawal and taxed accordingly. At the present time, the
IRS has not issued any guidance on whether loans with the attributes of a
preferred loan should be treated differently than a non-preferred loan. This
lack of specific guidance makes the tax treatment of preferred loans uncertain.
In the event IRS guidelines are issued in the future, you may revoke your
request for a preferred loan.
Section 264 of the Code restricts the deduction of interest on Policy loans.
Consumer interest paid on Policy loans under an individually owned Policy is not
tax deductible. Generally, no tax deduction for interest is allowed on Policy
loans, if the Insured is an officer or employee of, or is financially interested
in, any business
44
carried on by the taxpayer. There is an exception to this rule which permits a
deduction for interest on loans up to $50,000 related to any policies covering
the greater of (1) five individuals or (2) the lesser of (a) 5% of the total
number of officers and employees of the corporation or (b) 20 individuals.
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") adversely
affects the tax treatment of distributions under so-called "modified endowment
contracts." Under the 1988 Act, a Policy may be considered a "modified endowment
contract" if:
Total payments during the first seven Policy years (or within seven years of a
material change in the Policy ) EXCEED
- The total net level payments payable had the Policy provided for paid-up
future benefits after making seven level payments.
In addition, if benefits are reduced at anytime during the life of the Policy,
there may be adverse tax consequences. Please consult your tax adviser.
If the Policy is considered a modified endowment contract, distributions
(including Policy loans, partial withdrawals, surrenders and assignments) will
be taxed on an "income-first" basis and includible in gross income to the extent
that the surrender value exceeds the Policy owner's investment in the Policy.
Any other amounts will be treated as a return of capital up to the Policy
Owner's basis in the Policy. A 10% tax is imposed on that part of any
distribution that is includible in income, unless the distribution is:
- Made after the taxpayer becomes disabled,
- Made after the taxpayer attains age 59 1/2, or
- Part of a series of substantially equal periodic payments for the
taxpayer's life or life expectancy or joint life expectancies of the
taxpayer and beneficiary.
All modified endowment contracts issued by the same insurance company to the
same Policy owner during any 12-month period will be treated as a single
modified endowment contract in computing taxable distributions.
Currently, we review each Policy when payments are received to determine if the
payment will render the Policy a modified endowment contract. If a payment would
so render the Policy, we will notify you of the option of requesting a refund of
the excess payment. The refund process must be completed within 60 days after
the Policy anniversary or the Policy will be permanently classified as a
modified endowment contract.
ESTATE AND GENERATION-SKIPPING TAXES
If the Policy Owner is the surviving Insured, at the death of the surviving
insured the Net Death Benefit will generally be includible in his or her estate
for purposes of federal estate tax. If the Policy Owner is not the surviving
Insured, the fair market value of the Policy would be included in the Policy
Owner's estate upon the Policy Owner's death. Nothing would be includible in the
surviving Insured's estate if he or she neither retained incidents of ownership
at death nor had given up ownership within three years before death.
Federal estate tax is integrated with federal gift tax under a unified rate
schedule. In general, estates less than $625,000 will not incur a federal estate
tax liability. In addition, an unlimited marital deduction may be available for
federal estate and gift tax purposes. The unlimited marital deduction permits
the deferral of taxes
45
until the death of the surviving spouse, when the death proceeds would be
available to pay taxes due and other expenses incurred.
As a general rule, if an Insured is the Policy Owner, and death proceeds are
payable to a person two or more generations younger than the Policy Owner, a
generation-skipping tax may be payable on the death proceeds at rates similar to
the maximum estate tax rate in effect at the time. If the Policy Owner (whether
or not he or she is an insured) transfers ownership of the Policy to someone two
or more generations younger, the transfer may be subject to the
generation-skipping tax. The taxable amount would be the value of the Policy. If
the death proceeds are not includible in the Insured's estate (because the
Insured retained no incidents of ownership and did not relinquish ownership
within three years before death), the payment of the death proceeds to the
beneficiary is not subject to the generation-skipping tax regardless of the
beneficiary's generation. The generation-skipping tax provisions generally apply
to transfers which would be subject to the gift and estate tax rules.
Individuals are generally allowed an aggregate generation-skipping tax exemption
of $1 million. Because these rules are complex, the Policy Owner should consult
with a tax adviser for specific information where benefits are passing to
younger generations.
VOTING RIGHTS
Where the law requires, we will vote fund shares that each sub-account holds
according to instructions received from Policy Owners with Policy Value in the
sub-account. If, under the 1940 Act or its rules, we may vote shares in our own
right, whether or not the shares relate to the Policies, we reserve the right to
do so.
We will provide each person having a voting interest in a fund with proxy
materials and voting instructions. We will vote shares held in each sub-account
for which no timely instructions are received in proportion to all instructions
received for the sub-account. We will also vote in the same proportion our
shares held in the Variable Account that does not relate to the Policies.
We will compute the number of votes that a Policy owner has the right to
instruct on the record date established for the fund. This number is the
quotient of:
- Each Policy Owner's Policy Value in the sub-account divided by
- The net asset value of one share in the fund in which the assets of the
sub-account are invested
We may, when required by state insurance regulatory authorities, disregard
voting instructions if the instructions require that Fund shares be voted so as
(1) to cause to change in the sub-classification or investment objective of one
or more of the Funds, or (2) to approve or disapprove an investment advisory
contract for the Funds. In addition, we may disregard voting instructions that
are in favor of any change in the investment policies or in any investment
adviser or principal underwriter if the change has been initiated by Contract
Owners or the Trustees. Our disapproval of any such change must be reasonable
and, in the case of a change in investment policies or investment adviser, based
on a good faith determination that such change would be contrary to state law or
otherwise is inappropriate in light of the objectives and purposes of the Funds.
In the event we do disregard voting instructions, a summary of and the reasons
for that action will be included in the next periodic report to Contract Owners.
46
DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
Bruce C. Anderson Director (since 1996), Vice President (since 1984)
Director and Assistant Secretary (since 1992) of First
Allmerica
Mary Eldridge Secretary (since 1999) of First Allmerica; Secretary
Secretary (since 1999) of Allmerica Investments, Inc.; and
Secretary (since 1999) of Allmerica Financial
Investment Management Services, Inc., Attorney with
First Allmerica (since 1998), Employee of First
Allmerica (since 1992)
Warren E. Barnes Vice President (since 1996) and Corporate Controller
Vice President and Corporate (since 1998) of First Allmerica
Controller
Robert E. Bruce Director and Chief Information Officer (since 1997)
Director and Chief Information and Vice President (since 1995) of First Allmerica;
Officer and Corporate Manager (1979 to 1995) of Digital
Equipment Corporation
John P. Kavanaugh Director and Chief Investment Officer (since 1996)
Director, Vice President and Chief and Vice President (since 1991) of First Allmerica;
Investment Officer and Vice President (since 1998) of Allmerica
Financial Investment Management Services, Inc.
John F. Kelly Director (since 1996), Senior Vice President (since
Director, Vice President and 1986), General Counsel (since 1981) and Assistant
General Counsel Secretary (since 1991) of First Allmerica; Director
(since 1985) of Allmerica Investments, Inc.; and
Director (since 1990) of Allmerica Financial
Investment Management Services, Inc.
J. Barry May Director (since 1996) of First Allmerica; Director
Director and President (since 1996) of The Hanover Insurance
Company; and Vice President (1993 to 1996) of The
Hanover Insurance Company
James R. McAuliffe Director (since 1996) of First Allmerica; Director
Director (since 1992), President (since 1994) and Chief
Executive Officer (since 1996) of Citizens Insurance
Company of America
John F. O'Brien Director, President and Chief Executive Officer
Director and Chairman of the Board (since 1989) of First Allmerica; Director (since
1989) of Allmerica Investments, Inc.; and Director
and Chairman of the Board (since 1990) of Allmerica
Financial Investment Management Services, Inc.
Edward J. Parry, III Director and Chief Financial Officer (since 1996) and
Director, Vice President, Chief Vice President and Treasurer (since 1993) of First
Financial Officer and Treasurer Allmerica; Treasurer (since 1993) of Allmerica
Investments, Inc.; and Treasurer (since 1993) of
Allmerica Financial Investment Management
Services, Inc.
Richard M. Reilly Director (since 1996) and Vice President (since 1990)
Director, President and Chief of First Allmerica; Director (since 1990) of
Executive Officer Allmerica Investments, Inc.; and Director and
President (since 1998) of Allmerica Financial
Investment Management Services, Inc.
47
NAME AND POSITION WITH COMPANY PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------------------------ ----------------------------------------------
Robert P. Restrepo, Jr. Director and Vice President (since 1998) of First
Director Allmerica; Chief Executive Officer (1996 to 1998) of
Travelers Property & Casualty; Senior Vice President
(1993 to 1996) of Aetna Life & Casualty Company
Eric A. Simonsen Director (since 1996) and Vice President (since 1990)
Director and Vice President of First Allmerica; Director (since 1991) of
Allmerica Investments, Inc.; and Director (since
1991) of Allmerica Financial Investment Management
Services, Inc.
DISTRIBUTION
Allmerica Investments, Inc., an indirect wholly owned subsidiary of First
Allmerica, acts as the principal underwriter and general distributor of the
Policies. Allmerica Investments, Inc. is registered with the SEC as a
broker-dealer and is a member of the National Association of Securities
Dealers, Inc. ("NASD"). Broker-dealers sell the Policies through their
registered representatives who are appointed by us.
We pay to broker-dealers who sell the Policy commissions based on a commission
schedule. After the Date of Issue or an increase in Face Amount, commissions
will be 90% of the first-year payments up to a payment amount we established and
4.00% of any excess. Commissions will be 4.00% for subsequent payments in Years
2-10, and 2% for Years 11 and over. Alternate commission schedules are available
with lower commission limits on first year commissions, excess commissions, and
renewals, plus on any annual compensation of up to .25% of Policy Value. To the
extent permitted by NASD rules, overrides and promotional incentives or payments
may also be provided to General Agents, independent marketing organizations, and
broker-dealers based on sales volumes, the assumption of wholesaling functions
or other sales-related criteria. Other payments may be made for other services
that do not directly involve the sale of the Policies. These services may
include the recruitment and training of personnel, production of promotional
literature, and similar services.
Commissions paid on the Policies, including other incentives or payments, are
not charged to Policy Owners or to the Variable Account.
REPORTS
We will maintain the records for the Variable Account. We will promptly send you
statements of transactions under your Policy, including:
- Payments
- Changes in Face Amount
- Changes in death benefit option
- Transfers among Sub-Accounts and the Fixed Account
- Partial withdrawals
- Increases in loan amount or loan repayments
- Lapse or termination for any reason
- Reinstatement
48
We will send an annual statement to you that will summarize all of the above
transactions and deductions of charges during the Policy year. It will also set
forth the status of the death benefit, Policy Value, Surrender Value, amounts in
the Sub-Accounts and Fixed Account, and any Policy loans. We will send you
reports containing financial statements and other information for the Variable
Account, the Trust, Fidelity VIP and T. Rowe Price as the 1940 Act requires.
LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Variable Account or its
assets. The Company and Allmerica Investments, Inc. are not involved in any
litigation that is materially important to their total assets.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to law, to make additions to, deletions from, or
substitutions for the shares that are held in the Sub-Accounts. We may redeem
the shares of a Fund and substitute shares of another registered open-end
management company, if:
- The shares of the fund are no longer available for investment or
- In our judgment further investment in the Fund would be improper based on
the purposes of the Variable Account or the affected Sub-Account
Where the 1940 Act or other law requires, we will not substitute any shares
respecting a Policy interest in a sub-account without notice to Policy Owners
and prior approval of the SEC and state insurance authorities. The Variable
Account may, as the law allows, purchase other securities for other policies or
allow a conversion between policies on a Policy Owner's request.
We reserve the right to establish additional sub-accounts funded by a new fund
or by another investment company. Subject to law, we may, in our sole
discretion, establish new sub-accounts or eliminate one or more sub-accounts.
Shares of the funds are issued to other separate accounts of the Company and its
affiliates that fund variable annuity contracts ("mixed funding"). Shares of the
Portfolios of Fidelity VIP and T. Rowe Price are also issued to other
unaffiliated insurance companies ("shared funding"). It is conceivable that in
the future such mixed funding or shared funding may be disadvantageous for
variable life Policy Owners or variable annuity Policy Owners. The Company, the
Trust, Fidelity VIP and T. Rowe Price do not believe that mixed funding is
currently disadvantageous to either variable life insurance Policy Owners or
variable annuity Policy Owners. The Company and the Trustees will monitor events
to identify any material conflicts among Policy Owners because of mixed and
shared funding. If the Trustees conclude that separate funds should be
established for variable life and variable annuity separate accounts, we will
bear the expenses.
We may change the Policy to reflect a substitution or other change and will
notify Policy Owners of the change. Subject to any approvals the law may
require, the Variable Account or any sub-accounts may be:
- Operated as a management company under the 1940 Act
- Deregistered under the 1940 Act if registration is no longer required or
- Combined with other sub-accounts or our other separate accounts
49
FURTHER INFORMATION
We have filed a 1933 Act registration statement for this offering with the SEC.
Under SEC rules and regulations, we have omitted from this Prospectus part of
the registration statement and amendments. Statements contained in this
Prospectus are summaries of the Policy and other legal documents. The complete
documents and omitted information may be obtained from the SEC's Principal
Office in Washington, D.C., on payment of the SEC's prescribed fees.
MORE INFORMATION ABOUT THE FIXED ACCOUNT
This Prospectus serves as a disclosure document only for the aspects of the
Policy relating to the Variable Account. For complete details on the Fixed
Account, read the Policy itself. The Fixed Account and other interests in the
general account are not regulated under the 1933 Act or the 1940 Act because of
exemption and exclusionary provisions. The 1933 Act provisions on the accuracy
and completeness of statements made in prospectuses may apply to information on
the fixed part of the Policy and the Fixed Account. The SEC has not reviewed the
disclosures in this section of the Prospectus.
GENERAL DESCRIPTION
You may allocate part or all of your net payments to accumulate at a fixed rate
of interest in the Fixed Account. The Fixed Account is a part of our general
account. The general account is made up of all of our general assets other than
those allocated to any separate account. Allocations to the Fixed Account become
part of our general account assets and are used to support insurance and annuity
obligations.
FIXED ACCOUNT INTEREST
We guarantee amounts allocated to the Fixed Account as to principal and a
minimum rate of interest. The minimum interest we will credit on amounts
allocated to the Fixed Account is 4.0% compounded annually. "Excess interest"
may or may not be credited at our sole discretion. We will guarantee initial
rates on amounts allocated to the Fixed Account, either as payments or
transfers, to the next Policy anniversary. At each Policy anniversary, we will
credit the then current interest rate to money remaining in the Fixed Account.
We will guarantee this rate for one year. Thus, if payments have been allocated
to the Fixed Account for less than one Policy year, the interest rate credited
to such payments may be greater or less than the interest rate credited to
payments that have been allocated to the Policy for more than one Policy year.
Policy loans may also be made from the Policy Value in the Fixed Account. We
will credit that part of the Policy Value that is equal to any Outstanding Loan
with interest at an effective annual yield of at least 4.0%.
We may delay transfers, surrenders, partial withdrawals, Net Death Benefits and
Policy loans up to six months. However, if payment is delayed for 30 days or
more, we will pay interest at our then current interest rate. The rate applied
will be at least equal to the rate required by state law for deferment of
payments. Amounts from the Fixed Account used to make payments on policies that
we or our affiliates issue will not be delayed.
TRANSFERS, SURRENDERS, PARTIAL WITHDRAWALS AND POLICY LOANS
If a Policy is surrendered or if a partial withdrawal is made, a surrender
charge or partial withdrawal charge may be imposed. On a decrease in Face
Amount, the surrender charge deducted is a fraction of the charge that would
apply to a full surrender. We deduct partial withdrawals from Policy Value
allocated to the Fixed Account on a last-in/first-out basis.
The first 12 transfers in a Policy year currently are free. After that, we will
deduct a $10 transfer charge for each transfer in that Policy year. The transfer
privilege is subject to our consent and to our then current rules.
50
Policy loans may also be made from the Policy Value in the Fixed Account. We
will credit that part of the Policy Value that is equal to any outstanding loan
with interest at an effective annual yield of at least 4.0%.
We may delay transfers, surrenders, partial withdrawals, Net Death Benefits and
Policy loans up to six months. However, if payment is delayed for 30 days or
more, we will pay interest at least equal to an effective annual yield of 3.0%
per year for the deferment. Amounts from the Fixed Account used to make payments
on policies that we or our affiliates issue will not be delayed.
INDEPENDENT ACCOUNTANTS
The financial statements of the Company as of December 31, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998, included in this
Prospectus constituting part of this Registration Statement, have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of the Company included herein should be considered
only as bearing on the ability of the Company to meet its obligations under the
Policy.
YEAR 2000 DISCLOSURE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a third party assessment, the Company determined that significant
portions of its software required modification or replacement to enable its
computer systems to properly process dates beyond December 31, 1999. The Company
has completed the process of modifying or replacing existing software and
believes that this action will resolve the Year 2000 issue. However, should
there be serious unanticipated interruptions from unknown sources, the
Year 2000 issue could have a material adverse impact on the operations of the
Company. Specifically, the Company could experience, among other things, an
interruption in its ability to collect and process premiums, process claim
payments, safeguard and manage its invested assets, accurately maintain Policy
holder information, accurately maintain accounting records, and perform customer
service. Any of these specific events, depending on duration, could have a
material adverse impact on the results of operations and the financial position
of the Company.
The Company is engaged in formal communications with all of its suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 issue. The Company's total Year 2000
project cost and estimates to complete the project include the estimated costs
and time associated with the Company's involvement on a third party's Year 2000
issue, and are based on presently available information. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company. The Company does not believe that it has
material exposure to contingencies related to the Year 2000 issue for the
products it has sold. Although the Company does not believe that there is a
material contingency associated with the Year 2000 project, there can be no
assurance that exposure for material contingencies will not arise.
The cost of the Year 2000 project is being expensed as incurred and is being
funded primarily through a reallocation of resources from discretionary projects
and a reduction in systems maintenance and support costs. Therefore, the Year
2000 project is not expected to result in any significant incremental technology
cost and is not expected to have a material effect on the results of operations.
The Company and its affiliates have
51
incurred and expensed approximately $59 million related to the assessment, plan
development and substantial completion of the Year 2000 project, through
June 30, 1999. The total remaining cost of the project is estimated between
$10-20 million.
FINANCIAL STATEMENTS
Financial Statements for the Company and for the Variable Account are included
in this Prospectus, beginning immediately after the Appendices. The financial
statements of the Company should be considered only as bearing on our ability to
meet our obligations under the Policy. They should not be considered as bearing
on the investment performance of the assets held in the Variable Account.
52
APPENDIX A
GUIDELINE MINIMUM DEATH BENEFIT FACTORS TABLE
(DEATH BENEFIT OPTION 1 AND DEATH BENEFIT OPTION 2)
Under Death Benefit Option 1 and Death Benefit Option 2, the Guideline Minimum
Death Benefit is a percentage of the Policy Value as set forth below:
GUIDELINE MINIMUM DEATH BENEFIT FACTORS
Younger Insured's Percentage of
Attained Age Policy Value
- ------------ -------------
0- 40................................................. 250%
41.................................................... 243%
42.................................................... 236%
43.................................................... 229%
44.................................................... 222%
45.................................................... 215%
46.................................................... 209%
47.................................................... 203%
48.................................................... 197%
49.................................................... 191%
50.................................................... 185%
51.................................................... 178%
52.................................................... 171%
53.................................................... 164%
54.................................................... 157%
55.................................................... 150%
56.................................................... 146%
57.................................................... 142%
58.................................................... 138%
59.................................................... 134%
60.................................................... 130%
61.................................................... 128%
62.................................................... 126%
63.................................................... 124%
64.................................................... 122%
65.................................................... 120%
66.................................................... 119%
67.................................................... 118%
68.................................................... 117%
69.................................................... 116%
70.................................................... 115%
71.................................................... 113%
72.................................................... 111%
73.................................................... 109%
74.................................................... 107%
75 -90................................................ 105%
91.................................................... 104%
92.................................................... 103%
93.................................................... 102%
94.................................................... 101%
95 and above.......................................... 100%
A-1
APPENDIX B
OPTIONAL INSURANCE BENEFITS
This Appendix provides only a summary of other insurance benefits available by
Rider for an additional charge. For more information, contact your
representative.
SPLIT OPTION RIDER/EXCHANGE OPTION RIDER
This Rider, WHICH IS AVAILABLE ONLY AT DATE OF ISSUE, permits you to split the
Policy into two life insurance policies, one covering each Insured singly,
subject to Company guidelines.
OTHER INSURED RIDER
This Rider provides a term insurance benefit for up to five Insureds. At present
this benefit is only available for the spouse and children of the primary
Insured. The Rider includes a feature that allows the "other Insured" to convert
the coverage to a flexible premium adjustable life insurance Policy.
SURVIVING TERM LIFE INSURANCE RIDER
This Rider provides an additional term insurance benefit for the surviving
Insured.
FOUR-YEAR TERM RIDER
This Rider provides a term insurance benefit during the first four Policy years,
payable upon the death of the last surviving Insured during the coverage period.
GUARANTEED DEATH BENEFIT RIDER
This Rider, which is available only at issue, (a) guarantees that your Policy
will not lapse regardless of the Performance of the Variable Account and (b)
provides a guaranteed Net Death Benefit.
Certain Riders May Not Be Available In All States.
B-1
APPENDIX C
SURRENDER CHARGES
If you surrender the Policy, reduce the Face Amount, or the Policy lapses during
the first nine Policy years, we will assess a surrender charge, which will be
deducted from the Policy Value. This charge is imposed in part to recover
distribution expenses and in part to recover certain first year administrative
costs. The initial surrender charges will be specified in your Policy and will
be in compliance with each state's nonforfeiture law.
When we issue your Policy, we determine the initial surrender charge. To
determine the initial surrender charge, we multiply the initial Face Amount of
your Policy by a rate per thousand dollars of Face Amount. The applicable rate
depends on the sexes, issue ages and underwriting classes of the Insureds. For
the following examples of Insureds, the applicable rates per $1000 of Face
Amount are:
Male Preferred Non-Smoker Age 35, Female Preferred
Non-Smoker Age 35 $18.03
Male Preferred Non-Smoker Age 45, Female Preferred
Non-Smoker Age 45 $22.60
Male Preferred Non-Smoker Age 55, Female Preferred
Non-Smoker Age 55 $30.52
Male Preferred Smoker Age 55, Female Preferred Non-Smoker
Age 55 $32.33
Male Preferred Non-Smoker Age 65, Female Preferred
Non-Smoker Age 65 $44.67
Male Preferred Non-Smoker Age 75, Female Preferred
Non-Smoker Age 75 $52.76
Accordingly, if the Insureds were a male preferred non-smoker age 55, a female
preferred non-smoker age 55, and the Policy's Face Amount was $500,000, the
initial surrender charge would be $15,260 ($30.52 x 500).
The maximum rate per $1000 of Face Amount, considering all possible combinations
of sexes, issue ages, and underwriting classes of the Insureds, is $54.65.
The surrender charge will decrease by one-ninth (11.11%) each year to zero by
the 10th contract year.
C-1
APPENDIX D
MONTHLY EXPENSE CHARGES
A monthly expense charge is computed on the Date of Issue and on each increase
in Face Amount. The factors used to compute the monthly expense charges vary
with the gender and issue ages of the Insureds as indicated in the methodology
below.
Start with the actual ages of the Insured on the date of issue of the Policy or
the date of an increase in Face Amount.
STEP 1. ADJUST AGES FOR GENDER
Subtract years from the ages based on gender. The table below shows the
adjustments.
Gender Subtract from age (years)
- ------ -------------------------
Female 5
Male 0
Unisex 3
STEP 2. DETERMINE ADD-ON FACTOR
Subtract the younger adjusted age from the older adjusted age. Find the
difference between the two in the following table to determine the add-on
factor.
DIFFERENCE IN ADD-ON DIFFERENCE IN ADD-ON
ADJUSTED AGE FACTOR ADJUSTED AGE FACTOR
(YEARS) (YEARS) (YEARS) (YEARS)
- -------------- ------- -------------- -------
0 2 40-44 14
1-2 3 45-47 15
3-4 4 48-50 16
5-6 5 51-53 17
7-9 6 54-56 18
10-12 7 57-60 19
13-15 8 61-64 20
16-18 9 65-69 21
19-23 10 70-75 22
24-28 11 76-82 23
29-34 12 83-91 24
35-39 13 92-100 25
STEP 3. CALCULATE MONTHLY EXPENSE CHARGE AGE
Add the add-on factor (from Step 2) to the younger adjusted age (from Step 1).
The sum is the monthly expense charge age.
STEP 4. DETERMINE THE MONTHLY EXPENSE CHARGE
Find the monthly expense charge age in the following table to determine the
monthly unit expense charge rate. Then multiply the monthly unit expense charge
rate by (Face Amount * .001).
D-1
MONTHLY EXPENSE CHARGES PER $1000 OF FACE
Monthly Expense Monthly Unit Monthly Expense Monthly Unit
Charge Age Expense Charge Charge Age Expense Charge
- ---------------- -------------- ---------------- --------------
0 $ 0.02 43 $ 0.14
1 $ 0.02 44 $ 0.15
2 $ 0.02 45 $ 0.16
3 $ 0.02 46 $ 0.16
4 $ 0.02 47 $ 0.17
5 $ 0.03 48 $ 0.18
6 $ 0.03 49 $ 0.18
7 $ 0.03 50 $ 0.19
8 $ 0.03 51 $ 0.21
9 $ 0.03 52 $ 0.22
10 $ 0.03 53 $ 0.24
11 $ 0.03 54 $ 0.25
12 $ 0.04 55 $ 0.27
13 $ 0.04 56 $ 0.29
14 $ 0.04 57 $ 0.31
15 $ 0.04 58 $ 0.33
16 $ 0.04 59 $ 0.35
17 $ 0.04 60 $ 0.38
18 $ 0.05 61 $ 0.40
19 $ 0.05 62 $ 0.42
20 $ 0.05 63 $ 0.44
21 $ 0.05 64 $ 0.46
22 $ 0.06 65 $ 0.49
23 $ 0.06 66 $ 0.50
24 $ 0.06 67 $ 0.51
25 $ 0.06 68 $ 0.52
26 $ 0.07 69 $ 0.53
27 $ 0.07 70 $ 0.54
28 $ 0.07 71 $ 0.56
29 $ 0.07 72 $ 0.58
30 $ 0.08 73 $ 0.60
31 $ 0.08 74 $ 0.61
32 $ 0.08 75 $ 0.63
33 $ 0.09 76 $ 0.65
34 $ 0.09 77 $ 0.67
35 $ 0.09 78 $ 0.69
36 $ 0.10 79 $ 0.71
37 $ 0.10 80 $ 0.73
38 $ 0.11 81 $ 0.74
39 $ 0.12 82 $ 0.76
40 $ 0.12 83 $ 0.78
41 $ 0.13 84 $ 0.80
42 $ 0.14 85 $ 0.83
D-2
EXAMPLE
Assume a male, age 52, and a female, age 48, apply for a Policy with a Face
Amount of $350,000.
STEP 1. ADJUST AGES FOR GENDER
The adjusted age for the male is 52 years (from the table, 52 + 0 = 52). The
adjusted age for the female is 53 years (from the table, 48 + 5 = 53).
STEP 2. DETERMINE ADD-ON FACTOR
The difference between the adjusted ages is 1 year (53 years - 52 years = 1
year). From the table in Step 2 above, the add- on factor is 3 years.
STEP 3. CALCULATE MONTHLY EXPENSE CHARGE AGE
Adding the add-on factor of 3 years (from Step 2) to the younger adjusted age of
52 years (from Step 1) results in a monthly expense charge age of 55 years.
STEP 4. DETERMINE THE MONTHLY EXPENSE CHARGE
Based on the monthly expense charge age of 55 years, from the above table the
monthly unit expense charge rate $0.27 per $1000 of Face Amount. For the
$350,000 Policy in this example, the Monthly Expense Charge is $94.50 (350 time
$0.27).
D-3
APPENDIX E
ILLUSTRATIONS
The following tables illustrate the way in which the Policy 's death benefit and
Policy Value could vary over an extended period of time. ON REQUEST, WE WILL
PROVIDE A COMPARABLE ILLUSTRATION BASED ON THE PROPOSED INSURED'S AGE, SEX, AND
UNDERWRITING CLASS, AND THE REQUESTED FACE AMOUNT, DEATH BENEFIT OPTION AND
RIDERS.
ASSUMPTIONS
The tables illustrate a Policy issued on the lives of both Insureds, each Age
55, under a Standard Underwriting Class and qualifying for the non-smoker
discount. The tables also illustrate the guaranteed cost of insurance rates and
the current cost of insurance rates.
The tables illustrate the Policy Values that would result based upon the
assumptions that no Policy loans have been made, that you have not requested an
increase or decrease in the initial Face Amount, that no partial withdrawals
have been made, and that no transfers above 12 have been made in any Policy year
(so that no transaction or transfer charges have been incurred).
The tables assume that all premiums are allocated to and remain in the Separate
Account for the entire period shown, and are based on hypothetical gross
investment rates of return for the Underlying Fund (i.e., investment income and
capital gains and losses, realized or unrealized) equivalent to constant gross
(after tax) annual rates of 0%, 6%, and 12%. The second column of the tables
shows the amount which would accumulate if an amount equal to the Guideline
Annual Premium were invested to earn interest (after taxes) at 5% compounded
annually.
The Policy Values and Death Proceeds would be different from those shown if the
gross annual investment rates of return averaged 0%, 6%, and 12% over a period
of years, but fluctuated above or below such averages for individual Policy
years. The values would also be different depending on the allocation of a
Policy 's total Policy Value among the Sub-Accounts of the Separate Account, if
the actual rates of return averaged 0%, 6% or 12, but the rates of each
Underlying Fund varied above and below such averages.
DEDUCTIONS FOR CHARGES
The amounts shown in the tables take into account the deduction of the tax
charges and payment expense charge from premiums and the monthly deduction from
Policy Value.
EXPENSES OF THE UNDERLYING FUNDS
The amounts shown in the tables also take into account the Underlying Fund
advisory fees and operating expenses, which are assumed to be at an annual rate
of 0.90% of the average daily net assets of the Underlying Funds. The actual
fees and expenses of each Underlying Fund vary, and in 1998, ranged from an
annual rate of 0.32% to an annual rate of 2.19% of average daily net assets. The
fees and expenses associated with your Policy may be more or less than 0.90% in
the aggregate, depending upon how you make allocations of Policy Value among the
Sub-Accounts.
AFIMS has declared a voluntary expense limitation of 1.35% of average net assets
for the Select Aggressive Growth Fund and Select Capital Appreciation Fund,
1.50% for the Select International Equity Fund, 1.25% for the Select Value
Opportunity Fund, 1.20% for the Select Growth Fund, 1.10% for the Select Growth
and Income Fund, 1.00% for the Select Income Fund, and 0.60% for the Money
Market Fund. The total operating expenses of these Funds of the Trust were less
than their respective expense limitations throughout 1998. These limitations may
be terminated at any time.
Until further notice, AFIMS has declared a voluntary expense limitation of 1.20%
of average daily net assets for the Select Strategic Growth Fund. In addition,
AFIMS has agreed to voluntarily waive its management fee
E-1
to the extent that expenses of the Select Emerging Markets Fund exceed 2.00% of
the Fund's average daily net assets, except that such waiver shall not exceed
the net amount of management fees earned by AFIMS from the Fund after
subtracting fees paid by AFIMS to a sub-adviser. These limitations may be
terminated at any time.
Until further notice, the Select Value Opportunity Fund's management fee rate
has been voluntarily limited to an annual rate of 0.90% of average daily net
assets, and total expenses are limited to 1.25% of average daily net assets.
NET ANNUAL RATES OF INVESTMENT
Applying the average Fund advisory fees and operating expenses of 0.90% of
average net assets, in the Current Cost of Insurance Charges tables the gross
annual rates of investment return of 0%, 6% and 12% would produce net annual
rates of -0.90%, 5.10% and 11.10%. In the Guaranteed Cost of Insurance Charges
tables, the gross annual rates of investment return of 0%, 6% and 12% would
produce net annual rates of -0.90%, 5.10% and 11.10%, respectively.
The hypothetical returns shown in the tables do not reflect any charges for
income taxes against the Variable Account since no charges are currently made.
However, if in the future the charges are made, to produce illustrated death
benefits and cash values, the gross annual investment rates of return would have
to exceed 0%, 6% or 12% by a sufficient amount to cover the tax charges. The
second column of the tables shows the amount that would accumulate if the
Guideline Annual Premium were invested to earn interest (after taxes) at 5%,
compounded annually.
UPON REQUEST, THE COMPANY WILL PROVIDE A COMPARABLE ILLUSTRATION BASED UPON THE
PROPOSED INSUREDS' AGES AND UNDERWRITING CLASSIFICATIONS, AND THE REQUESTED FACE
AMOUNT, SUM INSURED OPTION, AND RIDERS.
E-2
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARIABLE LIFE POLICY
INSURED #1: MALE, NON-SMOKER ISSUE AGE 55
INSURED #2: FEMALE, NON-SMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
BASED ON CURRENT MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
- --------------------- ------------ --------- --------- --------- --------- --------- ---------
1 10,500 0 5,643 1,000,000 0 6,082 1,000,000
2 21,525 0 11,213 1,000,000 0 12,451 1,000,000
3 33,101 0 16,706 1,000,000 0 19,114 1,000,000
4 45,256 745 22,118 1,000,000 4,709 26,082 1,000,000
5 58,019 9,632 27,443 1,000,000 15,551 33,362 1,000,000
6 71,420 18,545 32,793 1,000,000 26,835 41,083 1,000,000
7 85,491 27,352 38,038 1,000,000 38,447 49,134 1,000,000
8 100,266 36,041 43,166 1,000,000 50,391 57,516 1,000,000
9 115,779 44,605 48,167 1,000,000 62,672 66,235 1,000,000
10 132,068 53,022 53,022 1,000,000 75,286 75,286 1,000,000
11 149,171 60,914 60,914 1,000,000 87,973 87,973 1,000,000
12 167,130 68,566 68,566 1,000,000 101,126 101,126 1,000,000
13 185,986 75,939 75,939 1,000,000 114,729 114,729 1,000,000
14 205,786 82,983 82,983 1,000,000 128,755 128,755 1,000,000
15 226,575 89,652 89,652 1,000,000 143,178 143,178 1,000,000
16 248,404 95,850 95,850 1,000,000 157,929 157,929 1,000,000
17 271,324 101,569 101,569 1,000,000 173,019 173,019 1,000,000
18 295,390 106,734 106,734 1,000,000 188,400 188,400 1,000,000
19 320,660 111,253 111,253 1,000,000 204,009 204,009 1,000,000
20 347,193 115,019 115,019 1,000,000 219,770 219,770 1,000,000
Age 60 58,019 9,632 27,443 1,000,000 15,551 33,362 1,000,000
Age 65 132,068 53,022 53,022 1,000,000 75,286 75,286 1,000,000
Age 70 226,575 89,652 89,652 1,000,000 143,178 143,178 1,000,000
Age 75 347,193 115,019 115,019 1,000,000 219,770 219,770 1,000,000
HYPOTHETICAL 12%
GROSS INVESTMENT RETURN
---------------------------------
SURRENDER
POLICY R POLICY DEATH
YEAR VALUE VALUE (2) BENEFIT
- --------------------- --------- --------- ---------
1 0 6,523 1,000,000
2 0 13,744 1,000,000
3 0 21,735 1,000,000
4 9,200 30,573 1,000,000
5 22,531 40,342 1,000,000
6 37,013 51,262 1,000,000
7 52,633 63,319 1,000,000
8 69,499 76,624 1,000,000
9 87,738 91,300 1,000,000
10 107,477 107,477 1,000,000
11 128,710 128,710 1,000,000
12 152,101 152,101 1,000,000
13 177,852 177,852 1,000,000
14 206,177 206,177 1,000,000
15 237,326 237,326 1,000,000
16 271,539 271,539 1,000,000
17 309,170 309,170 1,000,000
18 350,566 350,566 1,000,000
19 396,119 396,119 1,000,000
20 446,277 446,277 1,000,000
Age 60 22,531 40,342 1,000,000
Age 65 107,477 107,477 1,000,000
Age 70 237,326 237,326 1,000,000
Age 75 446,277 446,277 1,000,000
(1) Assumes a $10,000 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6%, AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
POLICY VALUE TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE
THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
E-3
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARIABLE LIFE POLICY
INSURED #1: MALE NON-SMOKER ISSUE AGE 55
INSURED #2: FEMALE NON-SMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
BASED ON GUARANTEED MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
- --------------------- ------------ --------- --------- --------- --------- --------- ---------
1 10,500 0 5,625 1,000,000 0 6,064 1,000,000
2 21,525 0 11,162 1,000,000 0 12,397 1,000,000
3 33,101 0 16,608 1,000,000 0 19,007 1,000,000
4 45,256 586 21,959 1,000,000 4,528 25,902 1,000,000
5 58,019 9,398 27,209 1,000,000 15,274 33,085 1,000,000
6 71,420 17,444 31,693 1,000,000 25,642 39,891 1,000,000
7 85,491 25,149 35,836 1,000,000 36,038 46,725 1,000,000
8 100,266 32,451 39,576 1,000,000 46,400 53,525 1,000,000
9 115,779 39,270 42,832 1,000,000 56,641 60,203 1,000,000
10 132,068 45,508 45,508 1,000,000 66,652 66,652 1,000,000
11 149,171 50,715 50,715 1,000,000 76,077 76,077 1,000,000
12 167,130 55,086 55,086 1,000,000 85,183 85,183 1,000,000
13 185,986 58,503 58,503 1,000,000 93,837 93,837 1,000,000
14 205,786 60,842 60,842 1,000,000 101,895 101,895 1,000,000
15 226,575 61,947 61,947 1,000,000 109,177 109,177 1,000,000
16 248,404 61,597 61,597 1,000,000 115,435 115,435 1,000,000
17 271,324 59,418 59,418 1,000,000 120,261 120,261 1,000,000
18 295,390 55,165 55,165 1,000,000 123,361 123,361 1,000,000
19 320,660 48,243 48,243 1,000,000 124,093 124,093 1,000,000
20 347,193 38,032 38,032 1,000,000 121,768 121,768 1,000,000
Age 60 58,019 9,398 27,209 1,000,000 15,274 33,085 1,000,000
Age 65 132,068 45,508 45,508 1,000,000 66,652 66,652 1,000,000
Age 70 226,575 61,947 61,947 1,000,000 109,177 109,177 1,000,000
Age 75 347,193 38,032 38,032 1,000,000 121,768 121,768 1,000,000
HYPOTHETICAL 12%
GROSS INVESTMENT RETURN
---------------------------------
POLICY SURRENDER POLICY DEATH
YEAR VALUE VALUE (2) BENEFIT
- --------------------- --------- --------- ---------
1 0 6,505 1,000,000
2 0 13,689 1,000,000
3 0 21,619 1,000,000
4 8,996 30,369 1,000,000
5 22,207 40,018 1,000,000
6 35,716 49,965 1,000,000
7 49,992 60,678 1,000,000
8 65,053 72,178 1,000,000
9 80,903 84,465 1,000,000
10 97,528 97,528 1,000,000
11 114,780 114,780 1,000,000
12 133,148 133,148 1,000,000
13 152,657 152,657 1,000,000
14 173,345 173,345 1,000,000
15 195,233 195,233 1,000,000
16 218,310 218,310 1,000,000
17 242,456 242,456 1,000,000
18 267,693 267,693 1,000,000
19 293,804 293,804 1,000,000
20 320,610 320,610 1,000,000
Age 60 22,207 40,018 1,000,000
Age 65 97,528 97,528 1,000,000
Age 70 195,233 195,233 1,000,000
Age 75 320,610 320,610 1,000,000
(1) Assumes a $10,000 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6%, AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
POLICY VALUE TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE
THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
E-4
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARIABLE LIFE POLICY
INSURED #1: MALE NON-SMOKER ISSUE AGE 55
INSURED #2: FEMALE NON-SMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 2
BASED ON CURRENT MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
- --------------------- ------------ --------- --------- --------- --------- --------- ---------
1 10,500 0 5,643 1,005,643 0 6,082 1,006,082
2 21,525 0 11,213 1,011,213 0 12,450 1,012,450
3 33,101 0 16,706 1,016,706 0 19,114 1,019,114
4 45,256 744 22,117 1,022,117 4,707 26,081 1,026,081
5 58,019 9,629 27,440 1,027,440 15,547 33,358 1,033,358
6 71,420 18,539 32,788 1,032,788 26,827 41,076 1,041,076
7 85,491 27,341 38,027 1,038,027 38,433 49,120 1,049,120
8 100,266 36,022 43,146 1,043,146 50,365 57,489 1,057,489
9 115,779 44,572 48,135 1,048,135 62,627 66,189 1,066,189
10 132,068 52,971 52,971 1,052,971 75,211 75,211 1,075,211
11 149,171 60,834 60,834 1,060,834 87,852 87,852 1,087,852
12 167,130 68,441 68,441 1,068,441 100,933 100,933 1,100,933
13 185,986 75,750 75,750 1,075,750 114,428 114,428 1,114,428
14 205,786 82,702 82,702 1,082,702 128,292 128,292 1,128,292
15 226,575 89,243 89,243 1,089,243 142,484 142,484 1,142,484
16 248,404 95,261 95,261 1,095,261 156,898 156,898 1,156,898
17 271,324 100,743 100,743 1,100,743 171,525 171,525 1,171,525
18 295,390 105,601 105,601 1,105,601 186,278 186,278 1,186,278
19 320,660 109,725 109,725 1,109,725 201,041 201,041 1,201,041
20 347,193 112,990 112,990 1,112,990 215,677 215,677 1,215,677
Age 60 58,019 9,629 27,440 1,027,440 15,547 33,358 1,033,358
Age 65 132,068 52,971 52,971 1,052,971 75,211 75,211 1,075,211
Age 70 226,575 89,243 89,243 1,089,243 142,484 142,484 1,142,484
Age 75 347,193 112,990 112,990 1,112,990 215,677 215,677 1,215,677
HYPOTHETICAL 12%
GROSS INVESTMENT RETURN
---------------------------------
POLICY SURRENDER POLICY DEATH
YEAR VALUE VALUE (2) BENEFIT
- --------------------- --------- --------- ---------
1 0 6,523 1,006,523
2 0 13,744 1,013,744
3 0 21,735 1,021,735
4 9,198 30,571 1,030,571
5 22,527 40,338 1,040,338
6 37,004 51,253 1,051,253
7 52,614 63,300 1,063,300
8 69,463 76,587 1,076,587
9 87,674 91,236 1,091,236
10 107,368 107,368 1,107,368
11 128,526 128,526 1,128,526
12 151,798 151,798 1,151,798
13 177,362 177,362 1,177,362
14 205,401 205,401 1,205,401
15 236,119 236,119 1,236,119
16 269,682 269,682 1,269,682
17 306,376 306,376 1,306,376
18 346,438 346,438 1,346,438
19 390,108 390,108 1,390,108
20 437,633 437,633 1,437,633
Age 60 22,527 40,338 1,040,338
Age 65 107,368 107,368 1,107,368
Age 70 236,119 236,119 1,236,119
Age 75 437,633 437,633 1,437,633
(1) Assumes a $10,000 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6%, AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
POLICY VALUE TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE
THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
E-5
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARIABLE LIFE POLICY
INSURED #1: MALE NON-SMOKER ISSUE AGE 55
INSURED #2: FEMALE NON-SMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 2
BASED ON GUARANTEED MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
- --------------------- ------------ --------- --------- --------- --------- --------- ---------
1 10,500 0 5,625 1,005,625 0 6,064 1,006,064
2 21,525 0 11,162 1,011,162 0 12,397 1,012,397
3 33,101 0 16,608 1,016,608 0 19,007 1,019,007
4 45,256 584 21,958 1,021,958 4,527 25,900 1,025,900
5 58,019 9,394 27,205 1,027,205 15,270 33,082 1,033,082
6 71,420 17,411 31,660 1,031,660 25,600 39,849 1,039,849
7 85,491 25,070 35,757 1,035,757 35,936 46,623 1,046,623
8 100,266 32,308 39,433 1,039,433 46,206 53,330 1,053,330
9 115,779 39,037 42,600 1,042,600 56,310 59,873 1,059,873
10 132,068 45,152 45,152 1,045,152 66,126 66,126 1,066,126
11 149,171 50,193 50,193 1,050,193 75,271 75,271 1,075,271
12 167,130 54,335 54,335 1,054,335 83,980 83,980 1,083,980
13 185,986 57,451 57,451 1,057,451 92,088 92,088 1,092,088
14 205,786 59,407 59,407 1,059,407 99,413 99,413 1,099,413
15 226,575 60,038 60,038 1,060,038 105,733 105,733 1,105,733
16 248,404 59,115 59,115 1,059,115 110,745 110,745 1,110,745
17 271,324 56,253 56,253 1,056,253 113,969 113,969 1,113,969
18 295,390 51,224 51,224 1,051,224 115,059 115,059 1,115,059
19 320,660 43,448 43,448 1,043,448 113,287 113,287 1,113,287
20 347,193 32,365 32,365 1,032,365 107,903 107,903 1,107,903
Age 60 58,019 9,394 27,205 1,027,205 15,270 33,082 1,033,082
Age 65 132,068 45,152 45,152 1,045,152 66,126 66,126 1,066,126
Age 70 226,575 60,038 60,038 1,060,038 105,733 105,733 1,105,733
Age 75 347,193 32,365 32,365 1,032,365 107,903 107,903 1,107,903
HYPOTHETICAL 12%
GROSS INVESTMENT RETURN
---------------------------------
POLICY SURRENDER POLICY DEATH
YEAR VALUE VALUE (2) BENEFIT
- --------------------- --------- --------- ---------
1 0 6,505 1,006,505
2 0 13,689 1,013,689
3 0 21,619 1,021,619
4 8,994 30,368 1,030,368
5 22,202 40,013 1,040,013
6 35,664 49,912 1,049,912
7 49,859 60,545 1,060,545
8 64,789 71,914 1,071,914
9 80,435 83,997 1,083,997
10 96,750 96,750 1,096,750
11 113,536 113,536 1,113,536
12 131,215 131,215 1,131,215
13 149,731 149,731 1,149,731
14 169,012 169,012 1,169,012
15 188,948 188,948 1,188,948
16 209,342 209,342 1,209,342
17 229,808 229,808 1,229,808
18 250,084 250,084 1,250,084
19 269,495 269,495 1,269,495
20 287,314 287,314 1,287,314
Age 60 22,202 40,013 1,040,013
Age 65 96,750 96,750 1,096,750
Age 70 188,948 188,948 1,188,948
Age 75 287,314 287,314 1,287,314
(1) Assumes a $10,000 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6%, AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
POLICY VALUE TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE
THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
E-6
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARIABLE LIFE POLICY
INSURED #1: MALE NON-SMOKER ISSUE AGE 55
INSURED #2: FEMALE NON-SMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 3
BASED ON GUARANTEED MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------------- -----------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
- --------------------- ------------ --------- --------- --------- --------- --------- -----------
1 10,500 0 5,643 1,011,287 0 6,082 1,012,165
2 21,525 0 11,213 1,022,426 0 12,450 1,024,901
3 33,101 0 16,705 1,033,411 0 19,113 1,038,226
4 45,256 742 22,116 1,044,232 4,706 26,079 1,052,158
5 58,019 9,626 27,437 1,054,875 15,544 33,355 1,066,710
6 71,420 18,533 32,782 1,065,563 26,820 41,068 1,082,137
7 85,491 27,330 38,016 1,076,033 38,418 49,105 1,098,210
8 100,266 36,003 43,127 1,086,254 50,338 57,463 1,114,926
9 115,779 44,540 48,102 1,096,205 62,582 66,144 1,132,287
10 132,068 52,919 52,919 1,105,839 75,136 75,136 1,150,273
11 149,171 60,753 60,753 1,121,507 87,731 87,731 1,175,461
12 167,130 68,317 68,317 1,136,635 100,740 100,740 1,201,480
13 185,986 75,563 75,563 1,151,125 114,127 114,127 1,228,254
14 205,786 82,423 82,423 1,164,845 127,832 127,832 1,255,664
15 226,575 88,836 88,836 1,177,671 141,793 141,793 1,283,586
16 248,404 94,676 94,676 1,189,353 155,875 155,875 1,311,749
17 271,324 99,925 99,925 1,199,849 170,045 170,045 1,340,091
18 295,390 104,480 104,480 1,208,960 184,180 184,180 1,368,360
19 320,660 108,218 108,218 1,216,436 198,117 198,117 1,396,235
20 347,193 110,998 110,998 1,221,996 211,663 211,663 1,423,325
Age 60 58,019 27,437 9,626 1,054,875 33,355 15,544 1,066,710
Age 65 132,068 52,919 52,919 1,105,839 75,136 75,136 1,150,273
Age 70 226,575 88,836 88,836 1,177,671 141,793 141,793 1,283,586
Age 75 347,193 110,998 110,998 1,221,996 211,663 211,663 1,423,325
HYPOTHETICAL 12%
GROSS INVESTMENT RETURN
---------------------------------
POLICY SURRENDER POLICY DEATH
YEAR VALUE VALUE (2) BENEFIT
- --------------------- --------- --------- ---------
1 0 6,523 1,013,046
2 0 13,744 1,027,488
3 0 21,734 1,043,468
4 9,196 30,570 1,061,139
5 22,523 40,334 1,080,667
6 36,994 51,243 1,102,487
7 52,595 63,281 1,126,563
8 69,427 76,552 1,153,103
9 87,609 91,172 1,182,343
10 107,258 107,258 1,214,516
11 128,342 128,342 1,256,684
12 151,495 151,495 1,302,991
13 176,875 176,875 1,353,750
14 204,629 204,629 1,409,257
15 234,919 234,919 1,469,837
16 267,839 267,839 1,535,678
17 303,609 303,609 1,607,218
18 342,360 342,360 1,684,720
19 384,190 384,190 1,768,381
20 429,159 429,159 1,858,319
Age 60 40,334 22,523 1,080,667
Age 65 107,258 107,258 1,214,516
Age 70 234,919 234,919 1,469,837
Age 75 429,159 429,159 1,858,319
(1) Assumes a $10,000 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6%, AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
POLICY VALUE TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE
THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
E-7
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
VARIABLE LIFE POLICY
INSURED #1: MALE NON-SMOKER ISSUE AGE 55
INSURED #2: FEMALE NON-SMOKER ISSUE AGE 55
SPECIFIED FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 3
BASED ON CURRENT MONTHLY INSURANCE PROTECTION
CHARGES WITHOUT RIDERS
PREMIUMS HYPOTHETICAL 0% HYPOTHETICAL 6%
PAID PLUS GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN
INTEREST --------------------------------- ---------------------------------
POLICY AT 5% SURRENDER POLICY DEATH SURRENDER POLICY DEATH
YEAR PER YEAR (1) VALUE VALUE (2) BENEFIT VALUE VALUE (2) BENEFIT
- --------------------- ------------ --------- --------- --------- --------- --------- ---------
1 10,500 0 5,625 1,011,250 0 6,064 1,012,128
2 21,525 0 11,162 1,022,324 0 12,397 1,024,794
3 33,101 0 16,607 1,033,215 0 19,006 1,038,013
4 45,256 583 21,957 1,043,913 4,525 25,899 1,051,797
5 58,019 9,391 27,202 1,054,405 15,267 33,078 1,066,156
6 71,420 17,377 31,626 1,063,252 25,558 39,807 1,079,614
7 85,491 24,992 35,679 1,071,358 35,834 46,521 1,093,041
8 100,266 32,166 39,290 1,078,581 46,012 53,136 1,106,273
9 115,779 38,806 42,368 1,084,736 55,982 59,544 1,119,088
10 132,068 44,801 44,801 1,089,601 65,605 65,605 1,131,209
11 149,171 49,676 49,676 1,099,353 74,474 74,474 1,148,949
12 167,130 53,595 53,595 1,107,191 82,795 82,795 1,165,591
13 185,986 56,420 56,420 1,112,839 90,373 90,373 1,180,745
14 205,786 58,007 58,007 1,116,015 96,993 96,993 1,193,986
15 226,575 58,188 58,188 1,116,376 102,397 102,397 1,204,794
16 248,404 56,729 56,729 1,113,457 106,241 106,241 1,212,483
17 271,324 53,242 53,242 1,106,485 107,991 107,991 1,215,983
18 295,390 47,526 47,526 1,095,052 107,277 107,277 1,214,554
19 320,660 39,027 39,027 1,078,055 103,326 103,326 1,206,652
20 347,193 27,261 27,261 1,054,522 95,389 95,389 1,190,778
Age 60 58,019 27,202 9,391 1,054,405 33,078 15,267 1,066,156
Age 65 132,068 44,801 44,801 1,089,601 65,605 65,605 1,131,209
Age 70 226,575 58,188 58,188 1,116,376 102,397 102,397 1,204,794
Age 75 347,193 27,261 27,261 1,054,522 95,389 95,389 1,190,778
HYPOTHETICAL 12%
GROSS INVESTMENT RETURN
---------------------------------
POLICY SURRENDER POLICY DEATH
YEAR VALUE VALUE (2) BENEFIT
- --------------------- --------- --------- ---------
1 0 6,505 1,013,009
2 0 13,688 1,027,377
3 0 21,618 1,043,236
4 8,992 30,366 1,060,732
5 22,198 40,009 1,080,017
6 35,612 49,861 1,099,721
7 49,726 60,413 1,120,825
8 64,527 71,651 1,143,302
9 79,970 83,532 1,167,064
10 95,979 95,979 1,191,957
11 112,307 112,307 1,224,614
12 129,312 129,312 1,258,624
13 146,861 146,861 1,293,723
14 164,790 164,790 1,329,580
15 182,865 182,865 1,365,730
16 200,738 200,738 1,401,475
17 217,805 217,805 1,435,610
18 233,590 233,590 1,467,180
19 247,095 247,095 1,494,190
20 257,245 257,245 1,514,490
Age 60 40,009 22,198 1,080,017
Age 65 95,979 95,979 1,191,957
Age 70 182,865 182,865 1,365,730
Age 75 257,245 257,245 1,514,490
(1) Assumes a $10,000 payment is made at the beginning of each Policy Year.
Values will be different if payments are made with a different frequency or
in different amounts.
(2) Assumes that no Policy loan has been made. Excessive loans or withdrawals
may cause this Policy to lapse because of insufficient Policy Value.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN ARE ILLUSTRATIVE ONLY, AND SHOULD
NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, AND WILL DEPEND
ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY A POLICY OWNER,
AND THE DIFFERENT INVESTMENT RATES OF RETURN FOR THE UNDERLYING FUNDS. THE
SURRENDER VALUE OF UNITS, POLICY VALUE, AND DEATH BENEFIT FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF INVESTMENT RETURN AVERAGED 0%,
6%, AND 12% OVER A PERIOD OF YEARS, BUT FLUCTUATED ABOVE AND BELOW THOSE
AVERAGES FOR INDIVIDUAL POLICY YEARS, OR IF ANY PREMIUMS WERE ALLOCATED OR
POLICY VALUE TRANSFERRED TO THE FIXED ACCOUNT. NO REPRESENTATIONS CAN BE MADE
THAT THESE HYPOTHETICAL INVESTMENT RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE
YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
E-8
APPENDIX F
PERFORMANCE INFORMATION
The Policies were first offered to the public in 1999. However, we may advertise
"Total Return" and "Average Annual Total Return" performance information based
on the periods that the Sub-Accounts have been in existence (Tables IA and IB),
and based on the periods that the Underlying Funds have been in existence
(Tables IIA and IIB). The results for any period prior to the Policies being
offered will be calculated as if the Policies had been offered during that
period of time, with all charges assumed to be those applicable to the
Sub-Accounts and the Funds.
Total return and average annual total return are based on the hypothetical
profile of a representative Policy owner and historical earnings and are not
intended to indicate future performance. "Total Return" is the total income
generated net of certain expenses and charges. In each table below, "One-Year
Total Return" refers to the total of the income generated by a sub-account,
based on certain charges and assumptions as described in the respective tables,
for the one-year period ended December 31, 1998. "Average Annual Total Return"
is based on the same charges and assumptions, but reflects the hypothetical
annually compounded return that would have produced the same cumulative return
if the Sub-Account's performance had been constant over the entire period.
Because average annual total returns tend to smooth out variations in annual
performance return, they are not the same as actual year-by-year results.
In Tables I, performance information under the Policies is net of total fund
expenses, mortality and expense risk charges, administrative charges, Monthly
Insurance Protection charges, and surrender charges. We take a representative
Policy owner and assume that:
- The Insureds are male, Age 55, standard (nonsmoker) Underwriting Class,
and female, Age 55, standard (nonsmoker) Underwriting Class
- The Policy owner had allocations in each of the sub-accounts for the fund
durations shown, and
- There was a full surrender at the end of the applicable period.
In Table II, the performance information is net of total Underlying Fund
expenses. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER THE POLICY OR
SURRENDER CHARGES.
We may compare performance information for a sub-account in reports and
promotional literature to:
- Standard & Poor's 500 Composite Stock Price Index ("S&P 500")
- Dow Jones Industrial Average ("DJIA")
- Shearson Lehman Aggregate Bond Index
- Other unmanaged indices of unmanaged securities widely regarded by
investors as representative of the securities markets
- Other groups of variable life separate accounts or other investment
products tracked by Lipper Inc.
- Other services, companies, publications, or persons such as
Morningstar, Inc., who rank the investment products on performance or
other criteria
- The Consumer Price Index
F-1
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions for insurance and administrative charges, separate account
charges and fund management costs and expenses.
Performance information for any sub-account reflects only the performance of a
hypothetical investment in the sub-account during a period. It is not
representative of what may be achieved in the future. However, performance
information may be helpful in reviewing market conditions during a period and in
considering a fund's success in meeting its investment objectives.
In advertising, sales literature, publications or other materials, we may give
information on various topics of interest to Policy owners and prospective
Policy owners. These topics may include:
- The relationship between sectors of the economy and the economy as a whole
and its effect on various securities markets, investment strategies and
techniques (such as value investing, market timing, dollar cost averaging,
asset allocation and automatic account rebalancing)
- The advantages and disadvantages of investing in tax-deferred and taxable
investments
- Customer profiles and hypothetical payment and investment scenarios
- Financial management and tax and retirement planning
- Investment alternatives to certificates of deposit and other financial
instruments, including comparisons between the Policies and the
characteristics of and market for the financial instruments.
At times, the Company may also advertise the ratings and other information
assigned to it by independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service ("Moody's"), Standard & Poor's
Insurance Rating Services ("S&P") and Duff & Phelps. A.M. Best's and Moody's
ratings reflect their current opinion of the Company's relative financial
strength and operating performance in comparison to the norms of the life/heath
insurance industry. S&P's and Duff & Phelps' ratings measure the ability of an
insurance company to meet its obligations under insurance policies it issues do
not measure the ability of such companies to meet other non-Policy obligations.
The ratings also do not relate to the performance of the Underlying Portfolios.
F-2
TABLE I(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF THE UNDERLYING FUNDS
NET OF ALL CHARGES AND ASSUMING SURRENDER OF THE POLICY
The following performance information is based on the periods that the
Underlying Funds have been in existence. The data is net of expenses of the
Underlying Funds, all Sub-Account charges, and all Policy charges (including
surrender charges) for a representative Policy. It is assumed that the Insureds
are male, Age 55, standard (nonsmoker) Underwriting Class, and female, Age 55,
standard (nonsmoker) Underwriting Class, that the Face Amount of the Policy is
$500,000, that an annual premium payment of $7,500 was made at the beginning of
each Policy year, that all premiums were allocated to each Sub-Account
individually, and that there was a full surrender of the Policy at the end of
the applicable period.
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
Select Emerging Markets Fund N/A N/A -100.00%
Select International Equity Fund -100.00% N/A -15.07%
T. Rowe Price International Stock Portfolio -100.00% N/A -17.55%
Select Aggressive Growth Fund -100.00% -7.61% 3.51%
Select Capital Appreciation Fund -100.00% N/A -19.41%
Select Value Opportunity Fund -100.00% -10.03% -3.76%
Select Growth Fund -100.00% 1.19% 4.72%
Select Strategic Growth Fund N/A N/A -100.00%
Equity Index Fund -100.00% 0.70% 11.89%
Fidelity VIP Growth Portfolio -100.00% 2.67% 11.09%
Select Growth and Income Fund -100.00% -4.07% 0.57%
Fidelity VIP Equity-Income Portfolio -100.00% -2.90% 7.97%
Fidelity VIP High Income Portfolio -100.00% -15.57% 3.25%
Select Income Fund -100.00% -19.44% -10.08%
Investment Grade Income Fund -100.00% 18.19% 1.24%
Money Market Fund -100.00% -20.60% -2.51%
The inception dates for the Underlying Funds are: 4/29/85 for Money Market and
Investment Grade Income; 9/19/85 for Fidelity VIP High Income; 10/9/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/28/90 for the Equity
Index; 8/21/92 for Select Income, Select Growth and Income, Select Growth, and
Select Aggressive Growth; 4/30/93 for Select Value Opportunity; 3/31/94 for T.
Rowe Price International Stock; 5/2/94 for Select International Equity; 4/28/95
for Select Capital Appreciation; and 2/20/98 for Select Emerging Markets and
Select Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
F-3
TABLE II(A)
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1998
SINCE INCEPTION OF THE UNDERLYING FUNDS
EXCLUDING MONTHLY POLICY CHARGES AND SURRENDER CHARGES
The following performance information is based on the periods that the
Underlying Funds have been in existence. The performance information is net of
total Underlying Fund expenses. THE DATA DOES NOT REFLECT MONTHLY CHARGES UNDER
THE POLICY OR SURRENDER CHARGES. It is assumed that an annual premium payment of
$7,500 was made at the beginning of each Policy year and that ALL premiums were
allocated to EACH Sub-Account individually.
10 YEARS
ONE-YEAR OR LIFE
TOTAL 5 OF SUB-ACCOUNT
UNDERLYING FUND RETURN YEARS (IF LESS)
Select Emerging Markets Fund N/A N/A -21.46%
Select International Equity Fund 16.48% N/A 12.26%
T. Rowe Price International Stock Portfolio 15.86% N/A 9.66%
Select Aggressive Growth Fund 10.56% 14.99% 18.11%
Select Capital Appreciation Fund 13.88% N/A 20.37%
Select Value Opportunity Fund 4.87% 13.09% 14.71%
Select Growth Fund 35.44% 22.15% 19.18%
Select Strategic Growth Fund N/A N/A -2.47%
Equity Index Fund 39.49% 21.74% 19.41%
Fidelity VIP Growth Portfolio 28.33% 23.39% 20.69%
Select Growth and Income Fund 16.43% 17.82% 15.53%
Fidelity VIP Equity-Income Portfolio 11.63% 18.77% 15.62%
Fidelity VIP High Income Portfolio -4.33% 8.80% 11.08%
Select Income Fund 6.83% 6.05% 6.56%
Investment Grade Income Fund 7.97% 6.95% 9.17%
Money Market Fund 5.51% 5.22% 5.62%
The inception dates for the Underlying Funds are: 4/29/85 for Money Market and
Investment Grade Income; 9/19/85 for Fidelity VIP High Income; 10/9/86 for
Fidelity VIP Equity-Income and Fidelity VIP Growth; 9/28/90 for the Equity
Index; 8/21/92 for Select Income, Select Growth and Income, Select Growth, and
Select Aggressive Growth; 4/30/93 for Select Value Opportunity; 3/31/94 for T.
Rowe Price International Stock; 5/2/94 for Select International Equity; 4/28/95
for Select Capital Appreciation; and 2/20/98 for Select Emerging Markets and
Select Strategic Growth.
PERFORMANCE INFORMATION REFLECTS ONLY THE PERFORMANCE OF A HYPOTHETICAL
INVESTMENT DURING THE PARTICULAR TIME PERIOD ON WHICH THE CALCULATIONS ARE
BASED. ONE-YEAR TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
PERFORMANCE INFORMATION SHOULD BE CONSIDERED IN LIGHT OF THE INVESTMENT
OBJECTIVES AND POLICIES, CHARACTERISTICS AND QUALITY OF THE PORTFOLIO OF THE
UNDERLYING FUND IN WHICH A SUB-ACCOUNT INVESTS AND THE MARKET CONDITIONS DURING
THE GIVEN TIME PERIOD, AND SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF WHAT
MAY BE ACHIEVED IN THE FUTURE.
F-4
ALLMERICA FINANCIAL
LIFE INSURANCE AND
ANNUITY COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
Allmerica Financial Life Insurance and Annuity Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholder's equity
and cash flows present fairly, in all material respects, the financial position
of Allmerica Financial Life Insurance and Annuity Company (the "Company") at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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 the opinion expressed
above.
/s/PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 2, 1999, except for paragraph 2 of Note 12,
which is as of March 19, 1999
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
REVENUES
Premiums................................................ $ 0.5 $ 22.8 $ 32.7
Universal life and investment product policy fees....... 267.4 212.2 176.2
Net investment income................................... 151.3 164.2 171.7
Net realized investment gains (losses).................. 20.0 2.9 (3.6)
Other income............................................ 0.6 1.4 0.9
------ ------ ------
Total revenues...................................... 439.8 403.5 377.9
------ ------ ------
BENEFITS, LOSSES AND EXPENSES
Policy benefits, claims, losses and loss adjustment
expenses.............................................. 153.9 187.8 192.6
Policy acquisition expenses............................. 64.6 2.8 49.9
Sales practice litigation............................... 21.0 -- --
Loss from cession of disability income business......... -- 53.9 --
Other operating expenses................................ 104.1 101.3 86.6
------ ------ ------
Total benefits, losses and expenses................. 343.6 345.8 329.1
------ ------ ------
Income before federal income taxes.......................... 96.2 57.7 48.8
------ ------ ------
FEDERAL INCOME TAX EXPENSE (BENEFIT)
Current................................................. 22.1 13.9 26.9
Deferred................................................ 11.8 7.1 (9.8)
------ ------ ------
Total federal income tax expense.................... 33.9 21.0 17.1
------ ------ ------
Net income.................................................. $ 62.3 $ 36.7 $ 31.7
====== ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-1
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- --------- ---------
ASSETS
Investments:
Fixed maturities at fair value (amortized cost of
$1,284.6 and $1,340.5)................................ $ 1,330.4 $ 1,402.5
Equity securities at fair value (cost of $27.4 and
$34.4)................................................ 31.8 54.0
Mortgage loans.......................................... 230.0 228.2
Real estate............................................. 14.5 12.0
Policy loans............................................ 151.5 140.1
Other long-term investments............................. 9.1 20.3
--------- ---------
Total investments................................... 1,767.3 1,857.1
--------- ---------
Cash and cash equivalents................................. 217.9 31.1
Accrued investment income................................. 33.5 34.2
Deferred policy acquisition costs......................... 950.5 765.3
Reinsurance receivables on paid and unpaid losses, future
policy benefits and unearned premiums................... 308.0 251.1
Other assets.............................................. 46.9 10.7
Separate account assets................................... 11,020.4 7,567.3
--------- ---------
Total assets........................................ $14,344.5 $10,516.8
========= =========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits.................................. $ 2,284.8 $ 2,097.3
Outstanding claims, losses and loss adjustment
expenses.............................................. 17.9 18.5
Unearned premiums....................................... 2.7 1.8
Contractholder deposit funds and other policy
liabilities........................................... 38.1 32.5
--------- ---------
Total policy liabilities and accruals............... 2,343.5 2,150.1
--------- ---------
Expenses and taxes payable................................ 146.2 77.6
Reinsurance premiums payable.............................. 45.7 4.9
Deferred federal income taxes............................. 78.8 75.9
Separate account liabilities.............................. 11,020.4 7,567.3
--------- ---------
Total liabilities................................... 13,634.6 9,875.8
--------- ---------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1,000 par value, 10,000 shares authorized,
2,524 and 2,521 shares issued and outstanding........... 2.5 2.5
Additional paid-in capital................................ 407.9 386.9
Accumulated other comprehensive income.................... 24.1 38.5
Retained earnings......................................... 275.4 213.1
--------- ---------
Total shareholder's equity.......................... 709.9 641.0
--------- ---------
Total liabilities and shareholder's equity.......... $14,344.5 $10,516.8
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
COMMON STOCK................................................ $ 2.5 $ 2.5 $ 2.5
------- ------- -------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period.......................... 386.9 346.3 324.3
Issuance of common stock................................ 21.0 40.6 22.0
------- ------- -------
Balance at end of period................................ 407.9 386.9 346.3
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Net unrealized appreciation on investments:
Balance at beginning of period.......................... 38.5 20.5 23.8
Appreciation (depreciation) during the period:
Net (depreciation) appreciation on
available-for-sale securities..................... (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal income
taxes............................................. 9.0 (9.0) 1.8
------- ------- -------
(14.4) 18.0 (3.3)
------- ------- -------
Balance at end of period................................ 24.1 38.5 20.5
------- ------- -------
RETAINED EARNINGS
Balance at beginning of period.......................... 213.1 176.4 144.7
Net income.............................................. 62.3 36.7 31.7
------- ------- -------
Balance at end of period................................ 275.4 213.1 176.4
------- ------- -------
Total shareholder's equity.......................... $ 709.9 $ 641.0 $ 545.7
======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Net income.................................................. $ 62.3 $ 36.7 $ 31.7
Other comprehensive income:
Net (depreciation) appreciation on available-for-sale
securities............................................ (23.4) 27.0 (5.1)
Benefit (provision) for deferred federal income taxes... 9.0 (9.0) 1.8
------ ------ ------
Other comprehensive income.......................... (14.4) 18.0 (3.3)
------ ------ ------
Comprehensive income.................................... 47.9 $ 54.7 $ 28.4
====== ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF ALLMERICA FINANCIAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 62.3 $ 36.7 $ 31.7
Adjustments to reconcile net income to net cash used in
operating activities:
Net realized gains.................................. (20.0) (2.9) 3.6
Net amortization and depreciation................... (7.1) -- 3.5
Sales practice litigation expense................... 21.0
Loss from cession of disability income business..... -- 53.9 --
Deferred federal income taxes....................... 11.8 7.1 (9.8)
Payment related to cession of disability income
business.......................................... -- (207.0) --
Change in deferred acquisition costs................ (177.8) (181.3) (66.8)
Change in reinsurance premiums payable.............. 40.8 3.9 (0.2)
Change in accrued investment income................. 0.7 3.5 1.2
Change in policy liabilities and accruals, net...... 193.1 (72.4) (39.9)
Change in reinsurance receivable.................... (56.9) 22.1 (1.5)
Change in expenses and taxes payable................ 55.4 0.2 32.3
Separate account activity, net...................... (0.5) 1.6 8.0
Other, net.......................................... (28.0) (8.7) 2.3
------- ------- -------
Net cash provided by (used in) operating
activities.................................... 94.8 (343.3) (35.6)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposals and maturities of
available-for-sale fixed maturities................... 187.0 909.7 809.4
Proceeds from disposals of equity securities............ 53.3 2.4 1.5
Proceeds from disposals of other investments............ 22.7 23.7 17.4
Proceeds from mortgages matured or collected............ 60.1 62.9 34.0
Purchase of available-for-sale fixed maturities......... (136.0) (579.7) (795.8)
Purchase of equity securities........................... (30.6) (3.2) (13.2)
Purchase of other investments........................... (22.7) (9.0) (13.9)
Purchase of mortgages................................... (58.9) (70.4) (22.3)
Other investing activities, net......................... (3.9) -- (2.0)
------- ------- -------
Net cash provided by investing activities........... 71.0 336.4 15.1
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock and capital paid in..... 21.0 19.2 22.0
------- ------- -------
Net cash provided by financing activities........... 21.0 19.2 22.0
------- ------- -------
Net change in cash and cash equivalents..................... 186.8 12.3 1.5
Cash and cash equivalents, beginning of period.............. 31.1 18.8 17.3
------- ------- -------
Cash and cash equivalents, end of period.................... $ 217.9 $ 31.1 $ 18.8
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................... $ 0.6 $ -- $ 3.4
Income taxes paid....................................... $ 36.2 $ 5.4 $ 16.5
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
Allmerica Financial Life Insurance and Annuity Company ("AFLIAC" or the
"Company") is organized as a stock life insurance company, and is a wholly owned
subsidiary of SMA Financial Corporation ("SMAFCO"), which is wholly owned by
First Allmerica Financial Life Insurance Company ("FAFLIC"). FAFLIC is a wholly
owned subsidiary of Allmerica Financial Corporation ("AFC").
The consolidated financial statements of AFLIAC include the accounts of Somerset
Square, Inc., a wholly-owned non-insurance company, which was transferred from
SMAFCO effective November 30, 1997 and dissolved as a subsidiary, effective
November 30, 1998. Its results of operations are included for 11 months of 1998
and for the month of December, 1997.
The Statutory stockholder's equity of the Company is being maintained at a
minimum level of 5% of general account assets by FAFLIC in accordance with a
policy established by vote of FAFLIC's Board of Directors.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
B. VALUATION OF INVESTMENTS
In accordance with the provisions of Statement of Financial Accounting Standards
No. 115 ("Statement No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities", the Company is required to classify its investments into one
of three categories: held-to-maturity, available-for-sale or trading. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
Marketable equity securities and debt securities are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholder's equity. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income.
Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and reserves. Reserves on mortgage loans are based on
losses expected by the Company to be realized on transfers of mortgage loans to
real estate (upon foreclosure), on the disposition or settlement of mortgage
loans and on mortgage loans which the Company believes may not be collectible in
full. In establishing reserves, the Company considers, among other things, the
estimated fair value of the underlying collateral.
Fixed maturities and mortgage loans that are delinquent are placed on
non-accrual status, and thereafter interest income is recognized only when cash
payments are received.
Policy loans are carried principally at unpaid principal balances.
During 1997, the Company adopted to a plan to dispose of all real estate assets
by the end of 1998. As of December 31, 1998, there was 1 property remaining in
the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, real estate held by the Company and real estate joint
ventures were written down to the estimated fair value less cost of disposal.
Depreciation is not recorded on this asset while it is held for disposal.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized investment gains and losses, other than those related to separate
accounts for which the Company does not bear the investment risk, are reported
as a component of revenues based upon specific identification of the investment
assets sold. When an other-than-temporary impairment of the value of a specific
investment or a group of investments is determined, a realized investment loss
is recorded. Changes in the valuation allowance for mortgage loans are included
in realized investment gains or losses.
C. FINANCIAL INSTRUMENTS
In the normal course of business, the Company enters into transactions involving
various types of financial instruments, including debt, investments such as
fixed maturities, mortgage loans and equity securities and investment and loan
commitments. These instruments involve credit risk and also may be subject to
risk of loss due to interest rate fluctuation. The Company evaluates and
monitors each financial instrument individually and, when appropriate, obtains
collateral or other security to minimize losses.
D. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
E. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs consist of commissions, underwriting costs and other costs,
which vary with, and are primarily related to, the production of revenues.
Acquisition costs related to universal life products, variable annuities and
contractholder deposit funds are deferred and amortized in proportion to total
estimated gross profits from investment yields, mortality, surrender charges and
expense margins over the expected life of the contracts. This amortization is
reviewed annually and adjusted retrospectively when the Company revises its
estimate of current or future gross profits to be realized from this group of
products, including realized and unrealized gains and losses from investments.
Acquisition costs related to fixed annuities and other life insurance products
are deferred and amortized, generally in proportion to the ratio of annual
revenue to the estimated total revenues over the contract periods based upon the
same assumptions used in estimating the liability for future policy benefits.
Deferred acquisition costs for each product are reviewed to determine if they
are recoverable from future income, including investment income. If such costs
are determined to be unrecoverable, they are expensed at the time of
determination. Although realization of deferred policy acquisition costs is not
assured, the Company believes it is more likely than not that all of these costs
will be realized. The amount of deferred policy acquisition costs considered
realizable, however, could be reduced in the near term if the estimates of gross
profits or total revenues discussed above are reduced. The amount of
amortization of deferred policy acquisition costs could be revised in the near
term if any of the estimates discussed above are revised.
F. SEPARATE ACCOUNTS
Separate account assets and liabilities represent segregated funds administered
and invested by the Company for the benefit of certain pension, variable annuity
and variable life insurance contractholders. Assets consist principally of
bonds, common stocks, mutual funds, and short-term obligations at market value.
The investment income, gains and losses of these accounts generally accrue to
the contractholders and, therefore, are not included in the Company's net
income. Appreciation and depreciation of the Company's interest in the separate
accounts, including undistributed net investment income, is reflected in
shareholder's equity or net investment income.
G. POLICY LIABILITIES AND ACCRUALS
Future policy benefits are liabilities for life, disability income and annuity
products. Such liabilities are established in amounts adequate to meet the
estimated future obligations of policies in force. The liabilities associated
with traditional life insurance products are computed using the net level
premium method for
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
individual life and annuity policies, and are based upon estimates as to future
investment yield, mortality and withdrawals that include provisions for adverse
deviation. Future policy benefits for individual life insurance and annuity
policies are computed using interest rates ranging from 3% to 6% for life
insurance and 3 1/2% to 9 1/2% for annuities. Mortality, morbidity and
withdrawal assumptions for all policies are based on the Company's own
experience and industry standards. Liabilities for universal life include
deposits received from customers and investment earnings on their fund balances,
less administrative charges. Universal life fund balances are also assessed
mortality and surrender charges.
Individual disability income benefit liabilities for active lives are estimated
using the net level premium method, and assumptions as to future morbidity,
withdrawals and interest which provide a margin for adverse deviation. Benefit
liabilities for disabled lives are estimated using the present value of benefits
method and experience assumptions as to claim terminations, expenses and
interest.
Liabilities for outstanding claims, losses and loss adjustment expenses are
estimates of payments to be made for reported claims and estimates of claims
incurred but not reported for individual life and disability income policies.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations.
Contractholder deposit funds and other policy liabilities include
investment-related products and consist of deposits received from customers and
investment earnings on their fund balances.
All policy liabilities and accruals are based on the various estimates discussed
above. Although the adequacy of these amounts cannot be assured, the Company
believes that it is more likely than not that policy liabilities and accruals
will be sufficient to meet future obligations of policies in force. The amount
of liabilities and accruals, however, could be revised in the near term if the
estimates discussed above are revised.
H. PREMIUM AND FEE REVENUE AND RELATED EXPENSES
Premiums for individual life and individual annuity products, excluding
universal life and investment-related products, are considered revenue when due.
Individual disability income insurance premiums are recognized as revenue over
the related contract periods. The unexpired portion of these premiums is
recorded as unearned premiums. Benefits, losses and related expenses are matched
with premiums, resulting in their recognition over the lives of the contracts.
This matching is accomplished through the provision for future benefits,
estimated and unpaid losses and amortization of deferred policy acquisition
costs. Revenues for investment-related products consist of net investment income
and contract charges assessed against the fund values. Related benefit expenses
primarily consist of net investment income credited to the fund values after
deduction for investment and risk charges. Revenues for universal life and group
variable universal life products consist of net investment income, with
mortality, administration and surrender charges assessed against the fund
values. Related benefit expenses include universal life benefit claims in excess
of fund values and net investment income credited to universal life fund values.
Certain policy charges that represent compensation for services to be provided
in future periods are deferred and amortized over the period benefited using the
same assumptions used to amortize capitalized acquisition costs.
I. FEDERAL INCOME TAXES
AFC and its domestic subsidiaries file a consolidated United States federal
income tax return. Entities included within the consolidated group are
segregated into either a life insurance or non-life insurance company subgroup.
The consolidation of these subgroups is subject to certain statutory
restrictions on the percentage of eligible non-life tax losses that can be
applied to offset life insurance company taxable income.
The Board of Directors has delegated to AFC management, the development and
maintenance of appropriate federal income tax allocation policies and
procedures, which are subject to written agreement between the
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
companies. The Federal income tax for all subsidiaries in the consolidated
return of AFC is calculated on a separate return basis. Any current tax
liability is paid to AFC. Tax benefits resulting from taxable operating losses
or credits of AFC's subsidiaries are not reimbursed to the subsidiary until such
losses or credits can be utilized by the subsidiary on a separate return basis.
Deferred income taxes are generally recognized when assets and liabilities have
different values for financial statement and tax reporting purposes, and for
other temporary taxable and deductible differences as defined by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement
No. 109). These differences result primarily from policy reserves, policy
acquisition expenses, and unrealized appreciation or depreciation on
investments.
J. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("Statement No. 133"), which establishes
accounting and reporting standards for derivative instruments. Statement No. 133
requires that an entity recognize all derivatives as either assets or
liabilities at fair value in the statement of financial position, and
establishes special accounting for the following three types of hedges; fair
value hedges, cash flow hedges, and hedges of foreign currency exposures of net
investment in foreign operations. This statement is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the impact of
adoption of Statement No. 133.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use" ("SoP 98-1"). SoP 98-1 requires that
certain costs incurred in developing internal-use computer software be
capitalized and provides guidance for determining whether computer software is
to be considered for internal use. This statement is effective for fiscal years
beginning after December 15, 1998. In the second quarter, the Company adopted
SoP 98-1 effective January 1, 1998, resulting in an increase in pre-tax income
of $9.8 million through December 31, 1998. The adoption of SoP 98-1 did not have
a material effect on the results of operations or financial position for the
three months ended March 31, 1998.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" ("SoP 97-3"). SoP 97-3 provides
guidance when a liability should be recognized for guaranty fund and other
assessments and how to measure the liability. This statement allows for the
discounting of the liability if the amount and timing of the cash payments are
fixed and determinable. In addition, it provides criteria for when an asset may
be recognized for a portion or all of the assessment liability or paid
assessment that can be recovered through premium tax offsets or policy
surcharges. This statement is effective for fiscal years beginning after
December 15, 1998. The Company believes that the adoption of this statement will
not have a material effect on the results of operations or financial position.
In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of
an Enterprise and Related Information" ("Statement No. 131"). This statement
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that
selected information about those operating segments be reported in interim
financial statements. This statement supersedes Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise". Statement No. 131 requires
that all public enterprises report financial and descriptive information about
their reportable operating segments. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. This statement
is effective for fiscal years
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
beginning after December 15, 1997. AFLIAC consists of one segment, Allmerica
Financial Services, which underwrites and distributes variable annuities and
variable universal life via retail channels.
In June 1997, the FASB also issued Statement No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"), which established standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. All items that are required to be
recognized under accounting standards as components of comprehensive income are
to be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise during a
period from transactions and other events and circumstances from non-owner
sources. This statement is effective for fiscal years beginning after
December 15, 1997. The Company adopted Statement No. 130 for the first quarter
of 1998, which resulted primarily in reporting unrealized gains and losses on
investments in debt and equity securities in comprehensive income.
2. SIGNIFICANT TRANSACTIONS
Effective January 1, 1998, the Company entered into an agreement with a highly
rated reinsurer to reinsure the mortality risk on the universal life and
variable universal life blocks of business. The agreement does not have a
material effect on the results of operations or financial position of the
Company.
On April 14, 1997, the Company entered into an agreement in principle to cede
substantially all of the Company's individual disability income line of business
under a 100% coinsurance agreement with a highly rated reinsurer. The
coinsurance agreement became effective October 1, 1997. The transaction has
resulted in the recognition of a $53.9 million pre-tax loss in the first quarter
of 1997.
During 1998, 1997 and 1996 , SMAFCO contributed $21.0 million, $40.6 million and
$22.0 million, respectively, of additional paid-in capital to the Company. The
nature of the 1997 contribution was $19.2 million in cash and $21.4 million in
other assets including Somerset Square, Inc.
3. INVESTMENTS
A. SUMMARY OF INVESTMENTS
The Company accounts for its investments, all of which are classified as
available-for-sale, in accordance with the provisions of Statement No. 115.
The amortized cost and fair value of available-for-sale fixed maturities and
equity securities were as follows:
1998
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
U.S. Treasury securities and U.S. government and
agency securities................................ $ 5.8 $ 0.8 $-- $ 6.6
States and political subdivisions................. 2.7 0.2 -- 2.9
Foreign governments............................... 48.8 1.6 1.5 48.9
Corporate fixed maturities........................ 1,096.0 58.0 17.7 1,136.3
Mortgage-backed securities........................ 131.3 5.8 1.4 135.7
-------- ----- ----- --------
Total fixed maturities............................ $1,284.6 $66.4 $20.6 $1,330.4
======== ===== ===== ========
Equity securities................................. $ 27.4 $ 8.9 $ 4.5 $ 31.8
======== ===== ===== ========
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997
----------------------------------------------
GROSS GROSS
DECEMBER 31, AMORTIZED UNREALIZED UNREALIZED FAIR
(IN MILLIONS) COST (1) GAINS LOSSES VALUE
- ------------- --------- ---------- ---------- --------
U.S. Treasury securities and U.S. government and agency
securities......................................... $ 6.3 $ 0.5 $-- $ 6.8
States and political subdivisions................... 2.8 0.2 -- 3.0
Foreign governments................................. 50.1 2.0 -- 52.1
Corporate fixed maturities.......................... 1,147.5 58.7 3.3 1,202.9
Mortgage-backed securities.......................... 133.8 5.2 1.3 137.7
-------- ----- ----- --------
Total fixed maturities.............................. $1,340.5 $66.6 $ 4.6 $1,402.5
======== ===== ===== ========
Equity securities................................... $ 34.4 $19.9 $ 0.3 $ 54.0
======== ===== ===== ========
(1) Amortized cost for fixed maturities and cost for equity securities.
In connection with AFLIAC's voluntary withdrawal of its license in New York,
AFLIAC agreed with the New York Department of Insurance to maintain, through a
custodial account in New York, a security deposit, the market value of which
will at all times equal 102% of all outstanding liabilities of AFLIAC for New
York policyholders, claimants and creditors. At December 31, 1998, the amortized
cost and market value of these assets on deposit in New York were
$268.5 million and $284.1 million, respectively. At December 31, 1997, the
amortized cost and market value of assets on deposit were $276.8 million and
$291.7 million, respectively. In addition, fixed maturities, excluding those
securities on deposit in New York, with an amortized cost of $4.2 million were
on deposit with various state and governmental authorities at December 31, 1998
and 1997.
There were no contractual fixed maturity investment commitments at December 31,
1998 and 1997, respectively.
The amortized cost and fair value by maturity periods for fixed maturities are
shown below. Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties, or the Company may have the right to put or sell the
obligations back to the issuers. Mortgage backed securities are included in the
category representing their ultimate maturity.
1998
--------------------
DECEMBER 31, AMORTIZED FAIR
(IN MILLIONS) COST VALUE
- ------------- --------- --------
Due in one year or less..................................... $ 97.7 $ 98.9
Due after one year through five years....................... 269.1 278.3
Due after five years through ten years...................... 638.2 658.5
Due after ten years......................................... 279.6 294.7
-------- --------
Total....................................................... $1,284.6 $1,330.4
======== ========
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The proceeds from voluntary sales of available-for-sale securities and the gross
realized gains and gross realized losses on those sales were as follows:
FOR THE YEARS ENDED DECEMBER 31, PROCEEDS FROM GROSS GROSS
(IN MILLIONS) VOLUNTARY SALES GAINS LOSSES
- ------------- --------------- -------- --------
1998
Fixed maturities............................................ $ 60.0 $ 2.0 $ 2.0
Equity securities........................................... $ 52.6 $17.5 $ 0.9
1997
Fixed maturities............................................ $702.9 $11.4 $ 5.0
Equity securities........................................... $ 1.3 $ 0.5 $--
1996
Fixed maturities............................................ $496.6 $ 4.3 $ 8.3
Equity securities........................................... $ 1.5 $ 0.4 $ 0.1
Unrealized gains and losses on available-for-sale and other securities, are
summarized as follows:
EQUITY
FOR THE YEARS ENDED DECEMBER 31, FIXED SECURITIES
(IN MILLIONS) MATURITIES AND OTHER (1) TOTAL
- ------------- ---------- ------------- --------
1998
Net appreciation, beginning of year........................ $ 22.1 $ 16.4 $ 38.5
------ ------ ------
Net depreciation on available-for-sale securities.......... (16.2) (14.3) (30.5)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 7.1 -- 7.1
Benefit from deferred federal income taxes................. 3.2 5.8 9.0
------ ------ ------
(5.9) (8.5) (14.4)
------ ------ ------
Net appreciation, end of year.............................. $ 16.2 $ 7.9 $ 24.1
====== ====== ======
1997
Net appreciation, beginning of year........................ $ 12.7 $ 7.8 $ 20.5
------ ------ ------
Net appreciation on available-for-sale securities.......... 24.3 12.5 36.8
Net depreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... (9.8) -- (9.8)
Provision for deferred federal income taxes................ (5.1) (3.9) (9.0)
------ ------ ------
9.4 8.6 18.0
------ ------ ------
Net appreciation, end of year.............................. $ 22.1 $ 16.4 $ 38.5
====== ====== ======
1996
Net appreciation, beginning of year........................ $ 20.4 $ 3.4 $ 23.8
------ ------ ------
Net (depreciation) appreciation on available-for-sale
securities................................................ (20.8) 6.7 (14.1)
Net appreciation from the effect on deferred policy
acquisition costs and on policy liabilities............... 9.0 -- 9.0
Benefit (provision) for deferred federal income taxes...... 4.1 (2.3) 1.8
------ ------ ------
(7.7) 4.4 (3.3)
------ ------ ------
Net appreciation, end of year.............................. $ 12.7 $ 7.8 $ 20.5
====== ====== ======
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Includes net appreciation on other investments of $.9 million, $1.3 million,
and $2.2 million in 1998, 1997, and 1996, respectively.
B. MORTGAGE LOANS AND REAL ESTATE
AFLIAC's mortgage loans and real estate are diversified by property type and
location. Real estate investments have been obtained primarily through
foreclosure. Mortgage loans are collateralized by the related properties and
generally are no more than 75% of the property's value at the time the original
loan is made.
The carrying values of mortgage loans and real estate investments net of
applicable reserves were as follows:
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
Mortgage loans.............................................. $230.0 $228.2
Real estate held for sale................................... 14.5 12.0
------ ------
Total mortgage loans and real estate........................ $244.5 $240.2
====== ======
Reserves for mortgage loans were $3.3 million and $9.4 million at December 31,
1998 and 1997, respectively.
During 1997, the Company committed to a plan to dispose of all real estate
assets by the end of 1998. At December 31, 1998, there was 1 property remaining
in the Company's real estate portfolio, which is being actively marketed. As a
result of the Plan, during 1997, real estate assets with a carrying amount of
$15.7 million were written down to the estimated fair value less cost to sell of
$12.0 million, and a net realized investment loss of $3.7 million was
recognized. Depreciation was not recorded on these assets while they were held
for disposal.
There were no non-cash investing activities, including real estate acquired
through foreclosure of mortgage loans, in 1998 and 1997. During 1996, non-cash
investing activities included real estate acquired through foreclosure of
mortgage loans, which had a fair value of $0.9 million.
There were no contractual commitments to extend credit under commercial mortgage
loan agreements at December 31, 1998. These commitments generally expire within
one year.
Mortgage loans and real estate investments comprised the following property
types and geographic regions:
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
Property type:
Office building........................................... $129.2 $101.7
Residential............................................... 18.9 19.3
Retail.................................................... 37.4 42.2
Industrial/warehouse...................................... 59.2 61.9
Other..................................................... 3.1 24.5
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
====== ======
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
Geographic region:
South Atlantic............................................ $ 55.5 $ 68.7
Pacific................................................... 80.0 56.6
East North Central........................................ 41.4 61.4
Middle Atlantic........................................... 22.5 29.8
West South Central........................................ 6.7 6.9
New England............................................... 26.9 12.4
Other..................................................... 14.8 13.8
Valuation allowances...................................... (3.3) (9.4)
------ ------
Total....................................................... $244.5 $240.2
====== ======
At December 31, 1998, scheduled mortgage loan maturities were as follows:
1999 -- $24.8 million; 2000 -- $43.5 million; 2001 -- $6.6 million; 2002 --
$11.5 million; 2003 -- $0.6 million; and $143.0 million thereafter. Actual
maturities could differ from contractual maturities because borrowers may have
the right to prepay obligations with or without prepayment penalties and loans
may be refinanced. During 1998, the Company did not refinance any mortgage loans
based on terms which differed from those granted to new borrowers.
C. INVESTMENT VALUATION ALLOWANCES
Investment valuation allowances, which have been deducted in arriving at
investment carrying values as presented in the balance sheet and changes thereto
are shown below.
FOR THE YEARS ENDED DECEMBER 31, BALANCE AT BALANCE AT
(IN MILLIONS) JANUARY 1 PROVISIONS WRITE-OFFS DECEMBER 31
- ------------- ---------- ---------- ---------- ------------
1998
Mortgage loans................................... $ 9.4 $(4.5) $1.6 $ 3.3
===== ===== ==== =====
1997
Mortgage loans................................... $ 9.5 $ 1.1 $1.2 $ 9.4
Real estate...................................... 1.7 3.7 5.4 --
----- ----- ---- -----
Total........................................ $11.2 $ 4.8 $6.6 $ 9.4
===== ===== ==== =====
1996
Mortgage loans................................... $12.5 $ 4.5 $7.5 $ 9.5
Real estate...................................... 2.1 -- 0.4 1.7
----- ----- ---- -----
Total........................................ $14.6 $ 4.5 $7.9 $11.2
===== ===== ==== =====
Provisions on mortgages during 1998 reflect the release of redundant reserves.
Write-offs of $5.4 million to the investment valuation allowance related to real
estate in 1997 primarily reflect write downs to the estimated fair value less
cost to sell pursuant to the aforementioned 1997 plan of disposal.
The carrying value of impaired loans was $15.3 million and $20.6 million, with
related reserves of $1.5 million and $7.1 million as of December 31, 1998 and
1997, respectively. All impaired loans were reserved as of December 31, 1998 and
1997.
The average carrying value of impaired loans was $17.0 million, $19.8 million
and $26.3 million, with related interest income while such loans were impaired
of $2.0 million, $2.2 million and $3.4 million as of December 31, 1998, 1997 and
1996, respectively.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. OTHER
At December 31, 1998, AFLIAC had no concentration of investments in a single
investee exceeding 10% of shareholder's equity.
4. INVESTMENT INCOME AND GAINS AND LOSSES
A. NET INVESTMENT INCOME
The components of net investment income were as follows:
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Fixed maturities............................................ $107.7 $130.0 $137.2
Mortgage loans.............................................. 25.5 20.4 22.0
Equity securities........................................... 0.3 1.3 0.7
Policy loans................................................ 11.7 10.8 10.2
Real estate................................................. 3.3 3.9 6.2
Other long-term investments................................. 1.5 1.0 0.8
Short-term investments...................................... 4.2 1.4 1.4
------ ------ ------
Gross investment income..................................... 154.2 168.8 178.5
Less investment expenses.................................... (2.9) (4.6) (6.8)
------ ------ ------
Net investment income....................................... $151.3 $164.2 $171.7
====== ====== ======
There were no mortgage loans or fixed maturities on non-accrual status at
December 31, 1998. The effect of non-accruals, compared with amounts that would
have been recognized in accordance with the original terms of the investment,
had no impact in 1998 and 1997, and reduced net income by $0.1 million in 1996.
The payment terms of mortgage loans may from time to time be restructured or
modified. The investment in restructured mortgage loans, based on amortized
cost, amounted to $12.6 million, $21.1 million and $25.4 million at
December 31, 1998, 1997 and 1996, respectively. Interest income on restructured
mortgage loans that would have been recorded in accordance with the original
terms of such loans amounted to $1.4 million, $1.9 million and $3.6 million in
1998, 1997, and 1996, respectively. Actual interest income on these loans
included in net investment income aggregated $1.8 million, $2.1 million and
$2.2 million in 1998, 1997, and 1996, respectively.
There were no fixed maturities or mortgage loans which, were non-income
producing for the twelve months ended December 31, 1998.
B. REALIZED INVESTMENT GAINS AND LOSSES
Realized gains (losses) on investments were as follows:
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Fixed maturities............................................ $ (6.1) $ 3.0 $ (3.3)
Mortgage loans.............................................. 8.0 (1.1) (3.2)
Equity securities........................................... 15.7 0.5 0.3
Real estate................................................. 2.4 (1.5) 2.5
Other....................................................... -- 2.0 0.1
------ ------ ------
Net realized investment gains (losses)...................... $ 20.0 $ 2.9 $ (3.6)
====== ====== ======
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
C. OTHER COMPREHENSIVE INCOME RECONCILIATION
The following table provides a reconciliation of gross unrealized gains to the
net balance shown in the Statement of Comprehensive income:
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(5.6) million, $10.2 million and $(2.9) million in
1998, 1997 and 1996 respectively).......................... $ (8.2) $ 20.3 $(5.3)
Less: reclassification adjustment for gains included in net
income (net of taxes of $3.4 million, $1.2 million and
$(1.0) million in 1998, 1997 and 1996 respectively)........ 6.2 2.3 (2.0)
------ ------ -----
Other comprehensive income.................................. $(14.4) $ 18.0 $(3.3)
====== ====== =====
5. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
Statement No. 107, "Disclosures about Fair Value of Financial Instruments"
("Statement No, 107"), requires disclosure of fair value information about
certain financial instruments (insurance contracts, real estate, goodwill and
taxes are excluded) for which it is practicable to estimate such values, whether
or not these instruments are included in the balance sheet. The fair values
presented for certain financial instruments are estimates which, in many cases,
may differ significantly from the amounts which could be realized upon immediate
liquidation. In cases where market prices are not available, estimates of fair
value are based on discounted cash flow analyses, which utilize current interest
rates for similar financial instruments, which have comparable terms and credit
quality.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND CASH EQUIVALENTS
For these short-term investments, the carrying amount approximates fair value.
FIXED MATURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models using discounted cash flow
analyses.
EQUITY SECURITIES
Fair values are based on quoted market prices, if available. If a quoted market
price is not available, fair values are estimated using independent pricing
sources or internally developed pricing models.
MORTGAGE LOANS
Fair values are estimated by discounting the future contractual cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. The fair value of below investment grade mortgage loans is
limited to the lesser of the present value of the cash flows or book value.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
POLICY LOANS
The carrying amount reported in the balance sheet approximates fair value since
policy loans have no defined maturity dates and are inseparable from the
insurance contracts.
INVESTMENT CONTRACTS (WITHOUT MORTALITY FEATURES)
Fair values for the Company's liabilities under investment type contracts are
estimated based on current surrender values.
The estimated fair values of the financial instruments were as follows:
1998 1997
------------------- -------------------
DECEMBER 31, CARRYING FAIR CARRYING FAIR
(IN MILLIONS) VALUE VALUE VALUE VALUE
- ------------- -------- -------- -------- --------
FINANCIAL ASSETS
Cash and cash equivalents....................... $ 217.9 $ 217.9 $ 31.1 $ 31.1
Fixed maturities................................ 1,330.4 1,330.4 1,402.5 1,402.5
Equity securities............................... 31.8 31.8 54.0 54.0
Mortgage loans.................................. 230.0 241.9 228.2 239.8
Policy loans.................................... 151.5 151.5 140.1 140.1
-------- -------- -------- --------
$1,961.6 $1,973.5 $1,855.9 $1,867.5
======== ======== ======== ========
FINANCIAL LIABILITIES
Individual fixed annuity contracts.............. $1,069.4 $1,034.6 $ 876.0 $ 850.6
Supplemental contracts without life
Contingencies................................. 16.6 16.6 15.3 15.3
-------- -------- -------- --------
$1,086.0 $1,051.2 $ 891.3 $ 865.9
======== ======== ======== ========
6. FEDERAL INCOME TAXES
Provisions for federal income taxes have been calculated in accordance with the
provisions of Statement No. 109. A summary of the federal income tax expense
(benefit) in the statement of income is shown below:
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Federal income tax expense (benefit)
Current................................................... $22.1 $13.9 $26.9
Deferred.................................................. 11.8 7.1 (9.8)
----- ----- -----
Total....................................................... $33.9 $21.0 $17.1
===== ===== =====
The provision for federal income taxes does not materially differ from the
amount of federal income tax determined by applying the appropriate U.S.
statutory income tax rate to income before federal income taxes.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred tax liabilities are comprised of the following:
DECEMBER 31,
(IN MILLIONS) 1998 1997
- ------------- -------- --------
Deferred tax (assets) liabilities
Policy reserves........................................... $(205.1) $(175.8)
Deferred acquisition costs................................ 278.8 226.4
Investments, net.......................................... 12.5 27.0
Sales practice litigation................................. (7.4) --
Bad debt reserve.......................................... (0.4) (2.0)
Other, net................................................ 0.4 0.3
------- -------
Deferred tax liability, net................................. $ 78.8 $ 75.9
======= =======
Gross deferred income tax liabilities totaled $291.7 million and $253.7 million
at December 31, 1998 and 1997, respectively. Gross deferred income tax assets
totaled $212.9 million and $177.8 at December 31, 1998 and 1997, respectively.
The Company believes, based on its recent earnings history and its future
expectations, that the Company's taxable income in future years will be
sufficient to realize all deferred tax assets. In determining the adequacy of
future income, the Company considered the future reversal of its existing
temporary differences and available tax planning strategies that could be
implemented, if necessary.
The Company's federal income tax returns are routinely audited by the IRS, and
provisions are routinely made in the financial statements in anticipation of the
results of these audits. The IRS has examined the consolidated group's federal
income tax returns through 1994. The Company has appealed certain adjustments
proposed by the IRS with respect to the consolidated group's federal income tax
returns for 1992, 1993, and 1994. Also, certain adjustments proposed by the IRS
with respect to FAFLIC/AFLIAC's federal income tax returns for 1982 and 1983
remain unresolved. If upheld, these adjustments would result in additional
payments; however, the Company will vigorously defend its position with respect
to these adjustments. In the Company's opinion, adequate tax liabilities have
been established for all years. However, the amount of these tax liabilities
could be revised in the near term if estimates of the Company's ultimate
liability are revised.
7. RELATED PARTY TRANSACTIONS
The Company has no employees of its own, but has agreements under which FAFLIC
provides management, space and other services, including accounting, electronic
data processing, human resources, legal and other staff functions. Charges for
these services are based on full cost including all direct and indirect overhead
costs, and amounted to $145.4 million and $124.1 million in 1998 and 1997. The
net amounts payable to FAFLIC and affiliates for accrued expenses and various
other liabilities and receivables were $16.4 million and $15.0 million at
December 31, 1998 and 1997, respectively.
8. DIVIDEND RESTRICTIONS
Delaware has enacted laws governing the payment of dividends to stockholders by
insurers. These laws affect the dividend paying ability of the Company.
Pursuant to Delaware's statute, the maximum amount of dividends and other
distributions that an insurer may pay in any twelve month period, without the
prior approval of the Delaware Commissioner of Insurance, is limited to the
greater of (i) 10% of its policyholders' surplus as of the preceding
December 31 or (ii) the individual company's statutory net gain from operations
for the preceding calendar year (if such insurer is a
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life company) or its net income (not including realized capital gains) for the
preceding calendar year (if such insurer is not a life company). Any dividends
to be paid by an insurer, whether or not in excess of the aforementioned
threshold, from a source other than statutory earned surplus would also require
the prior approval of the Delaware Commissioner of Insurance.
No dividends were declared by the Company during 1998, 1997 and 1996. During
1999, AFLIAC could pay dividends of $26.1 million to FAFLIC without prior
approval.
9. REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Reinsurance transactions are accounted for in
accordance with the provisions of Statement No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No.
113").
The Company reinsures 100% of its traditional individual life and certain blocks
of its universal life business, substantially all of its disability income
business, and effective January 1, 1998, the mortality risk on the variable
universal life and remaining universal life blocks of business in-force at
December 31, 1997.
Amounts recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policy. Reinsurance contracts
do not relieve the Company from its obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the Company;
consequently, allowances are established for amounts deemed uncollectible. The
Company determines the appropriate amount of reinsurance based on evaluation of
the risks accepted and analyses prepared by consultants and reinsurers and on
market conditions (including the availability and pricing of reinsurance). The
Company also believes that the terms of its reinsurance contracts are consistent
with industry practice in that they contain standard terms with respect to lines
of business covered, limit and retention, arbitration and occurrence. Based on
its review of its reinsurers' financial statements and reputations in the
reinsurance marketplace, the Company believes that its reinsurers are
financially sound.
Amounts recoverable from reinsurers at December 31, 1998 and 1997 for the
disability income business were $230.8 million and $216.1 million, respectively,
traditional life were $11.4 million and $15.2 million, respectively, and
universal and variable universal life were $65.8 million and $19.8 million,
respectively.
The effects of reinsurance were as follows:
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Insurance premiums:
Direct.................................................... $ 45.5 $ 48.8 $ 53.3
Assumed................................................... -- 2.6 3.1
Ceded..................................................... (45.0) (28.6) (23.7)
------ ------ ------
Net premiums................................................ $ 0.5 $ 22.8 $ 32.7
====== ====== ======
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Insurance and other individual policy benefits, claims,
losses and loss adjustment expenses:
Direct.................................................... $204.0 $226.0 $206.4
Assumed................................................... -- 4.2 4.5
Ceded..................................................... (50.1) (42.4) (18.3)
------ ------ ------
Net policy benefits, claims, losses and loss adjustment
expenses................................................... $153.9 $187.8 $192.6
====== ====== ======
10. DEFERRED POLICY ACQUISITION COSTS
The following reflects the changes to the deferred policy acquisition asset:
FOR THE YEARS ENDED DECEMBER 31,
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Balance at beginning of year................................ $765.3 $632.7 $555.7
Acquisition expenses deferred............................. 242.4 184.2 116.6
Amortized to expense during the year...................... (64.6) (53.1) (49.9)
Adjustment to equity during the year...................... 7.4 (10.2) 10.3
Adjustment for cession of disability income insurance..... -- (38.6) --
Adjustment for revision of universal life and variable
universal life insurance mortality assumptions.......... -- 50.3 --
------ ------ ------
Balance at end of year...................................... $950.5 $765.3 $632.7
====== ====== ======
On October 1, 1997, the Company revised the mortality assumptions for universal
life and variable universal life product lines. These revisions resulted in a
$50.3 million recapitalization of deferred policy acquisition costs.
11. LIABILITIES FOR INDIVIDUAL DISABILITY INCOME BENEFITS
The Company regularly updates its estimates of liabilities for future policy
benefits and outstanding claims, losses and loss adjustment expenses as new
information becomes available and further events occur which may impact the
resolution of unsettled claims. Changes in prior estimates are recorded in
results of operations in the year such changes are determined to be needed.
The liability for future policy benefits and outstanding claims, losses and loss
adjustment expenses related to the Company's disability income business was
$233.3 million and $219.9 million at December 31, 1998 and 1997. Due to the
reinsurance agreement whereby the Company has ceded substantially all of its
disability income business to a highly rated reinsurer, the Company believes
that no material adverse development of losses will occur. However, the amount
of the liabilities could be revised in the near term if the estimates are
revised.
12. CONTINGENCIES
REGULATORY AND INDUSTRY DEVELOPMENTS
Unfavorable economic conditions may contribute to an increase in the number of
insurance companies that are under regulatory supervision. This may result in an
increase in mandatory assessments by state guaranty funds, or voluntary payments
by solvent insurance companies to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments, which are subject to statutory
limits, can be partially
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovered through a reduction in future premium taxes in some states. The
Company is not able to reasonably estimate the potential effect on it of any
such future assessments or voluntary payments.
LITIGATION
In July 1997, a lawsuit on behalf of a putative class was instituted in
Louisiana against AFC and certain of its subsidiaries including AFLIAC, by
individual plaintiffs alleging fraud, unfair or deceptive acts, breach of
contract, misrepresentation, and related claims in the sale of life insurance
policies. In October 1997, plaintiffs voluntarily dismissed the Louisiana suit
and filed a substantially similar action in Federal District Court in Worcester,
Massachusetts. In early November 1998, AFC and the plaintiffs entered into a
settlement agreement, to which the court granted preliminary approval on
December 4, 1998. A hearing was held on March 19, 1999 to consider final
approval of the settlement agreement. A decision by the court is expected to be
rendered in the near future. Accordingly, AFLIAC recognized a $21.0 million
pre-tax expense during the third quarter of 1998 related to this litigation.
Although the Company believes that this expense reflects appropriate recognition
of its obligation under the settlement, this estimate assumes the availability
of insurance coverage for certain claims, and the estimate may be revised based
on the amount of reimbursement actually tendered by AFC's insurance carriers, if
any, and based on changes in the Company's estimate of the ultimate cost of the
benefits to be provided to members of the class.
The Company has been named a defendant in various legal proceedings arising in
the normal course of business. In the Company's opinion of, based on the advice
of legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's financial statements. However, liabilities
related to these proceedings could be established in the near term if estimates
of the ultimate resolution of these proceedings are revised.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Although the Company does not believe that there is a material contingency
associated with the Year 2000 project, there can be no assurance that exposure
for material contingencies will not arise.
13. STATUTORY FINANCIAL INFORMATION
The Company is required to file annual statements with state regulatory
authorities prepared on an accounting basis prescribed or permitted by such
authorities (statutory basis). Statutory surplus differs from shareholder's
equity reported in accordance with generally accepted accounting principles
primarily because policy acquisition costs are expensed when incurred,
investment reserves are based on different assumptions, life insurance reserves
are based on different assumptions and income tax expense reflects only taxes
paid or currently payable. Statutory net income and surplus are as follows:
(IN MILLIONS) 1998 1997 1996
- ------------- -------- -------- --------
Statutory net income........................................ $ (8.2) $ 31.5 $ 5.4
Statutory shareholder's surplus............................. $309.7 $307.1 $234.0
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT ACCOUNTANTS' REPORT (UNAUDITED)
AFC has made certain changes to its corporate structure effective July 1, 1999.
These changes include the transfer of FAFLIC's ownership of Allmerica Property &
Casualty Companies, Inc., as well as several non-insurance subsidiaries, from
FAFLIC to AFC. In addition, certain changes affected AFLIAC. SMAFCO transferred
its ownership in AFLIAC to FAFLIC. Hence, AFLIAC became a wholly owned
subsidiary of FAFLIC. Further, four non-insurance subsidiaries previously held
by SMAFCO were contributed to AFLIAC. Under an agreement with the Commonwealth
of Massachusetts Insurance Commissioner ("the Commissioner"), AFC has
contributed to FAFLIC capital of $125.0 million and agreed to maintain FAFLIC's
statutory surplus at specified levels during the following six years. In
addition, any dividend from FAFLIC to AFC during 2000 and 2001 would require the
prior approval of the Commissioner. This transaction was approved by the
Commissioner on May 24, 1999.
In 1998, the net income of the subsidiaries, which was reported in SMAFCO's
results of operations, to be transferred to AFLIAC from SMAFCO pursuant to the
aforementioned change in corporate structure was $18.8 million. As of
December 31, 1998, the total assets and total shareholders' equity of these
subsidiaries were $16.8 million and $9.2 million, respectively.
On May 19, 1999, the Federal District Court in Worcester, Massachusetts issued
an order relating to the litigation mentioned in Note 12, above, certifying the
class for settlement purposes and granting final approval of the settlement
agreement.
F-22
PART II
UNDERTAKINGS AND REPRESENTATIONS
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission ("SEC") such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the SEC heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
RULE 484 UNDERTAKING
Article VIII of Registrant's Bylaws provides: Each Director and each Officer of
the Corporation, whether or not in office, (and his executors or
administrators), shall be indemnified or reimbursed by the Corporation against
all expenses actually and necessarily incurred by him in the defense or
reasonable settlement of any action, suit, or proceeding in which he is made a
party by reason of his being or having been a Director or Officer of the
Corporation, including any sums paid in settlement or to discharge judgment,
except in relation to matters as to which he shall be finally adjudged in such
action, suit, or proceeding to be liable for negligence or misconduct in the
performance of his duties as such Director or Officer; and the foregoing right
of indemnification or reimbursement shall not affect any other rights to which
he may be entitled under the Articles of Incorporation, any statute, bylaw,
agreement, vote of stockholders, or otherwise.
Insofar as indemnification for liability arising under the 1933 Act 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 SEC such indemnification is against public
Policy as expressed in the 1933 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 1933 Act
and will be governed by the final adjudication of such issue.
REPRESENTATIONS PURSUANT TO SECTION 26(e) OF THE INVESTMENT COMPANY ACT OF 1940
The Company hereby represents that the aggregate fees and charges under the
Policy are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by the Company.
CONTENTS OF THE REGISTRATION STATEMENT
This registration statement amendment comprises the following papers and
documents:
The facing sheet
Cross-reference to items required by Form N-8B-2
The prospectus consisting of ___ pages
The undertaking to file reports
The undertaking pursuant to Rule 484 under the 1933 Act
Representations pursuant to Section 26(e) of the 1940 Act.
The signatures
Written consents of the following persons:
1. Actuarial Consent
2. Opinion of Counsel
3. Consent of Independent Accountants
The following exhibits:
1. Exhibit 1 (Exhibits required by paragraph A of the instructions to
Form N-8B-2)
(1) Certified copy of Resolutions of the Board of Directors of the
Company dated June 13, 1996 authorizing the establishment of
the Separate Account IMO is filed herwith.
(2) Not Applicable.
(3) (a) Underwriting and Administrative Services Agreement between
the Company and Allmerica Investments, Inc. was previously
filed on April 16, 1998 in Post-Effective Amendment No. 12
(Registration Statement No. 33-57792), and is incorporated
by reference herein.
(b) Registered Representatives/Agents Agreement was previously
filed on April 16, 1998 in Post-Effective Amendment No. 12
(Registration Statement No. 33-57792), and is incorporated
by reference herein.
(c) Sales Agreements with broker-dealers were previously filed
on April 16, 1998 in Post-Effective Amendment No. 12
(Registration Statement No. 33-57792), and are incorporated
by reference herein.
(d) Commission Schedule was previously filed on April 16, 1998
in Post-Effective Amendment No. 12 (Registration Statement
No. 33-57792), and is incorporated by reference herein.
(e) General Agents Agreement was previously filed on April 16,
1998 in Post-Effective Amendment No. 12 (Registration
Statement No. 33-57792), and is incorporated by reference
herein.
(f) Career Agents Agreement was previously filed on April 16,
1998 in Post-Effective Amendment No. 12 (Registration
Statement No. 33-57792), and is incorporated by reference
herein.
(4) Contract is filed herwith.
(5) (a) Form of IMO survivorship policy;
(b) Survivorship Term Life Insurance Rider;
(c) Other Insured Rider;
(d) Guaranteed Death Benefit Rider;
(e) Split Option Rider/Exchange Option Rider; and
(f) Estate Protector/Four Year Term Rider are filed herewith.
(6) Articles of Incorporation and Bylaws, as amended of the Company,
effective as of October 1, 1995 were previously filed on
September 29, 1995 in Post-Effective Amendment No. 5
(Registration Statement No. 33-57792), and are incorporated by
reference herein.
(7) Not Applicable.
(8) (a) Participation Agreement with Allmerica Investment Trust was
previously filed on April 16, 1998 in Post-Effective
Amendment No. 12 (Registration Statement No. 33-57792),
and is incorporated by reference herein.
(b) Participation Agreement with Variable Insurance Products
Fund, as amended, was previously filed on April 16, 1998 in
Post-Effective Amendment No. 12 (Registration Statement
No. 33-57792), and is incorporated by reference herein.
(c) Participation Agreement with T. Rowe Price International
Series, Inc. was previously filed on April 16, 1998 in
Post-Effective Amendment No. 12 (Registration Statement
No. 33-57792), and is incorporated by reference herein.
(d) Fidelity Service Agreement, effective as of November 1,
1995, was previously filed on April 30, 1996 in
Post-Effective Amendment No. 6 (Registration Statement
No. 33-57792), and is incorporated by reference herein.
(e) An Amendment to the Fidelity Service Agreement, effective as
of January 1, 1997, was previously filed on April 30, 1997
in Post-Effective Amendment No. 9 (Registration Statement
No. 33-57792), and is incorporated by reference herein.
(f) Fidelity Service Contract, effective as of January 1, 1997,
was previously filed in Post-Effective Amendment No. 9
(Registration Statement No. 33-57792), and is incorporated
by reference herein.
(g) Service Agreement with Rowe Price-Fleming International,
Inc. was previously filed on April 16, 1998 in
Post-Effective Amendment No. 12 (Registration Statement
No. 33-57792), and is incorporated by reference herein.
(9) (a) BFDS Agreements for lockbox and mailroom services were
previously filed on April 16, 1998 in Post-Effective
Amendment No. 12 (Registration Statement No. 33-57792),
and are incorporated by reference herein.
(b) Directors' Power of Attorney is filed herewith.
(10) Form of application is filed herewith.
2. Policy and Policy riders are included in Exhibit 1 (5) above.
3. Opinion of Counsel is filed herewith.
4. Not Applicable.
5. Not Applicable.
6. Actuarial Consent is filed herewith.
7. Procedures Memorandum dated May, 1993 pursuant to Rule
6e-3(T)(b)(12)(iii) under the 1940 Act, which includes
conversion procedures pursuant to Rule 6e-3(T)(b)(13)(v)(B),
is filed herewith.
8. Consent of Independent Accountants is filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this Initial Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Worcester, and Commonwealth of Massachusetts, on the
1st day of November, 1999.
Separate Account IMO
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Mary Eldridge
-------------------------------
Mary Eldridge, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Initial
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Warren E. Barnes Vice President and Corporate Controller November 1, 1999
- ------------------------
Warren E. Barnes
Edward J. Parry III* Director, Vice President, Chief Financial
- ------------------------ Officer and Treasurer
Richard M. Reilly* Director, President and
- ------------------------ Chief Executive Officer
John F. O'Brien* Director and Chairman of the Board
- ------------------------
Bruce C. Anderson* Director
- ------------------------
Robert E. Bruce* Director and Chief Information Officer
- ------------------------
John P. Kavanaugh* Director, Vice President and
- ------------------------ Chief Investment Officer
John F. Kelly* Director, Vice President and
- ------------------------ General Counsel
J. Barry May* Director
- ------------------------
James R. McAuliffe* Director
- ------------------------
Robert P. Restrepo, Jr.* Director
- ------------------------
Eric A. Simonsen* Director and Vice President
- ------------------------
Director
- -----------------------
Phillip E. Soule
*Sheila B. St. Hilaire, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named Directors and Officers of the
Registrant pursuant to the Power of Attorney dated July 1, 1999 duly executed
by such persons.
/s/ Sheila B. St. Hilaire
- ---------------------------------------
Sheila B. St. Hilaire, Attorney-in-Fact
(333-63093)
FORM S-6 EXHIBIT TABLE
Exhibit 1(1) Vote of the Board
Exhibit 1(5)(a) Form of Policy
Exhibit 1(5)(b) Survivorship Term Life Insurance Rider
Exhibit 1(5)(c) Other Insured Rider
Exhibit 1(5)(d) Guaranteed Death Benefit Rider
Exhibit 1(5)(e) Split Option/Exchange Option Rider
Exhibit 1(5)(f) Estate Protector Rider/Four Year Term Rider
Exhibit 1(9)(b) Directors' Power of Attorney
Exhibit 3 Opinion of Counsel
Exhibit 6 Actuarial Consent
Exhibit 7 Procedures Memorandum
Exhibit 8 Consent of Independent Accountants
Exhibit 10 Form of Application