NORTHBROOK LIFE INSURANCE COMPANY
MODIFIED SINGLE PREMIUM
VARIABLE LIFE INSURANCE CONTRACT
3100 SANDERS ROAD
NORTHBROOK, IL 60062
TELEPHONE (800) 654-2397
This prospectus describes the "Dean Witter Variable Life," a modified single
premium variable life insurance contract ("Contract") offered by Northbrook Life
Insurance Company (the "Company") for prospective insured persons age 0-85. The
Contract lets the Contract Owner pay a significant single premium and, subject
to restrictions, additional premiums.
The Contracts are modified endowment contracts for federal income tax purposes,
except in certain cases described under "Federal Tax Matters," page 21. A LOAN,
DISTRIBUTION OR OTHER AMOUNT RECEIVED FROM A MODIFIED ENDOWMENT CONTRACT DURING
THE LIFE OF THE INSURED WILL BE TAXED TO THE EXTENT OF ANY ACCUMULATED INCOME IN
THE CONTRACT. ANY AMOUNTS THAT ARE TAXABLE WITHDRAWALS WILL BE SUBJECT TO A 10%
PENALTY, WITH CERTAIN EXCEPTIONS.
The minimum initial premium the Company will accept is $10,000. Premiums are
allocated to Northbrook Life Variable Life Separate Account A ("Variable
Account"). The Variable Account invests exclusively in shares of the Dean Witter
Variable Investment Series (the "Fund"), a mutual fund managed by Dean Witter
InterCapital Inc., a wholly owned subsidiary of Morgan Stanley Dean Witter & Co.
The Fund has thirteen available Portfolios: (1) Money Market (2) Quality Income
Plus (3) High Yield (4) Utilities (5) Income Builder (6) Dividend Growth (7)
Capital Growth (8) Global Dividend Growth (9) European Growth (10) Pacific
Growth (11) Capital Appreciation (12) Equity and (13) Strategist.
There is no guaranteed minimum Account Value for a Contract. The Account Value
of a Contract will vary up or down to reflect the investment experience of the
Portfolios to which premiums have been allocated. The Contract Owner bears the
investment risk for all amounts so allocated. The Contract continues in effect
while the Cash Surrender Value is sufficient to pay the monthly charges under
the Contract ("Monthly Deduction Amount").
The Contracts provide for an Initial Death Benefit shown on the Contract Data
page. The death benefit ("Death Benefit") payable under a Contract may be
greater than the Initial Death Benefit but so long as the Contract continues in
effect, if no withdrawals or loans are made, will never be less than the Initial
Death Benefit. The Account Value will, and under certain circumstances the Death
Benefit of the Contract may, increase or decrease based on the investment
experience of the Portfolios to which premiums have been allocated. At the death
of the Insured, we will pay a Death Benefit to the beneficiary.
IT MAY NOT BE ADVANTAGEOUS TO PURCHASE VARIABLE LIFE INSURANCE AS A REPLACEMENT
FOR YOUR CURRENT LIFE INSURANCE OR IF YOU ALREADY OWN A VARIABLE LIFE INSURANCE
CONTRACT.
THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED BY THE CURRENT PROSPECTUS FOR THE
FUND WHICH CONTAINS A FULL DESCRIPTION OF THE PORTFOLIOS. THE PROSPECTUS SHOULD
BE READ AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE PRODUCTS DESCRIBED HEREIN ARE NOT DEPOSITS OF, OR GUARANTEED BY, ANY BANK,
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
<PAGE>
The Contracts may not be available in all States.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO DEALER OR OTHER PERSON IS AUTHORIZED
TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
TABLE OF CONTENTS
Page
Summary .............................................................. 3
Special Terms ........................................................ 6
The Company .......................................................... 7
The Variable Account ................................................. 7
General ........................................................... 7
Fund .............................................................. 7
The Contract ......................................................... 9
Application for a Contract ........................................ 9
Premiums .......................................................... 9
Allocation of Premiums ............................................ 10
Accumulation Unit Values .......................................... 10
Deductions and Charges ............................................... 11
Monthly Deductions ................................................ 11
Cost of Insurance Charge ...................................... 11
Tax Expense Charge ............................................ 11
Administrative Expense Charge ................................. 12
Other Deductions .................................................. 12
Mortality and Expense Risk Charge ............................. 12
Annual Maintenance Fee ........................................ 12
Taxes Charged Against the Variable Account .................... 12
Charges Against the Fund ...................................... 12
Withdrawal Charge ............................................. 12
Due and Unpaid Premium Tax Charge ............................. 12
Contract Benefits and Rights ......................................... 13
Death Benefit ..................................................... 13
Accelerated Death Benefit ......................................... 13
Account Value ..................................................... 13
Transfer of Account Value ......................................... 13
Dollar Cost Averaging ............................................. 14
Contract Loans .................................................... 14
Amount Payable on Surrender of the Contract ....................... 15
Partial Withdrawals ............................................... 15
Maturity .......................................................... 15
Lapse and Reinstatement ........................................... 15
Cancellation and Exchange Rights .................................. 16
Confinement Waiver Benefit ........................................ 16
Suspension of Valuation, Payments and Transfers ................... 16
Last Survivor Contracts ........................................... 16
Other Matters ........................................................ 17
Voting Rights ..................................................... 17
Statements to Contract Owners ..................................... 17
Limit on Right to Contest ......................................... 17
Misstatement as to Age and Sex .................................... 17
Payment Options ................................................... 17
Beneficiary .......................................................... 18
Assignment ........................................................... 18
Dividends ............................................................ 18
Executive Officers and Directors of the Company ...................... 19
Distribution of the Contracts ........................................ 20
Safekeeping of the Variable Account's Assets ......................... 20
Federal Tax Matters .................................................. 21
Introduction ...................................................... 21
Taxation of the Company and the Variable Account .................. 21
Taxation of Contract Benefits ..................................... 21
Modified Endowment Contracts ...................................... 22
Diversification Requirements ...................................... 22
Ownership Treatment ............................................... 22
Policy Loan Interest .............................................. 23
Additional Information About the Company ............................. 23
Legal Proceedings .................................................... 23
Legal Matters ........................................................ 23
Registration Statement ............................................... 23
Experts .............................................................. 24
Financial Information ................................................ 24
Financial Statements ................................................. F-1
<PAGE>
SUMMARY
NOTE: A GLOSSARY OF SPECIAL TERMS USED IN THIS PROSPECTUS APPEARS AT PAGE 6,
IMMEDIATELY FOLLOWING THIS SUMMARY.
THE CONTRACT
The Contracts are life insurance contracts with death benefits, cash values, and
other traditional life insurance features. The Contracts are "variable." Unlike
the fixed benefits of ordinary whole life insurance, the Account Value will
increase or decrease based on the investment experience of the investment
Portfolios of the Fund to which premiums have been allocated. Similarly, the
Death Benefit may increase or decrease under some circumstances, but so long as
the Contract remains in effect it will not decrease below the Initial Death
Benefit if no withdrawals or loans are made. The Contracts are credited with
units ("Accumulation Units") to calculate cash values. The Contract Owner may
transfer the Account Value among the Variable Account's underlying investment
Portfolios.
The Contracts can be issued on a single life or "last survivor" basis. For a
discussion of how last survivor Contracts operate differently from single life
Contracts, see "Last Survivor Contracts," page 16.
In some states, the Contracts may be issued in the form of a group Contract. In
those states, certificates will be issued evidencing a purchaser's rights under
the group Contract. The terms "Contract" and "Contract Owner", as used in this
Prospectus, refer to and include such a certificate and certificate owner,
respectively.
THE VARIABLE ACCOUNT AND THE FUND
The Variable Account funds the variable life insurance Contracts offered by this
prospectus. The Variable Account is a unit investment trust registered as such
under the Investment Company Act of 1940. It consists of multiple sub-accounts
("Variable Sub-Accounts"), each investing in a corresponding Portfolio.
Applicants should read the prospectus for the Fund in connection with the
purchase of a Contract. The investment objectives of the Portfolios are briefly
summarized below under "Fund," page 7.
The Variable Account invests in shares of the Dean Witter Variable Investment
Series (the "Fund"). The Fund has thirteen available Portfolios: (1) Money
Market (2) Quality Income Plus (3) High Yield (4) Utilities (5) Income Builder
(6) Dividend Growth (7) Capital Growth (8) Global Dividend Growth (9) European
Growth (10) Pacific Growth (11) Capital Appreciation (12) Equity and (13)
Strategist.
The assets of each Portfolio are accounted for separately from the other
Portfolios and each has distinct investment objectives and policies which are
described in the accompanying prospectus for the Fund.
PREMIUMS
The Contract requires the Contract Owner to pay an initial premium of at least
$10,000. Additional premium payments may be made at any time, subject to the
following conditions:
- only one payment is allowed in any Contract Year;
- the minimum payment is $500;
- the attained age of the insured must be less than age 91; and
- absent submission of new evidence of insurability of the insured, the
maximum additional payment permitted in a Contract Year is the
"Guaranteed Additional Payment." The Guaranteed Additional Payment is
the lesser of $5,000 or a percentage of the initial payment (5% for
attained ages 40-70, and 0% for attained ages 20-39 and 71-90).
THE COMPANY RESERVES THE RIGHT TO OBTAIN SATISFACTORY EVIDENCE OF INSURABILITY
BEFORE ACCEPTING ANY ADDITIONAL PREMIUM PAYMENTS REQUIRING AN INCREASE IN
SPECIFIED AMOUNT. WE ALSO RESERVE THE RIGHT TO REJECT AN ADDITIONAL PREMIUM
PAYMENT FOR ANY REASON.
Additional premium payments may require an increase in the Specified Amount in
order for the Contract to meet the definition of a life insurance contract under
the Internal Revenue Code. Additional Premiums may also be paid at any time and
in any amount necessary to avoid termination of the Contract.
DEATH BENEFIT
At the death of the Insured while the Contract is in force, we will pay the
Death Benefit (less any Indebtedness and certain due and unpaid Monthly
Deduction Amounts) to the beneficiary. The Death Benefit determined on the date
of the Insured's death is the greater of (1) the Specified Amount, or (2) the
Account Value multiplied by the death benefit ratio as found in the Contract.
See "Contract Benefits and Rights--Death Benefit," page 13.
ACCOUNT VALUE
The Account Value of the Contract will increase or decrease to reflect (1) the
investment experience of the Fund Portfolios underlying the Variable Sub-Account
to which Account Value is allocated, and (2) deductions for the mortality and
expense risk charge, the Monthly Deduction Amount, and the annual maintenance
fee. There is no minimum guaranteed Account Value and the Contract Owner bears
the risk of the investment in the Fund Portfolios. See "Contract Benefits and
Rights - Account Value," page 13.
CONTRACT LOANS
A Contract Owner may obtain one or both of two types of cash loans from the
Company. Both types of loans are secured by the Contract. The maximum amount
available for such loans is 90% of the Contract's Cash Value, less the amount of
all loans existing on the date of the loan request (including loan interest to
the next Contract Anniversary), less any annual maintenance fee due on or before
the next Contract Anniversary, and less any due and unpaid Monthly Deduction
Amounts. See "Contract Benefits and Rights--Contract Loans," page 14.
LAPSE
Under certain circumstances a Contract may terminate if the Cash Surrender Value
on any Monthly Activity Date is less than the required Monthly Deduction Amount.
The Company will give written notice to the Contract Owner and a 61 day grace
period during which additional amounts may be paid to continue the Contract. See
"Contract Benefits and Rights - Contract Loans," page 14 and "Lapse and
Reinstatement," page 15.
CANCELLATION AND EXCHANGE RIGHTS
A Contract Owner has a limited right to return his or her Contract for
cancellation. This right to return exists during the free-look period. The
free-look period is a number of days (which varies by state) as specified in
your Contract. If the Contract Owner returns the Contract for cancellation, by
mail or hand delivery, to the Account Executive who sold the Contract, within
the free-look period following delivery of the Contract to the Contract Owner,
the Company will return to the Contract Owner within 7 days thereafter the
premiums paid for the Contract adjusted to reflect any investment gain or loss
resulting from allocation to the Variable Account prior to the date of
cancellation, unless state law requires a return of premium without such
adjustments. In those states where the Company is required to return the
premiums paid upon a free-look of the Contract and where it has been approved by
the state, the Company reserves the right to allocate all premium payments made
prior to the expiration of the free-look period to the Money Market sub-account
of the Variable Account.
In addition, once the Contract is in effect it may be exchanged during the first
24 months after its issuance for a permanent life insurance contract on the life
of the Insured without submitting proof of insurability. See "Contract Benefits
and Rights - Cancellation and Exchange Rights," page 16.
TAX CONSEQUENCES
The current Federal tax law generally excludes all death benefit payments from
the gross income of the Contract beneficiary. The Contracts generally will be
treated as modified endowment contracts. This status does not affect the
Contracts' classification as life insurance, nor does it affect the exclusion of
death benefit payments from gross income. However, loans, distributions or other
amounts received under a modified endowment contract are taxed to the extent of
accumulated income in the Contract (generally, the excess of Account Value over
premiums paid) and may be subject to a 10% penalty tax. See "Federal Tax
Matters," page 21.
PERSONALIZED ILLUSTRATIONS
The Company will furnish, upon request and at no charge, a personalized
illustration reflecting the proposed Insured's age, sex, and underwriting
classification. Where applicable, the Company will also furnish upon request an
illustration for a Contract that is not affected by the sex of the Insured.
Personalized illustrations provided by the Company upon request will be based,
as appropriate, on the methodology and format of the hypothetical illustrations
that the Company has included in its registration statement for the Contracts.
See "Registration Statement," page 23, for further information.
<PAGE>
Fees and Expenses
The following tables are designed to help you understand the various fees and
expenses that you will bear, directly or indirectly, as a Contract owner. The
first table describes the Contract charges and deductions you will directly bear
under the Contracts. The second table describes the fees and expenses of the
Fund Portfolios you will indirectly bear when you invest in the Contracts. For
further information, see "Deductions and Charges" on page 11.
<TABLE>
<CAPTION>
CONTRACT CHARGES AND DEDUCTIONS
Account Value Charges (deducted monthly and shown as an annualized percentage of
Account Value):(1)
<S> <C> <C>
Current(2) Maximum (Monthly Charges)
---------- -------------------------
Cost of Insurance Charge............ Single Life Single Life
----------- -----------
Standard - 0.65% (Contract Years 1-10) Standard - Ranges from $0.06 per $1,000 of net
- 0.55% (Contract Years 11+) amount at risk (younger ages) up to $82.50 per
$1,000 of net amount at risk (age 99)
Special - 1.00% (Contract Years 1-10) Special - Ranges from $0.12 per $1,000 of net
- 0.90% (Contract Yaers 11+) amount at risk (younger ages) up to $82.92
(age 99).
Joint Life Joint Life
---------- ----------
Standard - 0.30% (Contract Years 1-10) Standard - Ranges from $0.00015 per $1,000 of
- 0.20% (Contract Years 11+) net amount at risk (younger ages) up to $61.995
per $1,000 of net amount at risk (age 99)
Special - 0.65% (Contract Years 1-10) Special - Ranges from $0.00061 per $1,000 of net
- 0.55% (Contract Years 11+) amount at risk (younger ages) up to $78.71083
(age 99).
</TABLE>
Administrative Expense Charge........ 0.25%
Tax Expense Charge................... 0.40%(3)
Annual Separate Account Charges (deducted daily and shown as a percentage of
average net assets):
Mortality and Expense Risk Charge.... 0.90%
Federal Income Tax Charge............ Currently none(4)
Annual Maintenance Fee:................. $30(5)
Transfer Charges:....................... $25(6)
Maximum Withdrawal Charge: ............. 7.75% of initial premium withdrawn(7)
Due and Unpaid Premium Tax Charge: ..... 2.25% of initial premium withdrawn(8)
- ----------------------
(1) Except for the maximum or "guaranteed" cost of insurance charge, which is
expressed as a range of monthly costs per thousand dollars of net amount at
risk. The net amount at risk is the difference between the Death Benefit
and the Account Value. See "Cost of Insurance Charge," page 11.
(2) The actual amount of insurance purchased will depend on the insured's age,
sex (where permitted) and rate class. See "Cost of Insurance Charge," page
11. The current cost of insurance charge under the Contracts will never
exceed the guaranteed cost of insurance charge shown in your Contract.
(3) This charge includes a premium tax deduction of 0.25%, and a federal tax
deduction of 0.15%, of Account Value. This charge is assessed only during
the first 10 Contract Years. See "Tax Expense Charge," page 11.
(4) The Company does not currently assess a charge for federal income taxes
that may be attributable to the operations of the Variable Account, though
it may do so in the future. See "Taxes Charged Against the Variable
Account," page 12.
(5) This fee is waived if total premiums paid are $40,000 or more.
(6) No charges will be imposed on the first 12 transfers in any Contract Year.
The Company reserves the right to assess a $25 charge for each transfer in
excess of 12 in any Contract Year, excluding transfers due to dollar cost
averaging.
(7) This charge applies only upon withdrawals of the initial premium paid at
the time of Contract purchase. It does not apply to withdrawals of any
additional payments paid under a Contract. The withdrawal charge declines
to 0% over nine years and is imposed to cover a portion of the sales
expense incurred by the Company in distributing the Contracts. See
"Deductions and Charges -- Other Deductions -- Withdrawal Charge," page 12.
No withdrawal charge will be imposed on any withdrawal to the extent that
aggregate withdrawal charges and the federal tax portion of the tax expense
charge imposed would otherwise exceed 9% of total premiums paid prior to
the Withdrawal. See "Deductions and Charges," page 11 and "Withdrawal
Charge," page 12.
(8) This charge applies only upon withdrawals of the initial premium paid at
the time of Contract purchase. It does not apply to withdrawals of any
additional payments paid under a Contract. The charge for due and unpaid
premium tax declines to 0% over nine years and is imposed on full or
partial withdrawals in excess of the Free Withdrawal Amount.
<TABLE>
<CAPTION>
FUND EXPENSES
(AS A PERCENTAGE OF FUND ASSETS)
Management Other Total Fund
Portfolio Fees Expenses Annual Expenses
- --------- ---- -------- ---------------
<S> <C> <C> <C>
Money Market ........................ .50% .02% .52%
Quality Income Plus ................. .50%(1) .03% .53%
High Yield .......................... .50%(2) .03% .53%
Utilities ........................... .65%(3) .02% .67%
Income Builder(5) ................... .75% .24% .99%
Dividend Growth ..................... .625%(4) .01% .635%
Capital Growth ...................... .65% .06% .71%
Global Dividend Growth .............. .75% .09% .84%
European Growth ..................... 1.00%(6) .12% 1.12%
Pacific Growth ...................... 1.00% .44% 1.44%
Capital Appreciation(5) ............. .75% .22% .97%
Equity .............................. .50%(7) .02% .52%
Strategist .......................... .50% .02% .52%
</TABLE>
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(1) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be 0.45%.
(2) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be 0.425%.
(3) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be 0.55%.
(4) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be 0.50%, for assets that exceed $1 billion, the
fee will be 0.475%, and for assets that exceed $2 billion, the fee will be
0.45%.
(5) Dean Witter InterCapital has undertaken to assume all expenses until the
pertinent portfolio has $50 million in assets or until July 31, 1998,
whichever occurs first. Income Builder obtained $50 million on December 3,
1997 resulting in fees being applied on that date and thereafter. As of the
date of this prospectus, Capital Appreciation had not attained $50 million
in assets.
(6) Applicable to net assets of up to $500 million. For net assets which exceed
$500 million, the fee will be 0.95%.
(7) Applicable to net assets of up to $1 billion. For net assets which exceed
$1 billion, the fee will be 0.475%.
SPECIAL TERMS
As used in this prospectus, the following terms have the indicated meanings:
Account Value--The aggregate value under a Contract of the Variable Sub-Accounts
and the Loan Account.
Accumulation Unit--An accounting unit of measure used to calculate the value of
a Variable Sub-Account.
Age--The Insured's age at the Insured's last birthday.
Cash Value--The Account Value less any applicable withdrawal charges and due and
unpaid premium tax charges.
Cash Surrender Value--The Cash Value less all Indebtedness and the annual
maintenance fee, if applicable.
Code--The Internal Revenue Code of 1986, as amended.
Contract Anniversary--The same day and month as the Contract Date for each
subsequent year the Contract remains in force.
Contract Date--The date on or as of which coverage under a Contract becomes
effective and the date from which Contract Anniversaries, Contract Years and
Contract months are determined.
Contract Owner--The person having rights to benefits under the Contract during
the lifetime of the Insured; the Contract Owner may or may not be the Insured.
Contract Years--Annual periods computed from the Contract Date.
Death Benefit--The greater of (1) the Specified Amount or (2) the Account Value
on the date of death multiplied by the death benefit ratio as specified in the
Contract.
Free Withdrawal Amount--The amount of a surrender or partial withdrawal that is
not subject to a withdrawal charge. This amount in any Contract Year is 15% of
total premiums paid.
Initial Death Benefit--The Initial Death Benefit under a Contract is shown on
the Contract data page.
Fund--The Dean Witter Variable Investment Series
Indebtedness--All Contract loans, if any, and accrued loan interest.
Insured--The person whose life is insured under a Contract.
Loan Account--An account in the Company's general account, established for any
amounts transferred from the Variable Sub-Accounts for requested loans. The Loan
Account credits a fixed rate of interest that is not based on the investment
experience of the Variable Account.
Monthly Activity Date--The day of each month on which the Monthly Deduction
Amount is deducted from the Account Value of the Contract. Monthly Activity
Dates occur on the same day of the month as the Contract Date. If there is no
date equal to the Monthly Activity Date in a particular month, the Monthly
Activity Date will be the last day of that month.
Monthly Deduction Amount--A deduction on each Monthly Activity Date for the cost
of insurance charge, a tax expense charge and an administrative expense charge.
Specified Amount--The minimum Death Benefit under a Contract, equal to the
Initial Death Benefit on the Contract Date. Thereafter it may change in
accordance with the terms of the partial withdrawal and the subsequent premium
provisions of the Contract.
Valuation Day--Every day the New York Stock Exchange is open for trading. The
value of the Variable Account is determined at the close of regular trading on
the New York Stock Exchange (currently 4:00 p.m. Eastern Time) on such days.
Valuation Period--The period between the close of regular trading on the New
York Stock Exchange on successive Valuation Days.
Variable Account--Northbrook Life Variable Life Separate Account A, an account
established by the Company to separate the assets funding the Contracts from
other assets of the Company.
Variable Sub-Account--The subdivisions of the Variable Account used to allocate
a Contract Owner's Account Value, less Indebtedness, among the Portfolios of the
Fund.
THE COMPANY
- -----------
The Company is the issuer of the Contract. Incorporated in 1978 as a stock life
insurance company under the laws of the State of Illinois, the Company is
licensed to operate in the District of Columbia, all states (except New York)
and Puerto Rico. The Company's home office is located at 3100 Sanders Road,
Northbrook, Illinois 60062.
The Company is a wholly owned subsidiary of Allstate Life Insurance Company
("Allstate Life"), a stock life insurance company incorporated under the laws of
the State of Illinois. Allstate Life is a wholly owned subsidiary of Allstate
Insurance Company ("Allstate"), a stock property-liability insurance company
incorporated under the laws of Illinois. All of the outstanding capital stock of
Allstate is owned by The Allstate Corporation ("Corporation").
THE VARIABLE ACCOUNT
- --------------------
GENERAL
The Variable Account is a separate account of the Company established on January
15, 1996 pursuant to the insurance laws of the State of Illinois. The Variable
Account is organized as a unit investment trust and registered as such with the
Securities and Exchange Commission under the Investment Company Act of 1940. The
Variable Account meets the definition of "separate account" under federal
securities law. Under Illinois law, the assets of the Variable Account are held
exclusively for the benefit of Contract Owners and persons entitled to payments
under the Contracts. The assets of the Variable Account are not chargeable with
liabilities arising out of any other business which the Company may conduct.
FUND
The Variable Account will invest in shares of the Dean Witter Variable
Investment Series (the "Fund"). The Fund is registered with the Securities and
Exchange Commission as an open-end, series, management investment company.
Registration of the Fund does not involve supervision of its management,
investment practices or policies by the Securities and Exchange Commission. The
Fund Portfolios are designed to provide investment vehicles for variable
insurance contracts of various insurance companies, in addition to the Variable
Account. The Fund Portfolios available for investment by the Variable Account
are listed below:
THE MONEY MARKET PORTFOLIO seeks high current income, preservation of capital,
and liquidity by investing in certain money market instruments, principally U.S.
government securities, bank obligations, and high grade commercial paper.
THE QUALITY INCOME PLUS PORTFOLIO seeks, as its primary objective, to earn a
high level of current income and, as a secondary objective, capital
appreciation, but only when consistent with its primary objective, by investing
primarily in debt securities issued by the U.S. Government, its agencies and
instrumentalities, including zero coupon securities and in fixed-income
securities rated A or higher by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("Standard & Poor's") or non-rated securities of
comparable quality, and by writing covered call and put options against such
securities.
THE HIGH YIELD PORTFOLIO seeks, as its primary objective, to earn a high level
of current income by investing in a professionally managed diversified portfolio
consisting principally of fixed-income securities rated Baa or lower by Moody's
or BBB or lower by Standard & Poor's or non-rated securities of comparable
quality, which are commonly known as junk bonds, and, as a secondary objective,
capital appreciation when consistent with its primary objective. The risks of
investing in junk bonds are discussed in the accompanying prospectus for the
Fund, which should be read carefully before investing.
THE UTILITIES PORTFOLIO seeks to provide current income and long-term growth of
income and capital by investing primarily in equity and fixed-income securities
of companies engaged in the public utilities industry.
THE INCOME BUILDER PORTFOLIO seeks, as its primary objective, reasonable income
by investing primarily in common stock of large-cap companies which have a
record of paying dividends and the potential for maintaining dividends, in
preferred stock and in securities convertible into common stocks of small and
mid-cap companies and, as its secondary objective, growth of capital.
THE DIVIDEND GROWTH PORTFOLIO seeks to provide reasonable current income and
long-term growth of income and capital by investing primarily in common stock of
companies with a record of paying dividends and the potential for increasing
dividends.
THE CAPITAL GROWTH PORTFOLIO seeks to provide long-term capital growth by
investing principally in common stocks.
THE GLOBAL DIVIDEND GROWTH PORTFOLIO seeks to provide reasonable current income
and long-term growth of income and capital by investing primarily in common
stock of companies, issued by issuers worldwide, with a record of paying
dividends and the potential for increasing dividends.
THE EUROPEAN GROWTH PORTFOLIO seeks to maximize the capital appreciation on its
investments by investing primarily in securities issued by issuers located in
Europe.
THE PACIFIC GROWTH PORTFOLIO seeks to maximize the capital appreciation of its
investments by investing primarily in securities issued by issuers located in
Asia, Australia and New Zealand.
THE CAPITAL APPRECIATION PORTFOLIO seeks long-term capital appreciation by
investing primarily in common stocks of U.S. companies that offer the potential
for either superior earnings growth and/or appear to be undervalued.
THE EQUITY PORTFOLIO seeks, as its primary objective, growth of capital through
investments in common stock of companies believed by the Investment Manager to
have potential for superior growth and, as a secondary objective, income when
consistent with its primary objective.
THE STRATEGIST PORTFOLIO seeks a high total investment return through a fully
managed investment policy utilizing equity securities, fixed-income securities
rated Baa or higher by Moody's or BBB or higher by Standard & Poor's (or
non-rated securities of comparable quality), and money market securities, and
the writing of covered options on such securities and the collateralized sale of
stock index options.
Dean Witter InterCapital Inc. ("InterCapital"), Two World Trade Center, New
York, New York 10048, is the Fund's Investment Manager. InterCapital is a wholly
owned subsidiary of Morgan Stanley Dean Witter Discover & Co.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank and the shares are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board or any other agency.
An investment in the Money Market Portfolio is neither insured nor guaranteed by
the U.S. Government. There can be no assurance that the Money Market Portfolio
will be able to maintain a stable net asset value of $1.00 per share.
All dividends and capital gains distributions from the Portfolios are
automatically reinvested in shares of the distributing Portfolio at their net
asset value.
There is no assurance that the Portfolios will attain their respective stated
objectives. Additional information concerning the investment objectives and
policies of the Portfolios can be found in the current prospectus for the Fund
accompanying this prospectus.
You will find more complete information about the Portfolios, including the
risks associated with each Portfolio, in the accompanying prospectus for the
Fund. You should read the prospectus for the Fund in conjunction with this
prospectus.
THE FUND'S PROSPECTUS SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE
CONCERNING THE ALLOCATION OF PURCHASE PAYMENTS TO A PARTICULAR VARIABLE
SUB-ACCOUNT
It is conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
a Fund simultaneously. Although neither the Company nor the Fund currently
foresees any such disadvantages either to variable life insurance or variable
annuity contract owners, the Fund's Board of Directors intends to monitor events
in order to identify any material conflicts between variable life and variable
annuity contract owners and to determine what action, if any, should be taken in
response thereto. If the Board of Directors were to conclude that separate funds
should be established for variable life and variable annuity separate accounts,
the Company will bear the attendant expenses.
All investment income of and other distributions to each Variable Sub-Account
arising from the corresponding Portfolio are reinvested in shares of that
Portfolio at net asset value. The income and both realized and unrealized gains
or losses on the assets of each Variable Sub-Account are therefore separate and
are credited to or charged against the Variable Sub-Account without regard to
income, gains or losses from any other Variable Sub-Account or from any other
business of the Company. The Company will purchase shares in the Fund in
connection with premiums allocated to the corresponding Variable Sub-Account in
accordance with Contract Owners' directions and will redeem shares in the Fund
to meet Contract obligations or make adjustments in reserves, if any.
The Company reserves the right, subject to compliance with the law as then in
effect, to make additions to, deletions from, or substitutions for the Fund
shares underlying the Variable Sub-Accounts. If shares of the Fund should no
longer be available for investment, or if, in the judgment of the Company's
management, further investment in shares of the Fund should become inappropriate
in view of the purposes of the Contracts, the Company may substitute shares of
another Fund for shares already purchased, or to be purchased in the future,
under the Contracts. No substitution of securities will take place without
notice to Contract Owners and without prior approval of the Securities and
Exchange Commission to the extent required by the Investment Company Act of 1940
("1940 Act"). The Company reserves the right to establish additional Variable
Sub-Accounts of the Variable Account, each of which would invest in shares of
another Fund. Subject to Contract Owner approval, the Company also reserves the
right to end the registration under the 1940 Act of the Variable Account or any
other separate accounts of which it is the depositor or to operate the Variable
Account as a management company under the 1940 Act.
The Fund is subject to certain investment restrictions and policies which may
not be changed without the approval of a majority of the shareholders of the
Fund. See the accompanying prospectus for the Fund for further information.
THE CONTRACT
- ------------
APPLICATION FOR A CONTRACT
Individuals wishing to purchase a Contract must submit an application to the
Company. A Contract will be issued only on the lives of Insureds age 0-85 who
supply evidence of insurability satisfactory to the Company. Acceptance is
subject to the Company's underwriting rules and the Company reserves the right
to reject an application for any lawful reason. No change in the terms or
conditions of a Contract will be made without the consent of the Contract Owner.
Applications must be submitted and approved prior to the payment of initial
premium. The Insured will be covered under the Contract as of the Contract Date.
In addition to determining when coverage begins, the Contract Date determines
Monthly Activity Dates, Contract months, and Contract Years.
PREMIUMS
The Contract is designed to permit an initial premium payment and, subject to
certain conditions, additional premium payments. The initial premium payment
purchases a Death Benefit initially equal to the Contract's Specified Amount.
The minimum initial payment is $10,000.
Under current underwriting rules, which are subject to change, proposed Insureds
are eligible for simplified underwriting without a medical examination if their
application responses and anticipated initial premium payment meet simplified
underwriting standards. Customary underwriting standards will apply to all other
proposed Insureds. The maximum initial premium currently permitted on a
simplified underwriting basis varies with the issue age of the insured according
to the following table:
SIMPLIFIED UNDERWRITING
ISSUE AGE MAXIMUM INITIAL PREMIUM
0-34........................................ Not available
35-44....................................... $15,000
45-54....................................... $30,000
55-64....................................... $50,000
65-80....................................... $100,000
Over age 80................................. Not available
Additional premium payments may be made at any time, subject to the following
conditions:
- only one additional premium payment may be made in any Contract Year;
- each additional premium payment must be at least $500;
- the attained age of the Insured must be less than age 91; and
- absent submission of new evidence of insurability of the insured, the
maximum additional payment permitted in a Contract Year is the
"Guaranteed Additional Payment."
- the Guaranteed Additional Payment is the lesser of $5,000 or a
percentage of the initial payment (5% for attained ages 40-70, and 0%
for attained ages 20-39 and 71-90).
THE COMPANY RESERVES THE RIGHT TO OBTAIN SATISFACTORY EVIDENCE OF INSURABILITY
UPON ANY ADDITIONAL PREMIUM PAYMENTS REQUIRING AN INCREASE IN SPECIFIED AMOUNT.
WE ALSO RESERVE THE RIGHT TO REJECT ANY ADDITIONAL PREMIUM PAYMENT FOR ANY
REASON.
Additional premium payments may require an increase in Specified Amount in order
for the Contract to remain within the definition of a life insurance contract
under Section 7702 of the Code.
Unless you request otherwise in writing, any additional premium payment received
while a Contract loan exists will be applied: first, as a repayment of
Indebtedness, and second, as an additional premium payment, subject to the
conditions described above.
Additional premiums may be paid at any time and in any amount necessary to avoid
termination of the Contract without evidence of insurability.
ALLOCATION OF PREMIUMS
Upon completion of underwriting, the Company will either issue a Contract, or
deny coverage. If a Contract is issued, the initial premium payment will be
allocated on the date the Contract is issued according to the initial premium
allocation instructions specified on the application. The Company reserves the
right to allocate the initial premium to the Money Market Sub-Account during the
free look period in those states where state law requires premiums to be
returned upon exercise of the free-look right.
ACCUMULATION UNIT VALUES
The Accumulation Unit value for each Variable Sub-Account will vary to reflect
the investment experience of the corresponding Fund Portfolio and will be
determined on each Valuation Day by multiplying the Accumulation Unit value of
the particular Variable Sub-Account on the preceding Valuation Day by a "Net
Investment Factor" for that Sub-Account for the Valuation Period then ended. The
Net Investment Factor for each Variable Sub-Account is determined by first
dividing (A) the net asset value per share of the corresponding Fund Portfolio
at the end of the current Valuation Period (plus the per share dividends or
capital gains by that Fund Portfolio if the ex-dividend date occurs in the
Valuation Period then ended), by (B) the net asset value per share of the
corresponding Fund Portfolio at the end of the immediately preceding Valuation
Period; and then subtracting from the result an amount equal to the daily
deductions for mortality and expense risk charges imposed during the Valuation
Period. Applicants should refer to the prospectus for the Fund which accompanies
this prospectus for a description of how the assets of the Fund are valued since
such determination has a direct bearing on the Accumulation Unit value of the
corresponding Sub-Account and therefore the Account Value of a Contract. See
"Contract Benefits and Rights--Account Value," page 13.
All valuations in connection with a Contract, e.g., with respect to determining
Account Value and Cash Surrender Value and in connection with Contract loans, or
calculation of Death Benefits, or with respect to determining the number of
Accumulation Units to be credited to a Contract with each premium, other than
the initial premium and additional premiums requiring underwriting, will be made
on the date the request or payment is received in good order by the Company at
its Home Office if such date is a Valuation Day; otherwise such determination
will be made on the next succeeding date which is a Valuation Day.
Specialized Uses of the Contract: Because the Contract provides for an
accumulation of Cash Value as well as a Death Benefit, the Contract can be used
for various individual and business financial planning purposes. Purchasing the
Contract in part for such purposes entails certain risks. For example, if the
investment performance of Sub-Accounts to which Account Value is allocated is
poorer than expected or if sufficient premiums are not paid, the Contract may
lapse or may not accumulate sufficient Account Value to fund the purpose for
which the Contract was purchased. Withdrawals and Contract loans may
significantly affect current and future Account Value, Cash Surrender Value, or
Death Benefit proceeds. Depending upon Sub-Account investment performance and
the amount of a Contract loan, the loan may cause a Contract to lapse. Because
the Contract is designed to provide benefits on a long-term basis, before
purchasing a Contract for a specialized purpose a purchaser should consider
whether the long-term nature of the Contract is consistent with the purpose for
which it is being considered. Using a Contract for a specialized purpose may
have tax consequences. (See "Federal Tax Matters," page 21.)
DEDUCTIONS AND CHARGES
- ----------------------
MONTHLY DEDUCTIONS
On each Monthly Activity Date including the Contract Date, the Company will
deduct from the Account Value attributable to the Variable Account an amount
("Monthly Deduction Amount") to cover charges and expenses incurred in
connection with a Contract. Each Monthly Deduction Amount will be deducted pro
rata from each Variable Sub-Account attributable to the Contract such that the
proportion of Account Value of the Contract attributable to each Sub-Account
remains the same before and after the deduction. The Monthly Deduction Amount
will vary from month to month. If the Cash Surrender Value is not sufficient to
cover a Monthly Deduction Amount due on any Monthly Activity Date, the Contract
may lapse. See "Contract Benefits and Rights-- Lapse and Reinstatement," page
15. The following is a summary of the monthly deductions and charges which
constitute the Monthly Deduction Amount:
COST OF INSURANCE CHARGE: The cost of insurance charge covers the Company's
anticipated mortality costs for standard and special risks. Current cost of
insurance rates are lower after the 10th Contract Year. The current cost of
insurance charge will not exceed the guaranteed cost of insurance charge. This
charge is the maximum annual cost of insurance per $1,000 as indicated in the
Contract; multiplied by the difference between the Death Benefit and the Account
Value (both as determined on the Monthly Activity Date); divided by $1,000; and
divided by 12. For standard risks, the guaranteed cost of insurance rate is
based on the 1980 Commissioners Standard Ordinary Mortality Table, age last
birthday. (Unisex rates may be required in some states). A table of guaranteed
cost of insurance charges per $1,000 will be included in each Contract; however,
the Company reserves the right to use rates less than those shown in the table.
Special risks will be charged at a higher cost of insurance rate that will not
exceed rates based on a multiple of the 1980 Commissioners Standard Ordinary
Mortality Table, age last birthday. The multiple will be based on the Insured's
special rating.
The cost of insurance charge rates are applied to the difference between the
Death Benefit determined on the Monthly Activity Date and the Account Value on
that same date prior to assessing the Monthly Deduction Amount, because the
difference is the amount for which the Company is at risk should the Death
Benefit be then payable. The Death Benefit as computed on a given date is the
greater of (1) the Specified Amount on that date, and (2) the Account Value on
that date multiplied by the applicable Death Benefit ratio. (For an explanation
of the Death Benefit, see "Contract Benefits and Rights," page 13.)
EXAMPLE:
Specified Amount .......................................... $100,000
Account Value on the Monthly Activity Date ................ $ 30,000
Insured's attained age .................................... 45
Death Benefit ratio for age 45 ............................ 2.15
On the Monthly Activity Date in this example, the Death Benefit as then computed
would be $100,000, because the Specified Amount ($100,000) is greater than the
Account Value multiplied by the applicable Death Benefit ratio ($30,000 X 2.15 =
$64,500). Since the Account Value on that date is $30,000, the cost of insurance
charges per $1,000 are applied to the difference ($100,000 - $30,000 = $70,000).
Assume that the Account Value in the above example was $50,000. The Death
Benefit would then be $107,500 (2.15 X $50,000), since this is greater than the
Specified Amount ($100,000). The cost of insurance rates in that case would be
applied to ($107,500 - $50,000) = $57,500.
Because the Account Value and, as a result, the amount for which the Company is
at risk under a Contract may vary from month to month, the cost of insurance
charge may also vary on each Monthly Activity Date. However, once a risk rating
class has been assigned to an Insured when the Contract is issued, that rating
class will not change if additional premium payments or partial withdrawals
increase or decrease the Specified Amount.
The level of specified amount that an initial premium will purchase will vary
based on age and sex. For example, a $10,000 initial premium paid by a male at
age 45 would result in a specified amount of $39,998. If a female age 65 paid a
$10,000 premium, the specified amount would be equal to $22,749.
TAX EXPENSE CHARGE: The Company will deduct monthly from the Account Value a tax
expense charge equal to an annual rate of 0.40% for the first ten Contract
Years. This charge compensates the Company for premium taxes imposed by various
states and local jurisdictions and for federal taxes related to the receipt of
premiums under the Contract and that results from the application of section 848
of the Code. The charge includes a premium tax deduction of 0.25% and a federal
tax deduction of 0.15%. The 0.25% premium tax deduction over ten Contract Years
approximates the Company's average expenses for state and local premium taxes
(2.5%). Premium taxes vary, ranging from zero to 3.5%. The premium tax deduction
will be imposed regardless of a contract owner's state of residence and,
therefore, is made whether or not any premium tax applies. The deduction may be
higher or lower than the premium tax imposed. The 0.15% federal tax deduction
helps reimburse the Company for approximate expenses incurred for federal taxes
resulting from the application of Section 848 of the Code.
ADMINISTRATIVE EXPENSE CHARGE: The Company will deduct monthly from the Account
Value an administrative expense charge equal to an annual rate of 0.25%. This
charge compensates the Company for administrative expenses incurred in the
administration of the Variable Account and the Contracts.
All monthly deductions are taken by canceling Accumulation Units of the Variable
Account under your Contract.
OTHER DEDUCTIONS
MORTALITY AND EXPENSE RISK CHARGE: The Company will deduct from the Variable
Account a daily charge equivalent to an annual rate of 0.90% for the mortality
risks and expense risks the Company assumes in relation to the Contracts. The
mortality risk assumed includes the risk that the cost of insurance charges
specified in the Contract will be insufficient to meet claims. The Company also
assumes a risk that the Death Benefit will exceed the amount on which the cost
of insurance charges were based on the Monthly Activity Date preceding the death
of an Insured. The expense risk assumed is that expenses incurred in issuing and
administering the Contracts will exceed the administrative charges set in the
Contract.
ANNUAL MAINTENANCE FEE: The Company will deduct from the Account Value an annual
maintenance fee of $30 on each Contract Anniversary. This fee will help
reimburse the Company for administrative and maintenance costs of the Contracts.
Currently, this charge is waived for Contracts which have an aggregate premium
which equals or exceeds the dollar amount indicated on your Contract data page.
TAXES CHARGED AGAINST THE VARIABLE ACCOUNT: Currently, no charge is made to the
Variable Account for federal income taxes that may be attributable to the
operations of the Variable Account (as opposed to the federal tax related to the
receipt of premiums under the Contract). The Company may, however, make such a
charge in the future. Charges for other taxes, if any, attributable to the
Variable Account or this class of Contracts may also be made.
CHARGES AGAINST THE FUND: The Variable Account purchases shares of the Funds at
net asset value. The net asset value of the Fund shares reflect Fund investment
management fees already deducted from the assets of the Funds. The Fund
investment management fees are a percentage of the average daily value of the
net assets of the Portfolios. See the "Fund Expenses" table on page 6.
WITHDRAWAL CHARGE: Upon surrender of the Contract and partial withdrawals in
excess of the Free Withdrawal Amount, a withdrawal charge may be assessed. The
Free Withdrawal Amount in any Contract Year is 15% of total premiums paid. Any
Free Withdrawal Amount not taken in a Contract Year may not be carried forward
to increase the Free Withdrawal Amount in any subsequent year. Withdrawals in
excess of the Free Withdrawal Amount will be subject to a withdrawal charge as
set forth in the table below:
Contract Year 1 - 4 5 6 7 8 9 10
- ----------------------------------------------------------------------
Percentage of Initial
Premium Withdrawn 7.75% 6.25% 5.25% 4.25% 3.25% 2.25% 0.00%
After the ninth Contract Year, no withdrawal charges will be imposed. In
addition, no withdrawal charge will be imposed on any withdrawal to the extent
that aggregate withdrawal charges and the federal tax portion of the tax expense
charge imposed would otherwise exceed 9% of total premiums paid prior to the
withdrawal. The withdrawal charge may be waived under certain circumstances if
the Insured is confined to a qualified long-term care facility or hospital. See
"Contract Benefits and Rights-- Confinement Waiver Benefit," page 16.
The withdrawal charge is imposed to cover a portion of the sales expense
incurred by the Company in distributing the Contracts. This expense includes
agents' commissions, advertising and the printing of prospectuses.
DUE AND UNPAID PREMIUM TAX CHARGE: During the first nine Contract Years, a
charge for due and unpaid premium tax will be imposed on full or partial
withdrawals in excess of the Free Withdrawal Amount. This charge is shown below,
as a percent of the Account Value withdrawn:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year 1 2 3 4 5 6 7 8 9 10
- --------------------------------------------------------------------------------------
Percentage of
Initial Premium
Withdrawn 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00%
</TABLE>
After the ninth Contract Year, no due and unpaid premium tax charge will be
imposed. The percentages indicated above are guaranteed not to increase.
CONTRACT BENEFITS AND RIGHTS
DEATH BENEFIT
The Contracts provide for the payment of Death Benefit proceeds to the named
beneficiary when the Insured under the Contract dies. The Proceeds payable to
the beneficiary equal the Death Benefit less any Indebtedness and less any due
and unpaid Monthly Deduction Amounts occurring during a grace period (if
applicable). The Death Benefit equals the greater of (1) the Specified Amount or
(2) the Account Value multiplied by the Death Benefit ratio. The ratios vary
according to the attained age of the Insured and are specified in the Contract.
Therefore, an increase in Account Value due to favorable investment experience
may increase the Death Benefit above the Specified Amount; and a decrease in
Account Value due to unfavorable investment experience may decrease the Death
Benefit (but not below the Specified Amount).
EXAMPLES: A B
Specified Amount................................... $100,000 $100,000
Insured's Age...................................... 45 45
Account Value on Date of Death..................... $48,000 $34,000
Death Benefit Ratio................................ 2.15 2.15
In Example A, the Death Benefit equals $103,200, i.e., the greater of $100,000
(the Specified Amount) and $103,200 (the Account Value at the Date of Death of
$48,000, multiplied by the Death Benefit ratio of 2.15). This amount, less any
Indebtedness and due and unpaid Monthly Deduction Amounts, constitutes the
proceeds which we would pay to the beneficiary.
In Example B, the Death Benefit is $100,000, i.e., the greater of $100,000 (the
Specified Amount) or $73,100 (the Account Value of $34,000 multiplied by the
Death Benefit ratio of 2.15).
All or part of the proceeds may be paid in cash or applied under an income plan.
See "Other Matters--Payment Options," page 17.
ACCELERATED DEATH BENEFIT
If the Insured becomes terminally ill, the Contract Owner may request an
Accelerated Death Benefit in an amount up to the lesser of (1) 50% of the
Specified Amount on the day we receive the request, and (2) $250,000 for all
policies issued by the Company which cover the Insured. "Terminally ill" means
an illness or physical condition of the Insured that, notwithstanding
appropriate medical care, will result in a life expectancy of 12 months or less.
If the Insured is terminally ill as the result of an illness, the accelerated
Death Benefit is not available unless the illness occurred at least 30 days
after the issue date. If the Insured is terminally ill as the result of an
accident, the Accelerated Death Benefit is available if the accident occurred
after the issue date.
We will pay benefits due under the Accelerated Death Benefit provision upon
receipt of a written request from the Contract Owner and due proof that the
Insured has been diagnosed as terminally ill. The Company also reserves the
right to require supporting documentation of the diagnosis and to require (at
the Company's expense) an examination of the Insured by a physician of the
Company's choice to confirm the diagnosis. The amount of the payment will be the
amount requested by the Contract Owner, reduced by the sum of (1) a 12 month
interest discount to reflect the early payment; (2) an administrative fee (not
to exceed $250); and (3) a pro rata amount of any outstanding Contract loan and
accrued loan interest. After the payment has been made, the Specified Amount,
the Account Value and any outstanding Contract loan will be reduced on a pro
rata basis.
Only one request for an Accelerated Death Benefit per Insured is allowed. The
Accelerated Death Benefit may not be available in all states. Its features may
differ from those discussed above as required by state law. Please refer to the
Contract for further information.
ACCOUNT VALUE
The Account Value of a Contract will be computed on each Valuation Day. On the
Contract Date, the Account Value is equal to the initial premium less the
Monthly Deduction Amount for the first month. Thereafter, the Account Value will
vary to reflect the investment experience of the Fund, the value of the Loan
Account and the Monthly Deduction Amounts. There is no minimum guaranteed
Account Value.
The Account Value of a particular Contract is related to the net asset value of
the Fund to which premiums on the Contract have been allocated. The Account
Value on any Valuation Day is calculated by multiplying the number of
Accumulation Units credited to the Contract in each Variable Sub-Account as of
the Valuation Day by the then Accumulation Unit value of that Sub-Account and
then adding the results for all the Sub-Accounts credited to the Contract to the
value of the Loan Account. See "The Contract--Accumulation Unit Values," page
10.
TRANSFER OF ACCOUNT VALUE
While the Contract remains in force and subject to the Company's transfer rules
then in effect, the Contract Owner may request that part or all of the Account
Value of a particular Variable Sub-Account be transferred to other Variable
Sub-Accounts. The Company reserves the right to impose a $25 charge on each such
transfer in excess of 12 per Contract Year. However, there are no charges on
transfers at the present time. The minimum amount that can be transferred is
shown on the Contract data page (currently $100) or the total amount in the
Variable Sub-Account whichever is less.
On days when the New York Stock Exchange ("NYSE") is open for trading, telephone
transfer requests will be accepted by the Company if received at 1(800) 654-2397
by 4:00 p.m., Eastern Time. Telephone transfer requests received by the Company
before 4:00 p.m., Eastern Time are effected at the next computed value. In the
event that the NYSE closes early, i.e., before 4:00 p.m. Eastern Time, or in the
event that the NYSE closes early for a period of time but then reopens for
trading on the same day, telephone transfer requests will be processed by the
Company as of the close of the NYSE on that particular day. Telephone requests
received at any telephone number other than the number that appears in this
paragraph or received after the close of trading on the NYSE will not be
accepted by the Company.
Transfers by telephone may be made by the Contract Owner's Account Executive or
attorney-in-fact pursuant to a power of attorney. Telephone transfers may not be
permitted in some states. The policy of the Company and its agents and
affiliates is that they will not be responsible for losses resulting from acting
upon telephone requests reasonably believed to be genuine. The Company will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine; otherwise, the Company may be liable for any losses due
to unauthorized or fraudulent instructions. The procedures the Company follows
for transactions initiated by telephone include requirements that callers on
behalf of a Contract Owner identify themselves and the Contract Owner by name
and social security number or other identifying information. All transfer
instructions by telephone are tape recorded. Otherwise, transfer requests must
be in writing, on a form provided by the Company.
As a result of a transfer, the number of Accumulation Units credited to the
Variable Sub-Account from which the transfer is made will be reduced by the
number obtained by dividing the amount transferred by the Accumulation Unit
value of the Sub-Account from which the transfer is made on the Valuation Date
the Company receives the transfer request. The number of Accumulation Units
credited to the Sub-Account to which the transfer is made will be increased by
the number obtained by dividing the amount transferred by the Accumulation Unit
value of that Sub-Account on the Valuation Day the Company receives the transfer
request.
DOLLAR COST AVERAGING
Transfers may be made automatically through Dollar Cost Averaging while the
Contract is in force. Dollar Cost Averaging permits the Owner to transfer a
specified amount every month (or some other frequency as may be determined by
the Company) from the Money Market Sub-Account to any other Variable Sub-
Account. The minimum amount that can be transferred is shown on the Contract
data page (currently $100) or the total amount in the Variable Sub-Account
whichever is less. The theory of Dollar Cost Averaging is that, if purchases of
equal dollar amounts are made at fluctuating prices, the aggregate average cost
per unit will be less than the average of the unit prices on the same purchase
dates. However, participation in the Dollar Cost Averaging program does not
assure you of a greater profit from your purchases under the program; nor will
it prevent or alleviate losses in a declining market. There are no additional
charges imposed upon participants in the Dollar Cost Averaging program.
Transfers under Dollar Cost Averaging are not counted toward the 12 free
transfers per Contract Year currently permitted.
CONTRACT LOANS
While the Contract is in force, a Contract Owner may obtain, without the consent
of the beneficiary (provided the designation of beneficiary is not irrevocable),
one or both of two types of cash loans from the Company. These types are
preferred loans (described below) and non-preferred loans. Both types of loans
are secured by the Contract. The maximum amount available for a loan is 90% of
the Contract's Cash Value, less the amount of all Contract loans existing on the
date of the loan (including loan interest to the next Contract Anniversary),
less any due and unpaid Monthly Deduction Amounts, and less any annual
maintenance fee due on or before the next Contract Anniversary.
The loan amount will be transferred pro rata from each Variable Sub-Account
attributable to the Contract (unless the Contract Owner specifies otherwise) to
the Loan Account. The amounts allocated to the Loan Account will be credited
with interest at the loan credited rate set forth in the Contract. Loans will
bear interest at rates determined by the Company from time to time, but which
will not exceed the maximum rate indicated in the Contract (currently, 8% per
year). The amount of the Loan Account that equals the excess of the Account
Value over the total of all premiums paid under the Contract net of any premiums
returned due to partial withdrawals and net of any prior loan balance, as
determined on each Contract Anniversary, is considered a "preferred loan."
Preferred loans bear interest at a rate not to exceed the preferred loan rate
set forth in the Contract. The difference between the value of the Loan Account
and the Indebtedness will be transferred on a pro rata basis from the Variable
Sub-Accounts to the Loan Account on each Contract Anniversary. If the aggregate
outstanding loan(s) and loan interest secured by the Contract exceeds the Cash
Value of the Contract, the Company will give written notice to the Contract
Owner that unless the Company receives an additional payment within 61 days to
reduce the aggregate outstanding loan(s) secured by the Contract, the Contract
may lapse.
All or any part of any loan secured by a Contract may be repaid while the
Contract is still in effect. When loan repayments or interest payments are made,
the repayment will be allocated among the Variable Sub-Accounts in the same
percentage as subsequent payments are allocated (unless the Contract Owner
requests a different allocation), and an amount equal to the payment will be
deducted from the Loan Account. Any outstanding loan at the end of a grace
period must be repaid before the Contract will be reinstated. See "Contract
Benefits and Rights-- Lapse and Reinstatement," page 15.
A loan, whether or not repaid, will have a permanent effect on the Account Value
because the investment results of each Variable Sub-Account will apply only to
the amount remaining in that Sub-Account. The longer a loan is outstanding, the
greater the effect is likely to be. The effect could be favorable or
unfavorable. If the Variable Sub-Accounts earn more than the annual interest
rate for amounts held in the Loan Account, a Contract Owner's Account Value will
not increase as rapidly as it would have had no loan been made. If the Variable
Sub-Accounts earn less than that rate, the Contract Owner's Account Value will
be greater than it would have been had no loan been made. Also, if not repaid,
the aggregate outstanding loan(s) will reduce the Death Benefit proceeds and
Cash Surrender Value otherwise payable.
AMOUNT PAYABLE ON SURRENDER OF THE CONTRACT
While the Contract is in force, a Contract Owner may elect, without the consent
of the beneficiary (provided the designation of beneficiary is not irrevocable),
to fully surrender the Contract. Upon surrender, the Contract Owner will receive
the Cash Surrender Value determined as of the day the Company receives the
Contract Owner's written request or the date requested by the Contract Owner,
whichever is later. The Cash Surrender Value equals the Cash Value less the
annual maintenance fee and any Indebtedness. The Company will pay the Cash
Surrender Value of the Contract within seven days of receipt by the Company of
the written request or on the effective surrender date requested by the Contract
Owner, whichever is later.
The Contract will terminate on the date of receipt of the written request, or
the date the Contract Owner requests the surrender to be effective, whichever is
later. For a discussion of the tax consequences of surrendering the Contract,
see "Federal Tax Matters," page 21.
The Contract Owner may elect to apply the surrender proceeds to an Income Plan
(see "Other Matters--Payment Options," page 17).
PARTIAL WITHDRAWALS
While the Contract is in force, a Contract Owner may elect by written request to
make partial withdrawals from the Cash Surrender Value of at least $100, or the
total amount in the Variable Sub-Account, whichever is less. The Cash Surrender
Value, after the partial withdrawal, must at least equal $2,000; otherwise, the
request will be treated as a request for full surrender. The partial withdrawal
will be deducted pro rata from each Variable Sub-Account, unless the Contract
Owner instructs otherwise. The Specified Amount after the partial withdrawal
will be the greater of:
- the Specified Amount prior to the partial withdrawal reduced
proportionately to the reduction in Account Value; or
- the minimum Specified Amount necessary in order to meet the definition
of a life insurance contract under section 7702 of the Code.
Partial withdrawals in excess of the Free Withdrawal Amount may be subject to a
withdrawal charge and any due and unpaid premium tax charges. See "Deductions
and Charges--Other Deductions--Withdrawal Charge" and "Due and Unpaid Premium
Tax Charge," page 12. For a discussion of the tax consequences of partial
withdrawals, see "Federal Tax Matters," page 21.
MATURITY
The Contract has no maturity date.
LAPSE AND REINSTATEMENT
The Contract will remain in force until the Cash Surrender Value is insufficient
to cover a Monthly Deduction Amount due on a Monthly Activity Date. The Company
will give written notice to the Contract Owner that if an amount shown in the
notice (which will be sufficient to cover the Monthly Deduction Amount(s) due)
is not paid within 61 days ("Grace Period"), there is a danger of lapse.
The Contract will continue through the grace period, but if no payment is
forthcoming, it will terminate at the end of the grace period. If the Insured
dies during the grace period, the proceeds payable under the Contract will be
reduced by the Monthly Deduction Amount(s) due and unpaid. See "Contract
Benefits and Rights--Death Benefit," page 13.
If the Contract lapses, the Contract Owner may apply for reinstatement of the
Contract by payment of the reinstatement premium (and any applicable charges)
required under the Contract. A request for reinstatement must be made within
five years of the date the Contract entered a grace period. If a loan was
outstanding at the time of lapse, the Company will require repayment of the loan
before permitting reinstatement. In addition, the Company reserves the right to
require evidence of insurability satisfactory to the Company. The reinstatement
premium is equal to an amount sufficient to (1) cover all Monthly Deduction
Amounts and annual maintenance fees due and unpaid during the grace period, and
(2) keep the Contract in force for three months after the date of reinstatement.
The Specified Amount upon reinstatement cannot exceed the Specified Amount of
the Contract at its lapse. The Account Value on the reinstatement date will
reflect the Account Value at the time of termination of the Contract plus the
premiums paid at the time of reinstatement. Withdrawal charges and due and
unpaid premium tax charges, cost of insurance, and tax expense charges will
continue to be based on the original Contract Date.
CANCELLATION AND EXCHANGE RIGHTS
A Contract Owner has a limited right to return a Contract for cancellation. This
right to return exists during the free-look period. The free-look period is a
number of days (which varies by state) as specified in your Contract. If the
Contract is returned for cancellation by mail or personal delivery to the
Company or to the Account Executive who sold the Contract within the free-look
period following delivery of the Contract to the Contract Owner, the Company
will return to the Contract Owner within 7 days the sum of (1) the Account Value
on the date the returned Contract is received by the Company or its agent; and
(2) any deductions under the Contract or by the Fund for taxes, charges or fees.
Some states may require the Company to return the premiums paid for the returned
Contract.
Once the Contract is in effect, it may be exchanged during the first 24 months
after its issuance for a non-variable permanent life insurance contract offered
by the Company on the life of the Insured. The amount at risk to the Company
(i.e., the difference between the Death Benefit and the Account Value) under the
new contract will be equal to or less than the amount at risk to the Company
under the exchanged Contract on the date of exchange. Premiums under the new
Contract will be based on the same risk classification as the exchanged
Contract. The exchange is subject to adjustments in premiums and Account Value
to reflect any variance between the exchanged Contract and the new contract. The
Company reserves the right to make such a contract available that is offered by
the Company's parent or by any affiliate of the Company.
CONFINEMENT WAIVER BENEFIT
Under the terms of an amendatory endorsement to the Contract, the Company will
waive any withdrawal charges on partial withdrawals and surrenders of the
Contract requested while the Insured is confined to a qualified long-term care
facility or hospital for a period of more than 90 consecutive days beginning 30
days or more after the issue date, or within 90 days after the Insured is
discharged from such confinement. The confinement must have been prescribed by a
licensed medical doctor or a licensed doctor of osteopathy, operating within the
scope of his or her license, and must be medically necessary. The prescribing
doctor may not be the Insured, the Contract Owner, or any spouse, child, parent,
grandchild, grandparent, sibling or in-law of the Contract Owner. "Medically
necessary" means appropriate and consistent with the diagnosis and which could
not have been omitted without adversely affecting the Insured's condition. The
confinement waiver benefit may not be available in all states. In addition, its
features may differ from those discussed above as required by state law. Please
refer to the Contract for further information. The Company reserves the right to
discontinue the offering of the confinement waiver benefit amendatory
endorsement upon the purchase of a new contract.
SUSPENSION OF VALUATION, PAYMENTS AND TRANSFERS
The Company will suspend all procedures requiring valuation of the Variable
Account (including transfers, surrenders and loans) on any day the New York
Stock Exchange is closed or trading is restricted due to an existing emergency
as defined by the Securities and Exchange Commission, or on any day the
Securities and Exchange Commission has ordered that the right of surrender of
the Contracts be suspended for the protection of Contract Owners, until such
condition has ended.
LAST SURVIVOR CONTRACTS
The Contracts are offered on a single life and "last survivor" basis. Contracts
sold on a last survivor basis operate in a manner almost identical to the single
life version. The most important difference is that the last survivor version
involves two Insureds and the proceeds are paid only on the death of the last
surviving Insured. The other significant differences between the last survivor
and single life versions are listed below:
1. Last survivor Contracts are offered for prospective insured persons
age 18-85.
2. The cost of insurance charges under the last survivor Contracts are
determined in a manner that reflects the anticipated mortality of the
two Insureds and the fact that the Death Benefit is not payable until
the death of the second Insured.
3. To qualify for simplified underwriting under a last survivor Contract,
both Insureds must meet the simplified underwriting standards.
4. For a last survivor Contract to be reinstated, both Insureds must be
alive on the date of reinstatement.
5. The Contract provisions regarding misstatement of age or sex, suicide
and incontestability apply to either Insured.
6. Additional tax disclosures applicable to last survivor Contracts are
provided in "Federal Tax Matters," page 21.
7. The Accelerated Death Benefit provision is only available upon
terminal illness of the last survivor.
8. The Confinement Waiver Benefit is available upon confinement of either
insured.
OTHER MATTERS
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VOTING RIGHTS
In accordance with its view of presently applicable law, the Company will vote
the shares of the Fund at regular and special meetings of the shareholders of
the Fund in accordance with instructions from Contract Owners (or the assignee
of the Contract, as the case may be) having a voting interest in the Variable
Account. The number of shares of a Fund Portfolio held in a Variable Sub-Account
which are attributable to each Contract Owner is determined by dividing the
Contract Owner's interest in that Variable Sub-Account by the per share net
asset value of the corresponding Fund Portfolio. The Company will vote shares
for which no instructions have been given and shares which are not attributable
to Contract Owners (i.e., shares owned by the Company) in the same proportion as
it votes shares for which it has received instructions. If the Investment
Company Act of 1940 or any rule promulgated hereunder should be amended,
however, or if the Company's present interpretation should change and, as a
result, the Company determines it is permitted to vote the shares of the Fund in
its own right, it may elect to do so.
The voting interests of the Contract Owner (or the assignee) in the Fund will be
determined as follows: Contract Owners are entitled to give voting instructions
to the Company with respect to Fund Portfolio shares attributable to them as
described above, determined on the record date for the shareholder meeting for
the Fund. Therefore, if a Contract Owner has taken a loan secured by the
Contract, amounts transferred from the Sub-Account(s) to the Loan Account in
connection with the loan (see "Contract Benefits and Rights--Contract Loans,"
page 14) will not be considered in determining the voting interests of the
Contract Owner. Contract Owners should review the prospectus for the Fund which
accompanies this prospectus to determine matters on which Fund shareholders may
vote.
The Company may, when required by state insurance regulatory authorities,
disregard voting instructions if the instructions require that the shares be
voted so as to cause a change in the sub-classification or investment objective
of the Fund or to approve or disapprove an investment advisory contract for the
Fund.
In addition, the Company itself may disregard voting instructions in favor of
changes initiated by Contract Owners in the investment objectives or the
investment adviser of the Fund if the Company reasonably disapproves of such
changes. A change would be disapproved only if the proposed change is contrary
to state law or prohibited by state regulatory authorities. If the Company does
disregard voting instructions, a summary of that action and the reasons for such
action will be included in the next periodic report to Contract Owners.
STATEMENTS TO CONTRACT OWNERS
The Company will maintain all records relating to the Variable Account and the
Variable Sub-Accounts. At least once each Contract Year, the Company will send
to each Contract Owner a statement showing the coverage amount and the Account
Value of the Contract (indicating the number of Accumulation Units credited to
the Contract in each Variable Sub-Account and the corresponding Accumulation
Unit value), and any outstanding loan secured by the Contract as of the date of
the statement. The statement will also show premium paid, Monthly Deduction
Amounts under the Contract since the last statement, and any other information
required by any applicable law or regulation.
LIMIT ON RIGHT TO CONTEST
The Company may not contest the validity of the Contract after it has been in
effect during the Insured's lifetime for two years from the Contract Date. If
the Contract is reinstated, the two-year period is measured from the date of
reinstatement. Any increase in the Specified Amount for which evidence of
insurability was obtained is contestable for 2 years from its effective date. In
addition, if the Insured dies by suicide while sane or self destruction while
insane in the two-year period after the Contract Date, or such period as
specified in state law, the benefit payable will be limited to the premiums paid
less any Indebtedness and partial withdrawals. If the Insured dies by suicide
while sane or self-destruction while insane in the two-year period following an
increase in the Specified Amount, the benefit payable with respect to the
increase will be limited to the additional premium paid for such increase, less
any Indebtedness and partial withdrawals.
MISSTATEMENT AS TO AGE AND SEX
If the age or sex of the Insured is incorrectly stated, the Death Benefit will
be appropriately adjusted as specified in the Contract.
PAYMENT OPTIONS
The surrender proceeds or Death Benefit proceeds under the Contracts may be paid
in a lump sum or may be applied to one of the Company's Income Plans. If the
amount to be applied to an Income Plan is less than $3,000 or if it would result
in an initial income payment of less than $20, the Company may require that the
frequency of income payments be decreased such that the income payments are
greater than $20 each, or it may elect to pay the amount in a lump sum. No
surrender or partial withdrawals are permitted after payments under an Income
Plan commence.
We will pay interest on the proceeds from the date of the Insured's death to the
date payment is made or a payment option is elected. At such times, the proceeds
are not subject to the investment experience of the Variable Account.
The Income Plans are fixed annuities payable from the Company's general account.
They do not reflect the investment experience of the Variable Account. Fixed
annuity payments are determined by multiplying the amount applied to the annuity
by a rate to be determined by the Company which is no less than the rate
specified in the fixed payment annuity tables in the Contract. The annuity
payment will remain level for the duration of the annuity. The Company may
require proof of age and gender of the payee (and joint payee, if applicable)
before payments begin. The Company may also require proof that such person(s)
are living before it makes each payment.
The following options are available under the Contracts (the Company may offer
other payment options):
INCOME PLAN 1--LIFE INCOME WITH GUARANTEED PAYMENTS The Company will make
payments for as long as the payee lives. If the payee dies before the selected
number of guaranteed payments have been made, the Company will continue to pay
the remainder of the guaranteed payments.
INCOME PLAN 2--JOINT AND SURVIVOR LIFE INCOME WITH GUARANTEED PAYMENTS The
Company will make payments for as long as either the payee or Joint payee, named
at the time of Income Plan selection, is living. If both the payee and the Joint
payee die before the selected number of guaranteed payments have been made, the
Company will continue to pay the remainder of the guaranteed payments.
The Company will make any other arrangements for income payments as may be
agreed on.
BENEFICIARY
The applicant names the beneficiary in the application for the Contract. The
Contract Owner may change the beneficiary (unless irrevocably named) during the
Insured's lifetime by written request to the Company. If no beneficiary is
living when the Insured dies, the proceeds will be paid to the Contract Owner if
living; otherwise to the Contract Owner's estate.
ASSIGNMENT
Unless required by state law, the Contract may not be assigned as collateral for
a loan or other obligation.
DIVIDENDS
No dividends will be paid under the Contracts.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The directors and executive officers of the Company are listed below, together
with information as to their ages, dates of election and principal business
occupations during the last five years (if other than their present business
occupations).
LOUIS G. LOWER, II, 52, Chief Executive Officer and Chairman of the Board
(1995)*
Also Director (1986-Present) and Senior Vice President (1995-Present) of
Allstate Insurance Company; Director (1991-Present) of Allstate Life Financial
Services, Inc.; Director (1986-Present) and President (1990-Present) Allstate
Life Insurance Company; Director (1983-Present) and Chairman of the Board
(1990-Present) of Allstate Life Insurance Company of New York; Chairman of the
Board of Directors and Chief Executive Officer (1995-1997), Chairman of the
Board of Directors and President (1990-1995) of Glenbrook Life Insurance
Company; Director (1992-Present), Chairman of the Board of Directors and Chief
Executive Officer (1995-Present) of Glenbrook Life and Annuity Company; Director
and Chairman of the Board (1995-Present) of Laughlin Group Holdings, Inc.;
Director and Chairman of the Board of Directors and Chief Executive Officer
(1989-Present) Lincoln Benefit Life Company; Chairman of the Board of Directors
and Chief Executive Officer (1995-Present) Surety Life Insurance Company; and
Trustee (1991-Present) and Vice President (1995-Present) The Allstate
Foundation.
PETER H. HECKMAN, 52, President, Chief Operating Officer and Director (1996)*
Also Director and Vice President (1988-Present) of Allstate Life Insurance
Company; Director (1990-1996), Vice President (1989-Present), Allstate Life
Insurance Company of New York; Director (1991-1993) of Allstate Life Financial
Services, Inc.; Director (1990-1997), President and Chief Operating Officer
(1996-1997), and Vice President (1990-1996), Glenbrook Life Insurance Company;
Director (1992-Present) President and Chief Operating Officer (1996-Present),
and was Vice President (1995-1996), Glenbrook Life and Annuity Company; Director
(1995-Present) and Vice Chairman of the Board (1996-Present) Laughlin Group
Holdings, Inc.; Director (1990-Present) and Vice Chairman of the Board
(1996-Present) Lincoln Benefit Life Company; and Director (1995-Present) and
Vice Chairman of the Board (1996-Present) Surety Life Insurance Company.
<PAGE>
MICHAEL J. VELOTTA, 52, Vice President, Secretary, General Counsel, and Director
(1992)*
Also Director and Secretary (1993-Present) of Allstate Life Financial Services,
Inc.; Director (1992-Present) Vice President, Secretary and General Counsel
(1993-Present) Allstate Life Insurance Company; Director (1992-Present) Vice
President, Secretary and General Counsel (1993-Present) Allstate Life Insurance
Company of New York; Director (1992-Present) Vice President, Secretary and
General Counsel (1993-1997) Glenbrook Life Insurance Company; Director
(1992-Present) Vice President, Secretary and General Counsel (1993-Present)
Glenbrook Life and Annuity Company; Director and Secretary (1995-Present)
Laughlin Group Holdings, Inc.; Director (1992-Present) and Assistant Secretary
(1995-Present) Lincoln Benefit Life Company; and Director and Assistant
Secretary (1995-Present) Surety Life Insurance Company.
JOHN R. HUNTER, 43, Assistant Vice President (1990)* and Director (1994)*
Also Assistant Vice President (1990-Present) Allstate Life Insurance Company;
Assistant Vice President (1996-Present) Allstate Life Insurance Company of New
York; President and Chief Operating Officer (1998-Present) Allstate Life
Financial Services, Inc.; Director (1996-1997) Glenbrook Life Insurance Company;
and Director (1996-Present) and Senior Vice President--Product Management
(1995-Present) Glenbrook Life and Annuity Company.
MARLA G. FRIEDMAN, 44, Vice President (1996)*
Also Director (1991-Present) and Vice President (1988-Present) Allstate Life
Insurance Company; Director (1993-1996) Allstate Life Financial Services, Inc.;
Director (1997-Present) and Assistant Vice President (1996-Present) Allstate
Life Insurance Company of New York; Director (1995-1996) Allstate Settlement
Corporation; Director (1991-1996), President and Chief Operating Officer
(1995-1996) and Vice President (1990-1995) and (1996-1997) Glenbrook Life
Insurance Company; Director (1992-1996), President and Chief Operating Officer
(1995-1996) and Vice President (1992-1995) and (1996-Present) Glenbrook Life and
Annuity Company; and Director and Vice Chairman of the Board (1995-1996)
Laughlin Group Holdings, Inc.
KAREN C. GARDNER, 44, Vice President (1996)*
Vice President (1996-Present) Allstate Insurance Company; Vice President
(1996-Present) Allstate Life Insurance Company; Vice President (1996-Present)
Allstate Life Insurance Company of New York; Vice President (1997-Present),
Allstate Life Financial Services, Inc.; Vice President (1996-1997) Glenbrook
Life Insurance Company; Vice President (1996-Present) Laughlin Group Holdings,
Inc.; Assistant Vice President (1996-Present) Lincoln Benefit Life Company; Vice
President (1996-Present) Northbrook Life Insurance Company; Assistant Vice
President (1996-Present) Surety Life Insurance Company. Prior to 1996 she was a
Partner (1975-1996) Ernst & Young LLP.
KEVIN R. SLAWIN, 40, Director and Vice President (1996)*
Also Assistant Vice President and Assistant Treasurer (1995-1996) Allstate
Insurance Company; Director (1996-Present) and Assistant Treasurer (1995-1996)
Allstate Financial Services, Inc.; Director and Vice President (1996-Present)
and Assistant Treasurer (1995-1996) Allstate Life Insurance Company; Director
and Vice President (1996-Present) and Assistant Treasurer (1995-1996) Allstate
Life Insurance Company of New York; Director and Vice President (1996-1997) and
Assistant Treasurer (1995-1996) Glenbrook Life Insurance Company; Vice President
(1996-Present) and Assistant Treasurer (1995-1996) Glenbrook Life and Annuity
Company; Director (1996-Present) and Assistant Treasurer (1995-1996) Laughlin
Group Holdings, Inc.; Director (1996-Present) Lincoln Benefit Life Company;
Director (1996-Present) Surety Life Insurance Company; Assistant Treasurer and
Director (1994-1995) Sears Roebuck and Company; and Treasurer and First Vice
President (1986-1994) Sears Mortgage Corporation.
CASEY J. SYLLA, 54, Chief Investment Officer and Director (1995)*
Also Director (1995-Present) Senior Vice President and Chief Investment Officer
(1995-Present) Allstate Insurance Company; Director (1995-Present) Chief
Investment Officer (1995-Present) Allstate Life Insurance Company; Chief
Investment Officer (1995-Present) Allstate Life Insurance Company of New York;
Chief Investment Officer (1995-1997) Glenbrook Life Insurance Company; Chief
Investment Officer (1995-Present) Glenbrook Life and Annuity Company; Prior to
1995 he was Senior Vice President and Executive Officer--Investments (1992-1995)
of Northwestern Mutual Life Insurance Company.
JAMES P. ZILS, 47, Treasurer (1995)*
Also Vice President and Treasurer (1995-Present) Allstate Insurance Company;
Treasurer (1995-Present) Allstate Life Financial Services, Inc.; Treasurer
(1995-Present) Allstate Life Insurance Company; Treasurer (1995-Present)
Allstate Life Insurance Company of New York; Treasurer (1995-1997) Glenbrook
Life Insurance Company; Treasurer (1995-Present) Glenbrook Life and Annuity
Company; and Treasurer (1995-Present) Laughlin Group Holdings, Inc. From 1995 to
1993 he was Vice President of Allstate Life Insurance Company.
* Date elected to current office
<PAGE>
DISTRIBUTION OF THE CONTRACTS
- -----------------------------
The Contracts will be distributed exclusively by Dean Witter which serves as the
principal underwriter of the Contracts under a general agency agreement with the
Company.
Dean Witter is a wholly owned subsidiary of Morgan Stanley Dean Witter & Co.
Dean Witter is located at Two World Trade Center, New York, New York. Dean
Witter is a member of the New York Stock Exchange and the National Association
of Securities Dealers.
The Company may pay up to a maximum sales commission of 6.75%. Dean Witter will
pay annually to its Account Executives from its profits, an amount equal to .10%
of the net assets of the Variable Account attributable to the Contracts. In
addition, sale of the Contract may count toward incentive program awards for the
Account Executive.
SAFEKEEPING OF THE VARIABLE ACCOUNT'S ASSETS
- --------------------------------------------
The assets of the Variable Account are held by the Company. The assets of the
Variable Account are kept physically segregated and held separate and apart from
the general account of the Company. The Company maintains records of all
purchases and redemptions of shares of the Fund.
FEDERAL TAX MATTERS
- -------------------
INTRODUCTION
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE. THE
COMPANY MAKES NO GUARANTEE REGARDING THE TAX TREATMENT OF ANY CONTRACT OR
TRANSACTION INVOLVING A CONTRACT. Federal, state, local and other tax
consequences of ownership or purchase of a life insurance contract depend upon
the individual circumstances of each person. If you are concerned about any tax
consequences with regard to your individual circumstances, you should consult a
qualified tax advisor.
TAXATION OF THE COMPANY AND THE VARIABLE ACCOUNT
The Company is taxed as a life insurance company under Part I of Subchapter L of
the Internal Revenue Code. Since the Variable Account is not an entity separate
from the Company and its operations form a part of the Company, it will not be
taxed separately as a "Regulated Investment Company" under Subchapter M of the
Code. Investment income and realized capital gains are automatically applied to
increase reserves under the Contracts. Under existing federal income tax law,
the Company believes that the Variable Account investment income and net capital
gains will not be taxed to the extent that such income and gains are applied to
increase the reserves under the Contracts. Accordingly, the Company does not
anticipate that it will incur any federal income tax liability attributable to
the Variable Account, and therefore the Company does not intend to make
provisions for any such taxes. If the Company is taxed on investment income or
capital gains of the Variable Account, then the Company may impose a charge
against the Variable Account in order to make provision for such taxes.
TAXATION OF CONTRACT BENEFITS
In order to qualify as a life insurance contract for federal income tax
purposes, the Contract must meet the definition of a life insurance contract set
forth in Section 7702 of the Code. Section 7702 limits the amount of premiums
that may be invested in a contract that is treated as life insurance. The manner
in which Section 7702 should be applied to certain features of the Contract
offered in this prospectus is not directly addressed in Section 7702.
Nevertheless, the Company believes that the Contact will meet the Section 7702
definition of a life insurance contract. This means that:
- the death benefit should be fully excludable from the gross income of
the beneficiary under Section 101(a)(1) of the Code; and
- the Contract Owner should not be considered in constructive receipt of
the Cash Value of the Contract, including any increases, until actual
cancellation of the Contract
In addition, in the absence of final regulations or other pertinent
interpretations of Section 7702, there is necessarily some uncertainty as to
whether a substandard risk Contract will meet the statutory life insurance
contract definition. If a Contract were determined not to be a life insurance
contract for purposes of Section 7702, such Contract would not provide most of
the tax advantages normally provided by a life insurance contract. The Company
reserves the right to amend the Contracts to comply with any future changes in
the Code, any regulations or rulings under the Code and any other requirements
imposed by the Internal Revenue Service.
Upon surrender of the Contract, the cash surrender value is taxable to the
extent it exceeds the investment in the Contract. The investment in the Contract
is the gross premium or other consideration paid for the Contract reduced by any
amounts previously received from the Contract to the extent such amounts were
properly excluded from gross income. For non-modified endowment contracts, in
the event of a partial withdrawal, or a reduction in benefit in the first
fifteen years of the Contract, the partial withdrawal or reduction in benefit
may result in a taxable distribution of income before recovery of the investment
in the Contract. Partial withdrawals and reduction in benefits on non-modified
endowment contracts after fifteen years are taxed first as a recovery of
investment in the Contract, then as a taxable distribution of income.
If you own and are the Insured under the Contract, the Death Benefit will be
included in your gross estate for federal estate tax purposes if the proceeds
are payable to your estate. If the beneficiary is other than your estate but you
retained incidents of ownership in the Contract, the Death Benefit will also be
included in your gross estate. Examples of incidents of ownership include, but
are not limited to, the right to change beneficiaries, to assign the Contract or
revoke an assignment, to pledge the Contract or to obtain a policy loan. If you
own and are the Insured under the Contract and you transfer all incidents of
ownership in the Contract, the Death Benefit will be included in your gross
estate if you die within three years from the date of the ownership transfer.
State and local estate and inheritance tax consequences may also apply. In
addition, certain transfers of the Contract or Death Benefit, either during life
or at death, to individuals (or trusts for the benefit of such individuals) two
or more generations below that of the transferor may be subject to the federal
generation skipping transfer tax.
In addition, the Contract may be used in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans, and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if you are
contemplating the use of a Contract in any arrangement the value of which
depends in part on its tax consequences, you should be sure to consult a
qualified tax advisor regarding the tax attributes of the particular
arrangement.
MODIFIED ENDOWMENT CONTRACTS
A life insurance contract is treated as a "modified endowment contract" under
Section 7702A of the Code if it meets the definition of life insurance in
Section 7702 but fails the "seven-pay" test of Section 7702A. The seven-pay test
provides that premiums cannot be paid at a rate more rapidly than that allowed
by the payment of seven annual premiums using specified computational rules
provided in Section 7702A(c). The large single premium permitted under the
Contract (which is equal to 100% of the "Guideline Single Premium" as defined in
Section 7702 of the Code) does not meet the specified computational rules for
the "seven-pay test" under Section 7702A(c). Therefore, the Contract will
generally be treated as a modified endowment contract for federal income tax
purposes. However, an exchange of a life insurance contract that is not a
modified endowment contract will not cause the new contract to be a modified
endowment contract if no additional premiums are paid. An exchange under Section
1035 of the Code of a life insurance contract that is a modified endowment
contract for a new life insurance contract will always cause the new contract to
be a modified endowment contract. A contract that is classified as a modified
endowment contract is generally eligible for the beneficial tax treatment
accorded to life insurance. Accordingly, the death benefit is excluded from
income and increments in value are not subject to current taxation. If a person
receives any amount as a policy loan from a modified endowment contract, or
assigns or pledges any part of the value of the contract, such amount is treated
as a distribution. Unlike other life insurance contracts, distributions received
before the insured's death are treated first as income (to the extent of gain)
and then as recovery of investment in the contract. Any amounts that are taxable
withdrawals will be subject to a 10% additional tax, with certain exceptions:
(1) distributions made on or after the date on which the taxpayer attains age 59
1/2; (2) distributions attributable to the taxpayer's becoming disabled (within
the meaning of Section 72(m)(7) of the Code); or (3) any distribution that is
part of a series of substantially equal periodic payments (not less frequently
than annually) made for the life (or life expectancy) of the taxpayer or the
joint lives (or joint life expectancies) of such taxpayer and his or her
beneficiary.
All modified endowment contracts that are issued within any calendar year to the
same Contract Owner by one company or its affiliates shall be treated as one
modified endowment contract in determining the taxable portion of any loan or
distributions.
DIVERSIFICATION REQUIREMENTS
For a Contract to be treated as a variable life insurance contract for federal
tax purposes, the investments in the Variable Account must be "adequately
diversified" in accordance with the standards provided in the Treasury
regulations. If the investments in the Variable Account are not adequately
diversified, then the Contract will not be treated as a variable life insurance
contract for federal income tax purposes and the Owner will be taxed on the
excess of the Contract Value over the investment in the Contract. Although the
Company does not have control over the Funds or their investments, the Company
expects the Funds to meet the diversification requirements.
OWNERSHIP TREATMENT
In connection with the issuance of the regulations on the adequate
diversification standards, the Department of the Treasury announced that the
regulations do not provide guidance concerning the extent to which contract
owners may direct their investments among sub-accounts of a Variable Account.
The Internal Revenue Service has previously stated in published rulings that a
variable contract owner will be considered the owner of separate account assets
if the owner possesses incidents of ownership in those assets such as the
ability to exercise investment control over the assets. At the time the
diversification regulations were issued, the Treasury Department announced that
guidance would be issued in the future regarding the extent that owners could
direct their investments among sub-accounts without being treated as owners of
the underlying assets of the Variable Account.
The ownership rights under this contract are similar to, but different in
certain respects from, those described by the service in rulings in which it was
determined that contract owners were not owners of separate account assets. For
example, the owner of this contract has the choice of more investment options to
which to allocate premiums and contract values, and may be able to transfer
among investment options more frequently than in such rulings. These differences
could result in the contract owner being treated as the owner of the Variable
Account. In those circumstances, income and gain from the Variable Account
assets would be includible in the Contract Owner's gross income. In addition,
the Company does not know what standards will be set forth in the regulations or
rulings which the Treasury Department has stated it expects to issue. It is
possible that Treasury Department's position, when announced, may adversely
affect the tax treatment of existing contracts. The Company, therefore, reserves
the right to modify the contract as necessary to attempt to prevent the contract
owner from being considered the federal tax owner of the assets of the Variable
Account. However, the Company makes no guarantee that such modification to the
contract will be successful.
POLICY LOAN INTEREST
Interest paid on loans against a Contract is generally not deductible.
ADDITIONAL INFORMATION ABOUT THE COMPANY
- ----------------------------------------
The Company also acts as the sponsor for two other of its separate accounts that
are registered investment companies: Northbrook Variable Annuity Account and
Northbrook Variable Annuity Account II. The officers and employees of the
Company are covered by a fidelity bond in the amount of $5,000,000. No person
beneficially owns more than 5% of the outstanding voting stock of The Allstate
Corporation, of which the Company is an indirect wholly owned subsidiary.
LEGAL PROCEEDINGS
- -----------------
From time to time the Company is involved in pending and threatened litigation
in the normal course of its business in which claims for monetary damages are
asserted. Management, after consultation with legal counsel, does not anticipate
the ultimate liability arising from such pending or threatened litigation to
have a material effect on the financial condition of the Company or the Variable
Account.
LEGAL MATTERS
- -------------
Freedman, Levy, Kroll & Simonds, Washington, D.C., has advised the Company on
certain federal securities law matters. All matters of Illinois law pertaining
to the Contracts, including the validity of the Contracts and the Company's
right to issue such Contracts under Illinois insurance law, have been passed
upon by Michael J. Velotta, General Counsel of the Company.
REGISTRATION STATEMENT
- ----------------------
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. This prospectus does
not contain all information set forth in the registration statement, its
amendments and exhibits, to all of which reference is made for further
information concerning the Variable Account, the Fund, the Company, and the
Contracts. The exhibits to the registration statement include hypothetical
illustrations of the Contract that show how the Death Benefit, Account Value and
Cash Surrender Value could vary over an extended period of time assuming
hypothetical gross rates of return (i.e., investment income and capital gains
and losses, realized or unrealized) for the Variable Account equal to annual
rates of 0%, 6%, and 12%, an initial premium of $10,000, Insureds in the
standard rating class, and based on current and guaranteed Contract charges.
EXPERTS
- -------
The financial statements of the Variable Account and the financial statements
and financial statement schedule of the Company included in this prospectus have
been audited by Deloitte & Touche LLP, Two Prudential Plaza, 180 North Stetson
Avenue, Chicago, IL 60601-6779, independent auditors, as stated in their report
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
The hypothetical Contract illustrations included in the Company's registration
statement have been approved by Diana Montigney, FSA, Allstate Life Insurance
Company, and are included in reliance upon her opinion as to their
reasonableness.
FINANCIAL INFORMATION
- ---------------------
The financial statements of the Company and the Variable Account appear
immediately below. The financial statements for the Company should be considered
as bearing only on the ability of the Company to fulfill its obligations under
the Contracts. They do not relate to the investment performance of the Variable
Account.
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
NORTHBROOK LIFE INSURANCE COMPANY:
We have audited the accompanying Statements of Financial Position of Northbrook
Life Insurance Company (the "Company") as of December 31, 1997 and 1996, and the
related Statements of Operations, Shareholder's Equity and Cash Flows for each
of the three years in the period ended December 31, 1997. Our audits also
included Schedule IV - Reinsurance. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, Schedule IV - Reinsurance,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 1998
F-1
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments
Fixed income securities, at fair value (amortized
cost $72,491 and $65,500) $ 76,402 $ 67,479
Short-term 3,031 6,590
------------------ ------------------
Total investments 79,433 74,069
Reinsurance recoverable from Allstate Life
Insurance Company 2,293,094 2,480,034
Net receivable from Allstate Life Insurance Company 1,467 4,246
Other assets 5,033 2,639
Separate Accounts 5,719,203 4,354,783
------------------ ------------------
Total assets $ 8,098,230 $ 6,915,771
================== ==================
LIABILITIES
Reserve for life-contingent contract benefits $ 144,352 $ 143,346
Contractholder funds 2,148,555 2,336,296
Income taxes payable 162 555
Deferred income taxes 2,674 2,085
Separate Accounts 5,719,203 4,354,783
------------------ ------------------
Total liabilities 8,014,946 6,837,065
------------------ ------------------
SHAREHOLDER'S EQUITY
Common stock, $100 par value, 25,000 shares
authorized, issued and outstanding 2,500 2,500
Additional capital paid-in 56,600 56,600
Unrealized net capital gains 2,542 1,286
Retained income 21,642 18,320
------------------ ------------------
Total shareholder's equity 83,284 78,706
------------------ ------------------
Total liabilities and shareholder's equity $ 8,098,230 $ 6,915,771
================== ==================
</TABLE>
See notes to financial statements.
F-2
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------ ------ ------
($ IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Net investment income $ 5,146 $ 4,888 $ 4,782
Realized capital gains and losses (68) (20) 67
--------------- --------------- ---------------
INCOME BEFORE INCOME TAX EXPENSE 5,078 4,868 4,849
INCOME TAX EXPENSE 1,756 1,666 1,686
--------------- --------------- ---------------
NET INCOME $ 3,322 $ 3,202 $ 3,163
=============== =============== ===============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
COMMON STOCK $ 2,500 $ 2,500 $ 2,500
--------------- --------------- ---------------
ADDITIONAL CAPITAL PAID-IN 56,600 56,600 56,600
--------------- --------------- ---------------
UNREALIZED NET CAPITAL GAINS
Balance, beginning of year 1,286 2,657 (1,553)
Net change 1,256 (1,371) 4,210
--------------- --------------- ---------------
Balance, end of year 2,542 1,286 2,657
--------------- --------------- ---------------
RETAINED INCOME
Balance, beginning of year 18,320 15,118 11,955
Net income 3,322 3,202 3,163
--------------- --------------- ---------------
Balance, end of year 21,642 18,320 15,118
--------------- --------------- ---------------
Total shareholder's equity $ 83,284 $ 78,706 $ 76,875
=============== =============== ===============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- ------ -------
($ IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,322 $ 3,202 $ 3,163
Adjustments to reconcile net income to net
cash provided by operating activities
Amortization and other non-cash items 516 782 903
Realized capital losses (gains) 68 20 (67)
Increase (decrease) in life-contingent contract
benefits and contractholder funds 205 (198) 113
Change in deferred income taxes (87) 24 608
Changes in other operating assets and liabilities (657) 864 (2,705)
------------ ------------ -------------
Net cash provided by operating activities 3,367 4,694 2,015
----------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed income securities
Proceeds from sales 1,606 3,522 5,423
Investment collections 10,036 5,770 7,108
Investment purchases (18,568) (15,532) (9,843)
Change in short-term investments, net 3,559 1,459 (4,675)
------------- ------------- -------------
Net cash used in investing activities (3,367) (4,781) (1,987)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH - (87) 28
CASH AT BEGINNING OF YEAR - 87 59
------------- ------------- -------------
CASH AT END OF YEAR $ - $ - $ 87
============= ============= =============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS)
1. General
Basis of presentation
The accompanying financial statements include the accounts of Northbrook Life
Insurance Company (the "Company"), a wholly owned subsidiary of Allstate Life
Insurance Company ("ALIC"), which is wholly owned by Allstate Insurance Company
("AIC"), a wholly owned subsidiary of The Allstate Corporation (the
"Corporation"). On June 30, 1995, Sears, Roebuck and Co. ("Sears") distributed
its 80.3% ownership in the Corporation to Sears common shareholders through a
tax-free dividend (the "Distribution"). These financial statements have been
prepared in conformity with generally accepted accounting principles.
To conform with the 1997 presentation, certain amounts in the prior years'
financial statements and notes have been reclassified.
Nature of operations
The Company markets life insurance and annuity products in the United States
through Dean Witter Reynolds Inc. ("Dean Witter") (see Note 4), a wholly owned
subsidiary of Morgan Stanley Dean Witter Discover & Co. Life insurance contracts
sold by the Company include universal life and other interest-sensitive life and
variable life products. Annuities include both deferred annuities, such as
variable annuities and fixed rate single and flexible premium annuities, and
immediate annuities.
Annuity contracts and life insurance policies issued by the Company are subject
to discretionary withdrawal or surrender by customers, subject to applicable
surrender charges. These policies and contracts are reinsured with ALIC (see
Note 3), which invests premiums and deposits to provide cash flows that will be
used to fund future benefits and expenses. In order to support competitive
crediting rates and limit interest rate risk, ALIC, as the Company's reinsurer,
adheres to a basic philosophy of matching assets with related liabilities while
maintaining adequate liquidity and a prudent and diversified level of credit
risk.
The Company monitors economic and regulatory developments which have the
potential to impact its business. There continues to be new and proposed federal
and state regulation and legislation that would allow banks greater
participation in the securities and insurance businesses, which will present an
increased level of competition for sales of the Company's life and annuity
products. Furthermore, the market for deferred annuities and interest-sensitive
life insurance is enhanced by the tax incentives available under current law.
Any legislative changes which lessen these incentives are likely to negatively
impact the demand for these products.
Enacted and pending state legislation to permit mutual insurance companies to
convert to a hybrid structure known as a mutual holding company could have a
number of significant effects on the Company by (1) increasing industry
competition through consolidation caused by mergers and acquisitions related to
the new corporate form of business; (2) increasing competition in capital
markets; and (3) reopening stock/mutual company disagreements related to such
issues as taxation disparity between mutual and stock insurance companies.
The Company is authorized to sell life and annuity products in all states except
New York, as well as in the District of Columbia and Puerto Rico. The top
geographic locations for statutory premiums and deposits earned by the Company
are California, Florida and Texas for the year ended December 31, 1997. No other
jurisdiction accounted for more than 5% of statutory premiums and deposits. All
premiums and contract charges are ceded to ALIC under reinsurance agreements.
F-6
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
2. Summary of Significant Accounting Policies
Investments
Fixed income securities include bonds and mortgage-backed securities. All fixed
income securities are carried at fair value and may be sold prior to their
contractual maturity ("available for sale"). The difference between amortized
cost and fair value, net of deferred income taxes, is reflected as a component
of shareholder's equity. Provisions are recognized for declines in the value of
fixed income securities that are other than temporary. Such writedowns are
included in realized capital gains and losses. Short-term investments are
carried at cost which approximates fair value.
Investment income consists primarily of interest, which is recognized on an
accrual basis. Interest income on mortgage-backed securities is determined on
the effective yield method, based on the estimated principal repayments. Accrual
of income is suspended for fixed income securities that are in default or when
the receipt of interest payments is in doubt. Realized capital gains and losses
are determined on a specific identification basis.
Reinsurance
The Company has reinsurance agreements whereby all premiums, contract charges,
credited interest, policy benefits and certain expenses are ceded to ALIC and
reflected net of such cessions in the statements of operations. The amounts
shown in the Company's statements of operations relate to the investment of
those assets of the Company that are not transferred to ALIC under reinsurance
agreements. Reinsurance recoverable and the related reserve for life-contingent
contract benefits and contractholder funds are reported separately in the
statements of financial position. The Company continues to have primary
liability as the direct insurer for risks reinsured.
Recognition of premium revenues and contract charges
Revenues on interest-sensitive life insurance policies are comprised of contract
charges and fees, and are recognized when assessed against the policyholder
account balance. Revenues on most annuities, which are considered investment
contracts, include contract charges and fees for contract administration and
surrenders. These revenues are recognized when levied against the contract
balance.
Income taxes
The income tax provision is calculated under the liability method. Deferred tax
assets and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at the enacted tax
rates, and reflect the impact of reinsurance agreements. Deferred income taxes
arise primarily from unrealized capital gains and losses on fixed income
securities carried at fair value.
Separate Accounts
The Company issues flexible premium deferred variable annuity contracts and
single premium variable life policies, the assets and liabilities of which are
legally segregated and reflected in the accompanying statements of financial
position as assets and liabilities of the Separate Accounts (Northbrook Variable
Annuity Account, Northbrook Variable Annuity Account II and Northbrook Life
Variable Life Separate Account A, unit investment trusts registered with the
Securities and Exchange Commission).
Assets of the Separate Accounts are carried at fair value. Investment income and
realized capital gains and losses of the Separate Accounts accrue directly to
the policy- and contractholders and, therefore, are not included in the
Company's statements of operations. Revenues to the Company from the Separate
Accounts consist of contract maintenance fees, administration fees, mortality
and expense risk charges, cost of insurance charges and tax expense charges, all
of which are ceded to ALIC.
Reserve for life-contingent contract benefits
The reserve for life-contingent contract benefits, which relates to structured
settlement annuities and supplemental contracts with life contingencies, is
computed on the basis of assumptions as to future investment yields, mortality
and expenses. These assumptions include provisions for adverse deviation and
generally vary by such characteristics as type of coverage, year of issue and
policy duration. Reserve interest rates ranged from 4.00% to 11.00% during 1997.
F-7
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Contractholder funds
Contractholder funds arise from the issuance of individual or group policies and
contracts that include an investment component, including most annuities and
universal life policies. Payments received are recorded as interest-bearing
liabilities. Contractholder funds are equal to deposits received and interest
credited to the benefit of the contractholder less withdrawals, mortality
charges and administrative expenses. During 1997, credited interest rates on
contractholder funds ranged from 3.30% to 9.51% for those contracts with fixed
interest rates and from 3.25% to 7.39% for those with flexible rates.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Related Party Transactions
Reinsurance
Premiums and contract charges ceded to ALIC were $1,979 and $83,559 in 1997,
$3,775 and $60,744 in 1996, and $2,284 and $52,348 in 1995, respectively.
Credited interest, policy benefits and expenses ceded to ALIC amounted to
$201,526, $218,088 and $229,525 in 1997, 1996 and 1995, respectively. Investment
income earned on the assets which support contractholder funds is not included
in the Company's financial statements as those assets are owned and managed by
ALIC under the terms of reinsurance agreements.
Business operations
The Company utilizes services and business facilities owned or leased, and
operated by AIC in conducting its business activities. The Company reimburses
AIC for the operating expenses incurred by AIC on behalf of the Company. The
cost to the Company is determined by various allocation methods and is primarily
related to the level of services provided. Operating expenses, including
compensation and retirement and other benefit programs, allocated to the Company
were $7,842, $8,074 and $5,341 in 1997, 1996 and 1995, respectively. Of these
costs, the Company retains investment related expenses. All other costs are
ceded to ALIC under reinsurance agreements.
4. Exclusive Distribution Agreement
The Company and ALIC have a strategic alliance with Dean Witter to develop,
market and distribute proprietary annuity and life insurance products through
Dean Witter account executives. Dean Witter provides a portion of the funding
for these products through loans to an affiliate of the Company. An affiliate of
Dean Witter, Dean Witter InterCapital Inc., is the investment manager for the
Dean Witter Variable Investment Series, the funds in which the assets of the
Separate Accounts are invested.
Under the terms of the strategic alliance, the Company has agreed to use Dean
Witter as an exclusive distribution channel for the Company's products. Although
the strategic alliance is cancelable by either party, termination of the
alliance would not impact existing policies and contracts.
F-8
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
5. INVESTMENTS
Fair values
The amortized cost, gross unrealized gains and losses, and fair value for fixed
income securities are as follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------ FAIR
COST GAINS LOSSES VALUE
--------- ----- --------- -------
<S> <C> <C> <C> <C>
At December 31, 1997
U.S. government and agencies $ 8,638 $ 823 $ - $ 9,461
Municipal 1,143 28 - 1,171
Corporate 25,913 897 (12) 26,798
Mortgage-backed securities 36,797 2,315 (140) 38,972
-------- ------- ------ -------
Total fixed income securities $ 72,491 $4,063 $(152) $76,402
======== ======= ====== =======
At December 31, 1996
U.S. government and agencies $ 8,629 $ 193 $ (54) $ 8,768
Municipal 873 48 - 921
Corporate 16,902 260 (69) 17,093
Mortgage-backed securities 39,096 1,883 (282) 40,697
-------- ------ ------ -------
Total fixed income securities $ 65,500 $2,384 $(405) $67,479
======== ======= ====== =======
</TABLE>
Scheduled maturities
The scheduled maturities for fixed income securities are as follows at December
31, 1997:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ ----------
<S> <C> <C>
Due in one year or less $ 2,133 $ 2,155
Due after one year through five years 5,343 5,472
Due after five years through ten years 19,410 20,217
Due after ten years 8,808 9,586
------------ ----------
35,694 37,430
Mortgage-backed securities 36,797 38,972
------------ ----------
Total $ 72,491 $ 76,402
============ ==========
</TABLE>
Actual maturities may differ from those scheduled as a result of prepayments by
the issuers.
F-9
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Net Investment Income
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
Fixed income securities $ 5,364 $ 4,675 $ 4,633
Short-term investments 84 390 215
----------- ----------- -----------
Investment income, before expense 5,448 5,065 4,848
Investment expense 302 177 66
----------- ----------- -----------
Net investment income $ 5,146 $ 4,888 $ 4,782
=========== =========== ===========
Realized capital gains and losses
Year Ended December 31, 1997 1996 1995
- ----------------------- ------ ------ ------
Fixed income securities $ (70) $ (22) $ 67
Short-term investments 2 2 -
------------- ------------- -------------
Realized capital gains and losses (68) (20) 67
Income tax benefit (expense) 24 7 (23)
------------- ------------- -------------
Realized capital losses and gains, after tax $ (44) $ (13) $ 44
============= ============= =============
</TABLE>
Excluding calls and prepayments, gross losses of $70 and $32 and gross gains of
$67 were realized on sales of fixed income securities during 1997, 1996 and
1995, respectively.
Unrealized net capital gains
Unrealized net capital gains on fixed income securities included in
shareholder's equity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Cost/ Fair Unrealized
Amortized Cost Value Net Gains
-------------- ----- -------------
<S> <C> <C> <C>
Fixed income securities $ 72,491 $ 76,402 $ 3,911
============== ==============
Deferred income taxes (1,369)
-------------
Unrealized net capital gains $ 2,542
=============
</TABLE>
F-10
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Change in unrealized net capital gains
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
- ----------------------- ------- ------- -------
<S> <C> <C> <C>
Fixed income securities $ 1,932 $(2,108) $ 6,477
Deferred income taxes (676) 737 (2,267)
------- ------- -------
Increase (decrease) in unrealized net
capital gains $ 1,256 $(1,371) $ 4,210
======= ======= =======
</TABLE>
Securities on deposit
At December 31, 1997, fixed income securities with a carrying value of $8,039
were on deposit with regulatory authorities as required by law.
6. Financial Instruments
In the normal course of business, the Company invests in various financial
assets and incurs various financial liabilities. The fair value estimates of
financial instruments presented below are not necessarily indicative of the
amounts the Company might pay or receive in actual market transactions.
Potential taxes and other transaction costs have not been considered in
estimating fair value. The disclosures that follow do not reflect the fair value
of the Company as a whole since a number of the Company's significant assets
(including reinsurance recoverable) and liabilities (including deferred income
taxes and reserve for life-contingent contract benefits) are not considered
financial instruments and are not carried at fair value. Other assets and
liabilities considered financial instruments, such as accrued investment income,
are generally of a short-term nature. It is assumed that their carrying value
approximates fair value.
Financial assets
The carrying value and fair value of financial assets at December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fixed income securities $ 76,402 $ 76,402 $ 67,479 $ 67,479
Short-term investments 3,031 3,031 6,590 6,590
Separate Accounts 5,719,203 5,719,203 4,354,783 4,354,783
</TABLE>
Fair values for fixed income securities are based on quoted market prices.
Short-term investments are highly liquid investments with maturities of less
than one year whose carrying value approximates fair value. Separate Accounts
assets are carried in the statements of financial position at fair value.
F-11
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Financial liabilities
The carrying value and fair value of financial liabilities at December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contractholder funds on
investment contracts $ 1,977,479 $ 1,951,214 $ 2,143,482 $ 2,118,583
Separate Accounts 5,719,203 5,719,203 4,354,783 4,354,783
</TABLE>
The fair value of contractholder funds on investment contracts is based on the
terms of the underlying contracts. Reserves on investment contracts with no
stated maturities (single premium and flexible premium deferred annuities) are
valued at the account balance less surrender charges. The fair value of
immediate annuities and annuities without life contingencies with fixed terms is
estimated using discounted cash flow calculations based on interest rates
currently offered for contracts with similar terms and durations. Separate
Accounts liabilities are carried at the fair value of the underlying assets.
7. Income Taxes
The Company joins the Corporation and its other eligible domestic subsidiaries
in the filing of a consolidated federal income tax return (the "Allstate Group")
and is party to a federal income tax allocation agreement (the "Tax Sharing
Agreement"). Under the Tax Sharing Agreement, the Company paid to or received
from the Corporation the amount, if any, by which the Allstate Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this results in the
Company's annual income tax provision being computed, with adjustments, as if
the Company filed a separate return.
Prior to the Distribution, the Corporation and all of its eligible domestic
subsidiaries, including the Company, joined with Sears and its domestic business
units (the "Sears Group") in the filing of a consolidated federal income tax
return (the "Sears Tax Group") and were parties to a federal income tax
allocation agreement (the "Sears Tax Sharing Agreement"). Under the Sears Tax
Sharing Agreement, the Company, through the Corporation, paid to or received
from the Sears Group the amount, if any, by which the Sears Tax Group's federal
income tax liability was affected by virtue of inclusion of the Company in the
consolidated federal income tax return. Effectively, this resulted in the
Company's annual income tax provision being computed as if the Allstate Group
filed a separate consolidated return, except that items such as net operating
losses, capital losses or similar items, which might not be recognized in a
separate return, were allocated according to the Sears Tax Sharing Agreement.
The Allstate Group and Sears Group have entered into an agreement which governs
their respective rights and obligations with respect to federal income taxes for
all periods prior to the Distribution ("Consolidated Tax Years"). The agreement
provides that all Consolidated Tax Years will continue to be governed by the
Sears Tax Sharing Agreement with respect to the Allstate Group's federal income
tax liability.
F-12
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The components of the deferred income tax assets and liabilities at December
31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred assets
Separate Accounts $ 149 $ -
------- -------
Deferred liabilities
Difference in tax bases of investments (1,454) (1,392)
Unrealized net capital gains (1,369) (693)
------- -------
Total deferred liabilities (2,823) (2,085)
-------- --------
Net deferred liability $(2,674) $(2,085)
======== ========
</TABLE>
The components of income tax expense for the year ended December 31, are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 1,843 $ 1,642 $ 1,078
Deferred (87) 24 608
----------- ----------- -----------
Total income tax expense $ 1,756 $ 1,666 $ 1,686
=========== =========== ===========
</TABLE>
The Company paid income taxes of $2,236, $2,308 and $4,980 in 1997, 1996 and
1995, respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate on income from operations for the year ended December 31, is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Tax-exempt income (0.4) (0.6) -
Other - (0.2) (0.3)
---- ----- -----
Effective federal income tax rate 34.6% 34.2% 34.7%
==== ==== ====
</TABLE>
F-13
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
Prior to January 1, 1984, the Company was entitled to exclude certain amounts
from taxable income and accumulate such amounts in a "policyholder surplus"
account. The balance in this account at December 31, 1997, approximately $16,
will result in federal income taxes payable of $6 if distributed by the Company.
No provision for taxes has been made as the Company has no plan to distribute
amounts from this account. No further additions to the account have been
permitted since the Tax Reform Act of 1984.
8. Statutory Financial Information
The following tables reconcile net income for the year ended December 31, and
shareholder's equity at December 31, as reported herein in conformity with
generally accepted accounting principles with statutory net income and capital
and surplus, determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities:
<TABLE>
<CAPTION>
Net Income
----------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance per generally accepted accounting principles $ 3,322 $ 3,202 $ 3,163
Deferred income taxes (87) 24 608
Statutory investment reserves 79 30 (28)
Other (405) (691) (1,443)
----------- ------------ ------------
Balance per statutory accounting practices $ 2,909 $ 2,565 $ 2,300
=========== ============ ============
</TABLE>
F-14
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDER'S
EQUITY
----------------
1997 1996
------- -------
<S> <C> <C>
Balance per generally accepted accounting principles $ 83,284 $ 78,706
Deferred income taxes 2,674 2,085
Unrealized gain/loss on fixed income securities (3,911) (1,979)
Non-admitted assets and statutory investment
reserves (4,431) (3,317)
Other (1,939) (397)
---------- ------------
Balance per statutory accounting practices $ 75,677 $ 75,098
========== ============
</TABLE>
Permitted statutory accounting practices
The Company prepares its statutory financial statements in accordance with
accounting principles and practices prescribed or permitted by the Illinois
Department of Insurance. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
("NAIC"), as well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. The Company follows a permitted statutory accounting practice
whereby it includes amounts receivable from an affiliated insurance company in
statutory admitted assets at a level which exceeds the threshold prescribed by
the Illinois Department of Insurance by $7,737.
Final approval of the NAIC's proposed "Comprehensive Guide" on statutory
accounting principles is expected in early 1998. Implementation could be as
early as January 1, 1999. The requirements of the Comprehensive Guide are not
expected to have a material impact on statutory surplus of the Company.
Under the NAIC's proposed accounting practices, the Company's practice related
to its receivable from affiliate will be prescribed rather than permitted.
Dividends
The ability of the Company to pay dividends is dependent on business conditions,
income, cash requirements of the Company and other relevant factors. The payment
of shareholder dividends by insurance companies without the prior approval of
the state insurance regulator is limited to formula amounts based on net income
and capital and surplus, determined in accordance with statutory accounting
practices, as well as the timing and amount of dividends paid in the preceding
twelve months. The maximum amount of dividends that the Company can distribute
during 1998 without prior approval of the Illinois Department of Insurance is
$7,318.
F-15
<PAGE>
NORTHBROOK LIFE INSURANCE COMPANY
SCHEDULE IV--REINSURANCE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Gross Net
Year ended December 31, 1997 amount Ceded amount
- ---------------------------- -------- -------- ------
<S> <C> <C> <C>
Life insurance in force $ 515,890 $ 515,890 $ -
=========== =========== =========
Premiums and contract charges:
Life and annuities $ 85,538 $ 85,538 $ -
=========== =========== =========
Gross Net
Year ended December 31, 1996 amount Ceded amount
- ---------------------------- ------- ------ ------
Life insurance in force $ 556,242 $ 556,242 $ -
=========== ========== =========
Premiums and contract charges:
Life and annuities $ 64,519 $ 64,519 $ -
=========== ========== =========
Gross Net
Year ended December 31, 1995 amount Ceded amount
- ---------------------------- ------ ----- ------
Life insurance in force $ 610,478 $ 610,478 $ -
=========== ========== =========
Premiums and contract charges:
Life and annuities $ 54,632 $ 54,632 $ -
=========== ========== =========
</TABLE>
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
Northbrook Life Insurance Company:
We have audited the accompanying statement of net assets of Northbrook Life
Variable Life Separate Account A (the "Account") as of December 31, 1997, and
the related statements of operations and changes in net assets for the period
from November 13, 1997 (date operations commenced) to December 31, 1997 of the
Money Market, High Yield, Equity, Quality Income Plus, Strategist, Dividend
Growth, Utilities, European Growth, Capital Growth, Global Dividend Growth,
Pacific Growth, Capital Appreciation, and Income Builder portfolios of the Dean
Witter Variable Investment Series that comprise the Account. These financial
statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned at December 31, 1997. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Account as of December 31, 1997, the
results of its operations and the changes in its net assets for the period
November 13, 1997 (date operations commenced) to December 31, 1997, of each of
the portfolios comprising the Account, in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 20, 1998
F-17
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
- --------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in the Dean Witter Variable Investment Series Portfolios:
Money Market, 138,067 shares (cost $138,067) $ 138,067
High Yield, 4,993 shares (cost $30,559) 30,558
Equity, 4,706 shares (cost $154,624) 158,019
Quality Income Plus, 6,740 shares (cost $72,144) 72,587
Strategist, 1,173 shares (cost $17,233) 17,361
Dividend Growth, 12,037 shares (cost $257,826) 259,993
Utilities, 474 shares (cost $8,628) 8,812
European Growth 1,507 shares (cost $35,437) 35,484
Capital Growth, 785 shares (cost $13,737) 14,357
Global Dividend Growth, 3,944 shares (cost $54,814) 54,786
Pacific Growth, 0 shares (cost $0) -
Capital Appreciation, 1,699 shares (cost $19,961) 19,231
Income Builder, 0 shares (cost $0) -
---------
Total assets 809,255
LIABILITIES
Payable to Northbrook Life Insurance Company:
Accrued contract charges 31
---------
Net assets $ 809,224
=========
</TABLE>
See notes to financial statements.
F-18
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM NOVEMBER 13, 1997 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1997
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Dean Witter Variable Investment Series Portfolios
-------------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ...................................... $ 455 $ 337 $ 268 $ 711 $ 110 $ 1,300 $ 67
Charges from Northbrook Life Insurance Company:
Mortality and expense risk ................... (78) (17) (100) (68) (5) (160) (3)
-------- -------- -------- -------- -------- -------- --------
Net investment income (loss) ........ 377 320 168 643 105 1,140 64
REALIZED AND UNREALIZED GAINS
(LOSSES) ON INVESTMENTS
Realized gains (losses) from sales
of investments:
Proceeds from sales ........................ 59,910 16 142 189 5 175 3
Cost of investments sold ................... 59,910 16 143 188 5 174 3
-------- -------- -------- -------- -------- -------- --------
Net realized gains (losses) ......... -- -- (1) 1 -- 1 --
Change in unrealized gains (losses) .......... -- (1) 3,395 443 128 2,167 184
-------- -------- -------- -------- -------- -------- --------
Net gains (losses) on investments ... -- (1) 3,394 444 128 2,168 184
-------- -------- -------- -------- -------- -------- --------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS ................................... $ 377 $ 319 $ 3,562 $ 1,087 $ 233 $ 3,308 $ 248
======= ======= ======== ======== ======== ======== ========
Dean Witter Variable Investment Series Portfolios
--------------------------------------------------------------------------------
Global
European Capital Dividend Pacific Capital Income
Growth Growth Growth Growth Appreciation Builder Total
--------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends ...................................... $ -- $ -- $ 104 $ -- $ -- $ -- $ 3,352
Charges from Northbrook Life Insurance Company:
Mortality and expense risk ................... (23) (4) (21) -- (11) -- (490)
--------- -------- ------- --------- -------- -------- ---------
Net investment income (loss) ........ (23) (4) 83 -- (11) -- 2,862
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS
Realized gains (losses) from sales
of investments:
Proceeds from sales ........................ 25 4 30 -- 16 -- 60,515
Cost of investments sold ................... 26 4 30 -- 17 -- 60,516
--------- -------- ------- --------- -------- -------- ---------
Net realized gains (losses) ......... (1) -- -- -- (1) -- (1)
Change in unrealized gains (losses) .......... 47 620 (28) -- (730) -- 6,225
--------- -------- ------- --------- -------- -------- ---------
Net gains (losses) on investments ... 46 620 (28) -- (731) -- 6,224
--------- -------- ------- --------- -------- -------- ---------
CHANGE IN NET ASSETS RESULTING FROM
OPERATIONS ................................... $ 23 $ 616 $ 55 $ -- $ (742) $ -- $ 9,086
========= ======== ======= ========= ======== ======== =========
</TABLE>
See notes to financial statements.
F-19
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM NOVEMBER 13, 1997 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1997
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Dean Witter Variable Investment Series Portfolios
-----------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth Utilities
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) .............. $ 377 $ 320 $ 168 $ 643 $ 105 $ 1,140 $ 64
Net realized gains (losses) ............... -- -- (1) 1 -- 1 --
Change in unrealized gains (losses) ....... -- (1) 3,395 443 128 2,167 184
-------- -------- -------- ------- -------- --------- -------
Change in net assets resulting
from operations ...................... 377 319 3,562 1,087 233 3,308 248
FROM CAPITAL TRANSACTIONS
Deposits .................................. -- -- -- -- -- -- --
Benefit payments .......................... -- -- -- -- -- -- --
Payments on termination ................... -- -- -- -- -- -- --
Contract charges .......................... (209) (40) (252) (131) (19) (410) (9)
Transfers among the portfolios and
with the general account - net .......... 137,894 30,278 154,703 71,628 17,146 257,086 8,573
-------- -------- -------- ------- -------- -------- -------
Change in net assets resulting from
capital transactions ................. 137,685 30,238 154,451 71,497 17,127 256,676 8,564
--------- -------- ------- - ------- -------- -------- -------
INCREASE IN NET ASSETS .................... 138,062 30,557 158,013 72,584 17,360 259,984 8,812
NET ASSETS AT BEGINNING OF PERIOD ......... -- -- -- -- -- -- --
NET ASSETS AT END OF PERIOD ............... $ 138,062 $30,557 $158,013 $72,584 $ 17,360 $259,984 8,812
========= ======= ======== ======= ======== ======== =======
Net asset value per unit at end of period $ 10.06 $ 10.16 $ 10.47 $ 10.19 $ 10.22 $ 10.24 $ 11.15
========= ======= ======== ======= ======== ======== =======
Units outstanding at end of period ........ 13,725 3,006 15,088 7,123 1,699 25,395 790
========= ======= ======== ======= ======== ======== =======
</TABLE>
F-20
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM NOVEMBER 13, 1997 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1997 (CONT'D)
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Dean Witter Variable Investment Series Portfolios
------------------------------------------------------------------------------------
Global
European Capital Dividend Pacific Capital Income
Growth Growth Growth Growth Appreciation Builder Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) .............. $ (23) $ (4) $ 83 $ -- $ (11) $ -- $ 2,862
Net realized gains (losses) ............... (1) -- -- -- (1) -- (1)
Change in unrealized gains (losses) ....... 47 620 (28) -- (730) -- 6,225
-------- ------- --------- ------- ---------- -------- ---------
Change in net assets resulting
from operations ................... 23 616 55 -- (742) -- 9,086
FROM CAPITAL TRANSACTIONS
Deposits .................................. -- -- -- -- -- -- --
Benefit payments .......................... -- -- -- -- -- -- --
Payments on termination ................... -- -- -- -- -- -- --
Contract charges .......................... (48) (20) (81) -- (28) -- (1,247)
Transfers among the portfolios and
with the general account - net .......... 35,507 13,760 54,810 -- 20,000 -- 801,385
-------- ------- --------- ------- ---------- -------- ---------
Change in net assets resulting from
capital transactions .............. 35,459 13,740 54,729 -- 19,972 -- 800,138
-------- --------- --------- ------- ---------- -------- ---------
INCREASE IN NET ASSETS .................... 35,482 14,356 54,784 -- 19,230 -- 809,224
NET ASSETS AT BEGINNING OF PERIOD ......... -- -- -- -- -- -- --
-------- --------- --------- ------- ---------- -------- ---------
NET ASSETS AT END OF PERIOD ............... $ 35,482 $ 14,356 $ 54,784 $ -- $ 19,230 $ -- $ 809,224
======== ======== ========= ======= ========== ======== =========
Net asset value per unit at end of period $ 10.26 $ 9.43 $ 10.17 $ -- $ 9.63 $ --
======== ======== ========= ======= ========== ========
Units outstanding at end of period ........ 3,458 1,522 5,388 -- 1,997 --
======== ======== ========= ======= ========== ========
</TABLE>
See notes to financial statements.
F-21
<PAGE>
NORTHBROOK LIFE VARIABLE LIFE SEPARATE ACCOUNT A
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM NOVEMBER 13, 1997 (DATE OPERATIONS COMMENCED)
TO DECEMBER 31, 1997
- -----------------------------------------------------------------
1. ORGANIZATION
Northbrook Life Variable Life Separate Account A (the "Account"), a unit
investment trust registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, is a Separate Account of
Northbrook Life Insurance Company ("Northbrook Life"). The assets of the
Account are legally segregated from those of Northbrook Life. Northbrook
Life is wholly owned by Allstate Life Insurance Company, a wholly owned
subsidiary of Allstate Insurance Company, which is a wholly owned
subsidiary of The Allstate Corporation. The Account was established January
15, 1996, by resolution of the Board of Directors of Northbrook Life and
began accepting policyholder deposits on November 13, 1997.
Northbrook Life writes certain life insurance policies, the proceeds of
which are invested at the direction of the policyholder. Policyholders
invest in units of the portfolios comprising the Account, for which they
bear all of the investment risk. The Account, in turn, invests in shares of
the portfolios of the Dean Witter Variable Investment Series (the "Fund").
Northbrook Life provides administrative and insurance services to the
Account for a fee.
Dean Witter Reynolds Inc. ("Dean Witter"), a wholly owned subsidiary of Morgan
Stanley Dean Witter Discover & Co., is the sole distributor of Northbrook Life's
flexible premium deferred variable annuity contracts, single premium variable
life policies, and certain single and flexible premium annuities. Dean Witter
InterCapital Inc. ("InterCapital"), a wholly owned subsidiary of Morgan Stanley
Dean Witter Discover & Co., is the investment manager for the Fund. InterCapital
receives investment management fees from the Fund.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Valuation of Investments - Investments consist of shares in the portfolios
of the Fund and are stated at fair value based on quoted market prices.
Recognition of Investment Income - Investment income consists of dividends
declared by the portfolios of the Fund and is recognized on the date of
record.
Realized Gains and Losses - Realized gains and losses represent the
difference between the proceeds from sales of shares by the Account and the
cost of such shares, which is determined on a weighted average basis.
Policyholder Account Activity - Account activity is reflected in individual
policyholder accounts on a daily basis.
Federal Income Taxes - The Account is intended to qualify as a segregated
asset account as defined in the Internal Revenue Code ("Code"). As such,
the operations of the Account are included with and taxed as a part of
Northbrook Life. Northbrook Life is taxed as a life insurance company under
the Code. Under current law, no federal income taxes are payable by the
Account.
Account Value - Certain calculations that could be made in the financial
statements may differ from published amounts due to the truncation of
actual Account values.
F-22
<PAGE>
3. MORTALITY AND EXPENSE RISK AND CONTRACT CHARGES
Northbrook Life assumes mortality and expense risks related to the
operations of the Account and deducts charges daily at a rate equal to .90%
per annum of the daily net assets of the Account. Northbrook Life
guarantees that the rate of this charge will not increase over the life of
the contract.
Northbrook Life deducts certain contract charges including cost of
insurance, tax expense charges, and contract maintenance charges. The cost
of insurance charge covers Northbrook Life's anticipated mortality costs
for standard and substandard risks. The cost of insurance will not exceed
the guaranteed cost of insurance as determined by the 1980 Commissioners
Standard Mortality Table for standard risks. Substandard risks are charged
a higher cost of insurance that will not exceed rates based on a multiple
of the previously mentioned table. The multiple is based on the insured's
substandard rating.
Northbrook Life deducts monthly a tax expense charge equal to a rate of
.40% per annum of policy value for the first 10 years of the policy to
cover Northbrook Life's expenses for state and federal taxes relating to
receipt of premium. Northbrook Life deducts a monthly administration fee
equal to a rate of .25% per annum of policy value on a monthly basis to
compensate Northbrook Life for administrative expenses incurred in the
administration of the Account.
For each year or portion of a year a contract is in effect, Northbrook Life
deducts a fixed annual contract maintenance charge of $30 as reimbursement
for expenses related to the maintenance of each contract and the Account.
The amount of this charge is guaranteed not to increase over the life of
the contract. This charge is waived if the total purchase payments are
$40,000 or more on a contract anniversary.
4. FINANCIAL INSTRUMENTS
The investments of the Account are carried at fair value, based upon quoted
market prices. Accrued contract charges are of a short-term nature. It is
assumed that their carrying value approximates fair value.
F-23
<PAGE>
5. UNITS ISSUED AND REDEEMED
Units issued and redeemed by the Account during 1997 were as follows:
<TABLE>
<CAPTION>
Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------
Quality
Money High Income Dividend
Market Yield Equity Plus Strategist Growth
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Units outstanding at beginning of period -- -- -- -- -- --
Unit activity during 1997:
Issued ............................. 19,718 3,010 15,956 7,144 1,701 26,306
Redeemed ........................... (5,993) (4) (868) (21) (2) (911)
------- ------ ------- ------ ------- --------
Units outstanding at end of period ..... 13,725 3,006 15,088 7,123 1,699 25,395
======= ====== ======= ====== ======= ========
Dean Witter Variable Investment Series Portfolios
---------------------------------------------------------------------------------
Global
European Capital Dividend Pacific Capital Income
Utilities Growth Growth Growth Growth Appreciation Builder
---------------------------------------------------------------------------------
Units outstanding at beginning of period -- -- -- -- -- -- --
Unit activity during 1997:
Issued ............................. 791 3,462 1,524 6,245 -- 2,000 --
Redeemed ........................... (1) (4) (2) (857) -- (3) --
------- ------ ------- ------- ------- -------- ------
Units outstanding at end of period ..... 790 3,458 1,522 5,388 -- 1,997 --
======= ====== ======= ======= ======= ======== ======
</TABLE>
Units relating to accrued contract charges are included in units redeemed.
F-24
